Poverty and Globalization

December 1, 2005 Topic: Economics Regions: Americas Tags: AcademiaEconomic LiberalismFree Trade

Poverty and Globalization

Mini Teaser: Protecting consumer interests is the path to global peace and prosperity.

by Author(s): Shanker A. SinghamDonna Hrinak

MOST OF the world's people live in countries where markets do not work properly and resources are not efficiently allocated. The notion that liberal economics has "failed" misses the point that in many areas of the world it has not really been tried.

Poverty--often cast as the fault of multinational corporations or "imperialist governments"--is the most virulent killer on our planet. Many continue to believe that increased government regulation and control, particularly when it comes to international trade, is the best way to combat poverty, ignoring the fact that real liberalization--truly free and competitive markets--is in fact the agenda of the world's poor.

It is therefore ironic that efforts to ensure that markets are competitive often fall on the sword of "national interest." Alleged threats to sovereignty are often cited by countries as reason not to negotiate on matters that touch domestic regulation and policies. In practice, this means that they reserve the right to maintain the status quo in which local producer interests trump consumer welfare. Allowing such notions of sovereignty to dominate over economic empowerment of people is to consign the vast majority of citizens to poverty.

It is remarkable that one of the most effective vehicles for empowering individual citizens--global trade negotiations--has largely disregarded this pivotal element of its work. Trade discussions have long centered on enhancing the welfare of producers, rather than on empowering consumers, despite the fact that the fundamental principles on which trade agreements are based are consumer-welfare enhancing ones. Today, the divide between those who would adopt a more consumer-led approach to market-opening and economic growth and those who maintain a producer-led focus represents a major factor opposing free trade and contributes notably to the stagnation of the international trade agenda.

One of the main problems is that governments and elites have refused to recognize the most basic fact of economic life: We are all consumers. Even businesses are also consumers of raw materials or finished or unfinished products. Yet trade negotiations are conducted with a strong bias toward mercantilism. It is quite revealing that in trade talks negotiators continue to refer to tariff cuts as concessions, as if lowering a tariff requires a "payment" by one's trading partner. This mercantilist logic is now applied to a whole raft of rules-based negotiations. Countries that employ this approach are really saying that they reserve the right to harm their consumers so that producers may receive a benefit in some unrelated area. This is irrational and destructive economics, which if not rooted out will perpetuate misery for billions of people. The recent Eminent Persons' Report prepared by a group chaired by former WTO Director General Peter Sutherland offered an opportunity to redirect the mercantilist approach toward trade. Sadly, however, the word "consumer" never appears in the text of that report.

Because so little attention was paid to consumer welfare, the unprecedented amount of trade liberalization that occurred in the 1990s did not lead to the competitive markets as had been predicted. At first this lag went unnoticed by trade negotiators from major developed countries, such as the United States and the EU countries, where competitive markets were much more the norm. The assumption was that removing trade barriers would inevitably lead to competitive markets inside the border.

But these negotiators failed to factor in the decades of state control and import-substitution economics that had pervaded most of the world's markets. In this context, removal of at-the-border barriers, which were often accompanied by significant privatization programs, often only enriched the gatekeepers, who initially invested in the privatizations at the expense of new entrants. Consumers in countries with low levels of competition were not always empowered by an opening to trade because the prices they paid for products were determined not by tariffs but by levels of competition in the market, which had not changed. The result was an increase in the perceived--and actual--disparity of wealth between the gatekeepers and consumers while poverty persisted. So instead of reacting by advocating more competitive markets and greater pro-competitive regulation inside borders, consumers questioned the entire process of liberalization itself.

Reform Fatigue in Latin American

IN LATIN America, the reaction has been so pervasive that one would be hard pressed to find anyone in the region who would not agree that the privatizations and liberalization of the 1990s had been a costly failure. Few would identify that failure with a lack of competitive markets, but they are linked. In many cases, public monopolies with regulation were simply converted into private monopolies without regulation. In other situations, laws were left on the statute books that not only tolerated but actually mandated anti-competitive conduct by private parties, such as laws that prevented foreign suppliers from severing relationships with failed distributors or taxes that discriminated against new market entrants, especially through foreign investment.

