THE BEAR'S
LAIR The de-flattening of the
world By Martin Hutchinson
"The world is flat" declared New York
Times columnist Thomas L Friedman in 2005. His
book with that title was full of heart-warming
anecdotes about noble Third World businessmen
being brought together through the Internet; in
terms of hard analytical truth it was something of
a stretch even then. However, it is now certain
that the world has started de-flattening, becoming
bumpier by the day. Much though one likes to diss
New York Times columnists, this is economically
not entirely a good thing.
Contrary to the
views of the globalization extremists, there are
some clear benefits to this de-flattening. The
"level playing field" so beloved of academic
economists who wish for universal free trade and
unrestricted immigration resembles in reality not
an orderly soccer pitch but something akin to the
Russian steppe
with
winter approaching: bleak, infinite and entirely
without tree cover.
Needless to say, some
previous versions of competition - say 1950s
Detroit - bore more resemblance to the bowling
green in a well-kept Oxbridge college, with a high
wall round the edge and guard dogs to keep out the
unwashed. However, the advent of truly global
competition since 1990 has demonstrated to the
Western workforce that removing barriers to
entirely free competition can be highly
detrimental to their living standards and job
security.
It is thus unsurprising that a
number of free trade shibboleths are being
questioned as never before. Unfortunately the new
protectionism shows every sign of making no
distinction between desirable and undesirable
barriers to free movement of goods, capital and
persons. Instead it is constructing impenetrable
walls whose benefit even to their builder is
dubious, and whose cost to the world economy is
undoubted and immense.
Of all the new
barriers to free trade, the most damaging are
probably export restrictions, as on rice in Egypt,
India and Vietnam, or export tariffs, as in
Argentina. Rice export restrictions have had the
effect of doubling the world market price of rice
in three months, to the immense suffering of the
Third World's urban masses. They are the product
of an ideology of scarcity, in which resources are
thought to be severely limited and trade is viewed
as a negative factor in the welfare of a country's
inhabitants.
Not only do they damage the
economy of commodity buyers, they are even more
damaging to the country that imposes them.
Nevertheless, in a world in which corn becomes
scarce because of massive US ethanol subsidies,
they have made their malign appearance, and they
will not be eliminated until food and other
commodity prices decline.
Agriculture
subsidies were a creation of the last major
recession 70 years ago, and they seem fated to
remain with us whatever the economic weather. They
made a certain amount of sense as an income
protection program for small farmers during the
Great Depression; they make far less sense now.
Nevertheless it was for the sake of agriculture
subsidies that the US and the European Union
killed the Doha Round of trade talks, which had
offered the best hope of putting world trade on a
basis of openness and equality between rich and
poor countries.
The Doha Round has now
apparently been replaced with a network of
bilateral arrangements. These make sense
politically but not particularly economically;
they are also by definition de-flattening since in
a bilateral trade agreement both parties give each
other benefits and tariff reductions that they do
not extend to other countries.
In any
case, the AFL/CIO and its cheerleaders among the
Democrats in Congress appear to have found a way
to kill even bilateral trade agreements, by
demanding US levels of union protections, benefits
and environmental restrictions in the relatively
poor countries with which they are generally
negotiated. A world full of bilateral trade
agreements is not flat but mildly bumpy; a world
in which even these have become impossible
requires serious landscaping.
Even more
egregious than agriculture subsidies are the newly
fashionable environmental subsidies, whether
paying farmers to refrain from farming or paying
them excessive amounts to plant crops that can
inefficiently be converted to ethanol, at an
outcome in carbon dioxide emissions significantly
worse than regular gasoline.
In the United
States these subsidies are the product of the
exceptional cynicism and corruption of US politics
over the past decade (to be precise, since Newt
Gingrich was forced to resign the House
speakership in November 1998.) It is thus hardly
surprising that their direct costs have been
considerable and their indirect costs enormous.
They began by sparking off a tortilla subsidy
program in Mexico and are now producing food
export restrictions in much of the Third World.
Subsidies make
comeback Subsidies to consumption of
food, gasoline and other favored commodities,
which had been thought moribund in the free trade
world of the 1990s, have been making a comeback.
No longer restricted to the likes of Cuba and
Venezuela, such subsidies now extend across most
middle-income countries, allowing consumers,
generally middle class, to buy gasoline and food
products exceptionally cheaply. Needless to say,
these subsidies are hugely expensive for national
budgets, damage local wholesalers of the product
concerned (or, in the case of oil, exploration
companies in such places as India) and represent a
sharp move away from the primacy of the price
mechanism. There is no sign whatever of their
disappearance.
On the intellectual front,
the most important barrier to globalization is the
increasing tendency of authoritarian regimes to
censor the Internet. Countries such as Iran offer
almost no access to the world-wide Internet at
all, restricting communications speeds and
blocking access to the Internet altogether during
periods of political tension. China too has
largely domesticated its Internet, using its
enormous domestic market as leverage to invent
Chinese equivalents of such companies as Google
(Baidu) and eBay (Alibaba) while heavily
restricting its citizens' access to the outside
world.
Even in Western Europe, political
correctness rules differ from country to country
and force international websites to adopt bizarre
domestic practices. Globally, the Internet is no
longer a "flat" institution as Friedman claimed;
it has become thoroughly bumpy, with a number of
impenetrable walls.
