Would free trade harm the rich?

Click to download the reoprt

Economists love sporting terminology. There’s the elusive level playing field and, of course, firms, even whole countries, are racing to stay ahead of the competition.

So, what kind of race is it when the starter’s pistol is loaded with live ammunition and he shoots one of the runners in the back? Try the cotton trade.

According to a new report from the Fairtrade Foundation, Benin, Burkina Faso, Chad and Mali – the C4 – produce cotton more cheaply than anywhere else in the world. They also rely on it more than any other commodity for export revenues.

But they can’t trade their way out of poverty because richer countries have subsidised their producers to the tune of $47 billion since the Doha Round of trade negotiations started in November 2001.

The C4 are trapped in a vicious circle. They’re squeezed out of markets by subsidies. That means they don’t earn the revenue that would allow them to compete – physical infrastructures like roads and ports or less tangible, but equally important competencies like managerial skills or legal knowledge. (The expression often used for this is “capacity building”. )

Lack of income also means they can’t move up the value chain, for example by investing in factories to make the cotton goods so much in demand around the world.

The OECD-WTO Aid-for-Trade Initiative aims to help developing countries overcome the  limitations that undermine their ability to profit from trade opportunities.

Useful links

OECD work on development issues

OECD work on trade

OECD work on agriculture

From wigs to riches: trade, employment and growth

Click to go to the summit website

In the early 1960s when the OECD was created, you could buy a portable TV for 150 dollars in the US, around the same price as you’d pay for an entry-level LCD television today.

But 60 years ago, an average manufacturing worker would have had to work almost two weeks to pay for it, compared with less than a day at present.

For many other products we use all the time, a comparison like this is not even possible, since they didn’t exist.

Trade played a major role in boosting the growth that allowed the world economy to grow by so much in such a short time. Apart from providing cheaper goods for consumers or bigger markets for producers, it helped to spread innovation and technological progress. 

A paper submitted to the G20 meeting in Seoul today by the OECD along with the ILO, World Bank and WTO argues that: “Countries that have embraced openness have been more successful in sustaining growth and moving up the development ladder than those that have not”.

Korea, the summit’s host is a good example. In the 1950s, that country was less developed than Sudan, and its main export was wigs made of human hair. Trade helped it to integrate the world economy and move up the value chain to become a high tech powerhouse.

And yet, trade is often blamed for destroying jobs and driving down wages. Is that true?

The paper estimates the impact on growth and jobs of lower tariffs and a reduction of other, less visible kinds of protection applied “behind the border”, such as product standards and administrative procedures that put importers at a disadvantage compared to domestic producers.

Even though the case of Korea is extreme, similar outcomes can be seen to a lesser degree more generally. In the 1990s, per capita real income grew more than three times faster for those developing countries that lowered trade barriers (5.0% per year) than for other developing countries (1.4% per year).

In fact, more openness would benefit all countries. Full liberalisation of trade in goods and services would help increase average real incomes in developing countries by 1.3%, and by 0.76% in high-income countries. Developing economies would benefit most, and not just the stars such as Brazil. The second wave of emerging economies, including Egypt, Thailand and Nigeria, would gain 3% to 6% of GDP.

The idea that trade destroys jobs and drives down wages, especially for the less skilled, doesn’t match the data either. If the G20 economies reduced tariffs and non-tariff barriers (such as import quotas) by 50%, employment of lower-skilled workers would rise by 0.9% to 3.9% over the long run depending on the country, and employment of skilled workers by 0.1% to 4%.

Wages would rise too, by at least 4.5% in the OECD countries in the G20.

So, all we have to do is open borders to the free flow of goods and services and all will be well? US president Harry Truman once implored his staff to find him some one-armed economists, because every time the lot he had promised him some good news, they always continued, “But on the other hand…”.

There’s another hand to trade too. First, it exposes economies to shocks like the recent recession that increased unemployment by 30 million worldwide (210 million today versus 180 million in 2007). Second, the gains from more openness can take time to materialise, and be spread thinly among the population, or, worse still, benefit only an elite. The pain from jobs losses is immediate and visible.

