July 19, 2001
The boss, President George W. Bush, got it right. On the eve of his trip to the G8 conference in Genoa, he stated that free trade, economic freedom, and grants rather than loans to poor nations should be a mainstay of the policies of the developed world. He also argued that other nations should follow the lead of the United States to find policies to stimulate their economies.
Three weeks before, Treasury Secretary Paul O'Neill used his photo opportunities in Europe to brag upon U.S. economic policies and suggest that enough had been done to ensure improving conditions worldwide in the second half of the year.
An opportunity to chide Europe on its restrictive monetary policies and to encourage Japan's new prime minister to move forcefully to resolve the banking problems in Japan was lost by O'Neill's international boasting about U.S. policy. Following the pollyannish Treasury comments, several countries in Asia and Latin America reported economic declines for their latest quarter and a currency crisis in Argentina nearly spread throughout Latin America.
Thankfully, President Bush provided a much more forceful statement about international economic policy in his latest remarks. To be sure, the activists will continue to seek headlines in Genoa as they rail against U.S. economic hegemony and the impoverishment of the world by large corporations. However, the President identified the right issues and presented the right tone (with the possible exception of the world's environmental problems).
World poverty can be addressed either by redistributing economic well being or by generating more well being (or a combination thereof). Unfortunately, significant redistribution leads to reduced effort by the most productive. When China pursued a policy of equality, they had to import grain. Once they provided incentives to encourage production, they began exporting foodstuffs. Replacing equality with incentives actually reduced poverty in the world's most populous country.
Many other examples can be cited for the power of incentives over equality to eliminate poverty. To be sure, the redistribution of the accumulated wealth of corrupt officials and their cronies in some developing countries would be beneficial. However, policies of growth over redistribution will do more to reduce poverty in the long run.
But there sometimes are short term needs. That is where grants should be made to develop transportation, communication, and storage infrastructure in poor countries. Except where flagrantly abusive policies are creating short term poverty (perhaps in the Sudan or North Korea), grants should be used by international agencies for short term relief. Of course, the development of private assets still would be through loans, even in the poorest countries.
Now we come to international trade. People do not engage in trade unless there is an advantage to do so. Indeed, economists as early as Adam Smith demonstrated that opening a country to trade adds to the growth of that country, even if other countries remain abusive in their trade policies. This is a strong statement that is not easily understood by non-economists.
Most people can identify the plant that was closed because cheaper goods were shipped in from a plant somewhere else in the world. They cannot identify the new enterprises that grew because the lower cost goods from abroad raised purchasing power. Exposing your resources to international competition is scary and not all activities will grow. But the overall economy will expand.
Of course, world growth could be even stronger if trade abuse is not practiced by some countries. That is why it is sometimes beneficial to withhold access to our markets to encourage more open trade in other markets. After all, this is a nation that used boycotts in its formation. (Unfortunately, the boycotts were not very successful).
Open economies develop incentives and stimulate growth. That growth, in turn, can be used to reduce poverty. The number of examples where increased economic freedoms and open economies reduced poverty are legion beside the few examples where corporate exploitation has impoverished societies.
President Bush was on target in his remarks about these global issues, even if the activists behave as if he was not.