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Free trade - a debate



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Mr. Venugopal <gvvs@nird.ap.nic.in> has sent in an article, entitled, "SOME
COMMON MISCONCEPTIONS ABOUT FREE TRADE". This is being sent here as well as
available on the IPI publications page at

http://www.indiapolicy.org/debate/Notes/venugopal1.htm
 
through the publications page. Thanks, Mr. Venugopal. 

Now for my brief comment on the article: I must say that Mr. Venugopal
might do with a little more analysis of the beauty of price system to work
effectively not only nationally but internationally; to elaborate the
problem of international prices (foreign exachange regimes, where tradables
determine the 'numeraire' of international prices, and how easy it is to
distort these), the problem of closed capital and labour flows in most
parts of the world, the tendency of political forces to prevent competition
from developing countries, and so on. Second, the **facts** of growth of
world trade over 200 years, and its dramatic impact on growth and
development in general, has been ignored. The reality is that trade has
been the engine of growth (apart from technology) not only of the West, but
of the East (Japan, now China, etc.). Setting up barriers to trade hurts
the country (consumers) setting up such barriers in **most** cases. 

Economics does talk of the theory of free trade and shows how it is the
best. Practice is quite different, and India is the one that has perhaps
suffered the most out of its horrendous tarrifs and barriers to import of
technology, etc. (Kanwal Rekhi said it well in his article in Siliconindia,
referred to by Parth). Folk like you who are teaching in NIRD should
perhaps take a very careful look at historical correlations between free
trade and development and not get bogged down with specific examples which
do not prove the rule, which remains, in my firm view, that free trade is
best for all nations, in all sectors, including labour. If you go into
strategic advantage, then some tinkering can be recommended, in the very
short run, but it is most likely to be counterproductive.

I would like Barun and Parth to chip in, among others. Gurucharan Das and
Sauvik could also comment, and of course Prof. Subroto Roy. Let the experts
debate this thoroughly and persuade all 200 odd members on IPI that free
trade is unequivocally the best.

Sanjeev
=-=-=--=-=-=--=-=-

SOME COMMON MISCONCEPTIONS ABOUT FREE TRADE

By Venugopal, National Institute of Rural Development, Hyderabad. Feb. 2001

* Free trade is a practical concept based on fundamentals of Economics:
There is no evidence to support that free trade is practically possible.
Fundamental economics talks about demand and supply equilibrium, which is
supposed to be brought about by the invisible hand spoken of by Adam Smith.
But the essential assumption for such equilibrium is the existence of
several buyers and several sellers. Unless you have many players,
equilibrium will not arrive. Now in real world, there are not 'many
players' actually playing the game. For example, see UNDP Human Development
Report 1999, which estimates that top 10 pesticide companies in the world
control 85% of the $31 Billion market. Top 10 telecom companies control 86%
of the $262 Billion market. Similar point can be noted about top computer
companies.Mergers are a fact of corporate life, which leads to monopolies
or oligopalies, which are not characteristics of free trade. In my native
village farmers can sell their paddy to only one miller agent and at most
to two. 

* Free trade leads to efficiency This is almost taken as a tautology. But
if we see a little carefully as to how efficiency is actually defined in
adopting this view, things will be clear. Efficiency is seen strictly with
reference to costs or input as compared with income or output. This output
is defined in the narrowest possible sense by referring to the particular
industrial unit or enterprise. If the unit transfers its costs by passing
on to others, it automatically becomes efficient by this definition. For
example, a unit reduces its costs by discharging industrial effluents into
a river. It may lead to much more social and environmental costs. Mostly it
does. But the cost transferred to society is not considered in such
analysis. Another example of how waste is encouraged in the name of free
trade is the way advertisements affect the whole business. There are
certain products where the cost of advertisement is more than 50% of the
price. Cost of packaging is more than 50% of price. OK, it is good news for
the packaging and advertisement sector. But if you see the society as a
whole, surely it is a waste to have such high costs incurred in style
rather than substance. 

* Free trade is practised throughout the western world Nothing can be
farther from truth than this statement. When it comes to the
inter-relationships between exports and imports, there is always
doubletalk. There have been several instances when the west has tried to
impose tariff barriers on products that are considered threatening to
domestic industry. Just examine why they have limit on number of H-1 visas
in the USA. If free trade is the objective, why not allow every skilled
person to offer his or her services to them, whether the person is from
Asia or Africa or Europe. Why are ceilings put, if not to protect the
domestic manpower within their own countries? Similarly the bogey of child
labor is invoked when it means protecting domestic carpet industry. 

