Prosperity: The Trade Policy Instrument

The final instrument for addressing the problems of the poorest nations, given in Paul Collier’s The Bottom Billion, is trade policy. Collier acknowledges the complex ramifications of trade. He laments the good-intentioned but wrongheaded campaigns of so many activist and Christian organizations who cast freer trade as a conspiracy of large corporations to take advantage of the poorest nations. The support of these activists for trade barriers in the poorest nations is damaging to the people of the bottom billion.

Time and again, we’ve seen that when one or a few corporations rise to the top of an industry they tend to become stale and complacent. Domestic corporations that are protected from foreign competition have little impetus to innovate and improve. High tariffs on foreign goods shield domestic corporations from the pressure to evolve. Consequently, domestic consumers get lower quality goods and higher prices than they would if there were foreign competition. Generally speaking, when poor nations maintain high barriers to trade the weaken their international competitive advantage and actually make their citizens poorer in that they have to spend more for the same market basket of goods than they would otherwise.

Activists clamor for more aid and this is needed in some cases. But what is done with aid once it is received? Goods and services are purchased from elsewhere by the country that is ill equipped to provide for itself, which means they will need to import the goods and services.

Furthermore, high tariffs mean extensive involvement of government officials in the management of trade operations and tariff collecting. These circumstances provide opportunities for “entrepreneurial” officials to solicit bribes and pedal influence. It severally restricts the ability of an emerging nation to enter the global market.

There is craziness on the part of developed nations that damages trade as well. On one hand aid is given to poor nations for agricultural development with an eye toward creating exports. On the other hand both the U.S. and the E.U. heavily subsidize their agricultural production and restrict imported agricultural goods. This effectively blocks the agricultural goods they have been giving aid to develop.

Some champion the idea of “Fair Trade.” Collier maintains that the premium paid for fair trade products is really just a form of charitable transfer. There is not harm in people being charitable if they so chose. However, he worries that many fair trade projects gives incentives for people to stay doing what they are presently doing instead of diversifying or moving into new industries, which is precisely what is needed in many contexts.

Another, approach that has been tried is regional integration of markets. Collier discusses research that shows that this strategy only works in certain contexts. When most of the nations are reasonably wealthy, the poorer nations in the network will get the biggest benefit. However, when there are mostly poor nations, the wealthiest nation usually ends up with greatest benefit.

“Think of the European Union. Its common external tariff keeps out labor-intensive goods from poor countries. This creates opportunities for countries within the EU that have the cheapest labor, which are the poorest member countries. The middle, with relatively cheap labor, is protected from the very cheap-labor extreme. Now think it through for a scheme among the bottom billion. The common external tariff keeps out skill-intensive goods from rich countries. This creates opportunities for those countries within the club that have the most skills, which are the richest members. The relatively skill-abundant middle is protected from the very skill-abundant extreme.” (165)

Collier believes a significant portion of the answer for African nations lies in export diversification and intensification. While export business does nothing to increase productivity in developed nations, Collier’s research shows that it has a significant impact for the poorest nations. Competing and interacting in the global market quickly develops skills and knowledge that a domestic focus simply will not. Collier goes on to suggest that African nations should be given favored status with regard to tariffs over Asian producers for the present, until African nations get connected to the upward spiral the global economy.

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