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Policies and politics

Boon to some, bane for others

M. A. Taslim | December 09, 2019 00:00:00

Economic policies have consequences. Some policies, such as universal health care, are global in nature which affect all citizens of a country. Other policies are narrower in scope. For example, subsidies on some goods will benefit only a small part of the population. Importantly, some policies that confer significant benefits on certain section of the population may at the same time impose adverse consequences on some other section. A large tariff imposed on the import of textiles will greatly benefit the owners, and possibly the workers, of the textile industry. But it will impose costs on the population who will now pay a higher price for any fabric products they buy. A policy of greater free trade may harm some import competing domestic industries which are not as competitive as their foreign counterparts. They may have to downsize as they lose their domestic market share to foreign competitors. It is possible that they may have to shut down altogether if the foreign competition is too intense. The workers in these industries will lose their jobs and perhaps their livelihood. Other industries which are internationally competitive could flourish under a policy of free trade. It is possible, and perhaps very likely, that the industries that gain from the free trade policy will outnumber or outweigh the losers. Policy makers and their advocates usually highlight the benefits conferred by the policy on the gainers such that the public hear mostly about the successes of the policy. The agony of the losers is suppressed and lost from the public domain.

Ready-made garment workers at work

Since most policies will have both positive and negative outcomes, how should policy makers decide on the right course? A decision criterion proposed by economists is that if the benefits conferred by a policy are more than adequate to compensate the losers for their losses, the policy may be adopted because it will increase the net national income or welfare. In simpler terms, whenever a policy raises national income it may be adopted. Since the policy does not require the actual payment of any compensation, the decision is essentially a political decision and a matter of political will.

Since no compensation is given, the losses suffered by the losers are real. These entail job losses or unemployment with concomitant reduction in income and a deterioration of the standard of living. There could be further loss in terms of a reduction in social standing and self-esteem. These people are hurt badly. They have every reason to be angry about the policy as well as the policy makers who robbed them of their welfare. When such angry people (and their sympathisers) comprise a large section of the population they are potentially a formidable political force if they could be mobilised.

When such a situation exists, some political groups will see an opportunity to exploit the hurt and anger of these unfortunate people to their political advantage. This is perceived to have happened in recent times in several countries, particularly the United States.

Since the mantra of globalisation was ardently pursued by USA (and imposed on lesser countries) its economy boomed mainly because of the rapid growth of high tech and service industries. But some manufacturing industries, such as clothing, coal and steel, suffered badly. In fact, manufacturing as a whole suffered a decline. Technological changes, high labour cost and the emergence of new centres of low-cost manufacturing in East Asia, all contributed to rendering a part of the US manufacturing unviable in the globalised marketplace. These industries became increasingly less competitive than their overseas counterparts both at home and overseas. The loss of domestic competitiveness witnessed large scale migration of manufacturing industries to Asian countries. Offshoring, development of supply chains, foreign direct investment, overseas licensing and outright closures led to the shrinkage of the domestic manufacturing base of USA. Consequently, a large number of white American blue-collar workers, who held good jobs earlier, found themselves unemployed with little prospect for new employment. In this milieu emerged Donald Trump, a billionaire businessman, who saw a golden opportunity to cash in on the misfortunes of this large group of white Americans (mostly Christians).

Trump joined the US Presidential race of 2016 as an outsider but soon rose to the top of the Republican hopefuls with unabashedly populist policies. He blamed the Muslims and immigrants for much of America's owes and promised to reverse the consequences of globalization with trade policies that put America first. He promised to return the vanishing manufacturing to its former glory by imposing high tariffs and forcing American businesses to return their offshore enterprises back to USA. These were highly cynical policies meant to temporarily appease the angry middle American, but certain to fail in the longer term. It did the trick, Trump won a mass following among the rightwing, the Christian bigots, the racist and the disgruntled, who were disillusioned with their situation and were fearful of becoming marginalised in their own society. Trump's populist strategy worked brilliantly; from being a political novice he was catapulted to the Presidency of the country defying the forecasts of pundits and polls. The US election result was not an aberration; populism won out against liberalism in several other countries, most recently in Brazil.

Trump implemented, or at least tried to implement, his election promises. One of the first things he did after entering the White House office was to scrap the almost final Trans Pacific Partnership free trade deal with pacific rim countries. He threatened to terminate North American Free Trade Area (NAFTA), but later let it continue in a different name (USMCA) and with some changes in the rules of origin, labour standards and intellectual property protection. He unilaterally picked up a trade dispute with China and imposed large tariffs on much of the imported goods from there, thus initiating a trade war. He threatened to impose tariffs on imports from Europe, Japan, South Korea and India. It seems he has targeted the major US trade partners for tariff incursions in order to soften them up for later negotiations on trade deals. However, the most ominous act of his administration is the onslaught on the WTO to weaken the rule-based world trade body. The crown jewel of WTO, the Dispute Settlement Body, may become inoperative next year if USA vetoes the appointment of judges to the appellate bench. The rule-based world trade conducted since the inception of GATT in 1948 could rupture with unforeseen consequences for trade and commerce. While much of the world and the liberal press criticise Trump for these policies and actions, his hold on his constituency seems solid.

There is a widespread belief in Bangladesh that the trade war between USA and China will be beneficial for Bangladesh, especially for ready-made garment (RMG) industry. China is the largest exporter of RMG products to USA, and it is likely that the trade war will raise the prices of Chinese RMG products in the US market. In that event Bangladesh could raise its share of the US market when US buyers switch to other more competitive RMG suppliers such as Bangladesh. A healthy increase in RMG export to USA last year was viewed as a harbinger of good times ahead even though a more careful look at the data would have suggested that there had been very little growth in RMG export to USA since 2015.

Such optimism misses an important development. The world trade as a whole is likely to decelerate to 1.2 percent in 2019. If a full-scale trade war blows out total trade could tumble even lower in the following year. This could pull the western economy, and even the world economy, to a recession. Most forecasters now predict of a recession next year in the west. The prospect of growth of world trade in RMG products in this scenario is slim. The recession will hurt more than what Bangladesh could conceivably gain from a shrinkage of Chinese export to USA. The US import of RMG products from China reached a peak in 2015 and then fell gradually by US$3.4 billion in 2018. But Bangladesh could not capitalise on the reduction of import from China; US import from Bangladesh also declined during this period, even though only marginally. Vietnam captured more than half of the reduction in US import from China. It is by no means guaranteed that a trade war will increase Bangladeshi export of RMG to USA. Much work, especially in skill development and market research, will be needed to achieve this end.

The RMG sector has profited hugely from the export-friendly industrialsation policy since the 1980s. It is a specially favoured industry with many policy supports such as bonded warehouse facility, and its export is still being subsidised by the state. This sector has seen the rise of many of the billionaire entrepreneurs of the country. However, the workers, mostly young women, did not see much increase in their real wages. The income inequality is worsening, and every now and then worker unrest is spilling out on the roads and highways. With the ongoing mechanisation and stalled employment in the industry, the unrest could increase. The RMG industry leadership need to study the domestic and external situation carefully and take remedial measures to prevent the occurrence of any untoward situation.

The author is Professor of Economics, Independent University Bangladesh.


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