This essay will also continuously examine the importance of the international institutions in not only how they facilitate and promote the contemporary international trading regime, but also in how they are distributing the gains and losses of trade, and particular attention will be put on how the structure of the World Trade Organisation and the World Bank support the current trading regime in maintaining the status quo of the neo-liberal trading regime, and how they attempt to redistribute the share of world trade, and in extension, how they a ttempt to change the distribution of wealth in the global economy.
Firstly, the theory which the current global trading regime rests upon is one of the first things that an economist learns upon entry into academia.
The theory of Comparative Advantage was first introduced by Torrens in 1815, in his “an Essay on External Corn Trade” (Ruffin, 2002: 732) – but made famous through the mathematical proof by David Ricardo in 1817, in his book “On the Principles of Political Economy and Taxation”, explains and describes how all actors in an economy will benefit from specialization of production and engagement in trade – and by extension, strict theorists of neo-liberal economics, such as Milton Friedman (1997), have argued that all trade between states and nations must be unregulated and therefore without government intervention in order to allow for the market to be clear of market failures, or in other terms, free of inefficiencies.
It was with the support and encourage from economists such as Friedman, that the Thatcher and Nixon governments of the UK and the US respectively, adopted neoliberal reforms, including free trade reforms. Free trade reforms are changes to the current democratic and bureaucratic procedures that exist surrounding the exchange of goods and services across borders. Grinspun and Kreklewich (Consolidating Neoliberal Reforms: “Free Trade” as a Conditioning Framework, 1994: 33) suggests that such reforms would include the privatization of state capital, deregulation of markets and a liberalization of the economy – all of which are measures that mean to decrease the influence the state has over the economy.
Looking specifically at privatization and market de-regulation, an assumption is made that these efforts all lead to a liberalization of the economy, and therefore an analysis of other pro-liberalization reforms will not be considered in this essay. Burton (1987: 22) defines privatization of capital as “any measure by which transfers to private owners hip of previously governmentally-owned resources occurs”, such as the selling of public housing or stateowned firms. Privatization is an act that is very closely linked to the deregulation of markets, as expressed by Pirie (Burton, 1987: 22) – where he argues that the change of ownership is insufficient to acknowledge it as privatization, but that “the other, more important one, is competition”.
In order to increase competition in markets, market de-regulation became an increasingly important tool, and a prime example of market de-regulation pursued by a government would be the Airline Deregulation Act of 1978 (Derthick and Quirk, 1985: 5) in the United States, where the market had previously experienced high barriers to entry through the requirements imposed by the Civil Aeronautics Board. Through the change in legislation, it became much easier to engage in the market – particularly as “the CAB proceeded to interpret [the law] in a pro-competitive way” (Derthick and Quirk, 1985: 5) – and therefore the amount of competition in the market, which is a key indicator of effectiveness to economists, increased.
These types of market liberalisations, but market de-regulation in particular, are the things that neo-liberal economists argue are the key reasons behind the incredible increase in international trade between from the end of the Second World War onwards (O’brien and Williams, 2010: 168), and at first glance, it does seem credible that the trade reforms introduced through the GATT (General Agreement on Tariffs and Trade) would lead to increased trade, especially in Europe during the post-war period. However, Strange (1985: 241) argues that was in fact prosperity itself, brought about through the Mars hall Plan and the economic injections into the European economy that permitted that liberalization to exist. By turning the trade liberalization arguments this way, one can start questioning the true intentions behind trade liberalization. If the European states needed prosperity before embracing trade liberalization, can one argue that trade will bring about wealth?
According to neo-liberal economics, trade liberalization will lead to wealth for all countries involve d in the global trading regime – however that is not the case in the contemporary international trading regime. In the current global trading regime, one could assume that the global south should engage in agricultural production and/or labour-intensive non-skilled production and engage in international trade for exports and because of the increased market size, thus increase their revenues and develop their countries – an entirely valid idea, but something that has failed in practice, as the Global North tends to subsidize the agricultural sector in their own economies, or put non-tariff barriers on foreign agricultural produce, as expressed by Medhora (2003).
Medhora points out quite vividly, that although the European Union has the “Everything but Arms” initiative, the non-tariff barriers that are imposed on the agricultural produce markets effectively mean that developing countries are excluded from the markets that they have Comparative Advantages in, which leads to the developing countries being entirely excluded from the benefits of trade. It is therefore quite clear, that in the contemporary global trading regime, the developing countries, or Global South, are the losers of trade on an international level. Although the Global South has been identified as the losers of trade at an international level, one must also look at how actors in domestic economies benefit or suffer from interaction in trade – and analyze how this has come about, and been enabled to happen. To do this analysis, countries which are involved and engaged in the international trading regime will be examined in terms of winners and losers on a domestic level, as well as on an international level.
The first country to be looked at is the country of Singapore, an island nation with a very prominent port – primarily due to its geographic and geopolitical position in South East Asia. Singapore from the 1960’s has been pursuing an export-led economic development policy, and has not de-regulated its markets, nor has it deconstructed the government tools for subsidizing industry (Ministry of Trade and Industry Singapore, 2010). It is however, very much engaged in trade, as illustrated by the Free Trade Agreements with the U. S, Japan and other countries. Due to this export-led development policy, Singapore has managed to increase its GNI per capita to over $52,000 – a level that similarly to Russia, does not tell the entire story. The Gini coefficient of Singapore was 0. 25 in 2009 (United Nations Development Programme, 2009), but is still ranked fairly highly in the Human Development Index scale. This would indicate that although there is a serious difference between the highest income earners and the lowest income earners, Singapore experiences similar Human Development Index scores such as Germany, UK and Hong Kong. One could therefore argue that Singapore is a winner in the contemporary international trading regime, and although the poorer portion of the population of Singapore is not benefitting as much as the richer portions, the general public of Singapore is benefitting from the engagement in trade pursued by companies and the state.
