Fernando MonteiroHow Should We Go About Free-Trade
May 27th 2010 11:59
We all hear from time to time about protecting our industries and our jobs from foreign competition, but we also hear about liberalising our external trade so that only the fit, competitive industries remain in place while the fat ones disappear to give way to more productive ones.
It’s funny that when I went to university, the economics lecturer did not just expose the topic, he also pushed his credo. With regards to free-trade, he told us that the way to go was about removing all tariffs, even though none of us could envisage how that would save thousands of jobs in our Australian car industry, together with the taxes paid by these businesses to our government which expends them with the general community.
In truth, economics has a bad reputation since, at the level of the student, it does not allow for critical thinking. Students are told how to think and the doctrine of the day prevails. This is surprising if we consider that critical thinking, whatever the chosen subject, is what you go to uni to develop.
Since the 1970s we have been bombarded by the theory of neo-liberal economics, also called free-market economics or economic rationalism. Its proponents proclaim that the government should be minimal and should not intervene in the economy, and that it should not try to pic winners but should sell most of its assets. It also says that consumers always act rationally and make choices accordingly. With regards to external trade, it declares that there should not exist any barriers to trade.
Neo-liberal economics is inspired in nineteenth century economics thinking and in people such as Adam Smith, David Ricardo and others. As we all know, Adam Smith – who wrote The Wealth of Nations -- saw an invisible hand driving any free market into equilibrium, which is a point where demand and supply stably meet in an automatic way. The question for us today is whether this ever happens in practice.
David Ricardo, after making a fortune in the stock market, wrote books that influenced the thinking of his day. He founded the current economic rationalism idea that economies should be totally open to international trade. His main reason: that this way each country of the world would produce what it is most apt at producing, which is what it can compete with greater probabilities of success. A priori the idea is interesting. But does it in reality work? Let’s have a closer look into it.
Ricardo gave one example of his thinking: the trade between England and Portugal by which England sells to Portugal manchester goods, of which it is a very efficient producer, and Portugal sells to England its famous Oporto wine. England would avoid producing Oporto wine or any similar product, since it is not very good at doing so, and rather import it from Portugal; and Portugal would avoid trying to produce manchester goods, which it is not very good at producing, but would rather import them from England. If you put down some figures to this idea, you have to conclude that there is some merit to it.
This is, though, not all about Ricardo’s free-trade idea. He makes two assumptions: (1) that all capital, which in economics is plant and machinery, is infinitely deployable elsewhere; and (2) that all labour is equally infinitely deployable into other industries. That is, if the re-organisation of industry resulting from free international markets means that your capital and labour are uprooted, you can be assured it can be deployed elsewhere. But can it truly in reality be so? Let’s look into a contemporary example.
Mozambique is a nice country in the east cost of Africa. It is also my country of birth. Its ruling party, Frelimo, abandoned its 1970s colonial Marxism indoctrination and transformed the country into a democracy, a true one, to be proud of. It also liberalised its economy. But it didn’t go crazy about removing tariff barriers to its industries. Problem was, it run into financial trouble in the 1990s and the International Monetary Fund (IMF) was called in.
Now, the IMF is made of conservative, free-market thinkers, now during democratic Obama rule, and before with Clinton’s rule as well. They are just entrenched there, regardless of who sends them the money. In Mozambique they just imposed as a condition for help that the country removed all its trade barriers. The Frelimo government had no options.
In Mozambique, since the Portuguese colonial times, there existed a small nice industry producing Caju cashew. In Mozambique almost every household has some Caju tree in their backyard, and so every year the owner makes some money selling it to the processing company, this one called Mocita. Mocita would roast the cashew, extract it and package it for export. They made a nice profit, provided employment to thousands of workers, since it was labour intensive, besides buying the Caju from individual local suppliers. The only problem with Mocita became: they were protected by tariffs and the IMF wanted them down.
The Mozambican government argued with the IMF about the liberalisation of the Caju industry, but the IMF was inflexible: all tariffs had to go. And so they did in the end. What happened next? India, that could process the cashew for a lower cost and so also sell it cheaper, got the entire Mozambican production of Caju cashew the year after tariffs were removed and Mocita just closed its doors. Thousands of workers lost their jobs, the government lost some precious tax revenue and the country lost a long-standing industry.
