Wednesday, March 1, 2000

Is Free Trade Fair Trade?

My article titled "Is Free Trade Fair Trade?" was published in March 2000.

Free trade is fair trade, or so one thought until the recent protests in Seattle during the WTO meeting. The Seattle protesters contended that unrestricted trade harms developing countries. In contrast, India's experience provides clear evidence of the high costs of a restrictive trade policy. For almost fifty years, India, the world's largest democracy, lived under the premise that trade is a zero-sum game. Successive governments believed that free trade would only weaken the Indian economy further and open it up for even greater economic exploitation.

The result of this economic experiment has been tragic but clear. In 1947, at the time of Independence from British colonial rule, India's share of global trade was estimated to be about 1.8%. Today it is less than half that. Per capita income has stagnated at less than $500, and an estimated 20-30% of the population lives in abject poverty. The Indian experience is in sharp contrast with that of many countries in South-East Asia that had started out at around the same level or worse, but in the last thirty years have leapt far ahead.

The economic philosophy behind a restricted trade regime was national self-sufficiency, and import substitution. It was argued that protecting local industries would not only help protect jobs, but also allow the industries to mature and develop, and the domestic knowledge base and technology to grow.

The results of this policy, in India and elsewhere, have been the opposite of what had been intended. The experiment failed because of fatal misconceptions about the nature of the market and the role of trade. And the cost for this failure has been extremely high. Ordinary consumers lost out, because domestic producers faced little competition, and their products were characterised by high price and low quality. Foreign goods were either unavailable or made prohibitively expensive through sky-high tariffs. Not surprisingly, the contribution of the economy to the growth of knowledge and technology was marginal.

Trade restrictions have clearly failed the citizens of developing countries. It is time to try a new policy which will promote domestic economic growth, spur innovation, and benefit consumers. There are several critical components to such a policy. They include the lifting of trade restrictions, respect for private property rights and contracts, and the assurance of freedom of choice in the marketplace. Such policies will induce competition and force producers to find better and cheaper ways of satisfying consumer demands.

To enhance the domestic base of knowledge and promote technological innovation, another essential component of a pro-growth policy is protection of intellectual property rights (IPR). The approach to IPR is another clear distinguishing factor between developing and developed countries. The former generally considered knowledge to be free and IPR as an instrument for restricting access to knowledge. The unintended consequence of this approach has been that while knowledge may be free, it has also become scarce, dated and even unavailable, as there is no incentive to invest in the discovery process.

The experience of India in this regard is quite telling. It may be argued that a lot of the traditional knowledge systems in India have decayed or died because of lack of protection for IPR. This seems particularly ironic today when there is universal concern for protecting the local knowledge base. For instance, the failure of most local pharmaceutical companies to utilise the "free" knowledge to develop new and better drugs is an illustration of the significance of IPR. IPR may limit access, but in the process eliminates the "tragedy of the commons" in the knowledge domain. IPR, therefore, provides the incentive to discover and makes knowledge affordable and sustainable.

Another aspect of trade that needs more attention is its relationship with democracy. Traders in the marketplace are like voters in a democracy. If free flow of ideas is essential to sustain political freedom and a democratic polity, then free trade is critical to sustain economic freedom and an efficient marketplace. Liberty, after all, is indivisible.

Therefore, the best way to realise the competitive advantage that an opportunity to trade provides is through universal dismantling of barriers to trade and economic growth. The evidence of prosperity is clear from the diverse group of countries that instituted domestic reforms and adopted relatively open trading systems -- to the benefit of their citizens. Their experience is testimony to the fact that, where the interests of ordinary citizens are at stake, free trade is fair trade.

Poverty, Wealth and Waste

My article titled "Poverty, Wealth and Waste" is Reproduced from the March 2000 issue of PERC Reports. The original pdf version of the journal is available here . PERC, a think tank based in Bozeman, Montana, USA, is dedicated to Providing Market Solutions to Environmental Problems.

In 1986, a waste-to-energy plant opened in Delhi, India, financed by the Danish International Development Agency at a cost of over $10 million. The plant was expected to generate 3.8 mw of electricity from garbage, and its success was to be copied in other Indian cities. However, the plant was a failure. Two years later, the government was spending about $100,000 a year to burn garbage without producing energy. Surprisingly, the principal reason was the fact that there wasn’t enough urban waste in Delhi.

It turns out that the waste—paper, rags, plastic, etc.—in Delhi produces only about half the caloric value of a Western city. This contrast tells us a lot about the treatment of waste in rich and poor countries and helps us to understand the importance of trade in waste.
Poor societies can afford little waste in the traditional sense. Poverty ensures that every bit of a resource is reused, recycled, or otherwise utilized. In India, an enormous army of rag pickers continuously supply millions of trash merchants all over the country. They pick up virtually everything that might have a potential value. The rag-pickers, particularly in urban centers, have an unmatched capacity to extract and sort every bit of material that can be reused, recycled, or have other potential uses.

