How to Spend $50 Billion to Make the World a Better Place
Page 17
If progress is to be made in the face of strong protectionist pressure from powerful domestic interest groups, a multi-pronged approach must be adopted. This would encourage
both unilateral reform within countries and comprehen-
sive multilateral reform through the WTO, supplemented
by regional initiatives of the sort which support both. To counter the entrenched protectionist forces whose lobbying of national governments is extremely influential, the
case for free trade needs to be made more strongly, for
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156 How to Spend $50 Billion to Make the World a Better Place 9000
8000
Without policy reform
7000
With policy reform
6000
5000
$bn
4000
World
3000
Developing countries
2000
1000
0
20062008 201020122014 20162018 2020 20222024 20262028 2030 2032 203420362038 20402042 2044 2046 2048
Figure 9.1. Annual increment to global GDP without and with 50 per cent cut to subsidies and trade barriers, 2006–2050 ($US 2002 bn) example by sponsoring policy think tanks and others able
to effectively disseminate to the gainers from trade reform the empirical findings of researchers.
Preferential trade agreements seem destined to be part
of the ongoing move toward liberalization, although on
their own they are not the best solution. Non-reciprocal
agreements (Opportunity 4) in particular are of doubt-
ful value, discouraging further liberalization and disadvantaging non-LDC developing countries (which include such
poor countries as Vietnam). Free Trade Areas have similar
drawbacks, and deliver only a fraction of the benefits realizable from WTO-based multilateral reform.
Summary of gross benefits
As a working figure, an average of the upper and lower
bounds of studies used as a basis for this chapter has been taken: This amounts to a 1.8% increase in global GDP as the
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Subsidies and Trade Barriers
157
static gain (that is, taking no account of reform-stimulated economic growth) after full adjustment to the new regime.
For developing countries, the benefits would be relatively higher: 2.5% of GDP. It is assumed that the gains will begin at one-fifth of that rate but rise by one-fifth each year from 2006 until 2010 when they are assumed to be fully realized.
In addition, there are dynamic gains from free trade. A
conservative estimate is that reform would boost the annual rate of economic growth by one-sixth for developed countries and one-third for developing countries. For the world as a whole, growth would rise from 3.2% to 3.8% a year,
while for developing countries this would raise their average annual growth rate from 4.6% to 6.1%. To again err on
the conservative side, this higher rate of growth is assumed to continue just until 2050 rather than forever.
Economic costs
The costs incurred in the reform process are one-off, in contrast to the gains which are long-term and continuing. Costs include those associated with negotiation rounds, support
for policy think tanks, adjustments for companies and workers, and social costs and welfare payments for the temporarily unemployed. Studies tend to show that such costs are relatively small compared to the gains, and are minimized by
careful phasing in of reforms. However, governments may
still be reluctant to reform since job losses tend to be concentrated and highly visible, whereas the gains are spread so thinly across the entire economy as to not be obvious to most citizens.
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158 How to Spend $50 Billion to Make the World a Better Place For the purposes of this chapter, it is assumed that the
adjustment period following 50% liberalization lasts for five years (considerably longer than has been found in most case studies). For each year, the cost is assumed to be one-third of the eventual total static benefit of the reform: $243 billion annually for the period 2006–2010, with $71 billion of that incurred in developing countries.
Social and environmental benefits
By generating large economic gains over a long period,
trade reform would indirectly help to tackle the other global challenges by making more funds available. However, there
would also be direct effects on a number of key challenges.
For example:
r Poverty reduction would be fostered, as faster-growing developing economies have been shown to be better at
reducing poverty than countries with slow economic
growth.
r Communicable diseases could be tackled more effectively by countries where poverty is reduced and
medicines are more widely available and affordable.
r Conflicts are likely to be reduced when countries are more economically interdependent and where there are
fewer barriers to migration.
r Educational under-investment particularly by poor families in developing countries is likely to be alleviated by trade reform-induced increases in international prices
for farm and textile products.
