The Causes of Human Rights Violations (47): Globalization

Human history is often viewed as a widening circle of moral concern. In the olden days, the claim goes, people cared only about their siblings and tribe. Then they started to care about their class, their nation, their religious community, their civilization, and ultimately their shared humanity. Cosmopolitanism, or the equal respect for all human beings whatever their affiliation or location, is then the end-state of morality (although some want to go further and include animals or even inanimate objects in the circle of moral concern). This end-state dovetails with human rights concerns because human rights are also the rights of all humans, whatever country, class or culture they belong to.

The widening of moral concern – if it indeed occurred as described – went in tandem with other and more familiar globalization processes, such as increased international trade, integration of different economies, the development of international law, increased communication through the internet, easier transportation, intercultural dialogue, migration etc. And all these different processes interact: communication and transportation foster trade, trade fosters communication, communication widens the circle of moral concern etc.

This story implies that globalization – of any kind – is always or unequivocally beneficial from the point of view of human rights. However, that may not be true. Let’s look at some of the pros and cons of different types of globalization.

Pros

  • Increased migration is almost without exception beneficial to the prosperity and freedom of all parties involved, although the migrants obviously benefit most.
  • Intercultural dialogue promotes tolerance and agreement on human rights, and this dialogue is not only fostered by new technologies but also by international trade. Better communication as well makes people care more about what happens in the world and makes it more difficult for oppressive regimes to hide their oppression. In this sense, communication and trade drive the widening circle of moral concern.
  • Economic interdependence between countries creates a self-interested incentive for governments to promote rights and democracy elsewhere in the world and makes it more likely that international law can impose itself over concerns about national sovereignty. Global economic collaboration requires international regulation, and economic regulation can open the door for other types of regulation, including rights regulation. Countries that depend economically on an international institutional and regulatory system, will have a much harder time invoking their sovereignty when faced with accusations of rights violations, since they already lost a huge chunk of their sovereignty due to economic integration.
  • The increasing importance of multinational companies makes it easier for consumers in one part of the world to lobby for corporate responsibility elsewhere in the world.

Cons

  • Outsourcing, a commonly cited aspect of globalization, can result in people losing their jobs, and the threat of outsourcing can force people to accept lower wages or inferior labor conditions. And work is a human right.
  • The threat of cheap foreign labor and cheap foreign products can lead to protectionism and immigration restrictions, two major causes of poverty in developing countries.
  • Globalization may erode the welfare state because a large part of the tax base – corporations, financial intermediaries and skilled workers – become internationally mobile and can thereby avoid to pay the taxes that governments need to finance their welfare systems. The tax base can also decrease because governments cut taxes in an effort to maintain the competitiveness of local businesses.
  • The previous three phenomena – outsourcing, labor and product competition and pressure on the welfare state – may not only lead to restrictions on international trade and migration, but can also counteract the widening circle of moral concern: politicians and local businesses can and often do use these threats to stir up xenophobia. A xenophobic public is more likely to vote in favor of trade and immigrations restrictions. On the other hand, there’s some evidence that people’s circle of moral concern is wider in countries that are more affected by globalization.
  • Globalization implies a certain degree of power deflation: states lose power vis-à-vis the market, multinationals, international institutions and each other. This in turn means that decisions affecting the well-being of people are taken by outside forces. Democratic self-government – which is a human right – is then threatened.
  • The interconnectedness of international financial markets increases the likelihood that a local financial or economic crisis spreads to the rest of the world.
  • A higher number of increasingly globalized multinational companies also means a higher risk that some of those threaten indigenous cultures, exploit poor workers etc.

On balance, however, I believe that globalization is good for human rights, even though I can’t quantify the pros and cons.

The Causes of Poverty (54): Lack of Trade Liberalization

I mentioned before that trade liberalization – the removal of trade barriers such as tariffs, subsidies and other distortions of international trade – is, on aggregate and in the medium term, a powerful mechanism for poverty reduction. I say “in the medium turn”, because some structural adjustment may be necessary, and “on aggregate” because some may lose while others gain.

