A New Model for Managing International Trade and Development , Part III

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In Development…
…only one road leads to Rome, Part 3
By Sid Eschenbach / The Rag Blog / November 14, 2008

To Rome… or to Ruin?

As a result of the application of their influence and power, the ‘structural adjustment programs’ pursued by the IMF, World Bank and other international agencies reflected corporate, not national agendas. In fact, the entire neo-liberal ‘free-trade’ approach represents a policy that will produce exactly the opposite results from those desired by the national entities.

The forced opening of fragile and underdeveloped manufacturing sectors to the onslaught of ‘free-trade’ international industrial giants pits David against Goliath, but this time David has no slingshot, and the outcome cannot be in doubt. In the name of lower prices, consumerism and market efficiency, developing nations are reduced to dependent colonies, exporting raw materials and importing finished goods, a policy that we have seen is a dead end policy, a policy of decreasing returns rather than increasing returns.

This is even true when manufacturing facilities are located in a low-labor cost nation, because the nation does not control nor own the factories… and as they can be and are moved on a moments notice, the nation can never develop any real leverage regarding wage productivity gains for the workers, or national ownership and participation.

That being the case, they represent a road that doesn’t lead to Rome, but to ruin. Therefore, a new trade and development paradigm must be developed to challenge the policies and practices of international policy makers as represented by the ‘Washington Consensus’; a new model that, as a product of its use, creates new and widespread national economic sectors of increasing returns, the condition that builds prosperous societies without creating a new, massive, or unwieldy regulatory framework to manage it. However, before we move to a new trade theory, one more element of economic well-being must be reviewed, and that is innovation.

Labor and Innovation

As I wrote at the start of this essay, “…it has been repeatedly shown that there is only one proven road to economic well-being, and that road starts with industrialization and ends higher worker productivity and innovation.” I have discussed the reasons that the road to prosperity of necessity passes through industrialization and higher worker productivity… but what about innovation? What role does that play?

Innovation is generally thought of as phenomena separate from both industrialization and productivity, driven by good education and free capital markets… but actually it is productivity’s little brother and industrialization’s child. The same obligations of management that drive the ‘efficiency wage hypothesis’ described above, the desire to cut costs and increase profits, is also the driving force behind innovation. Therefore, just as the search to lower costs is the driving component behind increased worker productivity as wages rise, the need to increase sales is the driving force behind increased innovation.

Innovative features on existing products, or wholly new products themselves, can do nothing but separate your product from the competition, thereby increasing total sales and profits. None of these things happen by chance or by magic, but rather they must and always do happen in a competitive, industrial, organized labor environment.

The issue isn’t which company will innovate and separate itself, but the simple truth that one or some of them must and will. Because of that central fact of the capitalist environment, we should be able to design a new manufacturing and labor oriented development paradigm that factors in the goals, motivations, rights and abilities of the new player, the global, stateless international corporations, and integrates their abilities and needs with those of the states and the people.

Ideas for a new Trade and Development Policy

Before I get into details of what a new international trading and development regime should look like, it might be best to restate the goals first, because as we have seen, it was the replacement of the original national goals with international business goals that has brought us to this point. Therefore, these are the fundamental elements of what I believe any decent trade and development policy should deliver to each of the three parties involved: the people, the governments, and the businesses:

1. For the people, higher wages and wider employment.
2. For the government, greater tax revenues and greater political and social stability.
3. For business, a fair, level and universal platform on which to compete, whether globally or nationally.

The People

Taking them one at a time, we have seen that wages can only be raised when productivity is raised... and that can only happen in an industrialized society as a byproduct of higher worker productivity. Beyond that, and because most industrial companies are not run by the likes of Henry Ford, we must recognize that the economic benefits of increased worker productivity are usually not passed on to labor willingly, but held as increased profits by management.

That being the historical truth, we must then accept that organized labor is not an option but a requirement in any future development paradigm. As pointed out earlier, historical periods when there was a balance of the countervailing forces of capital and labor were the most prosperous periods, so we must accept as fact that the benefits that organized labor brings to society more than offset whatever problems they present. So, from the people’s point of view, the new model must:

• Create national economies that grow at rates higher than that of population, and create new, middle class jobs.
• Guarantee the rights of industrial workers to organize and share in the benefits of higher productivity.

The Government

Second, from the governmental point of view, a new trade and development policy cannot demand the creation of costly new bureaucracies. It cannot be based upon ten-thousand page international ‘trade’ deals that take longer to negotiate than the time it takes for new technical or financial conditions to overtake them and render them useless.

Bi- or tri-lateral treaties between willing nations, of course, cannot and should not be excluded, but they should not be the general trade model. The new model should be able to be implemented unilaterally. Most importantly, it should be a model that does not represent a race to the bottom and present national leaders with a set of equally unpopular choices, destabilizing fragile governments and encouraging abuse and corruption. On the contrary, it should be a policy that can be easily explained to any population, and readily seen as in the national interest while not at the national expense. Furthermore, it must be politically viable in any setting, as it must help all nations on their road to prosperity, rich and poor.

Therefore, a new policy must:

• Not cost any government in creation or operation more than it is worth
• Be easy and simple to negotiate and implement
• Be clearly beneficial to the mass of the people in order to increase national socio-political stability
• Allow for unilateral implementation if desired
• Encourage poor nations to develop a protected sector of increasing returns and innovation
• Maintain the existing sectors of increasing returns and innovation in developed nations
• Help rich and poor nations alike.

Business

Lastly, it must be fair from the businesses point of view. It must not create or foster an adversarial ‘friend/enemy’, ‘us/them’, ‘national polity/international business’ division and discord. While the interests of the stateless global business may be historically new to the scene, they’re certainly not inherently detrimental, nor are they leaving any time soon. Therefore, they must be seen as a component of the solution, not the creator of the problem.

One of the major problems with the current WTO model of globally negotiated deals is that the very essence of them is to legislate and protect particular national or corporate advantages … which is why they are not only immensely complex and large documents, but indeed why the model itself has finally failed with the end of the Doha round.

Instead of a model whose intent is to legislate and protect inequalities, the new model must be a system that does not create opportunities that can be exploited by any of the three parties; not by governments, not by businesses, and not by the people. Specifically, it must aim to build a uniform floor under labor costs, the greatest single variable cost advantage and the dominant driver of all ‘off-shoring’, particularly in developed and prosperous countries.

It must be a system that tends and trends towards equality as a function of its operation, and that makes it impossible for any company to take a labor cost advantage over another by abusing the poverty of a particular region that for any reason it has access to. There will always be disparities in labor costs. However, the effort should be to lift the poor into the middle and consuming class, not exploit the situation and maintain a state of desperate poor.

The huge labor surplus that exists in the world today provides the fuel for this race to the bottom. This creates a situation where for competitive reasons many companies must meet the lowest labor price available at any given time in order to ensure their own survival. To prevent this, a floor must be built under these labor costs that over time will trend towards parity, not more and greater inequality.

If the rise in labor costs is shared by all producers, there is no competitive advantage to any. Therefore, a new trade and development policy must, to the degree possible, tend and trend to equalize labor costs internationally so that companies are no longer required to shop for the poorest and most desperate workers in order to maintain the viability of their business.

For all of the reasons above, from the international businesses point of view, a new development and trade paradigm must be only one thing

• Simple, fair and internationally uniform

Sidney Eschenbach, 60, lives and works in Guatemala, Central America. His thoughts regarding developmental economics and trade are based on decades of development work in Latin America at various levels, community and corporate.

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