Huge benefit from free trade

With one simple policy – more free trade – we could make the world $500-trillion (R5 750-trillion) better off and lift 160 million people out of extreme poverty.

If there is one question we have to ask ourselves, it is: why don’t we?

In 2000, the international community agreed to a set of important targets to improve the lot of the world’s poorest by this year, the Millennium Development Goals.

Many of these goals were extremely successful in vital areas such as reducing poverty and hunger, but there is still much to be done.

Through the UN, world leaders are now working on the next set of targets for 2015-2030. As the world will spend $2.5-trillion (R28.7-trillion) just on development aid over that period, and countless trillions in national budgets, there are lots of contenders for these targets.

That is why my think tank, the Copenhagen Consensus, has asked some 60 of the world’s top economists to look at the economic, social and environmental costs and benefits of many different targets, in areas like health, nutrition and education.

These are all important, but one issue is often missing.

As argued in a new paper by Prof Kym Anderson, of the University of Adelaide, reducing trade barriers not only makes the world richer, it is a great enabler for reducing poverty, curtailing hunger, improving health and restoring the environment.

Freer trade essentially means that each country can focus on doing what it does best, making all countries better off. Big strides have been made in liberalisation since World War 2, but the latest phase – the Doha Development Agenda – seems stalled, with little hope of a resolution.

This is dreadful, particularly for developing countries, because two of the main areas where agreement is elusive are agriculture and textiles, both sectors where lower wage countries in the tropics and sub-tropics have a comparative advantage.

A successful Doha round could get Africa better prices for agricultural produce and textiles, which would make Africa richer. But more importantly, free trade could make Africa focus on what it does best, which would boost growth just like it has happened for China.

Analysis shows that there would be substantial rewards for completing the Doha round. The direct economic benefits would be a 1.1% increase in global GDP.

This sounds modest. But because it would impact the entire world economy, by 2030 we would be about $1.5-trillion (R17.2-trillion) richer every year.

But open economies also grew faster. In the last 50 years, countries as diverse as South Korea, Chile and India have seen their rate of growth shoot up by 1.5% per annum on average, shortly after liberalisation.

If Doha can be completed, it is estimated that the global economy will grow by an extra 0.6% for the next few decades. By 2030, such dynamic growth would make the world economy $11.5-trillion (R132.2-trillion) larger each year, leaving us 10% more resources to fix all other problems.

A large part of the benefit will go to the developing world, which by 2030 would see its economy $7-trillion (R80.5-trillion) larger each year. On average, this increased GDP is equivalent to $1 000 (R11 495) more for every person in the developing world. Translated directly to South Africa, this would mean the average person could be making an extra $2 300 (R26 432) per year. By the end of the century, free trade could leave our grandkids 20% better off, or with $100-trillion (R1 149-trillion) more every year than they would otherwise have had.

For now, powerful vested interests make it hard for politicians to compromise. The jobs that are lost from free trade are obvious and concentrated – witness Western farmers protesting losing their subsidies.

But the benefits are spread out – for example, food will be a bit cheaper for everyone and Third World farmers will see greater profits. Yet we need to keep a sense of proportion.

There are real costs from free trade in terms of workers needing retraining and the provision of unemployment benefits. These outlays will occur mostly over the next decade and will cost $100- to $300-billion (R1.1- to R3.5-trillion).

But the benefits will accrue for at least the next nine decades and total $500-trillion (R5 753-trillion) in present day dollars. For every dollar (R11.50) spent, we will achieve more than $3 000 (R34 531) of benefits.

This will have huge impacts for the world’s poor. We know that economic growth has been one of the major drivers of poverty reduction – China’s rapid growth over the past 30 years has pulled 680 million people out of poverty, the most ever achieved in human history.

Yet we still have about 1.2 billion people living in abject poverty today. With future growth, this number will likely be reduced to a still chokingly high 700 million by 2030.

But if we achieve freer trade through the Doha round, the faster growth could lift an extra 160 million people out of poverty by 2030.

It is worth stepping back and realising this amazing opportunity for the world. Yes, we should help in areas like food, education, health and the environment.

But if we could just get it right on free trade, we could possibly do more good here than anywhere else – leaving the world $500-trillion (R5 757-trillion) better off, with 160 million fewer poor.

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