Philippe Legrain

Why Britain should be buying food from Brazil not trying to grow it all itself

The British government argues that the country needs to try to become more self-sufficient in food. I debated the issue with Peter Kendall, the head of the National Farmers Union, on BBC Newsnight.

Don't take globalization for granted

Twenty years ago, nobody foresaw the imminent fall of the Berlin Wall; two years ago, no one was predicting the partial nationalization of the Western banking system. The future is unknowable; caution, skepticism, and, above all, humility are essential in seeking to peer into it.

What, then, do we know? We know that globalization is the combination of distance-shrinking technology and market-opening government policy that is bringing the world closer together. Global connections are—for the most part—cheaper, faster, and more pervasive than ever. Technological progress is almost certain to continue, while powerful economic and political interests support further global integration. Continued globalization would therefore seem inevitable.

But it isn’t. Technology can’t (short of a nuclear winter) be uninvented, but its impact can be impeded. Today, globalization is neither uniform nor universal. It will always be incomplete. Clearly, then, it is also reversible. The cost of connectivity could rise, while governments could make foreign interactions costlier or tougher.

History shows that economic disintegration can happen: witness the devastating 1930s, the economic closure of Russia and China when they became communist, or the widespread pursuit of import-substitution policies in the 1960s and 1970s. Now, the global financial crisis has undermined faith in free markets. A long and deep recession could stoke protectionist pressures. An alliance among the losers from globalization, those who fear they might become losers, ideological opponents to globalization, and opportunistic lobby groups could conceivably throw it into reverse.

The retreat, if it happens, may be patchy rather than wholesale. Globalization is not an all-or-nothing state of the world; it is a process that can progress—or regress—to varying degrees and in different ways country by country. It operates through at least five channels: cross-border trade in goods and services; international capital mobility; the movement of labor across borders; the flow of ideas, information, and technology around the world; and politics: cooperation among national governments, international rules and institutions, and the activities of nongovernmental actors, such as Greenpeace, the Catholic Church, and even online social networks, such as Facebook.

Start with product markets. The Word Trade Organization’s (WTO) Information Technology Agreement prohibits countries from imposing tariffs on many IT products, but its scope is disputed: the United States objects to the EU’s tariffs on flat-screen monitors and multifunction printers, for instance. As new high-tech products emerge, they will be vulnerable to tariff encroachment and trade-limiting regulations. In agriculture, WTO rules have little bite. Most developing countries have plenty of scope to raise their tariffs on manufactured goods, since their current applied rates are well below the maximum allowed. Governments’ commitments to liberalizing trade in services, which account for the bulk of the global economy, are patchy.

A panoply of other measures can also be used to gum up trade, such as antidumping duties, trade-inhibiting regulations, and official tolerance of monopolies, cartels, and other anticompetitive practices. And if governments really want to, they can ignore WTO rules.

This need not involve a trade war. The WTO’s core principle of nondiscrimination is already being eroded almost daily as preferential pacts proliferate. Far from being “free-trade agreements,” these bilateral or regional deals are their antithesis, giving privileged access to some at the expense of others and tying up trade in a web of rules-of-origin requirements and other red tape. Such deals are also more prone to have quasi-protectionist labor and environmental clauses tacked on to them. Worse, they create their own infernal logic, whereby those who are discriminated against seek their own special deal.

After 13 years without a comprehensive WTO agreement, they seem like the only game in town for politicians and businesspeople, sapping efforts to conclude an ambitious Doha round and raising new obstacles to it, as countries and companies fight to preserve the preferences they have acquired.

Even where markets remain reasonably open, other factors can limit globalization. Regulations that are not protectionist in intent can nonetheless act as barriers to trade: think of food safety standards, port security inspections, and different accounting standards. Preferences can also tilt toward the local for all sorts of reasons.

Among them:

    * Green initiatives: People may opt for local holidays and farm produce to shrink their carbon footprint.
    * Culture: Viewers may prefer television programs that relate to their everyday experience.
    * Nationalism: Some may reject cheaper and better imports because they want to consume national products.
    * Politics: Witness the consumer boycott of Danish products in many countries following the Muhammad cartoon row—and the “Buy Danish” backlash.
    * And, of course, economics: Rising prosperity and demographic aging tends to skew demand away from imported goods towards services—such as cleaning and social care, that can only be provided on the spot. With or without government intervention, global connections could weaken.