The usual fears about trade liberalization – that it reduces government revenues necessary for redistribution, that it leads to labor competition, lower wages and higher unemployment rates, or that it raises prices in developing countries – are, in general and on aggregate, unfounded (an overview of the evidence is here). Of course, trade liberalization may cause local economic shocks, and there can be distributional effects: some people will benefit more than others, and some may even be worse of after liberalization, especially in the short term. But it’s the aggregate medium term effect on a country or an economy that counts.

This is similar to the positive effect of economic growth on poverty reduction:

The vast majority of the world’s poor live in the rural areas of these two countries [China and India]. Both countries achieved significant reductions in poverty during 1980–2000 when they grew rapidly. According to World Bank estimates, real GDP grew at an annual average rate of 10 percent in China and 6 percent in India during these two decades. No country in the world had as rapid growth as China, and fewer than ten countries exceeded the Indian growth rate. The effect on reduction in poverty in both countries was dramatic, entirely in keeping with the “Bhagwati hypothesis” of the early 1960’s that growth is a principal driver of poverty reduction. (source)

Not all of the poor will be automatically better of as a result of economic growth, and growth may widen income inequality or relative poverty while reducing absolute poverty. But on average and on aggregate, economic growth – like trade liberalization – reduces poverty. That’s not just a story of “trickle down” or “all boats rising on a rising tide”; economic growth also means that the government has more resources to fund welfare and redistribution. (Obviously, none of this implies that growth is always beneficial or that there isn’t room to make growth even more “pro-poor” than it already is).

Arguments in favor of trade liberalization

The interesting part of the argument is that the positive effect of trade liberalization on poverty reduction passes through enhanced economic growth: liberalization reduces poverty because it enhances growth.

[P]ractically no country that has been close to autarkic has managed to sustain a high growth performance over a sustained period. Furthermore, … if one classifies countries into globalizers and nonglobalizers by reference to their relative performance in raising the trade share in GNP during 1977–1997, the former group has shown higher growth rates… [T]he outward-orientation of the Far Eastern strategy … led to the Asian miracle. (source)

Free trade is one of the determinants of economic growth. Growth requires increased productivity, and that’s what free trade delivers. Free trade means more productivity because it means

  • more specialization
  • more use of comparative advantage
  • better access to technology and knowledge
  • better and cheaper intermediate goods (raw products etc.) and capital goods (machines etc.)
  • benefits of scale
  • and increased competition.

All these consequences of free trade have a positive effect on productivity and hence on growth. And that’s not just theory; there’s empirical proof. Reductions in trade barriers were almost always followed by significant increases in productivity (source).

And it’s not just productivity; trade liberalization has other effects as well. The removal of tariffs can reduces prices for consumers and hence reduce poverty. It’s often the case that goods consumed by poor people have a higher tariff tax than goods consumed by rich people:

In his research, [Edward Gresser, senior fellow and director of trade policy at the Progressive Policy Institute] found that the tariff rate on a cashmere sweater is 4 percent; the rate for one made of much cheaper acrylic is 32 percent. A silk brassiere has a tariff rate of less than 3 percent, but the rate on a polyester one is slightly less than 17 percent. The tariff rate on a snakeskin handbag is just over 5 percent but climbs to 16 percent for one made of canvas. Similar variations occur when it comes to household goods. Drinking glasses that cost more than $5 each have a tariff of 3 percent, while those that cost less than 30 cents each have a rate of 28.5 percent. A silk pillowcase has a rate of 4.5 percent; this goes up to nearly 15 percent for one made of polyester.

Overall, clothes and shoes contributed nearly $10 billion in tariff revenue in 2009, while higher-cost items including audiovisual equipment, computers and even cars added less than $2 billion. Gresser contends that the $10 billion is disproportionately borne by people who can’t afford to buy luxury goods. What’s more, when customers pay sales tax on these products, that amount is also higher than it would otherwise be thanks to the tariff that drives up the retail price. (source)

Hence, not only does free trade alleviate poverty, trade restrictions and protectionism actually aggravate poverty. Take also the example of restrictions on rice exports in rice-producing countries:

At first glance, this seems understandable, because a country may not wish to send valuable foodstuffs abroad in a time of need. Nonetheless, the longer-run incentives are counterproductive. (source)

When farmers can’t export, there’s little incentive for them to farm rice. Result: the shortages that were meant to be avoided.