The answer is not to cut the country off from the potential benefits of trade, such as cheaper goods for consumers or bigger markets for producers. Governments should apply measures that help those hardest hit, both financially and to find a new job. In the wake of a recession, this is difficult because revenues are falling at the same time as needs are growing.

Moreover, in order to attract foreign investment, governments may reduce taxes on capital and increase spending on R&D and infrastructures at the expense of other public programmes, including unemployment and other benefits.

This means that an open trade policy alone will not solve all the problems. It has to be part of a package that includes labour policies, education policies and social policies to give everybody, and every region, a chance to share the benefits of trade, and build up financial reserves for the next time they’re needed.

Useful links

OECD Insights on International Trade

OECD work on trade

Smoke kills

Click to go to the 2010 World Energy Outlook

Cooking will soon kill more people in developing countries than malaria, tuberculosis or HIV/AIDS. That’s the shocking message from a chapter on energy poverty in the 2010 World Energy Outlook, released today.

Our colleagues at the International Energy Agency combined their projections of traditional biomass use with WHO figures on mortality. They estimate that if nothing is done, household air pollution from the use of biomass in inefficient stoves would lead to over 1.5 million premature deaths per year, over 4000 a day. Many of them are young children who are at home all day, breathing in the pollution from the stove.

Access to modern energy services, and better stoves, would change this. The IEA point out that 1.4 billion people in the world today don’t have access to electricity (other than costly batteries). That number will drop by 2030 thanks to general economic expansion, but only to 1.2 billion.

The Millennium Development Goal of eradicating extreme poverty by 2015 is unlikely to be met unless an additional 395 million people are provided with electricity, and a further 1 billion with clean cooking facilities. That would require an annual investment of $41 billion a year over 2010-2015, or 0.06% of global GDP. To achieve universal access to modern energy services by 2030 would cost $36 billion a year.

Another way of looking at it is that adding under 2% to electricity tariffs in OECD member countries would raise enough money to bring electricity to the entire global population within 20 years, while in the past year, the prospective cost of the additional global energy investment to 2035 to curb greenhouse-gas emissions has risen by $1 trillion because of the caution of the commitments made at the December 2009 Copenhagen climate change conference.

More generally, the world energy outlook to 2035 hinges critically on government policy action, and how that action affects technology, the price of energy services and consumer behaviour. For instance, consumption subsidies to fossil fuels in 2009 cost $312 billion, compared with  $57 billion in support given to renewable energy.

Removing fossil-fuel consumption subsidies could make a big contribution to meeting energy-security and environmental goals, including mitigating carbon-dioxide and other emissions. However, as  Nobuo Tanaka, Executive Director of the IEA said this morning at the launch of the Outlook,  “The Copenhagen Accord and the agreement among G20 countries to phase out subsidies are important steps forward. But, these moves still fall a very long way short of what is required to set us on the path to a truly sustainable energy system”.

Useful links

International Energy Agency

OECD work on green growth

OECD work on development

Defying fiscal deficits

Government budgets are under pressure as the recession and economic crisis continue to take a toll. The crisis has pushed public deficits and debt to unsustainable levels for many countries, OECD experts say, as weak economic activity causes tax revenues to dwindle, forcing crisis-embattled governments to borrow in a cautious market to pay for services and welfare, and in some cases, still limping banking sectors.

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Stop “AIDS orphan” tourism

Good intentions may end up harming them

Today’s contribution is from Professor Linda Richter of South Africa’s Human Sciences Research Council and the Global Fund to Fight AIDS, Tuberculosis and Malaria, based on a paper she has just published with Amy Norman of Queen Mary, University of London

The global perception that sub-Saharan Africa is experiencing a burgeoning AIDS orphan crisis, coupled with growing trends in volunteer tourism has produced a potentially high-risk situation for already vulnerable young children.  “AIDS orphan” tourism is one aspect of the global “voluntourism” industry selling an emotional connection with needy young children.

Programmes which encourage or allow short-term tourists to take on primary care-giving roles for very young children are misguided for a number of reasons.

Voluntourist contributions are often brief, so the work they can do is usually low-skilled. As a result there is a real danger of crowding out local workers, especially when people are prepared to pay to volunteer. These opportunities should be given to local youth, many of whom would be grateful for regular meals, some training and a testimonial to their work experience.

