In defence of globalisation: The moral and liberal case

Recently, in an article published in Businessday of 26th and 27th August, 2014, I reviewed a lecture that Dr Kingsley Moghalu, Deputy Governor of the Central Bank of Nigeria (CBN), delivered on Africa’s development in July at the London School of Economics (LSE). My aim was to present a competing paradigm to the one proposed by Dr Moghalu, and, more importantly, to encourage a debate on the vexed issue of Africa’s response to globalisation. The article provoked passionate responses, including two rejoinders in BusinessDay of 3rdand 4th September and of 18th September.

I welcome the responses as valuable contributions to the debate, but was struck by the protectionist and anti-globalisation sentiments writ large in them. Some would want us to “abandon theory and confront reality” on the basis that the developed countries protected their economies when they were starting out. And some still do today. So, Africa should protect its own markets too. But this type of argument defies a simple Socratic principle of reasoning: the correctness of a statement cannot be determined by whether it is held by a majority.

When Britain pursued a policy of unilateral free trade in the 19thcentury, its decision was based on an intellectual conviction that it was the right thing to do; that protectionism was a “complete folly” which “brings its own punishment”. So, it does little credit to the quality of the debate on globalisation to argue that Africa should protect its economies simply because some countries did in the past or are doing that now. Whether protectionism or openness, Africa’s choice should be motivated by a cerebral faith in the economic virtues of one or the other.

At this point, it is important to stress that ideas matter. Indeed, as John Maynard Keynes put it, “the world is ruled by little else.” For instance, the tone for policy-making is often set by the economic ideas or beliefs held by decision-makers or their advisers. And it is precisely because ideas matter that we should not allow bad ideas to drive out good. Unfortunately, in the debate about how Africa should respond to globalisation, the anti-globalist and protectionist sentiments are dominating the public space. The voices of economic liberals are not heard often enough, but, in the public interest, they need to.

Critics of economic integration often display such a visceral hatred of the term ‘globalisation’ (some call it “evil”, others “oppressive”) that one wonders if they understand what it means. However, once the term ‘globalisation’ is disaggregated into its different varieties, the critics often show some selective judgments that betray their inconsistency. So, let’s separate globalisation into its different forms and see what the anti-globalists would make of each type. The key types of globalisation are international migration, foreign direct investment (FDI), portfolio investment (i.e. short-term capital flows), and international trade.

Take international migration. Virtually all African governments and people now look upon outward migration as overwhelmingly beneficial. Earlier concerns about “brain drain” has now been replaced by what the India-born economics professor at Columbia University, Jagdish Bhagwati, called the “Diaspora model”, based on the notion that having your own people in the rich countries works to your advantage. Indeed, many African governments now have policies aimed specifically at harnessing their Diaspora. In a recent study on poverty traps, two World Bank economists, Aart Kraay and David McKenzie argued that “the strongest evidence for a poverty trap at an individual level is the one based on country of residence.” And to tackle what they referred to as “geographic poverty trap,” they called for policy efforts to lower the barriers to international mobility. One of the issues African countries are pushing for in WTO negotiations is the operationalisation of “Mode 4” of the General Agreement on Trade in Services (GATS), which relates to cross-border movements of natural persons. Even the anti-globalists will welcome the opportunities for Africans to study and work overseas. So, globalisation-induced outward migration is not a problem for the anti-globalists.

What about foreign direct investment? Again, views have changed significantly here. Inward FDI is no longer regarded as a tool of neo-colonialism. All African governments now view the inflow of FDI as a mutually beneficially phenomenon, and are actively taking steps to attract foreign direct investments into their country. For instance, for several years now, Nigeria has had a standing International Investment Advisory Council, chaired by British Baroness Linda Chalker, and many other African governments have similar bodies.  Leaving aside the issue of the social corporate responsibility of multinational corporations, which has nothing to do with globalisation, even the anti-globalists would have a positive view of FDI. And so do the majority of Africans. According to the US-based Pew Research Centre’s 2014 Global Attitude survey, “African countries are the most supporting of foreigners investing in their economies, with 85 per cent of those surveyed seeing FDI as positive.” So, again, the anti-globalists would support globalisation-driven inward FDI.

As for portfolio investment, it is arguably the only globalisation process that poses truly serious problems, given the speed at which capital can flow in and out of a country at the whims of the markets. Yet, most African governments and people would want to attract capital into their economy. Even the anti-globalists know that if capital is not coming into their country their currency would plummet in value, hurting the economy. The same Pew Research survey found that 57 per cent of the Africans surveyed supported portfolio investment, with 66 per cent of Kenyans and 68 per cent of Tanzanians viewing it as beneficial.

