From Prof Jagdish Bhagwati.

Sir, In your editorial “The right leader for the World Bank” (March 28) you say that Ngozi Okonjo-Iweala is a hugely preferable candidate to succeed Robert Zoellick, but you nonetheless surrender to Barack Obama’s faux pas in choosing Jim Yong Kim, a healthcare expert, as “inevitable”. Whatever happened to the notion that this time around, we would opt for the “best” candidate? But more can be said.

First, Dr Kim is no more an American than many of us: he was born abroad and is reported to have come here at the age of five. Besides, Americans do not entertain discrimination against foreign-born “intellectual guestworkers”. Dr Okonjo-Iweala has studied with great distinction at Harvard and MIT in economics, has lived in the US for many years, and (I speak from personal experience) she can outwit and outsmart almost any policy economist I know.

Second, how can President Obama bypass an independent-minded African in favour of yet another agreeable Korean – Ban Ki-moon is another one – and keep a straight face?

Third, an administration that prides itself on promoting women is sidelining the most gifted woman candidate for this important job. It makes a mockery of the claims that Mr Obama cares for women whereas Mitt Romney will not.

Finally, and most important of all, the Obama administration mistakenly believes that “development” consists of healthcare, microfinance and other such projects, and not the big high-pay-off “macro-level” policies such as trade. The insidious notion that the former constitutes “development economics” and the latter does not is both wrong and glorifies the less important at the expense of the more important.

The US government has already put an administrator with a background in health in charge of the United States Agency for International Development: Rajiv Shah. At the same time, it has destroyed Doha and encouraged the manufactures fetish and protectionism, which will cost developing countries far more than USAID’s micro projects will benefit them. Dr Okonjo-Iweala will do both “macro” and “micro” projects. But Dr Kim’s healthcare expertise comes with an uncritical embrace of the charges against “neoliberalism”, betraying susceptibility to the anti-reform, anti-growth rhetoric of the 1990s. Caveat emptor.

The original article appeared in Financial Times.

So much has been written, by so many, against the muddled ideas that have now overwhelmed good sense on trade policy in the United States government that one wonders whether there is anything left to say. Yet it is worth recalling what Pierre-Joseph Proudhon reportedly told the Russian intellectual Alexander Herzen: “And do you imagine that once a thing has been said, it is enough?….It has to be dinned into people, it has to be repeated over and over again.”

What we need now is a primer on the major misconceptions in the hope that, unlike Gresham’s Law, which says that bad money drives out good money, good economics will drive out bad economics. Four, in particular need to be corrected.

The first misconception is that exports create jobs, while imports do not – a fallacy that the great trade economist Harry Johnson traced to mercantilism, and which the US has resurrected. In fact, in a world where parts and components come from everywhere, interference with imports imperils competitiveness. The success of parcel-delivery companies, for example, depends on imports, which must be brought from the borders inland, as well as on exports.

Second, the credo “Trade, not aid” has given way to the mistaken belief that trade matters less than foreign assistance. The labor constituency, ever fearful of import competition, has undermined trade policy. It has also shifted aid policy in directions that assign priority to areas where the returns to US efforts are relatively minuscule.

Thus, the US State Department has ceased being an advocate of multilateral trade liberalization, despite decades of massive gains from the removal of trade barriers. Instead, its aid arm, the US Agency for International Development, has now retreated into low-yield programs conceived as randomized experiments. That technique impresses Bill Gates, and the new USAID administrator, Rajiv Shah, has experience with it. But, even if all such programs succeeded, their benefits would not add up to a fraction of the documented gains that have accrued from trade and other macro-level policies in which the US has lost interest.

Third, many believe that manufactures deserve preferential support. This is practically the mantra of US President Barack Obama’s administration, and it has cost him the support not only of much of the economics profession, but also of Christina Romer, who chaired his Council of Economic Advisers. In a recent newspaper commentary, she refuted virtually all of the arguments advanced by manufacturing lobbyists for special treatment.

