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U.S. Economists Debate Benefits of Open Economies

Transcript: U.S. Economists Debate Benefits of Open Economies

(May 7 "Dialogue" program with South Korea, Mongolia) (9070)

While there can be problems in opening a national economy to global free trade, that strategy is still the best path to economic growth, according to an economist taking part in a State Department interactive television program with participants in Seoul, South Korea and Ulaanbaatar, Mongolia.

His colleague in the May 7 "Dialogue" program took the opposite view, stressing controlled access to a nation's economy as a critical step in economic development.

"Those developing economies historically that have been open have tended to experience faster growth rates," said Dr. Edward Graham, a senior fellow at the Institute for International Economics (IIE).

Open economies have often had faster rates of growth in productivity, the key to economic growth and national income, he added.

Dr. Robert Scott, an international economist at the Economic Policy Institute (EPI), presented some of the negative consequences of rapid trade liberalization.

According to Scott, trade liberalization following the North American Free Trade Agreement with Mexico hurt working class people in Canada and the United States while benefiting more highly skilled workers.

Scott also asserted that financial liberalization in the 1980s contributed to the Asian financial crisis of 1997.

East Asian countries, Scott suggested, "did not simply throw open their economies -- I am talking here about Japan, Korea, Thailand and other South Asian economies that grew rapidly."

Instead, he said, those nations "very carefully restricted access to their markets until they were ready to compete with producers at a worldwide level."

The successful Asian economies emphasized an export strategy initially, and "only gradually did they liberalize imports and then ultimately restrictions on capital flows as well," Scott said.

Scott acknowledged that all countries must eventually open their markets to compete internationally, but stressed that "the question is how do they get there."

While Graham conceded that South Korea had initially directed resources to develop export-oriented industries during the Park and Chun administrations, he emphasized that those governments exercised a very discriminating judgment as to which industries to back.

Graham advised against attempts by Mongolia to copy Korea's example by protecting industrial sectors.

Mongolia today "is really a very, very small country with a population that is a fraction the size of Korea's," Graham said. "Were a country that small to try to be self-sufficient in the production of a wide range of goods the result would be disaster."

Mongolia would be better off with an open market to imports, he added.

"I believe that an open economy is generally the best thing," Graham said. "If there is a case for protecting sectors in a small country such as Mongolia, that those protected sectors must be chosen very carefully for export competitive potential."

Turning to China, Graham said that country's proposed entry into the World Trade Organization (WTO) and its growing presence on the world economic stage are not "something we can debate."

"This is something that Korea really must adjust to, that China is a rising power," he said.

WTO membership will also "make China rise faster," Graham continued, "and it is something that we all better get used to living with, because I don't think that we are going to stop it."

On economic relations between South Korea and North Korea and possible reunification, Graham said it is very much in Seoul's interest to encourage the economic opening of North Korea.

"Hopefully from this will come the expected benefit of rising per capita income, because until the per capita incomes of the two Koreas are more level, I would believe that any future reunification would indeed pose adjustment difficulties that would be very deep and might quite adversely affect the South," he said.

Following is a transcript of the U.S. Department of State's May 7 "Dialogue" interactive television program:

(begin transcript)

"DIALOGUE"

UNITED STATES DEPARTMENT OF STATE

Office of Broadcast Services, Washington, D.C.

GUESTS: Dr. Robert Scott, International Economist

the Economic Policy Institute

Dr. Edward Graham, Senior Fellow, Institute for

International Economics

TOPIC: U.S.-East Asian Economic Issues: Open Economy

POSTS: Seoul, Ulaanbaatar

HOST: Judlyne Lilly

DATE: May 7, 2001

TIME:21:00 - 22:00 EDT

MS. LILLY: Hello, and welcome to "Dialogue," I'm your host Judlyne Lilly. Economic issues are very important in East Asia, as the emerging democracies seek to implement economic strategies that will cement democratic principles. As the region continues to recover from the financial crisis of 1997 and make the transition to a market-based economy, it faces several challenges.

In this three-part series on U.S.-East Asian economic issues, we have discussed trade and tax policy and building the financial sector. Today's program is the third in a series, and we will discuss another challenge facing the region: How governments can promote an open-market strategy and also support the growth of small and medium-sized domestic companies.

We are joined in our discussion by two experts: Dr. Robert Scott -- he is an international economist at the Economic Policy Institute, and he specializes in trade, NAFTA, global finance and international economic comparisons. Dr. Scott has represented U.S,. industries as an expert witness on the economic effects of imports, and in several cases before the U.S. International Trade Commission concerning unfair trade complaints. Dr. Edward Graham is a senior fellow with the Institute for International Economics. He also served as an international economist in the Office of International Investment Affairs at the U.S. Treasury. He is the author or co-author of a number of studies on international investment and technology transfer. Gentlemen, welcome to "Dialogue."

We would like to now welcome our participants in Ulaanbaatar, Mongolia and Seoul, Korea. Ulaanbaatar, we go to you now for an opening question or comment for Dr. Scott or Dr. Graham.