Arguments against trade liberalization

However, we shouldn’t lose sight of the undisputed downsides of trade liberalization. The removal of subsidies can hurt certain producers and it can, especially in the short run, depress employment and wages in certain sectors. It can therefore reduce some people’s incomes and push them into poverty. Trade liberalization can destroy entire markets: it can force a country to abandon tomato production for example, because nonsubsidized local producers are no longer able to compete with increased import competition coming from countries with a comparative advantage. The local producers will lose their jobs and income. However, these same people may benefit in other areas: products which they consume may become cheaper. So, when assessing the impact of trade liberalization on poverty, one has to aggregate all the losses and gains in different areas, and that’s ultimately an empirical question that has to be investigated country by country. Overall, the evidence is that, on aggregate, the effect is probably positive.

There can be individual losers from liberalization, and even individual countries can lose: countries that depend on mineral resources, for example, can take the fast lane towards the resource curse when trade is liberalized. But it’s the global balance of poverty alleviation that determines the desirability and success of trade liberalization.

The claim that liberalization negatively affects government revenues because of decreasing income from tariff taxes, and hence diminishes the generosity of the welfare state, is also not well founded. First of all, liberalization also means reduced subsidies, which should improve governments’ fiscal situation. Secondly, trade volumes increase as tariffs are reduced, and hence the net effect of reducing tariffs doesn’t have to be falling revenues. And finally, even if revenues fall, the poor don’t necessarily have to suffer: it’s ultimately a political decision where to spend which types of government revenues. Priorities can change when revenues change.

Another possible disadvantage of free trade is a cultural one. The claim is that free trade means cultural imperialism: small cultures don’t have the resources to export their cultural products and risk being overwhelmed by, in particular, American culture. Hence, there may be a case for cultural protectionism, but this case doesn’t extrapolate to protectionism writ large.

Conclusion

Liberalization isn’t a magic bullet, neither for economic growth nor for poverty alleviation. Sustained growth and substantial long term poverty reduction require more than free trade. Conflict resolution, good governance, education etc. need to accompany liberalization. It’s no secret that we don’t yet fully understand all the determinants of growth and poverty reduction. The advantage of trade liberalization, compared to other possible pro-growth or pro-poor policies, is that it’s relatively easy to implement: it is – or should be – easier to abolish tariffs and other trade restrictions (especially if there’s an element of reciprocity in global negotiations) than to create a solid education system or a non-corrupt judiciary able to enforce market rules and property rights.

The evidence in favor of the pro-poor effects of trade liberalization is compelling, but we shouldn’t underestimate some measurement difficulties: the measurement of poverty, of trade liberalization and of the effect of the latter on the former is by definition imprecise. The concept of trade liberalization may also be too broad or too vague. And the specific outcomes of liberalization policies depend not only on the precise reforms being undertaken, but also on the context in which they are undertaken. The same measures will have different results in different economic environments. The extent of multilaterality also determines the effects.

Read more on the topic here and here. More posts in this series are here.

Types of Human Rights Violations (6)

Let’s take an example of a fictional and very specific human rights violation: a Nigerian woman, let’s call her Joy, doesn’t have enough money to buy food and other necessities on a regular and predictable basis, for her and her family. And yes, poverty is a human rights violation, but if you insist you can easily rewrite this post with another example of a rights violation. Then you can also take another country. The choice of Nigeria is purely random, and nothing in this post is supposed to imply that certain rights violations are typical of Nigeria, or any other country for that matter.

Joy’s poverty can be a case of one or several types of rights violations. A first question we need to ask is whether we’re dealing with an act or a rule based rights violation. Joy’s predicament can be the result of her dominant husband, Emmanuel, who doesn’t allow her to work because he’s jealous and afraid that she may be unfaithful when given the occasion, but who also doesn’t bring home enough money himself. However, a more important cause of her poverty may be the predominant social and cultural rules against education and professional work for girls and women.

