Blinded by Free Trade and Comparative Advantage
By Geepu Nah Tiepoh
July 26, 2000
In his reaction to my recent article, "The Rice Import Liberalization Agenda in Liberia: Some Critical Policy Issues", Harry Greaves, Jr. has clearly evaded the crucial arguments of the article and focused instead on preaching rhetoric about comparative advantage, free trade and globalization. In asking the question, "What's the Case for Self-Sufficiency in Rice Production?", Greaves asserted that the article was based on "the false premise" that Liberia should be self-sufficient in rice production. He then tried to argue that such a policy option is unnecessary in the context of a new "global economy in which the easy accessibility and relatively low cost of information has made trade amongst peoples over vast expanses of geography a snap". He continues, "As a consumer, I can log on to the Internet from my perch in Monrovia, and in an instant get quotations from rice producers as far afield as Thailand, Vietnam and Louisiana to enable me to make an informed decision as to whether I would be better off to buy my rice from a farmer in Tappita or from one of foreign competitors". Greaves also described my article (which is also available online for readers to judge) as advocating "policy prescriptions purely on the basis of emotion", and he cautioned us that the answer to Liberia's economic questions "lies in research and analysis, not in ideology".
It is obvious, ladies and gentlemen, that this commentator has either misunderstood or deliberately chosen to distort my arguments. To reiterate, the main thrust of the article was about explaining some of the possible policy implications of rice import liberalization for macroeconomic stability and Liberia's longstanding preoccupation with rice self-sufficiency. It was not about judging or advocating any strategy as an appropriate policy option for Liberia. Had this been the objective of the article, every effort would have been made to present the case successfully. It is therefore offensive and intellectually bankrupt for someone else to ascribe a false objective to my thoughts. Most students of Liberia's modern economic history, perhaps with the exception of our critic, are aware that successive Liberian governments, since at least the early 1970s, have to different degrees embarked upon a strategy of rice self-sufficiency. Under its 1976-1980 National Socio-Economic Plan, the Tolbert government, for example, introduced and pursued this policy option. The Doe government also made similar efforts in the 1980s. About a year ago, Taylor gave his most vocal support yet to this strategy when he accused Liberians of being "too lazy" to produce their own food, and threatened that "anyone who wanted to eat imported rice would pay more for it" (Star Radio Liberia Daily News Bulletin, October 24, 1999). Few months later, however, this same Taylor government was embarking upon rice import liberalization. My article was about explaining the domestic and international imperatives driving this new policy attitude of the government, and how rice import liberalization might possibly affect Liberia's longstanding pursuit of (or flirtation with) rice self-sufficiency as a policy option. Nowhere in the discussion that a judgement was passed on the appropriateness or inappropriateness of this policy. I hereby challenge Greaves to identify where in that article I have expressed "emotion-laden cant, hype and theology about the need for Liberia to be self-sufficient in rice", as he falsely claimed. Where in the article was any support or condemnation espoused for rice self-sufficiency as a policy option? Where in the article did I advocate the adoption of "policy prescriptions purely on the basis of emotion", as insinuated by him? Greaves failed to identify where these things were expressed in the article.
One would think that a man, who claims to be interested in "research and analysis, not in ideology", would have avoided the temptation of being blinded by orthodox economic ideology and concentrated instead on the practical policy questions raised in the article. However, like a 6-year old boy anxious to show off his new toy, Greaves chose to impress upon us his knowledge of the old theoretical dogma of Ricardian comparative advantage and free trade (all of which are being somewhat discredited by global economic and human realities). Instead of debating on how rice import liberalization might affect Liberia's internal and external balances and the policy option of rice self-sufficiency (which was the objective of the article), he decided to preach about how international trade is free, and therefore Liberia does not need rice self-sufficiency because consumers like him can "log on to the Internet" from Monrovia and locate cheaper rice in Thailand, Vietnam and Louisiana instead of buying it from Tappita. It is obvious that this man's whole reaction to the article was prompted by mere ideology and not based on any genuine interest in debating the serious policy issues raised in the article.