Today, the economic environment in many countries in Latin America and the Caribbean is dominated by two conditions: fatigue and fear. We talk about societies inflicted with "reform fatigue": They are tired of dealing with economic reforms that fail to fulfill their promise of growth and development. And we lament studies that show many Latin Americans and citizens throughout the Caribbean, some of whom lived under authoritarian rule and military dictatorships just twenty years ago, are today also tired of democracy--tired of a system of government that guarantees free and fair elections at regular intervals but that brings no concrete benefits in between.

It's easy to see why many societies in our region are experiencing reform fatigue. Today in our hemisphere, after over a decade of supposed free market economics and democratic government, there are still eighty million people who live on less than $2 per day. For these eighty million people, all the political and economic reforms have been largely meaningless.

This fatigue with reforms is dangerous, because when countries, peoples and societies are tired, they often opt for the easy way out. Today, there is a new wave of populist leaders--from Hugo Chavez in Venezuela to Nestor Kirchner in Argentina to potential leaders like Evo Morales in Bolivia--prepared to offer that alternative. Their rhetoric varies somewhat from country to country, of course, but the message at its core is that those who are poor find themselves in that circumstance because others are rich--because the pie of prosperity is only so big and someone has taken your piece. And the only way to change the status quo is to cut the pie a different way, to take your piece back. That view also figures in the populists' foreign policy, which holds that the developed world has grown rich only through the exploitation of other countries and that the emerging world is poor because of that abuse.

While overly simplistic, these claims deserve serious examination, because they contain a kernel of truth. They accurately describe the zero-sum game that has too long distorted reform initiatives and liberalization. Too often there have been cozy arrangements between the political and business elites that have ignored the welfare of the majority of the people. One example of this is the much-studied Mexican telecommunications sector, which has recently been the subject of a WTO case for anti-competitive post-privatization practices. Another example is the plethora of dealer-protection laws around the hemisphere, where it is almost impossible for foreign suppliers to terminate their local distributors, because the laws effectively mandate that supplier-distributor relationships go on forever. This chokes off competition at the distribution level and leads to rent-seeking behavior by the gatekeepers of the economy, in this case the local distributors. As a result of such laws, the prices of some basic products are kept artificially high. In the case of medicines in some countries, local distributors have been able to maintain 100 percent profit margins. Indeed, there are examples of local distributors refusing to allow suppliers to make charitable donations, claiming that such an act would effectively terminate the agreement between them and trigger the very high termination indemnities under these laws. The financial benefits that these gatekeepers acquire are then ploughed back into the system in an effort to preserve the anti-competitive regulation. There are also examples of privatization that merely lead to an uncompetitive and uncontrolled private monopoly, as opposed to a state-controlled and sanctioned one, largely because of the focus on government revenue generation. Even in the UK, where the privatization experience has been more pro-competitive than most, initial electricity privatization did not result in enough competition at the generation level and caused competitive problems downstream. Rarely is there a focus on unleashing the forces of competition. Privatization, countries have learned, does not automatically lead to a competitive market. That depends on the quality of the domestic regulatory system.

The oft-quoted remark that there are winners and losers in free trade unfortunately reinforces the idea of a zero-sum environment by suggesting that if someone is winning, someone else is losing. Positing the idea that someone must end up on the zero side of the free trade ledger engenders fear. The fearful believe that, in this new world, they will not be able to compete. A good example of this is the resistance in some Latin American countries, notably Ecuador and the Dominican Republic, to a competition law. Viewed through the lens of producers only, local producers do not want to face competition in their markets and do not want to change their customary practices, however damaging those practices are to consumers. But competition can benefit local producers also. Viewed through a consumer-welfare lens, even small businesses, which often buy raw materials for their productive processes, would benefit enormously from more competitive practices at this level.

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