Today's date:
Spring 2005

China Shows Trade Is Best Route Out of Poverty

JAGDISH BHAGWATI, professor of economics at Columbia University, is one of the world's leading policy intellectuals on trade and development. He has been a key advisor to the director general of the General Agreement on Tariffs and Trade (GATT) and to the World Trade Organization (WTO). Among his 45 books are Protectionism: The World Trading System at Risk, A Stream of Windows: Unsettling Reflections on Trade, Immigration and Democracy and, most recently, In Defense of Globalization. He spoke with NPQ editor Nathan Gardels in Davos during the annual meeting of the World Economic Forum.

NPQ | As usual, this year anti-globalization protestors picketed against the WTO in Davos, and the World Social Forum met in Porto Alegre, Brazil, to argue that freer trade hurts the poor.

Yet, hasn't it by now become clear that liberalized trade-codified in the World Trade Organization, which is now 10 years old-has lifted more people out of poverty than all the social revolutions of the 20th century combined?

JAGDISH BHAGWATI | That is exactly right. Liberalized trade, along with foreign investment, has opened up opportunity for the poor across the globe by expanding economic growth. In fact, the great sea change over the past decade has been precisely that the governments of traditionally poor countries like India, China and Brazil now see liberalized trade and investment flows not as a threat but as the opportunity it actually is.

This way of thinking marks a profound break with the old prominent ideas of people like Raul Prebisch about the "Third World periphery" being exploited by the "rich center." As a sociology professor before he preceded (Luiz Inacio) Lula (da Silva) as president of Brazil and changed his mind, Fernando Henrique Cardoso formulated the "dependencia" theory, which said that the "South" was poor because the "North" exploited it to get rich. If a country avoided the "neocolonial embrace," he thought in the old days, it would be better off.

Governments in the poorer world today have not changed their policies on ideological grounds-"embracing the neoliberal, Washington consensus"-but as a pragmatic response to the need for access to markets, investment capital and economic growth. They did not move to the right, only from the left to the center.

Of course, privatization can be corrupted, as it was in Russia's haste to break with the Communist past. It went from the Politburo to the oligarchs. China, of course, has its problems with corruption. But two decades of high growth that resulted from opening up to the world economy have pulled hundreds of millions out of poverty.

The same is true for India. It has gone from 3.5 percent annual income growth rate over 25 years to 5.5 percent rate of growth in the past 15 years. The opportunities created by that growth have pulled huge numbers of unemployed and underemployed people up the ladder.

In my view, the last government in India, which moved toward liberalization and privatization, lost the elections not because it hadn't done anything about poverty-but because it had! And that created a revolution of rising expectations it couldn't fulfill. People no longer accepted that living in poverty was the normal way of life-"the non-revolution of non-expectations." This is democracy's importance in development terms: It reinforces the expectations of growth and thus drives governments to produce or be thrown out of power.

The empirical evidence is there for all to see. It is therefore mystifying to me to see the anti-globalization movement continue to insist that liberalized trade and the WTO are somehow enemies of the poor. The ball is now really in their court. They can't just take ideological positions and ignore the enormous strides in India or China that have resulted from globalization.

NPQ | To the chagrin of the antiglobos who gathered recently in Porto Alegre, even one of the most leftist leaders in the world today, President Lula da Silva of Brazil, now embraces a policy of liberalized trade as the main route to development.

His foreign minister, Celso Amorim, hailed the decision of the WTO meeting in Geneva last August to move toward lifting agricultural subsidies, saying that "the WTO Doha Round now provides a framework for the full integration of developing countries into the international marketplace. Estimates of global gains vary from $250 billion to $700 billion per year. An estimated 500 million people are expected to rise out of poverty as a result. This new dynamic rekindles the belief that trade, not aid, should be the main engine of international development and social justice."

BHAGWATI | President Lula has been very smart-and cautious-in general. He has learned the lessons of (Salvador) Allende in Chile, who moved too sharply and quickly to the left, destroying the domestic equilibrium and creating the chaos that Henry Kissinger and company took advantage of. But the wound was first of all self-inflicted: The financial capital for growth fled Chile, yet the workers wanted to be rewarded right away. An impossible situation.

Lula is much more pragmatic and thereby more prudent. He is not a French Marxist intellectual but a trade union leader down in the trenches with his sleeves rolled up. Utopia is a nice idea, but, as trade union leaders know, you have to settle for what you can get based upon your bargaining strength. If you go too far, you kill the golden goose.

This approach is exactly what won the concessions on agricultural subsidies in the WTO negotiations. Brazil has led the g-20 group of countries [which includes South Africa, India and China-ed.] to press for change. In Cancun a couple of years ago, the g-20 simply stood up and told Europe and the United States that without a reduction in agricultural subsidies, they weren't getting enough out of the bargain to make a deal. A year later in Geneva, those countries conceded to the g-20.

Amorim is right to celebrate this transition to a new framework as an important victory.

