Trade adjustment in the WTO system: are more safeguards the answer?

For countries to engage successfully in the international tradingsystem, their industries, firms, and workers must respond continuallyto new conditions of competition. The continuing need to adjustarises both from policy changes approved in multilateral negotiations—e.g.implementation of trade liberalization commitments, preferenceerosion, or adverse terms-of-trade consequences of export subsidyelimination—and from ongoing changes in competitive pressuresinherent in a liberal trading system—e.g. effects on comparativeadvantage of changes in technology or factor supplies. But thepolitical response to a situation calling for adjustment isoften a call for ‘safeguards’—whether as anex ante provision in negotiated agreements or as an ex postmeasure once the agreement has been signed and the reality ofnew conditions takes shape. This paper examines the range ofadjustment problems confronting the current and future internationaltrading system, the economic arguments for intervention to dealwith these problems, the adjustment environment as set out inthe current World Trade Organization (WTO) Agreements, and proposalsfor reform. While the adjustment problems we discuss apply toboth rich and poor WTO member countries, we highlight the issuesof adjustment especially relevant for developing countries.     

The Assessment: EMU, Four Years On

This paper reviews the functioning of the Economic and MonetaryUnion over the first 4 years of its existence. Monetary policyis viewed as having been of the ‘inflation-targeting’type, but with a tendency towards delay and conservatism inadjustment, which may also reflect over-optimistic output growthforecasts. The resulting pressure on the Stability and GrowthPact (SGP) illustrates the weakness in the ‘consensusview’ of the harmonious interaction of monetary, fiscal,and supply-side policies, which requires policy in all threeareas to be ‘correct’. In discussing reform of theSGP, a looser but still constraining form of fiscal agreementis advocated. The supply-side and balance-of-payments issuesinvolved in inter-country adjustment also interact importantlywith the SGP and are identified as key areas of difficulty ina still ‘immature’ monetary union, with separatelabour-market structures. Here the mechanisms for coordinationare more or less absent.     

An ideal Kyoto protocol: emissions trading, redistributive transfers and global participation

We demonstrate that an interregional policy scheme featuringtrading of carbon dioxide emissions, redistributive resourcetransfers and global participation, a scheme which we call ‘IdealKyoto Protocol’, yields an efficient equilibrium allocationfor a global economy. An altruistic international agency—say,the Global Environment Facility—should operate the resourcetransfer mechanism. In addition, regional governments shouldbe able to make independent policy commitments regarding howto control regional emissions of carbon dioxide in anticipationof the redistributive transfers. Our efficiency result suggeststhat the USA should be ‘bribed’ to reverse its decisionof not participating in the Kyoto Protocol.     

Why is it so difficult? Trade liberalization under the Doha Agenda

Many explanations have been offered for the current difficultiesof the World Trade Organization (WTO). In fact, the system appearsto have managed many of these challenges reasonably well, includingthe increase in the number of members, its ‘mediaeval’decision-making procedures, the changing geopolitical environment,the rapid growth of preferential trade arrangements (PTAs),the complexity of its agreements, and concerns about erosionof unilateral preferences. By contrast, the near-exhaustionof the traditional fuel of industrial-country non-agriculturaltariffs, the increasing importance of non-trade concerns, andincomplete adjustment to a new, multi-polar negotiating systemappear to be important factors requiring further examination.     

The Evolving Accidental Information Super-Highway

The technology of the Internet is not static. Although its ‘end-to-end’architecture has made this ‘connection-less’ communicationssystem readily ‘extensible’, and highly encouragingto innovation both in hardware and software applications, thereare strong pressures for engineering changes. Some of theseare wanted to support novel transport services (e.g. voice telephony,real-time video); others would address drawbacks that appearedwith the opening of the Internet to public and commercial traffic—e.g.the difficulties of blocking delivery of offensive content,suppressing malicious actions (e.g. ‘denial of service’attacks), pricing bandwidth usage to reduce congestion. Theexpected gains from making improvements in the core of the networkshould be weighed against the loss of the social and economicbenefits that derive from the end-to-end architectural design.Even where technological ‘fixes’ can be placed atthe networks' edges, the option remains to search for alternative,institutional mechanisms of governing conduct in cyberspace.     

The Assessment: How Far has Globalization Gone?

There is a widespread perception that international economicintegration has been proceeding faster and further than everbefore. A careful examination of the appropriate indicatorsreveals that such a dramatic account of recent developmentsapplies only exceptionally (notably to China); the general ruleis for steadily increasing trade shares and foreign investment,which still leaves the majority of workers employed in shelteredsectors. Differences in rates of social spending have survivedpressures on countries to ‘race to the bottom’.Profitability has not converged, even in fiercely competitivemanufacturing. Declines in absolute poverty and perhaps inequalitystill leave rising absolute differences between North and South,while expectations are probably converging faster.     

