Democrats & Liberals Archives

Fair Trade, Not Free Trade

Joseph E. Stiglitz, the man who was the chief economist at the World Bank until 2000, and who won the Nobel Prize in economics in 2001, wrote “Making Globalization Work,” which states that there is no such thing as free trade. If we want globalization to work we need a system of fair trade.

Stiglitz won the Nobel Prize by pointing out how information asymmetry - one person or group has more or better information than another person or group - introduces inefficiencies in the market. I quote him:

My research on the economics of information showed that whenever information is imperfect, in particular, when there are information asymmetries - where some individuals know something that others do not (in other words, always) - the reason that the invisible hand seems invisible is that it is not there. Without appropriate government regulation and intervention, markets do not lead to economic efficiency.

Information asymmetries abound in what some people call free trade. This is why, Stiglitz says, free trade has not worked:

In part, free trade has not worked because we have not tried it: trade agreements in the past have been neither free nor fair. They have been asymmetric, opening up markets in the developing countries to goods from advanced industrial countries without full reciprocation. A host of subtle but effective trade barriers have been kept in place. This asymmetric globalization has put developing countries at a disadvantage. It has left them worse off than they would be with a truly free and fair trade regime.

Stiglitz discusses in detail the free trade flaws and recommends remedies. Here, I highlight the major points he makes.

The biggest flaw is what is called the Washington Consensus, that is, the financial rules forged by the IMF, World Bank and the U.S. Treasury, and imposed upon developing countries seeking loans. To receive a loan a third-world country must promise to downsize government, deregulate business and privatize government agencies. This is information asymmetry at its most extreme. Implementing these rules has caused havoc among the poor in these poor countries; in some cases, it has led to riots.

By means of this Washington Consensus, financial organizations in developed countries shifted all sorts of risks from themselves to the destitute countries.

By concentrating on finances, we disregarded governance and the needs of people. In many cases, primarily the dictators in charge and their cronies benefited from the loans. Simple needs of people were not met and the people suffered.

Stiglitz makes many recommendations. I highlight them as follows:

  • Remove Information Asymmetries - Of course, there is no way to remove them all. However, we can restore some balance. First and foremost, poor countries need debt relief; without it they cannot improve their economy. Rich countries must cut agricultural subsidies that give them a huge advantage, and dumping laws that are nothing but trade barriers

  • Enhance Role of People - Today the concern is only about business and products. If we have universal capital flow why not universal labor flow? If business people can negotiate deals, why can't workers do the same? Worker relationships and conditions as well as environmental concerns should be part of the negotiation package

  • Government Must Have a Role - Instead of allowing business to dictate what it wants to governments, as is the situation today, governments must be part of the negotiation. Let's introduce some democracy and social justice
Stiglitz says a lot, lot more. You must read the book.

According to Stiglitz there is no free trade. However, by removing information asymmetries and making the system more democratic we can come close to achieving fair trade.

Posted by Paul Siegel at March 30, 2007 5:52 PM
Comments
Comment #214477

Thanks Paul,

A good post. Finally, someone who is honest about capitalism. I’ll be sure to read the book.

Posted by: gergle at March 30, 2007 6:33 PM
Comment #214496

I find this confusing, and I’m not sure if the cause is Stiglitz’s ideas or Paul’s presentation of them.

About these “information asymmetries”: is one party having more or better information than the other AND one party having an advantage over the other in the rules both called an information asymmetry?

They seem like very different issues and Paul is clearly labeling both issues with the same name.

I just wonder if this is an accurate representation of Stiglitz’s ideas.

Posted by: Loyal Opposition at March 30, 2007 10:55 PM
Comment #214509

LO-
Enron was an example, I would think. So is the Vioxx scandal. Essentially, It’s the ability to or not volunteer critical information from the other side that allows them to make the right judgments.

Information takes time, effort, and often resources to gather. Many use that against others by manipulating exactly what information is easily available. In Enron’s case, they covered up financial difficulties with a flurry of front companies and financial instruments. In the Vioxx case, patients and doctors were prevented from learning the kind of information that would would have meant a decline in sales for the company, even though it would have saved lives.