Now, let’s do the maths. Of the four key varieties of globalisation, the anti-globalists would support three – international migration, foreign direct investment, and portfolio investment. That leaves trade liberalisation. Even with international trade, virtually all African governments and people will support the export component. Just think about the endless streams of export promotion measures that African governments are introducing so as to export more of their country’s products. So, let’s revisit the maths. Assuming now that there are five varieties of globalisation, treating import and export as separate types, even the fiercest critics of globalisation in Africa would support four of these, namely – international migration, foreign direct investment, portfolio investment, and export.

Obviously, therefore, when most people criticise globalisation, it is import liberalisation they are worried about. Like the mercantilists of old, their mantra is “export is good, import is bad.” They blame imports for all sorts of evil: factory closures, job losses, falling wages.

But here again lies the ignorance. Technological progress and trade openness are the two key drivers of globalisation. However, if you ask the anti-globalists to choose between technological advancement and trade liberalisation, they would probably choose the former. Yet, several studies have shown that technology causes more havoc to industrial jobs and wages than trade. As the Nobel Prize-winning economist, Paul Krugman puts it in his book, Pop Internationalism, “industrial workers are losing their jobs more because of technological change than because of foreign competition.” A company is likely to suffer because it cannot adapt to new technologies or because its workers lack the relevant education and technical know-how than because of foreign competition.

There is either ignorance or hypocrisy at play in the debate about globalisation. If the anti-globalists hate globalisation so much, they should, like the Luddites, oppose technological progress as well. In fact, they should oppose all varieties of globalisation. But instead they want globalisation a la carte, and choose trade liberalisation or, more specifically, import liberalisation, as their pet hate. Of course, they are motivated by ideology and special interests and do not speak for the people. The most recent evidence of the attitudes of the African publics to trade liberalisation shows that the majority of Africans support trade openness. According to the Pew Research Centre’s Global Attitude survey, published on September 16, 2014, “the benefits of trade are strongly appreciated in African countries,” with a median of 87 per cent of those surveyed in Africa saying trade is good for their country. Therefore, the anti-globalists are not only misinformed about the nature of globalisation, they are also out of touch with public opinion in Africa.

Of course, we should not base the case for economic openness or globalisation only on the results of some surveys. We need to build the case for trade openness on solid intellectual arguments about its values and benefits.

The intellectual case for economic openness

Throughout history, several economists, from classical ones, such as David Hume, Adam Smith, John Stuart Mill, and David Ricardo, to modern scholars, such as Paul Krugman, have made a strong economic case for free trade. The economic arguments focus on the static (direct) and dynamic (indirect and long-term) gains of trade. On the static side, trade openness and the competition that this engenders in the domestic market enable firms to allocate and use resources more efficiently as they specialise in what they are really good at.  At an aggregate level, trade liberalisation will prevent a wasteful diversion of resources and allow a country to better allocate resources so that the more productive sectors, such as export, can grow and expand. Clearly, an export-oriented country would favour trade openness.

The dynamic effects of trade liberalisation are even more important than the short-term ones. The dynamic gains from trade relate to its impact on technological transfer and productivity growth, on the one hand, and economies of scale, on the other. David Hume viewed trade liberalisation as “a conveyor belt for the transmission of ideas and technology across borders.” As individuals and enterprises are exposed to international trade, they can spot and then imitate better practices, which lead to improvements in their productivity. Trade, of course, also widens the geographical extent of the market, which enables enterprises to reap economies of scale and increase productivity.

When I see African private banks, such as Zenith Bank operating branches in several foreign countries, or African private airlines, such as Arik Airline flying from London and other world capitals, I see globalisation in action. The shareholders of these companies will be richer for the global reach and the companies themselves will be more productive as they are exposed to new ideas and new technologies. And as more African enterprises, including those in the manufacturing sector, are integrated with the world market, this will, in the aggregate, lead to overall economic growth. However, such outward-facing approach is not compatible with protectionism at home. A country cannot promote export while restricting import at the same time: exports and imports are interdependent.

Now, the economic gains of trade openness are fairly well known, it is the “non-economic” benefits that are often overlooked. Yet, as John Stuart Mill pointed out, “the economic advantages of commerce are surpassed in importance by those of its effects which are intellectual and moral.”  These moral and liberal benefits relate to individual liberties, consumer welfare and the prosperity of the people, and the effect of trade openness on domestic institutions.

At the heart of the liberal case for economic and trade openness is the idea of individual freedom, what Adam Smith referred to as a “system of natural liberties” in his book, ‘The Theory of Moral Sentiments.’ Indeed, for Adam Smith, natural liberty is the bedrock of free trade. Other classical economists, such as David Hume and JS Mill, also made the case for individual economic freedom on the basis that legitimate voluntary exchange in the economic realm, including the freedom to trade, is an inalienable human right.