So we can try to understand whether rights violations are caused by the conduct and actions of individuals, groups, states etc. or rather by systems of rules and institutions in a society. Counterfactuals will be helpful: how would things have been different if someone had acted in another way or if some other rules had been in force?

In the case of act based violations we’ll also need to establish an agent’s intent, his ability to predict and to avert the consequences of his actions, the availability of alternative actions, the cost of alternative actions to the agent etc. It’s not Emmanuel’s intention to force Joy into poverty, but he can be expected to understand the consequences of his actions. There’s also an obvious alternative action available – let Joy work – which won’t impose a large cost on Emmanuel (most women are not unfaithful at work).

In the case of rule based violations as well we’ll need to see whether the rule’s consequences could have been predicted and averted, whether alternative rules are available, feasible, realistic and not too costly, and, if so, whether there is someone who can be held responsible for not implementing and enforcing those alternatives. If Joy’s poverty is the result of cultural rules against education and work for girls and women, then there are alternative rules available, but those may not be feasible in the short term given the cultural nature of the existing rules. However, we can perhaps point the finger at the government for not trying hard enough to impose an alternative rule such as compulsory education for girls or a law against gender discrimination in employment.

This leads us to the following point: both act based and rule based rights violations can be divided into two additional categories or types, call them active and passive types of rights violations. Rights violations may be caused by wrongful acts or by a failure to act. Or they may be caused by the wrong rules or by a failure to impose the right rules. Emmanuel can violate Joy’s rights by forcing her to stay home or by failing to help her find a job. Joy’s government can violate her rights by enforcing the cultural norms against education and work for girls and women, or by failing to enforce rules regarding compulsory education and employment discrimination.

As is clear from the last example, the rules in rule based rights violations can be either moral and cultural rules or legal and institutional rules (or both of course). And legal and institutional rules can be national or international. Joy’s poverty may be caused by national rules such as in the example above, but also by international legal rules such as those regarding trade restrictions (and even by national rules of other countries such as those restricting immigration).

Act based rights violations can of course also be national or international. If Joy’s government is corrupt and allows the country’s national resources to be expropriated by foreign companies that fill the pockets of government officials, then that will be the cause of her poverty.

In the case of national legal rule based violations, the cause of violations may be incidental or structural: the cause may be a single rule or a small set of specific rules (e.g. the enforcement of gender discrimination in education and work), but may also be a general failure of the rules in society. If Nigeria becomes a failed state, then that will be the cause of Joy’s poverty because it’s unlikely that an economy will flourish absent the rule of law and good governance – and if the economy won’t flourish, neither will Joy.

Other possible classifications of rights violations could differentiate between

  • vertical and horizontal violations: vertical violations being those inflicted on individuals by a government, international institutions etc.; horizontal violations being those inflicted by individuals or groups on each other (both vertical and horizontal violations can be either rule or act based, caused by wrongful acts/rules or a failure to act/rule, national or international, incidental or structural etc.)
  • zero sum violations, positive sum violations, or negative sum violations (Emmanuel or male citizens of Nigeria in general may profit from gender discrimination in the short run – zero sum – but may ultimately also suffer from it – negative sum – because gender discrimination reduces the pool of talent in a society)
  • inflicted or self-inflicted violations (Joy may only have herself to blame for her poverty)
  • current or transtemporal violations (Joy’s poverty may be the lingering effect of slavery)
  • etc.

The Causes of Poverty (37): Lack of Trade Liberalization

I’ve argued before that doing away with trade restrictions (especially in the agricultural sector) – such as subsidies (like the EU’s Common Agricultural Policy), import duties and other protectionist measures – would be a boost to the global struggle against poverty. Free and unsubsidized trade reduces poverty in at least three ways:

  • It brings down prices because of increased specialization, competition and comparative advantage. Although the removal of subsidies (only one element of trade liberalization) would initially raise prices and hence also poverty levels in importing countries, over time this would be compensated by the downward pressure created by specialization, increased competition and comparative advantage. However, these importing countries wouldn’t be the poorest ones: “three-quarters of the world’s poor live in rural areas, with the majority of them depending directly or indirectly on agriculture for their livelihoods” (source). The poorest countries would benefit from initial price rises caused by the removal of subsidies. (That doesn’t mean that everyone in the poorest countries would benefit: non-farm workers may suffer).
  • It opens up foreign markets for poor producers.
  • It eliminates distortions of competition between local producers and foreign, subsidized products, distortions which often force local producers out of business.

