TCS Daily

Equality vs. Poverty

By TCS Staff - August 4, 2003 12:00 AM

Arvind Panagariya is a Professor of Economics and Co-Director of the Center for International Economics at the University of Maryland, College Park.  He is the author of numerous articles and scholarly papers on free trade and globalization, including the recent "Miracles and Debacles:  Do Free-Trade Skeptics Have a Case?" which inspired this interview with TCS contributor Radley Balko.


The paper looks at economic data for a variety of countries over the last half century and concludes that while there are cases where a country has liberalized its trade policies and failed to show significant signs of economic growth, there are virtually no examples of developing countries that have shown considerable economic growth without liberalizing trade.


Panagariya also looks at developing countries that have remained economic stagnant, or that have atrophied, what he calls "economic debacles."  His conclusions here are similar. Countries that experienced paltry growth in income -- or no growth at all -- inevitably also showed little growth in imports.


The following interview elaborates on some of the other issues addressed in Panagariya's paper.



TCS: Does free trade exacerbate income inequality?  One pro-trade counterargument says that even if the gap between "developed" and "developing" grows, free trade's a net plus, so long as both are in fact growing.  Does your research support that premise, or that conclusion?


PANAGARIYA: First, let us consider the evidence.  If we construct the distribution of the average incomes of the nations, treating nations as the unit of observation, inequality has gone up during the past two decades. 


But if we construct the distribution of all households in the world, inequality has actually gone down in a big way.  This should not be surprising.  India and China, which are home to more than 40 percent of the world's households at the bottom of the world (household) income distribution, have grown at more than twice the rate in the rich countries over the past two decades. 


Recent research by economists Surjit Bhalla of New Delhi, India and Xavier Sala-i-Martin of Columbia University establishes beyond a shred of doubt that income inequality across households in the world has declined markedly in the last two decades.


But there is a deeper issue here.  While we all must deeply care about global poverty, there is something wrong about treating global inequality with almost the same concern.  Individuals are concerned about inequality principally in the context of their immediate social and political environments.  Does an Indian farmer really care about the change in his income relative to that of a U.S. farmer, let alone Bill Gates?  Besides, why do we assume that inequality will only lead to envy and not inspiration?  Watching Narayan Mutrhy of Infosys become a billionaire and rub shoulders with Bill Gates may inspire many other young Indians to try to do the same benefiting themselves and many others in the process!


TCS: A common criticism of free trade -- particularly on college campuses -- is that there's virtually an endless supply of cheap, sweatshop-style labor, and so the idea that trade will create competition for labor in these areas is misleading, because rather than compete in a developing market where there's an emerging competitive labor market, a corporation can simply choose to locate in another area where there isn't one.  Can you comment, based on your research?


PANAGARIYA: If you are concerned about poverty, you should admire corporations that go to labor-abundant countries.  Contrary to popular perceptions, multinational corporations actually pay wages that are significantly higher than those paid by local firms employing similar workers.  The multinational jobs have been among the most coveted jobs in developing countries. 


Even while growing up in India, I remember looking with envy at those employed with Pan Am, IBM and Coca-Cola.  Students on campus have their hearts in the right place when they show concern about the exploitation of sweatshop workers in the poor countries.  But they must dig deeper.  They must ask why the workers in Calcutta are lining up for jobs with the multinationals before they begin demanding an end to the exploitation.


A related but different issue has to do with the impact of the international movement of capital on wages in the rich countries.  But even here, we need to remind ourselves that the United States is the world's largest recipient of foreign capital.  As such, international capital flows have actually helped sustain higher wages in the United States than would have been the case in the absence of such flows.  For every plant that leaves for abroad, more are coming into the United States.


TCS: Many free traders believe the anti-globalization crowd isn't interested in creating wealth in the developing world -- that they're more interested [in] creating equality, and if the means to equality is lowering the standard of living in the West, so be it.  Has that been your experience in your interaction with anti-globalization colleagues in academia, or is this kind of thinking limited to the anti-globalization "street"?


PANAGARIYA:  I have found the concern with poverty and creation of wealth in the poor countries among NGOs to be generally genuine. 


My disagreement is with their premises that freer trade is a barrier to achieving these goals and a massive redistribution of wealth within and between nations is actually possible.  Targeted poverty reduction programs can surely help reduce poverty faster, but the centerpiece of the strategy has to be rapid growth.  To my knowledge, in the democratic societies, significant reduction in poverty through deliberate redistribution of income has rarely been achieved.


TCS: You mention that in order for trade openness to lead to economic growth, a country needs to have complementary conditions in place -- macroeconomic stability, enforcement of contracts, and rule of law, to name three.  Should the West refrain from trading with developing countries until we're confident these institutions are in place? 


PANAGARIYA: No. The point is that without the complementary policies, the country will fail to generate trade and growth even if developed countries are open to trade with it.  Being open is not going to hurt, but the benefits from it will be far less than true potential. 


TCS: What does it do to the political case for trade in the future if we forge trade agreements with countries that don't have these sustaining institutions in place, and such agreements then fail to spur growth?


PANAGARIYA: It is too much to expect that simply signing trade agreements will spur growth.  The countries themselves need to do a lot more by adopting market-friendly and credible policies. 


TCS: How do you think modern technology -- the Internet, cellular phones, satellites, etc. -- will affect the correlation between trade and economic growth in the years to come?