Long term, I would say, information can be slowed, but never perfectly held back, and the behavior of Business both here and abroad can effect both economic health (as the Enron collapse, among others, did) and the business’s social permission to operate as it pleases. Power abused for long enough is power eventually denied. If America and it businesses succeed in alienating people that badly, it doesn’t help us in the long run.

Posted by: Stephen Daugherty at March 31, 2007 12:03 AM
Comment #214515

Stephen, I understand your points, but I was wondering something far more basic—whether Paul has accurately described the ideas of this guy Stiglitz. I honestly don’t think he has because he’s using this term “assymetrical information” to refer to two totally different things.

I agree that a lack of critical information on the part of one side in a business relationship—an example of “assymetrical information” as Paul defined it in his second paragraph—is a problem.

But you cite Enron. Remember, though, that Enron’s behavior was totally illegal under our PRESENT system. They’re no longer in business and many of their chief executives have been prosecuted, convicted, and punished.

It’s crucially important to draw a distinction between enjoying assymetrical rules and having assymetrical information, but Paul collapses the two issues into one incoherent stew.

It seems to me impossible to totally do away with assymterical information and replace it with symettrical information. What is the stock market but people betting their interpretation of information against other peoples? All investment is predicated on the belief that the investor has better information.

If I buy a property in what I think is an up-and- coming neighborhood and what the seller thinks is a slum, then I’m putting my money behind what I think is my advantageous “assymetrical information.” This is the basis of any investment or economic enterprise. And not just under capitalism. How can the government come in and say what the truth is, what information is “correct” and what is “assymetrical” and why should we want them to even try?

If businesses and investors can’t figure this out, why the hell should we throw it all in the hands of government officials to sort out? What makes their information superior? Are they to be trusted just because they’re government officials?

If we’re talking about the rules, however, and that’s where Paul eventually goes—to complaints about some enjoying rights which others dont’—then how ISN’T that an argument for a complete and totally unfettered laissez-faire economy without rules? None of this is clear in the way Paul has laid it out.

Posted by: Loyal Opposition at March 31, 2007 12:38 AM
Comment #214516

Stephen:

Whenever there is an extention of something new in economics, such as globalization or most recently new products to help the working poor buy their own homes, there is a period of time when a “purer” form of capitalism exists. Time after time government has to move it.

This is a normal process, dating back to slave and child labor. In the 1920’s with new technology that brought stock ownership to the masses, the government wrote some execellent legislation requiring full disclosure etc.

With the expansion of globalization I would assume and support some modification of agreements.

You are right to point to Enron as an example. Regulations had not kept up with techology creating “information asymmetries” (more advanced insider trading).

Even though this book come from the left, I would support many of his reasonable aims.

What is also true is that sometimes government becomes the problem. Those on the left should hold their fire, as this is fairly predictable. Basically, techology outstrips the usefulness of regulations and they become outdated. Of course this creates imbalances not unlike “information asymmetries.”

And so the battle continues to rage through time as we make economic progress and different bottlenecks occur. I think Paul has brought up a good subject with an excellent sourse. I would encourage those on the left to be non defensive when government becomes the problem instead of the solution. We need to stay in a state of constant reform to keep up with economic progress. Government needs to reform the subprime housing market, as well as global trade agreements. There are other areas where it is government that needs to be reformed.

Craig

Posted by: Craig Holmes at March 31, 2007 12:38 AM
Comment #214517

Loyal opposition:

I agree with much of what you say. In your housing example government should remain neutral. However it is in societies interest to require full disclosure. If you are looking to buy a home and there are serious septic issue, those need be disclosed.

This same premise holds true with regard to international globalization. It may be on a higher level of understanding, but the premise is the same. Government needs to require certain levels of documentation and transparency.

It is a lack of transparency that is of great concern.

Craig

Posted by: Craig Holmes at March 31, 2007 12:43 AM
Comment #214518
In your housing example government should remain neutral. However it is in societies interest to require full disclosure. If you are looking to buy a home and there are serious septic issue, those need be disclosed.

I agree 100%, and so do the laws of every state in these United States. The government is NOT neutral in the example you supply, and it is totally illegal to hide and fail to disclose a property’s septic problems or any other problems. You can be sued if you try it, and what’s more you realtor could be sued as well and lose their license if they had any idea what you were up to.

