Trade at Your Own Risk

Review of International Political Economy,
Vol. 10, No. 4, November 2003, Sussex

Markets do not exist in a vacuum; they operate in a social, political, and legal context. That insight — obvious to thinkers such as Adam Smith and Karl Marx, but forgotten in the zeal to fashion economics into a science more like physics than sociology — lies behind the revival in recent decades of the academic discipline known as "international political economy" (IPE). But although IPE scholars are right to reject a vulgar economism, they often assert the primacy of politics so vigorously that they neglect economics. This trend leads to unfortunate misconceptions: When the world economy is seen as ultimately a zero-sum power game, the crucial point that everyone can gain from market transactions is often lost.

This approach is evident in the 10th anniversary issue of the Review of International Political Economy, a leading IPE journal edited by U.S. and British scholars. In their introductory essay, two American editors, Mark Blyth of Johns Hopkins University and Hendrik Spruyt of Arizona State University, locate the journal’s inception alongside the emergence of what they term the "second Washington Consensus," defined as "a new orthodoxy that entailed a particular view of globalization as predestination." They contend that the six articles in the anniversary edition provide "numerous challenges to that view," perhaps none more so than the essay by Robert Hunter Wade, a professor of political economy and development at the London School of Economics.

In "What Strategies Are Viable for Developing Countries Today?" Wade contends that poor nations have less and less ability to follow their own development paths. Why? Because international bodies, notably the World Trade Organization (WTO), increasingly lay down and enforce rules — at the behest of the United States and Europe — that constrain developing countries’ policy options.

Wade points to three big examples. First, WTO rules force developing countries to tighten their intellectual-property protection, thereby transferring an extra $19 billion per year in royalties to U.S. companies and making it harder for poor countries to develop by copying Western ideas. They also limit developing countries’ ability to nurture infant industries through measures such as requiring foreign investors doing business in poor nations to buy intermediate goods and services locally. And the wto’s agreement on services allegedly compels governments to open up vital sectors such as banking, education, telecommunications, and water supply to unbridled foreign competition against which local firms stand little chance.

Worse, the United States and Europe have reneged on their side of the bargain. Even as they pry open developing markets and impose Western rules, they conspicuously fail to open their own markets to exports such as textiles from developing countries. In short, the WTO is a rich man’s racket that keeps the poor in their place.

That needs to change, Wade argues. Instead of sticking to a development prescription that boils down to "liberalize" and "integrate," he believes developing economies should have greater discretion to choose industrialization policies that suit their needs and tastes — including "import replacement" (protectionism) and capital controls.

Wade is right to point out that nearly all governments negotiating at the WTO reflect the "exports-good, imports-bad" worldview. And since the United States and European Union are more powerful than developing economies — not least because companies everywhere want access to their huge domestic markets — the mercantilist bargains struck at the WTO often reflect the lobbying demands of powerful U.S. and European firms. Sometimes that power results in deals that harm developing countries, as in the case of the WTO’s intellectual-property agreement. Moreover, the United States and Europe hardly practice what they preach about free trade, notably in agriculture.

But even if they also benefit Western multinationals, WTO deals that liberalize markets in developing countries primarily help the poor themselves.

The larger point is that developing countries are not compelled to join the WTO, let alone sign on to its agreements. They are free to take the blind alley of import substitution if they so desire. But increasingly, eyeing the success of the Asian tigers and now of China, they decide that "liberalize" and "integrate" are essential planks of a successful development strategy. Nor are countries compelled to abandon their capital controls: Rightly, China has maintained them, and Malaysia reimposed them in 1998 during the Asian financial crisis.

We unquestionably live in a world of unequal power. Since development consists of increasing opportunities, developing countries by definition have fewer options than rich ones. Yes, the WTO is imperfect, its member governments deplorably mercantilist. All the more reason to celebrate that free trade makes all countries better off; poor countries that have embraced globalization are catching up with rich ones.