All this has a positive effect on the income of the poor. There’s a new paper here arguing that the net effect of trade liberalization is a reduction of the number of poor people worldwide by 3%:

the winners from trade reform would include poorer countries and the poorest individuals within countries. Nevertheless, it is also clear that even among the extreme poor, some would lose.

Of course, and again: beware of the silver-bullet fallacy. Domestic anti-poverty policies continue to be important as well.

The Causes of Poverty (33): Agricultural Subsidies

After the United States and before Turkey, the world’s second largest producer of tomato concentrate is the EU. Its tomato farmers are paid a minimum price higher than the world market price, which stimulates production. The processors, in turn, are paid a subsidy to cover the difference between domestic and world prices.

Some of the effects of these subsidies on West African LDCs in the 1990s have been documented. The subsidy is reported to have reached about $300 million in 1997. The processors, then, need to find markets, and about 20 per cent of exports at that time went to West Africa. In the mid-1990s, about 80 per cent of demand in this region was covered by tomato products from the EU, which were cheaper than local supplies.

Stiff competition from EU industries led to the closure of tomato-processing plants in several West African countries. In Senegal, for instance, tomato cultivation was introduced in the 1970s, and progressively acquired an important position for farmers, for whom tomato production was synonymous with a key opportunity to diversify their farming systems and stabilize incomes. In 1990-1991, production of tomato concentrate was 73,000 tons, and Senegal exported concentrate to its neighbours. Over the past seven years, total production has fallen to less than 20,000 tons.

One of the main reasons for this dramatic fall was the liberalization of tomato concentrate imports in 1994. Despite the positive impetus provided by the devaluation of the CFA franc, the tomato-processing industry could not compete with EU exporters. Imports of concentrates jumped from 62 tons in 1994 (value: $0.1 million) to 5,130 tons in 1995 (value: $4.8 million) and 5,348 tons in 1996 (value: $3.8 million). SOCAS, the one Senegalese processing firm that has survived, buys imported triple concentrate and processes it into double concentrate.

Other West African LDCs – Burkina Faso and Mali – have had similar experience of enormous increases in imports of EU tomato concentrate. (source)

More on free trade and protectionism.

The Causes of Human Rights Violations (16)

We usually distinguish between three different origins of human rights violations:

  • The state. States commit rights violations for different reasons. Rulers may believe that such violations are necessary in order to maintain power, undermine or destroy the opposition, and impose some world view or economic organization of society. Or they may think that some types of violations are necessary evils when faced with certain risks. For example, torture or indefinite detention can appear to be a reasonable price to pay in order to reduce the risk of terrorism. States can also violate human rights unintentionally: lawmakers can draft a legal system that unnecessarily encroaches on private freedom (e.g. the “nanny state”). And, finally, a state can violate rights, not – as in the previous cases – by doing something it shouldn’t do, but by failing to do what it should do: a state that doesn’t provide an efficient judiciary or police force will be unable to protect the rights of its citizens and will be an accessory to rights violations.
  • Selfishness. In the case of economic human rights – such as the right not to suffer poverty – it’s often greed, lack of compassion or generosity, or the absence of sufficient and adequate aid and intervention that causes rights violations. Selfishness can cause both individuals and states to violate rights. States, for example, can uphold international trade structure or protectionist legal systems that favor the local economy at the expense of relatively poor exporters elsewhere.
  • Culture. Some say that certain elements of cultures and religions lead to practices that violate human rights. And then usually we get a mention of Islam, Shari’a, muslim misogyny etc. Here as well, we see that both states and individuals can use culture as a reason to violate rights.

Regarding the last point, there’s an interesting paper here (or here) claiming that it’s not Islam but oil that causes gender discrimination in Muslim countries.

