As I write this Pearl, the world is holding its collective breath waiting for the other shoe to drop in Iraq. The Philippines is certain to be fundamentally affected when the United States high tech military machine finally swings into action. The Republic of the Philippines is one of the most globalized developing nations around (just think of all those overseas foreign workers who may need to be evacuated when events unfold), not to mention being the official cheerleader for the Bush administration in Southeast Asia (GMA is off to Washington in April and Bush will be returning the favor in the fall, both with the full pomp and circumstance of Important State Visits).

I'm just hoping, along with the rest of the international community in Manila, that the impact can be controlled and that the damage here (whether from returning OFWs, retaliatory terrorist acts, or who knows what) is minimal. However, I don't really want to use this Pearl to pontificate about unknown probabilities and add yet another voice to the cacophony.

Instead, spurred by current news about yet another impasse in WTO talks about agricultural tariffs and subsidies in Tokyo last weekend, following find some reflections on the perils of agricultural trade liberalization, with particular reference to the Philippines and other developing countries. Looks like I'll probably flash back a bit to academic gobbledygook, and that I'll no doubt oversimplify as usual (sorry, can't be helped, it's the nature of these Pearls).

Anyway, the issue of export subsidies has been a huge challenge for trade negotiations since the new rounds kicked off in Doha, Qatar in November, 2001. It took a great deal of acrimonious debate, but the meetings eventually led to a commitment to "reductions of, with a view to phasing out, all forms of export subsidies." At this weekend's meetings, the WTO circulated a draft paper (prepared by former Hong Kong Ambassador Stuart Harbinson) pushing for lower import tariffs on agricultural products and decreased farm subsidies as the basis for ongoing talks. Not surprisingly, the European Commission (EC) and Japan screamed bloody murder and the preliminary talks ground to a halt. They'll be back in Geneva jawboning this coming week, with the goal of reaching a preliminary consensus by the end of March feeding into a wider agreement on moderating trade barriers on all types of products. All 145 WTO members will meet in Cancun, Mexico in September this year, with the whole process supposed to be concluded by early 2005.

The global economy in the early 21st century has become increasingly integrated, with rapid cross-border flows of goods and services dictating the pulse of business. Developing countries find themselves under ever-increasing pressure to open their doors to foreign direct investment, conform to the fiscal requirements of international lending institutions, and lower tariffs. In return, they are supposed to receive the full panoply of benefits embedded in the international capitalist system.

By integrating themselves into the global marketplace, the developing countries (the story goes) benefit from the international division of labor. Domestic producers become more efficient by virtue of specializing in sectors in which they enjoy comparative advantages, while their consumers enjoy access to a wider variety of domestic and imported goods at cheaper prices. Other benefits include economic and social development, access to huge consumer markets in more developed countries, and an increased standard of living for their often poverty-stricken populations.

The roots of this rosy theory can be traced back to David Ricardo's labor theory of value and the key concept of comparative advantage. Ricardo, drawing on Adam Smith's free market classic The Wealth of Nations (1776) and the pessimistic demographic theories of Malthus, developed an influential analysis of capital accumulation (his Principles of Political Economy and Taxation was published in 1817). Ricardo observed that while workers and landlords consume their incomes, capitalists accumulate and invest. Such investment patterns create conditions that lead to growing populations, but within the context of limited resources and finite domestic markets that constitute constraints to growth - constraints that could only be alleviated by technological progress and international trade.

Ricardo's famous and much oversimplified example involved a comparison of "England" and "Portugal" involved in a mutual trade of "wine" and "cloth":

• Assumption #1: In England it costs 100 hours of work to produce a bolt of cloth and 120 hours to produce a barrel of wine.
• Assumption #2: In Portugal, it costs 90 hours to produce the same bolt of cloth and 80 hours to produce the same barrel of wine.
• Thus: Portugal has an absolute cost advantage in both commodities.
• However: Both nations will benefit by specializing because the opportunity cost of a producing barrel of wine is higher in England than in Portugal; i.e., it is cheaper for Portugal to obtain cloth by producing wine and selling it to England than to produce any cloth on its own.

The benefits of unfettered trade theoretically include greater market access for smaller players, increased trade volume, improved technology, and virtually unlimited foreign investment. The size of the global economy is maximized as countries concentrate their efforts on producing and exporting the goods/services in which they are most efficient; at the same time, they import goods/services that they can't produce efficiently at home. The logical implication: Any country or region should specialize in goods/services that it can produce relatively more efficiently, then export those goods/services.

Ricardo's theory has provided the major theoretical support for free trade, as exemplified in the British Empire and (in post-WWII years) in the neoliberal prescriptions of the IMF and WB (see Globalization Part 1 and Globalization Part 2 for my own analysis of the Philippine case and the some of the key neoliberal concepts).

