An eccentric’s* refreshing views on the international economic system (very slight ed.)

May 17, 2008

[One of the rare book reviews that do not fit the category “always late in my readings”….]

Razeen Sally – my former supervisor at the LSE, and the reason for my move to ECIPE – just published a small book at the Institute of Economic Affairs. It’s called pompously Trade Policy, New Century. The WTO, FTAs and Asia Rising”. It’s downloadable for free here.

This book is a merger and compilation of various writings that had been accumulating over the last years. It is short, extremely well written, and refreshingly non-technical. Razeen Sally’s talent for writing is the icing on the cake of his ability to think big but keep it short. Despite many catchy phrases and formulations, it is a dense read based on solid facts and deepest theoretical understanding.

As usual, Sally turns out to be once again highly provocative. This is the kind of book that tends to annoy everybody on the political spectrum – leftists anyway, but also rightwing neo-liberals, … and people on top of the world sitting in various international organizations (more below).

The book talks about (almost) everything: it starts with the trends in the WTO as an institution that was created to maintain an open economic system, and especially the current crisis reflected in the failure of Doha to move forward. He also dwells on the current fashion for preferential/bilateral/free trade agreements, castigating of course most of their “trade-light” content, the “noodle bowl” and administrative mess they create. He criticises Asia, and especially China for having followed the US and Europe in this trend. The book calls for a return to a few basics, and especially the rediscovery of “unilateral” liberalization – or “just do it” – as the United Kingdom did in the 19th century starting with the repeal of the Corn Laws in the late 1840s. His hopes are on China, which has been the engine for liberalisation in the last decades – without China, probably no change would have occurred in India and elsewhere.

“The WTO’s raison d’être is to provide a framework of rules to assist (mainly developing-country) governments that have strategically chosen to take their national economies in a market-oriented, globally integrated direction. That demands willing adherence to WTO rules. The problem with the Doha Round is that it has become home and breeding ground to a swarm of anti-market ideas and activity that defeat the very purpose of the WTO (…).”

“Political realism is also in order – something from which the WTO has taken an extended vacation. The WTO has to work with the grain of global political and economic realities if it is to work at all. That means US leadership, cooperation among major powers, and ‘coalitions of the willing’ among the approximately fifty WTO members who count. “

But:

The poorest developing “countries must of course be consulted and will exercise influence through the less developed countries (LDC), African, Caribbean and Pacific countries (ACP), G90 and other ‘common characteristic’ groupings. But the plain fact is that they are very marginally involved in the world economy, and most have chronic misgovernment that often descends into ethnic strife, civil war and state collapse (…)”

“(…) they should be accorded generous old-style Special and Differential Treatment – essentially a free ride. Through Most Favoured Nation (MFN) status, they should have rights to whatever liberalisation is negotiated by others; and preferably duty- and quota-free access to OECD and leading developing-country markets. At the same time, they should not be obliged to reciprocate with their own liberalisation, nor should they be under pressure to sign up to other new obligations if they feel unready to do so. (….) This is not to say, as do most trade NGOs, that continued protection is the right policy for poor countries. Quite the reverse: the main objective should be not to hold up wider liberalisation by those countries that have more weight in international commerce. Others can join when they are ready and willing, i.e. when they come to their senses and see the self-imposed harm done by maintaining protectionist barriers.”

Razeen is an old-style classic liberal. His gods are Hume, Smith and Hayek. In his earlier book, Classical Liberalism and International Order he goes against highly abstract “neo-liberal” theories based on the assumption of the homo oeconomicus, and too idealistic “liberal” international political theories advancing that all international problems can be solved by international organizations (what he calls “liberalism from above”). His case for free trade is one that comes from the writers of the beginning of our contemporary era – 18th Century – and their very humanistic way of integrating politics and economics. This explains both his flexibility and realism such as demonstrated above in the case of developing countries in the WTO, and his greater radicalism when it comes to defending free trade, and free domestic economic systems. Many “pure” economists have very static views – a classic case of “déformation professionnelle” . Their views can lead them to waver on their professed principles of openness when they are a bit overwhelmed by politics (such as a very disappointing Paul Krugman – a post to come)

So here a few more morceaux choisis from Razeen:

On Hume and Smith:

“Hume and Smith were much more concerned with a dynamic, rather than a static, view of international trade. To them, the dynamic gains from trade are critical to the long-run progress of commercial society – far more important than short term resource-allocation effects.

Hume’s main observation on the dynamic gains from trade relates to what we now call ‘technology transfer’. He viewed unfettered international trade as a conveyor belt for the transmission of ideas and technology across borders. This allows individuals and enterprises within nations to spot and then imitate better practice abroad, leading to improvements in their own performance, and, in the aggregate, to overall economic growth.

To Hume, this is a process of mutually beneficial competitive emulation among nations, akin to competition in economic markets. As Hume said, ‘A noble emulation is the source of every excellence.’

Smith’s major insight was that international trade widens the geographical extent of the market. This allows a deepening of the division of labour (i.e. more specialisation), which enables enterprises to reap economies of scale and increase productivity. This in turn feeds into economic growth. Today this is known as the ‘increasing returns’ argument.

Both Hume and Smith – Smith in particular – stressed the role of institutions in linking openness to the world economy and economic growth. The gradual improvement of domestic institutions is the lynchpin of the system. Opening to the world economy creates new incentives to firm up ‘hard’ and ‘soft’ infrastructure (to use modern terms). For example, traders link farmers and other small-scale producers in the hinterland to coastal ports, whence their goods are exported. Then come roads, ailways, the telegraph and other forms of transport and communications. Competition from abroad and awareness of international trading possibilities create the demand to improve property rights, contract enforcement, and other forms of regulation and (what we now call) governance. Such institutions help to maximise the gains from trade and associated foreign investment. Over time, this interaction between institutions and external openness leads to capital accumulation, investment, entrepreneurship and the diversification of a growing economy. Such was Smith’s vision of development. His was a model of an open-ended, dynamic, institution-rich economy. Its assumptions were realistic – a far cry from the perfect-competition, general-equilibrium, institution-free comparative-advantage models that held sway in the nineteenth and twentieth centuries.”

Here my favourites. On Global Governance:

To the ‘WTO junkie’, trade policy begins and ends in Geneva, and the WTO is the central trade pillar in the architecture of global governance. The Doha Development Agenda has been viewed as a means of delivering development (or salvation) ‘from above’. Of such are pipe-dreams made. “

And:

“To cap it all, the global-governance catchphrase – ‘global solutions for global problems’ – assumes, wrongly, that most problems have to be dealt with by members of the ‘international community’. The latter are usually unaccountable, unrepresentative and distant. It is this unconditional embrace of global governance which is glib, illiberal and dangerous.”

He’s got a point, ain’t he?

* I have heard Razeen Sally several times refer to himself as an eccentric.

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One Response to “An eccentric’s* refreshing views on the international economic system (very slight ed.)”

  1. Loren Paz Says:

    Sounds like a good book. Might read it when I get the chance.


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