Oil production reduces the number of women in the labor force, which in turn reduces their political influence. As a result, oil-producing states are left with atypically strong patriarchal norms, laws, and political institutions. I support this argument with global data on oil production, female work patterns, and female political representation, and by comparing oil-rich Algeria to oil-poor Morocco and Tunisia. Michael Ross

Oil production and export crowd out other exports, and hence artificially restrict the manufacturing sector. Compared to oil production, manufacturing uses relatively large numbers of low wage workers, which is why manufacturing has always and everywhere been a booster for female labor participation. Female labor participation in turn has always and everywhere promoted female political representation and women’s rights. The paper shows that, in the Middle East, countries without much oil (like Morocco and Tunisia) do relatively well on gender equality, compared to oil-rich countries. The same is true when comparing oil-poor and oil-rich countries outside the Middle East.

If that’s correct, then it’s still cultural and religious practices and beliefs that cause gender discrimination, but these beliefs are themselves caused by or at least promoted by economic fundamentals. Sounds quite Marxian to me (which doesn’t mean it’s wrong!).

Papers looking into the cultural and religion causes of gender discrimination can be found here and here (thanks to the Monkey Cage for the pointer).

The Ethics of Human Rights (22): Caring for What Happens in the World vs Moral Indifference or Moral Apathy

I guess we all have, now and again, the feeling that it’s strange that we go about our business as usual, being content or even happy, when at exactly the same time in countless other places in the world, someone is suffering, being tortured, killed, raped or whatever. Normally, we don’t think about these facts, because that would make our lives impossible. Thinking about it causes feelings of guilt and unease. Even though we’re often not directly responsible for what happens to these people, there’s always the lingering thought that there may be something we can do to help. And probably there is something we can do, especially if we invested some more effort in associating with others. (Individually we may indeed be powerless).

And there’s an even more unsettling thought lurking deeper in the backs of our minds, namely that we are responsible to some extent, even for the suffering of people thousands of miles away, people we don’t know and will never know. Thomas Pogge for instance has claimed – correctly in my view – that in our globalized world we all contribute, to some extent,  to institutions, rules and processes that violate human rights. For example, we buy clothes from companies that use child labor or ban trade unions; we still profit from colonial exploitation that happened more than a century ago; we acquiesce in democratically enacted laws that exclude poor producers from our markets etc.

The existing global trading regime contributes to the perpetuation of poverty through the asymmetrical market opening that took place in the 1990s. Poor countries still do not enjoy unfettered access to our markets and are still hampered by anti-dumping duties, quotas and very high subsidies, for instance on agricultural products and textiles. Not only do these subsidies make poor countries’ products uncompetitive on rich countries’ markets. They also hamper poor countries’ products in other markets because they allow the rich countries to undersell these products everywhere. By upholding a global economic order that grandfathers the rich countries’ right to impose such protectionist measures into the global trading system, the rich countries greatly contribute to the persistence of the world poverty problem. Thomas Pogge (source)

By the way, Pogge’s argument can be used to counter the claim that “poverty human rights” are substantially different from “normal human rights” such as the right to free speech etc. (are perhaps not even “real human rights” at all), because they impose positive duties instead of merely negative duties, duties to help instead of merely duties not to interfere. For Pogge, poverty is a negative duty: people aren’t poor because we fail to help them but because we actively – albeit often unconsciously – contribute to their poverty. Rather than focusing our efforts on how we can help the poor, we should focus on how we hurt them. This is reminiscent of recent debates on the continued usefulness of development aid.

