In an Uncertain World (56 page)

China is sometimes offered as an example of a thriving closed economic system. In fact, it is the opposite. China's economic boom began when Deng Xiaoping began moving the country toward exports and market incentives, albeit in the context of state-owned enterprises and a carefully controlled opening to capital flows. This mind-set has taken hold to a remarkable degree—though much still remains to be done to convert China to a true market economy. Every time I've visited with people running banks and industrial companies in China, I've found that they sound much like their American counterparts when they talk about their businesses—discussing prices, competition, growth, and economic issues. Our view at Treasury was that China could do even better if it opened its markets more quickly to imports as well as promoting exports. And while China did not do that, as it pursued a policy of export-led growth it also slowly opened its own markets to both imports and capital flows, and then took the dramatic step of joining the WTO. India, which is also in the process of transforming itself from a state-dominated to a market-based economy, albeit at a slower rate than China, also grew rapidly during the 1990s.

Sub-Saharan Africa doesn't fit into any neat category. The problems in most of these countries are momentous. But my trip to Africa as Treasury Secretary left me with the impression that there were also great opportunities. For example, the Finance Minister of Mozambique, where strong economic policies have led to high growth from a low base, explained to me how much could be done with even small amounts of capital. To move forward, Africa needs to develop more effective governments and stronger institutions. The industrial world also needs to focus much more of its attention—and provide adequate resources—to deal with Africa's special problems.

   

ADDRESSING GLOBAL POVERTY and the dislocations sometimes caused by globalization is an immense moral issue, but is also enormously in America's national self-interest. Unfortunately, the importance of this endeavor is not reflected in American politics. The American public does not understand the stakes involved, nor do people generally appreciate how little we currently spend relative to the magnitude of the problem.

While at Treasury I was deeply involved in seeking the annual congressional appropriations for certain programs of the World Bank, which uses those contributions from the industrialized countries to fund a wide variety of programs to combat poverty and improve living conditions in the developing countries. This was always an uphill struggle in Congress. After leaving government, I had the opportunity to revisit these issues in a systematic fashion in the context of a United Nations commission on foreign assistance on which I served in 2001. The commission, chaired by former Mexican President Ernesto Zedillo and including representatives from the developed and developing worlds, was intended to draw attention to these issues in connection with a conference held in March 2002 in Monterrey, Mexico, to support increased financial assistance for developing countries.

The Zedillo commission advocated the same basic approach of integrating with the global economy, market-based economics, “parallel agenda” policies to deal with needs markets won't fulfill, and effective government. But it also focused heavily on what the industrial nations can do to support developing-country growth, the large shortfalls in these areas, and the difficult politics around these issues in the industrialized countries.

The developing countries are heavily dependent on industrial countries' markets for exports, and those markets are dependent on industrial countries' growth. Both Japan and, to a lesser extent, Europe have had relatively weak economic performance in recent years, in large measure because structural rigidities—in labor laws, social safety nets, regulation, and so on—have deterred investment and private-sector growth. The United States grew strongly in the 1990s but is now positioning itself for long-term fiscal deficits that could undermine that growth over the longer term. And as we urged Japan in connection with the Asian financial crisis, the industrial countries should feel a responsibility for sound growth policies, not only for their own people, but for the rest of the world.

In addition to managing our own economic policies so as to contribute to strong global growth and better markets for developing countries, there are two primary ways in which the industrial countries can support developing-country growth: trade and aid. Trade—improving access for developing countries' goods to our markets—is almost certainly the single most important measure industrial nations could take to help developing ones. President Zedillo made this point in our commission discussions as he expressed, in his understated way, enormous frustration with how advanced countries such as ours advocate free trade while impeding imports from the poorest countries. Virtually all developing countries have a strong comparative advantage in cheaper low-skilled labor. In many of the poorest countries, the most important export industries are agricultural products and textiles, which are produced by labor-intensive means. But agriculture and textiles are among the most politically powerful and economically protected sectors in developed countries, and developing nations often find themselves very limited in their access to export markets in Europe, Japan, and the United States. Barriers to trade can be direct—such as tariffs or trade restrictions—or indirect, through subsidies to goods produced in the industrialized world that make it harder for imports to compete. Lowering such import barriers—primarily on textiles and agricultural products, but also on steel, an important product to some emerging markets—would be of enormous benefit to the developing world, especially the poorest countries.

I remember the negotiations around an African trade bill that the Clinton administration supported. We wanted to remove textile duties but were opposed by unions and some manufacturers in this country. Because of their influence, the best compromise we could negotiate was reducing tariffs on African textiles that were made from fiber originating in the United States. The bill that passed has already produced significant gains for the products and nations that were included and is projected to raise the level of nonoil exports from Africa by roughly 10 percent. But the benefit would have been nearly five times greater without adding restrictive conditions on the terms of market access, according to an IMF estimate. And the bill did not apply to developing countries outside Africa, such as Bangladesh, which has more than one million women working in the textile industry and could increase export revenues from such products by an estimated 45 percent, if granted this kind of duty-free access to markets in industrialized countries such as the United States and Japan.