* Free trade symbolizes democracy 

* What is democracy? If we take Abraham Lincoln's definition of it being a
government 'of the people, by the people and for the people', will free
trade really fit into this definition? If new multistoreyed
mega-supermarkets or shopping mals come up and if large number of people
are excluded from entering those mals, not by display of any board like the
one used at the entrance of clubs during the colonial rule, but by sheer
lack of purchasing power, can it be called government for the people? If
power is not decentralized but the villager is left almost entirely at the
mercy of world market forces, can it be said to be government by the
people? If elections continue to be increasingly influenced by money power,
can it be said to be government of the people? Democracy does not mean just
holding elections every five years, but it means enabling people to
participate in governance in a number of ways. If the ability of government
to intervene is increasingly eroded,because of various entities like WTO,
globalization, so-called reforms and so on, how can ordinary people
participate? 

* Free trade is in line with Darwin's theory of survival of the fittest
Society comprises of people who are inter-dependant. When minimum basic
human needs are not fulfilled for animal existence by majority of poor
people, not to speak of Meslow's theory of needs,do we really need luxury
goods and services for a few? Does it require too much intelligence to note
that poverty anywhere can be a threat to prosperity everywhere? Is there
nothing to distinguish human civilization from animal kingdom? Is there
nothing called justice? Is it not an intellectual challenge to the combined
wisdom of mankind at the threshold of 21st century to be able to wipe out
abject poverty and deprivation from this planet and lead to sustainable
development? To persuade oneself that there is no point in addressing issue
of poverty because the poor are destined to die... would be an attitude
which could have perpetuated slavery. But history shows that mankind has
evolved through various phases and the innate urge for a better society has
been the reason for many epoch-making changes in the past. Why cannot the
same principles operate now and lead to better changes towards a more
egalitarian society? Why is it insisted that man should not use his brains
and has necessarily to live like animals, by taking cue from Darwin? Man
can surely live with hopes, aspirations, values of good and bad, values of
justice, equality and be different from rest of the animal kingdom. It
reminds to me a newspaper clipping some time back when a tiger in Nehru
Zoological park at Hyderabad was skinned alive by an intruder who entered
the cage and committed the ghastly act. After the event, the remaining
tigers in the neighbouring cages, who were helpless witnesses to the event,
refused to have food for a few days! They were so outraged at the
injustice. If this could be the level of compassion which a tiger can show
towards his brethren, why should not human beings have moral values and
work towards a society which does not deprive basic needs to its people? 

* After the collapse of communism all over the world, there is no
alternative to free trade Of course it is true that Eastern Europe
underwent major upheaval and China has embraced market reforms. But these
countries have started traversing the new path, after taking firm and
decisive steps to increase the standard of living of general masses, not
withstanding aberrations like famine of the 1940's in China. Of course, it
was done at a great deal of social cost and violation of human rights. A
useful lesson could be that human rights should not be trampled upon. But,
it does not follow that free trade is the only solution. The solution is to
explore avenues of increasing participation by the people and prevent human
rights violations like the ones in Soviet Russia. Any real economy is
basically a mixed economy with certain areas controlled by State and
certain areas given over to markets. It is a matter of degree, rather than
something fundamental, when one looks at the extent of control the state
has. It is possible to work for a model of economy based on participatory
democracy and aiming at fulfilment of basic human needs of all and which
respects human rights. 