NPQ | What seems to be going on is a shift in the global balance of economic power. Once China joined the WTO and the larger developed countries joined in the G-20 group, they have used their weight against the European Union and the US to insist on fairer rules of trade. Globalization is thus now a two-way street, with benefits flowing all around, not just to the rich countries.

Do you see that shift?

BHAGWATI | This is definitely true. Without question there has been a shift in the ethos of the world trading system because there are now weighty players on both sides. It is no longer just the EU and the US running the show, but China, India, Brazil, South Korea, Mexico, South Africa and Argentina. Clout has been democratized. Under these circumstances, WTO can never be an instrument of the rich countries.

China's mere weighty presence has shifted the balance of how trade rules are set, yes. Though, perhaps wisely for them, China has not led the charge because it knows it is vulnerable if demands to include human rights and labor rights in trade negotiations ever reach fruition. Also, with the elimination of textile quotas this year, many other poorer countries see China as a competitor which threatens to capture most of the market.

NPQ | Textile quotas set by GATT were put in place decades ago both as a kind of affirmative action policy for the poorest countries from India to Bangladesh to export to the West, but also as a way to protect the American textile industry by limiting imports.

Now that has expired, the poorest countries, as you mention, fear being overrun by China, which can dominate textile exports.

Do you see this?

BHAGWATI | I don't think so. India was not even fulfilling its quotas when they existed because it was so uncompetitive it couldn't find enough buyers for its textiles. Now that the market is open, the Indians are saying, "Oh, if we don't shape up to world standards, we'll lose out."

As a result, the languishing textile sector is now being modernized with better quality control and capacity to produce quickly on a large scale. The winds of competition for India are like spinach for Popeye; suddenly it is pumped up and ready to fight.

In general, the effect of the new competition in global textiles will be similar to the opening of the American auto market to the Japanese. All those fuel-efficient, high-quality cars from Japan after the first oil shock forced Detroit to become efficient again. It suddenly learned all kinds of manufacturing innovations from the Japanese, from just-in-time production techniques to diversifying the supply chain.

The other issue is that China itself is not static. As big as China is, two decades of double-digit growth in a country with a one-child policy is already producing labor shortages in the Pearl River Delta and around Shanghai and some other coastal cities, thus pushing up wages. Once-desperate young women coming to work in factories from the provinces now quit their job if they don't like it to find another one. Suddenly, all that social legislation on the books which was ignored is finally kicking in. Workers will stay at plants where they are treated well and leave worse places.

Overall, this will make China less competitive in labor-intensive industries-such as textiles-which will begin to shift more to places like Sri Lanka or Bangladesh, parts of India and even Africa. China, like Japan before it, will begin to move up the value-added ladder to more skill-intensive and knowledge-intensive production.

In short, the fear of China's dominance of global textiles is probably exaggerated.

NPQ | The promise of globalization is the creation of a global middle class. With the flattening of the global economy we've been discussing, the rising middle classes of India or China are now set to compete with those of the US and Europe. We see this with outsourcing of service jobs to India, for example. How do the rich countries now cope with the displacement of their jobs elsewhere?

BHAGWATI | There is a genuine worry that the rising middle classes of India and China will push down wages and salaries in the richer world. That is valid. As far as job displacement, however, it is far more impacted by technology than trade. When a laptop computer can do what a secretary can, or when an ATM machine can do what a bank teller does, he loses his job. Even so, whole new sectors have opened up: You may not need a secretary or bank teller, but now you need the technicians to fix your computers or the ATM machines when they don't work. And they charge $100 an hour!

During the deindustrialization debate a few years ago in the US, presidential candidate Walter Mondale said America threatened to become a nation of hamburger flippers, working in low-wage fast food restaurants. Instead, unfortunately, we've become too much a nation of hamburger eaters!

But I do think there are trade adjustment policies-such as wage insurance-that need to be put in place to relieve the middle-class anxieties about liberalized trade, including outsourcing. But these should not be universal, across-the-board policies, but targeted to the impacted sectors.

NPQ | While it may be true that liberalized trade is helping create a larger middle class in the developing world, that may comprise only 20 percent or so of a country's population. Are there ways to link the growing prosperity of the export sector to benefit the rest of the economy that remains poor?

BHAGWATI | This question of linkage is critical. In India, the innovation of multiple cropping of the Green Revolution actually increased the demand for labor not only because the growing and harvesting season was longer, but because the rest of the economy, including the export sector, was growing and demanded more food. If workers are paid more in the tradeable sector, they buy more in the rest of the economy.

And, of course, if the inputs to the manufacturing sector that is exporting come from within the country itself-domestic content-that will expand jobs and income growth all down the supply line.

One of the most important things that the rich countries can do to help expand growth more evenly in poor and developing countries-and here I agree with Oxfam-is to reduce or remove tariffs not just on agricultural commodities or raw materials, but also on processed goods. That would encourage the growth of industries that require higher-wage and skilled workers, who in turn will spend more in the domestic economy. Growing incomes will pull other people into employment. Trade can be an engine for that.