OK, back to the main point. It’s all very well to encourage “caring”, and possibly also “helping”, but thinking about what we could call the “synchronicity of heaven and hell” makes it very difficult to get on with our lives. Hence we tend to suppress such thoughts. It’s a survival strategy, and quite understandable as such, but the consequence of not thinking is not helping. We know in the back of our minds that while we’re doing fine, elsewhere it’s hell, but we just don’t think about it too much. Only when we watch the news, donate something, or sit in the park and have nothing else to do. And then we’re amazed at how cold-hearted we can be. But at the same time and unconsciously, we continue to function in structures, institutions and sets of rules that underpin the problems that occasionally make us angry. And then we return to our normal mode of moral indifference. Much like the people in the “Fall of Icarus” by Breughel, a painting commented upon in a poem by WH Auden:

… In Breughel’s Icarus, for instance: how everything turns away
Quite leisurely from the disaster; the ploughman may
Have heard the splash, the forsaken cry,
But for him it was not an important failure; the sun shone
As it had to on the white legs disappearing into the green
Water; and the expensive delicate ship that must have seen
Something amazing, a boy falling out of the sky,
had somewhere to get to and sailed calmly on. (full text here)

Also like the father figure in the “Elf King” poem by Goethe, ignoring the suffering and anxiety of his own sun until it’s too late. We can try to rationalize our moral indifference in several ways. First, we may reject the claim that we have any part in the problems that occur far away. We may believe that poverty and dictatorship are home-grown, and not supported by globalization or our own countries’ involvement. Perhaps we believe that individuals failures are the only cause of their problems. Instead of being a bleeding heart Atlas supporting the misery of the world (as in the poem by Heinrich Heine below), we should simply “shrug“.

Ich unglücksel’ger Atlas! Eine Welt,
Die ganze Welt der Schmerzen muß ich tragen,
Ich trage Unerträgliches, und brechen
Will mir das Herz im Leibe.
Du stolzes Herz, du hast es ja gewollt!
Du wolltest glücklich sein, unendlich glücklich,
Oder unendlich elend, stolzes Herz,
Und jetzo bist du elend.

We also rationalize our inaction and moral indifference by pointing to the distance between us and those who suffer. This distance makes action on our part difficult, we believe, and makes it more likely that actions by others who are closer and more familiar with what’s happening will be more successful. While it’s generally correct to state that closeness is a factor in the ability to help, that’s not always the case. Sometimes, the causes of problems are very distant indeed, and hence the solutions have to be distant as well.

The Causes of Poverty (12): Protectionism

Few propositions command as much consensus among professional economists as that open world trade increases economic growth and raises living standards. N. Gregory Mankiw

Types and justifications of protectionism

Most governments in the world apply restrictions on the international trade of goods. They limit the imports into their countries by way of different measures:

  • Import tariffs (or taxes – “duties” ’96 on imported goods)
  • Regulatory legislation (e.g. public health legislation or sanitation legislation, “purity” legislation etc.)
  • Quotas (limits on quantities of certain goods that can be imported)
  • Anti-dumping laws (laws against selling below production cost)
  • Government-imposed monopolies on the sale of certain goods
  • And other measures.

They do so in order to protect local producers and farmers against foreign competition. That is where the word “protectionism” comes from. The reasons they state for introducing these measures are usually the following:

  • Someone else did it first.
  • Labor in other countries is cheaper, and therefore the products are cheaper.
  • Labor in other countries may be forced labor, e.g. in prison camps.
  • Labor in other countries may be child labor.
  • Governments’ first duties are towards their own citizens.
  • Countries should be self-sufficient and should protect certain important industries such as the food and energy industries, so as not to depend on foreign countries, even if the local products are more expensive than their foreign equivalents.
  • It may take some time for industries to become fully operative. Before that, countries can protect these industries by shielding them from foreign competition.
  • It is more environmentally responsible to consume local goods than products that have to be transported over thousands of miles.
  • Free trade favors the stronger party in a deal, and hence is neocolonial. The outcome of a free deal between unequal partners means more inequality.
  • Free trade encourages off-shoring and outsourcing, and hence job losses in the unprotected markets.
  • Etc.

Many of these justifications are also commonly used in the debate on globalization. (I will not examine the merits of these arguments here ’96 although I believe that some have some merit – because this post deals with the rationale of trade liberalization, not protectionism.)

Both developed and developing countries uses these measures to protect their own producers.

Another distortion of free international trade comes in the form of subsidies for the production of goods to be exported. This is also a protectionist measure because the aim is to protect industries in difficulties, industries which would have problems selling their goods abroad at normal prices.

