The Assault on Free Trade

The Asian currency collapse has reenergized all of those people who never liked markets and capitalism. Columns and commentators now eagerly tell us the world must pull back from "globalization" and unfettered markets which put everyone at risk of such dangerous financial uncertainty.

Interestingly, the critics seldom mention that this would also mean giving up many of the gains in human well-being the world has won through its "unfettered" trade over recent decades.

So let's think back a few years to the time before "globalization," to that supposedly better and more secure world.

In 1967, for example, Indonesia's per capita income was $50, few of its people could read, and the life expectancy was approximately forty-five years. By 1997, in that awful world of "unfettered" trade, Indonesia had achieved the following:

• Raised its per capita purchasing power to $3,400;



• Cut the proportion of Indonesians living in poverty from 60 percent to 15 percent;



• Cut its illiteracy rate by two-thirds;



• Extended life expectancy by nearly 50 percent; and



• Radically reduced its fertility rate from nearly 6 births per woman to 2.6 births. (Stability is 2.1.)

By 1997, Indonesia's textile, shoe, and electric appliance exports were earning enough to make the country a major world market for autos, jet airplanes, electric generating equipment, and sophisticated medical technology.

During the thirty years since 1967, American standards of living have also gone up dramatically, not down. Computers, video recorders, disc brakes, jet travel, and microwave ovens have all become commonplace in America's daily life. It takes far less working time to pay for jogging clothes and shoes, for example, and cruise ships have become a major growth industry. This is hardly an economy in turmoil!

One of the key elements of the fabulous economic growth of the past twenty years-for Indonesia, for the U.S., and for most of the world-has been the fifteen-fold increase in trade. Liberalized trade has been made possible by the most successful international institution in human history, the General Agreement on Tariffs and Trade (GATT)-now administered by the World Trade Organization.

The world's average non-farm tariff has been cut from 40 percent to 4 percent since the GATT was signed in 1947. This trade liberalization has also helped spread capital and jobs throughout the Third World, even as it increased the wealth of the already-affluent countries.

In fact, things are rather better than some of the data indicate. America's very substantial gains in quality of life have not been fully reflected in its income statistics, largely because of (1) the proliferation of single-parent households; and (2) flaws in how we measure our output. For example, today's laptop computer has as much power as a million-dollar mainframe in 1967; today's cell phone provides communication mobility never dreamt of thirty years ago; and air and water pollution have been sharply reduced. None of these gains is reflected in our GDP statistics, but they add greatly to our quality of life.

Past Failures To Conquer Poverty

When I began my professional career in the 1950s, the biggest concern among thoughtful people was the endemic poverty and potential famine lurking in the Third World. Life expectancy in most of the developing countries was less than fifty years. Few people could read or write. Most of them faced a life of stoop labor, debilitating disease, and periodic hunger.

Hardly any Americans felt comfortable being an island of affluence in a sea of such urgent, unmet human needs. The U.S. Agency for International Development and the Peace Corps were attracting our "best and brightest," who went overseas in direct attempts to raise up what we euphemistically called "developing countries."

Unfortunately, neither the Peace Corps nor the aid programs made much of an impact on poverty. Most of the aid money went to the Third World's corrupt governments and disappeared into numbered bank accounts. The rest of it built flashy but unnecessary public works projects such as the customary superhighway from the capital to the president's hometown.

Former Ford Motor Company President, "whiz kid," and U.S. Secretary of Defense Robert McNamara became head of the World Bank and shifted the organization's focus away from infrastructure investment toward "basic human needs." His intent was to attack Third World poverty at its roots, but the effect of his actions was to put the bank's billions into back-country "investments" where they couldn't possibly jump-start any sustainable trend toward real economic growth.

In addition, much of the world saw communism as a shortcut to egalitarian prosperity for all. The ideal, "From each according to his abilities, to each according to his needs" sounded wonderful. But we soon found that we could not share something that had not been produced, and communism was very poor at producing anything besides weapons. Worse, what little got produced for domestic consumption wound up in the control of the most bloodthirsty set of bureaucrats since Genghis Khan.

