From the TUC

The lessons of trade liberalization, according to David Cameron (the other one)

11 Apr 2011, by Guest in Economics, International, Public services, Working Life

I’ve just been reading “The Globalization Paradox”, by Harvard’s Dani Rodrik who makes an interesting and powerful point: “If you want markets to expand, you need governments to do the same.” (page 18).

Rodrik stumbles across this slightly counterintuitive conclusion in an old article by David Cameron – not our public budget butchering Prime Minister, but a political scientist from Yale. “Yale” Cameron wanted to understand why the public sector had expanded in the 18 industrialised countries he studied – and what explained the variation in the size of the governments between those countries? 

His answer is simple: governments had grown the largest in those economies most exposed to international markets. Larger economies, further away from trading parties, such as the United States, Japan and Australia had government expenditures relative to the economy of about 35 percent. Yet smaller economies, closer to their trading partners, such as Sweden and the Netherlands had public sectors of between 55-60 percent.  

Rodrik put Cameron’s conclusion through an empirical test drive. He expanded the sample size to over 100 countries, used different data sources and different time periods, and controlled variously for country size, geography, demography, income level, and urbanisation among other variables. Yet the correlation of big government and global integration was exactly the same. So what explains the link? Rodrik finally agrees with Cameron’s answer:

People demand compensation against risk when their economies are more exposed to international economic forces; and governments respond by erecting broader safety nets, either through social programs or through public employment (more typical in poor nations). (page 18)

And dare I add that this public sector expansion is not just to ameliorate the impact of openness as Rodrik describes, but also to build the very institutions that help businesses and workers take advantage of it: an active industrial policy investing in skills, financing start-ups and supporting R&D etc to help domestic firms move up global value chains.

So where does this leave our David Cameron, who, on the one hand believes that growth and jobs will come from his government’s “messianic” commitment to “free trade and open markets around the world”, yet on the other hand is butchering the very public sector needed to harness such openness? It complicates an already complicated mess for the government’s trade strategy– but let’s take our complications in order.  

Complication No.1: The UK Government has very little ability to liberalize trade any further. Trade making powers have moved to Brussels and most major trade negotiations are making glacial progress . The other strategy of “trade promotion” seems to boil down to unleashing the charm of Prince Andrew on oversees trade delegation, now that the old approach of gun boats, slavery, opium and the East India company is all a bit 18th century. Don’t hold your breath on either count.  

Complication No. 2: Every government and their trade promotion poodles are now trying to export their way out of recession. That just doesn’t add up if no-one is increasing their imports. Unless there is an expansion in domestic demand there will be losers, and unless some bright spark in Britain is threatening to create the equivalent of Nokia, Apple and Ikea, by Friday then we’re likely to be those losers. As Richard Exell, my colleague down the hall, has argued with a bit more empirical rigour, “we aren’t going to export our way out of this mess”.

Which is further confirmed by Complication No. 3 – those that are likely to win this battle of exports are those following the pattern of public sector support identified by “Yale” Cameron and confirmed by Rodrik. Yet sadly our David Cameron is taking his axe to exactly the sort of supportive measures (The Future Jobs Fund? Regional Development Agencies?) that can help workers and businesses get back on their feet and take advantage of openness to trade.

So can we stick our David Cameron in Yale and borrow the other one?

2 Responses to The lessons of trade liberalization, according to David Cameron (the other one)

  1. Falco
    Apr 16th 2011, 11:19 am

    “And dare I add that this public sector expansion is not just to ameliorate the impact of openness as Rodrik describes, but also to build the very institutions that help businesses and workers take advantage of it: an active industrial policy investing in skills, financing start-ups and supporting R&D etc to help domestic firms move up global value chains.”

    I’m sure you may dare but you don’t appear to have anything to back this up. After all, the increase in wealth and resultant inequality has to begin before the state grows and given the inefficiency inherent in state planning this is likely to act as a drag on, rather than a spur for, growth.

  2. Ben Moxham

    Ben Moxham
    Apr 18th 2011, 9:54 am

    My point is not a very daring one: that spending on industrial policy has played some role in aiding economic integration. East Asian success would happily back me up on this – to take the easiest case, but certainly not the only one. And there, growth kicked off well before those countries started a gradual process of trade liberalisation. Opening up was a way to sustain growth, not the prime initiator of it.
    To be sure, social protection spending probably dwarfs that spent on industrial policy, but that is not the same as saying that the latter is irrelevant.
    And yes, state planning can be a drag on growth if you’re talking about Soviet-era white elephants. But I’m not. I’m thinking of a UK entrepreneur trying to crack into new green technology who is seeking finance and investment insurance, R&D support, and some sort of predictable demand for their products. For new industries, the private sector is often unable to provide this, because of classic market failures over coordination and risk-taking. The state needs to step in to provide a supporting environment for innovation. The Germans get this – and they’re hardly wallowing in inefficiency and stagnation.