The Bottom Billion and Christian Aid’s Trade Policy

Paul Collier devoted 3 pages of his book, the “Bottom billion”, rubbishing Christian Aid, calling it a “headless heart”, either uninformed about trade or misled by Marxist advisors.

Christian Aid’s Marxist credentials are apparently derived from an advertising campaign in which Christian Aid depicts global economic injustice in the form of a poor person carrying the burden of a greedy world, depicted as a fat pig. Our advertising campaigns are designed to shock, and we do not apologise for that. The source of Christian Aid’s apparent incapacity to grasp the “complex issue of trade policy” is a report we published in 2005 which estimated GDP losses due to aggregate demand effects arising from trade deficits due to trade liberalization in the 1980s and 1990s. The report’s findings were consistent with similar studies conducted by UNCTAD, the Carnegie Institute and others, in showing that although trade liberalization led to increases in exports, increases in imports were even higher thereby, worsening the trade balance. In addition, trade liberalization led to a reduction in the net demand for domestically produced goods and services, especially in the manufacturing and services sectors. This latter effect in particular may have been the most likely cause of the decrease in domestic income our estimates produced, which in the case of Africa, amounted cumulatively to $270bn over the 2 decades. These findings were not palatable for those who have often presented trade liberalisation as the only option available to poor countries.

Following the publication of this report, , Mr Collier went on the attack with a group of people he names in his book, denouncing our work and triggering a string of debates on the letters page of the Financial Times. In his current book, as in the FT denunciation, he offers no substantive critique of our work safe the fact that the lead author of our paper was merely a “young man” whose work was not supervised by those Mr Collier consider credible trade economists but merely by “two gentlemen whom the author himself had chosen”. The truth is that these unnamed “gentlemen” included a former Chief Economist of UNCTAD, a renowned professor of economics whose accolades include being the “father of CGE models”, the Head of the Economics Department of the Jawaharlal Nehru University in Delhi and a Professor of economics at SOAS. For Christian Aid, these people are credible enough to advice our work. We must hasten to add of course that none of these people or their affiliated institutions should take any responsibility for work published by Christian Aid.

But it is not worth the space to discuss whose academic allies are better than whose. Academics should disagree with one another. It is healthy to recognize areas of controversy as this advances understanding. A high-handed and ideologically driven approach does not.

Mr Collier’s team during his time at the World Bank would have done well to learn this lesson. A recent evaluation of the Bank’s research on trade during his time as Head of Research reported that the bank had failed to take a balanced view of the evidence and tended to favour research that favoured its own policies, without expressing the appropriate skepticism. Another findings was that the Bank did not properly count trade costs or compile information on how industries, regions, firms and households respond to changes in trade barriers.

If we put aside the contest of credentials and labels there is much that Christian Aid agree with the substance of Mr Collier’s analysis and of course a lot we disagree. It is a pity that he does not recognize this so that we can properly debate our differences, such as why he dismisses trade protection as a valid tool for economic development despite overwhelming evidence from around the world?

Christian Aid on the other hand has based its position firmly on the evidence of the experience of trade reforms in practice, and come to the conclusion that a variety of solutions need to be available to developing countries in harnessing trade for poverty reduction.

In attacking the mantra of free trade, we are attacking an ideology. Free trade is not a policy, at least not one that any country has ever adopted. It is an ideal. Whether or not you believe in this ideal is, frankly, academic, what’s important is that the free trade mantra has been pushed on developing countries to impose only one solution for all their trade problems.

Our position is simple, that countries must be allowed to use the mix of policies that work for their development: lowering, maintaining or even raising trade barriers might each be the appropriate solution depending on the circumstances, and each will depend on sound implementation and a mix of other policies to determine their success.

Saying this doesn’t make us Marxists, unless it also makes most country governments, including the most successful ones, north and south, Marxists too.

In some things we are not so far apart as Mr Collier suggests.

Mr Collier’s call for a new non-mercantilist approach to trade negotiations with developing countries and for an end to incoherent trade and development policies by donors resonate with our own work and writings on the WTO’s “development” Round. He may be surprised to read in our report on the EU’s trade talks with African countries an echo of his own call for an upfront offer by the EC to maintain Africa’s existing preferential access to European markets and to upgrade it by addressing problems that currently limit their usefulness, such as overly stringent rules of origin.

