Sunday, May 19, 2024

Free trade and developing countries


Cogent criticisms have been made about the ability of the doctrine of comparative advantage to deal with the obvious global disadvantage of developing countries. The concern here is that ‘in a world of uneven development free trade, or even trade per se, may be inherently unequalising. There is a range of economic arguments that explain why the doctrine of comparative advantage may be unable to deliver its promised welfare benefits to developing countries.
One of the important general arguments in this context is that comparative advantage is created and cumulative, rather than natural, being based on historical development processes, acquired skills, cultivated industry patterns or “first mover” benefits, so it can change over time, can be shaped by governments or industry leaders and can decay through neglect. If this is so, then the cumulative comparative advantage of developed countries will ensure either that inequalities remain or that they take an unacceptably long time to disappear.
Another important school of economic thought postulates perpetual inequalities as a consequence of free trade. According to this argument, where there is low elasticity in demand for the exports of a country but high elasticity in domestic demand for imports, then export prices relative to import prices will result in a continuous trade deficit. As this tends to describe the terms upon which at least some developing countries export their primary products and import manufactured products, it is argued that under free trade conditions these developing countries will remain trapped in a trade deficit preventing them from realising the welfare gains promised by free trade doctrine.
These are not, of course, the only explanations for the current trade deficit and retarded economic development suffered by developing countries. It is certainly the case that the adverse economic position of developing countries has been exacerbated by the fact that they have been denied comparative advantages that they might have otherwise enjoyed. In this respect two factors, in particular, are worthy of note.
The first is that the requirements for the global protection of intellectual property rights, the large scale benefits of which are overwhelmingly enjoyed by undertakings based in the developed world, deny to developing countries any comparative advantage that they may have accrued in the processes or imitation of certain manufactured goods and in incremental innovation. To place this in context, it is essential to understand that many of today’s developed countries once placed extensive economic reliance on the unfettered ability to copy manufactured goods emanating from other more developed economies.
Secondly, the trading position of many developing countries is adversely affected by the fact that developed countries have continued to protect their domestic markets for certain primary products and manufactured goods exported from developing countries. However, the extent to which the opening of developed country markets to such exports would alleviate the trade deficits of developing countries remains a matter of debate amongst economists.
The protectionism of developed countries is a response to what is perceived as a potential flood of ‘cheap imports’ from the developing world. It is not uncommon for industries in developed countries to argue that, in order to survive, they need protection from such imports, which are made on the back of low labour costs in developing countries. From the free trade point of view, this argument denies to developing countries their legitimate comparative advantage. In economic terms, some questions have been raised about the validity of this free trade argument given that many of the employers of low- cost labour in the developing world are multinational corporate interests, which marry high technology with low cost labour in order to achieve an advantage that gives little in the way of welfare benefits to the host developing country.
In addition to this, it is not clear that the developed world market for cheap manufactured imports from developing countries functions in quite the way that classical free trade economists postulate. Theoretically, the comparative advantage of the developing country will be realised when developed world consumers purchase the cheaper imports rather than more expensive domestic products.
However, increasing numbers of consumers in the developed world eschew the products of low-cost labour on ethical grounds. This not only shows the limits of economic theory but also indicates that the debate about free trade should transcend arguments about the validity in solely economic terms of the doctrine of comparative advantage.
Ethical concerns about the exploitation of labour, whether by multinational corporate interests or by domestically based interests, are one of a number of non- economic arguments that may be made about an unfettered free trade regime. What these arguments have in common is the rejection of wealth maximisation as the ultimate measure of human happiness and attainment.
As Keynes famously wrote: “If it were true that we should be a little richer, provided that the whole country and all the workers in it were to specialise on half- a dozen mass-produced products, each individual doing nothing and having no hopes of doing anything except one minute, unskilled repetitive act all his life long, should we all cry out for the immediate destruction of the endless variety of trades and crafts and employments which stand in the way of the glorious attainment of this maximum degree of specialised cheapness? Of course we should not – and that is enough to prove the case for free trade . . . has left something out. Our task is to redress the balance of the argument”.
The critique of free trade based upon the rejection of wealth maximization draws stark attention to the difficulty in attempting to divide the political and the economic. The decision to embrace a free trade regime is not, and can never be, a purely economic one. Rather, it is a political choice involving, amongst other things, economic considerations. Joseph Stiglitz underlines the significance of this point: “There are important disagreements about economic and social policy in our democracies. Some of these disagreements are about values, how concerned should we be about our environment (how much environmental degradation should we tolerate, if it allows us to have a higher GDP); how concerned should we be about the poor (how much sacrifice in our total income should we be willing to make, if it allows some of the poor to move out of poverty, or to be slightly better off); or how concerned should we be about democracy”.
Overall, the debate on the non-economic merits and de-merits of the comparative advantage doctrine is one that even the most thoughtful modern proponents of free trade. In this, as in so much else, modern free trade theorists appear to be embracing a type of intellectual foreclosure that dates back to the work of Adam Smith. Adam Smith postulated non-economic effects of free trade, both positive and negative. On the positive side, both he and Ricardo cited cosmopolitanism and international harmony as a non- economic benefit of free trade. However, Smith saw that the pursuit of material wealth had less desirable effects.

Read more