The Wrong Enemy

T he economic development of poor countries is heavily dependent on their ability to export. But many American liberals are troubled, wrongly in my view, that commerce with low-wage countries will infect our own body politic. Rather than worrying so much about Third World export growth, we should be addressing how to attain full domestic employment and mobility. We need to concentrate on formulating policies that make trade the mutual opportunity promised in the textbooks. If we fail to do this, trade will still provide an economic gain on average, but will also represent a costly burden for the victims of the abrupt dislocations it causes.

The Third World is growing. Almost half of the world's population resides in China, India, Indonesia, Pakistan, Turkey, and Thailand, poor countries where, even in the richest of them (Thailand), adjusted per capita income is only about one-fourth of ours. Yet in these countries recent growth rates of manufactured goods have been phenomenal. Between 1990 and 1995, the annual growth in manufacturing output has ranged from a "low" of 4.7 percent in Turkey to a high of 17.2 percent in China.

International trade has played a critical role in this growth. In four of these countries, export growth exceeded 10 percent per year between 1990 and 1995, and in the other two it was nearly as great. Furthermore, the countries' economic modernization is most dramatically revealed in the composition of their exports. As recently as 1980, manufactures as a share of exports exceeded 50 percent only in the case of India, and was as low as 2 percent in Indonesia. Thirteen years later, manufactures exceeded 70 percent of exports in all cases except that of Indonesia, where it had grown to 53 percent. What is clear is that the economic success of these large countries has been heavily based upon their ability to produce and sell manufactured goods overseas.

Despite these impressive accomplishments, export-led growth in the Third World is seen as a threat by many American liberals. A number of progressive legislators, commentators, and activists, who otherwise express great concern for poverty, sincerely believe that expanded exports from poor countries to the United States threaten American wages and environmental protections. Some even suggest that contemporary modernization benefits only small elites.

For example, in the recent Sierra Club publication The Case Against the Global Economy, critic Jerry Mander writes that "even at its optimum performance level, the long-term benefits [of global development] go only to a tiny minority of people who sit at the hub of the process and to a slightly larger minority that can retain an economic connection to it."

But Mander's assessment of the benefits of growth is almost certainly wrong. The development in South and East Asia has, with the likely exception of China, been accompanied by an increasingly equal distribution of income. In China the share of income received by the poorest 20 percent of households is quite low- only 5.5 percent. Nevertheless, that country's economic growth was associated with what the United Nations Development Program (UNDP) described as a "dramatic" decline in poverty through the mid-1980s. Though this favorable trend stalled during the last half of that decade, the UNDP reports that in recent years poverty is once again falling, with the number of rural poverty-stricken people in China dropping from 94 million to 65 million between 1991 and mid-1995. In Asia the benefits of growth have in fact raised the region's standard of living.

Mander is also incorrect when he contends that Asia's rapid growth has been fueled by an ideology of economic deregulation and free trade. These countries in fact do not subscribe to "the need for free trade to stimulate the growth; the unrestricted 'free market'; the absence of government regulation; and voracious consumerism combined with an aggressive advocacy of a uniform worldwide development model that faithfully reflects the Western corporate vision and serves corporate interests." Evidence of their deviation from this view, referred to as the Washington Consensus, is provided by the Heritage Foundation and the Wall Street Journal, themselves ardent supporters of laissez-faire. In the ranking of "economic freedom" provided by these organizations, none of the six countries shows up as a participant in the free market paradigm. The most "free"-that is, the one that most conforms to the model-is Thailand. But even that country ranks only twenty-third of the 148 countries assessed. By contrast, Turkey's ranking is 50, Indonesia's is 59, Pakistan's is 78, India's is 118, and China's is 125. The same liberals who worry about low-wage competition have criticized just these countries for practicing other forms of neo-mercantilism.

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O ther critics have faulted globalization for creating cultural convergence. Elites, such as the French intelligentsia, try to resist this when they seek to limit imports of American movies. More importantly, trade does promote a kind of convergence; with technological advance providing the impetus to development, strong pressures are generated in every modernizing society to ensure the availability of scientists, engineers, and employees capable of working with modern technology. Richard A. Easterlin, a leading scholar of the long-term growth process, writes, "the greater complexity of the new methods requires literacy and numeracy on the part of workers and hence a better educated labor force to learn and execute the new technologies."

In The Case Against the Global Economy, Helena Norberg-Hodge, a Swedish environmental activist, mourns the loss of traditional education, which she describes as "the product of a person's intimate relationship with the community and the ecosystem"-a loss that occurs when children are taught to adopt a scientific worldview.