One big question is whether higher oil prices will render globally scattered supply chains uncompetitive. To a certain extent, high oil prices are eventually self-limiting since they stimulate the development of additional supplies and crimp demand. Greater efficiency and the development of alternative energy sources could permanently depress oil demand. In any case, transport costs are relatively unimportant for higher value-added trade. So oil may not be that significant a drag on globalization.

Consider capital next. The global financial crisis continues to surprise; its long-term consequences are unpredictable. It could foster greater economic policy coordination, closer monetary integration in Asia, and the expansion of the eurozone. Or it could rankle national sensibilities in the Pacific and even split the eurozone.

The crisis would appear likely to curb financial globalization. Countries that maintain capital controls are less likely to lift them; poor countries that struggled to attract external finance in the go-go years will find it even tougher. Tougher international regulation could also hamper capital flows (not a bad thing in itself, admittedly). Yet tougher national rules could drive more finance offshore. Desperation has lowered the barriers to sovereign-wealth funds and other foreign investors taking big stakes in American and European banks. Ambitious reforms to the global financial system could end up prompting more, not less, financial globalization.

How so? Consider that although money flows freely, it does not reliably irrigate everywhere. The promise of financial globalization—that it will spread risk and allocate capital better—remains largely unfulfilled. Even emerging economies with excellent investment prospects cannot count on regular capital inflows; many feel obliged to pile up vast foreign-currency reserves. This is a huge waste of resources—and it perversely results in them becoming net savers. Judicious reforms, starting with the swap arrangements the Fed has started offering to a handful of emerging-economy central banks, could thus support further financial globalization

Don't take globalisation for granted

Today, globalisation is neither uniform nor universal. It will always be incomplete. Clearly, then, it is also reversible. Read my new article for McKinsey here

Madhouse economics

Ha-Joon Chang's suggestion that the world needs a dose of protectionism to tide it through the global recession is utterly misguided. Read my new article for Prospect here.

The economics of the madhouse

The failures of global finance have brought the world economy to its knees, threatening a re-run of the Great Depression of the 1930s. Such a terrible outcome is much more likely if policymakers follow Ha-Joon Chang’s suggestion that the world needs a dose of protectionism to see it through these troubled times.

Around the world, we are witnessing the devastating impact of globalisation going into reverse. What was once a virtuous circle of rising trade and booming economic growth has become a vicious spiral of collapsing demand and plunging exports. The question is: how to break this spiral? The answer, in my view, is coordinated government action to boost global demand, combining large fiscal stimulus packages, unconventional monetary policy measures, and the nationalisation and restructuring of zombie banks that are dragging the economy down with them. Chang, in contrast, favours limited protectionism—in effect, a tax on imports.

This should ring alarm bells among people who may be tempted by the siren song of protectionism. Most governments are scrambling to boost spending and /cut/ taxes to stimulate demand. David Cameron’s Conservatives oppose such a fiscal stimulus. Chang goes one step further: he is proposing a (selective) tax hike instead. The immediate impact would be to reduce people’s purchasing power in a highly regressive way. And since Chang proposes that all governments agree to raise their import taxes, demand would be dealt a further knock by the fall in demand for our exports. Higher taxes and lower exports as a cure for the global recession? This is the economics of the madhouse.

Chang is surely aware of this. After all, even he concedes that an all-out trade war would be a bad thing. But the difference between limited protectionism and a trade war is a matter of degree: the former would involve fewer casualties, for sure, but it would not lead to economic resurrection. And history shows that limited protectionism is often a precursor to much larger conflicts.

Chang claims that rising protectionism in the 1930s was not as harmful as is often claimed. It is true that trade collapsed for several reasons, including falling demand. But protectionism greatly amplified the damage. According to a study by Jakob Madsen of Monash University (Trade Barriers and the Collapse of World Trade During the Great Depression), world trade declined 14% in inflation-adjusted terms between 1929 and 1932 due to declining incomes, 8% because of policy-induced tariff increases, 5% due to deflation-induced tariff increases (when prices are falling, a tariff of, say, £1 per item rises in real terms), and a further 6% because of the imposition of non-tariff barriers. So, most of the collapse in trade was due to rising protectionism rather than falling demand.