* Anybody who opposes free trade is a communist and has been proved wrong
by history History has not come standstill and the course of history has
not pronounced any final verdict ever.Two or three decades of history is
too small in comparison with the march of civilization. It would be
juvenile to presume that there are only capitalism and socialism. There are
many variations and many kinds of ideas at various dimensions.It is not a
simple white and black issue, but reality is much more complex and has many
shades. Many people have opposed free trade on the grounds of long term
sustainability. Mahatma Gandhi has said 'the earth has enough for
everybody's need, but not enough for everybody's greed'. Mahatma Gandhi has
also said he preferred violence to cowardice. He was of the firm view that
the tiller of the soil is entitled to as much remuneration as that of a
lawyer. There are people like Baba Amte and Medha Patkar who have been
inspired by Gandhi and are opposing construction of large dams at the cost
of displacement of poor people and total ruination of their livelihoods.
The President of India made a mention of these issues in his Address to the
Nation on the eve of Republic Day, 2001. Surely all these people are not
communists. After all, who is a communist? If we take the basic view of
socialism as defined by Karl Marx meaning a society ensuring 'from each,
according to his ability and to each, according to his need', most people
have nothing prima faci against this concept. But the word 'communist'
brings out notions of arbitrariness, or state monopoly or human rights
violations or corruption to some. They can be rest assured that this writer
is not supporting such notions. But if some people think the word
symbolizes justice,egalitarianism, fulfilment of basic needs, concern for
fellow human beings and concerted efforts to bring a better society that
could produce human beings with a more humane character, I do not find any
reason to oppose the label. But instead of getting bogged down with labels,
one could examine whether free trade model can be sustainable at all. By
compelling people to do only those things at which they have so-called
comparitive advantage, the free trade model enforces mono-cropping in
agriculture and leads to extraordinarily high doses of chemical fertilizers
at long term costs to the soil fertility. Afterall, Nature prefers
diversity. Increasing world trade leads to greater transporation costs and
faster depletion of fossil fuel or non-renewable energy sources. And of
course, it expects ordinary people to interact with world markets, thereby
giving additional strength and undue advantage to the developed countries,
who have already reached a stage of industrial progress with a major input
by way of raw material from the third world countries in the initial days
of industrial revolution. By concentrating on GNP, it ignores
environmental, public health and other social factors. Let us note a simple
fact to illustrate this point. A village has been protecting its forest
over thirty years by concerted efforts of people. They may use firewood or
twigs for various purposes but other than that, they do not fell the trees.
They add nothing to the GNP in the free trade model. On the other hand, if
a smuggler breaks the village unity and starts felling the forest and
supplies to timber industry, then it gets counted in our national accounts
statistics and GNP increases! When we do not trust the government officials
for running our policies, how do we trust mechanism and treaties signed by
the same people, under the same limitations, which will limit our sovereign
ability and subordinate it to world bodies? 

* Merit and efficiency can be promoted only by the apparent ruthlessness of
market forces 

* History has denied equal opportunities to large number of people.
Suddenly it is declared that there is free trade and everybody is free to
take part in it. It does not stand to reason that because governments
declare supremacy of market, society automatically allows merit or
efficiency to flourish. As distinct from State and the markets, we have
society. Society has its own characteristics with different social strata
and inter-relationships between them. Definitely not all are placed in
equal position to compete in trade, considering diverse backgrounds,
castes, hierarchy, social position, variations in self-esteem, variations
in objective social conditions, variations in knowledge or education,
differences in power and so on. The ruthlessness of market is not apparent.
It is real. The markets are based on notion of profit. It can be argued
that State is run through government officials who are corrupt. But we
should note that there are always some government officials who are not
corrupt and it is desireable to promote channels of public participation in
order to increase operational space for good public servants. But market is
by definition self-seeking, with profit as the ever-underlying theme. A
society that cannot rely on government officials in a democratic framework
has no logic to rely on markets, which are by definition, seeking private
profit. Entrepreneurship is important but regulation through people's
participation, with due respect to human rights, will be necessary to see
that in the name of free trade, one does not lead to long term damage of
environment, or increase long term social costs by depriving basic needs of
people. 

* Free trade leads to more choices 

* If I am a poor woman having problems of collecting drinking water and
finding it difficult to get two square meals a day, it does not really
matter if the nearest city has ten night clubs or five shopping mals. If I
am already marginalized by lack of purchasing power, whatever increased
choices available in towns for those with fat purses are not available to me. 