Despite her unhappiness with modernization, Norberg-Hodge stops short of alleging that it is an imposition on an unwilling population. Rather she maintains that the people in poor countries are ignorant of modernization's cultural implications. She reports that in the Himalayan province of Ladakh (Kashmir), the population, after observing tourists, came to believe that all Westerners are multimillionaires who never work. Beyond that, films and television seemed to demonstrate that with economic growth, machines do everything. Distorted in this way, Norberg-Hodge concedes that "the picture is irresistible" and the "same pattern is being repeated in rural areas all over the South, where millions of young people believe contemporary Western culture to be far superior to their own." Thus, even modernization's most severe critics agree that its onset is likely to be welcomed rather than resisted by the people living in poor countries.

TRADING WITH THE THIRD WORLD

International trade has obviously benefited the rapidly growing Asian countries. But it has also benefited the countries to which these countries have exported, including the United States. On one hand, developing countries' growing income and growing market size have allowed the United States to increase its own exports. On the other hand, and too often overlooked in discussions of international trade, we gain from our ability to import, since purchasing goods from abroad allows us to buy at relatively low prices. Thus the fact that the share of our exports going to Asia between 1990 and 1995 increased from 18.2 percent to 22.7 percent, while our share of imports from that continent grew from 23.8 percent to 26.6 percent, meant that Asia's growth contributed in two ways to our welfare. Increased exports raised our incomes. But so too did increased imports. In this latter connection, economist Adrian Wood estimates that if imports from the South-his designation for the poor countries of the world including but not confined to Asia-had not been available, those goods typically would have "cost about three times as much if they were made in the North."

Despite the benefits of trade, there are also concerns. With trade comes dislocation. Industries that are successful in finding markets overseas thrive. Their firms are profitable and jobs are created. But other industries suffer, unable to match the price or quality of imports. In these cases, firms may go bankrupt and jobs may be lost. If this flux occurred in the context of a fully employed economy, the resulting problems would not be substantial, as labor and other resources simply moved from declining industries to expanding ones. Wages would rise as workers shifted to highly productive employment opportunities in industries producing for expanding domestic and overseas markets.

Typically, however, such a benign environment does not prevail. Full employment rarely is present, and as a result workers displaced from defunct firms tend to be added to the ranks of the jobless. Moreover, where imports compete directly with domestic producers and can match the latter's quality and productivity, there is a tendency for wage rates to be bid down toward the level prevailing overseas. Finally, when overseas markets do not expand as rapidly as imports, a country's currency will tend to decline in value internationally, reducing its consumers' ability to buy from abroad.

Thus the real-world version of international trade is messier than the textbook version. The gains associated with trade are real and accrue to the society as a whole. But there are costs, and those costs are borne disproportionately by specific segments of the economy and labor force. That those hurt tend to be low-productivity workers or inefficient firms makes their pain no less real.

The fact that each of these concerns possesses either real or potential validity has given impetus to the view that we should reverse the trend toward increased participation in the world economy. But to do so would be to attack the wrong enemy. Instead, since trade represents an engine of growth, we should adjust in order to minimize the difficulties imposed in taking advantage of its dynamism. We should work to solve the problems associated with our increasing involvement in the global economy rather than avoiding those problems and retreating from that involvement. A successful adjustment would allow both the United States and developing countries to continue the mutually beneficial relationship that the globalization of production allows.

The problem most frequently cited by trade critics is our increasing current account deficit, caused by the fact that imports have grown more than exports. Robert E. Scott, an economist at the Economic Policy Institute (EPI), writes that "we must recognize that our trade policies have created a balance of payments crisis for the United States." In fact, this is the smallest concern generated by global trade. If such a crisis existed it would take the form of a devaluation of the dollar. Such a fall would have devastating consequences for world trade because of the dollar's continuing status as the international reserve currency. But in fact there is no evidence that the trade deficit has caused anything like a crisis. Precisely because of the role the United States dollar plays worldwide, the demand for it greatly exceeds the level suggested by our exports. Thus, despite the continuing current account deficit, there has not been a tendency for the dollar to decline in value. According to the Economic Report of the President for 1997, the index of the trade-weighted value of the dollar stood at 86 in 1990 and 87.3 in the fourth quarter of 1996.

A second major concern of critics is that United States trade with the Third World has had a negative impact on our labor market. Again, Scott is representative. He writes that "increased imports of goods from low-wage countries have depressed U.S. production workers' wages, U.S. foreign direct investment in these countries has further weakened the bargaining power of our workers, and unfair trade and industrial policies of key trading partners have reduced the number of high-wage jobs in this country."

There is validity to this concern. There is a body of analytic work linking deteriorating labor market conditions for the unskilled to increased imports. Adrian Wood, for example, has produced estimates suggesting that imports from low-wage countries have caused a 5 percent fall in the demand for unskilled labor in the developed world. In the United States, where wages are more flexible than in Europe, this decline in demand has shown up mainly as an increase in the gap between the wages of the unskilled relative to the skilled. In Europe, in contrast, where wages are less flexible, the result of trade with developing nations has been to increase unemployment among the unskilled. Is the best solution, then, to curtail the purchase of goods from poor countries?