When Deng Xiao-Ping took control of the Chinese Communist government in 1978, two-hundred-million Chinese people were not even getting enough food to sustain their bodies. More than thirty million Chinese starved in the 1959-61 famine brought on by Chairman Mao's disastrous effort to impose communal farming. (After 1978, Deng gave the farmland back to families-along with chemical fertilizer-and farm output doubled in seven years.)

The Communist shortcut to "equal prosperity for all" cost more than fifty million lives in the communist countries alone. It also cost trillions of dollars in Cold War weapons spending and established the worst record of environmental pollution the world has ever seen.

The "Third Way"

The "Third Way"-the protected markets of European socialism-has also failed to generate jobs and affluence. In Europe, these policies have created virtually no new non-government jobs in the past thirty years. The jobs Europe has pay well, but fully one-fourth of Europe's young men under twenty-five are either unemployed, enrolled in government-sponsored "apprenticeships," or stashed in universities with student stipends. Frighteningly large numbers of these young people have never had a real job and never expect to hold one.

Nor has European-style socialism generated much Third World prosperity when adopted in developing nations. India, an ardent acolyte and advocate of this approach, has been noteworthy for an economic growth rate about half as high as that of the more market-oriented Asian Tigers. This "Hindu rate of growth" barely kept ahead of India's population growth. India's auto industry is still turning out the equivalent of the 1957 Morris Minor-because the nation's noncompetitive market has given producers no incentive to update technology.

In recent years, more and more Indian villages have gotten satellite-fed TV sets and consequently a glimpse of the twentieth century. Now, virtually every Indian political party has publicly committed itself to double-digit rates of economic growth. And to achieve the higher growth rates, they are gradually cutting the governmental controls and red tape that suppress the economy.

Miracle of Trade

What has been generating economic growth in the Third World is virtually the same set of factors that have been generating economic growth in America for two-hundred years: incentives for individuals, new technologies, education, and broad market opportunities. It would be ironic for the U.S., which pioneered broad market freedom with the Interstate Commerce Clause of the Constitution, to forget the importance of this simple fact of human life.

The GATT, signed in 1947, marked the beginning of a worldwide shift from mercantilism toward free trade. GATT members promised to use only moderate tariff protection between their markets, opening the way for greater economies of scale, more use of comparative advantage, and, most importantly, competition.

Two Harvard University professors studied the economic performance of 117 countries between 1970 and l989. According to their discoveries, those with more open economies grew at an annual rate of 4.5 percent, while the relatively closed economies grew at only 0.7 percent.

Thus it is evident that the GATT opened the door for the Asian Tigers, as well as a less-famous pride of more recent Tigers in Latin America (Argentina, Chile, Mexico), Eastern Europe (Poland, Hungary, the Czech Republic), North Africa (Egypt, Tunisia), and even Africa (Mauritius).

The World Bank says that more open economies have helped raise per capita incomes in the low-income countries from perhaps $50 or $100 when the GATT was signed to more than $1400 in equivalent purchasing power. East Asia now averages $3,500 per person in purchasing power. Additionally, average life expectancy in poor countries has risen to nearly sixty years. (At the dawn of the twentieth century, the average life expectancy in the U.S. was less than fifty years.)

This affluence and increase in urban factory jobs-along with food security-have helped lower fertility rates in the low-income countries from 6 births per woman in 1965 to 3.2 births today. Those birth rates are continuing to decline rapidly, with the biggest families still being the poorest and those in rural areas.

Free Trade and Asia's Collapse

Trade did not cause Asia's recent currency collapse. In fact, a good argument can be made that the Asian collapse occurred because trade was not free enough!

One of the triggers for the Asian problems was the collapse of the Japanese real estate bubble in the early 1990s. This collapse took the big Japanese banks out of their key Asian lending role. Oddly enough, the real estate bubble was originally engendered by price supports for Japanese rice. Here's how: Japan's land values began to inflate after World War II because the postwar Japanese government courted rural voters with high price supports for rice. The government said that the country needed to supply all of its own rice in order to have food security-and it jacked the rice growers' prices up to as much as ten times the world market level.

The political fraud on food security then led Japan put punitive tax burdens on the conversion of land from rice to urban uses. And, of course, rice imports were forbidden. All of this government action transformed Japan from merely a densely populated country into one with a critical shortage of land for business, housing, parks, and roads.