Could it be that our critic is so irretrievably committed to neo-liberal economic ideology that he considers any expression of differences with this order as a personal challenge? Perhaps, he felt that my brief discussion of the possible negative implications of rice import liberalization was a challenge to his ideological convictions, and therefore he had to come up to defend and protect his creed. But in doing so he has committed a serious analytical blunder. As someone who claims to be particular about "research and analysis", he should have been careful about the points at which to critique the article. He should have, for example, tried to refute my argument that the spread of import liberalization to many more sectors of the Liberian economy may result in government revenue loss and have a destabilizing effect on the government's self-established objective of fiscal policy restraint. Instead of distorting and evading the basic arguments of the article, he should have attempted to refute the claim made that the extension of import liberalization to more economic sectors, including rice, may lead to export dumping and a possible discouraging impact on the domestic production of rice. Oh, less we forget, these policy implications of import liberalization are not relevant because, for him, the Liberian consumer can log on to the Internet from Monrovia and get rice cheaply from Louisiana.
It is important for Greaves to realize that we do not need to be taught the virtues of comparative advantage and free trade, for it is common knowledge that nations must engage in some form of international exchange of goods, services, and capital investments. Therefore, what is being questioned is not the principle of international trade and investment as such, but the systemic inequalities underlying the global economic system as well as those ideological tools that are used to perpetuate them. Unfortunately, certain individuals have succumbed to these ideological stratagems and therefore find nothing wrong with the current system of international trade and investment. For them, the global economy is operating perfectly, as predicted by the neo-classical theories of comparative advantage and free trade. Such a conclusion is false, however. And while it is unworthy to be dragged into the ceaseless debates about the virtues of economic liberalism, there are few points that have to be made here to let our critic know that, contrary to his deep-seated convictions, the world trading system is not as smooth as predicted by the nineteenth-century theories of comparative advantage and free trade. It is important to make these points since his argument is that these theories are the true determinants of the pattern of international trade and therefore Liberia must conform to them. And afterwards, I will adapt the discussion to the specific issue of the appropriateness of rice self-sufficiency, since this is what Greaves is anxious to talk about.
To begin with, it is worth remembering that Adam Smith, David Ricardo and their neo-classical successors invented their theories of free trade long after the British had established their industrial predominance. As noted by Theresa Hayter (1985), in the early days of British industrialization, industrialists sought and obtained ample protection for their 'infant' industries against foreign competition. The British not only protected their own industries from foreign competition but also destroyed those of other countries. Thus, the fact that Portugal focused on wine production had nothing to do with the natural workings of comparative advantage. Such was imposed by the British government through the Methuen Treaty of 1703 (Hayter, 1985). Our critic seems not to also understand that the current pattern of international trade, in which most African countries are producers and traders of primary commodities, has less to do with the natural workings of the market. Part of this international division of labor and pattern of trade was established through the imposition of slavery, colonialism, and neo-colonial economic relations. Is he not aware of the colonial destruction of Africa's textile industries (Rodney, 1974), or is he blind to the rubber plantation history of our own country? These are relevant points to remember because individuals, like Greaves, are insisting on converting us to the false belief that nations have 'natural' destinies to produce and trade in different goods, and thus, for example, a country like Britain was naturally destined to produce industrial products, while Liberia was destined to trade in non-industrial products. They want us to believe, for example, that it is the natural destiny of "Thailand, Vietnam and Louisiana" to produce rice, while it is the destiny of Liberia to produce rubber, "cocoa or coffee or some other crop".
The theory of comparative advantage, romanticized so much by our critic, and which is supposed to be the theoretical foundation of international trade, has long been contradicted by real-life global economic situations. For instance, the Heckscher-Ohlin Model, which is the expanded version of the original Ricardian theory of comparative advantage, was found to be incapable of explaining United States' pattern of trade. In his famous Leontief paradox, the 1973 Nobel Prize winner Wassily Leontief provided strong evidence that although the US was the more capital-abundant country (with higher capital-labor ratios), long before Western Europe and Japan started catching up, it was not exporting capital-intensive goods and importing labor-intensive goods. Such a finding was in sharp contrast to the comparative advantage theory that a country should produce and export those goods that are intensive in the factors with which the country is relatively well endowed. This empirical evidence is mentioned here to underline the widely known fact that most of the theories of comparative advantage and free trade, being so much romanticized, are not as absolutely realistic as some believe. If these theories were the true determinants of global economic realities, then there would be greater international economic welfare and harmony among nations. But this is not the case, except in Mr. Greaves' wonderland.