Add to the critiques that of Nobel laureate Robert Solow, a staunch supporter of Obama’s Democratic Party. He agrees that there are activities that yield higher social returns than private returns. The problem, he notes, is that neither he nor anyone else can possibly know which ones they are, whereas the lobbyists claim that they know this precisely.

Proponents of a “manufacturing first” policy argue that “clusters” of businesses are more productive than individual businesses are. But big clustering effects are hard to find. The economists Glenn Ellison and Edward Glaeser have found that clustering is only marginally greater than if businesses are allocated randomly. Besides, it is hard not to accept that, in the economist Frances Cairncross’s famous words, we are increasingly seeing the “death of distance.”

Finally, the financial sector has come to be viewed as the bane of morality. In a world of financial fraud and insider trading, it is easy enough to believe this, and to accept that the financial sector must be taxed. But morality cuts across sectors. There are plenty of honest people in all walks of life, and crooks as well. The quasi-Marxist view that our morality stems from our economic position overlooks the moralizing role of family, religion, culture, and art.

Given these misconceptions, protectionism has re-emerged as a formidable foe. In 1999, when the ministerial meeting of the World Trade Organization erupted into bomb threats and mayhem, I asked then-Director-General Mike Moore whether we ought not to be prepared to die for the great cause of free trade. I should have said: we ought at least to be prepared to live for it.

Between old and new muddle, and the certain prospect that the demolition of each bad idea merely allows others to take root and grow in its place, the task of the free trader is never finished.

The original article appeared on Project Syndicate.

President Barack Obama infamously killed the multilateral Doha Round last December by instructing his representative at the World Trade Organisation to be a “rejectionist” negotiator. He compounded the folly by instead floating the trans-Pacific Trade Initiative that is conceived in a spirit of confronting China rather than promoting trade, and is also a cynical surrender to self-seeking Washington lobbies that would have made John Kenneth Galbraith blush. Not content with these body blows to the world trading system, which his predecessors had built up over decades of US leadership, Mr Obama pulled off the remarkable feat of making things yet worse with his State of the Union address.

In particular, he decried outsourcing: “We will not go back to an economy weakened by outsourcing.” He also celebrated manufacturers: “Tonight, I want to speak about an economy that’s built to last an economy built on manufacturing.” Both are costly fallacies that deserve no quarter from our leadership. They hurt the US economy; they also guarantee that the US will undermine further the world trading system.

Outsourcing is a bogeyman. The deception that Mr Obama buys into goes back to the populist commentator Lou Dobbs, who denounced the companies that bought components from abroad as Benedict Arnolds – the rogue who became a byword for treachery when he changed sides during the American war for independence.

The fact is that Mr Obama is guilty of promoting at least two wrong but prevalent notions. When companies are denounced for “losing” jobs by outsourcing, the fallacy is one of looking at only primary impacts. When Senator Barbara Boxer blamed her rival Carly Fiorina in the last election for eliminating 30,000 jobs at Hewlett-Packard, the proper response would have been: in this fiercely competitive world, Hewlett-Packard would have lost 100,000 jobs if she had not lost 30,000.

Second, there is already evidence that significant insourcing is occurring in parallel. Indian information giants such as Wipro are increasingly outsourcing to the US. Walk down Madison Avenue and you will find that trade in variety or “trade in similar products” is now important and almost everyone is in each other’s markets. Again, Dell has discovered that outsourcing troubleshooting for its computers does not work well: geographical proximity works a lot better.

But if Mr Obama is wet behind the ears on outsourcing, his surrender to the “manufactures fetish” is a disaster. As Bill Emmott, former editor of The Economist, once remarked: “Unless one can drop a product on one’s foot many believe it is not worth making.” The fallacy goes back to Adam Smith who, in a rare lapse into folly in The Wealth of Nations, condemned as unproductive the labours of “churchmen, lawyers, physicians, men of letters of all kinds, players, buffoons, musicians etc”.

Mr Obama’s surrender stems from at least four errors. First, he has bought into the fallacy, promoted by the economist Michael Spence, that manufactures are declining in the US, but his work suffers from conceptual flaws. Take just one problem: services splinter off from manufacturing even as vertical integration yields to specialisation. Over time, manufacturing yields to services. This gigantic change that is taking place has nothing to do with outsourcing.

