Economics and similar, for the sleep-deprived

Wednesday, September 24, 2003

 
High Noon in Cancun

This is a test of the new "Director's Cut" style; comments grudgingly acknowledged

Apparently the Cancun ministerial conference of the World Trade Organisation has got to such an appalling standstill that they all decided to pack up and go home. And the interesting thing is that what killed it wasn�t EU intransigence on agricultural subsidies, but rather something called the �Singapore issues�; a set of proposals about foreign investment on which the developed world is more or less united. Which is really rather a scandal., but as I argue below, the good thing about the Cancun collapse is that it allows us to get the measure of the character of the WTO as an organisation.

The Cancun round was meant to be all about the rich countries giving something up for the benefit of the developing world. We were going to reduce farm subsidies and let the poorer nations compete in our markets on fairer terms. And as far as one can tell from the outside, real progress was being made on these issues before the round collapsed.

Comment: I'm surprised how well this bald assertion held up; I expected that I'd have to back down significantly from the assertion that the Singapore issues were what sunk Cancun (although not from the general points made below). The Economist spun the whole thing as being the Kenyans' fault; basically, the Kenyans had been expecting a much better deal on cotton subsidies than they were offered, and in "anger", they joined the Indian anti-Singapore bloc. I put "anger" in scare-quotes because I think it's one of Kieran's intransitive verbs:

• I abandon an unworkable proposal in order to fundamentally reassess the situation
• You destroy the talks in the hope of a better deal
• He flounces off in a fit of pique

The Economist also tried to make the whole thing the fault of the NGOs for giving the poor countries "unrealistic" hopes about what they could get out the WTO, but somehow I don't think that one's gonna fly. Personally, I blame the Economist for giving the EU unrealistic ambitions about the acceptability of the Singapore agenda.

However, lower down the agenda (and off the media agenda entirely, perhaps because it didn�t offer all that many opportunities to bash the French) were a raft of issues grouped together under the name of Singapore because they were discussed there in 1996. There are four of them; �Investment�, �Competition�, �Transparency in Government Procurement� and �Trade Facilitiation�. Of these four issues, the last two are not particularly controversial; what tore the Cancun summit apart were the first two, which India in particular had been campaigining to keep off the agenda for a long time. Here�s a few questions and answers.

What are the investment and competition �issues�?
What are they is a fairly easy question to answer. They�re basically a set of proposals which would have the effect of making WTO rules apply to cross-border investment as well as to trade in goods and services.

What does that mean?
Effectively, that it would become illegal under the WTO not only to place tariffs on trade in goods and services, but also to place any restrictions on investment by overseas corporations, or to have any laws in place which had the effect of disadvantaging foreign companies compared to domestic ones.

Aren�t these natural things for the WTO to be discussing?
Absolutely not. The WTO is the World Trade Organisation, which was set up in order to facilitate trade in goods and services, something which more or less everyone agrees to be a general good. Free mobility of capital and investment is a much more controversial topic, mainly because the legal procedures needed to establish it would be much more invasive of national sovereignty, and because the benefits from liberalising capital flows are much less certain and significant than those from liberalising trade (for example, it�s not really consistent with the existence of nationalised industries, and it provides an easy channel for multinational companies to launch harrassing cases against any domestic legislation they don�t like; to take a hypothetical example, the local Coke bottling plant could launch an action against a free school milk program for unfairly prejudicing their investment1.).

Comment: I don't think that I pushed this hard enough. It's also important to note that trade in ownership is much more of a zero-sum game than trade in goods; it's hard to see any sort of "comparative advantage" in capital allocation unless you're going to make some very, implausibly unrealistic marginalist assumptions about the rate of return on capital in the developed and developing world. "Recycling" arguments of this kind (that free movement of capital would naturally lead to rich countries becoming net lenders to poor ones) were popular in the 1970s and 1980s, but they simply don't fit the observable facts.

Brad DeLong picked up on this one in a comment which (shorn of particular references to India which I don't necessarily agree with) represents the neoliberals' best argument for something like the Singapore agenda; that the freedom to nationalise industries and hand out investment permits is a freedom not worth having for developing countries because it leads to corruption and political favouritism. I think I would make two responses to this:

1. Most importantly, I just disagree with the neoliberals on the amount of freedom polities should have. Even if it is usually economically destructive, I think it's an unacceptable restriction on a political system to insist that certain kinds of economic behaviour have to be put above the law of the land and into a separate realm governed by treaties. To put it perhaps more provocatively, I think it was a good day for the world when the British government got out of the business of sending gunboats to defend commercial interests. Maybe it's bad from a development point of view to have capital controls, maybe it isn't. Either way, I think that even if it is bad, it ought to be up to the voters of a polity to decide whether the cost in terms of development is one they're prepared to pay. One only has to look at those Central American republics which are effectively owned by the fruit canning industry to see that there is a real choice here.
   
