A new form of colonialism: labour and environment standards in trade agreements

A Filipino friend had a blunt way of referring to labour and environment clauses in trade agreements: “the whites are back, telling us what to do”. Prior to our meeting at graduate school in Japan, he was head of the APEC division at the Philippine ministry of International trade and industry

One of my policy essays for my Masters of Public Policy Degree in Japan was on the social clauses of the GATT. I described the labour and environmental clauses is a new form of colonialism.

My classmates were government officials from all around Asia, more than 20 countries. As they spoke English as a second language, they were pleased to learn of a new way of describing social clauses in trade agreements in English.

Developing countries are rather awash with democratic governments these days. More than a few and extended period of rule by left-wing governments and by left-wing populists. They are well able to reflect the will of the people on labour market regulation. An example of this is from when Richard Posner was writing about the rise of left-wing populists in Latin America about 10 years ago:

What happens in a democracy is that if the party in power does not deliver what the people expect, they will vote for another party, regardless of their views of sound policy–on which they probably have no settled views. Democracy is not a deliberative process (as many academics believe), in the sense that voters examine and discuss issues and so formulate a thoughtful, knowledgeable opinion on what policies are right for the nation or for them. Voters have neither the time, the education, nor the inclination for such an activity, as intellectuals imagine. All they know is results. So if the Right fails to deliver on its promises, the Left takes over, whether or not it has better or even different policies.

Becker notes the discrepancy between left-wing rhetoric and the Left’s actual economic policies when in power, which in Latin America as elsewhere tend to be more moderate than their rhetoric. Political identity is more than the resultant of a sober calculation of advantages, especially since voters know that a single vote will not swing an election. Political identity is more like being a fan, attracted to one team or another for reasons unrelated to any concrete benefits.

The Latin American Left is defined in significant part, for historical and cultural reasons, by hostility to the United States and, by extension, to capitalism, of which the United States is the symbol; that hostility need not be expressed other than in words and largely symbolic actions.

…But, to repeat, the “demand” for anti-American and anti-capitalist positions can, it seems, be largely satisfied by rhetoric and symbolic actions. Leftist governments intelligent enough to understand that they can benefit their constituents more by adopting capitalist policies than by nationalizing industry or redistributing wealth will do so, while employing leftist rhetoric to satisfy the constituents’ emotional commitments.

The principal conspiracy theory of the 20th century left was too many developing countries were voting in left-wing governments and the CIA launched military coups against them. Those same countries are having vibrant elections electing governments from both the left and the right which are embracing the market economy.

What is quite clear is elections are lively affairs in most developing countries. You are fooling yourself if you suggest to the contrary. More than a few of these left-wing populists that do get elected come from union backgrounds with suitable pro-labour fiery rhetoric. Once the left-wing parties win power, they are careful, not always but more often than you think, of killing the goose that laid the golden egg as Posner explained.

As for why electorate in developing countries such as Latin America were turning left, Gary Becker explained in the same blog post with Posner in 2006:

One of the more interesting and disturbing developments during the past several years is the leftward movement of several governments in South America, including Venezuela, Bolivia, Argentina, and others. They may soon be joined by Mexico and Peru since both countries shortly have elections where avowedly left wing candidates are favored to win. What makes this development so noticeable is that much of the rest of the world is moving in the opposite direction. China and India, with 40 percent of the world’s population, are moving away from socialism and communism. Poland and the other countries of central Europe have also rejected state controls of their economies and have transited toward capitalist economies.

What factors made Latin America, Asia, and Central Europe take such different paths? One part of the explanation is that the language used by Latin American politicians is often more anti-capitalism than elsewhere, even when policies are not so different.

…One legitimate reason for the opposition to capitalism in Latin America is that it frequently has been “crony capitalism” as opposed to the competitive capitalism that produces desirable social outcomes. Crony capitalism is a system where companies with close connections to the government gain economic power not by competing better, but by using the government to get favored and protected positions. These favors include monopolies over telecommunications, exclusive licenses to import different goods, and other sizeable economic advantages. Some cronyism is found in all countries, but Mexico and other Latin countries have often taken the influence of political connections to extremes.