Nor did protectionism save jobs. Research by Doug Irwin of Dartmouth College, the leading US trade historian, concludes that “The Smoot-Hawley tariff of 1930, for example, significantly reduced imports but failed to create jobs overall because exports fell almost one-for-one with imports, resulting in employment losses in those industries.”

Clearly, then, the costs of protectionism are large. Yet Chang claims that “temporary” protectionism would have a big benefit: it would provide breathing space for companies and workers to reinvent themselves. But that too is dubious. Protectionism does not provide the right incentives for businesses and workers to adapt. Companies that have a captive local market tend to milk it, rather than seeking out more competitive markets overseas—especially if they are prevented from doing so by others’ protectionism. And while protectionism may start off as a “temporary” response to the crisis, companies that benefit from it have every incentive to find new reasons to maintain it, and to devote their energies to lobbying politicians to that end. Just look at Europe’s Common Agricultural Policy, which was originally designed to prevent Europeans starving. The last thing we need is a CAP writ-large.

Protectionism would obstruct the world economy from adjusting, rather than encouraging it. There is, for instance, huge overcapacity in the US and European car industries. If each country acts to prop up their carmakers, none will thrive. Only if the least efficient shrink can the carmarkers that produce the cars people actually want to buy thrive. Chang’s prescription is also bizarre considering his main focus is aiding developing countries. If the EU keeps out foreign cars, India’s Tata Motors and his native South Korea’s Hyundai, Daewoo and Kia will suffer.

In Britain’s case, advocating protectionism is particularly perverse. One big reason why the manufacturing sector has shrunk so much in recent years is the pound’s prolonged overvaluation. Now that the pound has collapsed, UK-based exporters, not least its remaining manufacturers, have received a timely boost that will make them more competitive when the global economy recovers. An increase in global protectionism would close off their future export markets.

The real help that companies need to tide them through the crisis is not protectionism but access to finance and broad measures to stimulate demand. These would also boost employment, especially if combined with cuts in payroll taxes and increased help for workers to retrain and find new jobs.

I'm writing a new book. Can you help?

I'm writing a new book, on the future of globalisation. It will look at the risks to globalisation from the ongoing crisis (such as protectionism, nationalism and political extremism) and ask what needs to change in the global economy - and what shouldn't. As with my previous books, this will involve a combination of first-hand reporting, economic and political analysis, and reasoned argument.

As part of my research, I am reading a lot, talking to lots of people, and travelling around the world. I'd be really grateful if you could suggest papers I should read, people I should talk to, and places I should visit. I'm particularly interested in hearing about people that the mainstream media often neglects.

You may be able to point me to a small business in China whose exports have evaporated and whose migrant workers are going home, or to one that is prospering by taking on a new line of work.

You may know Icelandic people who can relate how their lives have been turned upside down by the financial collapse.

You may have connections to communities in Australia that until recently were booming by exporting to China, and drawing in lots of foreign workers as a result; how are they coping?

You may know Mexicans who have gone home from the US, or Poles who have left the UK or Ireland, because of the recession.

And amid all the gloom and despair, what new opportunities are emerging that could help build a better and fairer global economy?

Or something else entirely.

Please email me on mail AT philippelegrain DOT com

I'll get back to you if I think there could be a fit.

Thank you very much.

Freeland on Friedman

One of the casualties when Russian tanks rolled past Gori was the beguiling “Golden Arches Theory of Conflict Prevention” proposed by Thomas Friedman, the New York Times columnist: “No two countries that both have a McDonald’s have ever fought a war against each other.” Alas, you can buy Big Macs in both Moscow and Tbilisi, so we now know a little consumer capitalism is insufficient immunisation against old-fashioned clashes between imperialism and independence.

From the FT

Gene Epstein of Barron's recommends both my books

I have to say a big thank you to Gene Epstein, economics editor of Barron's, who recommends both my books as gifts "that promote thought".

Do you need an economics tutor?

