The Panacea Myth.

• Author: GALLAGHER, KEVIN
• Position: George W. Bush, free trade - Brief Article

Free trade is not a cure-all for all that ails the developing world.

In an effort to gain followers for his new trade agenda, President Bush recently declared that we have a "moral imperative" to grant his administration authority to negotiate new trade treaties. Beyond economic reasons, Bush preached that free trade advances the "universal value" of eradicating poverty, advancing human freedom, and cleaning the planet. The evidence makes it difficult to keep the faith.

Bush would do better to recognize that free trade does not automatically cure the world's ills. However, trade can be successfully packaged with social and environmental policies as part of a comprehensive plan for economic development.

Dani Rodrik, one of the world's leading trade economists, has recently co-authored a study for the National Bureau of Economic Research. He found that neither trade nor capital liberalization was strongly linked with development. Indeed, in a summary of the report he wrote, "If anything, the evidence for the 1990's indicates a positive relationship between import tariffs and economic growth." He goes on to add that current proposals for free trade are "bad news for the world's poor."

Much of the logic behind the new administration's free trade doctrines regarding poverty and the environment invokes the work of the late economist Simon Kuznets. In a classic 1955 paper that looked at a cross section of countries, Kuznets observed that inequality tended to increase at the early stages of economic growth, but decrease in later stages. This inverted U-shaped relationship became known as the Kuznets Curve, and was held up as the rationale to advise governments to "grow now, worry about the poor later."

The Kuznets curve did not hold up to empirical scrutiny. World income inequality has been rising for almost two centuries. The United Nations Development Program estimates that the ratio of GDP per capita for the richest and poorest countries in the world grew from 3 tol in 1820 to 72 tol by the 1990's. Inequality is growing within nations as well. Many countries, both rich and poor, have become dramatically more unequal in the past thirty years. Mexico's Foreign Minister, Jorge Castaneda, cites the exacerbation of inequality in Mexico under NAFTA as one of the key reasons why his Latin American counterparts are skeptical about a Free Trade Area of the Americas (FTAA). An FTAA and a reworked World Trade Organization are the administration's promised...