The setting for discussing the theme of my lecture has significantly changed since last June, when I accepted the invitation to address the given topic. With the ongoing financial crisis and a worldwide economic depression looming the question no longer is, whether politics can or should influence international trade – or, as I would prefer to formulate the issue in much broader terms – can or should politics influence the way the international economy works – but rather how can politics do so.
At best we may be living through one of those great sea changes in world history when the ruling paradigm no longer works and a new one is emerging. With the old paradigm I am referring to the so-called Washington consensus, the short-hand term for a set of neoliberal theses which, with the heavy guiding hand of the IMF and the World Bank, became the generally, if not exactly accepted then at least imposed, set of recommended principles which governments and international organisations were supposed to follow in the name of sound macroeconomic policy.
As originally set out by the American economist John Williamson from the Institute for International Economics, the Washington consensus included ten broad sets of recommendations
Fiscal policy discipline; Redirection of public spending from subsidies (”especially indiscriminate subsidies”) toward broad-based provision of key pro-growth, pro-poor services like primary education, primary health care and infrastructureinvestment; Tax reform – broadening the tax base and adopting moderate marginal tax rates; Interest rates that are market determined and positive (but moderate) in real terms; Competitive exchange rates; Trade liberalization – liberalization of imports, with particular emphasis on elimination of quantitative restrictions (licensing, etc.); any trade protection to be provided by low and relatively uniform tariffs; Liberalization of inward foreign direct investment; Privatization of state enterprises; Deregulation – abolition of regulations that impede market entry or restrict competition, except for those justified on safety, environmental and consumer protection grounds, and prudent oversight of financial institutions; and, Legal security for property rights.
There was, of course, never any real consensus behind these principles, but there was enough political support from those with the most resources and influential positions to marginalize its criticism – this was still the time when the successors to Ronald Reagan and Margaret Thatcher were continuing the monetarist, neoliberal policies which had become dominant in most market economies in the 80’s.
Now, with the present financial crisis, open free-market fundamentalism has very few, if any, open defenders. Everyone is talking about the need not only for more regulation of the financial sector, but for more government intervention in the economy as a whole. It is as if we were, once again ”all Keynesians now”.
This sounds too good to be true, and it is. It is still much to early to say what this talk will actually lead to, or how the new paradigm which will rule international economic decision-making will look like. What he have seen so far in concrete terms, is a set of measures taken by the leading economies of the world to set aside huge amounts of money – literally trillions, and with more zeroes to them than most citizens can count – to prevent a total collapse of the banking system, including guarantees, capital infusions to distressed financial institutions and also direct government takeovers of banks to prevent their bankruptcy.
This may prevent the most feared collapse – although this is far from certain as yet – but without a follow-up of stringent and far-reaching reforms it will not prevent a repetition of the crisis we have seen in say 10 to 15 years time. And without active Keynesian intervention in the world economy we could be heading to at least as difficult and dangerous a recession as the one we experienced in the 30’s.
It would be comforting to think that we already have enough knowledge and experience to avoid this worst-case scenario, and as far as economics are concerned I would agree that we do, but staying alive in today’s world is much more complicated than that. I am referring to all the cumulated effects that human activities have had on our environment during the centuries that we have overstepped the boundaries of sustainable development. Now with climate change as the most urgent and biggest challenge finally breaking through into our consciousness we have had to recognize, that the way we have used scarce natural resources has not taken into account their non-renewability nor husbanded our renewable resources in a sustainable fashion.
We also have to recognize what is the most irreversible and far-reaching change we have experienced in our lifetime, namely the growth of the world’s population. Since the end of WWII we have seen the world’s population grow from 2,3 billion people to 6,3 billion today, and even if this growth looks like evening, there will be at least 9 – 10 billion people in the world before we can reach zero growth.
We are living in a world where mankind may have, at best, only a few decades time to change our ways to meet the standards of ecologically, socially and economically sustainable development. No-one can know for certain that we can succeed in this, or indeed if is any longer possible at all. I think it is vital to stress this, because as the world’s economic outlook darkens there will be increasing demands for ”re-estimating” at least ”postponing” our goals on stopping climate changes as they will be deemed too costly and harmful for economic recovery.
These appeals have to firmly rejected, as the economic consequences of continuing business-as-usual policies with increasing energy use, greenhouse gas emissions and other ecological hazards will in the not too long run be much more costly. And should someone recall Keynes’s famous dictum about all of us being dead in the long run, the difference is, that in today’s world this may apply not only to us personally, but to mankind as a whole already in what is commonly referred to as the foreseeable future.
To repeat what I said in the beginning: politics has to be able not only influence, but change the way the international economy works. In this respect the main challenges are, after the absolutely overriding one of slowing down and ultimately stopping humanly caused climate change
– implementing the Millennium Development Goals agreed in 2000
– reforming the international financial institutions, (A new Breton Woods system under UN auspices)
– introducing total transparency and effective supervision of financial markets,
– a world-wide currency transaction tax
– taxing stock-market transactions to reduce purely speculative de-stabilizing trading
– achieving better regulation of hedge funds, private equity funds and markets in derivates,
– setting tougher standards for the behaviour of trans-national corporations,
– eliminating tax-havens, Offshore Banking Centres and other means of tax evasion, with the aim of i.e. capital income being subject to minimum taxation everywhere
– making bail-outs and subsidies for banks and companies who have through their own mistakes and recklessness brought themselves to the brink of collapse strictly conditional and with public ownership
– agreeing on a new multilateral agreement on investment (MAI mark 2)
Recalling the tough battles needed to scuttle the draft MAI treaty formulated in the OECD, this last point requires a clarification. That the world needs clear and universally applied rules for foreign investment is not in doubt. However the draft MAI treaty which the campaigns of the international NGO community helped to stop would have been a step in the wrong direction, as it would have radically changed the existing balance of rights and obligations between governments and trans-national corporations radically in favour of the latter and could have led to a significant weakening of labour and environmental standards and the possibilities for governments to monitor and set the ground rules for foreign investment. An acceptable MAI treaty which would strengthen the role governments and safeguard labour, environmental and other important standards of behaviour for companies cannot be negotiated in the OECD from which all developing countries are excluded, and the right forum for agreeing on such a treaty would also have to include representatives of the social partners and the NGO community.
