The Great Escape: Open Trade and Investment with Asian Countries

In Chapter Six, “Globalization and the Greatest Escape,” Deaton writes:

The convergence of average incomes among the rich countries is just what we would expect when growth is driven by new ideas and new ways of doing things and if new ideas spread rapidly across the world. What is puzzling is the failure of the poor countries to catch up… After all, the techniques and knowledge that are the basis for the high living standards in the rich countries are available to the poor countries too.

Average living standards around the world should converge, yet economic growth rates have varied dramatically, especially in poor countries. Why have some once-poor countries rocketed to prosperity while many others have stagnated? Deaton focuses on the key role of institutions:

… average living standards should draw closer over time. Why this had not happened is a central question in economics. Perhaps the best answer is that poor countries lack the institutions–government capacity, a functioning legal and tax system, security of property rights, and traditions of trust–that are a necessary background for growth to take place. [The Great Escape, p. 234]

Consider the development success stories Deaton cites, many in this year’s Stoa trade resolution:

Some countries have been able to take advantage of the opportunities for catch-up. A group of Asian countries–China, Hong Kong, Malaysia, Singapore, South Korea, Taiwan, and Thailand–as well as one African country, Botswana, grew at more than 4 percent a year from 1960 to 2010–a more than sevenfold increase in average income over five decades.

U.S. policy toward these Asian countries has advocated and defended open trade, even when countries only slowly lowered their trade barriers to U.S. exports.

Asia scholar and investment advisor William Overholt argues that the key difference between the successful Asian transition and escape from totalitarian and authoritarian governments versus the disastrous regression across the Middle East and North Africa, was a shift in U.S. policy toward these regions.

Overholt’s September 24, 2015 article, “America’s Biggest Enemy Is Neither China nor Russia — It’s Us,” in The World Post begins:

For half a century after World War II, the United States pursued one of world history’s most successful national strategies: it nurtured the economic and institutional rebuilding of Europe and Japan, the development of other countries, especially in Asia, and bonded them economically, while protecting this strategy with superior military force. …

Analogues of this economics-focused strategy consolidated the security of U.S. allies. Japan became a big power despite lacking a strong military. In South Korea, General Park Chung Hee took over a country inferior to the North politically, economically and militarily, and shifted to an overwhelming priority for economic development; today South Korea is stronger in all respects due to an economy more than 20 times the size of that of its military-obsessed adversary. In Indonesia, General Suharto abandoned territorial claims to most of Southeast Asia in order to focus on development and made Indonesia the clear regional leader. China’s Deng Xiaoping, emulating them, cut the military budget from 16 percent of GDP to 3 percent in order to focus on development, and China became a great power in only 30 years.

Overholt argues that this successful economics-based foreign policy was accidently lost after the terrorist attack in September, 2001. Instead of focusing on economic reforms across the Middle East after 9/11, the U.S. focused on military engagement:

In 2001, the United States abandoned its successful economics-focused strategy. For the first time in modern history, all major foreign policy positions were held by defense specialists: General Colin Powell as secretary of state, Richard Armitage as his deputy, Donald Rumsfeld at defense and Condoleezza Rice as national security advisor, all led by a former defense secretary, Vice President Cheney. 

As a result, in planning the Iraq war, there was no economic voice; any development expert knew that dismissing the entire ruling class would be catastrophic. Even after great revolutions like those of France and Russia, a country can only be run by the experienced bureaucracy. In Afghanistan, expenditures on economic development were pitiful and Rumsfeld insisted that economic development must be controlled by the military; the accumulated civilian expertise and success of half a century were contemptuously dismissed. 

With its overwhelming military priority, the United States now has the most powerful military in world history. Because of its exceptional competence and devotion, Americans rightly hold the military in higher esteem than any other government institution. But this great military has lost every war it has fought since the change of strategy, and continues to lose.

I don’t find Overholt’s discussion of the role of international institutions like the World Bank and IMF compelling, but his discussion of problems with the TTP agreement are worth considering:

An equally important risk to U.S. leadership is the new global trading structure that the United States is promoting. The Trans-Pacific Partnership envisions a new era across the Pacific, and the Transatlantic Trade and Investment Partnership across the Atlantic. Omitted from these agreements is the world’s largest trading economy, China. Washington argues that China is not ready for the high standards of TPP, but this argument is belied by the inclusion of Vietnam and Japan. Vietnam lags China in every dimension addressed by TPP. Japan is much more closed to foreign trade and investment than China and has demonstrated none of the heroic willingness to adjust to higher standards that China showed when it joined WTO. Shanghai streets teem with Buicks, whereas American cars are rare in Tokyo.

