For too long the International Monetary Fund (IMF) has acted
like the arsonist who would set fire to a building and then rush to put it out.
A number of countries got stung by it, understood what it was doing and responded
by distancing themselves from it.
The world has now evolved in such a way as to create
opportunities for the IMF to redeem itself by repairing some of the damage it
caused over the decades. It can thus regain the trust of the nations it is
supposed to serve. To understand what happened in the past, and what can be
done in the future, it'll be a good idea to read the article that came under
the title: “The Era of Free Trade Might Be over. That's a Good Thing,” written
by Jared Bernstein and published on March 14, 2016 in the New York Times.
Bernstein does not mention the IMF, perhaps because he does
not accept that it played a major role in the matter of globalization, or
perhaps he does not see a possible role for it in the future. In fact, he discusses
an approach to solving future problems based on steps that America can
take independent of any other nation and of any international organization. And
this is where I have a different opinion.
In telling why Free Trade Agreements (FTAs) have not lived
up to expectations, Bernstein brings out a number of crucial points. First,
there is a close relationship between prices and wages, he says. The equation
is simple to fathom: if you want low prices for the consumers, you must pay low
wages to the workers.
Second, the mixing of globalization and free trade has
“devolved into handshakes between corporate and investors interests” on both
sides of the advanced-emerging divide. Thus, the rich got richer, and the poor
got poorer in both the advanced and the emerging economies.
Third, because of all that, free trade has delivered growth
and jobs in the emerging economies that manipulated their currencies, but not
in the advanced category or those in the emerging category that refused to join
the race to the bottom.
What happened in the past is that a number of emerging
economies in Asia, North Africa and Latin America took to globalization and
soon discovered that, because of it, the gap between the wealthy and the poor
was widening. They strengthened the safety net for their people by enlarging
the system of subsidies for basic items. This caused the deepening of the
fiscal deficits in those nations and so, they asked the IMF to help till they
get over the hump. The latter responded with the cold-hearted: not while you're
maintaining those subsidies.
It turned out that the principles upon which the IMF
operated rested on the idea that competition, however savage it may be, was a
good thing. It would be even better if it encompassed the whole world as if the
economies of all the nations had merged to operate like a single economy. The result
of the IMF ideas has been misery and discontent in many places around the
world. The nations that escaped this fate were the ones that devalued their
currency and started a race to the bottom. They did so by keeping their own
workers in an impoverished state thus forced other countries to treat their
workers in that same fashion.
What can be done? To respond to that question, Jared
Bernstein begins by making an important observation: don't conflate trade with
trade agreements,” he says. That is, trade among the nations of the world is a
good thing as long as it is well managed, and takes into account the interest
of all the stakeholders. Thus, global trading relations must be maintained, but
something else must also be done. For that, Bernstein defers to the
manufacturing expert Mark Muro who “writes about many industries that tap our
comparative advantage...”
That's an idea, but not a sufficient one – in my opinion –
because it can only be a temporary solution that applies to a handful of
countries having the advantage, at this time, of producing knowledge. But as we
have learned, knowledge can no longer be monopolized by a few because it can
easily be duplicated elsewhere – in no time at all. Thus, if the advanced
economies tried to rely solely on the creation of knowledge, they will only
perpetuate the cycle they are trying to avoid.
I have a more comprehensive solution; one I've been
advocating for more than three decades. It consists of negotiating a global
agreement whereby every nation is given the right to protect any industry it
chooses to, up to 30 percent of its consumption in the products of that
industry. There is nothing sacred in that figure; it can be 25 percent or 40
percent or whatever figure will be acceptable to the negotiators.
The basic principle behind it all is that competition can
only be useful when it is not used as a weapon to crush someone else. Thus, if
every nation is made to feel protected up to an agreed upon percentage, the
rest can be fought over and competed about without it becoming an existential
threat to someone else.