As the Japanese economy grew, Japanese land and housing values soared to ridiculous heights. Rice land was worth $50,000 per acre, ten times the value of U.S. rice land. By 1990, builders were asking $2 million for a modest new home an hour's commute from downtown Tokyo. Banks convinced themselves that they couldn't lose money on Japanese land because it was too scarce. And then the real estate bubble burst, as such bubbles always do, leaving Japanese banks with more than $400 billion in bad loans.

If Japan had originally been willing to let rice prices find their market level, the real estate bubble would never have occurred. Japanese banks might today be financing the expansion of Asian factories-instead of watching helplessly as what had been good investments collapsed.

In Indonesia, meanwhile, the family of President Suharto was responding to economic growth by getting greedy. Suharto gave one of his sons control of the country's only auto company and then tried to discourage car imports. He gave a second son control of the cigarette industry. Other cronies got billions of dollars in economic payoffs. All of this cronyism frightened off the Japanese and U.S. investors who had put $30 billion into the Indonesian economy. It also reduced the country's ability to repay its loans.

Prospects for Economic Growth

Thanks to this governmental corruption, many Indonesian workers have lost their city jobs and moved back to their original villages. Many children have been taken out of school because their parents cannot afford school fees. A nutrition survey conducted by the Helen Keller Foundation indicates that the percentage of underweight children has increased from 8 percent to 14 percent, and maternal malnutrition has increased by 5 percent. The Indonesian government is providing 10 kg of heavily subsidized rice per month to approximately nine million very poor families.

Will Indonesia slump back into the traditional Third World pattern, with 250 million people living lives that are "poor, nasty, brutish, and short"? Or will it be able to fulfill its recent promise and become an affluent, First-World democracy with a stable population and concern for the environment? In 1998, gigantic wildfires caused by desperate Indonesian slash-and-burn farmers darkened daytime skies throughout the Far East. Averting a poor, nasty future for the nation may well rely on Indonesia maintaining its faith in hard work, investments, and open competition.

Mexico provides a good model. In 1977, Mexico suffered a peso collapse. At that time, its economy was politically guided, internally financed, and oriented to import displacement-and economic growth averaged only about 0.5 percent per year from 1977 to 1987.

Mexico suffered another peso collapse in December of 1994, and the country's GDP dropped by 6 percent in 1995. The average Mexican is said to have lost 35 percent of personal purchasing power. But by this time Mexico was a WTO member: financial flows had been liberated, tariffs had been lowered, and the North American Free Trade Agreement was in place. In distinct contrast to the aftermath of the 1977 peso collapse, Mexico's Gross Domestic Product (GDP) has been growing at 4 and 5 percent annually since 1996, and the country has been able to pay off a U.S. recovery loan ahead of schedule.

Thus we know what kinds of policies can repair such economic wreckage, and the nations hardest hit by the Asian currency collapse still have plenty of resources. Indonesia's factories are still intact. Its workers still have their literacy and their work ethic. Investors have lost billions, but what they built still exists. President Suharto has been forced to resign, and Indonesia is now likely to have the first truly democratic elections in its history. The other countries that suffered currency devaluations have instituted various reforms of their own.

Meanwhile, the world is generating more wealth more rapidly than ever before. It has more people with more jobs, more education, more machine tools, more research laboratories-and more unmet demands-than the world has ever had before.

If we can avoid public policies thatprevent people from using their assets to meet consumer demands, the economies of Asia should recover strongly. The economies of the whole world, in fact, should continue expanding. That will be good for both people and the natural environment. (Poor people tend to have large families, cut trees, and hunt down their wildlife for the stewpot; richer people have small families, stack themselves on small plots of urban land, and recycle their trash.)

This wealth has been built not by governments but by societies that offered their people education, incentives, rule of law, and government stability. Putting ourselves back under the thumbs of the world's bureaucrats is likely to exact a heavy cost in human and environmental well-being. Far from being the cause of economic instability, free trade is the key to a healthy, growing world economy in which poorer nations can achieve sustainable economic growth and enjoy better standards of living. That trend will continue unless powerful nations (such as the U.S. and the EU) lose faith in the very institutions that made them great. The current economic crisis is serious, but it is not a failure of free enterprise and free trade. It is a failure to extend them more widely.