The Ricardian theory of comparative costs, or relative advantage, asserts that free trade makes countries to specialize in those economic sectors where they have a relative advantage. This specialization, in turn, leads to expansion of international trade, resulting in increased global economic welfare. But, as Yoichi (1992) correctly argued, what the enforcement of this theory has caused, at least in the last 30 years, cannot be regarded as greater international economic welfare. According to this theory, for example, Japan was supposed to specialize in those industries in which it enjoyed a relative advantage. The pursuit of this specialization, however, resulted in a chronic trade surplus between her and the United States, which has been the source of persisting economic and international friction between the two countries. The US transformed agriculture into an export industry, resulting in a worldwide surplus of farm products, which precipitated a "grain war" with the European Community. Moreover, this ceaseless pursuance of comparative advantage has led to the excessive availability to international trade of primary commodities, contributing to a worldwide destruction of the natural environment.
Another point that our critic should note about comparative advantage is that the pursuance and application of this theory is not always politically and strategically neutral. So for example, in a genuinely free market environment, Europe and Japan should have abandoned food production and allowed the South, which has comparative advantage in food production, to produce food for them (Tandon, 1999). But this is not the case. These countries are not only involved in agriculture and food production but are heavily subsidizing and protecting their agricultural industries, mainly for security and political reasons. And yet they are the originators and masters of the Internet, who could have easily logged on to it from their perches to locate cheaper food around the world, in line with Greaves' thinking. Had there been a true devotion to comparative advantage based on a genuine free market, the South should have also been the natural clothier of the rest of the world. But this is not so. For 30 years the Multi-Fibre Agreement (MFA) gave protection to Northern producers of textiles and clothing, and while the Uruguay Round of trade agreements calls for the dismantling of the MFA, it has left in place 'safeguards' for Northern producers.
This is why our critic must understand that his renditions about comparative advantage and free trade are a bunch of empty rhetoric and ideological posturing. All comparative advantages, except perhaps those based on natural resource endowments, are deliberately constructed by societies through conscious economic, technical, and political efforts. They are not handed down on a silver platter. The sooner we understand this the earlier we will move to build such advantages for ourselves and stop demanding others to show us "data which demonstrates that Liberia enjoys such a comparative advantage in rice production". On the issue of the appropriateness of rice self-sufficiency for Liberia, which the critic wants us to talk about, I am aware, in agreement with others who had commented on this issue, that there are several structural and institutional barriers that have to be overcome to make rice self-sufficiency a realizable and feasible policy option for Liberia. Thus, there is a need for a careful study of this policy issue, as called for by other Liberians, such as Sirleaf (November, 1999). I also agree that the country would be better off focusing on food security involving raising overall self-sufficiency rates in the production of not only rice but also other major food commodities, such as cassava, sweet potatoes, and yams (Nathan Associates, 1989 in Toe, 1994). My disagreement is with only those who are insinuating that because of the existence of these obstacles there is no reason for self-sufficiency, and therefore no one should discuss the implications of government policy for such an option. My disagreement is with only those who harbour a fanatical faith in the imaginary perfection and ability of free trade to deliver food to the doorsteps of Liberia's poor consumers. It is these individuals who are also making misguided and unfounded statements about the situation of food self-sufficiency in the world.
Greaves states in his opening paragraph, "But there is no economic law which stipulates that a country has to be self-sufficient in its staple. Indeed, if we applied this logic to every nation on God's green earth, then we would all have to return to subsistence farming, . . . Thus, the Japanese (great consumers of beef) would have to herd their own cattle and eschew Texas beef, . . .". This statement is erroneous, deceptive and self-contradictory. While the Japanese may be great importers and consumers of Texas beef, this is not their shushoku (staple food). Rice is their staple food, and it has been that way for centuries. It is not beef that most Japanese would kill you for, but it is rice. And because it is their staple food, they have been self-sufficient in it since the 1960s, and have been adamant about not allowing its importation. It is only a year ago that Japan finally agreed to allow some importation of rice, even then behind very high tariffs. Therefore, while there may be no economic law stipulating self-sufficiency in a country's staple food, many countries including Japan are completely self-sufficient in their staples.