Second, the notion that manufacturing is more productive than services is not supported by research. Dale Jorgenson, a leading researcher on productivity, has shown that the most progressive sector is retailing, which has been transformed by IT innovation.

Third, the general disillusionment with the financial sector has been seized on by the manufacturing lobby to argue that therefore manufacturing should be supported. But that is a non-sequitur. The value added in the financial sector is probably a quarter at most of the total services sector. Why not opt for DHL, transport and communications, for example, instead of cement mixers?

Finally, the manufacturing sector in the US is already heavily subsidised. With the exception of New Jersey and New York, which compete for the financial sector, the main competition among US states is for attracting manufacturers through generous tax holidays, free land etc. Again a little-known tax provision, Section 199, gives tax relief for “domestic production activities”, which mostly support manufacturing.

So the campaign for more manufacturing is a boondoggle. Jeff Immelt of General Electric, a splendid businessman and confidant of Mr Obama, has succumbed: who would look a freebie in the eye? Clyde Prestowitz, a Republican who earned Bill Clinton’s plaudits in the 1992 campaign, is now celebrating on his blog that Mr Obama is his new convert. Mr Clinton regained his sanity in a year. This time it is likely to be a long slog.

The original article appeared in Financial Times.

While developed countries are angst-ridden over mostly illegal immigration by unskilled workers from developing countries, a different set of concerns has surfaced in Africa, in particular, over the legal outflow of skilled, and even more importantly, highly skilled, people to developed countries. This outflow is supposedly a new and damaging “brain drain,” with rich countries actively luring away needed skills from poor countries.

This fear is misplaced. At the outset, we have to distinguish between “need” and “demand.” Yes, many African countries need skills. But they are unable to absorb them, owing to several factors associated with economic backwardness.

In India in the 1950’s and 1960’s – a time when many professionals were emigrating – working conditions were deplorable. Bureaucrats decided whether we could go abroad for conferences. Heads of departments carried inordinate power. So, no surprise, many of us left. We Hindus may believe in an infinity of lifetimes, but we maximize our welfare in this one, just like everyone else.

Besides, simply holding people back, even if feasible, would do little for their countries. The “brain” is not a static concept. Trapped in Kinshasa, under appalling conditions, the brain will drain away in less time than it takes to get to New York.

Moreover, keeping people at home is easier said than done. In many poor countries, except those like India and South Korea, which have now developed superb educational institutions, the brightest citizens receive their education abroad. The challenge, then, is to prevent them from staying there and settling down.

But, in any event, emigration restrictions today would violate a human right enshrined in current international treaties. But would immigration restrictions work instead, as proposed by some developed-country organizations, which worry about the “brain drain”?

Here, human-rights concerns pose serious difficulties. Could we really say to a Ghanaian doctor that she must return to her country while an immigrant Russian doctor is allowed to settle down and start a new life? This is likely to run afoul of anti-discrimination principles and constitutional provisions in countries like the United States.

The proper response to the outflow of skilled manpower from poor countries, especially those in Africa, is to be found in a different direction. Given that outflows of skilled workers cannot be restricted – and, indeed, should not be – we must devise institutional mechanisms to work with it. This means adopting a “diaspora” model, which implies four policy proposals.

First, stop crying over the fact that the diaspora is not returning home. Instead, nurture the loyalty of professionals settling abroad, so that they assist their home countries in a variety of ways. Thus, they may be offered voting rights. Restrictions on investment and land purchases can be dropped. And immigration experts like me have proposed since the 1970’s that schemes be developed to enable the academic diaspora to run workshops aimed at bringing teachers up to the best international standards.

Second, while the diaspora should be integrated through more rights, its members also ought to accept obligations that put them on an equal footing with those who remain behind. I suggested in the 1970’s that a tax be levied on citizens abroad. Known as the “Bhagwati Tax,” it is of course “the American way”: US citizens and permanent residents abroad, like those at home, must pay federal taxes.

