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Unfair Fair Trade Laws and Other Mischief (Stiglitz: Chapter 6)
Christine Booth
The IMF is a Political Institution
The 1998 bailout of Russia was initiated to keep Boris Yeltsin in power. This action was linked to the political judgements of the Clinton administration’s Treasury even though doing so was against all the principles of lending. (Remember--the U.S. is the greatest IMF donor; therefore, has the greatest amount of leverage in voting in policies.) Why? The U.S. Treasury feared a backsliding into Communism.
Gradualists--those who advocated a slower transition to a free market economy--feared shock therapy would increase poverty, and that falling incomes would cause a loss of support for the transition. This proved to be correct when, in the 2000 election, 70% of votes went to the old Communists.
Attitudes from the Cold War continued.
Again, there was a war over political ideologies. The US and the IMF viewed transition as the last battleground; therefore, they treated ex-Communists (even the ones who supposedly had the power in Russia) with distrust. While many Russians had seen joining the Communist party as a way to get ahead, they still believed that the state was responsible for taking care of those in need, and believed in an egalitarian society. In Europe, they would have been labeled Social Democrats.
The irony here is that Clinton, a democrat, shared these views, but in regards to transition economies aligned with the reformers on the right side--people who paid too little attention to the social consequences. Stiglitz pointed out that at one time everyone in Russia was a Communist, but the "good guys" were men who had run businesses, even if they were only out to line their own pockets.
Finally, the IMF and US Treasury stopped judging people by whether they were Communist or not. The idealism that was present with Yeltsin’s election dissipated with his failings, leading to the welcoming of Putin by Bush. Putin had been affiliated with the KGB, but this did not matter to Bush at the time.
Similarity to Vietnam War
The problems of the reform strategy became clearer, but the strategy continued to ignore the facts, to deny the reality, to suppress the discussion, to throw more and more good money after bad--the next loan would get Russia going. Change was around the corner. Rhetoric changed from confidence in the leadership to fear of the alternative.
Russia Takes Initiative, Or at Least Tries To
Russia asked for help to grow; so far, the IMF had only been giving advice on stabilization, liberalization and privatization. Stiglitz was told not to go to Russia, but eventually did with the right letter writing. He, and Russia, wanted a discussion free of IMF and US special interests. He recommended broad-based support, not just the concentration of resources being held in the hands of a few leaders in the "loans for share" system.
The US should have had an actual debate over the subject, allowing Clinton to have heard other sides and therefore allowing for a better decision. Ironically, the Treasury felt the decision was too important for the president to make (even though Clinton was elected.)
US Interests and Russian Reform
Some viewed the failures in Russia to be deliberate, therefore removing Russia as a potential future threat. (This was a political motivation though Stiglitz doesn’t think this motivation was true.)
In July 1998, the Western Banks could have lost a lot of money (from investments going bankrupt), and saw inflation as the worst danger to their investments. Inflation decreases the value of the dollar, which leads to increasing interest rates, then declining bond prices. Since investors lose money, unemployment in Russia would be viewed as a better option.
In regards to trade, the US was also hypocritical. The US supports free trade, until it affects domestic labour. Once this occurs, protectionist measures set in. Laws known as Fair Trade in the US become known as Unfair Trade Laws in the rest of the world because they can be used to create barriers to trade. (This is exactly what the free market doesn’t agree with. Adam Smith would roll over in his grave.) Again, the global systems are used as a political tool in favour of the US.
The Aluminum Case
In 1994, after world aluminum prices fell, the US accused Russia of dumping their aluminum onto the world market. (Dumping is selling goods at a cost lower than the costs of production and distribution, therefore making it more attractive to buyers over American aluminum). In actuality, because of less demand from innovations in soda can design, for example, prices were lower. Paul O’Neil, an American in the aluminum industry, responded by threatening to establish a cartel if the anti-dumping laws weren’t applied to Russia.
Cartels raise prices by restricting outputs. Again, not what a free market economy is about. The U.S. Department of Commerce gathered information to decide whether dumping occurred or not based on the best information available. This information was gathered by an American firm, for an American department. Stiglitz tried to point out the harm of allowing a cartel, but could not win over the State Department, which favored order above all else, and that’s what cartels do. Cartels artificially raised costs to consumers. In the long run this is bad because consumers will find an alternative. This action by the U.S. State Department taught Russia to hand economics over to the government; again, not what free market economics are about.
National Security for Sale
The same occurred with Uranium. An American firm called USEC was going to purchase Russian uranium from deactivated war-heads to de-enrich it, therefore making it useless for weapons. Again, American firms accused Russia of dumping. Then, as a political move to catch up to Thatcher, the US had to do some severe privatization, and USEC was privatized. There was fear that a rogue state would get its hands on the uranium, and USEC promised to buy as much as possible.
Stiglitz got hold of a letter between Russia and USEC stating that Russia was willing to triple their output and USEC refused while offering some hush money. Stiglitz had been worried that privatization of USEC would interfere with the buying of Russian uranium, and he was proved to be right.
The main lesson taught to Russia through all this: trade is good, imports are bad.
Another Example: Cotton from Mali
Another example of the US protecting its own producers occurred in Africa in relation to cotton. The US government pays its cotton industry $3.4 billion dollars in subsidies, giving 70 cents per pound of cotton. These subsidies promote over-production, thus increasing supply and depressing world prices. America is artificially lowering their cotton prices so much that American cotton is cheaper in African countries than African cotton, even with transportation costs.
Mali, is a perfect example. Cotton is Mali’s second most important export but they are finding it difficult to compete with American firms. Yet, conditions attached to Mali’s IMF and World Bank loans prevent Mali from supporting its cotton industry the way the US does. In 2001, cotton farmers in Mali earned 13 cents per pound, and in 2002 earned 11 cents per pound. This is a lower cost than what it costs to produce.
Farmers may be heard to say, "If we don't earn money from cotton we won't be able to buy food. If any of our family members fall ill we won't be able to take care of them. If any of our vehicles need repairing we won't be able to do this."
The injustice is even greater when one realizes that Mali produces cotton more efficiently and more cheaply than American firms. If the subsidies weren’t there, the American farmers would be unable to compete. Meanwhile, cotton in Mali from previous years stacks up. With the conflict on the Ivory Coast, the cost of transport has increased too high. The cost of the cotton would be higher than the prices it would attract.
"A level playing field is all well and good - if the competitors are well matched. But a Ghanian saying sums up the reality rather well: Trade between Africa and the west is like a giraffe and an antelope competing for the best fruit at the top of a tree. You can make the ground level beneath their feet, but the contest will still be unfair."(www.guardian.co.uk/famine/story/0,12128,998666,00.html)
Works Cited
Nutt, Dominc. "Cottoning onto unfair trade." Manchester Guardian. 2003. (http://www.guardian.co.uk/famine/story/0,12128,998666,00.html)
Stiglitz, Joseph.Globalization and Its Discontents.New York: W.W. Norton and Company, 2003.
© Kristine Booth 2004
Fair Dealing Applies