Shanker Singham: Busting a Free Trade Myth

Shankhar SinghamCritics of free trade generally complain that income disparity in the world has vastly increased—that globalization has led to vast and growing inequalities. The larger question is whether inequality is the right measure of progress. It is not.

Inequality, either within a country or between countries, is the wrong yardstick with which to measure progress. The proper benchmark is whether the lot of the poor is improving. And here the data is unequivocal. By all measures of mortality rates and health standards, billions of the world’s poor have been lifted out of poverty by rising global growth.

Some of the more enlightened critics accept this, but ask us whether we can do a better job with distribution. They argue that we are beyond the Darwinistic capitalism of free and unbridled competition, and can embrace a capitalism with a human face—a third way.

The problem is that any attempt to engage in this kind of redistribution has a tendency to cut off the very engine of growth. In practice, what does redistribution entail? One example might be to give fuel subsidies to citizens in order to lighten the energy cost load. Many countries have historically done this, even if it is, at present, a budget buster. The problem with a fuel subsidy is that it artificially encourages demand, thus increasing price in places where subsidies are not given.

The result is to increase price on a global basis as consumers in other countries pay for the inefficiencies of the subsidizing country. What then transpires is truly a race to the bottom: larger and larger subsidies, more inefficiency, and deadweight losses taking ever larger chunks out of the economy.

Indeed redistribution ultimately visits more inefficiency on the economy because, by definition, such redistribution interferes with the market’s allocation of factors of production. This automatically increases inefficiency and leads to an overall diminishing of the global pie. There is then much less to redistribute, part of a vicious cycle that continually shrinks the world economy.

This underlies the fallacy of the critics’ arguments. They evidently do not realize that economic interactions between people are non-zero sum in nature, and hence the global pie can be made bigger, or smaller. Redistribution can make the pie smaller. Ultimately though, when we are all poor the goal of equality will have been achieved.

There are many political and economic systems, which shall remain nameless here, that set out equality as a goal and achieved it by making everybody equally destitute and hopeless. Equality then is not the right measure of progress. The idea should be dropped from the lexicon of economic development.

 

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Shanker Singham is a partner in the economic regulation group of Squire, Sanders & Dempsey, LLP, where he leads the market access/WTO practice. Singham is also the chairman of the International Roundtable on Trade and Competition Policy, Inc. He is the author of
A General Theory of Trade and Competition: Trade Liberalization and Competitive Markets (2007, Cameron May).

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