Wood says no, observing that protectionism "is clearly the least desirable of the possible alternatives." Tariff protection, he writes, "would help unskilled workers in the North, but would be more costly than other ways of doing so" and in the process "would hurt much poorer workers in the South." If implemented, Wood concludes, protectionism "would rob many millions of people in the South of the chance to work their way out of much more serious poverty."

Yet the temptation to curb imports remains powerful. Scott writes that "global quotas should be imposed on a few products from industries that account for a large portion of the trade deficit." In addition he recommends raising tariffs "to resolve fundamental bilateral trade disputes with Japan and some of the developing countries that are pursuing aggressive strategies aimed at export-led growth," and he proposes the imposition of country-specific limits on the rights of United States businesses to invest abroad.

There are two fallacies in this view of problem and remedy. The first is that it scapegoats the efforts of people in poor countries to achieve higher standards of living. The second is that it overlooks better remedies, such as domestic full employment and investment in worker retraining and mobility.

TRADE CAN BENEFIT EVERYONE

The protectionist impulse falsely implies that a zero-sum game is necessarily at work in trade among nations. It implicitly accepts the view that the interests of workers in poor countries can only be advanced when the interests of the labor force in rich countries are harmed. That this is a false dilemma is precisely the lesson that international trade theory-and practice-teaches. With supportive policies in place in both sets of countries, advancing the interests of one group will promote the well-being of the other. Therefore, the response of choice, I believe, is not to attack trade, but to implement domestic policies that will allow the gains from increasing trade to be widely dispersed throughout the population.

It is relatively easy to outline the domestic policies that should be adopted in light of the increased integration of the world economy. Our fundamental objective should be to ensure that the industries that come to dominate the American economy are sufficiently productive to be competitive internationally even though they offer high wages. The only way successfully to protect the standard of living in this country is for our industries to be at the technological frontier. Government policy must actively promote that objective. It is critical, for example, that our educational system produce graduates capable of being highly productive in a technologically sophisticated workplace. Seen in this light, the poor performance of our urban public schools harms not only their students, but the nation as a whole. Poorly educated young people retard productivity growth when they become members of the labor force.

Conversely, we should not attempt to preserve the life of those industries whose survival is dependent upon the use of low-cost labor. These are industries that can compete successfully only if they are engaged in a race to the bottom in wages. Tariff protection for them will slow the process of adjustment necessary to ensure that we remain a high-wage country. We should be aiming at an economy that is increasingly composed of high-productivity sectors rather than low-productivity ones. To be sure, the latter will continue to exist, especially in sectors not subject to overseas competition, but it should not be the objective of public policy to defend low-wage industries from imports. Doing so has the perverse effect of increasing the numbers of the working poor.

The benefits of trade are most equally distributed when there is full employment. In such a context, the demise of one industry acts simply as a signal for labor redeployment. Such a reallocation of the labor force is most efficiently accomplished when the demand for labor is strong. In such a setting, workers will enjoy more bargaining power, and therefore avoid becoming the victims of the dynamism associated with trade. It is the ready availability of alternative employment opportunities that, to a great extent, determines whether trade will harm or help workers.

An economy successfully participating in trade at high-wage levels will be constantly in flux. New industries will emerge, the product of advancing technology, and will require ever-better-educated labor. In such a context it will be critical that workers, displaced from declining industries, be encouraged and afforded the opportunity to move into these new jobs. But success in this regard will be possible only if workers develop the appropriate skills. Their "human capital" will have to be increased. In this way trade produces precisely the pressures that, if responded to positively, can result in economic advance. What is required are supportive government policies, especially with respect to adult education.

In addition to job retraining and continuing education, public-sector employment will have to be available to those who are capable of working but who continue not to meet the ever-advancing requirements of the private sector. Government will have to be the employer of last resort. Beyond all of this, income and household income supports will have to be available to those who simply cannot keep up with the dynamism present in the economy. Thus not only will an earned income tax credit program be necessary, but in all likelihood income transfers will have to be available to those who are unable even to take advantage of the work opportunities made available by government.

These, of course, are the kinds of programs that left-liberals have long advocated; they should still be at the top of our agenda. What is new is the context. The United States, as the most important market in the world, has the power to slow if not completely choke off the economic modernization of the Third World. This is something we as a society should not do, and it especially is not a stance liberals should adopt.

Instead we should endorse globalization as an effective way to allow people throughout the world to escape poverty. Rather than oppose the spread of development and the growth of international trade, we should work politically for domestic policies that can ensure that the benefits of increased international economic integration are widely and fairly shared. In this way complementarity, rather than conflict, can come to characterize the relationship between the labor forces of both the developed and the underdeveloped world.