As Friedman pointed
out, foreign investment had been for many years an
important "flattening" element in the world
economy. Multinational companies not only import
goods and services into countries in which they
invest, they import know-how and labor practices,
so that salaries for similar jobs become more
equal worldwide, and working conditions in poor
countries improve (even though child labor may be
common in say Indonesia, a US or EU multinational
cannot afford to be seen condoning it.)
However, in the past few years some
countries have begun to conduct their foreign
investment in the spirit of Cecil Rhodes rather
than Adam Smith, seeking to monopolize natural
resources, use trade as a political weapon and
gain political power through leverage in foreign
country economies.
Blocking the Chinese
investment in Unocal appeared paranoid in 2005, it
seems less so now, while the Dubai Ports fiasco
(the purchase of British-based ferries group
P&O), in which a minor (US) subsidiary
investment turned into a major political battle
also seems to have been a harbinger of things to
come.
When Russia's Gazprom regularly
disrupts gas supplies to its neighbors, while
seeking to acquire new supplies (entirely
unnecessary for its existing business, given
Russia's enormous gas reserves) in Libya, Algeria
and Nigeria, it is clearly motivated not by simple
economic goals but by the desire to acquire a
monopoly or near-monopoly of gas supplies to
Western Europe. Chinese investments in Africa and
Venezuela are somewhat more benign in their
motivation, seeking to tie up the supplies of
energy and commodities that China will need in the
decades ahead by doing business with regimes that
the West will not deal with, or by turning a blind
eye to local corruption, torture and other
misdeeds.
Gazprom's appears likely to be a
successful political strategy against the limp
push-back of the EU. China's strategy also appears
more than likely to be successful commercially,
since rogue regimes know that any attempts to
damage Chinese interests will result in several
divisions of the Red Army arriving, rather than a
mere diplomatic protest or lawsuit. Nevertheless,
neither strategy is working towards a level
playing field or a flat world; both are seeking to
construct Great Walls behind which their own
national interests can flourish.
World-flattening
immigration Finally there is mass
immigration, to Friedman the most world-flattening
innovation of all. He's right; unlike trade, mass
immigration has the potential to equalize wage
rates between rich and poor countries within no
more than a generation. The huge area of local
services, which provides a haven for the
low-skilled and is immune to international
competition, quickly succumbs to mass immigration.
Of course, any such rapid equalization of
wages across the globe would involve a
catastrophic decline in the living standards of
the less able populations of rich countries. There
is every sign that these oppressed helots are
waking up to this. In the United States, not only
was last year's immigration amnesty legislation
defeated easily, but there is now noticeable
pushback against expansion of the H1B visa
program, under which skilled young people from the
Third World get the chance to practice their
trades in the US market, competing against local
folk.
As Dean Baker of the Center for
Economic and Policy Research has pointed out, the
H1B program extends only to a limited range of
occupations and does not for example affect
lawyers. It is thus little surprise that the
remuneration for a newly minted computer scientist
with a PhD from a good college is less than half
that of a less credentialed junior commercial
lawyer. Immigration globalists will point out that
the lawyer may deal with Wall Street, but the
computer scientist deals with Silicon Valley,
equally a source of unimaginable riches and
innovation in the last decade. Little wonder
therefore that there is a shortage of US
engineers; they are all studying to be commercial
or trial lawyers, even if they are somewhat less
fitted for this role. The free market works!
The recommendations for policymakers from
all this naturally bear little resemblance to what
policymakers are currently doing. On trade, a
return to the Doha Round seems highly desirable,
and if agriculture subsidies have to be sacrificed
to achieve this, that would be another reason to
cheer. The autarkic policies of Russia and China
are most effectively battled by low energy and
commodity prices, which can best be produced by a
sharp increase in US interest rates, naturally
accompanied by corresponding moves elsewhere.
Higher global real interest rates will
also increase the relative as well as absolute
cost of capital for emerging markets, restoring
some of the United States' historic overall cost
advantage (emerging markets will then have cheaper
labor but more expensive capital.) Of course in
this area the high-saving nations of the richer
parts of East Asia (Japan, Taiwan, South Korea and
Singapore) will benefit even more than the United
States, but there should in this world be some
reward for the thrifty over the profligate.
On immigration, since US politicians are
paid to represent the interests of their
constituents and not those of foreigners, however
impoverished and photogenic, they should
strengthen enforcement against illegal immigration
and reduce rather than increase the H1B visa quota
- or alternatively keep the quota as it is but
extend its applicability to those professions such
as lawyers that have better lobbyists than the
unfortunate research scientists. That will ensure
that US university entrants can choose their field
of study based on their abilities and interests,
and not on whether or not graduation will plunge
them into competition with the teeming millions of
India and elsewhere.
The world is not
flat; it was flattening but has now got lumpier
again. On the whole, that makes the scenery more
interesting and gives better protection against
storms.
Martin
Hutchinson is the author of Great
Conservatives (Academica Press, 2005) - details
can be found at www.greatconservatives.com.
(Republished with permission from
PrudentBear.com . Copyright 2005-07 David W Tice
& Associates.)
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