Aid and trade
How to help the Third World
Michael Sharpston
Until recently, the rich developed countries had a virtual monopoly in world trade of manufactures. This is now changing, and the list of products in which developing countries are highly competitive is increasing.' The unsettled issue — an economic issue, but above all a political one — is whether the rich countries will permit access to their markets, or erect trade barriers, probably in the form of quotas which put a physical limit on imports. This is one of the major issues behind the meeting in Chile of the United Nations Conference on Trade and Development.
The economic case for granting access is so hackneyed it is almost embarrassing to repeat it here, and is essentially the argument that justifies any trade at all. You sell your trading partner what you can produce most cheaply, and buy from him what he can produce most cheaply. At this, theoretical level, it is easy to dismiss the traditional argument of the protectionists, that the developing country has the ' unfair ' advantage of low wages. Of course it has. Equally, the rich country has the unfair advantage of a highly educated labour force, large plants which permit economies of scale, a great deal of equipment for each worker, good transport and communications networks, ancillary service industries available to hand, a relatively efficient and stable public administration . . It is precisely these differences which make trade worthwhile.
To confound the arguments of the protectionists in this way is a simple exercise, but not in itself a very useful one. Rather, let us analyse in which circumstances protectionism does have an economic justification, and also the sources of its political and social power. First, in a rich country suffering from general unemployment, protectionism may lead to a genuine increase in both income and employment; and in times of general unemployment, protectionism is always a strong political force. Yet other ways to stimulate the economy are now well known (extra government expenditure, tax cuts . . .). Forty years after Keynes's work, it will be sad if the only, inefficient, way we can maintain full employment is to hinder the development of poor countries.
Second, a rich country may maintain an over-valued exchange rate, so that a whole range of its industries appear uncompetitive. This again leads to protectionism, but the solution is obvious — devalue.
A. third problem arises if one rich country is more liberal than the others: on the whole this has been the position of the UK. In theory, the rich country concerned still stands to benefit from its liberal trade policies: but in human, social, and political terms, illiberal policies elsewhere in the developed world do make things harder. Adjustment problems in a liberal developed country become larger and more sudden, and protectionist lobbies can point to the favours granted to their opposite numbers
elsewhere. A rich country should therefore encourage other rich countries to be liberaL
Another argument against permitting access to exports of manufacturers from low-wage countries goes as follows. Although permitting these imports may increase total income in the rich country, it may possibly lower the share of that income enjoyed by labour rather than capital. If trade is permitted, the equivalent labourintensive domestic industry is run down, and a capital-intensive export industry expanded, then labour is being made less scarce and capital more scarce, with possible detrimental effects for labour: particularly, perhaps, for unskilled labour. Two points can be made in answer. First, labour's relative share could decline, but since the national income will be larger because of the gains from trade, its absolute share could still increase. One reason for believing that the poorer classes in a developed country will not suffer, is that the sort of manufactures developing countries are exporting are often cheaper-quality consumer goods, of particular interest to the lower paid. Second, it is of course possible for developed country governments to redistribute income back from capital to labour by compensatory tax policies.
But now let us come to the nub of the whole issue of imports of manufactures from developing countries: the structural effects on the rich, importing country. The benefits to the importer country are generalised over the whole consumer population: the potential losses are concentrated in the threatened domestic industry. Politically, the consumer is almost completely unrepresented: no substantial and coherent consumer lobby exists. Indeed, the ordinary consumer probably does not know if there are important restrictions on, say, shoes or not. Conversely, the producers (industry or labour) are comparatively well informed, and certainly much more politically organised. To be fair, it is also true that although gainers from trade could more than compensate losers, at present this compensation often does not occur: and both employer and employed in the threatened industry stand to lose a lot, whereas any individual consumer would only gain a little. Some structural adjustment has taken place, but there is no doubt that it has been painful for those concerned. (And of course, with all the government help in the world, some interests are bound to find their empires diminishing, and naturally resent the fact.) The whole problem of structural adjustment is made worse by the fact that the threatened industries are likely to be concentrated in the depressed regions of the developed country. This is no coincidence. If a product is one which underdeveloped countries with cheap labour can export to developed countries, for exactly the same reasons it is likely to be one which the underdeveloped regions within a developed country export to the developed regions. These underdeveloped regions may have an unemployment problem already; and the management of the threatened industry is unlikely to be of the highest calibre. It is the expanding industries with high rates of technical innovation — and hence capital-intensive techniques — which attract the best talent, and these are not the industries which will typically be threatened.
There is thus no doubt that accepting export of manufactures from developing countries causes the rich countries certain problems: and it is as yet very unclear what the final reaction of the rich countries will be. We are, in fact, at something of a turning point. Cotton textiles, the first major product in which developing countries were competitive, are now subject to physical import controls in nearly, every rich country: these restrictions are now tending to spread to all textiles. Other products are also becoming subject to quotas, either official quotas imposed by the importing country, or ' voluntary ' restrictions on shipments imposed by the exporting country (which is of course having its arm twisted). In Britain some degree of informal limitation of cutlery imports already occurs; the shoe industry is also becoming politically vocal. As against this, it must be admitted that the rich countries are in the process of granting preferential access to manufacturers from developing countries, (though with 'sensitive' trade items generally excluded, and often with restrictions on the quantity of imports to benefit from preferences). However it is difficult to see this 'liberal bureaucrat' policy surviving the onslaught of grass roots political pressure, unless something is done to compensate the affected interests, A major step forward would be to analyse which industries are likely to be affected before there are substantial imports from poor countries, and to consider carefully the political, social, and human problems which contraction of these industries will entail, and the government assistance which will be required. (This the British government has explicitly refused to do.) Very often, there would be no question of an industry being eliminated altogether: but it would probably have to specialise in high quality, sophisticated products. With advance preparation of the kind suggested, structural re-adjustment would become less painful: in those cases where the demand for protection is nevertheless politically irresistible, it should be of limited duration, and in the form of a tariff. Quotas, frequently itemised by subcategories of product, often discourage the structural re-adjustment required.
Above all, aid to both sides of an industry affected by competition from developing countries should be prompt and generous: aid to companies in diversification, and to workers in re-location or retraining, and protection of company pension rights. Often government help has been too late and too meagre. (This is true even of the US, where apparently generous trade adjustment provisions were for many years applied too restrictively.) Delay or parsimony in assistance fosters protectionist political reactions. Strangely enough, aid to promote structural re-adjustment in the rich countries could be as useful to the poor countries as any aid they themselves receive directly.
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