These ideas still resonate today. When a government imposes tariffs on imports, except for reasonable revenue generation, or when it bans imports, other than as a legitimate and proportionate response to national security and health and safety concerns, but to protect special interests, it undermines the equal freedoms and property rights of its citizens. An African president once declared: “We are certainly going to ban more products. The idea is to protect our local industries and boost our manufacturing capacity substantially.” This was a threat to the individual economic freedoms and human rights of the citizens.

Several African governments have wide discretionary trade policy powers and many use administrative fiat to regulate foreign trade. For example, some African countries publish annual import prohibition lists; powerful individuals would then bypass officials to secure waivers from Ministers or even the president. Protectionism is, of course, inherently arbitrary and opaque while free trade limits arbitrariness and the exercise of wide government discretion. So, those who care about individual liberties should seek to limit the discretionary trade policy powers of governments. History and experience show that a powerful and overbearing state in the economic realm is not compatible with a prosperous nation and people. A key lesson of the liberal case is that individual economic liberties increase the prosperity of the people and of the nation.

Now, the liberal case for trade openness is inextricably linked to the moral arguments. The first aspect of the moral case is about the impact of protectionism on living standards. The higher an economy’s productivity level, the higher is that country’s standard of living. If a government wants to reduce poverty and inequality it should increase the productivity level of its economy. And trade liberalisation has a powerful effect on productivity growth. The moral case also considers the welfare of the consumers. Protectionism denies consumers the freedom to exercise choice and buy goods and services at the cheapest price possible. When consumers are forced to depend solely on domestic production of goods and services, their rights to greater variety of goods, better quality goods and lower prices are likely to be affected. If consumers do not patronise or use local products, they are exercising their freedom to choose as the best judge of their own interest, and the government should not ban the importation of competing foreign products to protect special interests.  It is morally indefensible to force domestic consumers to buy any good or service at above its world price, as this reduces their real income.

Then, there is the intellectual case that trade openness enhances the quality of domestic institutions. Indeed, economic openness is strongly linked to better domestic institutions and rule of law. Countries that are more open tend to have strong market-supporting institutions, such as property rights, competition law, non-discriminatory trade rules, as well as an independent judiciary that protects the sanctity of legally binding voluntary exchanges, including international agreements. Between Nigeria and South Africa, the latter is more export-oriented than the former, beyond the export of commodities.  All the key indicators suggest that Nigeria is less economically open than South Africa.  For example, the 2014 Index of Economic Freedom ranked Nigeria 129th and South Africa 75th (out of 178 countries); the World Bank Doing Business rankings for 2014 put Nigeria on 147 and South Africa on 41 (out of 189), and the 2014 World Economic Forum Global Competitiveness report ranked Nigeria 127th and South Africa 56th (out of 144).

Nigeria, of course, has a reputation for trade restrictions, with its traditional practice of banning imports to protect domestic industries. The IMF said in one report that Nigeria’s trade policy regime “is one of the most restrictive in the world.” It also has a reputation for relatively weak market institutions, including in relation to property rights and contract enforcement. During a visit to the then Ministry of Commerce in Abuja, in December 2003, a director told me that although Nigeria had signed many bilateral trade agreements, “most of them are simply not being implemented.” Many of Nigeria’s business laws predate its independence in 1960. This is not the attitude of a country that wants to be seen as a serious trading nation beyond the export of commodities.

But economic openness is a key driver of domestic institutional reforms. Once a country makes a commitment to economic openness and integration, it is inevitable and, indeed, imperative, that it must have the appropriate legal and institutional framework to support its integration into the global economy. As Martin Wolf, chief economics commentator at the Financial Times, rightly pointed out in an interesting paper, “globalisation does not make governments powerless or unnecessary.”  On the contrary, governments must be ready to provide proper regulation and governance to ensure the efficient functioning of the market, but not to undermine the market. The classical economists, especially Adam Smith, particularly stressed the role of institutions.

Of course, trade openness can create a few losers in the short-term. Part of the role of governments is to find ways to help the losers without resorting to protectionism. Often the best way to assist the losers is through education and training so that workers can acquire the skills needed to change jobs. Governments should also make it easier for enterprises to compete in the first place by reducing the costs of doing business and ensuing macroeconomic stability. But it is not job of governments to prop up unproductive and uncompetitive industries through protectionism.

The intellectual case for globalisation is compelling. The traditional economic arguments remain valid today, and the liberal and moral case is equally, if not more, compelling.  As David Hume pointed out, “the public becomes powerful in proportion to the opulence and extensive commerce of private men.” Africa has nothing to fear from globalisation. It is an opportunity to transform the continent and enhance its economic and social wellbeing.

 

OLU FASAN