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Global benefit-cost ratios
Lower-bound estimates for the overall net benefits of halving subsidies and trade barriers indicate an approximate
doubling of annual GDP growth after the initial (assumed
five year) adjustment period. Assuming there were no fur-
ther benefits after 2050 (though this is unlikely) and using a discount rate of 5%, the net present value would be
$23 trillion for the world economy, with half of this accruing to the current developing economies. Given the present value of estimated adjustment etc. and so on costs of just under $1 trillion, the benefit-cost ratio is 24.3 globally, and 37.9 for the developing countries.
If social and environmental benefits and costs were
included, these figures would most likely be considerably
higher. Even if more conservative assumptions are made
about the success of the Doha round and the transition
period, benefits are still likely to be enormous and the costs easily justifiable. All this is within our grasp, given bold lead-ership and a willingness to make the most of the opportu-
nity available for unilateral and multilateral trade reform, particularly within the WTO framework.
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SUBSIDIES AND TRADE BARRIERS
OPPONENTS’ VIEWS
In his challenge paper, Kym Anderson makes a strong case
for maximum liberalization of trade, not only as a good
in itself, but also as a way to contribute to the other high-priority challenges. Both opponents agree that free trade
has economic benefits, but have concerns about how these
might best be generated and
shared.
Arvind Panagariya whole heartedly supports Anderson’s
case for trade liberalization to be the highest priority among the challenges and, indeed, considers it essential if all the others are to be met. Nevertheless, he has some critical
points to make. In particular, he thinks that the case would be stronger if more details were given of the nature and
size of some of the barriers. Also, benefits are not uni-
formly distributed: The impact on some developing coun-
tries would actually be negative.
Anderson makes the case for liberalization on the
basis of broad generalizations, where cause (liberalization) inevitably leads to the desired effect (increased growth). In Panagariya’s view, this relationship cannot be guaranteed, and he sees openness instead as being necessary, but not
sufficient, for sustained rapid growth.
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Looking
at
the
first
of
Anderson’s
identified
opportunities – unilateral liberalization – Panagariya sees ample evidence for the benefits of this, citing in particular the dramatic improvements in growth resulting from India
and China following such a path. To critics who point to
the disastrous experiences of Latin American countries
in the 1980s and ’90s, he argues that the root cause was
not excessive liberalization but macroeconomic instability leading to excessive foreign borrowing (itself a problem
considered as a separate challenge). Chile represents a
unique success story in the region at that time because
it followed prudent domestic economic policies while
slashing subsidies.
Multilateral liberalization via completion of the Doha
round of World Trade Organisation (WTO) negotiations
is the second opportunity, also supported by Panagariya.
Given the complexity of the negotiations, he thinks that
halving of barriers by 2010 is unrealistic; however agreement to the elimination of industrial tariffs by a later date is quite feasible. On the question of agriculture, he makes the point that removal of subsidies would actually harm the majority of developing countries, which are net food importers and
would thus suffer from higher prices. Ironically, it would be richer countries (the USA in particular) that would gain most, even though it is their subsidies which would be cut.
Safety nets and transitional arrangements will be needed
to protect the developing countries that would be disadvantaged in the short term. However, this negative impact must be recognized and acknowledged by the rest of the world
before such policies could be put in place.
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162 How to Spend $50 Billion to Make the World a Better Place Panagariya agrees with Anderson that the introduction
of more Free Trade Areas and one-way preferential trad-
ing arrangements between poor and rich countries have
little to offer in terms of increased growth. There are few success stories, the maze of agreements complicates trade, and little incentive is left for multilateral reform that would be of greater benefit. He is also concerned that such agreements come with strings attached, such as commitment to
American views on intellectual property rights.
In his opposition notes, Jan Pronk raises many of the
same points, but expresses particular concerns about the
negative implications for some countries and social groups.
He believes in the value of free trade, but argues for a greater integration with domestic political policy making to maximize the benefits. He also does not see a direct role for free trade in meeting the other challenges; to him trade is only one of a number of important factors.