Q: Good morning, my name is Toman Baya (ph). I represent the parliament secretariat. I would like to put a question. Mongolia is vulnerable to requirements of international financial institutions like IMF or World Bank to grant favorable conditions for foreign investors. But from the other side there is the need to promote domestic producers. And so my question is where can the balance be found. Thank you.

MS. LILLY: Dr. Scott?

DR. SCOTT: Yes, we have seen that around the world the IMF and the World Bank as well have used very strict conditions to require countries to open up not only their trade markets but their markets to inflows of international capital as well. And that has had negative effects through many countries, particularly in the 1990s throughout Africa and Latin America in particular, and of course we have also seen that in Asia as well. I think it's well known that capital liberalization programs in the mid '80s were in large part responsible for the Asian financial crisis that swept through the region in 1997 and 1998.

MS. LILLY: Do you have something to add?

DR. GRAHAM: Yes, I don't guess that I entirely agree with the statement. I believe that it's correct to say that capital account liberalization is partly responsible for some of the difficulties that occurred. However, in the crisis-ridden countries that suffered from the crisis of 1997, the problem is really the sequencing of the opening of capital accounts. And in particular what happened is that these countries opened the short-term capital accounts and left closed the long-term accounts. The long-term accounts are the ones for foreign direct investment, the type of foreign investors that you are talking about would come in. So it seems a little odd to blame foreign direct investment for the crisis, given that many analysts believe that the problem was that the sequencing was wrong, that in fact capital accounts should have been open so that foreign direct investment came in before short-term capital account opening.

MS. LILLY: Thank you, Ulaanbaatar. Now let's go to Seoul for your first question or comment.

Q: Hello, this is Kish Kim (ph) with -- (inaudible) -- newspaper. The fast way developed countries, including the United States, have supported an open economy that contains a minimal of trade barriers and financial barriers. But what do developed countries mean to open economies? What are the positive impacts and negative impacts of the open economy?

MS. LILLY: Negative impacts, positive impacts of the open economy? Dr. Graham, would you like to try that?

DR. GRAHAM: Well, let me handle first the positive impacts. Those developing economies historically that have been open have tended to experience faster growth rates, and in particular faster growth rates factor productivity which is really the ultimate determinant of national income in countries that are relatively closed.

Most of the problems that have been recorded have had to do with transition of improper sequencing of opening or too rapid an opening. Even the most devout advocate of open markets will admit that if an economy opens too quickly that there could be problems.

DR. SCOTT: I think that we have to be aware of the negative consequences of rapid trade liberalization, both in developed and developing countries. I'll start with developed countries. And we just completed a study in my institute that looks at the impact of the North American Free Trade Agreement, which brought together Canada, the U.S. and Mexico. And, surprisingly, the impacts on both Canada and the U.S. have been strongly negative for working people -- we have seen downward pressure on wages throughout the hemisphere, and we have also seen shifts out of good manufacturing jobs and into lower-wage or paid service industries. It seems the only people who have benefited, according to our analysis, are very high-wage workers and also the multinational companies that get these cheap imports.

MS. LILLY: Thank you, Seoul. We'll go back to Ulaanbaatar for more questions. Go ahead please.

Q: Hello, my name is Timbru (ph). I am representing the Mongolian National Chamber of Commerce. My question is about is there any conflict between open policies and so-called supporting of national industries, because it seems to me that when you have the open policy one of the components of this is the pre-trade regime, so you have definitely a level import regime or -- (inaudible) -- competition. But at the same time there is ongoing discussion here in Mongolia of course in the domestic industry would have to deal with this import competition and this national industry support. Or it is some kind of question which is not related to each other? Thank you.

DR. SCOTT: Yes, I think it is important to compare the countries of East Asia that had developed very rapidly in the last two or three decades with countries that had been forced to open in the last 10 or 15 years with the pressure from the IMF and the World Bank.

The countries of East Asia did not simply throw open their economies -- I am talking here about Japan, Korea, Thailand and other South Asian economies that grew rapidly. They very carefully restricted access to their markets until they were ready to compete with producers at a worldwide level. So they did emphasize exports initially in that strategy, and then only gradually did they liberalize imports and then ultimately restrictions on capital flows as well.

DR. GRAHAM: I guess that my only response to that would be largely to a degree that in the case of Korea, which is of course one of the two countries with which we are having this dialogue tonight, if you look at their history, particularly during the period of Park Chung Hee, the following period of the heavy chemical industries drive that was started under President Park and finished under President Chun, the emphasis was very much on developing export competitiveness. And to this end the Korean government did grant massive subsidies to allow local industry to build itself up.

I think that one of the things that is very important is that at least in the early days that the Korean government chose its industries very carefully and evaluated very carefully those sectors which it believed that Korea could be internationally competitive, and really directed resources into the building up of these industries, while eschewing these industries where the government had determined that Koreans could not be competitive.

