This essay was submitted during my junior year of college for an essay contest at the John Glenn Institute. The question was "What is the most dangerous trend, in terms of globalization, to high-wage earners?" The original document was much longer and more comprehensive as it was a 20 page research paper (about 6000 words). I believe the page limit on this document was only 2000 words.
This document shows where I was a few years ago with my writting, and I can tell I have come a long way since then. In this essay are many of the elements of my maturing philosophy in thier infancy. I posted it because I put more heart and soul into this essay than any of my other writings in college, so it is basically the defining work of that era of my life.
Please note that much of the terminology is a little more intense than I would usually prefer. For example, I usually would not call what many politicians do "fear mongering." However, an essay for a competition needs a little kick to get attention, so it was added for emphasis.
The main idea is somewhat original. I have read much research which points out that it is in the interest of 3rd world countries for the so-called 1st world to eliminate subsidies. However, rarely do you see essays that argue soley that it is in the rational self-interest of 1st world countries as well. I emphasize "soley" because there is nothing original about the idea itself -- the originality comes from the idea to make it the principle thesis.
After reading this, check out this legendary speech by Ronald Reagan, where he discusses this issue during the 6th minute of the speech...
http://video.google.com/videoplay?docid=-1777069922535499977&hl=en
Enjoy!
--Josh
One of the most dangerous trends to high-wage earners—in terms of globalization—is the trend of democratic governments using globalization fear-mongering to justify manipulating the economy for their political advantage. Globalization is perceived as a threat to high-wage workers, because using the fear of globalization is advantageous for political leaders. Although there are some negative effects similar to any massive global trend, those negative effects are greatly out-weighed by the positive ones and are exaggerated for political gain. In practice, this trend has led to a policy of heavily subsidizing the agricultural industry. In order to reverse this trend, and prevent its effects such as lower standards of living throughout the world, the developed countries should work toward cutting off these subsidies.
From a purely economic standpoint, the justification for agricultural subsidies is that they "protect" this industry from globalization's negative effects, most notably the outsourcing of production in order to take advantage of lower foreign production costs.[1] However, this essay's analysis shows that agricultural subsidies have the reverse effect. These policies neglect the importance of market forces in fostering economic development.
This essay will outline how protectionist policies are threatening the future of high-wage earners in three main ways. First, they cost tax-payers/consumers enormous amounts of money that constitutes a massive misallocation of resources. This section will demonstrate the enormous scale of this problem and show just how much of an impact eliminating these subsidies will have on the developed economies. Second, subsidies stunt overall economic growth by going against the liberal economic policies that history shows are needed to grow the economy. Third, they create a form of hypocrisy that is diplomatically crippling to the United States. These large subsidies lead to surplus dumpings into the markets of developing countries, destroying their domestic agricultural industry and creating an area of contention between the countries. Without good diplomatic relations with these countries, resentment will grow and the developed nations will not be able to take advantage of the economic rewards developing countries offer.
Lastly, this essay provides causation as to why developed countries have subsidized agriculture despite the fact that it is not in their self-interest. In a democracy, it is the nature of economics that protectionist policies are politically advantageous despite the overall negative consequences. In conclusion, this essay offers a logical remedy to reverse this trend by removing agricultural policy from political pressures, similarly to how the Federal Reserve is so removed in monetary policy in the US.
1. Freeing up Money
Subsidies come at a high cost. Broadly speaking, rich countries spend about $1 billion dollars per day into agricultural subsidies.[2] In the US, significant reductions would be the equivalent to an $18 billion dollar per year tax cut and reduce the national deficit $20 billion per year.[3] The EU’s form of agricultural subsidies comes in the Common Agricultural Policy (CAP). CAP consumes half the Union’s budget and cost the average European family 1,200 euros a year.[4] The Japanese numbers are even higher.
Given this cost, one would assume that this form of commodity must take up an enormous section of the economy – this is not true. In fact, the opposite is the case because agriculture’s economic importance has consistently declined for decades. The sector's share of the global economy has fallen from its level in the 1960s from about one-tenth to one-thirteenth. Today in developed countries, it accounts for 1.8 percent of GDP and only a little higher than that in full-time employment. As for its share in global merchandise trade, it has gone from 22 percent to 9 percent. For developing countries, the decline has been even greater.[5] In fact, “…the EU, Japan, United States, and other wealthy countries spend $200-$300 billion annually to support agriculture. These subsidies are an order of magnitude equal to world agriculture trade!” [6]
In addition, agricultural protectionism is far less important given the ability of agricultural producers to produce far more than necessary. In fact, developed economies have serious problems with overproduction caused by subsidies which lead to massive surpluses.[7] The capacity of the world to consume food is drastically outweighed by its ability to produce food. [8]
2. Allowing for Overall Economic Growth through Liberalization
During the 1970s it became apparent that the Keynesian, welfare economics that were widely employed throughout the developed world were not working anymore. In an effort to determine what had gone wrong, the OECD [9] put together a commission of leading economists.[10] Their report, released in 1977, showed that governments had been undisciplined in implementing monetary policies in order to win the favor of their electorates. It suggested reimposing economic discipline and limiting public aspirations. In the US, government support was phased out of most industries except agriculture, largely because of the political access of this industry to political leaders.