Further, volunteer work is costly to host organisations because of the large overheads needed to host voluntourists. Institutions frequently provide accommodation and meals, and staff are allocated to guide volunteers around and organise their activities.

Non-family residential group care (“orphanages”) in southern Africa has expanded, perversely driven by the availability of funds, and the glamour that media personalities bring to setting them up. However, many orphanages are not registered with welfare authorities as required by law, and most face funding uncertainties and high staff turnover, making them unstable rather than secure environments for children. Moreover, children taken in by orphanages are usually from desperately poor families rather than orphans – as seen in the case of David Banda in Malawi, adopted by Madonna.

Aside from economic and employment questions, there are serious concerns about the impacts of short-term caregivers on the emotional and psychological health of very young children in residential care facilities. The formation and dissolution of attachment bonds with successive volunteers is likely to be especially damaging. Unstable attachments and losses experienced by young children with changing caregivers leaves them very vulnerable, and puts them at greatly increased risk of psychosocial problems that could affect their long-term well-being.

Institutionalised children tend to manifest the same indiscriminate affection towards volunteers. After a few days or weeks, this attachment is broken when the volunteer leaves and a new attachment forms when the next volunteer arrives. Although there is little empirical evidence on children’s reactions to very short-term, repeat attachments over time, evidence from children in temporary or unstable foster care indicates that repeated disruptions in attachment are extremely disturbing for children, especially very young children.

Every available resource should be utilised to support families and extended kin to enable them to provide high quality care for their children. Out-of-home residential care should not be an option when support can be given to families to take care of their own children.

Children out of parental care have a right to protection, including against experiences that are harmful for them. In particular, they have a right to be protected against repeated broken attachments as a result of rapid staff turnover in orphanages, exacerbated by care provided by short-term volunteers.

Welfare authorities must act against voluntourism companies and residential homes that exploit misguided international sympathies to make profits at the expense of children’s well-being.

Lastly, well-meaning young people should be made aware of the potential consequences of their own involvement in these care settings, be discouraged from taking part in such tourist expeditions, and be given guidelines on how to manage relationships to minimise negative outcomes for young children.

Useful links

Statistics on aid in support of HIV/Aids control from OECD

Tourism Concern “fights exploitation in tourism and campaigns for more ethical, fairly traded forms of tourism” and is currently promoting a code of practice for international volunteering organisations.

OECD Tourism Trends and Policies 2010

Meta-Analysis of Development Cooperation on HIV/AIDS

Too embarrassed to go to school

Click to read the report

I stopped reading a biography of Einstein when the author explained that the Jews, like the Scots, placed a high value on education. “Fiddlesticks!” I muttered, “Everybody places a high value on education”. That was a few years ago. Last week, I had a doubt. A candidate in the US mid-term elections boasted in a campaign video that she didn’t go to Yale. (She didn’t go to Washington either, but that’s another story).

The Tunisian grocer across from my place was perplexed by this attitude too. He works from 9 in the morning until 11 at night, six days a week, to give his children a better life, and that includes as good an education as possible. He also sends money back to his family in Tunisia to pay for private tuition.

He’s not alone. As the latest UN Human Development Report points out, despite progress in providing universal access to education, there are huge disparities based on ability to pay. The good news is that the world’s population is better educated than ever before. In 1960, an average 15 year-old had four years of schooling. By 2010, this had doubled globally and more than tripled in developing countries, from 1.9 years to 6.4. The gender gap has been narrowing too, and has even been reversed in some cases: in the Arab States, there are now 132 women in higher education for every 100 men.

The improvement is associated with increased public funding in much of the world, up from 3.9% of GDP in 1970 to 5.1% in 2006 (and 1% a century ago). However, as you’d expect, these averages hide enormous differences. In sub-Saharan Africa, average state spending per student is $184 a year, eight times less than in Latin America, and forty times less than in developed countries.

The UN also point out that higher spending and enrolment don’t necessarily mean better schooling. For instance, grade 8 students in Indonesia scored just as well in mathematics tests as those in many Latin American countries, despite having only an eighth of the spending per capita.

