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Inevitability now

22 September 2003

The emergence of a new identity among the less developed countries at Cancun sends a signal that the introspective mega-economies of the West will ignore at their peril.

This Column recently addressed the concept of inevitability, and how policy-makers should respond to a situation in which the inevitability of a certain outcome could be discerned. Is it better to embrace it early on, to get ahead of the game; or is it better to fight a rearguard action in the hope of postponing an undesired outcome for as long as possible?

Last week's trade talks at Cancun collapsed in a storm of multilateral mutual recrimination over what amounted to a failure to agree on precisely this point. The spectacle, of the U.S. and the E.U. in permanent buck-passing mode over the question of who should be blamed for the protectionism and agricultural subsidy that destroys developing country markets while barring access to their own, reveals deep feelings of guilt on both sides. But this guilt is not inspired by the hypocrisy of preaching free trade while practising protectionism; still less is it inspired by the actual suffering that these policies cause in poor countries. The guilt is more self-interested than that, originating in the knowledge that these rich-world policies are pork-barrel politics, bad for the countries that practice them and unsustainable in the longer term.

In developed countries subsidies flow rarely to innovation. When they do they are small, and carefully targeted. The big money goes to loss-making heavy industry or to pay for agricultural production that otherwise could not compete. The sheer cost of such efforts is grossly disproportionate to the local benefit that flows from it. It distorts the market and raises consumer costs, diverts funds into an investment dead end and, in consequence, takes resources away from economically more productive activity. It also stunts the economic activity of developing producer-countries, which in turn depresses demand in those countries for the high-end technology and services at which the rich countries excel.

Like junkies, the U.S. and the E.U. know that they shouldn't, but since they can't stop themselves they blame each other, close their eyes to the future and hope for the best in a classic exhibition of the policy of "inevitability postponed". It is a policy likely only to accelerate the arrival of the outcome that it fears. For, in clear reaction to this intransigence, developing countries at Cancun at last showed signs of giving up on the position they have for so long been encouraged to adopt. That posture implied a vestige of colonial cringe - the supplication of the poor man at the gate who believes in benevolence. The hope has been that if the developing countries hang in there long enough the inevitability of the inevitable will eventually cause it to come to pass, and the promised benefits to flow.

The negotiations at Cancun have reminded the populous developing world that asking is not enough. What can be seen emerging in the face of their "always jam tomorrow" experience is a stand-point for which the slogan might usefully be "inevitability now". In adopting it, these countries are seeking to draw attention to a more distant but no less inevitable picture of future economic development that the developed countries find it convenient to ignore. It is a picture that can be expected to feature increasingly prominently in future discussions about world trade.

It is this shift in emphasis that lies behind the significance attached by many commentators to the emergence of a negotiating bloc uniting the positions of China, India and Brazil. These three countries, it is pointed out, together account for getting on for half the population of the world. From a certain point of view it is hardly necessary to go further than that to make the point.

The point is, nonetheless, worth spelling out. In a peaceful, technologically-developed world, economic activity is driven by consumers. It was not always thus. In the early phase of industrialisation, when technology transfer was relatively slow, the technology-owning producer was able to capitalise on an almost limitless market for his manufactured goods. It was how the original workshop of the world financed its sprawling global empire, the decline of which mirrored the relative economic decline that accompanied the transfer of that technology to hungrier, more innovative and, ultimately, more productive economic groups.

Technology now ensures that a European or U.S. widget-maker can easily buy machinery to manufacture widgets more abundantly and at a lower unit cost than before. His decision to do so depends entirely upon the size of his market. If he invests and fails to sell his production, he will go to the wall; but if he does not invest, his higher unit cost and relatively small production makes him vulnerable to anyone else for whom the required investment can be made to pay. Whether or not a market does exist for his increased production depends increasingly upon the attitudes of the populous, developing countries to the terms of trade that they are offered. And when a lower cost competitor does emerge, it is likely to be in just such a country that he will be found.

This is the story of the decline of manufacturing industry across the developed world - the transfer of production to markets where costs are lower and where, eventually, the home-grown market may even outstrip the export market that the industry has been set up to supply. Because of this, the developed countries, and especially the U.S., have worked tirelessly to protect their technological lead and to promote stringent intellectual property control. Their object is to prevent (or, at least, to slow) the dissemination of know-how and productive capacity to the less developed world and to ensure a reciprocal flow of royalties and licence fees when such transfer does occur.

It is the same spirit as motivated the E.U., in particular, to seek to open up trade, investment and procurement policies in developing countries. The long-term economic future of the rich countries depends upon things being done in the rest of the world in ways that suit their established economic and financial structures. The hope is that the developing countries will develop in ways that mirror those of their already developed patrons, thereby giving the patrons both a head's start and a competitive edge when it comes to investing in and profiting from the development process.

For its fulfilment this hope depends largely upon the willingness to co-operate of the less developed countries themselves. Since most of the technological advances that matter to them can now be replicated, that co-operation comes at a price. What poor countries want more than anything is fair access to rich markets for their low cost (mostly agricultural) produce. But if the cost of that access must be paid in other areas the real benefit may shade to nothing, in which case a go-it-alone attitude combined with genuine solidarity and co-operation on the part of the developing countries presents the rich countries with a real threat.

China, India and Brazil (among others) will consume, over the next few decades, vastly more cars, televisions, shoes, aspirins and teaspoons than the already over-provided (and one quarter the size) combined U.S. and E.U. markets can hope to. This is inevitable; even if the timing and speed of development is uncertain, they will get there in the end. Restricting the access of these countries now to developed markets and undermining them by the dumping of surpluses may slow things down a bit, but it may also give rise to a more independent model of development in which the rich countries have less access than they hope. So are the old economies now jeopardising their participation in the future for the sake of domestic agricultural policies of subsidy that are, no less inevitably, doomed to fade away?