Not Quite Correct, Jo

Joseph Stiglitz’s latest book is a proposal for constructing a fair trading system for all. In many ways, Stiglitz’s work can be described as a work on the economics of imperfection. No simple market solution fits all cases because power relationships and asymmetries of information impede the neat flows that some simple economic models envisage. My economics tutor used to say that the most important part of an economic model is the "other things being equal" clause. And Stiglitz insistently reminds economists that other things are never quite equal.

So, open trade, while mostly good, may put some countries at a disadvantage; comparative advantage is not a given, but discovered through a process of struggle, and trade can sometimes impede the functioning of other necessary instruments of development like industrial policy. So, one size may not quite fit all, though what exactly fits which country will remain the object of intense debate.

What Stiglitz and his co-author Charlton have no doubt about is that an open trading system is mostly a good thing and can be an engine for development. Constructing a fair trading system, however, will have to jettison the bedrock principle of current trade negotiations: the principle of reciprocity—I will give you some concessions if you give me some in return. This system protects those who can extract more concessions from the weaker nations.

Instead, he proposes the following principle. All WTO members should commit themselves to providing free market access in all goods to all developing countries that are poorer and smaller than themselves.

In addition, he calls for the elimination of all agriculture subsidies by developed nations, and the elimination of rules of origin. Thus all developing countries should expect free access to all markets with a larger GDP and a larger GDP per capita. This is a sort of economic theory version of the view from below. It is premised on the thought that you have a right to be protected against the rich but not against the poor. The proposal has many advantages: it distributes the obligations to openness more evenly—so Egypt will have to grant open rights to a poorer nation like Uganda, it promotes more South-South liberalisation and so forth.

Stiglitz makes a characteristically bold and vigorous argument, with a mass of empirical and theoretical results conveniently summarised. His critique of the reciprocity principle is spot on. Unfortunately, the logic of his proposal is not fully spelled out. In the abstract, it is an intuitively defensible presumption that richer countries should be more open to countries that are poorer than they are. But it is not quite as intuitively defensible that the United States should be more open to a nation like China that is technically poorer, without reciprocal concessions. Indeed, it is difficult to see how this proposal distributes burdens more fairly, since it seems to expose nations to their more immediate competitors rather more starkly. After all, trade is not just about inter-country equality, it can have ramifications for intra-country inequality as well.

At the same time, it is also curious why Stiglitz does not follow his own logic more. Are agricultural exports really a panacea for the poorest countries of Africa? As always, Stiglitz’s book is incisive, clear and will be an extraordinary primer on trade issues. But there is something of an irony in the fact that the most distinguished exponent of the economics of imperfection seems to have fallen victim to his own brand of an utopian politics of perfection.