Free Trade and the 'Starving Child' Defense | The Nation


Free Trade and the 'Starving Child' Defense

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Turning to developing countries, several Asian countries have been outstandingly successful in terms of economic growth, rises in the standard of living and reduction in poverty during the past thirty years. However, contrary to neoliberal claims, countries like Japan and South Korea, during their periods of fast economic growth, did not operate under a regime of free trade and free capital movements but rather of managed trade and capital controls. Both Japan between 1950 and 1973 (when it was essentially a developing economy) and Korea in the seventies and eighties were definitely export-oriented economies. However, the important point is that although they were "open" to exports, they were not "open" to imports, i.e., they imposed fairly draconian selective-import controls. Both Japan and Korea actively discouraged foreign direct investment--while being fully open to foreign technology--and adopted a vigorous industrial policy rather than let unfettered market forces dictate the priorities and content of economic development.

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When some of these highly successful East and Southeast Asian developing countries (e.g., Korea, Malaysia and Indonesia) liberalized external capital flows and undertook other far-reaching liberalization measures in the mid-nineties, they were soon plunged into huge financial crises, virtual meltdowns. Countries like China and India, which had retained considerable capital controls, were able to avoid the Asian crisis despite, in the Indian case, having "fundamentals" that were worse than those of the crisis-affected countries.

Equally significant, the Latin American countries that have obediently followed the Washington consensus since the late eighties, and liberalized their trading and external capital regimes accordingly, have not fared well either. In the nineties they have been subject to "contagion" and fallouts from a series of severe financial crises, such as the Mexican crisis of 1994-95 and the Brazilian crisis of 1999. Their long-term rate of economic growth under this regime has been only about 3 percent per annum, compared with almost 6 percent per annum in their dirigiste period of 1950 to 1980.

Thus economic globalization has been suboptimal from the perspective of both developing and advanced economies. The only important gainers are the multinationals and the big financial institutions, which wish to have unrestrained freedom to move capital and goods anywhere and everywhere on the planet, irrespective of its consequences for the people. Both rich and poor countries would be considerably better off under a cooperative regime of managed trade, controlled capital movements and a social-market economy than under free trade, unfettered capital movements and market supremacy.

The arguments in favor of such a policy can be summarized as follows:

§ The achievement of full employment with steady productivity growth and modestly rising real wages requires a trend increase in long-term economic growth both in the North and the South.

§ The main constraints on fast economic growth in both the North and the South do not lie on the supply side but very much on the demand side. In relation to supply, not only do there exist vast un- and underemployed human resources (i.e., people) but there is also the huge unrealized potential of the ICT revolution.

§ However, such potential growth can only be realized in practice if there is a trend increase in the rate of growth of real world demand. This requires at the international level a coordinated expansion by industrial countries and the introduction of special and differential treatment for developing countries in a number of key spheres.

A global Keynesian regime of managed world trade and controlled global capital movements, together with genuine international cooperation as well as more harmonious relations between employers, employees and governments nationally, is more likely to deliver both fast and high-quality growth than the current globalization regime. Thus there is not only an alternative path to globalization for the world to follow but it is also a better choice. The main obstacles to economic progress lie today in the coordination failures that prevent the attainment of the required rate of growth of real aggregate demand; such coordination failures are ubiquitous in a free-market economy. In order for the trend rate of growth of real-world demand to be compatible with production possibilities on the supply side, institutional renewal at both the national and international levels is required to resolve these coordination problems on a sustained, long-term basis.

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