How to Make Depression Great

Friday, April 03, 2009

By Thompson Ayodele

Thomson AyodeleThe world economy is in severe recession. Trade is deteriorating every day. Political pressures demand import restrictions to protect employment. This is what makes a depression great.

The G20 meets in London on Thursday in an attempt to kick-start the world economy. Of course, expectations are high because the stakes are high.

U.N. Secretary General Ban Ki-moon hopes the G20, the group of top industrialized and developing economies, will commit itself “to sustaining an international stimulus package, on top of their own national stimulus packages" or “the economic crisis may soon be compounded by an equally severe crisis of global instability."

However, unless there is a new direction in global trade, the summit will be just another talking shop.

Everyone claims to recognize trade as the best way out of this recession, but usually on their own terms: Several developed and developing countries have already raised barriers on imports.

Last November, the G20 leaders signed a pledge against  protectionism, yet in the second half of 2008, 17 out of the G20 implemented 47 measures that restrict trade, the World Bank says.

These measures will push the world economy further into prolonged

If all countries go the same way, the global rate of import duty would double and ultimately shrink global trade by 7.7 percent, according to the International Food Policy Research Institute in Washington, D.C.

Already, exports from Chile, South Korea and Taiwan have dropped by about 20 percent, and those from Africa by over 30 percent.

Free trade delivers all-round gains, but protectionists claim to be acting in the national interest and strengthening the state by collecting import taxes.

Although this can show apparent short-term success, protectionism is quickly hijacked by vested interests and cronies while increasing prices for everyone, reducing choice and inviting retaliation from other nations, as Africa has demonstrated so disastrously for decades.

Apostles of import restrictions, such as the pressure group Oxfam, claim they increase exports, minimize imports and yield a trade surplus. They also favor the protection of infant industries, claiming they will create industrialization, because they believe that one nation can only gain at the expense of other nations. In real life, trade requires a willing buyer and a willing seller who both want the transaction.

Many African countries have used these protectionist arguments since independence. Most of their fledgling industries became a drain on the national purse because they were inefficient and expensive — we Nigerians are still paying for our vainglorious cement factories.

The sad reality is that protectionism doesn’t even protect domestic jobs or industries. It destroys them by harming efficient competition and companies that rely on imported components.

This is why most sub-Saharan Africans are still poor while others have lifted themselves out of poverty in the last 50 years.

But other countries are joining in. Tariff increases comprise only about half of the restrictions introduced so far in the G20. The U.S. government is propping up its auto industry, keeping out efficient competitors and making cars more expensive for Americans.

China is considering subsidies and higher export rebates for its steel. India has banned Chinese toys, China has banned Irish pork, and the EU has new export subsidies for butter, cheese and milk powder. In Britain, jingoists, unions and the Prime Minister call for “British jobs for British workers."

Many countries will quietly take less obvious protectionist measures such as health and safety, technical, licensing and certification requirements.

This is “do-it-yourself economics,” devoid of economic analysis or
real-world evidence. As always, the poor suffer most.

Between 1986 and 2007, tariffs on goods fell worldwide, from 26 percent to 8.8 percent, boosting the world economy with global trade. It also became more inclusive: Developing countries nearly doubled their share of world exports since 2000 to 37 percent in 2007.

A rise in protectionism would stifle internal and international recovery. It’s economic folly for politicians to opt for trade barriers when jobs and wages are at risk.

G20 countries must follow their own free trade recommendations and persuade all their trading partners to do the same — singly or collectively. Free trade has worked before, and it works now. But it will work even better if we let it.

Thompson Ayodele is the executive director of Initiative for Public Policy Analysis, a public policy think tank in Lagos, Nigeria. He can be reached at thompson @
This article first appeared in the Korea Times.