This is true across the economic spectrum. You’re not allowed to fiddle with a car’s odometer and sell it. You’re not allowed to falsify earning statements of a business you’re selling, participate in insider-trading, or lie, defraud, or fail to dislose pertinent information in any business transaction whatsoever.

In short, you are NOT allowed to enjoy “assymetrical information” to gain an unfair advantage NOW. All of this is on the books already, under our PRESENT system, so what’s the problem exactly?

Posted by: Loyal Opposition at March 31, 2007 1:03 AM
Comment #214521

Loyal Opposition:


so what’s the problem exactly?

In a nutshell progress. Economic progress outstrips regulation. New transactions are created all of the time. Regulations are created to create transparency in well known exchanges.

What if a new exchange is created? Look at the subprime struggle for instance. These loans were made to a new market (people new to the housing market). Watch as new regulations will come in and “clean this up” so that disclosure is made in a way that new homebuyers can understand. ie. create transparancy.

The same is true with globalization. (actually this illustration is very close). The IMF is has a high degree of knowledge compared to developing countries. trade agreements are probably very unfair. These then create havoc. We don’t want to throw the baby out with the bath water. I am sure this is what the writer is getting at. (I admit I haven’t read the book).

Craig

Posted by: Craig Holmes at March 31, 2007 1:36 AM
Comment #214523

What you guys are leaving out of the discussion of development of slums is that Government is never out of these development deals.

There is always involvement whether official or unofficial of developers and city leaders. Often there are tax zones, subsidies and infrastructure development that is not fully disclosed to the public. Developers don’t develope out of the kindness of their hearts or by taking wild risks with their money.

I work in the Civil Development field. You can often guess at the probable areas to be developed, but you never know all the deals going on unless you have inside information.

Posted by: gergle at March 31, 2007 3:16 AM
Comment #214525

Thanks for the great post.

Posted by: houseofpolitics at March 31, 2007 6:40 AM
Comment #214528

In the end, fair “anything” depends upon the willingness of the parties to accept their portion of “fair” regardless of whether it feels “fair” or not, and not overreach. The instant a party overreaches, a tug of war of counter-overreaching takes place.

This is evident by OPEC, who agree on what is a mutually beneficial output of oil production. They agree with the left hand and pump over their quota with the right. Rationale: surely if it is to my benefit to overpump, others of lesser character are already overpumping, so it is only “fair” that I get my share of the overpumping beyond the agreed OPEC quotas. I would be foolish to comply while others surely won’t.

And so OPEC nations cheat on their agreed upon quotas. This same dynamic occurs with so called “fair” or “free” trade. Self-serving interest dictates trade. Only “enlightened self-interest” could make it fair. Therein lies the foible in Adam Smith’s ‘Wealth of Nations’, to which he himself alluded to in his preceding work, ‘Theory of Moral Sentiments’.

Posted by: David R. Remer at March 31, 2007 8:11 AM
Comment #214535

The World Bank,IMF etc. are instraments of neo-colonialism,pure and simple. They are tools the international ruling class uses to subjugate workers here and abroad.

Posted by: BillS at March 31, 2007 10:48 AM
Comment #214562

Stephen,

As to Enron, there was something much more sinister at play. The sad truth is that is hasn’t been reformed yet.

Enron and others actually were behind the deregulation movement. They manipulated the creation of the market and the regulation in concert with government. Those “markets” are still in play. Utilities are not free markets by definition. That’s why when utilities were created they were not treated as such. Edison himself manipulated the electricity market by lying about DC current. He, however, had to take real risk. Energy is not a “free” commodity. It is a captive commodity of a few. There are limited producers. In reality, you cannot transfer energy from New York to California. Utility cooperatives are the way to go if you want to benefit the consumers. “Free” utility markets are set up to benefit the oligarchs.

Frontline did a story on the manipulation of FERC long before Enron blew up. This is about huge corporations seeking new profit centers, lobbying governments and not improving infrastructure or efficiency. It is about misinformation, not just assymetry.

The next “free” market is water. Try to drill a well in a city…see how free you are.