This morning I spoke at a conference for economics teachers organised by tutor2u, which provides a very useful online resource for economics teachers and students. They have also published an article by me in the latest issue of their magazine, Latte. It was a great conference, with Stephen King of HSBC providing a really enlightening presentation about how globalisation is changing the world economy.

Should we worry that foreign companies are taking over British ones?

On the day that India's Tata won a bidding war for Corus, the Anglo-Dutch steelmaker that was once British Steel, I debated whether such foreign takeovers of British companies are a good thing with Will Hutton of the Work Foundation on BBC Radio 4's Today programme. Listen here

War on Want are wrong to claim Bangladeshi garment workers are exploited

War on Want, a British lobby group, on Friday launched a campaign against Primark, Tesco and Asda for selling cheap clothes made by Bangladeshi workers whom the lobby group claim are exploited because they "regularly work 80 hours a week for just 5p an hour".

I debated the charge that such "sweatshops" are harming Bangladeshi workers in a debate with John Hilary of War on Want on BBC Radio 2's Jeremy Vine show: Listen here

Race Convention 2006

Britain's Commission for Racial Equality is celebrating its 30th anniversary, and to mark the occasion it is organising a race convention to debate race relations and the issues that affect them.

CSR is irresponsible

Corporate social responsibility - it seems impossible to be against it: who wants companies to be irresponsible towards society? But words are deceptive. The premise behind CSR - that the profit motive is tainted, global capitalism is leading the world to rack and ruin, and business has a duty to give something back to society - is fundamentally flawed. And so too is the practice of it.

Globalisation is working

Robert Wade of the LSE wrote an article in July's issue of Prospect alleging that Globalisation Isn't Working. I have written a response to this, which is published today on Prospect's website, and which I am also publishing on here. Needless to say, globalisation is working.

Globalisation is working

Inefficient markets

The sceptics are wrong: Freeing trade has boosted growth in China and India

In a comment on my recent post on the contribution of trade liberalisation to Asia's success, Jim takes issue with my contention that

China and India are very powerful examples of the benefits of liberalisation: before they started their reforms, growth was slow, but as they have opened up their economies, growth has accelerated.

He argues that growth speeded up before they opened up, and that their growth since they opened up is not due to freer trade.

Deconstructing Doha

Time is running out for the Doha Round. It's been said so many times, but this time it really is true. To see why, count back from July 2007. That is when President Bush's fast-track authority, which forces Congress to vote on trade deals without the possibility of amending them, is due to expire.

With the president so unpopular, the trade deficit so huge and the prospect of a Democratic majority in Congress by then, the chances of fast-track being renewed are vanishingly slim: it only passed by one vote the last time around.

A flawed charter

Eleven international NGOs have signed up to a new accountability charter, which says

We recognise that transparency and accountability are essential to good governance,whether by governments, businesses or non-profit organisations. Wherever we operate, we seek to ensure that the high standards which we demand of others are also respected in our own organisations... We agree to apply the Charter progressively to all our policies, activities and operations.

It's a positive first step. As I explained in an earlier post, NGOs have previously failed to live up to the high standards that they rightly demand of others. But it still doesn't go far enough.

Is Asia's success due to trade protection?

In a thoughtful comment on my recent Doha post, Matthew argues that

It is simply not the case that the enormous growth of the Asia tigers is evidence of the efficacy of free trade because most of those economies were protected behind trade barriers and currency controls for most of their development and still are.

I started replying in a comment, but then I thought the subject was so important that I would start a new post about it instead.

Time to behave better

NGOs demand that governments, businesses and international organisations be open and accountable for their actions. Hear, hear. But what about NGOs themselves? The likes of Oxfam and Greenpeace fall far short of the standards on which they rightly insist in others. These self-appointed guardians of global rectitude are scarcely models of transparency and accountability - a flagrant case of "do as I say, not as I do". As I have long argued, if NGOs are to be taken seriously in global politics this has to change - and it appears that they are finally starting to put their houses in order. The FT reports that 11 NGOs will on Tuesday sign a voluntary “accountability charter”. Sounds promising. Watch this space.

How best to tackle global poverty?