Q: My name is Agiad (ph). I work in the prime minister's office. My question is we are experiencing some negative impacts or effects of globalization in Mongolia in the promotion of domestic industries. How to deal with those effects? Thank you.

MS. LILLY: Would you like to take that, Dr. Scott?

DR. SCOTT: Sure. I think that what we can learn from experiences such as those we have been discussing in Korea is that it's important for newly developing countries like Mongolia to have a plan for industrial development. And in fact they have to consciously help I think to develop industrial policies to help particularly important sectors raise their competitiveness before they throw open their markets. So I think you have to think very carefully about rapid import liberalization before you are ready to throw open your markets to unrestricted free trade.

DR. GRAHAM: But I guess what I'd wonder about that though is that Mongolia is really a very, very small country with a population that is a fraction the size of Korea's. And were a country that small to try to be self-sufficient in the production of a wide range of goods the result would be disaster. So my own feeling about Mongolia is that actually in Mongolia's case it is rather important to maintain an open market to imports. To try to be self-sufficient and to try to build any but a small number of industries in a country with such a small population simply isn't going to work.

Q: Hello? My name is -- (inaudible) -- I am from the Ministry of Industry and Trade. And my question is: Due to -- (inaudible) -- in the world and after development policy for the -- (inaudible) -- countries like Korea has implemented very well. But for small countries like Mongolia that policy, to implement it, we'll have some problems, because we seem maybe we need some protection policy of market economy from other countries, like the tax policy and some -- (inaudible). What do you think -- what kind of protection policy can you recommend to us for implementing this policy?

MS. LILLY: Dr. Graham?

DR. GRAHAM: I wish that I had really good advice to give on that, because the only goods that I believe that a country such as Mongolia should protect would be those in sectors that Mongolia had assessed that there was a potential for export competitiveness. I am going to have to confess that I don't know your country well enough to give any specific advice as to exactly what those activities are. About the only thing that I can say is that for a country as small as Mongolia, that if you are going to protect a set of activities with the intention of building those into international competitiveness, you better be very careful to choose ones where that potential really does exist.

DR. SCOTT: I think it's also important to consider developing ties with other countries in a similar situation in the region. I think countries need to place more emphasis on regional development strategies and less on trying to compete just overnight with the wealthiest and most developed economies -- the U.S., Japan and Europe. So I think it would also be useful to think about where Mongolia has complementary production systems with its neighbors, in China, in Russia and elsewhere in the Far East, that it can also think about developing with in a coordinated fashion. Again, Mongolia will have much more bargaining power if it is allied with larger countries for the reasons that Dr. Graham mentioned earlier, than if it tries to go it alone.

Q: Hello again -- (inaudible) -- from the secretariat of Parliament. And this question is sort of close to the previous question, and this question was directed to me by a member of Parliament, Mr. Denmuran (ph). He is asking that there are different ways of supporting domestic producers, like favorable tax policies or long-term low-interest loans, or issuing government guarantees for private credits. So which are the most appropriate for conditions of Mongolia do you think? Thank you.

DR. SCOTT: I think that Mongolia has to think about making long-term investments in the industries that it wants to build up. I think you have to be careful to avoid giving subsidies that just increase the rate of profit of the investors in these new industries. I think you also have to think about investments in areas like skills and infrastructure that will build up your long-run competitive capacity.

That being said, of the options you listed, I think that perhaps access to credit is normally one of the most important constraints on a country's ability to grow. So of the list that you gave, I think that that would probably be one of the more attractive options. It certainly has been historically -- again like we have seen in the case of Korea and other countries.

DR. GRAHAM: About the major thing that I could add to that would be again looking at the case in Korea as a positive example, and looking at the early stages of Korean development. Korea did give subsidized loans, low market interest rates. It did give tax breaks. And it gave it only to those firms that demonstrated that they could perform. It was a very stringent condition that if a firm was to receive preferential treatment, both in lending or in tax treatment, that it had to meet goals that were specified by the government. And the goal was basically to export. A firm that was a successful exporter got the subsidized credits, got the preferential tax treatment. And if it failed to meet an export goal it as cut off.

And I think that the major problem that many countries find themselves with is exactly what was just mentioned, that they put forward subsidies that go to enterprises that don't meet specific goals. And when those goals aren't met the political pressures are to continue the subsidies anyway. And that's how countries get into difficulty.

Q: I just want to clarify my first question about this open policy and national industry, because when you saying national, open policy, you mean that there should be market forces dominated, less government involvement, so that the export competition should be based in the market forces import competition, be free, et cetera, et cetera. But when we are talking about the national support, all this, which means that there is some kind of protection policy -- but, as you said, Mongolia is a very small country. So is there a need for protecting the so-called domestic industry? And it is we have to clarify what does it mean, "national industry," because based on the terminology there is a lot of so-called -- to serve the patriotic -- some kind of assumption that there should be everything protected -- regime of the taxes. But meanwhile we are saying that there should be uniform taxation in more of these things. We just pursue an open policy as it has to be in this case. Thank you.

