Natural Resources

And the World's Top Priority Is… Free Trade?*

The fourth dispatch from the 2008 Copenhagen Consensus Conference

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Copenhagen, May 28—Trade is THE solution to poverty. Throw in international labor mobility, and we're well on the way to remedying any of the problems that money can fix—like controlling infectious diseases, providing electricity, clean water and sanitation, feeding people, educating women, and so forth. Or at least that's what Kym Anderson, an economics professor at the University of Adelaide in Australia more or less asserted in his presentation on trade and migration on the third day of the Copenhagen Consensus 2008 Conference.

Anderson looked at a number of econometric modeling scenarios and calculated the cost and benefits that would obtain from full trade liberalization under realistic assumptions derived from the current World Trade Organization's Doha Development Agenda negotiations. Anderson estimated that liberalization of global merchandise trade would mean an annual increase of $287 billion per year in global GDP, of which $86 billion would go to developing countries. This compares very nicely with the $104 billion in development assistance that the governments of industrialized countries gave to developing countries in 2006.

In other calculations, Anderson found that the long term effects of trade liberalization would be that global income in 2098 would be up to 10% greater than it otherwise would have been. The associated net present values from freer trade range from $50 trillion to $424 trillion. Consider that in 2007, total gross world product was $53 trillion. In other words, both the immediate and long-term benefits from free trade are enormous. Anderson reports benefit cost ratios ranging from 269:1 to 1121:1.

Allowing workers to move from developing countries to rich countries also provides big benefits to both. Anderson cites a World Bank study which found that annual migration from now to 2025 of 560,000 workers and their families from developing countries to rich countries would yield global gains by 2025 amouting to $674 billion per year in 2001 US dollars. Most of the gain would go to the migrants, but natives would gain $138 billion in benefits.

If the benefits are so great, why are governments squandering these opportunities and allowing world trade negotiations to verge on collapse? Poltics. Anderson notes that trade liberalization arouses opposition because significant groups in countries fear they will be the losers when their markets open, even though the whole economy will benefit. As Anderson observes, "Reform has political, and possibly employment, costs for politicians." Translation: Unhappy constituents will vote free traders out of office.

However, Anderson did find a free trade silver lining in the black cloud of the current world food crisis. Farmers from rich countries are making lots of money, so their governments might risk cutting agricultural subsidies and opening their markets to agricultural products from developing countries. (The new farm bill in the U.S. suggests that Anderson is a cock-eyed optimist.) In addition, as food prices have escalated, developing countries which are big food importers have slashed their tariffs, so they might take this opportunity make the lower rates permanent. Finally, Anderson also remarked on a synergy between free trade and illegal immigration. If the Doha negotiations fail, economic growth in many developing countries will remain sluggish and that means many more poor people will be seeking opportunities in rich countries.

Another session at the Copenhagen Consensus 2008 Conference was devoted to the challenge of women and economic development. Economist Stephan Klasen from the University of Gottingen in Germany cited the disadvantages that women still face, including lack of equal legal rights, education, weak access to market opportunities, and diminished political voice. For example, 60 percent of the 137 million illiterate youths in the world are girls. In many developing countries, laws make it difficult for women to own land and other property. And it is estimated that 130 million (17 percent) of all married women in developing countries would prefer to avoid pregnancy but do not have access to any form of family planning.

Klasen and his colleagues offered four solutions for consideration. The first is to improve girls' schooling. One promising program is conditional cash transfers (CCT) in which parents are offered a monthly stipend so long as their girl child remains in school. A program that would cover all eligible girls in South Asia and sub-Saharan Africa costing $32 per pupil annually could be funded with $6 billion. Another proposed solution would provide family planning support. Klasen estimated that a program that would avert 52 million pregnancies would cost $4 billion per year. To help women gain access to markets, another solution would expand microfinancing (making small loans). And a fourth option suggested by Klasen would legislate that a certain percentage of elected political officials must be women. Some research shows that female politicians tend to spend more government money on health care, education, and water supplies.

The tenth big challenge addressed by the Copenhagen Consensus conference was education in poor countries. The chief presenter was economist Peter Orazem from Iowa State University. Orazem argued that in developing countries the highest returns from education come from the lowest levels of schooling. In other words, schooling at an early age leads to further educational gains and higher worker productivity. He cited a survey of developing countries which found that each additional year of schooling boosted adult earnings by more than seven percent. In general, the completion of five years of schooling represents near assurance of lifetime literacy and numeracy. The World Bank estimates that would take an additional $9 to $36 billion annually to expand primary education to every child in the world.

Orazem and his colleagues decided to focus on primary school dropouts as the most cost effective way to meet the Copenhagen Consensus constraint of allocating an "extra" $75 billion over the next five years to useful programs. Why? Orazem gave three reasons: (1) We know there is a school nearby; (2) the parents were at least initially interested in schooling; (3) they've already had some schooling which means that they have fewer years to go to get through grade 5.

What solutions does Orazem propose? Two of them are similar to proposals made to meet the hunger and women and development challenges. For example, he notes that 28 percent of children in developing countries are malnourished. This increases the likelihood that they will not attend or remain in school. To correct this, Orazem suggests a program to supply micronutrients and deworming treatments.

Orazem is also a fan of conditional cash transfers to provide incentives to parents to make sure their children remain in school. And finally, schools in many developing countries charge fees which discourage the poorest from attending. When Uganda abolished its $16 primary school fee, thus cutting costs by 60 percent, the result was a 60 percent increase in enrollment. Vouchers can also be offered to pupils from poor families so that they can attend private schools. Orazem estimated that financing his proposals would cost $3.6 billion annually and would lower the fraction of developing country children failing to complete primary school from 23 percent to 10 percent.

In his perspective paper on education, Hebrew University economist Victor Lavy pointed especially to one very serious problem not addressed by Orazem—pervasive teacher absenteeism in many developing country schools. Unannounced visits to schools in Bangladesh, Ecuador, India, Indonesia, Peru, and Uganda found teachers absent 20 percent of the time. In India, it's 25 percent. And teachers are relatively well-paid in these countries with incomes generally three times the national average. Orazem acknowledged that one successful program reduced teacher absenteeism by providing them an additional stipend and requiring them to take a time-dated digital photo of themselves with students in the classroom everyday.

The data have been presented and the solutions proposed. Now the expert panel is pondering where in the world can we do the most good. To do this they are coming to a consensus on how to prioritize the 43 different solutions that have been made by nearly 50 different researchers to the world's ten biggest challenges. They will report their rankings on Friday.

Ronald Bailey is reason's science correspondent. His book Liberation Biology: The Scientific and Moral Case for the Biotech Revolution is now available from Prometheus Books.

Disclosure: Danish taxpayers are paying my travel expenses to attend CC08. There are no conditions placed upon my reporting.

*Well, having spent days listening and reading benefit cost analyses of proposed solutions to the world's biggest problems, free trade by far and away tops my ranking of solutions.
 
Update: The Copenhagen Consensus Youth Forum consisting of 80 college students from around the world announced their ranking on Thursday. I will compare it with what the experts announce Friday. One hint: the kids didn't rank free trade very highly.