Robert Keohane wrote in 1978, in a response to this report, that the entire problem was essentially an inherent conflict between the necessary conditions for economic growth and the nature of modern democracies.[11] Keohane showed how politically motivated government manipulation of the economy can be politically advantageous in the short-run, but have disastrous economic consequences in the long-run. As Robert Gilpin stated, "Many of the problems alleged to be the result of economic globalization are really the consequences of unfortunate national policies and government decisions."[12]
Liberal economic policies[13] have been seen for a number of years to be the most effective system for growth in developed economies because these policies take government out of the economy (with few exceptions) and allow the market itself to determine prices, supply and demand—often referred to as "the invisible hand." Perhaps Gilpin said it best when he noted that, "The concept of market as a self-regulating and self-correcting 'smoothly functioning machine' governed by objective laws and universal principles is at the heart of economics. Moreover, this concept leads to the conclusion that the free-market system, under certain circumstances and assumptions such as complete information and non-oligopolistic competition, leads to an optimal allocation of given resources." [14]
History has shown this philosophy to be correct, as deregulation has led to high economic gains in developed countries.[15] One enlightening case study of this exists in New Zealand where a highly subsidized agricultural sector in a developed economy was completely—and highly successfully—taken off subsidies. The result has been a flourishing economy and an agricultural sector that has become a point of national pride.[16]
3. Removing Diplomatically Crippling Hypocrisy
A major problem within the worlds primary international economic institutions (the WTO, World Bank and IMF) is the policies which push third world countries to lift their agricultural subsidies, consistent with the rationale that liberalization of economies is the best route to growth. However, these policies are not implemented in the agricultural sector of developed countries as well. This creates a situation where developed countries produce an enormous surplus, then sell their surpluses in third world markets at a price below cost, a process called "dumping." Consequently, the local farmers who are producing within miles of the market go out of business. Usually low prices for consumers are good, but only when the low prices are the result of market forces—not when they result from market distortions caused by subsidized imports which put genuinely competitive producers out of business.
This problem has been an enormous stumbling block at WTO negotiations for a long time. Many countries have asserted that they cannot negotiate until this problem has been solved. Most developing economies are dependent on agriculture for some sort of comparative advantage. Most recently, the Hong Kong round of WTO negotiations made virtually no progress, as neither side could find an acceptable compromise on this issue.[17] Meanwhile, countries such as Australia, New Zealand, Brazil, and Canada have created organizations such as The Cairns Group for the purpose of overcoming this trend.[18]
Developed countries have a high interest in third world economies growing and opening up, because it will create new larger markets for firms to sell to and often provide cheaper labor. Clearly this was the motivation behind NAFTA and the extension of the EU into Eastern Europe, among many examples. If the developed countries want to maintain a high standard of living into the future, we must have good relationships with these countries as they increase their importance and share of global markets. Further progress is nearly impossible with this double standard hindering negotiations.
4. Why Agricultural Subsidies Happen
Despite the fact that it is not in the economic self-interest of states and numerous arguments by economists, arguments made in support of protectionism constantly tend to prevail. This characterizes not only the agricultural subsidy debate, but also economics in general. Trade protection gathers small, easier-to-organize special interests, made up of individuals who are affected negatively in the short term by the new competition globalization brings in. [19] The forces of liberalization are much more difficult to mobilize, calling attention to the broad consumer interest and achieving small, unnoticed cost reductions that effectually foster overall market growth when added up.
For example, people may not get angry about price gains of 1 or 2 percent for consumer products. However, it is easy to imagine a few thousand workers becoming angry and mobilizing over job losses when a certain industry dies out because of changing market demands. It would not matter to them that statistics show per capita GDP and job turnover rates remain high in developed economies throughout transition phases. During liberalization processes there are always "winners and losers." However, experience has shown that individual interest groups do not realize or care that the losers are almost always outweighed by the winners.
In the US, exposure to political elites by these groups is often an example of the embeddedness of the economy in the political system. Many states in the US system are rural states with small populations, but they have equal access in the government. These rural special interest are very well organized and funded and they are supported by the government, which rewards leaders who are “farm-friendly.”