DR. GRAHAM: I'll go first on this one. I think that it's important to realize that as between your two panelists tonight that there is actually a difference of view on this, that I am generally not in favor of a closed economy. I believe that an open economy is generally the best thing. And what I've been saying is that if there is a case for protecting sectors in a small country such as Mongolia, that those protected sectors must be chosen very carefully for export competitive potential.

Otherwise I believe that a country such as Mongolia is much better served by being very open. And indeed I think that the record of history shows that this is the case, that small countries in particular need to be open, not to be closed. Prosperous small countries -- for instance in Europe include the Netherlands, include Switzerland, which are very, very open economies in terms of their trade policies. A small countries just simply cannot be self-sufficient in a wide range of industrial products. And because of that it must be open for importation for a wide range of products. Otherwise the country is condemning itself to long-term poverty.

DR. SCOTT: Well, I want to clarify a point here. I think there is no choice countries face regarding opening their markets. In the long run they will be forced to compete internationally. The question is how do they get there. How do they manage their relationship with the international economy so as to maximize the gains and minimize the losses that go along with globalization? And I think that I would certainly believe that much more needs to be done to help industrial sectors, key industrial sectors grow. Again, I think you are better off as a small country if you can do this in alliance with a much larger neighbor -- the Chinese or the Russians, the obvious choices.

I think it's also important to keep in mind the need to maintain domestic purchasing power. This has been one of the major flaws of the export-led growth model that has been promoted here in Washington for the last several decades, the notion that countries can grow entirely through raising exports. And it's simply not true, and it leads to a lot of economic instability. I think that one lesson we've learned from Korea and from Taiwan and from Indonesia before the crash, and other countries, is that it's critical to maintain high incomes, and that means high prices in agricultural products in part so that those agricultural rural consumers have incomes they can spend on domestically-made products, and also so that to avoid a large rush of people out of the farms and into the cities. Again, I don't know all the detail statistics, but I suspect that most of the work force in Mongolia is probably still engaged in agricultural or primary production activities. And so it's key to keep incomes up in those sectors.

Q: You have brought up the issue of the free trade zone and the economic zone. If you were the prime minister of Mongolia, what would you staff first, second and third? Would you continue? Thank you.

DR. SCOTT: How we are going to sequence the process of development. I think it is first probably necessary to begin to build some consensus amongst the different stake holders in the Mongolian society about what kinds of investments they are willing to make in their own growth. Even in a small country like Mongolia you have to decide which sectors you want to encourage and which sectors are going to be left to compete with foreign forces or with -- where you are going to cede those markets to other countries even in your own region. I think that's the first thing you have to do.

I think -- second, I think you have to plan up with the plans for development of those sectors that you do want to target, and that includes again certainly the agricultural sector and also those few industries that you do want to try to cultivate domestically or in cooperation with producers in other countries in the region. So I think that kind of planning is the first step -- first and second steps.

And then I think at that point you can begin thinking about strategies for building up those sectors and carefully bringing them into the globalization process. But again, I want to emphasize the importance of a domestic market. Too many countries have come into too much trouble by emphasizing growth through exports, and that has often led to problems and instability. And I might add much of that model has depended upon exporting those products to the U.S., and we are beginning to reach limits on how much we can consume of other countries' goods. In fact, our imports declined by four and a half percent last month alone, and I think that's an indicator that we may have reached our ability to consume those goods, at least for the moment.

DR. GRAHAM: Once again I find myself in some rather substantial disagreement. Knowing a little bit about the history of several of these countries -- and I'd have to mention Korea in particular, but also Taiwan, and also a certain of the Southeast Asian countries. Those that have done very well and that have actually increased per capita growth at a substantial rate indeed are those that have pursued export-led strategies. And indeed in all cases incidentally that the early exportation was largely of textiles and apparel goods. And that was true of every single one of the Asian countries that got themselves onto fast growth trajectories.

If you look at Korea during the 1960s, Korea was extremely poor -- about 80 percent of the people were rural, were farmers, and the country at that time had amongst the largest per capita incomes in the world. The big drive and the big early success of Korea came from the development of export industries. And during the 1960s again that was mostly in the textile and apparel area. These are areas to be sure are very sensitive in countries like the United States, Japan, Western Europe. But these are the industries that offer the most hope for a country that is in the early stages of development. And I personally think that it is incumbent upon countries such as mine to open our markets in these areas and to stop this sort of hypocrisy that says that this is bad for American workers to allow imports in these sectors to come into this country -- because, one, I don't think it's true, I don't think it's bad for our people; and, two, it certainly is very good for those countries who are trying to raise their own standards of living.

Q: I would just like to clarify a little bit the last question that was asked. The government here has been considering the idea of setting up a free economic zone or a free trade zone. You mentioned that Mongolia should look at specific exports, specific industries that they would like to support. Do you think those can be supported by a free trade zone, or should there be a broader policy that isn't limited to a specific production area?

MS. LILLY: Dr. Scott?

