Doughty free trader

Stream of Windows
October 23, 1998

Jagdish Bhagwati, professor of economics and political science at Columbia University in the US, belongs to that increasingly rare breed of economist who successfully combine an enthusiasm for academic scholarship with a passion for "active advocacy'' or, what Bhagwati calls "getting down into the trenches of public policy''. Bhagwati considers that an academic scholar can best advance the public good when he or she is prepared to be a public nuisance. It is the scholar's task to question and probe the received wisdom, whether this originates with politicians or, worse still, economists "whose conclusions are more obvious than their arguments''.

This volume contains a selection of the more recent writings of Bhagwati taken from newspapers, magazines, periodicals, journals and lectures. Each of the 55 pieces is intended to provide one of a stream of windows (the title is taken from a poem by James Schuyler) through which the author seeks "to let in fresh air, even gusts of gale''. Much of the book deals with subjects about which Bhagwati has written extensively in the past. Thus, there are chapters on the menace of protectionism, the diminished giant syndrome, the rise of aggressive unilateralism, the US obsession with Japan's trade surplus, the folly of putting fair trade before free trade and the dangers posed by the proliferation of free trade areas.

However, the book also contains Bhagwati's lesser-known views on a variety of other issues where he has sought to speak out. These include the problem facing the US and other advanced industrialised countries of how to cope with increasing numbers of illegal immigrants. Among other gems, the final chapter includes a reprint of an article by Bhagwati, which first appeared in 1982, remembering the life and work of the famous international economist, Harry Johnson, who taught Bhagwati at Cambridge in the 1950s.

An appealing aspect of this book is its wit and the eloquent style in which it is written. Once considered a candidate for the post of director-general of the World Trade Organisation, Bhagwati is an uncompromising advocate of free trade, which he regards as having been the primary source of the economic prosperity enjoyed by the world over the past 40 years. However, free trade is increasingly under threat from powerful political groupings, mainly from within the western industrialised countries, who have seized on the challenge posed by increasing globalisation to advocate protectionism. Much of this is hidden behind arguments about fair trading where what is "unfair'' is defined as any level of competition which becomes intolerable for domestic producers.

Bhagwati believes that it is the responsibility of academic economists to come down from their ivory towers and argue the case for free trade in the arena of public debate. Globalisation cannot be blamed, he argues, for the decline in the real wages of unskilled workers apparent in western industrialised countries, as is commonly believed. Instead, the results of empirical investigation show that it is the reduced demand for unskilled labour resulting from an accelerated pace of technological change which is the primary cause.

However, globalisation has contributed to the growing sense of insecurity felt by many workers. The reason is that the increased integration of financial markets combined with the growth of transnational production by multinationals has exposed firms to fiercer competition. A slight shift in costs can cause a large and sudden change in competitiveness, leading to the disappearance of jobs in a particular region or country of the world. Bhagwati has coined the term "kaleidoscopic comparative advantage'' to describe this.

However, protectionism serves merely to impoverish poor and rich countries alike. If the benefits of globalisation are to continue to be enjoyed, the right response is for governments to provide adjustment assistance to make changes less costly for workers affected. This, he argues, calls for an activist role of the state, not withdrawal.

Bhagwati regards the increasing demands for the inclusion of environmental and labour standards in the World Trade Organisation as being motivated by protectionist intent. Rather than imposing restrictions on developing country imports, the developed countries are seeking to moderate the threat of competition by forcing policy changes on developing countries, which will raise their costs of production. On first appearances such demands have a moral attraction which increases their popular appeal. While most people would agree that competition resulting from blatant abuses of human rights such as slavery is illegitimate, much of the argument about labour standards concerns more marginal issues (such as the right to form a trade union or go on strike) concerning which countries may legitimately disagree.

The International Labour Organisation provides a better forum for outlawing undesirable labour practices, although it lacks means for enforcing minimum standards on signatory countries. Much can also be done by non-government organisations through educating consumers and inviting a boycott of goods produced by morally unacceptable means.

Bhagwati is equally unpersuaded by the increasingly fashionable arguments in developed countries about so-called "eco-dumping''. To a greater extent than with labour standards, different environmental standards reflect diversity of preferences among countries with which trading rules should not seek to interfere. Bhagwati argues that fears about a so-called "race to the bottom'' in the establishing of environmental standards are unjustified as there exists little evidence to show that capital moves to countries where environmental standards are lower.

Bhagwati is also a strong advocate of non-discriminatory free trade, which he considers to be threatened by the current enthusiasm for regional free trade areas. In essence, these are preferential and not free trade agreements, which distort trade flows by making nationality and not the cost of production the determinant of the source from where goods are imported. Bhagwati has coined the phrase the "spaghetti bowl'' to describe the complex maze of import duties and other barriers which are created by the proliferation of PTAs. However, Bhagwati does see a place for PTAs such as the European Union which are seeking to achieve a common market with free capital mobility and a common external tariff.

All in all, this is an extremely enjoyable book written by one of the great economic liberals of our time, whose commitment to the maintenance of a fair and open global trading order remains undaunted.

Nigel Grimwade is principal lecturer in economics, South Bank University.

Stream of Windows: Unsettling Reflections on Trade, Immigration and Democracy

Author - Jagdish Bhagwati
ISBN - 0 262 02440 3
Publisher - MIT Press
Price - £19.95
Pages - 531

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