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

Strengthening Competition

IN THE current discourse, we have tended to classify countries into those that espouse free market economics with all its implications, and those that favor central control or greater government interference. In weighing their policy options, few countries look at microeconomic policy through a consumer lens.

The current model for trade negotiations is for all partners to defend their producer interests, which almost inevitably clash, leading to an impasse in the talks or, as in the case of negotiations to create the Free Trade Area of the Americas (FTAA), to such a limited set of objectives that the goal of free trade is virtually set aside. In the case of the FTAA, before negotiation stalled completely, some countries, led by the Mercosur trade bloc, resisted the notion that the trade agreement should cover more than traditional border measures and reach into the domestic regulatory measures in states. Attempts to introduce a consumer-welfare-oriented competition policy or to protect intellectual property rights were sacrificed to national sovereignty, as countries maintained that they reserved the right to have whatever domestic policies they chose. But this is a canard. International trade rules have already impacted domestic policy: A country's tariff law is itself a national law. What is really being said, in effect, is that they reserve the right to harm their own consumers or not to protect property rights. If this is indeed the claim, their own people should be aware of it.

To express more clearly the central importance of consumers, competition policy should be brought into the mainstream of trade negotiations. Competition policy must move from being merely an add-on to driving trade talks. Issues that affect the business climate in the target market--such as a country's rules on standards or the way it enforces intellectual property rights--are increasingly cited as legitimate topics for trade negotiators. It is also essential to ensure that the level of competition in the market is not itself a barrier to entry that would undermine the real goal of free trade. The principal benefactors of this approach will be consumers, who will have access to a greater variety of higher quality goods and services at lower prices and, not coincidentally, efficient producers capable of competing on a level playing field.

The last decade has seen an increase in the number of competition agencies throughout the world. Twenty years ago, the primary competition agencies were in the United States and Europe. There are now almost one hundred competition agencies in the world, including many in Latin America. These include agencies in Brazil, Argentina and Mexico, as well as in smaller countries, such as Costa Rica and Panama.

Unfortunately, the impact that these agencies can have on their local economies has been decidedly mixed. This is largely because they are dealing with the powerful entrenched forces noted earlier. They are also dealing, in many countries, with an environment that does not necessarily accept the notion that competition should be the chief economic organizing principle. And as long as many countries do not define "non-optimal" economic behavior as that which leads to harm to consumers, they are not in a position to ensure that the playing field will be level and that the rules of the game will apply to everyone.

Thus, we come back to the importance of international trade negotiations. By incorporating specific provisions regarding competition, multilateral trade agreements can enhance the external credibility--and the real independence--of domestic competition agencies. But more importantly, negotiators need to recall their primordial obligation within the trade system to construct and agree on rules that are more likely to lead to free trade and free markets, and to adopt a consumer welfare lens in their negotiations.

Despite the furor about introducing competition principles into the WTO, we should point out that it already does address competition issues in many of its existing provisions, both in the agreement that applies to goods and especially in the agreement that applies to services. However, there are some ways to link the level of competition in markets to liberalization processes. Tariff reductions by one side could be linked to the ending of public sector anti-competitive practices by the other side. This makes economic sense, since the benefits of these tariff reductions will be vitiated if there are anti-competitive public sector restraints in the market. Competition safeguards, which could be triggered by demonstrating anti-competitive practices by a government or perhaps a private party, could also be established. Additionally, there is a need for some kind of discipline over public sector restraints that are anti-competitive, akin to the EU's state aids provisions.

Such innovations in trade agreements would bring the interests of exporting companies and foreign investment into alliance with consumers in the trading partner. Local producers would no longer be able to dominate the debate about what is best for the particular country. We have intuitively known that local producers do not always speak for the best interests of their country--even Adam Smith stated that local producers were very good at proving that what was in their interests was in the interests of the country as a whole, when the opposite was often the case.

The principal benefactors of a new approach to trade liberalization would be consumers. While the WTO and World Bank have noted in studies savings of close to half a trillion dollars to the world economy if the Doha Development Agenda succeeds in substantial liberalization, little of that will accrue to consumers unless internal markets function competitively.

What Will It Take?

AT PRESENT, one cannot point to any country in the world that has fully embraced the cause of consumer welfare in its trade negotiations. It is often too difficult to ask trade ministries to see beyond the forces that their producer constituencies are exerting on them. Countries or specific economic sectors (since frequently countries are two-faced on these issues depending on which sector you are analyzing) often move back and forth between measures that protect producers and those that would empower consumers. While embracing certain aspects of free market norms, countries will advocate for old-style industrial policy in the building of national champions through government subventions. This occurs even in developed countries, such as France, where the government recently decided to list certain companies that are deemed strategically important and are therefore protected from foreign takeover. Recently, certain EU member states rejected the process of service liberalization within the European Union. The inventory of seriously liberalizing service offers from WTO members is bare indeed, even at this last stage of the game prior to the WTO's Hong Kong summit in December. Even postal privatization in Japan, which the overwhelming number of Japanese favor, became such a heated subject that it caused Prime Minister Junichiro Koizumi to dissolve Parliament when the reform was rejected there. What we see is countries trying to have their cake and eat it, too--good old-fashioned mercantilism--seeking better market access for their producers while resisting competition for their own markets. In addition, countries are seeking to adopt some aspects of the free market slate, particularly with respect to macroeconomic policy, while not adopting others, particularly in the microeconomic arena, or by adopting an industrial policy that favors the development of national champions (again, a producer-led vision). The problem is that in today's globalized world one simply cannot try to have a sound macroeconomic policy while tolerating or even encouraging the very practices domestically that will ultimately erode the path to economic progress. When governments try to intervene in markets to guarantee certain outcomes, the government subsidy or aid may distort the market in a particular sector, thus enriching one particular producer at the expense of consumers and even producers in other related sectors.

What we are witnessing now is the teasing out of these differences at the global level. China provides us a very good example of this--where the guiding economic principle is the "socialist market economy." Here, China is moving to a competitive market, complete with a competition authority, while at the same time operating in an environment with a large number of state-owned companies and corporate welfare. However, examples of this kind of picking of options from both sides of the consumer-producer ledger are certainly not confined to China and exist in many countries and many sectors. This is not a developed-versus-developing-world dichotomy, but rather a problem that plagues both developing and developed countries alike.

Clearly, open trade and competitive markets are just two of the factors required if the world economy is to grow and develop and to ensure that growth and development are sustainable and broad-based. In several public speeches, former U.S. Trade Representative and now Deputy Secretary of State Robert Zoellick has made the most skillful and inspiring case for free trade as an effective weapon in the fight against poverty. Speaking at the FTAA trade ministerial meeting in Quito, Ecuador, in November 2002, Zoellick said, "Our ultimate objective is not to have an agreement; it is not to increase trade. Our objective is to grow our economies, reduce poverty, generate jobs, offer opportunities and above all, to create hope." Indeed, free trade and competitive markets can convert the fears about the new economy into hope and the fatigue over reform into energy--if we will only use them to those ends.

Essay Types: Essay