Trade barriers are estimated to cost the developing world at least $100 billion of lost opportunity a year, or by some estimates much more, a multiple of foreign aid spending by all governments. For example, one study estimates that if Africa's share of world exports increased by 1 percent, its trade revenues could grow by $70 billion a year—five times what it receives in aid and debt relief.
The New York Times
ran a series of valuable editorials on this issue, pointing out that subsidies to the major cotton farmers in the United States were a critical factor in keeping the two million cotton farmers of the small African nation of Burkina Faso from competing on a level playing field in the global marketplace. The United States took a step backward by passing a ten-year, $180 billion agricultural subsidy bill in 2002, which increased the subsidies that American farmers receive by almost 80 percent. The United States also moved its trade policy in the wrong direction in 2002 when we increased restrictions on steel imports. These measures were damaging to the developing world and make it harder for us to argue for more open trade in the international arena.

In political terms, protecting industries is usually appealing, because the negative consequences of free trade are so visible while the benefits—though much greater—are diffuse. In a discussion with President Clinton about a Japanese trade agreement, I mentioned that one sector where we needed to push for reduced trade barriers was fish. Clinton remembered being in Japan and seeing some poor fishermen casting their lines off the rocks. He said quite determinedly that he wasn't going to do anything to hurt those vulnerable people. “But Mr. President,” I said, “to help those poor fishermen, you're going to prevent the vastly greater benefit that would come to the poor throughout Japan from being able to buy cheaper fish.” The damage of trade liberalization to the fisherman was the most palpable. But the preponderant effect would be to benefit a much larger number of other, invisible poor and consumers more generally.

Developing countries benefit from trade and openness, but so do industrialized countries such as our own. Trade and economic ties are sometimes discussed in terms of winners and losers. But while nations are in some sense economic “competitors,” in a more important sense trade is a mutually beneficial dynamic. Success in one country can raise living standards in another, rather than coming at the other's expense. The United States is already a huge market for the rest of the world and our growth creates opportunities elsewhere. Conversely, growth in Europe and Japan, and successful development in emerging economies, provides better markets for us.

Politicians don't like to say this, but imports also contribute greatly to our economic well-being, by reducing prices paid by American consumers and producers, by shifting our allocation of resources to areas where we have a comparative advantage in the global economy, and, very importantly, by creating competitive pressure on American companies to be more efficient and productive. This latter factor was central to the revival of American competitiveness in the late 1980s. In contrast, the more restricted trade regimes in Europe and Japan have sheltered protected industries, contributing significantly to lagging productivity growth. Between 1996 and 1999, U.S. imports of goods and services increased by almost $400 billion. Virtually every household in America has a better and cheaper TV, or toaster, or computer, or T-shirt, than would be possible without imports. According to a calculation by a former Federal Reserve economist, if those additional goods and services had not been available to American consumers, U.S. inflation could have been as much as 1 percentage point higher and interest rates could have been more than 2 percentage points higher. When I was at Treasury, I made this case for imports in testimony before congressional committees. Once, Phil Crane, a conservative Republican from Illinois, said I was the only government official he'd ever heard defend imports in public testimony. In speeches and testimony, I joined this case for imports with a strong statement saying that all change—whether from technology or trade—even if predominantly beneficial, will inevitably and unavoidably be harmful to some. Consequently, trade must be accompanied by effective programs to help dislocated workers find new places in our economy. This is not only fair, but will contribute both to productivity and to political acceptance of trade liberalization.

Dramatic changes in the world economy, including technology that links us easily with people working thousands of miles away, mean that low-wage workers elsewhere can provide goods and services in ways that were scarcely imaginable before. India and China in particular have very large numbers of lower-wage workers who are also skilled. Almost all mainstream economists believe that this change will provide great opportunities for both developing and industrial countries, as have past innovations. But all of this will almost surely increase the already sharp debate over trade in the political arena.

That makes efforts to improve the American people's understanding of trade all the more important. Protectionism may seem tempting in the face of competition from large pools of well-educated workers in low-wage countries. But policies that restrict trade—likely to be matched by similar policies in other countries—would be damaging to our economy and to our consumers, workers, and businesses. However, this new competition does call for the United States to act aggressively to safeguard the drivers of our own growth in productivity by increasing public investments in areas such as education, health care, the inner cities, and effective assistance for those disclocated by trade. Restoring a sound fiscal position will also serve this purpose by promoting lower interest rates, greater confidence, and higher levels of private investment.

While not as central as trade, the emergence of well-functioning capital markets and banking systems is also essential to the advancement of developing countries. Financial institutions are necessary to intermediate between savers and users of capital, and to allocate that capital efficiently. In the Mexican and Asian financial crises, the weak banking systems in almost every case either were part of the cause of the crisis or exacerbated the crisis. Industrial country expertise—from both the public sector and the private sector—can help developing countries create effective legal and regulatory infrastructures and strong banking and capital market institutions. Lack of access to capital in developing countries is a particular problem for smaller and medium-sized companies, which are key to growth. Providing access to capital for these companies has become a strong focus of public policy in many developing countries.

When I traveled to China as Treasury Secretary in 1997, I visited a jewelry manufacturer and exporter in central China that had been state-owned but was now a private corporation that had successfully raised the capital necessary to expand its operations by selling shares on the Shanghai Stock Exchange. If the expansion went well, that would mean more jobs, and, it was hoped, a better quality of life for women such as those I saw making jewelry that day—a direct result of better-functioning domestic capital markets, and a development that would have been unthinkable just a decade earlier in China.