The debt crunch and the Doha round

Source: http://dawn.com/2008/04/07/ebr15.htm


By M. Ziauddin

The rich world has been treating the Doha Development Agenda like its leadership does the two-state solution for Palestine. Talk about it at every talking opportunity even if it meant on daily basis, but do nothing.

In fact while mouthing unending rhetoric about globalisation and free world trade, the rich world has so far only lifted barriers against the free flow of financial resources that helped them among other things offshore companies to exploit the cheap labour in poor countries and the so- called emerging markets but kept raising ever higher tariff and non-tariff walls against free imports of agricultural products and manpower--the two most abundant and cheap commodities that the poor world could sell to the rich world.

Still, it does seem to have seen the writing on the wall. Just the other day using the point system (which Australia, a vast continent has been using for ages to keep the shirtless millions from its shores within which hardly more than 20 million people live) the UK believes it can promote brain drain from the poor country while at the same time consigning these countries with ever-growing burden of unskilled population.

But the islands of prosperity that the rich world thought it had created far away from the maddening poor world through its liberal financial policies first turned the rich world into one big gambling casino with every one and his auntie betting for windfall profits through private equities, hedge funds, off-balance sheet debt vehicles and derivatives with colourful abbreviations. All unregulated and backed by the same assets blown into ever bigger bubble at every transfer deal. And now the bubble has burst.

China and India had kept themselves largely out of this casino and therefore have succeeded not only in saving themselves but also many emerging markets in the process. China has so far proceeded cautiously, limiting the role of foreign banks and controlling even more tightly overseas brokerages, a sector in which local companies are especially weak.

And now of all the persons, Mr George Soros well known for his appetite for currency speculation has come out against what he calls market fundamentalist fallacy which he believes has caused the crisis. In an article in the Financial Times ( False ideology at the heart of the financial crisis--April 2) he says: Regulators ought to have known better because it was their intervention that prevented the financial system from unravelling on several occasions. Their success has reinforced the misconception that markets are self-correcting. That in turn allowed a bubble of excessive credit to develop, which extended through the entire financial system.

When the sub-prime mortgage crisis erupted it revealed all the weak points. Authorities, caught unawares, responded to each new disruption only after it occurred. They lacked the ability to foresee them because they were in the thrall of the market fundamentalist fallacy. They need a new paradigm. Market participants cannot base their decisions on knowledge, or what economists call rational expectations. There is a two-way, reflexive interaction between the participants’ biased views and misconceptions and the real state of affairs. Instead of random deviations, reflexivity may give rise to initially self-reinforcing but eventually self-defeating boom-bust sequences or bubbles.

Realising the folly ( apparently rather late) a representative of the richest club of one of the richest countries in the world says a deal on liberalising world trade is still possible and is more important than ever in the face of an uncertain global economy.

The Director-General of the CBI Richard Lambert said early last week while addressing visiting Japanese businessmen that the Doha Development Agenda was the only show in town when it comes to ridding the world of the subsidies and trade barriers which hold back prosperity and opportunity everywhere. But he warned that there are still big risks to a successful conclusion.

With the global financial markets reeling, “there are already the inevitable pressures to build up the barriers of regulation on to what has been an important driver of global growth in the past decade.”

”On top of this, we are also seeing a political pushback around the world against free trade and open markets - another prime force behind the rising growth and prosperity.

”There is, of course, a grim lesson in history. The Smoot-Hawley tariff act passed by the US Congress in the summer of 1930 was what turned the stock market crash into a Great Depression. Glass-Steagall legislation for the banking system followed shortly afterwards.”

But he argued that a deal “is still possible”, whilst warning that the current window of opportunity won’t stay open for long:

”Elections are looming in two of the key countries at the negotiating table – the US and India. Next year will bring a new European Commission. All this would put negotiations into the deep freeze for quite a while – and no one knows when and in what shape they might ultimately re-emerge.”

”Political opposition to trade liberalisation is strong because “although the benefits far outweigh the costs, they are thinly spread across the economy and take time to materialise. By contrast, the losers are much more visible and vociferous.”

”A final hurdle in the way of a successful round is that the political mood in the developed world has shifted against the idea of globalisation, which is taking the blame for growing income differentials and job insecurity in the rich countries of the West.”

”And by allocating the world’s resources more efficiently, reform would provide a means to spend more on other pressing problems, such as environmental degradation, hunger, malnutrition, and disease.

”A deal is close, and it is achievable. If we fail to grasp it now, the chance won’t come back for years. And this would not represent just a missed opportunity. Failure would seriously weaken one of the pillars of global prosperity – the rules-based multilateral trade regime.”