This commitment to resource utilization pervades almost all strata of society. Families in India willingly wait for weeks in the hope of getting a higher price for their old newspapers. Trash dealers frequent homes on a regular basis to buy newspapers, plastic and glass bottles, discarded furniture, or household gadgets. These are then meticulously sorted and sold for reuse, repair, recycling, resource recovery, and any number of other uses.

The pattern of waste utilization changes from poor rural areas to small towns to big cities. In the smaller and poorer areas, the volume of actual waste is very small, because whatever material can have some possible utility is reused or repaired. Consequently, dealing with waste as an economic activity is minimal. As one moves into towns, waste acquires a more economically vibrant characteristic. Household consumption levels are higher, and so is the quantity of waste. Consequently, there are more trash dealers to exploit the economic potential of the larger volume of wastes.

There are two reasons why recycling in poorer countries like India is so thorough. First, the low value of labor justifies the long hours spent extracting material. For rag-pickers, there are few other ways to earn money. Second, because the country is poor, many products made from virgin raw materials are luxury goods, simply too expensive for most people. Thus, there is a ready market for reused and recycled goods.

The painstaking efforts to recycle materials do not mean that a poor country like India is pollution-free. Indeed, the low quantity of waste generated in an economy with little capital and technological backwardness keeps the waste industry from graduating above small-scale local initiatives. And higher pollution occurs because there isn’t the technology to capture highly dispersed waste such as sulfur dioxide from smokestacks or heavy metals that flow into wastewater.

In contrast to the careful reuse and recycling of waste in poor counties, per capita generation of waste is much higher in wealthy countries (although pollution is lower). This obvious difference is often used to extol the virtues of lower consumption in poor countries and the evils of consumerist lifestyles in the former. But the explanation is more complex.

Rich societies generate more wastes because their citizens can afford to do without the leftovers, whether in the form of food, packaging, worn-out clothes, or energy. Another way of looking at it is that the value of the waste, even while it is substantial in terms of weight or volume, is so small in comparison to individuals’ disposable income that most people find the value of waste (in economic terms, the marginal utility of waste) to be quite low. Many cheap substitutes are of better quality. Many items that are reused in India are thrown away in the United States because they just aren’t worth very much to people who can afford new products.

Does this mean that the economics of waste loses viability as a society becomes richer? It may seem that way, because waste handling is such a big issue in the developed countries. Yet the much greater quantity of wastes generated, along with newer technologies, should make the waste industry more economically rewarding in richer countries.

Indeed, that has been the case, as Pierre Desrochers shows in “The Secret Past of Resource Recovery” (PERC Reports, Sept. 1999, 5-7). He reminds us that there was a flourishing waste processing industry decades before the major environmental statutes were enacted. And even today, a lot of waste, particularly industrial by-products, is sold for processing around the world. .
Yet, as western nations grew wealthier, leftovers became more visible. This reflects a problem of institutions (the rules and laws that govern actions). First, there was more pollution because of the "tragedy of the commons." Since people could dump waste on commonly owned or open-access property (such as the air and water), some people didn’t feel the need to develop a waste disposal system. Naturally, this increased the levels of pollution.

Second, the market for wastes and byproducts was not allowed to work to the extent that it could. Wealthy societies have the capability—and frequently the desire—to dispose of waste. They have the wealth to pay people to cart off leftovers rather than seeking payment from the waste disposers, as poorer people do. Under a market system, as societies grow wealthier, this should lead to markets for the disposal of waste in landfills or incinerators.

Unfortunately, rather than privatising the resources, restricting access to them, and allowing markets in waste to develop, government agencies took over the role of regulating and even providing the service of waste processors (often, by owning landfills). Bypassing all evidence of how the private sector had been performing this service economically, the argument was made that private markets couldn’t provide this service.

Without the disciplining influence of the market forces, public agencies became inefficient and began to consider waste a problem, not a potential resource. So efforts were made to regulate or reduce the generation of waste.

Waste can again become a valuable resource if markets are allowed to develop, both within countries and internationally. Free trade in waste would allow the comparative advantage of societies to make waste processing economically viable and efficient. (There are already attempts by some entrepreneurs to hold Internet-based auctions of wastes.)

Rich societies with technological advantage and economies of scale could buy certain wastes from poorer countries where low volume makes processing more expensive. Poorer societies, with lower labor costs, could import other types of waste products from rich countries, augmenting their own low quantity and making processing viable.

Current rules thwart this process. Responding to the international agreement known as the Basel convention, India stopped the import of waste lead and zinc. This was probably economically and environmentally unsound. The low consumption level in India of products such as batteries means that the imported waste is necessary to make recycling viable. Thus, the Basel convention may be contributing to a higher pollution load in developing countries by restricting trade that makes recycling feasible.

Trade creates wealth, and if free trade, including trade in waste, is allowed, someday all countries can become wealthy. What will happen to waste? Not only will some trade in waste continue (as it does in wealthier countries today), but the greater productivity and more advanced technology will ensure reasonably priced disposal of the waste that cannot be traded. Meanwhile, both the economy and the environment will gain if we can bring back to life the much abused cliché 'wealth from waste'