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Rankin Thursday: No Seattle Washington Consensus

The "Washington Consensus" is the popular name for the neoliberal policy programme promoted by the Bretton Woods institutions: the International Monetary Fund (IMF), the World Bank, and the late-born World Trade Organisation (WTO).

Bretton Woods was the location in New Hampshire of a world economic conference in 1944. The conference rubber-stamped an American plan to manage the post-war global economy. Management of world trade proved much more contentious than financial stabilisation and development, so the General Agreement on Tariffs and Trade - GATT - was set up in 1947 as a kind of interim WTO.

The fledgling WTO faced its Rubicon in Seattle (Washington, USA) last week, and was turned back, thanks in part to what must have been the largest mass protest in America since the Vietnam War.

It wasn't just the protests though; the forces of national conflict that prevented the WTO from being established 50 years ago haven't diminished, despite the veneer of neoliberal optimism in the 1980s and early 1990s. The WTO itself is divided because rich countries (eg USA) are relatively sensitive to their labour and environmental interests, while governments of poor countries (eg India) are more sensitive to the interests of their small capitalist elites who profit from cheap labour and low environmental standards.

The protests - just the tip of an Internet iceberg of dissent - represent exactly the kind of backlash to economic liberalism that Karl Polanyi saw as inevitable. Polanyi's thesis, expressed most fully in The Great Transformation which was written in the same year as the Bretton Woods conference, is very much in vogue in the late 1990s. Central to the late Bruce Jesson's thinking, the Polanyi analysis also features strongly in Jane Kelsey's latest book (Reclaiming the Future), and is consistent with Brian Easton's recent analysis of popular democracy as the Achilles heel of societies that have been engineered along pure market lines.

What is it about free trade in particular that sets off a popular reaction? It is a combination of class conflict and disbelief in the neoliberal story. In other words, free trade ideology is a mythology that serves the collective interest of the capitalist class at the expense of workers, beneficiaries, the environment and national sovereignty.

The mythology of free trade has led to a misconstruction of world economic history, and to a widespread failure to understand the contextual limitations of the economic theory of free trade.

Rod Oram in the Business Herald (Loose ends weighing down trade table - 3 Dec) repeated one of the standard myths. He said: "Liberalisation triggered by the [GATT Uruguay] round helped double the volume of world trade in the past dozen years. Thanks to trade, 10 developing countries with a combined population of 1.5 billion have doubled their per capita income over the past 15 years."

The truth is that increased trade is almost always a consequence rather than a cause of world economic growth. Further, in history, trade protection, by causing full employment and economic growth in each nation, has been a major cause of the growth of trade between nations. Conversely, free trade has been followed by slowing economic growth and hence a deceleration of the growth of international trade. Free trade need not mean more trade. Rather, multilateral trade liberalisation (of the sort the WTO was set up to promote) raises the ratio of world trade to world production by slowing down the growth of world production.

The classic trade story is that of the 1870s to the 1910s. This was an era of growing economic nationalism and tariff protection. Contrary to the general trend, Britain remained committed to free trade. The most protectionist countries of the time, the USA and Germany, led the expansion of world trade.
Britain, on the other hand, suffered a huge loss in its share of world trade.

Virtually without exception, countries undergoing industrialisation have done so with the help of protectionist policies. The 10 counties cited by Oram are "newly industrialised countries" (NICs) which have grown on account of their structural transformations. Their growth has generated a lot of new international trade. Their experience of doubling per capita incomes in 15 years is typical of protectionist countries experiencing national industrial "take-off".

The usual causal sequence in history is from national industrial growth to increased trade to freer trade. Free trade is most favoured by nations following successful industrialisation; it serves as a way of protecting an existing source of competitive advantage. Indeed, that's why Britain moved to free trade in the 1840s; to protect its factory system by creating an environment which would reinforce the capital-poor status of potential competitor nations.

A second neoliberal myth is that multilateral free trade always represents a cooperative solution to world economic wellbeing, while protectionism represents a kind of nationalist "race to the bottom". In fact, certain forms of mutual protection lead to better global outcomes than does free trade.

Under certain specified conditions - especially the never-realised condition of global full employment - global free trade leads to a "first best" allocation of resources (but not necessarily to a superior rate of economic growth). Under such textbook conditions, people who lose their jobs because of the removal of protection eventually get a better-paid job. But under real world conditions of chronic unemployment, job losses in one country through increased exposure to global market forces lead to decreased employment in that country and increased employment in the country that the goods come to be imported from.

First-best global outcomes can only be achieved under conditions of multilateral free trade. But first-best is an academic abstraction that than never be achieved. In real world conditions, it is free trade rather than protection that serves as an economic race to the bottom. Each country that does not protect itself is under pressure to cut wage and tax rates - and environmental standards - in order to remain competitive and attractive to international investment. In practice, global free trade leads the world to a third best situation, whereas enlightened protectionist policies, mutually applied, lead to a second-best world economy that may be almost as efficient as first-best while possibly having more growth potential.

It is useful to reflect on Adam Smith's basic argument for freedom of trade. Smith favoured laissez-faire because he believed that enlightened men were patriotic. Smithian men recognised that their own nations would be better off if all persons exercised patriotic discrimination in their consumption and investment decisions. Smith's "Invisible Hand" depended crucially on a kind of self-imposed protection that would render other forms of protection (such as tariffs or import licences) unnecessary.

Smith favoured voluntary protection through patriotic discrimination because he believed that governments were typically corrupt; meaning that they acted on behalf of business interests against the wider national interest and therefore could not be trusted.

The economic worldview (ie the "moral sentiments") of today's Greens differs from that of Adam Smith in only one respect; namely the Greens recognise that the social instability that follows from an opportunistic tariff-free global economy cannot be prevented by voluntary protection. Economic agents in large impersonal communities are opportunistic rather than cooperative; that's a fact. The solution is political; to have democratically accountable trustworthy governments that provide non-distortionary incentives for buyers and investors to favour - to some extent - domestic over foreign producers.

A healthy global economy is a collective of healthy national economies. Healthy national economies are collectives of healthy local economies. That is a message shared by today's Greens (what Jeanette Fitzsimons calls "new internationalism") and the father of economic liberalism.

The irony is that history tells us that the kinds of protectionist policies that the Greens advocate, mutually applied, facilitate world economic growth. And that's just the outcome that many Greens claim to not want!

The WTO can never achieve its official aims. It is following a rainbow. The bigger problem is that its recipe for international economic cooperation unwittingly serves other purposes. The free trade bandwagon acts as a Trojan Horse for the owners of internationally mobile capital. Multilateral free trade furthers capitalist interests by reducing the bargaining power of workers and the national governments they elect.

The WTO has a role as an agency for international economic cooperation through trade. It's just that international cooperation is more subtle than simply pushing a free trade agenda. Free trade is neither an engine of growth nor a means of avoiding opportunistic national economic policies.

Seattle's WTO failure represents a major step in the collapse of the Washington consensus. It opens the door to new more pragmatic forms of international economic cooperation.

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