Pronk, by arguing for a more balanced evaluation of the
opportunities for free trade with other aspects of a domestic political agenda (such as education, research, the environment, and social welfare policies) is offering a broader, more politically focused view of Panagariya’s point that trade liberalization is a necessary but not sufficient factor for sustained growth. In Pronk’s view, the ultimate objective of economic policy making is not to expand trade but to increase income and welfare.
Expanding on this, he points out that countries need
good institutions and economic and political stability
to benefit from free trade. He argues also for a grad-
ualist approach to opening markets: China has experi-
enced sustained rapid growth, partly at the expense of the
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environment and a sound banking system. The European
Union, on the other hand, has taken a long time to liberalize, not because politicians did not recognize the benefits, but because they feared the social consequences of less considered action. So, despite the distortions of the Common
Agricultural Policy, European farmers are in a better position than in many other countries.
Pronk is sceptical about Anderson’s proposal to lessen
resistance to free trade by providing more pro-market information. In his view, many citizens see subsidies as a way of promoting political and social stability, whatever the economic arguments for cutting them. Politicians will proceed cautiously to avoid creating greater inequalities. In this con-text, he agrees that a combination of unilateral reform at national level with multilateral action through the WTO is both sensible and politically feasible.
Although the benefits of liberalization are great and
Anderson’s estimates are indeed conservative, that does not mean they will be easy to bring about. This is because the benefits are unequally distributed (to date favoring rich
countries) and the structural and social costs are both
greater and longer term than accounted for in the challenge paper. Inequalities have been widening as trade restrictions have loosened; Pronk is therefore doubtful that free trade will do much to directly reduce poverty. Neither does he
necessarily see a positive effect on the environment.
In summary, both opponents agree that trade liberal-
ization could bring great economic benefits, but argue that reform has to be combined with other important aspects of
policy if success is to be achieved.
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Expert Panel Ranking
PANEL: JAGDISH N. BHAGWATI, ROBERT W. FOGEL,
BRUNO S. FREY, JUSTIN YIFU LIN, DOUGLASS C. NORTH,
THOMAS C. SCHELLING, VERNON L. SMITH, NANCY L. STOKEY
The goal of the project
The goal of the Copenhagen Consensus project was to set
priorities among a series of proposals for confronting 10
great global challenges. These challen
ges, selected from a wider set of issues identified by the United Nations, were: climate change; communicable diseases; conflicts and arms
proliferation; access to education; financial instability; governance and corruption; malnutrition and hunger;
migration; sanitation and access to clean water; and sub-
sidies and trade barriers.
A panel of economic experts, comprising eight of the
world’s most distinguished economists, was invited to con-
sider these issues. The members were Jagdish N. Bhagwati
of Columbia University, Robert S. Fogel of the University of Chicago (Nobel Laureate), Bruno W. Frey of the University
of Zurich, Justin Yifu Lin of Peking University, Douglass C.
North of Washington University in St Louis (Nobel Laure-
ate), Thomas C. Schelling of the University of Maryland,
Vernon L. Smith of George Mason University (Nobel Lau-
reate), and Nancy L. Stokey of the University of Chicago.
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166
Expert Panel Ranking
The panel was asked to address the 10 challenge areas
and to answer the question: “What would be the best
ways of advancing global welfare, and particularly the welfare of developing countries, supposing that an additional $50 billion of resources were at governments’ disposal?”
Ten challenge papers, commissioned from acknowledged
authorities in each area of policy, set out more than thirty proposals for the panel’s consideration. During the conference, the panel examined these proposals in detail. Each
chapter was discussed at length with its principal author
and with two other specialists who had been commissioned
to write critical appraisals in the form of Perspective papers, and then the experts met in private session. Finally, the
panel ranked the proposals in descending order of desir-
ability (see following table).
CHALLENGE
OPPORTUNITY
VERY GOOD
1 Communicable diseases
Control of HIV/AIDS
2 Malnutrition and hunger
Providing micronutrients
3 Subsidies and trade barriers
Trade liberalization
4 Communicable diseases
Control of malaria
GOOD
5 Malnutrition and hunger
Development of new
agricultural technologies
6 Sanitation and water