From here, however, our views diverge.

First, we disagree with respect to the usefulness of regionalism as a strategy for Africa. Mr Collier is dismissive of this “politically correct” solution to the trade problems of the Bottom Billion. He sees regional integration as necessarily inward looking, relying on stagnant domestic markets that have overly similar production patterns and as detrimental to the weakest members. This can and has been the experience of some regionalism efforts, but need not be the case.

Regional integration does offer possibilities of economies of scale and to make markets attractive to investors. It also offers the possibility for joint production and infrastructure projects, a pooling of resources for research and technology development and potentially a more dynamic diversification of production and of exports. These are just a few of the potential benefits. However, in order for these regional projects to be successful, countries must be able to manage those processes carefully, including to protect the weakest members – not have the pace and design determined by external interference such as World Bank advice or trade talks between the EC and the African regions.

Mr Collier also writes off tariff protection as a means to achieve economic diversification and globally competitive firms. Although he recognizes that big bang liberalization is undesirable as it can push potentially competitive firms “into sudden death”, he does not accept that protectionist measures can be successfully used to develop competitive industries and to diversify production and exports. Yet this has been the experience of many industries across many countries from the Japanese car industry to the milk industry in India.

Mr Collier’s solution for export diversification is that Africa should be guaranteed preferential access to OECD markets over Asian exporters. In effect, this already exists, although imperfectly, and has done little to overcome the production and competitiveness constraints that these countries face in grasping export opportunities. No active intervention to tackle these is advocated, rather it is discouraged for fear of aid leading to problems of “dutch disease”. It also assumes that the success of these regions is tied up in exporting to OECD markets, when trends suggest that South-South trade within and between developing country regions is becoming more important.

Similarly, whilst he recognizes the injustice of farm subsidies in preventing farmers “who have few alternatives” breaking into OECD markets, he does not seem to realize that trade can travel in the other direction and that subsidized imports have a devastating impact on those farmers in their key market – the local one. Even without subsidies, farmers in OECD countries will still swamp domestic competition if trade protection measures cannot be used to safeguard the livelihoods of small-scale farmers.

Perhaps most disappointing is what is missing from this book: the role of rich countries and Mr Collier’s former employer, the World Bank in creating the problems developing countries now face in harnessing trade for development. He finds blaming rich countries for the ills of malfunctioning developing country economies contrived – and does not concede its relevance beyond the case of OECD farm subsidies and tariff escalation. Yet economic conditions of the international financial institutions and unequal trade negotiations continue to impose reforms on developing countries – despite past evidence of the harm this causes.

Mr Collier has underplayed in his book the financial impacts of trade liberalisaton, including revenue and capital flight effects . A report by the IMF came to the conclusion that revenue losses brought about by trade liberalisation tend only to be partially recovered from consumer taxes and growth effects. Since as much as 30% of government revenues are derived from trade taxes in many poor countries, these losses can be very significant. He treats capital flight either as the act of corrupt elites slashing their ill-gotten gains abroad or otherwise the result of rational investors and high networth individuals seeking to minimize risks in chaotic countries by keeping their wealth abroad. Both factors are clearly valid but relatively trivial. This narrow focus, which has unfortunately imposed itself in policy circles denies or ignores the fact that by far the largest component of capital flight is illicit in nature, and mainly commercially related, including abusive transfer pricing, mispricing and the web of infrastructure, including tax havens, offshore and banking secrecy laws, anonymous trusts, fake foundations, disguised corporations , all designed to facilitate tax evasion and the avoidance of regulations designed to protect society. In this narrow approach, when the negative effects of tax havens are recognized, they tend to be largely limited to their effects as magnets of corrupt funds whilst ignoring the commercial angle.

As we have mentioned before, there is much in Mr Collier’s work we admire, learn from and agree with, but there are clearly others we don’t. It is our hope that Mr Collier is equally open to differences in opinion and look forward to working with Mr Collier in the future.