Five hypotheses concerning the fate of the Singapore issues in the Doha Round

At the Cancún Ministerial Conference, the members ofthe World Trade Organization (WTO) disagreed on whether to launchnegotiations on multilateral disciplines concerning the fourareas of government policy collectively known as the ‘Singaporeissues’. This amounted to a decision not to expand theWTO's boundaries along these dimensions. In this paper, fivehypotheses concerning the treatment of the Singapore issuesby the WTO's membership are described and assessed. The implicationsof this assessment for the likelihood that, at some future date,similar proposals can be successfully advanced in the multilateraltrade arena are also discussed.     

Redesigning Regulation of Pensions and Other Financial Products

We observe that financial regulation is ever-growing, with thelatest area to experience increased supervisory attention beingpensions. Yet this has not made the financial world or consumerssafer, and for pensions in particular there are unexpected andundesired consequences. We explore the current policy approachto supervision, which is ‘bottom up’, i.e. assessmentand regulation of individual institutions, with the aim ofmakingthe financial system safe by making each institution safe. Weshow that this is both damaging (because it stifles innovation)and does not work (because risk will always be squeezed fromthe regulated institutions to the less regulated and less seen).Instead, we advocate a ‘top-down’ approach, whichfocuses on making the system safe first. We conclude that onceyou have made systems safe, detailed supervision of individualinstitutions is less necessary, thus reducing the burden ofsupervision. We believe that this approach will lead to a moresuitable and diverse treatment of different risks that willincrease both systemic and consumer safety. ‘If you haveten thousand regulations you destroy all respect for the law’,Winston Churchill (1931). ‘The ultimate result of shieldingmen from the effects of folly is to fill the world with fools’,Herbert Spencer (1891). Footnotes ¹ E-mail addresses: n.barr{at}lse.ac.uk; john_nugee{at}ssga.com     

Assessing inflation targeting through intervention analysis

The aim of this paper is to deal with the empirical aspectsof the ‘new’ monetary policy framework, known asInflation Targeting. Applying Intervention Analysis to multivariateStructural Time Series models, which avoids certain biases encounteredin the use of conventional regression estimators, new empiricalevidence is produced in the case of a number of OECD countries.These results demonstrate that although Inflation Targetinghas gone hand-in-hand with low inflation, the strategy was introducedwell after inflation had begun its downward trend. But, then,Inflation Targeting ‘locks in’ low inflation rates.The evidence produced in this paper suggests that non-InflationTargeting central banks have also been successful on this score.     

Green and Brown? Globalization and the Environment

Globalization—viewed as a process of economic integrationthat embraces governance as well as markets—could leadto worldwide convergence toward higher or lower environmentalquality, or to environmental polarization in which the ‘greening’of the global North is accompanied by the ‘browning’of the global South. The outcome will not be dictated by aninexorable logic. Rather it will depend on how the opportunitiescreated by globalization alter balances of power within countriesand among them.     

Tactical Coordination in Plurality Electoral Systems

Simple plurality election systems (commonly known as ‘firstpast the post’) are often associated with the dominanceof two political parties. Such systems tend to reward leadingparties with a disproportionately large number of seats (the‘mechanical’ effect) and provoke tactical voting,where voters switch away from trailing parties (the ‘psychological’effect). We view tactical voting as a coordination problem.A group of voters wish to prevent a win by a disliked party(such as the Conservatives in recent UK elections) and mustpartially coordinate behind a single challenger (such as Labouror the Liberal Democrats) in order to do this. Crucially, votershave limited information on the situation within their constituencyand hence there is no common knowledge of the game being played—tacticalvoting is a global game. We show that in this setting, voterswill only partially coordinate. Furthermore, tactical votingexhibits negative feedback—tactical voting by others reducesthe incentive for an individual to vote tactically, since theybecome concerned that they may switch in the wrong direction.We calibrate our model, and apply it to the UK General Electionof 1997. Throughout England, we find that the ‘mechanical’and ‘psychological’ effects tend to offset eachother: tactical voting serves to reverse the Conservative biasthat results from the geographic distribution of preferences.     

Alternatives for multilateral development diplomacy: Some suggestions

The article examines the characteristics of international economic negotiations prepared by UNCTAD and makes suggestions to improve multilateral development diplomacy. The particular administrative and bureaucratic context of such discussions has been neglected. Rather than the politics or economics of negotiations, the dynamics of bargaining and of the UNCTAD secretariat are emphasized. The principles of the group system and the solidarity of developing countries were necessary to launch negotiations, but have become counterproductive. Suggestions for changes in the conduct of international economic negotiations are based on selected case studies. Alternatives for multilateral development diplomacy involve flexible coalitions based on interests rather than ideology; a modicum of political good will on the specific issue to be discussed and a willingness to compromise; and proper political and analytical spade-work for policy proposals.     

Product quality, lender liability, and consumer credit

Under ‘linked credit’ (also known as ‘connectedlending’), the buyer obtains a loan from a lender withthe specific purpose of purchasing a certain product. Creditis arranged directly by the seller, who acts as an intermediaryfor the finance company. Within this form of financing, thelender often accepts a measure of liability for defective products.We show that ‘connected-lender liability’ can workas a signalling device for the reliability of sellers, so asto alleviate the market failure that arises when sellers arebetter informed than consumers about the quality of their products.     