Neo-liberal theory is generally thought to have originated at the University of Chicago, where Friedrich von Hayek and his students (most prominently Milton Friedman) laid the theoretical groundwork that would later inspire Ronald Reagan and Margaret Thatcher. The key neoliberal public policy prescription is the promotion of an open economy; the message might well be paraphrased as: "protectionism creates complacency and liberalization speeds up technological progress." Domestic producers in developing countries gain access to global markets, benefiting from their comparative advantage and the international division of labor. By facing global competition head-on, they are also forced to become more efficient. To make things even better, domestic consumers benefit from open markets, lower prices, better quality, and greater variety of goods and services. Everybody wins!

This body of trade theory has now been thoroughly integrated into the international trade regime, and provides the subtext for the ongoing debates revolving around, for example, the IMF and the WTO. Sometimes referred to as the "Washington consensus", this approach stresses open markets, reduced government control (privatization), and deregulation.

Sounds good in theory. In practice, however, chasing the holy grail of globalization ain't all it's cracked up to be.

The Washington consensus has in practice proven a devastating economic cocktail for many developing countries who try to do too much too soon. The theory is that implementing these policies will cause foreign investment to pour in, growth to surge, and living standards to rise. But one can evaluate the reality by looking at countries like Indonesia and Argentina, countries that rushed headlong to adopt the Washington Consensus, in the process transitioning from economic growth success stories to economic basket cases. Globalization is turning out to be a lot harder than people thought in the euphoria of the mid-to-late nineties.

With specific reference to trade liberalization in the agricultural sector, the theory says that trade liberalization and the globalization of agriculture should be based on relative efficiencies, with countries benefiting from their comparative advantages. By opening up borders, farmers all over the world will be better off.

However, even as they preach the global free trade agenda, the major developing countries help out their own farmers with more than $360 billion a year in subsidies (up to 66% the value of production), about seven times what they give in development aid. Even as the Bush administration is pressuring developing countries to dismantle their remaining agricultural tariffs, actions speak louder than words. Congress passed the Farm Security and Rural investment Act in 2002, raising agricultural subsidies to up to $180 billion over the next decade. The EU continues to be the biggest offender, with the Common Agricultural Policy (CAP) costing EU governments over $40 billion each year (about half its annual budget, representing an average subsidy of $2.50 for every cow in EU).

The main developed nations (referring primarily to the US, EU, and Japan) use a variety of rationalizations in defense of agricultural subsidies. We have to preserve our remaining but rapidly vanishing green landscapes (but what about a serious approach to environmental protection?). We have to save our small family farms (but aren't the main beneficiaries of subsidies the huge agribusiness multinationals?). We have to ensure our nation's food security (but what about comparative advantage and the ability of the developing countries huge economies to import all the food needed from countries that produce more efficiently?). In short, red herrings all.

The reality is that existing developed country policies encourage agricultural monopolies and oligopolies. That tendency is reinforced by IMF structural adjustment programs that have (for example) forced developing countries to liberalize fertilizer imports, remove subsidies on irrigation or electricity, and deregulate the domestic production of wheat, rice, sugar and the like. Such policies promote centralized control and further economic dominance by the large transnational agribusiness concerns (e.g., Cargill, Pepsico).

The damage is being done globally, to countries like the Philippines, Brazil, Mozambique, even New Zealand. Mexico is a particularly acute example, as NAFTA has turned out to be great for Kansas agribusiness concerns but devastating for one-mule Mexican corn farmers. Poor campesinos trying to eke out a living find that they can't sell their produce due to mountains of unsold Yankee corn selling below market price in the Guadalajara market. Thanks to subsidies, American farmers can sell overseas at 20% below the actual cost of production and still make good money.

Returning to the theory of free trade for a moment, a productive farming sector based on cheap land and labor should be the first step up the ladder of social and economic development for poor countries. Given the relative factors of production (a la Ricardo), poor countries have a comparative advantage thanks to their cheap land and cheap labor. Thus, it makes sense that a healthy, export-oriented farm sector should lead the way out of poverty.

However, that logical path to development is blocked by the perverse subsidies of the United States, Europe, and Japan. The same Western leaders who are so ardent in promoting the virtues of free trade, and who so energetically push for tariff reductions by poor countries, are the same ones who refuse to dismantle domestic production incentives that create surpluses of sugar and cotton which are then dumped on world markets.

There's a strong argument to be made that this particular aspect of globalization as it currently exists encourages and supports anti-competitive and monopolistic behaviors. In the longer term, continued agricultural subsidies in developed countries will guarantee depressed global commodity prices, not to mention unemployment and underemployment and magnified dependency in developing countries. Expect social instability, environmental degradation, and increased illegal migration given the lack of jobs in the agricultural sectors in the developing countries.

'Nuff said for now.

If all goes well (or as my Grandpa used to say, if the Lord's willin' and the creek don't 'rise, or to paraphrase with reference to the current international situation, if the world don't end in a hail of weapons of mass destruction before I can get it written), I'll soon post "No Free Lunch, Part 2", in which I'll try to talk a bit more specifically about this issue with reference to Vietnamese catfish and (my old favorite topic) sugar cane.