Third, because skills are necessary for nearly all activities in most of Africa, here and now, we need to organize ways to supply such skills to these countries. I have long argued that, because many in rich countries are retiring while still in sound health, and because altruism increases with age, we could organize a Grey Peace Corps of senior citizens to share their skills in countries whose own trained professionals prefer to settle abroad.

Finally, foreign aid should be used to expand training massively for Africans in all the essential fields in rich countries like the US, the United Kingdom, France, and the Netherlands. They would add to the diaspora, while the Grey Peace Corps would help to fill current needs. When development has taken off, and conditions have improved sufficiently to attract people back to their homelands, the hugely increased diaspora would indeed return, as they have done in India, South Korea, and China.

Together, these policies would benefit Africa both immediately and in the long run. Sentimental handwringing over the “brain drain,” and foolish attempts at restricting people’s mobility, will not.

The original article appeared on Project Syndicate.

The 17th conference of the UN Framework Convention on Climate Change, popularly known as COP-17, is taking place in Durban, South Africa, at a critical moment, as the historic 1997 Kyoto Protocol is set to expire next year. But, like the climate-change conferences in Copenhagen in 2009 and in Cancún in 2010, COP-17 can be expected to spend much and produce little.

Indeed, the extravagance of these conferences seems to grow, rather than shrink, as their dismal results become more apparent. COP-15 in Copenhagen lasted 12 days, and is estimated to have attracted 15,000 delegates and 5,000 journalists. The carbon emissions created by so many people flying to Denmark was real, while the emissions targets that the conference sought remained beyond reach. That will be true in Durban as well – and on an even greater scale.

The real problem is that the expectations concerning meaningful action on climate change, as opposed to gimmicks such as US President Barack Obama’s last-minute arrival and minuscule gestures in Copenhagen, are now lower than ever. There are two problems that cannot be wished away.

First, the United States under Obama’s ineffective leadership has drifted yet further into a “What’s in it for me?” attitude on key issues requiring international action. In place of what the economist Charles Kindleberger once called an “altruistic hegemon,” the America that the world now faces is what I call a “selfish hegemon.”

Thus, the US has virtually pulled out of the Doha Round of multilateral trade negotiations, with Obama acquiescing to greedy business lobbies that will not settle unless more of their demands are met. But not only has Obama abandoned Doha; he has also seriously endangered the multilateral trading system by diverting US efforts and resources to discriminatory bilateral trade deals and, most recently, to the Trans-Pacific Partnership, which will principally aid countries that are worried about an aggressive China and seek political security rather than increased trade. The same is true of environmental action: after Australia’s belated ratification of the Kyoto Protocol in 2007, the US remains the only country that has not ratified the agreement.

The second problem is that the sheer weight of the US in international affairs, though diminished nowadays, has nonetheless led to a corruption of the principles that should underpin a new climate-change treaty to succeed the Kyoto Protocol.

For example, unlike the World Trade Organization, whose dispute-settlement mechanism imposes penalties for abandoning negotiated reductions of trade barriers, the targets for emission reductions are not binding and enforceable commitments. The US has not agreed to accept such sanctions for failing to meet emissions targets; but, without penalties, the exercise is largely futile and only encourages cynicism about the effort to combat climate change.

Moreover, abandoning the Kyoto Protocol’s exemption of developing countries from obligations for current emissions, the US has insisted on obligations from China and India that reflect a common form of “taxation” of emissions. But there are persuasive reasons why these countries insist that the obligations must instead reflect per capita emissions, a criterion that would require far greater emission cuts by the US than its leaders now contemplate.

Besides, these countries correctly argue that the tradeoff between action on climate change and poverty reduction is more compelling for them at their level of per capita income, unless they can access newly emerging technologies at low cost. This demand suggests that the US should subsidize the flow of technology to India and China from US firms holding patents, which is highly impractical.

That is where the $100 billion Global Climate Change Fund, promised at the Cancún COP-16 conference, comes in. Unfortunately, even environmental icons like Al Gore in the US are so heavily invested in new green technology that their self-interest is tied up in this fund being spent on developing privately owned new technologies that are protected by patents.

