Trade liberalization - time to move beyond the rhetoric

11 June 2009

First person by Mike Pullen

Editor's note: Mike Pullen is a Partner at DLA Piper and head of the firm's International Trade Practice in Europe, the Middle East and Asia. He wrote the following response to an article by Esther Busser of the International Trade Union Confederation in Geneva, titled "Trade Liberalization would make Lebanon vulnerable," which was published by The Daily Star on May 28, 2009.

ETher Busser's presentation of trade liberalization as the cause of economic recessions, unemployment, poverty, income inequality and exploitation by foreign investors is simply ill-informed rhetoric. Indeed her uncited, misleading and at times down-right inaccurate assertions make an unhelpful contribution to the important and complex debate about the future of Lebanon's trade and economic policies.

Firstly, to argue there is little evidence that trade liberalization leads to growth is naive. All you need to do is put the words "trade liberalisation" and "growth" into Google and you will quickly discover that reputable think tanks, development organizations and academics have been modelling and publishing works about this relationship for decades, and their conclusions are broadly consistent - trade liberalization stimulates economic growth.

In a World Bank report published this year, economists concludes that countries which liberalized their trade regimes post-1950 experienced annual growth rates that were approximately 1.5 percent higher than before liberalization. Their annual investment rates were found to be 1.5-2 percent higher post-liberalization.

Considering the global economy as a whole, the United Kingdom's Department for International Development recently valued the impact of trade liberalization on growth at more than $171 billion or 0.7 percent of world GDP annually.

Secondly, it is misleading to suggest that trade liberalization generates unemployment and poverty. A World Bank survey of developing countries in 2004 found that the 24 nations with liberal trade policies had higher growth rates, higher incomes, longer life expectancy and better schooling than comparatively closed nations. China provides an interesting example. Global Economic Prospects 2004 found that the number of people living on less than $1 a day in China fell from 361 million in 1990 to 204 million in 2000 as the country liberalized. Similarly, a study commissioned by the Center for Economic Policy Research in 2001 concluded that trade liberalization ultimately aids poverty alleviation by stimulating growth. Poor people in countries whose governments employed complementary pro-poor policies in areas such as transport, infrastructure, education and financial services derived the most benefits from this growth.

Now, I am not disputing the fact that economic reforms can generate negative consequences. You will always be able to find examples of a factory that has closed down and a worker that has lost his job as a result of trade liberalization. But this does not justify the maintenance or reintroduction of market barriers. The role of governments is to implement policies that promote the long-term sustainable interests of their countries and the majority of their citizens, while ensuring that those marginalized by reforms are given time and the necessary training and support they need to adjust.

Thirdly, contrary to the views espoused in Busser's article, there is no conclusive evidence that trade liberalization has reinforced income inequalities within and between countries. A World Bank Briefing Paper of 2004 found that there was no simple association between changes in trade openness and changes in inequality. Indeed it found that income inequality has increased in numerous countries post-liberalization and decreased in others. The paper concluded that other factors, such as technological change, investment patterns, changes in relative productivity and changes in institutional conditions were the main drivers of changes in income inequality within nations.

It is of course true that the distribution of per-capita income between countries has become more unequal in recent decades. But greater openness to trade is unlikely to explain why poor countries on average have grown less quickly than rich ones, since, as noted above, openness fosters higher not lower incomes.

On the contrary, there is some evidence that greater trade openness has tended to reduce inequality between countries. The 2004 World Bank study previously quoted found that while rich countries had on average grown faster than poor ones, poor countries that were open to trade had grown notably faster than rich ones, and a lot faster than the poor, closed countries.

Trade liberalization and accession to the World Trade Organization is likely to generate significant gains for Lebanon: businesses and consumers will benefit from a broader range of competitively priced goods and services; exporters will be subject to fewer export and foreign-investment restrictions; and inward investment will no doubt increase due to the introduction of polices that create a more stable and secure business environment in which to operate. Trade liberalization is good for economies. That's why 153 countries are members of the WTO and 29 others, including Lebanon, are lining up to join.

Non-governmental organizations should be encouraging Lebanon's accession negotiators and providing them with timely and accurate information that identifies vulnerable industries and suggests the types of assistance required to ensure they can adjust. By helping in this way, civil society can ensure that the country accedes to the Organization on the most favorable terms possible.

Organizations such as the International Trade Union Confederation can play an important role in informing the debate about the future Lebanon's trade and economic policies. They can highlight issues that others wish to sweep under the carpet and they can offer a voice to those that do not have one.

However, to perform this role effectively, their representatives must know the facts, understand the big picture and engage in the process constructively, suggesting ideas and solutions rather than an endless stream of perceived problems - it is time to move beyond the rhetoric.

Mike Pullen is s a partner at DLA Piper and head of the firm's International Trade Practice in Europe, the Middle East and Asia.

Copyright The Daily Star 2009.