Monday, October 24, 2005

Dwight Meredith seems to like a post of mine from back in 2002, about the inadequacy of prewar planning for anything but a best-case scenario. He thinks that was prescient. I'm not sure, myself. For those with eyes to see, it was all over the news; the thing itself starts off with Pentagon insiders who were airing their frustrations to, of all people, Robert Novak. But as the count of American casualties, post-"Mission Accomplished", edges towards 2000 (and will Dubya's body count stop short of al Qaeda's at the WTC by the time this is finished?), I can say this: I'd rather have been wrong.

Another post I'd rather be wrong about is this one, on the economic policies that the IMF and, to a lesser extent, the World Bank have been shoving down the throats of third-world countries, influenced by American administrations of both parties, for decades. I argue there that the economic argument for those policies --- particularly lowering trade barriers --- is all wrong. And that under plausible real-world conditions, the very principles that mainstream economists invoke to justify lowering trade barriers can actually be used to justify protective tariffs. But I buried the lede, and didn't say so up front.

Here's a capsule version of the argument. Briefly: the standard case is based on the notion of comparative advantage. That's the idea that if trade barriers are lowered, each country will naturally specialize in exporting goods which, in some sense, that particular country produces better than anything else --- and that this raises total world output, thus providing more stuff of all kinds for everybody.

Equally briefly, my counterargument is this: consider a dirt-poor country. Where's its comparative advantage going to be? Obviously not in producing any industrial good: the lack of transportation and other infrastructure will eliminate whatever benefit could possibly be gained by low wage rates. So, the classic theory of comparative advantage seems to me to say that in the absence of trade barriers, any attempt to industrialize in those countries is doomed to be crushed by the market before it can get halfway started.

And that's what seems to actually happen in African countries that follow our advice: for example, they are clothed in cast-off American T-shirts because it is literally cheaper to cart our discards across the sea than to make new ones on African soil. And if comparative advantage says that the free market will inevitably produce this result if it is allowed to operate unhindered, then the only way to prevent it is to temporarily hinder it, by, e.g., imposing protective tariffs. To quote my own conclusion:

The idea here isn't that trade barriers are a positive good, to be maintained in perpetuity -- but rather, that for developing economies, they are a necessary evil, to be dropped when local industry can stand on its own. It's not a fairy tale to suppose that can happen. That's what South Korea did, for example, last century, pursuing mercantilist policies while building up its industry in the 1960s and 70s, and progressively lowering trade barriers after that. For that matter, it's more or less what the U.S. did in the nineteenth century. And it's what Mauritius, one of the few bright lights in the dismal African economic picture is doing right now. But this flies in the face of conventional "Washington consensus" advice to developing governments -- which is to drop all trade barriers immediately, and keep them down.

There is more on both sides of the argument at the original post.

This is another one I'd very much rather be wrong about, since if I'm right, we've immiserated literally billions of people for no good reason at all. But I still can't find the flaw in the original argument.


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