2. I also maintain my view expressed in "The Trouble With Oligarchs" on this weblog last year, that privatised corruption under a liberalised regime is potentially much more dangerous than government corruption under a non-liberalised capital account. The point being that one has to take into account not just the microeconomic costs of corruption, but also the macroeconomic effects of capital flight. Corrupt officials can usually only divert resources for their own consumption, but capitalist oligarchs are also concerned with accumulation, and that the actions they take to protect their accumulated gains can lead to the perverse capital flows which caused all the trouble in Russia.

This used to be recognised before 1998, when there existed something called the Multilateral Agreement on Investment (MAI), a sort of sister to the WTO which was meant to negotiate, well, a multilateral agreement on investment. But the MAI folded in �98 due to lack of support. And a certain coterie of neoliberal types have been trying to bring it in through other means ever since

Comment: The chronology is a little bit skewed here as the original Singapore talks took place in 1996. But I stand by the broad sweep; nobody was really pushing this agenda in the WTO until the MAI avenue closed.

So anyway, the state of play was that India and Malaysia were dead set against the Singapore �Son of MAI� proposals, the EU, Switzerland and Japan were dead set on them and the USA was happy to let the whole thing fall apart because they were not exactly mustard-keen on getting rid of agricultural subsidies anyway. The Africans decided that they couldn�t wear the Singapore agenda either, and walked out So the entire Cancun talks fell apart.

I say that this provides a useful yardstick to measure the character of the WTO by because it brought face to face the two views of what the WTO is actually for. On the neoliberal side, we�ve heard for years that WTO is all about bringing the benefits of free trade and free markets to the poor of the world and allowing them to gain the benefits of �globalisation�. On the �anti� side, we�ve heard for years that the WTO is nothing more than a cynical exercise in attempting to subvert the democratic process of poor countries and forcing them to accept foreign ownership and control.
In other words, the neoliberals have said it was all about things like the agricultural subsidy proposals, while the antiglobos have said it was all about things like the Singapore issues. And when the two came head to head in Cancun, the Singapore agenda won. When push came to shove, the rich nations were not prepared to give an inch to the poor ones on agriculture unless they got their quid pro quo in the form of progress toward an agenda which has nothing to do with trade and everything to do with massively undermining the ability of democratically elected governments to set the terms on which the ownership of the means of production is decided.
On the basis that you can tell a lot about a person or an organisation from what it regards as negotiable and what it regards as a deal-breaker, it appears that those who suspected that the WTO was a ploy to force a political agenda down the throats of the third world would appear to have a point. It is going to take a heck of a lot for the WTO to win back the credibility it lost in Cancun.

Comment: Note that delay is not at all necessarily a bad thing; the collapse of the Seattle talks meant that Brazil and South Africa ended up with a much better deal on intellectual property rights than the one that was on the table at that time. I still maintain that a lot of poor AIDS victims owe a substantial debt to anyone who broke a window that day.

(Finally, let it be noted that China, India and Malaysia, three of the four poster children for the �benefits of globalisation�, were in the group of countries dead set against the Singapore issuses).

Comment: redacted a footnote related to Coca-Cola's behaviour as a corporate citizen; I now take an agnostic view on this subject

Closing comments: Most of the objections to this thesis revolved around assertions that developing world governments are corrupt. I'm sure that some of them are. But is it really the job of the WTO to do anything about it? The WTO is there to deliver tariff reductions. If it doesn't do that, what's the point of it?

A number of people also pointed out that it's quite likely that the EU decided to push the Singapore agenda precisely in order to scupper a set of trade talks that were going somewhere they didn't like. That's certainly a credible theory, although I haven't seen any real evidence. I want to now digress on the subject of why almost all criticisms of the role of the French in EU trade policy are based on bad faith, but that's really a separate subject and deserves a separate CT post.

Finally, a question for discussion. Jason McCullough raised it in comments, and I can't come up with a succinct or convincing answer. The question is simple; How on Earth can cheap food be bad for the Third World? EU and US subsidies to agricultural production are usually talked of as if they were satanic devices of oppression. But in the standard Ricardian model, a subsidy to exports usually benefits the other trading partner unless you make quite extraordinary assumptions. Why is it so bad in this case? (I'm interested particularly in the question of food subsidies; one can tell all sorts of industrial economics stories about cotton and other raw-materials goods).

0 comments this item posted by the management 9/24/2003 12:17:00 AM