The new “Green Revolution” seeds that the Nobel laureate agronomist Norman Borlaug developed with public money were freely available to all users anywhere. The technology developed by the money spent from the Global Climate Change Fund also should be equally available to all, including India and China, which would then enable them to agree to more emissions cuts.

Indeed, even the contributions to the Fund should have reflected the past damage by the developed countries over the course of a century of carbon emissions – an obligation based on the well-established tort principle that the US has accepted for domestic pollution. But here, too, the US has rejected the idea outright.

Several such sensible ways to design the Kyoto Protocol’s successor treaty have been undermined by efforts to accommodate inappropriate US-led demands and objections, resulting in the impasse that became evident at the COP conferences in Copenhagen and Cancún. Those who do not believe in magic know better than to hope that it will somehow disappear in Durban.

The original article appeared on Project Syndicate.

The indifference and apathy that one finds in Washington from both the Congress and President Barack Obama on the Doha Round of world trade talks, and the alarm and concern expressed by statesmen elsewhere over the languishing negotiations, mark the end of the post-1945 era of American leadership on multilateral free trade.

Evidence of anxiety outside the US has been clear to everyone for almost a year. German Chancellor Angela Merkel and British Prime Minister David Cameron were concerned enough to join with Turkey’s President Abdullah Gül and Indonesia’s President Susilo Bambang Yudhoyono in appointing Peter Sutherland and me as Co-Chairs of a High-Level Trade Experts Group in November 2010. We held a prestigious Panel at Davos with these leaders in January 2011, where, on the occasion of our Interim Report, we gave full-throated support to concluding Doha. But there was no response from the US government.

In September, former British Prime Minister Gordon Brown, former Spanish Prime Minister Felipe González, and former Mexican President Ernesto Zedillo reminded G-20 leaders that in November 2009, at their first meeting in London, they had expressed “a commitment to …conclude the Round in 2010.” And, two weeks ago, the UN met again on the Millennium Development Goals (MDGs). Goal 8 is about instruments such as trade and aid, and MDG 8A commits the UN member nations to “[d]evelop further an open, rule-based, predictable, non-discriminatory trading and financial system.”

But, while practically every country today has embraced preferential Free Trade Agreements, the recent leader in this proliferation is the US. There, Congress and the president apparently have plenty of time to discuss bilateral FTAs with South Korea, Colombia, and Panama, as well as the regional Trans-Pacific Partnership (TPP), but none for negotiating the non-discriminatory Doha Round, which is languishing in its tenth year of talks.

Indeed, it is notable that, while Obama’s State of the Union address in January 2010 at least mentioned Doha, his address in January 2011 did not. Obama confined himself to promoting the pending bilateral agreements with Colombia and other emerging-market countries.

Obama’s regrettable retreat from support for the Doha Round is the result of many factors and fallacies. These were highlighted in an “Open Letter to Obama” that I organized and released, over the signatures of nearly 50 of today’s most influential trade experts worldwide, urging a presidential shift in policy towards Doha.

America’s president is captive to the country’s labor unions, who buy the false narrative that trade with poor countries is increasing the ranks of the poor in the US by driving down wages. In fact, however, there is plenty of evidence for the rival narrative that rapid and deep labor-saving technological change is what is putting pressure on wages, and that imports of cheap labor-intensive goods that US workers consume are actually offsetting that distress.

Again, Washington lobbyists have bought into the absurd claim of trade experts such as Fred Bergsten that the gain from Doha, as it stands now, is a paltry $7 billion or so annually. This ignores the far greater losses that a failed Doha Round would entail, for example, by undermining the World Trade Organization’s credibility as the principal guarantor of rules-based trade, and by leaving trade liberalization entirely to discriminatory liberalization under preferential bilateral agreements. Again, someone needs to tell Obama that imports create jobs, too, and that his emphasis on promoting US exports alone is bad economics.