Another sweeping and unguided statement that our critic made, in defense of his free trade and comparative advantage credos, is the assertion that the information cost of trade is low for Liberian consumers because they can now "log on to the Internet" from their perches in Monrovia. At this stage in the development of Liberia, it is clear that this is yet another Disney-Land thinking on the part of Greaves. While the progress of globalization is bringing economies closer through advances in information technologies, these technologies are at present only accessible to very few privileged business, intellectual, and political elites in Africa. Where, at this time in Liberia, can the common consumers log on to the Internet to "get quotations from rice producers as far afield as Thailand, Vietnam and Louisiana" to enable them make informed decision about where to buy rice? Such will not be possible for a very long time. This means that it is only the few business importers of rice in Monrovia who will have access to such an information advantage and use it perhaps to profiteer. How will they profiteer? Well, they (perhaps including Greaves) will log on to the Internet from their perches in Monrovia and locate cheaper rice in Thailand. But when they import the cheaper rice to Liberia, they will sell it to the poor people in West Point and Tappita at higher profit margins. This is why at the present moment the informational advantage of the Internet cannot be construed as necessarily conferring greater power on the common consumer in Liberia.
As mentioned earlier, there are several institutional and structural obstacles that have to be overcome to make rice self-sufficiency a viable policy option for Liberia. But this does not imply that there are no compelling reasons for self-sufficiency in rice. One of such reasons, to me, is the question of community and, by extension, national food security. As noted above, food security has to be based on achieving overall self-sufficiency in other major food crops including but not limited to rice. Such a broadening of the strategy for food self-sufficiency will reduce the over-concentration and investment on a single food crop, thereby improving Liberia's chances for achieving food self-sufficiency and security. Self-sufficiency is important for achieving community and national food security in view of the periodic volatility of world and domestic economic conditions. Subsistence farming and the domestic production of Liberia's major food crops would serve as a safeguard against such unfavorable economic fluctuations. It is important for rural Liberians and communities, who constitute the majority of the national population, to always be secure of their food supplies even during times of world economic disruptions.
One particular example of these adverse international economic conditions is the unreliability and fluctuation of Liberia's foreign exchange flow. Greaves may be giving us the false impression that the importation of rice from Thailand is free. But this is not so, because even if all the consumers in Liberia could log on to their Internets and determine that it is better for them to import their rice from Thailand and not Tappita, they would need to have the required foreign exchange to pay for it. In this connection a critical issue, which our critic seems to be less concerned about, is the fact that Liberia's main sources of this foreign exchange (export earnings and foreign capital flows) have experienced periodic crises at least in the last 30 years. A particular mention is made of the period since 1968-1969 when various crises became pronounced in the external sector of the Liberian economy. Thus, the country's financial crisis, which had been occasioned by debt payments in the late 1960s (Pereira-Lunghu, 1995), was further exacerbated in the last half of the 1970s when revenues from exports of iron ore and rubber began to decline due to the eruption of the global economic crisis. Indeed, it was in the context of this financial crisis that the Tolbert government introduced the strategy of rice self-sufficiency aimed at saving foreign exchange on the importation of rice. Heavy external borrowing in the 1980s, despite weakened external demand for Liberia's export commodities, and climaxed by seven years of civil war in the 1990s, has now left the country with very deplorable Debt Service-to-Exports and Debt Service-to-GDP ratios of 70.8 percent and 11.6 percent, respectively (Preliminary figures from IMF Staff Country Report, April 2000). The negative consequences of such high debt burdens for foreign capital flow and foreign exchange are easy to understand.
This is why we cannot solely rely on world trade and financial markets to deliver our staple food. In much of Liberia's economic history, we have relied upon importation of our staple food, paid for through international trade exchange and sometimes through food aid and the good will of friendly nations. This has not, however, prevented food shortages. A main reason for this is that the sources of finance that we have depended upon to pay for our food imports have not been reliable. This is why I believe that we cannot solely rely upon the importation of our major foods, because there will always be times that we may not have the required export earnings and foreign assistance needed to pay for our food imports. Therefore, efforts have to be made not only to broaden our export base but also to increase food self-sufficiency and security.
The views just expressed in the preceding paragraphs, on the reasons why Liberia needs to achieve food security through self-sufficiency, are my first public declarations on this issue. They are preliminaries, but I shall be writing a full article dedicated exclusively to this issue of whether or not the country needs self-sufficiency for ensuring food security. These issues are here for any interested persons to debate them, but in the process of doing so we must avoid misrepresentations and distortions.
Geepu Nah Tiepoh is a development economist and consultant with ACLAD Development, Canada.
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