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OECD Forum 2010: Trade, jobs and innovation

27 May 2010

Neanderthals had big brains. Several species of primates used tools and had elaborate social systems. But we invented shopping, and that meant we conquered the Earth, not them.

There, in a nutshell is the explanation of Homo sapiens’ amazing success, according to Matt Ridley’s latest book, The Rational Optimist . Or in a seashell. Archaeological evidence from around 80,000 years ago suggests that our ancestors stopped relying on whatever they could collect or kill in their own territory and started swapping local produce for imports from other areas, including luxury goods such as ornamental shells (although of course these may have had significant symbolic value).

As Ridley points out, this means that a single human had access to objects he or she couldn’t find or make. But they didn’t just swap steaks for necklaces. They were also trading services, and more importantly, knowledge. Even if all the members of the group didn’t understand a particular piece of knowledge, they all benefited.

As knowledge grew, so did specialisation. For example after the invention of agriculture, surplus production could be distributed by a new breed of specialist – the trader. Trade in turn encouraged innovation – from better alphabets and arithmetic in its early days, to insurance later on, to today’s global telecommunications networks.

Trade then, has always encouraged and disseminated innovation. What gets traded is changing though. As several panellists pointed out in this session, today finished products have only a minor share in world trade. With the globalisation of value chains, most trade is in intermediate goods – circuit boards, semi-finished products and the like needed to make other things. Unfortunately, trade statistics do not reflect the value added at each point along the chain.

This is one reason many people are worried about the rise of the emerging economies. They only see the “made in China” label, and while it’s true that the final product was assembled there, it was probably designed elsewhere and may contain parts and software from a dozen countries or more.

This multinational sourcing and specialisation means we all have access to far more goods, far more cheaply than ever before. But it also means that some traditional business can no longer compete. The panellists agreed that protectionism wasn’t the solution, for at least two reasons. Other countries would retaliate, and the country imposing the “protection” would actually handicap its own businesses by making inputs more expensive.

So the best way to strengthen employment and foster innovation is to open up to the world economy. But also to make sure that workers and firms have the capacities to take advantage of new markets and ways of doing things. This means investment in “capacity building”, a term that covers R&D and training, as well as physical infrastructures like ports or railways, and the less tangible, but no less important aspects such as business organisation and financial and legal institutions.     

The overall conclusion seemed to be that governments had resisted protectionism during the recessession, but that the temptation could re-emerge if recovery was slower than expected.

Useful links

OECD work on trade

How imports improve productivity and competitiveness

Trade, policy and the economic crisis

Why open markets matter

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