Through the latter part of the 20th century, many of the world’s high-income countries embraced a market-centred approach to economic and social policy. Many low-income countries embraced the same approach, somewhat less willingly, as a condition of loans from the IMF or the World Bank.
Not surprisingly, this approach was reflected in regional and multilateral trade agreements. Agreements in this liberal age, beginning with the 1989 Canada-US Free Trade Agreement, moved well beyond traditional concerns with tariffs, quotas and other border measures, and began to deal with a wide range of public regulations and other public initiatives in terms of the “fairness” of their trade implications.
Unfortunately, the pay-off from this approach to economic policy has been less than stellar, especially for working people and the world’s poor. Economic growth has continued. But rates of growth have decelerated in many countries during the latter part of the 20th century, despite technological progress and a more highly educated labour force. Progress as measured by a wide range of social indicators like literacy and health has also decelerated. Inequality within and between countries has increased.
In many countries, working people have experienced high unemployment and/or stagnating wages. In Canada, where trade agreements have facilitated a significant opening up of the economy, average real wages have barely increased in 20 years, despite modest ongoing improvements in labour productivity. The same inability to capture the benefits of productivity increases has been true for American and, to an even greater degree, Mexican workers in recent years.
It is time to reconsider the general features of the road ahead. International trade will be important. But trade enthusiasts need to be cautioned on several points. First, the direction of causality between trade and growth is not as straightforward as “trade causes growth”. In fact, attempts to estimate the economic impact of trade liberalisation on growth show modest results. Also, there are few goods and services that require the entire global market to achieve the benefits of specialised, large-scale production. And anyway, the economic benefits of trade-induced growth are not automatically passed on to working people or to the poor.
It is also important to bear in mind the under-estimated role that trust and confidence play in economic activity. Theorising about market activity usually places all of its emphasis on the pursuit of individual interests. But when trust and confidence break down, the costs of economic transactions can skyrocket and economic activity itself grind to a halt.
The importance of trust has been underlined in the context of corporate scandals such as Enron, where purely commercial transactions are at stake. The difficulties in embedding market principles in Europe’s so-called transition economies may also reflect this need to cultivate trust relationships.
To state the obvious, it will be difficult to sustain trust relationships and support for an economic order that is not delivering benefits to the population at large. While the importance of trust has been emphasised in the work of the OECD that focuses on individual firms, the same truth holds for the economy as a whole.
Dynamic economies that are open are subject to continual “creative destruction” that enhances the positions of some while undermining those of others. Moreover, in much of the world, it is fair to generalise that “market failures” of one sort or another limit the prospects of distributing economic opportunities on a purely market basis. This is why all countries have employed non-market initiatives over the years to promote income and employment growth.
It is vitally important that countries retain the right to work out how they wish to share the benefits and burdens of adjusting to change. They also need the latitude to choose their own mix of public and private initiatives in order to promote their economic well-being. A democratic process for choosing the way forward is essential to creating a broad sense of trust and support for economic arrangements.
Unfortunately, many of the multilateral trade and financial arrangements now in place excessively constrain the development choices of low-income countries. Ironically, while these arrangements may serve the current needs of the high-income world, they would have curbed their growth in the past.
In thinking about new directions for the future, we need to consider reaching international agreements that combine openness to trade and investment. This means adopting national and international mechanisms that ensure a broad distribution of economic benefits (i.e. core labour standards and social protection), as well as recognising the right of countries to regulate the public interest, especially concerning health and the environment. It is also important that countries maintain the authority to balance public and private initiatives promoting income and employment growth.
*The Canadian Labour Congress is Canada’s largest trade union organisation. It represents 2.5 million Canadian workers. The Congress brings together Canada’s national and international unions along with the provincial and territorial federations of labour and 137 district labour councils. It is also an active member of the Trade Union Advisory Committee to the OECD. See links below.
©OECD Observer No 237, May 2003