Trade, development… and free ponies!!

The latest Cato Unbound features New York University's William Easterly, author of The White Man's Burden, on "Why Doesn't Aid Work?" There will also be reaction essays from the World Bank's Branko Milanovic, Deepak Lal of UCLA, and the Center for Global Development's Steve Radelet. Go check it out -- you can read my review of Easterly's book here. On a related topic, I see that Robert Reich reviewed Joseph Stiglitz and Andrew Charlton's new book Fair Trade for All. As Reich recounts the book's policy prescriptions, it appears that Stiglitz and Charlton believe in free ponies: Stiglitz and Charlton show that standard economic assumptions are wrong when it comes to many developing economies. When markets in sub-Saharan Africa and elsewhere are opened, people often can't move easily to new industries where the nation has a comparative advantage. Transportation systems that might get them there are often primitive, housing is inadequate and job training is scarce. They're vulnerable in the meantime because safety nets are weak or nonexistent. Most people lack access to credit or insurance because financial institutions are frail, so they're unable to start their own businesses or otherwise take advantage of new opportunities that trade might bring. Many poor countries are already plagued by high unemployment, and job losses in the newly traded sector might just add to it. Hence, the authors argue, the pace at which poorer nations open their markets to trade should coincide with the development of new institutions ? roads, schools, banks and the like ? that make such transitions easier and generate real opportunities. Since many poor nations can't afford the investments required to build these institutions, rich nations have a responsibility to help.... Moreover, they warn, one size does not fit all. Richer nations should not force all poorer nations to abide by the same market-opening rules and timetables. Poorer nations have different needs. They are at different stages of economic development (subsistence agriculture in much of Africa and parts of Asia, export-oriented agriculture in Latin America and other parts of Asia, early-stage industrialization elsewhere). They have different political and institutional capacities. The problem with this argument is the same as the problem with Stiglitz's Globalization and Its Discontents and Sachs' An End to Poverty -- they recognize that markets in the developing world lack vital infrastructure, but fail to recognize that developing governments suffer from even greater institutional deficits. Expecting these governments to determine when their proteted sectors should become unprotected from a welfare economic perspective is wishful thinking -- in large part because these governments will not want to give up the rents that they extract from trade protection. [But states like Japan and South Korea pulled this off!--ed. That's a matter of some debate, but accept the premise as given. The states that could pull this off have already done it. I ask my readers to identify states with well-developed institutional capabilities that have yet to hit the fast track of economic growth.] While Stiglitz and Charlton are at it, they should also wish for some ponies.