Hendri Tanjung and Asad Zaman, Islamabad | Opinion | Mon, May 03 2010, 11:38 AM
Few issues are as divisive as free trade, strongly supported by academics and some policy makers, and strongly opposed by the public. Many policy makers have expressed concern that the current global recession will fan the flames of protectionism, which in turn will make economic conditions even worse. For example, Finance Minister Sri Mulyani Indrawati, warned countries that protectionism in the condition of global recession today will harm both the national and global economy.
Similar statements have been made by British Premier Gordon Brown in his policy speech at Davos on Jan. 19 last year that more doses of the free market economy still remained the only remedy to financial crises. At the same time, policy makers in the US were more responsive to public sentiment than the free trade theorists. The “Buy American” provisions in the US$819 billion stimulus bill passed by the House of Representatives on Jan. 28, 2009 supported protectionism against free trade rhetoric.
Furthermore, President Obama’s 2010 budget would tighten taxation on US companies with operation overseas, limiting incentives to do business abroad. Many other countries have taken action to protect their market.
President Sarkozy offered a $5 billion bailout to French automakers but they can use only French made parts and are supposed to shift their factories located in Eastern Europe back to France. In Britain, nationalized banks are being told to offer loans to Britons first.
Responding to the situation, Simon Johnson, an MIT economic professor and former chief economist at the IMF stated that what we were seeing today was “an undoing of a lot of drivers of growth that we relied on for the last 20 years”. The reason is clear. What has been believed by the IMF and World Bank that “export led growth strategy” is a tool to achieve prosperity is now vindicated to fail.
Healthy competition among equals in stable times is beneficial. Inefficient businesses close down and are replaced by better ones. To survive, a business must be intelligent and energetic, follow market trends, keep prices low, produce quality goods, etc. All the Asian Tigers – Japan, South Korea and China – benefited by opening their markets to healthy doses of competition in an intelligent and planned fashion.
History teaches us that free trade is not a good policy in times of crisis, or when there is substantial inequality between trading partners. England, the first country to industrialize, preached Ricardian Theory of free trade to the rest of the world, but protected its weaker industries from competition at the same time.
Adoption of these free trade policies led to a recession in Europe. German economist Georg Friedrich List put forth the infant industry argument, and industry grew up in Europe after it was protected by competition from the more advanced British industries.
Similarly, the US developed industrial strength by protecting itself from British competition via a 40 percent manufacturing tariff in its period of rapid expansion at the end of 19th century. Once fully industrialized, it began advocating free trade to poor countries as a panacea of their economic ills. During the same period countries, which could not protect their industries from foreign competition, did not developed industries.
In The Shock Doctrine: The Rise of Disaster Capitalism, Naomi Klein has brilliantly documented how free markets have been imposed by force, threats and wars, and have created wealth for multinationals at the expense of the working classes of poorer countries.
It is increasing recognition of this free trade weapon by the LDC’s, which led to the collapse of the Doha round. The US and other developed countries introduced liberalization in agriculture and the service sector in the Doha Round in early 2000.
It is ironic that the talks collapsed after seven years of negotiations because the US refused to allow the same protection of jobs to other countries. which it had implemented in its own country. India and other developing nations proposed to protect sensitive agricultural products from competition in the event of a surge of imports that would make their own farmers less competitive. The US argued that such protection, which is not permitted now, would mean moving backward on current world trade commitments.
Free market forces wreak havoc on lives of people in times of crisis. While a financial crisis hit Asia in 1997, Indonesia called the IMF for help. Then the IMF applied their five formulas: privatized basic services, an independent central bank, “flexible” workforces, low social spending, and total free trade.
Instead of getting a better result, Indonesia’s unemployment rate increased from 4 to 12 percent in 1999. A similar experience occurred in all crisis situations. The IMF advised Russia to use “shock therapy” of the free market to improve its economy. There was a 50 percent productivity loss, and hunger and starvation on a large scale occurred in an economy previously able to feed its members. The promised benefits of free markets never materialized, leaving embarrassed IMF economists looking for excuses for their failure in Russia.
Similarly, free market forces could not eliminate huge unemployment in the world economy for more than 20 years following the Great Depression. Nearly all advanced economies have learned this lesson and are taking steps to protect their people from the shock of the current economic crisis.
We should follow suit and not let industries collapse and throw large amounts of people out of work in the vain hope that the market will automatically provide new opportunities. Australia and China chose to use economy stimulus for building infrastructure to create employment. Taiwan distributed vouchers for shopping to its people.
Based on Reuters’ compilation, the total stimulus package will be prepared in 2009 by 23 developed countries in North America, Europe and Asia reaches $4 billion or ninefold the Indonesian GDP. The US is spending trillions to protect its industries and bailout failures, in direct violation of free market principles.
What Indonesia should do to use the stimulus package? There are at least three issues to address: stimulating the real sector, eradicating poverty and building economic infrastructure.
Stimulating the real sector could be focused into activities that can absorb employment, boost exports and stabilize the price of food. It includes tax facilities, food security, export promotion, capital incentives for financial institution, interest free banking, and a profit sharing system for financial institutions and export assurance.
Poverty eradication comprises a national program for society empowerment, distributing zakat (alms) for low-income people, credit for small enterprise and providing energy for villagers. Economic infrastructure embraces building infrastructure post natural disaster, railway, drinking water, housing, electrical generator for villagers, port and stores.
The most important thing is to allocate government spending directly to low-income people and small and medium enterprises.
Hendri Tanjung is a PhD economics scholar, International Islamic University Islamabad, Pakistan. Asad Zaman is a professor of economics, International Islamic University Islamabad, Pakistan
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