Origins of protectionism

As is apparent from the quote above, these measures are usually not inspired by economic thought, but emanate from political concerns. Pressure groups in different industries lobby the government and try to have specific protections put in place. At the same time, however, the international community of states has been involved in trade liberalization negotiations (GATT, WTO etc.) that have been going on for decades already and that should result in the scaling down of the different protection measures. Some success has been achieved so far but the talks are still going on.

Trade liberalization and poverty

One of the aims of these negotiations is the reduction of poverty around the world. But does liberalization of farm trade help the poor? I think it does. Free trade brings down the cost of some products, because it may be cheaper to buy these products elsewhere than to produce them yourself. The cost of producing them yourself may be higher than the cost to produce them elsewhere (e.g. because of the climate in your country, or the available knowledge etc.), even if you include the profit margin of the seller in this cost.

Also, international trade’a0allows countries to specialize in certain products only, and specialization increases productivity and diminishes prices (see also the concept of comparative advantage).

There’s yet another reason why free trade may bring down the price of goods. Normally, if trade is free and restrictions on international trade are abolished, then competition will increase. And when competition increases, prices tend to go down.

So there are several reasons why free trade brings down prices. And when prices go down, consumers pay less. And when people pay less, they are generally less poor.

Import tariffs

Also, when import tariffs are cut in trade liberalization measures, prices for the consumers in importing countries go down, and exports in relatively poor export countries go up. So this would help the poor everywhere, the poor consumers in importing countries, and the poor producers in exporting countries.

However, when import tariffs are cut, local production in some countries will go down because local companies will have to compete with lower priced goods from abroad, lower priced because of the absence of tariffs, but often also because of cheaper foreign labor. With job losses as a consequence and hence more poverty for the people working in certain sectors of the economy. Consumers in general may be better off, but not those working in the industries that were protected by tariffs. For them, the benefits of cheaper products may be outweighed by the financial loss of losing their employment.

Furthermore, the government loses tax revenues when tariffs are cut, and therefore may be less able to provide a social safety net to cushion the adverse effects of competition.

However, most economists believe that removing tariffs and having free trade would be a net gain for society (for some evidence of this see here and here).

Import quotas

Import quotas limit the number of foreign goods that can enter a country and be sold there. This increases the prices of the goods because the supply is limited, and also because many of the foreign goods are cheaper than the local equivalents (mostly because of cheaper labor costs abroad). Restrictions on competition push up prices as well. Eliminating quotas therefore lowers prices and benefits the poor.

However, similarly to import tariffs, quotas protect local producers because they suffer less competition from foreign producers. Quotas can save jobs and therefore diminish poverty. But the people in these saved jobs are less numerous than the total population of consumers who benefit from lower prices (and they are also consumers themselves).

Quotas, contrary to tariffs, do not generate tax revenue, so there abolition would not cut into government benefits.

Export subsidies

Export subsidies depress prices and make it harder for non-subsidized producers, often in the poorer countries, to compete. Many local producers and workers will go bankrupted when the same products that they produce, are freely imported from countries where their production is heavily subsidized, sometimes to the extent that they can be sold below production price.

However, the initial effect of slashing export subsidies is an increase in prices of goods. Take the important example of food prices or prices for farm products. Even in rural societies, most people buy more food than they sell. Slashing subsidies would therefore hurt the poor because it makes it more expensive for them to buy food. The World Bank has estimated that slashing all farm subsidies would lead to a 5% increase in average prices. However, net food buyers are generally richer than net sellers; higher prices therefore transfer income from the rich to the poor, on average. Moreover, even the poor who buy more food than they sell (and those who do not sell at all), may benefit from higher prices for farm products because these higher prices boost demand for rural labor and push up wages for farm workers. The farm sector as a whole grows because of an increase in profitability, and this creates employment.

The World Bank has argued that the net effect of all these elements (price increases because of slashing subsidies, higher wages in farm jobs etc.) is positive for the poor.

Conclusion

Free trade helps the poor, and the ongoing trade liberalization talks in the framework of the WTO should be pursued. But at the same time it should be made clear that free trade is not a miracle solution. Poverty has many causes and many solutions and should be attacked from many fronts at the same time.