U.S. politicians and the military seem to think it is a good idea to isolate China as a way of countering China’s growing economic and military might.  But Overholt cautions:

The effort to exclude China jeopardizes one of the greatest achievements of U.S. postwar strategy. China and the United States have become the greatest economic partners in world history. Their trade in goods and services now exceeds $600 billion, or $700 billion including Hong Kong. Between 2000 and 2014, China invested $47.5 billion in the United States, including $12 billion in 2014 alone. Its integration into the Western investment, production and distribution system; its openness to vast amounts of foreign investment; its embrace of U.S. products to a degree that exceeds America’s main Asian allies; its heroic adjustments to join the WTO, accepting an agreement far tougher than those imposed on any other country; and its acceptance of WTO adjudication mechanisms, constitute one of history’s great reversals of alliance. The poorer part of the U.S. population has benefited from inexpensive goods to an extent that no imaginable welfare system could ever have provided. 

Marian L. Tupy of the Cato Institute, writing in Investment Business Daily (“Global Poverty’s Defeat Is Capitalism’s Triumph,” October 10, 2015). Discusses Angus Deaton’s The Great Escape with an example of the horrors of poverty the west escaped from through the 19th Century. At the time of America’s revolutionary war, the vast majority in Europe were impoverished:

At the end of the 18th century, to give one example, France had the fourth highest standard of living of any country in the world, behind the U.S., Great Britain and the Netherlands.

Bleak Existence
Yet, 10 million of France’s 23 million people relied on some sort of public or private charity to survive, and 3 million were full-time beggars. 

Before mechanization, jobs were scarce and children were a burden. Returning to late 18th century France, of the 30,000 babies who were born in Paris in 1780, up to 8,000 were abandoned by their mothers. Many died. 

Thanks to the industrial revolution and global trade, economic growth in the West accelerated to historically unprecedented levels. 

Over the course of the 19th and 20th centuries, real incomes in the West increased 15-fold. A huge chasm had opened up between the West and the rest, as Princeton University Professor Angus Deaton documents in his book “The Great Escape.” …

As Deaton notes that “the rapid growth of average incomes, particularly in China and India, and particularly after 1975, did much to reduce extreme poverty in the world. In China most of all, but also in India, the escape of hundreds of millions from traditional and long-established poverty qualifies as the greatest escape of all.”

The importance of growth cannot be overstated. There is not a single example of a country emerging from widespread poverty without sustained economic growth.

Students debating U.S. trade policy toward China, Japan, South Korea, and Taiwan, are encouraged to take some time to review the economic history of the last sixty years in Asia. Virtually no development economists predicted or even thought possible the rapid increase in prosperity across what in 1950 was the most heavily populated and poorest regions of the world.

Ronald Bailey writes in Reason of recent research on the benefits of international trade and globalization. Bailey begins with the numbers and the role of GATT in post WWII reduction of trade barriers:

How important is the open exchange of goods to the spreading of prosperity? This important: Since 1950, world trade in goods has expanded from $600 billion (in 2015 dollars) to $18.9 trillion in 2013. That’s a more than 30-fold increase, during a period in which global population grew less than three-fold. 

This massive increase in trade was kicked off in 1948 by the General Agreement on Tariffs and Trade, which began the liberalization process of lowering tariff and non-tariff barriers. As a result, autarkic national economies became more integrated and intertwined with one another. The World Bank reports that openness to trade—the ratio of a country’s trade (exports plus imports) to its gross domestic product (GDP)—has more than doubled on average since 1950.

Bailey cites much recent research on benefits from international trade and also cites a study showing early economic development can reduce environmental conditions. Conditions change as development continues:

But as poor countries become rich, they flip from getting dirtier to becoming cleaner. A 2012 Canadian Journal of Agricultural Economics study, “Deforestation and the Environmental Kuznets Curve in Developing Countries: A Panel Smooth Transition Regression Approach,” explored the relationship between deforestation and real income for 52 developing countries during the 1972–2003 period. The study found that deforestation reverses when average incomes reach a bit more than $3,000 per year. 

These studies basically confirm the Environmental Kuznets Curve hypothesis, in which various indicators of environmental degradation tend to get worse during the early stages of economic growth, but when average income reaches a certain point, subsequent economic growth leads to environmental improvement. Since trade openness and globalization boost economic growth and incomes, this suggests that opposing them slows down eventual environmental improvement in poor countries.

The biggest economic story of the last sixty years has been the success of trade and investment policy integrating the U.S. economy with China, Japan, South Korea, and Taiwan. Thuggish politicians, corporate lobbyists, labor unions, and environmental groups who attack free trade rely on the public’s lack of knowledge of economics. These attacks threaten the peace and prosperity of some four billion people across the U.S. and Asian.

An earlier post recommend Johan Norberg’s Free or Equal documentary, which updates Milton Friedman’s influential Free to Choose series shown on PBS.

Norberg’s 2003 documentary, Globalization is Good, directly counters the claims of anti-globalization activists. For debaters researching the Asia trade policy topic, Norberg’s segments in Taiwan and Vietnam explain the path from poverty of open trade and investment policies. The clips from Taiwanese “sweatshops” in the 1950s show much worse conditions than Nike factories in Vietnam a decade ago, shown in the next segment. Taiwan’s Great Escape from poverty, along with Hong Kong, Singapore, and South Korea, set the stage for rapid economic progress in China that followed with Deng Xiaoping’s 1979 economic reforms and “trip to the south” in 1982.