David Ricardo assumed that capital and labour would be deployed elsewhere, but in Mozambique retrenched workers found no other employment, and the Mocita capital lays there rusting. So much for free-trade.
It’s funny that when I went to university, the economics lecturer did not just expose the topic, he also pushed his credo. With regards to free-trade, he told us that the way to go was about removing all tariffs, even though none of us could envisage how that would save thousands of jobs in our Australian car industry, together with the taxes paid by these businesses to our government which expends them with the general community.
In truth, economics has a bad reputation since, at the level of the student, it does not allow for critical thinking. Students are told how to think and the doctrine of the day prevails. This is surprising if we consider that critical thinking, whatever the chosen subject, is what you go to uni to develop.
Since the 1970s we have been bombarded by the theory of neo-liberal economics, also called free-market economics or economic rationalism. Its proponents proclaim that the government should be minimal and should not intervene in the economy, and that it should not try to pic winners but should sell most of its assets. It also says that consumers always act rationally and make choices accordingly. With regards to external trade, it declares that there should not exist any barriers to trade.
Neo-liberal economics is inspired in nineteenth century economics thinking and in people such as Adam Smith, David Ricardo and others. As we all know, Adam Smith – who wrote The Wealth of Nations -- saw an invisible hand driving any free market into equilibrium, which is a point where demand and supply stably meet in an automatic way. The question for us today is whether this ever happens in practice.
David Ricardo, after making a fortune in the stock market, wrote books that influenced the thinking of his day. He founded the current economic rationalism idea that economies should be totally open to international trade. His main reason: that this way each country of the world would produce what it is most apt at producing, which is what it can compete with greater probabilities of success. A priori the idea is interesting. But does it in reality work? Let’s have a closer look into it.
Ricardo gave one example of his thinking: the trade between England and Portugal by which England sells to Portugal manchester goods, of which it is a very efficient producer, and Portugal sells to England its famous Oporto wine. England would avoid producing Oporto wine or any similar product, since it is not very good at doing so, and rather import it from Portugal; and Portugal would avoid trying to produce manchester goods, which it is not very good at producing, but would rather import them from England. If you put down some figures to this idea, you have to conclude that there is some merit to it.
This is, though, not all about Ricardo’s free-trade idea. He makes two assumptions: (1) that all capital, which in economics is plant and machinery, is infinitely deployable elsewhere; and (2) that all labour is equally infinitely deployable into other industries. That is, if the re-organisation of industry resulting from free international markets means that your capital and labour are uprooted, you can be assured it can be deployed elsewhere. But can it truly in reality be so? Let’s look into a contemporary example.
Mozambique is a nice country in the east cost of Africa. It is also my country of birth. Its ruling party, Frelimo, abandoned its 1970s colonial Marxism indoctrination and transformed the country into a democracy, a true one, to be proud of. It also liberalised its economy. But it didn’t go crazy about removing tariff barriers to its industries. Problem was, it run into financial trouble in the 1990s and the International Monetary Fund (IMF) was called in.
Now, the IMF is made of conservative, free-market thinkers, now during democratic Obama rule, and before with Clinton’s rule as well. They are just entrenched there, regardless of who sends them the money. In Mozambique they just imposed as a condition for help that the country removed all its trade barriers. The Frelimo government had no options.
In Mozambique, since the Portuguese colonial times, there existed a small nice industry producing Caju cashew. In Mozambique almost every household has some Caju tree in their backyard, and so every year the owner makes some money selling it to the processing company, this one called Mocita. Mocita would roast the cashew, extract it and package it for export. They made a nice profit, provided employment to thousands of workers, since it was labour intensive, besides buying the Caju from individual local suppliers. The only problem with Mocita became: they were protected by tariffs and the IMF wanted them down.
The Mozambican government argued with the IMF about the liberalisation of the Caju industry, but the IMF was inflexible: all tariffs had to go. And so they did in the end. What happened next? India, that could process the cashew for a lower cost and so also sell it cheaper, got the entire Mozambican production of Caju cashew the year after tariffs were removed and Mocita just closed its doors. Thousands of workers lost their jobs, the government lost some precious tax revenue and the country lost a long-standing industry.
David Ricardo assumed that capital and labour would be deployed elsewhere, but in Mozambique retrenched workers found no other employment, and the Mocita capital lays there rusting. So much for free-trade.
| 79 |
| Vote |
subscribe to this blog
