UNLIKE most trade agreements, the Asia-Pacific Economic Cooperation (Apec) operates simply as a cooperative, multilateral economic and trade forum. The process engages the member-economies to an open dialogue and fosters mutual respect for views of all participants. In Apec, there are no binding commitments or treaty obligations. Commitments are undertaken on a voluntary basis, and capacity-building projects help members implement Apec initiatives.
As host of the Apec meetings this year, the Philippines has proposed the theme, “Building Inclusive Economies, Building a Better World.” This is a path-breaking development for any international community as it implicitly accepts the fact that trade is ultimately not the goal of development. The priority is the improvement in the lives of the people in the region, not merely the exchange of goods and services.
In fact, orthodox trade theory has never concluded that growth will be even. In a world characterized by external economies, those countries that have pioneered and have started growth earlier will be able to accumulate wealth faster relative to those countries that have started late. Convergence in incomes can only be expected if countries are all competitive and eventually operates under constant returns to scale or at the most efficient levels. However, as markets are mostly imperfectly competitive and certain industries possess substantial market power for some regions, certain countries that have already gained a foothold in several sectors, and hence gained some dominance in capital development, would eventually experience lower costs of production, and naturally have a greater advantage. Trade, thus, reinforces this advantage and creates greater inequality.
The best recourse for the poor countries then is to use trade, not so much to obtain goods but to learn more of the existing technology and to gain greater access to capital. Two prominent, yet controversial, hypotheses about economic development are the so-called advantage of backwardness, such that on comparing two otherwise similar countries the one with the lower initial mean income will tend to see the higher rate of growth, and the advantage of growth, whereby a higher mean income tends to result to a lower incidence of absolute poverty. Previous empirical support for both hypotheses has shown that the dynamic processes for growth and poverty reduction do not depend directly on the initial level of poverty. Under these assumptions, we should see poverty convergence, that is, countries starting out with a high incidence of absolute poverty (reflecting a lower mean) should enjoy a higher subsequent growth rate and (hence) higher proportionate rate of poverty reduction. Indeed, the mean income and the poverty rate will have the same speed of convergence in widely used simplified models.
Unfortunately, the empirical proof to these hypotheses has been untenable for many poorer countries, including the Philippines. More precisely, while there may have a convergence in incomes, the convergence in poverty has not been significant. Economist Martin Ravallion of Georgetown University explains that very low income levels effectively negate the advantage of backwardness, and to a large extent, the presence of a strong middle income will be crucial to be able to obtain this advantage. Furthermore, with higher poverty incidence, greater inequality in income distribution becomes a constraint to economic and social development.
The Apec leaders should then realize that trade does not lead to a trickle-down effect. In order to address poverty, inequality itself should be the main priority. In which case, the market-oriented programs, including trade liberalization, instead of being the solution, may be the cause of greater poverty rates within and across nations.
For instance, one of the main issues of the summit here is the state of micro, small and medium enterprises (MSMEs). The problem in the Philippines, as well as in other poor countries, is that MSMEs have remained small over the years. Apec has been cognizant of these problems. However, the solutions being offered are fundamentally based on the market-oriented processes. These can be classified into two: (1) the promotion of larger markets to local industries to secure greater employment opportunities, as assistance for antipoverty measures and supporting social development; and (2) the enhancement of assistance in infrastructure building, technology transfer, MSME promotion, and development of supporting industries, demarcation and coordination with other public funds. In this case, assistance not only focuses on responding to the crisis, but also in strengthening the existing financial system, developing core human resources, and upgrading business management and technical skills.
While these measures are consistent with individual country concerns, these programs are inadequate in developing MSMEs. What is missing is the aspect of public goods that can help the MSMEs in poorer countries to prosper and generate positive externalities to their communities. Public goods become global (sometimes called international public goods) in nature when the benefits flow to more than one country and no country can effectively be denied access to those benefits. The promotion and protection of cultural diversity, core labor rights and the environment, through global cooperation, are all regarded as global public goods. For instance, health has been seen to have a significant effect on the productivity of the poor. Hence, this can be an important input coming from the international community. The provision of public goods related to human investments, especially from the richer nations or the wealthier sectors within the country, will be crucial in reducing inequality and alleviating poverty.
Trade liberalization is a vital ingredient for development, especially for the Philippines where the trade sector has not contributed significantly to growth. However, to distribute the benefits from this policy, complementary institutions must be established in order to create global public goods. Clearly, Apec is a crucial vehicle for making this a reality.
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Leonardo Lanzona Jr. is the director of Ateneo Center for Economic Research and Development and a senior fellow of Eagle Watch, the school’s macroeconomic research and forecasting unit.