December 06, 2004

A Market Failure In the Global Economy?

Here's a liberated version of Geoffrey Garrett's excellent globalization article in the current Foreign Affairs. Garrett argues that both very wealthy and very poor countries have made out well by embracing free trade; but middle class countries, such as Latin America or Eastern Europe, have not. These countries are stuck in limbo -- they're not advanced enough to compete in high-tech markets, but they have too high wages to compete with China et al in the low-tech manufacturing markets. So they just suffer, and free trade alone won't cure what ails them.

Anyways, Garrett suggests the solution for these limbo-dwellers lies with education and training, allowing them to "tech up" for the changing world. (Also, they ought to developing sophisticated banking systems, property rights, and better regulations.) Maybe that would work. But dude, what if it doesn't? Garrett never asks whether some sort of selective protectionism or strategic trade or (heavens!) central planning might actually do these countries some good. As I recall, it seemed to do wonders for the East Asia tigers in the 1950s-60s; so why couldn't a bit of protectionism work for these countries?

Now here's my card: I'm definitely a free trader by temperament -- which merely means, as it does for any non-economist, that I'm more "sympathetic" to flashy promises of dynamic growth than I am to images of workers toiling in sweatshops. That's all. Still, this sort of vague emotional position won't always match the facts on the ground, and if Garrett's right, it seems that middle-class countries simply can't find a niche in the world market. If they were businesses, we'd let them go bankrupt, die, and celebrate the creative destruction. But you can't just do that to entire countries. So we have ourselves a bona fide market failure; the question is whether it can be fixed through better education and local regulations, or whether more drastic intervention is needed.
-- Brad Plumer 3:21 AM || ||