Still, money can make a big difference. One of the downsides of expanded enrolments is that schools may not have the resources to cope with the extra numbers, hence the need for private lessons and a widening gap between students from different backgrounds. The UN report also stresses the social barriers to education poor students have to overcome. One 11 year-old boy described how he dropped out of school because he was too embarrassed to go bare foot after the teacher humiliated him for coming without shoes.

Similar trends are seen more generally outside education. The world population is healthier and wealthier on average than when the first Human Development Report appeared in 1990, but inequalities have been growing within and across countries, and some indicators have even got worse in certain areas.

Useful links

Meeting of education ministers at the OECD, 4-5 November

The educationtoday blog has contributions from particpants in the ministerial meeting

OECD Education Policy Forum: Investing in skills for the 21st century

Policies promoting education and training must go beyond employability

 

Encourgement, cooperation and sharing...

This post comes from Roland Schneider of the Trade Union Advisory Committee to the OECD (TUAC). It summarises TUAC’s submission to the meeting of education ministers taking place at the OECD today and tomorrow.

Education, training and learning have become important action points for trade unions across OECD member countries. Unions have spread the learning message in a variety of ways: through social dialogue and collective bargaining with employers, through taking part in the governance of vocational education and training (VET) systems; through innovation such as the establishment of union learning representatives providing support for workers in taking up training opportunities; as well as to insist that employers increase their provision of training and demand for skills.

TUAC’s submission to today’s meeting of education ministers at the OECD warns against taking an excessively utilitarian view of the purposes of education. It is essential to defend the broader value of education in enhancing the ability of individuals to contribute to the wider cultural, political and civic life.

Government policy on education must not neglect the right of all individuals to undertake learning as an intrinsically worthwhile activity. Policies to promote education, training and lifelong learning must go beyond a focus on employability alone; they must continue to be guided by a broad vision of the purposes and benefits of education.

A prevailing financing gap in education does not allow for spending to be slashed

As Education at a Glance 2010 points out, education is a large item of public expenditure in most countries. However, the data show that before the crisis most governments had not increased spending on education in line with growth in national income. Against the background of a prevailing financing gap in education, it was significant that the education sector benefited in many countries from the implementation of fiscal stimulus packages.

These packages provided important funds for investment in infrastructure, including educational buildings, as well as in training. However, the shift to austerity policies raises major risks. The challenge of making public finances sustainable must not be taken as an excuse to cut education spending. Students can’t acquire world class skills in ill-equipped, broken and battered schools, staffed with poorly paid teachers. Public spending on education has large and rising benefits for individuals as well as for society a whole.

Budget cuts in education would have large adverse consequences on institutions, staff and quality of education provision through reductions in teaching and support staff, reduced availability of teaching and learning materials, larger class sizes, suspended construction projects and less maintenance of buildings. Moreover, it would disproportionately harm those who are most vulnerable by creating new barriers for the disadvantaged.

OECD work on vocational education and training must go beyond employability

Another challenge to be addressed is to base skills policy on more realistic expectations of what can be achieved. An open and honest debate is necessary about how education and training policy can contribute to sustainable growth, decent work, social justice and inclusion. Vocational education and training policy cannot focus narrowly on the supply of skills, assuming that skills, once created, will automatically be utilized to their full potential.

Governments must attempt to integrate VET policy into a wider package of contextual factors and determinants that shape the formation of skills as well as their use. VET policy must in particular take into account the workplace and industrial relations context in which skills are created and mobilized and thus ensure union involvement in the design and implementation of training policy, as well as in the assessment and subsequent revision of curricula. Governments must also tackle underinvestment in training by employers by encouraging them to increase the levels of investment and commitments regarding skills development and training.

Blaming educational underachievement on teachers is dangerous

Qualified teachers must be at the heart of any educational reform. There is no doubt that the quality of teachers is an important in-school factor determining learning outcomes. However, it’s not the only one. There are also many factors, like the quality of school leadership, the quality of the curriculum and last but not least teacher collaboration.

Blaming educational underachievement on teachers is aiming at the wrong target. It distracts attention from other equally and likewise important school areas in need of improvement. Personnel management of teachers, based on an inappropriate evaluation systems is likely to undermine the morale and commitment of teachers, to discourage them from working with those with particular learning needs and causing many to leave the profession. At the same time, it will prevent others from entering the profession. (more…)