DR. SCOTT: Well, I think that again there are limits to what can be achieved today with export processing zones, particularly those targeted at textiles and apparel. What's happened in the last decade is that the U.S. has lost large segments of those industries, and they have moved offshore, particularly to Mexico and other countries in the Caribbean, and also to China.

Now, I think it's going to be difficult for producers in Mongolia, which faces a number of obstacles which I think you are well aware, to compete with producers, even in China locally who earn wages often as low as 10 cents an hour in U.S. dollars. I think that's going to be a very difficult -- different markets trying to break into than the apparel market say in the U.S. in the '50s and '60s where wages were much higher, comparatively speaking. So, again, I think that the export-processing zone idea is of relatively limited value in this case. I think that, again, Mongolia needs to think more about a development strategy -- perhaps also working with its neighbors -- perhaps working with some of the wealthier countries in the region who again want to invest more in developing education, skills and infrastructure to serve regional markets rather than to serve those in the West.

DR. GRAHAM: I actually agree with that, although I have to ask a quite serious question, which is: Is China prepared to be open? Is Russia prepared to be open to the exports of Mongolia? A regional strategy is great if your neighbors are willing to go down that path with you. But of course it is a question that has to be asked: Is this true?

Right now the most open markets in the world are not in East Asia. Most open markets in the world are basically the United States, and to a somewhat lesser extent Western Europe. Also, the per capita incomes of these markets are considerably higher than most Asian countries, with the exception of course of Japan. So a regional economic integration strategy might indeed bear fruit. But to make it work there has to be a willingness on the part of the Chinese government and certain other governments in the area to participate, and I don't know if that willingness is there.

MS. LILLY: Would you add something else, sir?

DR. SCOTT: Well, I just want to say that what we have seen in the past year is that China was offered the opportunity to join the World Trade Organization, to throw open its markets in a very rapid market-embracing strategy. And we have seen there has been tremendous internal debate and disruption over this question. And I am not convinced that it is going to happen at any time in the near future. I think China is reevaluating the way it wants to relate to the rest of the world economically, and so there may be an opening there to think more about different kinds of relations with its trading partners.

And, again, what you want to find there I think are complementaries where China may not be producing the same kinds of agricultural commodities that Mongolia is, and they can both benefit from trade in a classic sense, and the same can be true in terms of specialization in different industries, although again you would have to think very carefully about where Mongolia can specialize vis-a-vis a country like China.

MS. LILLY: All right, thank you for your questions, Ulaanbaatar. And now we go to Seoul for further questions. Go ahead please.

Q: Hello, I am -- (inaudible) -- business newspaper. As you know, Korea has pushed for the economic freedom -- (inaudible) -- IMF crisis. How do you evaluate Korea's efforts to lower trade barriers and liberalize financial markets? How do you observe the recent financial reform of Korea? Do you see any improvement? What do you think are the weakest points of the Korean economy in terms of the open economy? Thank you.

MS. LILLY: Dr. Graham?

DR. GRAHAM: Well, I might say first, hello, I'm Edward Graham, and I also write for the Mayo (ph) Business Newspaper. You may not know that, but I am a guest columnist for the newspaper based in Washington.

Let me go to the issue of financial sector reform. Here Korea has we know a very, very big problem, and that is that as a result of the crisis of 1997 all of the banks are under -- except one -- all of the banks are under state control, and all of them have large unresolved portfolios of nonperforming loans.

At the moment I would say the biggest priority in Korea is to continue to strengthen the financial sector, and to do this that Korea is going to have to get serious about resolution of nonperforming loans. And I guess that my own view on this is s a little bit negative. My belief is that Korea has really not taken the steps that are necessary, that the very rapid economic expansion that came in 1999 provided shall we say cover for Korea not to go as far as maybe it should have during that time to take care of this problem. So I think at this moment that Korea has a very big problem that is a hangover if you like from the '97-'98 crisis that is still unsolved.

DR. SCOTT: I think that's absolutely correct. I think that one of the things we have learned both in Korea and also in Japan before that is that the inability to go through bankruptcy processes and work outs of loans and to restructure banks -- essentially bankrupt institutions is a tremendous constraint on growth. It limits the supply of credit in each of these countries, and is going to constrain growth until those problems are resolved.

One of the consequences of this is on the trade side and on the real economy side of the equation. What we have seen is that Korea is almost -- is in fact completely dependent on exports for its recovery -- explains that explain essentially 100 percent of growth in the Korean economy since 1997, which means there has been no growth in domestic investment, no growth in domestic consumption. And that again reflects the fact that there are inadequate credit supplies available in the economy. So I think that Korea is in a very imbalanced situation in terms of its reliance on exports. And what that means is if the U.S. economy does continue to slow that the Korean recovery is threatened -- unless it begins to deal with just exactly the financial problems that Dr. Graham was talking about.

Q: Do both of you see any positive sides?

MS. LILLY: Anything positive, Dr. Graham?