Open-Source Software Development and Distributed Innovation

Open-source software development is a production model thatexploits the distributed intelligence of participants in Internetcommunities. This model is efficient because of two relatedreasons: it avoids the inefficiencies of a strong intellectualproperty regime and it implements concurrently design and testingof software modules. The hazard of open source is that projectscan ‘fork’ into competing versions. However, open-sourcecommunities consist of governance structures that constitutionallyminimize this danger. Because open source works in a distributedenvironment, it presents an opportunity for developing countriesto participate in frontier innovation.     

Liberalisation, FDI, and productivity spillovers--an analysis of Indian manufacturing firms

The objective of the intensification of reforms in India's trade,technology and industry policies in 1991 was to make Indianindustry competitive. In the light of these attempted changes,the present paper tested two hypotheses, namely (a) whetherliberalisation has improved the productivity of local firms;and (b) whether the spillovers from technology transfer haveincreased in the liberal regime. To test these, techniques frompanel data and stochastic production frontier were employedon 487 firms belonging to 24 three-digit manufacturing industriesfor the period 1989–90 to 1996–97. The results showedthat after liberalisation, the productivity of Indian industry,especially the foreign owned firms, has improved. The econometricresults suggested that only ‘scientific’ non-FDIfirms have benefited from the liberalisation. For the ‘non-scientific’firms, the impact is found to be productivity depressing. Withrespect to spillovers, only those domestic firms, which investedin R&D to decode the spilled knowledge, could benefit.     

MULTI-PRODUCT COST ATTRIBUTES: A STUDY OF U.K. BUILDING SOCIETIES

A translog multi-product cost function is estimated jointlywith a derived input cost share equation to obtain estimatesof overall economies of scale and ‘augmented’ overalleconomies of scale for the United Kingdom building society industry.The ‘augmented’ measure takes into account inducedchanges in the number of building society branch offices asthe outputs vary. The parameter estimates are then used to computethe derivatives of the marginal costs of each product to testfor product-specific economies of scale and economies of scope.     

The Social Cost of Carbon and its Policy Implications

The shadow price, or ‘social cost’, of carbon isan important indicator of the global incremental damage doneby emitting greenhouse gases today. Cost–benefit analysiswould set the optimal amount of greenhouse-gas-emission reductionat the point where this social cost just equals the incrementalcost of controlling emissions. The higher the value for thesocial cost of carbon, the more control is warranted. This comparisonassumes that cost–benefit analysis is the correct wayof determining climate-change policy, and many believe thisis not the case because of the very long-term, irreversible,and potentially catastrophic nature of global warming. But,in the short run at least, a comparison of cost and benefitsis required, and, in any event, all decisions imply costs andbenefits. But what is the ‘right’ figure for thesocial cost of carbon? This paper reviews the UK government'sassessment of the cost and concludes that it has been set fartoo high because of a misreading of the integrated assessmentmodels used to balance costs and benefits. Moreover, adoptionof the UK government's shadow price would have formidable implicationsfor energy policy in the UK, and for policies on afforestation.     

Agricultural productivity, trade, and industrialisation

Traditional development economics states that industrialisationmust be positively correlated with agricultural developmentas in the American and many European cases. However, some recentindustrialisation experiences suggests a negative link whichcan be supported by a simple Ricardian argument Yet this argumentis not consistent with the agricultural ‘leap forward’that often occurred before industrialisation took place. Here,we develop a model in which, for a closed economy, industrialisationfollows rising agricultural productivity. For a small open economy,multiple equilibria are possible and industrialisation tendsto be associated with low agricultural productivity, but istriggered by sudden changes in it.     

Active citizen's income, unconditional income and participation under imperfect competition: a welfare analysis

Various types of basic income schemes are considered to compensatethe allocative inefficiencies induced by unemployment benefits.A dynamic general equilibrium model of a unionised economy isdeveloped in which participation to the formal labour marketis endogenous and the budget of the State has to balance. Itis shown that basic income schemes reduce the equilibrium unemploymentrate. Assuming that job-search is costly to monitor, the normativeanalysis suggests that only the active population should beeligible to the basic income. Introducing such an ‘activecitizen’s income’ can be a Pareto-improving reform.     

Complementing EMU: Rethinking Cohesion Policy

Under EMU, the less competitive regions of the EU—usuallyassumed to be peripheral—have been widely expected tolose ground, yet it is the core of the EU that, so far, hasappeared to have suffered from the advent of the euro. Thispaper looks at the processes behind regional divergence in theEU, and presents evidence on recent and prospective trends asEMU is consolidated. Bearing in mind that the imminent enlargementof the EU will radically change the political economy of theEU's efforts to assure ‘cohesion’, policy issuesare then discussed. Looking forward to the next renegotiationof the Structural Funds, it is argued that difficult decisionshave to be taken about the extent and character of EU policy.The option of an open method of coordination for cohesion policyis put forward as a means of resolving some of the hard choices.