The Global Economy Needs Bridges Not Walls

It's easy to fall into the habit of blaming our woes on others. Today, it often seems as if growth and job gains in the developing world are coming at the expense of the industrialized world--and the evidence exists to support the argument. After all, U.S. manufacturers have said that they are shutting down stateside plants and moving production to Mexico, where labor is far cheaper.

But world growth is not a zero-sum proposition. Since the postwar recovery began in 1950, average annual growth, globally, has been 3.5%, while the value of trade, in real terms, has grown 6.5% a year. For every $100 billion more in goods that are traded around the world, growth is pushed about $10 billion to $20 billion higher than it otherwise would be, says Gary C. Hufbauer, economist at the Institute for International Economics, a Washington think tank. And even those numbers underestimate the gains, since cheap imports raise the buyers' standard of living by allowing them to purchase the same goods at lower cost.

There are, to be sure, winners and losers. Trade induces sizable shifts in production, swiftly creating and destroying jobs. It was the industrialized nations' recent poor record on job creation that prompted President Clinton's call for a Group of Seven jobs summit--a meeting that needs to be more than just another Clinton teach-in gone global.

ONE-PERCENT ANTE. The Clinton Administration might do well to start by addressing the people who have been left behind. Rudiger Dornbusch, a Massachusetts Institute of Technology economist and BUSINESS WEEK columnist, suggests that the U.S. should pledge 1% of its gross domestic product toward retraining and offering displaced workers other assistance. "We take it for granted that free trade is good, but that's not true if we don't compensate the losers," says Dornbusch.

If the U.S. and other industrialized nations do a better job of tending to their own, they ought to be better able to resist the temptation to scapegoat developing nations. Instead of preaching protectionism, G-7 officials should devise new strategies for dealing with the developing world and with the eastern European and former Soviet nations now in economic transition.

For instance, the industrialized nations ought to extend the goodies that bilateral and regional agreements offer select countries, says Peter F. Cowhey, professor of international relations at the University of California at San Diego. Cowhey proposes a "wedding-cake approach," whereby developing nations, depending on the extent to which they open their own markets and deregulate their financial systems, are permitted to ascend into the ranks of free traders. This way, they would receive more benefits in return for fulfilling more obligations under the multilateral trading system, known as the General Agreement on Tariffs & Trade.

Similarly, promises of membership in such groups as the Organization for Economic Cooperation & Development might be extended. Mexico wants to join the OECD and is likely to do so within a year or two. And Western Europe should eschew restrictive trade practices, such as the imposition of tariffs and import quotas, which will reduce output and incomes in eastern Europe and bring still more immigrants pressing against their own borders. Instead, promises of Eastern European entry into the European Community should be formalized, and a schedule for trade liberalization should be adopted.

OFFERING A CARROT. Finally, foreign aid, debt negotiations, and trade should be tied to specific objectives--not, as so often in the past, to military sales or purchases of goods from the donor country. It sometimes may make sense for the U.S. and other industrialized nations to seek certain outcomes, such as a cleaner environment and an improved record on human rights. And one way to achieve them is to introduce these issues as a condition for assistance or trade.

Novel arrangements known as debt-for-nature swaps, pioneered by Costa Rica, have reduced Third World debt in exchange for programs to protect natural resources, such as forests. Similar swap agreements could tie foreign-aid grants to progress on human rights.

Finally, trade negotiations might acknowledge some of these issues directly and attempt to find equitable solutions for all parties. It's likely, for instance, that the North American Free Trade Agreement will permit the formation of either a special development bank or a fund that will finance infrastructure and environmental projects--and help communities hurt by NAFTA. Certainly, the industrialized world's approach to the developing world ought to be inclusive rather than exclusive. Trade and stronger economic ties between nations are a win-win proposition.

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