Secondly, an analysis of the Russian Federation, which after the break-down of the Soviet Union, resorted to the adoption of free trade reforms, which included market de-regulation and – as expected – the mass privatization of public capital (Boycko et al. , 1993: 139). Over a year and a half, 20% of Russian workers were employed in private business, and privatization was initially supported by a majority of the people. However, the policies became quite unpopular due to the perception that they were “robbery by the old elite and oligarchs” (Megginson and Netter, 2001: 326). Sapir (1994) also notes that by early 1994, economic activity was not picking up, but rather decreasing, as Russia found itself in a recession. So even though the Russian Federation had followed all recommendations of the Washington Consensus, and liberalized their economy, there existed no economic benefits or the normal people of Russia. However, due to the privatization and the creation of the Oligarchs, some people benefitted greatly from the adoption of neo-liberal free trade reforms. The wealth of the Oligarchs had increased sharply after mass-privatization, and by 1997, Russia found itself with a Gini-coefficient of only 0. 5 (Shleifer and Treisman, 2005). As a major, global exporter of petroleum – with its connected high values – one would be inclined to believe that some of that wealth would be distributing to the people of Russia, but the distribution is a lot more towards specific Oligarchs, who own the companies responsible for the exports.
Therefore, there can be clearly identified winners and losers of the contemporary international trading regime, where the people of Russia are losing out on potential profits due to the mass-privatized companies, whereas the Oligarchs are in a quite comfortable position, where they most definitely can be declared as winners of trade in the Russian perspective – and because of the amount of political influence by the Oligarchs, one could argue that Russia itself (although not necessarily its people) is benefitting from engagement in trade. In a similar analysis to Russia, it must be stated that not all privatization or market de-regulation has been strictly voluntary. Through the World Bank and its Structural Adjustment Program, Bolivia was forced to privatize the public water supplier in Cochabamba in order to renew loans worth $600m (Schultz, 2003: 35), resulting in the transfer of public ownership of the water supply to private ownership – an action which had detrimental effects on the local population and therefore ultimately resulted in the re nationalization of the water supply of Cochabamba.
Furthermore, the International Monetary Fund has imposed conditions on loans from the Fund which demanded market de-regulation, through the de-regulation of trade barriers (tariffs) in 1987 – which had the result of pushing a large portion of Haitian rice farmers out of the market and subsequently replace their domestically produced rice with rice from heavily subsidized producers in the U. S. (Gros, 2010: 981). In both of the examples above, the market reform has been introduced without voluntary forces supporting them, and both have led to a direct detriment for the peoples in Haiti and Bolivia – although the intended purposes, from both the IMF and the World Bank were to liberalize the economies and therefore enable them to become greater parts of the global economy. These two examples show that the international institutions might not be pursuing what is ideal for the countries themselves, or its people – but is in fact pursuing policies that are beneficial to Transnational Corporations.
One of the key examples of how policies benefit Transnational Corporations is the case of the Trade-related Intellectual Property Rights, or TRIPs for short, which was an agreement which had not been initially introduced by the respective governments, but rather from the lobby groups attempting to achieve an agreement through the WTO which would ensure that individual firms and corporations would continue to see large profits – particularly in the areas of medical research and medicine production (Sell, 2000). The problem arises when TNCs and its lobbying groups are influential enough to be able to push through for these kinds of powerful measures, which unfortunately carry the risk of hindering developing countries in their journey towards development. Although the structure of the World Trade Organisation does not have provisions for lobbying industries bringing matters to discussion, the lobbying organisations target countries to bring matters on their behalf, mainly through international lobbying organisations, as in the case with TRIPs, the Intellectual Property Committee.
This is a clear example of why it is not the World Trade Organis ation itself that is to blame for the contemporary international trading regime, but the developed countries which are refusing to give concessions to the developing countries – particularly in the current rounds of trade talks, the Doha Round. This is entirely due to the structure of the WTO which requires unanimous decisions, which deflates the importance of the Global North in negotiating new trade agreements. The World Bank and the International Monetary Fund, however, do not have the same structure, and are therefore more under the control of the neo-liberal economists of the Global North. Because the Global North controls the majority of votes in both the IMF and the WB, conditions can be imposed on countries which choose to (or have no other option but to) take loans from the two organisations.
Because the Washington Consensus is constructed around the ideas of neo-liberal economics, these organisations also require for member states to have a drive and ambition to decrease the neo-liberal free trade reforms imposed by the IMF and WB. As can be seen in this essay, there are winners and losers of trade in all aspects of the contemporary international trading regime. In the international aspect, there is no question that there is a disparity between the Global North and the Global South, in terms of activity and engagement in trade, and through that, there is also an effect on the wealth distribution connected to trade. In the domestic aspect, there is also a quite clear correlation that capital accumulates capital – in the sense that the richest portions of populations tend to find more benefits from the engagement in international trade compared to the poorer portions.
The effects of the domestic disparity depends on the domestic policies pursued by the respective states, where comparatively poor people in Russia – without a welfare state whatsoever – find themselves comparatively poorer than the people of Singapore, which has a more functioning state system for providing for people. Furthermore, the international institutions do not have the tools to address the problems of the contemporary international trading regime by themselves, but as they are politically controlled by their member states, it is necessary for the cohort of members to decisively tackle the problems caused by disparity in the distribution of wealth due to trade.