Posted by: gergle at March 31, 2007 4:31 PM
Comment #214567

I find this discussion very interesting and wonder if any have noticed how closely this fits with the “global man-made warming” issue. Concensus doesn’t necessarily make a position correct. We need more transparency.

Posted by: Jim at March 31, 2007 6:08 PM
Comment #214571

LO:

Stiglitz says that “trade agreements have been asymmetric.” I assume that if rule making for these agreements is asymmetric this is similar to information being asymmetric. One side has more power than the other.

If you think I misunderstood him - it’s possible - why not read the book yourself and let us know what you think. It’s an excellent book by someone who knows what he is talking about.

Posted by: Paul Siegel at March 31, 2007 8:20 PM
Comment #214631

Thanks, Paul. You’ve cleared up my question by clarifying that he is talking about more than one kind of asymnetrey and that you were extending his argument by calling all asymmetries informational.

This is all interesting, but I must admit that as much I enjoy discussing his ideas—to the extent that any of us understand them—I’m unlikely to add an economic treatise of this kind to my list of summer reading.

In any case, this all seems to consist of highly theoretical material without obvious applications in policy.

I say this because I don’t see how ANY economic model, from Captitalism to Communism, can avoid one side having either more information or power.
I mean, anybody who gets out of bed and goes to work in the morning for a business they don’t personally own is selling their labor to a more powerful entity. If I go to the grocery store, they’re going to make a profit out of me because I’ve got to eat and they’ve got the groceries! Isn’t the same thing true on a larger scale, between corporations and nations? We can make rules to make things more fair (and we already have zillions of rules intended to do just that), but it doesn’t mean that we can ever end assymetrical relations of power and knowledge. And if we COULD do it, that government would be the most effective means.

Posted by: Loyal Opposition at April 1, 2007 9:46 PM
Comment #214673

Wait a minute, are we trying to suggest that we are wanting a free-trade market, but we also want more government regulation on the market???

That is like suggesting we want faster cars with governors on them that keep people from speeding.

A free-trade market would be a market that allows any entity the right to persue any market as a competitor, we have that, hell, China has that.

Also, if we were to create a situation where government has more negotiable weight than a corporation the market would not flourish, we have seen this scenario in communist Russia already. It failed miserably. It looked really good on paper, but it just opened a flood gate for politicians who held ownerships of companies to overtake companies with their inequalties.

I think the system is good how it is, the government and the corporations are pretty much balanced, there are some alliances and there are many battles, this keeps them both in check.

Government wants to restrict corporations and corporations want to side-step government. It is a good balance.

Posted by: Bryan AJ Kennedy at April 2, 2007 12:31 PM
Comment #214674

Also, World Bank has been responsible for more economic destruction in third world countries than any other entity in the world.

Strangely 90% of the countries they “help”, end up starving and suffering civil war with in the first twenty years of their World Bank experience.

Just look at some of their borrowers: Russia, Somalia, Bosnia, Congo, Sudan, Dafur, and the list goes on.

Posted by: Bryan AJ Kennedy at April 2, 2007 12:40 PM
Comment #214754

If I had to boil down my thoughts on this matter, it would be “Long term development over short term gain.”

Sure we can exploit current conditions. Then what? What happens to the Walmart economy if China experiences some kind of collapse, or if the government is forced into labor law changes? What happens when economic forces inevitably push demand on wage levels up?

Most importantly, how much of our happiness and prosperity can we retain in the long run, with all the ills and hardships we externalize to these countries? I’m as much a patriot as anybody, I love this country, but nothing about that fact means that those outside our borders have to love us, especially if we see fit to crap on them in economic, environmental, military, and other terms. We can raise up equals in the world, or we can create enemies. I would much rather our energies go to doing good business, living good lives and regaining our respect in the world than to see them consumed by decades worth of blowback from poor decision making in the world markets.

Posted by: Stephen Daugherty at April 3, 2007 1:17 AM
Comment #214777

Are you suggesting that before I buy that 1966 Jeep from you that I should have to tell you that I just read on the internet that it will be worth 10 time what you are asking within 6 months? How about you using your resourses to find out the same information that I did.

Posted by: insensitive at April 3, 2007 8:13 AM
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