DR. GRAHAM: At this moment, I hate to say that the negatives are winning at just this point in time. Maybe the one positive thing that I do see, however, is that for better or for worse that restructuring of the Hyundai group is going ahead, and in a way that is reasonably satisfactory. The group with the unfortunate passing of the founder, that the group has gone the route of splitting into component parts -- a real chance of course that the flag ship of the whole thing, the Hyundai construction company is in very serious difficulty -- real possibility that it could go bankrupt. But that nonetheless is positive in the sense that the constituent firms of Hyundai that are in healthier shape are now not likely to be brought to their knees because of a need to go and bail out those components of the group that are not healthy.

DR. SCOTT: One of the positive aspects I think of the current crisis, the continuing crisis in Korea, is that I think that it has brought together people on the -- working people to try and redress some of the problems they are confronted with. My institute is working with a number of others -- we have set up a network of think tanks -- it's called the Global Policy Network -- and we have a Web site, and in fact we have a partner in Korea, the Korean Labor and Society Institute which has just published a report on that site that discusses the state of the economy. And they put particular emphasis on unemployment, which has -- which I think is far above the levels of the 2 to 3 percent that was achieved in the pre-crash period. There's a growing consensus amongst economists there that they can never go back to those levels. And I think that the working people -- and their representatives in the labor unions in particular -- are being energized I think by these conclusions. So I think that's one of the silver linings of this cloud. It is going to take more organization amongst people who are concerned with the quality of the working life, the quality of the environment, to be able to respond to these kinds of pressures.

Q: Thank you. Korea is in a somewhat difficult situation, because we need to try to meet the developed countries' standards in economic freedom and developing countries are pursuing us. And recently the issue of WTO membership of China will result in the -- will change the economic landscape in this area. How do you estimate the effects on the global economy? What are the effects on such rival countries as Korea and Thailand? Thank you.

MS. LILLY: Go ahead, Dr. Scott.

DR. SCOTT: I think that we learned a lot about this situation during the recent debate on China's proposed entry into the WTO. I think one of the things that I am most concerned about actually is the impact on China. I think that if China comes into the agreement it's going to suffer extensive disruption. We have seen estimates from Beijing alone that upwards of 10 million workers will lose their jobs in that country. I think the number could be far larger. I think what's likely to happen is you are likely to see people increasingly pushed out of agriculture, which the U.S. has targeted as a major export sector in China. That will force some of the remaining four or five hundred million people who are still engaged in agricultural production off the land, into the cities, and furthers the problem of unemployment and downward pressure on wages in the coastal manufacturing areas. So I think that's going to be very bad news for China if it does decide to enter the WTO, and I think it will be disruptive.

But by the same token, I think that while Korea and Taiwan and some of its neighbors face big competitive threats at the low end of the production chain, I think other countries like Indonesia and Sri Lanka and Bangladesh that are competing in those very, very low wage markets for textiles and apparel and shoes and toys, may face an even greater threat than do the medium-sized and more advanced countries in the region. I think this also highlights the importance again of developing a domestic-led strategy for growth in Korea. I think that it is going to be very difficult to prosper in an unregulated, open and competitive international market in the coming period for all the reasons we've discussed.

DR. GRAHAM: Well, I don't mean to be pejorative, but I think that Dr. Scott just gave us a view from within China that reflects more the faction of Li Peng and the People's Liberation Army than it does say Zhu Rongji and President Jiang.

There is considerable concern in China that WTO accession will cause disruptions, and of course it will. In fact, that's actually what Premier Zhu is hoping for: he wants to shake up the state-owned enterprises. He believes that there are far too many people in agriculture, and that China needs to go through a process whereby great transformations do occur. And there's a rather reactionary group in China, those normally associated with quite a lot of the evils of the Chinese system, that mostly opposes this. So given that Dr. Scott is from a progressive institute -- and I am a little bit surprised by his support for the -- what I would consider the bad guys there.

Having said that, I do want to note that I have been to Taiwan in recent years, and one of the things that strikes me is that the Taiwanese are very worried -- not just simply about low-end competition from the mainland in apparel, toys and footwear, the usual industries; but increasingly the Taiwanese are very worried about competition at the high end, high technology. China is getting to be very good and things like software development, semiconductors, CDs -- of course you know a big issue of CD piracy has been on the horizon recently. So China has the potential to be competitive in a lot of activities that really could impinge upon Korea.

I guess what my feeling is though that this is something that Korea really must adjust to, that China is a rising power, that whether WTO membership contributes to this rise or not is something that we can debate. I happen to think that it will make China rise faster. And it is something that we all better get used to living with, because I don't think that we are going to stop it. And the only thing that we can do is to figure out how to live with it.

Q: (Off mike) -- again. Recently the North Koreans have taken some gestures to open their economy. Looking back on the liberalization process of the Eastern European societies, what can you advise the North Korean policymaker? And what do you think is the essential duty of South Korea for encouraging the liberalization process of North Korea?

MS. LILLY: Dr. Graham, do you want to take that?

