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Thursday, October 16, 2003

At the Asia Summit of the World Economic Forum: Part II

Eddie Lee has also been attending the WEF, although with some rather different priorities:

Attended one of the discussions on trade at the WEF held here in Spore and found an opportunity to slot in some talk on immigration, alan winters and edward hugh.

Yes, andy xie’s piece on property and savings is important. Property plays a big role. But I wonder again what the structural reforms really are. How to reduce the property value to income ratio and what are the consequences? In the end, the results are the same, they are a deflationary force. The one unusual thing I’m feeling right now in this current economic recovery is while the stockmarket is rising, and economic activity is lifting (somewhat), but the property market remains sluggish. It’s unusual because in all previous economic recoveries I know, the property market tends to pick up quite quickly. So is this a good signal (property value rein in, housing is affordable) or bad (lack of long term confidence)?

I have no easy answer to Eddie's question. Only time will show. And meantime Eddies' latest piece for the Straits Times, straight from the WEF:

How vital is free trade? Frankly, it's overstated
By Eddie Lee

Trade talks get the headlines. There's a reason: What's at stake appears to be nothing less than the key to economic prosperity. If anybody had an insider's view of the acrimony that led to the breakdown of the trade talks in Cancun, Mexico, and the likelihood of fences being mended, it was Singapore's Trade and Industry Minister George Yeo, the World Trade Organisation's facilitator for agriculture. But at the World Economic Forum East Asia Summit on Monday, he held little hope that there would be any progress over the next two years. As he described, 'once a bomb has gone off, you can't put it back'.

Philippine Agriculture Secretary Luis Lorenzo called on the United States to exercise leadership in the quest for global free trade, quoting former US president John F. Kennedy's inaugural address in 1961: 'If a free society cannot help the many who are poor, it cannot save the few who are rich.' In fact, the last time a series of global trade talks could be called a huge success was the Kennedy round in the early 1960s. But in the past two decades during which economic integration has occurred, it has been within regions. The two big success stories have been the European Community and the North American Free Trade Agreement.

And the next big story is Asia. In contrast to Cancun, the recently concluded Asean summit in Bali was almost euphoric. The Asean vision, dubbed the Bali Concord II, intends to turn the 10 Asean states into an integrated, tariff-free trading and economic community by 2020. Indonesian President Megawati Sukarnoputri said: 'We have just witnessed a watershed in the history of Asean. It will make it possible for our children to live in enduring peace, stability and shared prosperity.' But it may become inevitable that countries become more restrictive against trade from outside the bloc, with the result that the global economy ends up diverting world trade from between blocs to within blocs. Trade may grow, but it'll be largely within trade blocs.

Sure, trade blocs could eventually be the building blocks of global free trade. But don't hold your breath. The importance of free trade and protectionism's evils tend to get overstated. Protectionism, for example, did not cause the Great Depression of the 1930s. Many respected economists and economic historians have argued this. US economist Paul Krugman calls it the 'dirty little secret in international trade analysis'. The costs of protectionist policies are not that large. In theory, the costs arise from resource misallocation. How large the costs are is an empirical question. Estimates for developing countries rarely exceed 5 per cent of the country's gross domestic product. Put another way, these estimates suggest a protectionist country, by moving to completely free trade, would get a one-time economic boost equal to the growth China achieves in about half a year or so. Now, I'm a free trader at heart, and I'm not arguing for protectionist policies. But the impact of trade in economic debate has often been exaggerated; other aspects of globalisation, like immigration and capital flows, are more important.

This is a point Harvard economist Richard Freeman highlighted in his September Working Paper for the National Bureau of Economic Research in Washington. A consequence of the heavy emphasis on trade is that free traders have not agonised over the architecture of the global financial system as much as, for instance, they did over the risks of adding labour standards to trade treaties. And nobody asked for freer flows of immigrants. Now if you think about why trade is beneficial, it becomes obvious why the issue of immigration is more important. The economic rationale for trade is taking advantage of differences between countries. The bigger the difference, the more there is to gain. If movements of labour are liberalised, the mutual benefits should be great since developing countries have a larger number of young and less-skilled workers compared with developed countries with ageing populations.

But the issue of immigrants is always sensitive. Developed nations are often unwilling to accept Third World immigrants, resorting instead to temporary migrant labour. Mr Alan Winters, of the University of Sussex, estimates a temporary visa scheme that amounts to no more than 3 per cent of the labour force of the Organisation for Economic Cooperation and Development would yield economic benefits for both developed and developing countries of more than US$150 billion (S$260 billion) per annum. The main concern is that temporary migrants will lower wages and/or displace less-skilled workers of the developed countries. There are real adjustment costs. But as Mr Winters points out, the challenge is no different from that posed by imports of labour-intensive goods from developing countries. In the past, such competition was overcome by policies to ease adjustment among less-skilled workers in developed countries.

For example, the 1962 Trade Adjustment Assistance Act was established by the Kennedy administration as a quid pro quo for the wave of liberalisation that came on the heels of the Kennedy round of global trade talks. It offered loans and other assistance measures to support industries affected by liberalisation. There was also income support and training for displaced workers.

If you consider the average skills levels in a developed country must rise, it's clear its demand for and benefits accruing from immigrants with lower skills will increase over time. And as its population ages, higher-order skills will also need to be supplied by migrants. And in the latter area lies a rich irony, best summed up by economist Edward Hugh of the University of Barcelona: 'As we went up the (economic) cycle, we sucked them in; during the ride we trained them up. And now, on the way down, we have told them to pack their bags and leave for home. Advice they have meticulously followed to the letter, while taking part of the business back with them!' The Philippines' Mr Lorenzo may lament developing economies' restricted access to the agriculture markets of the West. But the developed economies will lament ignoring the issue of freeing up the flow of labour.
Source: Straits Times

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