In essence, crony capitalism often creates private monopolies that hurt consumers compared to their welfare under competition. The excesses of cronyism have provided ammunition to parties of the left that are openly hostile to capitalism and neo-liberal policies.

Yet when these parties come to power they usually do not reduce the importance of political influence but shift power to groups that support them. A distinguishing characteristic of Chile since the reforms of the early 1980’s is the growth in competitive capitalism at the expense of crony capitalism. This shift more than anything else explains the economic rise of Chile during the past 25 years that has made Chile the most economically successful of all Latin American nations.

An additional factor behind the recent resurgence of left wing parties in Latin America is the unequal access to education and financial capital that has produced an unusual degree of income inequality in most of these countries. Leftist ideologies take advantage of the discontent this causes among intellectuals and the poor, and promise a redistribution of assets and better education opportunities for the poor. Promises of redistribution have figured prominently in the speeches of Chavez, Lula, Morales, Peronists in Argentina, and Andres Manuel Lopez Obrador, former mayor of Mexico City and a leading candidate to be Mexico’s next president. When it is discovered that left wing governments usually do not end up helping the poor very much, they tend to be voted out of office.

Every successful example of economic development this past century has been by producing for the world market rather than trying for self-sufficiency. These workers in the export industries were even poorer before the new exporting jobs became available. It is globalisation and embracing the market economy that may China rich, India richer, and is contributing to the prosperity of many developing county as Paul Krugman well explains.

… wherever the new export industries have grown, there has been measurable improvement in the lives of ordinary people. Partly this is because a growing industry must offer a somewhat higher wage than workers could get elsewhere in order to get them to move.

More importantly, however, the growth of manufacturing–and of the penumbra of other jobs that the new export sector creates–has a ripple effect throughout the economy. The pressure on the land becomes less intense, so rural wages rise; the pool of unemployed urban dwellers always anxious for work shrinks, so factories start to compete with each other for workers, and urban wages also begin to rise.

Where the process has gone on long enough–say, in South Korea or Taiwan–average wages start to approach what an American teen-ager can earn at McDonald’s. And eventually people are no longer eager to live on garbage dumps. (Smokey Mountain persisted because the Philippines, until recently, did not share in the export-led growth of its neighbors. Jobs that pay better than scavenging are still few and far between.)

Environmental and labour standards are an attempt to impose upon developing countries rules they are well able to choose for themselves if they think their economies can afford it. Let their people decide at their own elections, not their former colonial masters. Krugman again back when he was heir apparent to Milton Friedman is a communicator of economics to the public:

And since export-oriented growth, for all its injustice, has been a huge boon for the workers in those nations, anything that curtails that growth is very much against their interests. A policy of good jobs in principle, but no jobs in practice, might assuage our consciences, but it is no favor to its alleged beneficiaries.

You may say that the wretched of the earth should not be forced to serve as hewers of wood, drawers of water, and sewers of sneakers for the affluent. But what is the alternative? Should they be helped with foreign aid? Maybe–although the historical record of regions like southern Italy suggests that such aid has a tendency to promote perpetual dependence. Anyway, there isn’t the slightest prospect of significant aid materializing. Should their own governments provide more social justice? Of course–but they won’t, or at least not because we tell them to.

And as long as you have no realistic alternative to industrialization based on low wages, to oppose it means that you are willing to deny desperately poor people the best chance they have of progress for the sake of what amounts to an aesthetic standard–that is, the fact that you don’t like the idea of workers being paid a pittance to supply rich Westerners with fashion items.

In short, my correspondents are not entitled to their self-righteousness. They have not thought the matter through. And when the hopes of hundreds of millions are at stake, thinking things through is not just good intellectual practice. It is a moral duty.

The left in New Zealand is more than precious in their objections to investment chapters in trade agreements. They encroach on sovereignty just as much as labour and environment chapters. They are inserted into trade agreements by former colonial masters as a way of placating opposition to import competition from the union movement in rich countries.

The unions are very much against investor state dispute settlement provisions of trade agreements, but are happy to be serial complainants to secretive International Labour Organisation (ILO) committees about employment law amendments they do not like. The unions are happy with those parts of international economic law that serve its interests but behave hypocritical about the other parts that do not.

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