DR. GRAHAM: That's a very difficult question to answer. I think when you refer to Europe that you are referring mostly to the reunification of Germany, I would assume. And of course Germany has had really quite a negative experience with reunification, for a number of reasons. One was that the exchange rate was set too much in favor of the East German Ost Mark. But it turns out that the number of adjustment problems in East Germany proved to be far greater than had originally been anticipated.

Now, North Korea is relative to East Germany -- is still a less developed country than -- and the potential for disruption of reunification on the Korean Peninsula is very, very great.

My own view on this is that it is very much in South Korea's interests to encourage economic opening of the North, and hopefully from this will come the expected benefit of rising per capita income, because until the per capita incomes of the two Koreas are more level, I would believe that any future reunification would indeed pose adjustment difficulties that would be very deep and might quite adversely affect the South. So it's very much in the South's interests to encourage economic growth in the North by whatever means possible.

DR. SCOTT: I think that's right, and I think it illustrates the importance of planning the process of integration very carefully and phasing the opening process. I mentioned earlier the study that we have just completed of the impacts of NAFTA within North America. And what I didn't talk about was the impact that we've observed in Mexico. We have an author in Mexico named Carlos Sallas (ph), and what he has found is that in fact NAFTA has been associated with a tremendous decline in real wages for the vast majority of working people. Wages there have fallen i real terms by 25 percent in the last 7 years under NAFTA. And, even worse, there has been a tremendous decline in job quality. A tremendous number of people have shifted out of formerly good jobs in traditional manufacturing industries -- they have been pushed out of those firms and pushed into jobs in the service sector and the informal sector -- tremendous increase in the number of people who are working as unpaid family workers. Wages in that sector alone have fallen by 40 percent. So there has been both a reduction in average wages and in job quality. And I think that's the pattern we have seen.

Now, Dr. Graham has mentioned several times this argument that we have no choice about liberalization and that rapid liberalization is good for growth -- it stimulates growth. But in fact this is a myth I think that has been perpetrated by members of the economics profession over the last several decades. In a recent survey by the economist Danny Rodrick (ph) at the Kennedy School at Harvard University, they have looked at these studies carefully and have found that many of the examples cited to support that kind of conclusion blame the failure to liberalize trade for problems that are in fact related to other development problems -- the lack of appropriate development institutions, for example, a legal infrastructure or a bankruptcy system as we discussed earlier. So I think you have to look very carefully at those data.

A third study that I might cite is a recent survey of growth in Latin America. In the '50s and '60s, growth in Latin America was very high during the period where they were pursuing what's known as an import substitution strategy -- reducing their reliance on imports, developing domestic firms that could produce the same commodities. When they moved to a strategy of export-led growth, as recommended by Dr. Graham and many of our colleagues in the economics profession, what we saw is the rate of growth of output and output per capita per person slow dramatically. And that is a tremendous problem of reality that we have to confront as we are presented with these theoretical arguments as to why free trade is inevitable under this most radical model that is being proposed by the U.S. and the IMF and the World Bank.

MS. LILLY: Do you have something else?

DR. GRAHAM: If I could just respond a little bit to the NAFTA point, that in the recent elections in Mexico, the people of Mexico were given the choice: Do they want to stay in NAFTA or do they want to get out of NAFTA? One of the candidates was anti-NAFTA. There were two candidates that were pro-NAFTA. Now, under that calculus you would think that the pro-NAFTA, the ones that want to stay in the NAFTA, would split the vote so that if there was a substantial majority of the Mexican people that wanted to opt out that the anti-NAFTA candidate would win. As it happened, the anti-NAFTA candidate got a tiny fraction of the vote. Vicente Fox, who is now the president of Mexico, was very much in favor of staying in NAFTA, and he of course did win the election. His opponent, who was in favor of NAFTA in fact got the second highest number of votes.

Now, one further point on this, and that is that we are told that NAFTA has made the lot of the average Mexican worse. But we are also told by these same people -- we are told that the U.S. is being made worse. Why? Because jobs are being exported to Mexico. Well, if jobs are being exported to Mexico, why is it that Mexicans are losing jobs? It's just impossible that as a result of this agreement that people on both sides of the border could be losing their jobs. The argument seems to be that both sides are losing jobs to the other. Well, if jobs are being lost to the other side, somebody has to be gaining -- it's just simple arithmetic. And, incidentally, I think the election on NAFTA showed what the arithmetic really is.

Q: Next question. Recently we -- (inaudible) -- year 2000 to 2005. How will FTAA improve America's economy? And do you think that a regional free trade area would be formed in -- (inaudible) -- FTAA? What kind of effort does this region make to create FTAA?

DR. SCOTT: Thank you. I am very concerned about the impacts of FTAA -- not on U.S. workers -- the countries of the South area relatively small -- they are not going to affect this country nearly as much as for example Mexico did. But I think that the disruption that we are likely to see in the Caribbean and the rest of Latin America is likely to be very high for the reasons I mentioned earlier.

