Why is it we always hurt the ones we love? The recent Summit of the Americas had President Obama yet again joining other world leaders in a well-publicized powwow to find a way back to prosperity--this time for the Western Hemisphere. They ended up echoing the G20's call for a major spending push--along with calls for increased financial aid for cash-strapped governments in the region.
But there's a fly in the soup. The dirty little secret (that all economists and most politicians already know) is that aid alone isn't going to solve the developing world's problems--and sometimes makes things a lot worse worse. Without access to world markets and a functioning economic infrastructure, the recipients will probably never be able to earn enough to pay the money back.
Instead of giving them fish, the rich countries should be offering the struggling economies of the world a fishing pole--and a place to sell their catch.
Basically, the only way the developing world can grow their way out of this global recession is to be able to sell their goods and services to the rich countries of the world. But how can they do it if the developed countries refuse to open their markets to trade?
Virtually every major economist points out that free trade is a win-win proposition. Apart from a few coddled industries, everyone from consumers to workers in export-oriented industries--think of anything from elevators to movies to California almonds--are much better off. But when those few who stand to lose their jobs because of increased imports scream "protectionism", governments listen.
In London, the best that the G20 nations could come up with was a call for members to "refrain from raising new barriers to investment or to trade in goods and services." They made a similar call in their November meeting. And what happened? In a report published by the World Bank in March, seventeen of the nineteen nations that make up the G20 (the European Union is the 20th member), introduced some sort of restrictive trade practice in the ensuing months. The call for free trade was met with everything from a U.S. proposal to require federal stimulus money be spent only on American products to Russia's decision to increase duties on imported cars and France's decision to create a sovereign wealth fund that would protect French companies from foreign "predators".
Instead of moving decisively to open the world economy to free trade, the G20 leaders decided to call for massive amounts of foreign aid, treating the world's developing world as economic invalids.
Why all this largess at a time when even the rich countries are struggling? World leaders are obviously motivated by fears of contagion--the domino effect that a fall of a dozen Iceland's could eventually cause, bringing down the whole house of cards. Think of the disastrous effect on Western European creditor nations if the struggling countries in Eastern Europe were to go into economic free fall.
The problem is that most of the new money is going to end up in countries that are on the brink of financial ruin--by definition, the IMF is there to bail out economies in trouble. Which means that the countries with most flawed economic policies are going to get the lion's share of the cash.
But what good does giving increased aid do if the developing countries aren't allowed to access to world markets? The Inter-American Development Bank, in a report published in 2006, noted foreign aid's relative inefficiency in achieving economic growth, pointing out that it's more the quality of economic and political infrastructure in the developing countries--including access to foreign markets--which determines whether a country will grow and prosper in the new global economy. Just look at Brazil's rise to global powerhouse, achieved largely by access to foreign markets.
So how do we get free trade back on the world's economic agenda? A global multi-lateral free trade agreement is obviously the best way to go. And we happen to have one waiting in the wings: the World Trade Organization's "Doha Round" which was scuttled last summer, mainly because of opposition of rich-country leaders who feared the political backlash of exposing local industries to the forces of global markets.
Those few industries that actually benefit from trade barriers-- sugar growers in Europe and the United States, for example--obviously want to keep the money flowing and will do anything to keep the tariffs and subsidies in place. But what about us, the average consumer and voter, who benefit from open markets and access to the global economy? It's important for us to get our leaders to listen to our side of the story, too.
By getting our leaders to open the world's borders to trade, we not only help ourselves, we help the developing countries of the world end their aid-enabled economic malaise--and become true partners in a renewed and reviving 21st century economy.