Some of this can and should be done at the national level through legislation and government activities. A lot also needs and can be done through the efforts and decisions of the European Union. But without effective and better global governance the most important parts of this agenda cannot be implemented. There the EU is again in a key position and it has, particularly on climate change, shown the kind of leadership needed. Also in many other issues Europe could be a positive influence, provided it gets and keeps its act together.
Nor should one underestimate the possibilities the Nordic countries taking the lead on global governance issues, not least because of the relative and often envied success of the Nordic model of a welfare state in combining global competitiveness with high social welfare standards and a more equal distribution of income then is found elsewhere. The fact that our societies too are feeling the negative effects of unbridled globalisation with for example income and wealth differentials again growing indicates that we also should have a self-enlightened interest in a better and more equitable management of globalisation.
Now I will address some of the issues relating to trade. I do not share the views of those who demonise the concept of free trade and/or the WTO. I believe that both the example of the Nordic countries as well as some of the Third World countries who have benefited from their participation in the world economy indicate, that a free trade regime does not necessarily carry negative social costs and that in can enhance the welfare of the population as a whole. And conversely, protectionism is often promoted by uncompetitive and cosseted special interests, seeking to maximise monopoly rents at the cost of the broader interest.
Flexisecurity is one answer to the adjustment costs that trade liberalisation imposes on many. Even if those who gain by the new, more productive and better-paid employment opportunities created by trade liberalisation clearly outnumber those who lose out in structural change, those who will end up in the more numerous winning group will not necessarily know this beforehand, whereas the immediate losers are easy to identify and to mobilize. In these situations there should be generous adjustment compensation with relocation and retraining support available for those who are the immediate losers. Such flexisecurity will enable people to be more ready to welcome changes which benefit the economy as a whole without having fear being condemned to a minority of losers in the process.
Flexisecurity is easier to effectuate and finance in more prosperous and developed countries with advanced social security provision, if the political will exists, but less developed countries lack the resources to do so. Funding from the developed countries for implementing and financing flexisecurity in the LDCs should be part of any agreement on further trade liberalisation.
A basically positive approach to free trade does not mean that we should always and unconditionally favour futher liberalisation. Even if the estimates stating the world wide gains that futher trade liberalisation can bring about are often exaggerated they are real enough, but do not mean that everyone will share the benefits equally.
This is why a conditions for further liberalisation should include, in addition to funding flexisecurity measures, many other provisions that recognize and address the concerns of the developing countries, including accepting long transition periods and even more permanent asymmetry. After all, there is a certain intellectual weakness in the general arguments of free trade enthusiasts when they demand full reciprocity in free trade agreements. If they really believe their own arguments they should know what every aspiring economy student is taught in their first year that unilateral tariff reductions will benefit the liberalizer irrespective of whether there is full reciprocity or not.
The WTO is a far from perfect organisation and is more attuned to the demands of the richer countries rather than to the needs of the developing ones. But if the WTO did not exist it should be immediately recreated, as a rules-based multilateral organisation setting and supervising equal rules for all countries, big and small, rich and poor, is surely better than a system of bilateral or regional agreements where the stronger more easily will prevail. There are not many places where Burkina Faso, for example, can call for the United States to answer charges of bending the rules in its favour in trade dispute panel and be awarded with a decision in its favour. That this does not happen as often as it should is partly because poorer countries lack the capacity to look after their rights against bigger countries which can always employ a battalion of high-priced lawyers to argue their case and intimidate weaker parties. Therefore support for such capacity-building for the LDCs has to supported with development aid.
But for free trade to be fair it needs a better-balanced set of rules, which are lacking today. This balance must include clearly defined provisions that allow for the protection of the environment, consumer protection, labour standards, safeguarding minority cultures and languages with rules which are exceptions to the general principle of free trade.
Such a hierarchy of rules already exists, when for example the Montreal Protocol on ozone-layer destroying substances, the CITES agreement on trade in endangered species or the Oslo Convention on cluster weapons exclude or severely limit trade in certain goods, but this needs to be developed and extended. The WTO is the right organisation for drawing the general rules on trade, but not for rulings on labour standard, the environment and so on. There organisations such as the ILO and a World Environmental Organisation have to take the lead. There is also a strong case for removing the responsibility for drafting the rules for Intellectual Property Rights from the WTO to some other better-suited forum.
What possibilities do politics have to implement such a program? Democracy has so far been a national project. While the number of democratically ruled countries is today bigger then ever before in history, the possibilities for nationally elected politicians to deliver what their electorates expect has actually diminished by globalisation and the lack of democratic control over international trade and the international economy.
Erkki Tuomioja MP, PhD
17.11.2008