Discussing debt relief and third world development with Noreena Hertz on the Today Programme. Listen here

French myth-making

Many French people rejected the constitution because they regard Brussels as the handmaiden of "ultra-liberal" Anglo-Saxon capitalism, intent on deregulating markets and opening up the French economy to competition. Just look, they say, at the EU's proposed services directive, which would tear down barriers to trade in services, or at the eastward enlargement of the EU, which has exposed French workers to competition from low-wage, low-tax economies such as Poland. The upshot, they claim, is that the EU is driving social standards down and pushing unemployment up.

Sorry, but we just don't need the global compact

Globalisation is not perfect, but it is overwhelmingly a force for good. The rapid growth of trade and investment across national borders is spreading greater prosperity and opening up new opportunities to billions of people around the globe. China has recorded the fastest fall in poverty the world has ever seen. Global inequality is now declining for the first time since the Industrial Revolution, as China, India and others begin to catch up with the West. Those countries that are still floundering  notably in Africa  are largely victims not of globalisation, but of a lack of it.

For richer, for poorer

Cultural globalization is not Americanization

"Listen man, I smoke, I snort ... I've been begging on the street since I was just a baby. I've cleaned windshields at stoplights. I've polished shoes, I've robbed, I've killed. ... I ain't no kid, no way. I'm a real man."

The delusion of world capitalism

Globalisation has become a convenient catch-all for everything many people dislike about the modern world. In truth, it is simply shorthand for how our lives are becoming increasingly intertwined with those of distant peoples and places around the world - economically, politically and culturally. These links are not always new, but they are more pervasive than ever before.

Free trade fallacy II

Eight years ago, in "The Next American Nation", Michael Lind terrified Americans with the threat of "ever-increasing low-wage, high-skill competition" from the third world, to which free-traders allegedly had "no answer." But after this menace failed to materialise, Lind changed his tune. Developing countries, far from being hypercompetitive are, in fact, unable to compete with rich countries, he now argues (Prospect, January 2003).

HARDtalk: Is the anti-globalisation movement wrong?

On BBC News 24's HARDtalk tonight (Friday 13 December), Allan Little interviews Philippe Legrain, economist.

Globalisation is, to many, the issue of our age. More trade means more wealth creation and greater prosperity for rich and poor alike, its supporters say.

Why then after a decade of radical liberalisation is so much of the world sinking into deeper poverty while the rich nations get steadily richer?

And why does the anti-globalisation movement seem to have ignited the passion of so many, especially the young?

Philippe Legrain is an evangelist for globalisation. He is an economist and a former special advisor to the World Trade Organisation. He talks to Allan Little.

Business doesn't rule

Progressive politics ought to be about hope: that we can create a fairer society where everyone can make the most of their potential. Yet the prevailing mood on the left is despair. Globalisation, many believe, is leading the world to rack and ruin - and there is little we can do about it. American-led corporate power is elbowing aside government and trampling on democracy.

The not so global economy

When the World Trade Organisation last held a ministerial meeting, anti-globalisation riots made Seattle seem like a war-zone. Two years on, hapless WTO ministers are about to fly into a real war-zone. They plan to meet on November 9th in Doha, the capital of Qatar, the Gulf state that plays host to al-Jazeera, the Arab TV station that is scooping the world’s media with its coverage of the war in Afghanistan. The US and the EU insist the meeting should go ahead as scheduled, although an escalation of hostilities could yet derail it.

Dump those prejudices

Many on the left obsessively loathe the World Trade Organisation, in the way Tory Europhobes hate the European Union. Just as Brussels-bashers peddle lies about the EU, so Naomi Klein, Noreena Hertz and others slander the WTO. That is a pity. The left has warmed to the EU. Now it should reconsider its opposition to the WTO. Believe it or not, the WTO is not against social democracy.

Free trade works in favour of the poorest

One of the enduring myths about globalisation is that it is bad for the poor. Yet the facts suggest otherwise. Freeing trade increases economic growth, because new technologies, such as the internet, spread faster and foreign competition spurs domestic companies to become more productive. This faster growth, in turn, reduces poverty.

One world? Don't blame globalisation

Europe is finally reforming. Governments are starting to liberalize. European Union leaders have pledged to nurture the new economy. Germany's parliament has approved radical tax reform. France's finance minister is talking about tax cuts too. Amazing. But is globalization forcing their hands?