THE BOTTOM BILLION
P. Collier
Chapter 10: Trade Policy for Reversing Marginalization
A Summary
In a Nutshell
Trade is not the problem for the bottom billion; indeed export diversification should be their way out of poverty. Agricultural subsidies in the developed world should be reduced to give the developing nations a chance. Protection in the developed world only fosters inefficient industries and is used as a tool for rent-seeking, so it should be dismantled as it is competition that spurs on productivity growth, although he advocates a gradualist approach rather than big bang liberalization. OECD countries should reduce tariffs on developed world goods to a level below those from Asia to allow for Africa etc. to make use of their cheap labour advantage and diversify their exports. This would be only a temporary relief as the WTO is committed to reducing tariffs with Asia.
Rich Country Problems
- Agricultural subsidies take away the chance of the bottom billion to export.
- Higher tariffs on processed goods relative to raw materials mean that bottom billion countries cannot advance productivity, technology, skills etc. associated with processing goods, and condemns then to being producers of low return agricultural products. Exports cannot be diversified because of this incoherence.
Bottom Billion Problems
- High tariffs protect parasitic companies. Higher domestic prices for low quality goods.
- Competition produces productivity gains.
- Big Bang liberalization will get rid of parasites, but it will not foster a diversified export sector. For this a whole range of other policies are needed.
- Often tariffs used as patronage/rent-seeking.
Aid
- Aid makes things worse. Aid flows in in $ and to buy services the $ must be changed for local currency. This pushes the value of the local currency upwards, hurting exporters. Additionally the buyers of the $ only buy so that they can import, therefore if there a high import restrictions the demand for the forex will be lower, meaning that aid will not actually buy much in terms of services. Importers who need forex can either buy it from exporters or from the aid stocks. Therefore aid is in competition with export, meaning there is less need for export so their earning fall: this happens through the exchange rate.
- Trade liberalization can help. The way to offset this problem is to increase the supply of imports. If imports become cheaper people want more, and the increased demand can soak up both the forex earned from export and the forex from aid.
Fair Trade
- Fair trade is good but it keeps people in low income industries. It is a tiny % of the total trade in even coffee. There is no push for diversification.
Regional Integration
- For regional integration to work there must be a club of rich and poor countries so that the poor can benefit from the research base industries of the rich, and the rich can benefit from the cheap labour of the poor. If everyone in the club is poor, you just have a poor regional club.
- In the EU the external protection kept out labour intensive goods that allowed the poorer states to use their labour advantage to converge with the rich states. In a poor club, the external walls keep out skills based products meaning those will better skills (the already relatively richer states) will do better, so instead of convergence there will be divergence.
- Good access to local markets is of course essential, but forming customs unions will not help.
Export Diversification
- Exporting leads to learning in the bottom billion (not so in the advanced world) so they need to export to get productivity gains. They need to expand exports into labour intensive products and services.
- To make the most of the competitive labour advantage (that Asia had as it was the only industrializing low wage zone at the time, whereas Africa would now be directly competing against Asia) OECD tariffs need to be lowered below the levels of those good coming in from Asia.
- The African Growth and Opportunity Act (US) and the All But Arms (EU) programs go some way. But in the former the time limit is too restrictive (3 years) to incentivize producers in Africa to invest in productivity as they know the benefits are strictly limited. The EU program is longer term but the Rules of Origin regulations are so complex and restrictive that it is barely used by African producers to get privileged access.
- What is needed is one simple scheme and a 2015 phase out, so that industry has an incentive to increase investment in the medium term, but knowing that their advantage will be worn out by 2015.
Bottom Billion in the WTO
- The economies of the bottom billion have no place in a trade organization that proceeds by negotiation. They have no stance from which to negotiate. Whether the US has subsidies on cotton produced in the south gravely hurts Chad, but if Chad were to offer to give US access to its market, the US would be supremely uninterested as the potential for generating trade is tiny with such backward economies.
- What is needed is a transfer round to begin each round of WTO negotiation where unreciprocated openings and gestures are made to the developing world in order to get their markets going.