PANAGARIYA: Predicting the future is hazardous.  To my knowledge, no one predicted the ascendancy of the Internet 20 years ago.  But the present already tells us much in this regard.  Back office services that no one thought would be traded even 15 years ago are now being traded in massive volumes, and there's no limit to its expansion in sight, unless the rich countries become protectionist.  So we may witnessing an increasing share of services in trade than has been the case in the past.


TCS: Your paper laments that while free trade is perhaps the most benign component of globalization -- that even globalization's most vocal scholarly critics accept it -- the more pedestrian anti-globalization groups fail to differentiate it from, for example, opening an economy to short-term capital flows, which have produced some unfortunate results in Latin America and East Asia.  How can free trade advocates effectively separate the unquestionably beneficial aspects of globalization (migration, technology transfers, free trade, etc.) from its less proven components?  Is it too late?


PANAGARIYA: For countries such as India and China that have not yet embraced short-run capital mobility, the two are separable.  The lesson is to wait longer and move gradually on this front, giving the internal financial markets time to develop and regulatory policies to be put in place.  For countries that have already embraced the mobility, separation is harder.  But there too we must admit the possibility of the use of price-based capital controls.  In this respect, the trend started in the recent FTAs [free trade agreements] with Singapore and Chile to impose restrictions on the use of such controls is regrettable.  For many developing countries, the occasional resort to capital controls may be the necessary cost of maintaining free trade.


TCS: A common criticism from the anti-trade crowd -- and one I happen to agree with -- conveys certain skepticism about the real free trade commitment of the West.  The U.S. still imposes protectionist barriers on the very goods most likely to be produced by emerging economies -- textiles and agricultural goods, for example.  The U.S. also just passed an enormous farm subsidies bill.  Europe and Japan are even more protective of favored domestic industries than the United States.  I am of the opinion that it's still to a developing country's benefit liberalize its trade policies.  But can you give us some evidence from your research that helps make that case?


PANAGARIYA: Despite all the talk of rich-country protectionism, the fact remains that on the average, barriers to trade in the poor countries are higher than those in the rich countries.  In terms of the outcomes, I am hard-pressed to think of a single developing country that did not achieve sustained growth without rapid expansion of its exports to rich country markets.


Now it is true that peak tariffs in rich countries apply to labor-intensive products such as textiles and clothing and footwear.  But this is because the poor countries had been absent from the negotiating table prior to the Uruguay Round.  When they did come to the negotiating table, an agreement was reached to phase out the Multi-fiber Arrangement (MFA), which currently restricts the exports of textiles and apparel by all major developing country exporters to the United States, EU, Australia and Canada via a network of product-by-product, bilateral quotas. Many critics complain today that the agreement to phase out the quotas represents progress but it is back loaded, meaning most of the quotas will not be abolished until January 1, 2005.  But few of them seem to know that the back loading was the result of the insistence of many developing countries.  Afraid that in the absence of quotas they may be driven out of the market by super-competitive China, these countries lobbied for back loading the MFA phase out.


The reason for agricultural protectionism is similar.  All rich countries protect agriculture so that until recently there was no pro-liberalization lobby in that sector.  With the developing countries having joined the negotiations and the Cairns Group taking the lead, this has changed.  Moreover, the U.S. has recognized that it too has a comparative advantage in agriculture and has joined the pro-liberalization camp.  So progress will now happen.


Then again, many NGOs have joined the chorus, led by the World Bank, that the OECD agricultural subsidies hurt the poor countries without recognizing that the majority of the least developed countries actually import agricultural products and, for their exports, have access to the EU internal prices under the Everything but Arms initiative and will therefore be hurt by the elimination of the subsidies.  Contrary to the popular rhetoric, in which Oxfam has joined fully and loudly, the bulk of the benefits of agricultural liberalization and elimination of the subsidies will go to the Cairns Group, a handful of agricultural exporting developing countries, the United States, and to some degree the EU, which will benefit from the removal of its own protection and subsidies. 


TCS: I was wondering if you might contrast China and India to Latin America.  China is notorious for its obliviousness to international copyright law, is questionable on its commitment to property rights, and is tremendously bureaucratic.  India faces many of the same problems, and is known for corruption at all levels of government.  Yet each has grown tremendously after liberalizing its respective trade policy.  Latin America, meanwhile, has struggled -- due, you say, to macroeconomic instability resulting from short-term capital flows.  Can we conclude, then, that macroeconomic stability -- which you argue has at least in some cases been undermined by one component of globalization (opening economies to capital flows) -- is a more important complementary mechanism to economic growth than the others, or are there too many variables between the two examples to draw such a conclusion?


PANAGARIYA: India and China provide a counterexample to yet another of the myths popularized by the World Bank, namely, that corruption is a central problem of development.  Corruption must, of course, be condemned and controlled on moral and ethical grounds alone.  But the contention that it is the central economic problem is surely not grounded in serious research.  Even the answer to the question of whether corruption helps or hinders development depends on the counterfactual.  Moreover, if controlling corruption is truly so central to growth, how is it that China and India have grown so rapidly while corruption has continued to rise there?


But turning to your main question, if the internal market is not too small, macroeconomic stability and credibility of policy may give you a low-level sustained growth even without liberal trade policies or without trade liberalization as illustrated by the pre-1980 experience of both India and China.  But you would be sacrificing several percentage points of growth annually for no good reason by being autarkic as these countries did during three decades spanning 1950-80.


Macroeconomic instability has certainly been a key problem in Latin America.  But growth is a complex process that we do not fully understand and there may be other structural reasons as well in which case ensuring macroeconomic stability, while necessary, may not prove sufficient to kick off growth in Latin America.


TCS Daily Archives