Most of all, Obama is badly served on trade by his senior colleagues. Secretary of State Hillary Clinton, for example, was opposed to trade liberalization when she ran against Obama for president, and advocated a “pause” in free-trade negotiations. She also misinterpreted the great economist Paul Samuelson as a protectionist, when he said nothing of the kind. She has never recanted.

Likewise, now that Warren Buffett is considered to be Obama’s most trusted economic adviser, it is worth recalling that back in 2003 he produced the astonishing prescription that the best way to reduce the US trade deficit was to allow no more imports than it could finance from its export earnings. An amused and alarmed Samuelson drew my attention to this nutty idea. While Buffett’s prescription of higher taxes for America’s wealthy is entirely desirable, will Obama realize that a genius in one area may be a dunce in another?

What we need today is for the world’s leading statesmen to stop pussyfooting and to unite in nudging Obama towards a successful conclusion of the Doha Round. That alone would provide the counterweight to the forces that pull him in the wrong direction. It is still not too late.

The original article appeared on Project Syndicate.

Below is an article by Dean Baker and Jagdish Bhagwati, as appeared on CNNMoney.

The notion of international trade in health care may seem strange. The issue may also seem far removed from the current policy preoccupations in Washington.

However, we believe it is finally time trade played a central role in the current debt debate.

One of the basic facts that the congressional super committee must confront is that the debt problem is not excessive current deficits, but rather a problem with the longer term budget.

And the main reason for the large projected deficits well into the future is the growth in health care costs. Public sector programs like Medicare and Medicaid will be increasingly unaffordable.

The health care system must be reformed — no easy task. President Obama and Congress sought to do it last year. But it remains to be seen how much the Affordable Care Act will accomplish, if Congress even allows it to take effect.

With the future uncertain, anything that we can do to contain costs significantly in other ways must be exploited.

National debt: What you need to know

We have a partial solution: medical trade, or allowing Americans to take advantage of different forms of international transactions in medical services.

The fact that medical care of comparable quality is available at much lower prices elsewhere in the world can be used to rein in costs in the United States.

The idea holds remarkable promise. Here’s how it could work.

Patients go overseas for major medical procedures: Modern medical facilities in Thailand, India and other countries would allow patients to have procedures like heart bypass surgery for tens of thousands or even hundreds of thousands of dollars less than in U.S. facilities.

Medicare and Medicaid could allow patients to use such facilities. The savings to these programs could be split between the patient and the government. This might mean tens of thousands of dollars for both, even after covering travel costs.

Buy into other countries’ health care systems: Many retirees have family or emotional ties to other countries. They can be given the option to use their Medicare to buy into the health care systems of Canada, Germany or whatever country they choose.

In effect, the money that the U.S. government would have spent on the beneficiary’s Medicare would instead be paid to another country’s government so that it would provide medical care. The difference in the cost of care, which could run into tens of thousands of dollars a year, would be split between the U.S. government and the beneficiary.

Import doctors: The United States could benefit by making it easier for foreign physicians to practice in the United States. This could be done with greater standardization and transparency in testing procedures.

Foreign doctors would still have to meet U.S. standards, but they could train and test for a license in their home countries.

A greater supply of doctors would reduce physicians’ compensation in the United States — and bring it closer to the levels in other wealthy countries.

This would also ease the other problem with last year’s health reform law: While it brings almost all people into insurance coverage, it doesn’t do enough to ensure that those people will find medical personnel who will treat them!

Medical trade where we “export” patients and “import” doctors — just two ways of exploiting medical trade — may seem a strange way to fix the U.S. health care system.

But it is clearly an important avenue that has so far not been taken seriously.

We are used to the notion that competition generated by trade helps consumers and disciplines producers. For example, Japanese competition led to lower car prices and better quality, although people can differ on how they view its impact in lowering wages for domestic auto workers.

International competition can have the same effect on the health care industry. It offers a route around the political power of the health care industry that may succeed in making health care in the United States affordable. 

Dean Baker is co-director of the Center for Economic and Policy Research. Jagdish Bhagwati is University Professor of Economics and Law at Columbia University.