Politically motivated industrial policy is generally harmful policy. The idea of special interests having influence in the economy is something that most economists would argue should not be allowed. They would say that only a few “market failures” justify government intervention, such as monopoly, negative externalities, and consumer information.[20] They argue that the governments simply cannot pick winners. The only strong argument against this is the Japanese (East Asian) development model. However, the Japanese economy has been stagnant for over several years, and economists vigorously dispute whether it was governmental control that led to the former success of the Japanese economy. As Gilpin states, although its government protected industries well, it undoubtedly had many failures in “picking winners.”[21] As a World Bank annual World Development Report noted, as part of a two-part strategy to foster effective economies “improvement of the state’s effectiveness requires vigorous public institutions and includes 'restraints to check corrupt behavior' by public officials.”[22]
Conclusion
Since the problem is that political leaders use subsidies to gain political advantage, the logical solution is to move industrial policy further away from political pressure. Incredible difficulty results because elected officials would have to create the necessary agencies and would retain only oversight authority. Public officials rarely give up power at all—especially appropriations power. However, this has been done before most notably with the creation of The Federal Reserve in the US, which has control over US monetary policy. Politicians could still campaign on these issues, given their oversight of these agencies. If done correctly, once productive movement is made in this direction market forces will determine industrial policy and government intervention will be driven by developmental motivations as opposed to political motivations. Therefore, nations will be more secure that their policies will ensure continued high standards of living in the future.
[1] Economist make other arguments as well, this essay is narrowly focused on the economic questions.
[2] Is the WTO Legit? Watkins, Kevin. Foreign Policy. Sep/Oct2002 Issue 132, p78, 2p, 1c
[3] Regime Change for Agriculture: It’s time for Action. Paul J. Gessing. National Review. April 10, 2003.
[4] The Common Agricultural Policy: How the European Union Distorts Trade With Non-EU Nations.
Brian M. Carney. http://new.heritage.org/research/features/index/ChapterPDFs/chapter1.HTML#8
[5] Agricultural Trade Reform and the Doha Agenda. Kym Anderson, Will Martin. World Bank. http://wdsbeta.worldbank.org/external/default/WDSContentServer/IW3P/IB/2005/05/12/000011823_20050512121406/Rendered/INDEX/wps3607.txt
[6] Liberalizing Agriculture Trade and Developing Countries. David Orden, Rashid S. Kaukab, and Eugenio Diaz-Bonilla. Nov 2002. Carnegie Endowment for International Peace.
[7] These surpluses lead to “dumpings” on other poorer states that cannot afford to subsidize and have been forced by the WTO, IMF and/ or World Bank to open up their markets. This is discussed in section 3.
[8] Trade and Food Security: Conceptualizing the Linkages. Arvind Panagariya. July 11-12, 2002. University of Maryland. Prepared for presentation at the Conference on Trade, Agricultural Development and food Security: http://ideas.repec.org/p/wpa/wuwpit/0308012.html
[9] Organization for Economic Cooperation and Development. This organization works to create better trade relations between the world's 30 most powerful economies, such as the EU, China, US and Japan. www.oecd.org
[10] Towards Full Employment and Price Stability. Paul McCracken. 1977. Paris : OECD ; Washington, D.C. : sold by OECD Publications Center.
[11] This issue is discussed in detail in section 4 of this essay.
Economics, Inflation, and the Role of the State: Political Implications of the McCracken Report. Robert Keohane. October, 1978. World Politics 31, no. 1. 108-28.
[12] Global Political Economy. Gilpin, Robert. Princeton University Press. 2001. P 367.
[13] It is important to note that "liberal economic policies" in the academic sense are called conservative economics in the mainstream arena, as popularly attributed to Ronald Regan, Newt Gingrich and others.
[14] Global Political Economy. Gilpin, Robert. Princeton University Press. 2001. P 54
[15] This is a reference to the Reagan and Thatcher eras in the US and Britain during the 1980's. However, other examples abound in Hong Kong, Australia and many others.
[16] A thorough website from the Cairns Group which examines the New Zealand case study can be viewed at—http://www.newfarm.org/features/0303/newzealand_subsidies.shtml
[17] Hong Kong Ministerial Briefing notes. 2005. http://www.wto.org/english/thewto_e/minist_e/min05_e/brief_e/brief12_e.htm
[18] The Cairns Group. http://www.cairnsgroup.org/
[19] Global Political Economy. Gilpin, Robert. Princeton University Press. 2001. P 200
[20] Administrative Law and Regulatory Policy. Stephen G. Breyer, Richard B. Stewart. Boston, Little Brown, 1979.
[21] Global Political Economy. Gilpin, Robert. Princeton University Press. 2001. P 163.
[22] World Development Report 1997: The State in a Changing World. World Bank. Oxford University Press
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