Now, I'd go back to a point that Dr. Graham made earlier, stating that what we have here -- for example, the Mexican election was a choice between getting out of NAFTA and staying in NAFTA. And I think we have to be careful with those kinds of strawmen in these kinds of debate. I know for example I think in the presidential election in Mexico you had President Vicente Fox, who actually was in favor of reforming NAFTA. Now, NAFTA is a reality, it's existed, it's in place -- we are not going to back out of it. But the question is: Do we need to change it? He immediately put on the agenda for negotiation the question of immigration. That's a major concern to people in his own country. There is no reason that we can't put on the table questions related to labor standards and environmental standards. I think that we also need to put on the question of development aid. So these institutions are not cast in stone. They can be reformed, they can grow. And in fact that's the lesson -- one of the lessons we have to learn from the European Union, is that they have grown steadily over the past 50 years by deepening their process of integration and putting more attention on it.

Now, back to the question of the FTAA. I think that it does threaten to expose countries, particularly like Brazil and Argentina and Chile to extensive disruption if they are forced to dismantle their development strategies overnight, and I think that's a major reason for concern. On the other hand, I think that we have seen an entirely new process developed throughout the hemisphere where citizens groups and labor groups are working together to put pressure on their governments to negotiate a different kind of agreement. Again, the question is not do we have free trade or no trade; the question is: What are the rules of the game going to be? And I think we are seeing new coalitions that reach across the hemisphere amongst people who are not normally part of the process, which I think raises the hope that we can get a different kind of agreement, one that gives better balance, more attention to labor rights and environmental standards and other social issues. Currently the agreement only benefits -- primarily just benefits investors -- and I think that is not the right way to go.

Finally, the last question was on a regional free trade agreement for Asia. I am not certain whether that will happen or not. I think whether it's a good idea or not again depends deeply on the terms. What countries are being involved, what are the rules of trade -- is it going to again be structured just to protect investor rights or is it going to be a broader process of economic integration?

MS. LILLY: Did you have something to add, sir?

DR. GRAHAM: Yes, just two things. One is just a factual point. Dr. Scott said that the economies of the FTAA to the South of Mexico are much smaller than Mexico. Actually Brazil is almost twice as big as Mexico, and has a considerably higher national income. Having said that, whether or not FTAA goes ahead could very well lie in the hands of Brazil. And there's a great debate going on in Brazil right now as to how far do they want to go with the FTAA. There is of course more positive feelings about FTAA emanating from the two not-so-small neighbors to the south, Argentina and Chile. Chile is quite a bit smaller; Argentina is a significant economy in its own right. And both of those economies are much more positively inclined.

With regard to the ASEAN plus three, or possibly the ASEAN plus three without ASEAN, the North Asian free trade area, given that I am addressing a Korean audience, I would have to say that a large part of this has to do with whether or not your country can shall we say overcome its very negative feelings towards Japan, because absolutely the key factor in this would be a Japanese-Korean FTAA.

I have spent a lot of time in Korea, and I have quite, shall we say quite a pronounced sense of how strong these feelings are. And what is involved in your area with regard to a free trade area has a lot more of resolving some, shall we say some very bad history that exists amongst -- well, Japan and Korea, but also I might say Japan and China, and much less to do with such things as whether the treaty will ennoble investors' rights. I think that's a rather minor issue in the case of what you are confronting in Asia.

MS. LILLY: All right, thank you, Seoul. We are going to go to Ulaanbaatar for one more question. I am going to be asking both sides, here and Ulaanbaatar, quick and short question, short answers please, gentlemen. Go ahead, Ulaanbaatar.

Q: Mongolia is in a very -- (inaudible) -- economic and political situation. We are between two big countries. Soon China will be a member of the World Trade Organization. Then Mongolia maybe go to an economic -- (inaudible) -- foreign countries. Of course the Mongolian government today is preparing to implement some protectionist policies. But I am interested what do you think at the moment what is better to do for the Mongolian government.

DR. SCOTT: Well, I think that you need to prepare alternative strategies. I wouldn't assume that China will immediately come into the WTO -- you have to be prepared. But again, I think it's important to look for different kinds of regional integration agreements; look for partners that are willing to work with you to help develop your economy.

MS. LILLY: Dr. Graham?

DR. GRAHAM: Well, we were asked for a very short answer -- (laughter) -- and I don't think that a short answer is appropriate to that question, because that's a question that necessarily involves a complicated answer. I guess that my own feeling nonetheless is that Mongolia -- I'll make my fundamental point, and that is that Mongolia must be an open economy if it is to proper.

MS. LILLY: Thank you. Well, we have come to the end of today's program. I would like to thank our guests, Dr. Robert Scott of the Economic Policy Institute, and Dr. Robert Graham of the Institute for International Economics. I also want to thank our participants in Ulaanbaatar and Seoul. And from Washington, I'm Judlyne Lilly for "Dialogue." Good day.

(end transcript)

(Distributed by the Office of International Information Programs, U.S. Department of State. Web site: http://usinfo.state.gov)

NNNN


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