* Free markets lead to competitiveness and promote excellence 

* There is no doubt that free market economy would promote competitiveness.
But it is again defined within the broad limitations of outputs and
profits, as already discussed. Therefore it is imperfect, as costs
transferred to others in the economy are not covered. In any case, what
happens at the end of this competition, in terms of one's contribution to
the society and deriving inner, blissful and rational satisfaction within
oneself? 'At the end of the rat-race, one is still a rat!' Regarding
excellence,of course, some individuals will definitely shine in disciplines
favorable to the markets. Let us note that any child has a great deal of
creativity and it is through social conditioning that much of it is lost or
controlled. A child is like a bud that can blossom into beautiful flowers
of various shapes and fragrances. If an economy does not allow many poor
children to live beyond the age of one year, obviously it does not allow
creativity to grow. If state takes no responsibility for promotion of
public health or for that matter, anything that does not pay, will it lead
to progress? Most important intellectual pursuits of life do not pay well
in monetary terms if they are left completely to the mercy of markets, the
list ranging from archaeology,basic Research, classical music, sociology,
study of astrophysics, pure sciences,social sciences,Mathematics and so
on.Surely, everything that does not pay now is not useless. If this logic
were to be applied in the past, many principles of science would not have
been discovered and many great inventions would not have been possible. By
promoting fields like Management, IT and Biotech at the cost of other
disciplines, we would not be promoting excellence in general. May be,
excellence is encouraged in some select fields. Therefore it does not
follow that excellence is promoted in free markets, as some subjects are
encouraged and some disciplines will be forced to fade away. 

* People who talk of distributive justice basically want to distributes
poverty No, there is historical evidence to show that trickle down theory
has never worked in addressing the scale and kind of income disparities
that we have. The logic that growth-oriented economic policies lead to
bigger size of the cake and hence every one will get a bigger share of the
cake has not been proved. Green revolution took place in India and has
helped the country to achieve self-sufficiency in food grains. But it has
not helped to increase food availability to the poorest of the poor. As
Amartya Sen has pointed out, mere production of food does not mean that
everyone got access to it. Nobody can distribute poverty or compel the rich
to live like the poor in the framework of human rights that has been
referred to before. What one is talking about it a fair degree of
distribution of economic benefits and enhancement of opportunities for all
on a sustained basis. 

* There is no place for centralized planning any longer Yes, I agree with
the statement here. Nobody is talking about centralized planning here. We
are talking about decentralized, people-based participatory planning and
execution. Rather than empowering State or Markets, I am talking about
empowerment of the people at the grass roots level. I am exploring ways and
means of people protecting and enhancing their own natural resource base
and sustaining their livelihoods without being victims of either state or
the markets. State could at best play a supportive role. 

* Anyone who opposes free trade supports class struggle 

* It is true that there are several classes in our society. It is also true
that not all situations are 'win-win' situations and not all are 'zero-sum
games' and therefore one cannot generalize it either way. There may be some
local situation where people may be in a position to come together and form
a good cooperative and economically compete with some big vested interest
and win by combined strength. It is also possible that somewhere else, poor
people are not able to stick together and their problems are exploited by
others. All that one is advocating is that government institutions should
play a 'pro-poor' role by taking up schemes, enforcing social legislations
and giving support to the poor in the latter kind of situations. Locus
standi for class struggle can be removed if state institutions perform
roles actually supporting the poor. 

* All this is alien to indian culture, as indian culture concentrated on
the individual and society has no place in ancient indian traditions Indian
culture had emphasized the concept of 'vasudhaiva kutumbakam' or treating
the whole planet as one's family. Where is any contradiction? Indian
culture has always emphasized concern to basic values of ecology or
sustainability, whether these words were ever used or not. The tradition
has always put emphasis on voluntary moderate habits. To help the poor was
always considered as a noble cause, be it in Hinduism or in Islamic thought
or in Christianity. Rather it is the culture of 'free trade' that has led
to high incidence of sex trade in south east asian countries, leading to
its concomitant problems. The fact of existence of diverse thoughts and
approaches was widely recognized in indian thoought as can be seen by the
saying, 'ekam sath vipraah bahudha vadanthi',meaning the same truth is
expressed by the learned in various ways. It was Swami Vivekananda who
declared that 'God cannot dare to appear in any other form to a starving
person except in the form of food'. There were several schools of thought
in ancient India including the materialist school, or the Lokayata school,
who believed in the primacy of society. Be that as it may, if somebody
wants to concentrate on the individual and explore avenues of
self-purification or self-improvement through, that is welcome and is not
contradicted in our approach based on individual liberty, alongwith all
other human rights. Ultimately the objective is to produce a better society
that could improve human nature. In the name of free trade, let us not
sacrifice our cultural heritage. Let us all keep on expressing it, by
imbibing the good in other traditions in diverse ways, including reducing
poverty by targetted approaches, more transparent and decentralized
government,better participation of public in various institutions,
electoral reforms, research and use of herbal medicines, forest protection,
preservation of tribal music, dance and other cultural traditions,promoting
indian languages, leading a life based on simple living and high thinking
aimed towards sustainable development. 


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