Adam Smith Institute

Soft-drink giants Coca-Cola, who recently agreed to pay $2.5 billion for China’s fruit juice company, Huiyuan Juice, must now take the deal to the country’s competition authorities and overcome the regulatory obstructions. This case will draw a great deal of attention as it is potentially the largest foreign acquisition of a Chinese company ever to take place, and the first case to be filed under China’s new anti-trust laws. 

Coca-Cola clearly want to establish their brand in China’s quickly growing soft drink industry, and Huiyuan Juice currently has 43% of the juice market, which would be a step in the right direction. Furthermore, the high levels of economic growth in China give potential increases in income and health awareness; as a result, the juice market grew by 15% last year and is on course to match that rate this year.

While some are unhappy with the takeover, and fear Coca-Cola’s global dominance, the potential gains for the Chinese economy are high. The deal should bring increases in investment, as well as much needed jobs to China’s immense population. Coca-Cola’s best practice expertise will improve efficiency and quality in the industry at large, driving the market forward through healthy competition.

Peter Griffiths, author of The Economist’s Tale: A Consultant Encounters Hunger and the World Bank, uses the August issue of Prospect magazine [subscription] to lam into the whole apparatus of the Fairtrade movement. Essentially his case adds to the one we made in Marc Sidwell’s ASI publication in February, Unfair Trade. It is that the Fairtrade movement selects some producers to favour over others, insisting on cooperatives at the expense of family farms. By paying higher than market prices, it ensures that its favoured farmers do not have to respect market conditions which might tell others to cut back production in the event of a world surplus. They continue to plant and expand production, adding to the surplus and depressing prices for millions of poor farmers. As Griffiths says,

This is not just a matter of one lot of farmers receiving a little more and another lot a little less. It means subsidizing 1.5m coffee workers while paying 25m farm families - the coffee growers who are not part of Fairtrade – a lot less. Most of these are subsistence producers, whose income from coffee is tiny. Any fall in income will mean children dying from malnutrition or malaria.

This is one of those cases in which what were probably good intentions have ended up doing far more harm than good. Indeed, Griffiths closes by describing Fairtrade in uncompromising terms as “a scheme which threatens the impoverishment of millions.”

The WHO last week released its long-awaited report on the "Social Determinants of Health" - the social and economic factors behind disease.

As the report lands in the in-trays of ministers all over the world, they would do best to file it under ‘B’ for ‘bonkers’.

Declaring that 'social injustice is killing people on a grand scale', the report proposes a vertiginous list of government interventions to help iron out inequality, from taxation to town planning. Many of their recommendations are particularly aimed at developing countries.

Over the course of 247 pages, the authors make the case that only the wholesale socialisation of society and the economy can improve health. Economic growth, open markets and free trade cause ‘inequality’ and must be rejected.

Most of the recommendations – such as beefing up state welfare and employment regulation, and soaking the rich with tax – would almost certainly create economic stagnation and structural unemployment. 

And calling for an end to free trade is perverse in the extreme.  Free trade has been demonstrated to be the biggest weapon ever against poverty. Since China recommenced international trade in the 1980s, 400 million people lifted themselves out of poverty in that country alone.

The WHO also willfully underestimates the importance of economic growth for health. Despite the report’s undergraduate-style railing against globalization, economic growth is causatively associated with improved health, because it allows people to afford decent living conditions, clean water and fuel. 

Without economic growth, there will be no money to pay for these vital things.

In this time of global economic uncertainty, it is vital that WHO member states ignore every last word of this report -- unless they wish to consign themselves to economic oblivion.

This week The Guardian reported on the new environmental campaign to get us to recognise our ‘water footprint’ – in other words, we are now being asked to factor into everything we consume the amount of water it would have taken to produce.

Water, it seems, is the new frontier in environmental campaigning. The WWF this week released a report entitled, UK Water Footprint: the impact of the UK's food and fibre consumption on global water resources. The report, timed to coincide with World Water week, highlights that:

[W]hile each person in the UK drinks, hoses, flushes and washes their way through around 150 litres of mains water a day, we consume about 30 times as much in 'virtual' water used to produce the food we eat and the clothes we wear. This is equivalent to about 58 bathtubs full of water for each of us, every single day.

Apparently the UK is the world’s sixth largest importer of water. This, it is claimed, is affecting drier areas of the world where water resources are either already stressed or very likely to become so in the near future. As such, we are now being asked to factor in our water footprint to our daily shop. Businesses are likewise being urged to evaluate their water footprints and take steps to reduce water consumption.

Needless to say, a much simpler solution would be to treat water supplies as an economic good, by making water demand less independent of users' willingness to pay for it. Of course, this may entail the privatization of water supplies in developing countries, something which has inevitably faced hostile opposition – despite its proven, and often dramatic benefits.

Whatever the solution, it is clear that the growing trend towards protectionism in the name of environmentalism is set to continue. If shoppers are now asked to consider ‘water footprints’ alongside the ubiquitous air miles, green bean growers in Kenya will only be the poorer for it.

A month ago, a BBC News investigation team uncovered a criminal network in West London, involved in smuggling poor, male farmers from Punjab in India into the UK. These illegal immigrants, known as faujis were given fake documents, poorly paid manual work and stationed in squalid housing. Yes, it was totally wrong to provide them with fake passports, driving licenses and Home Office registration cards. But there are other aspects of this activity where the illegality is not so obvious, and they should be further contemplated before being branded so quickly as inhumane.

Take their accommodation - the faujis are packed into houses living in poor conditions all over Southall. And their pay - they are often employed for 12-hour days, six days a week at £150, which is just over £2 an hour. In the exposé, the undercover reporter Mohammed‚ managed to work in a chip shop and on a building site flouting all safety regulations. But aren't all these circumstances better than the alternative? As rural workers in India pay, rights and living and working conditions are even worse. This is evident from the lengths they are willing to go to in order to enter Britain illegally. All the while, poverty in India is improved by the remittances of faujis to their families back home.

The UK also profits. In keeping within the laws of supply and demand, abundant labour brings down the costs of goods and services for the consumer. And with the need for manual labour taken care of, the UK can focus on becoming a knowledge-based economy.

Evidently, we need a pro-immigration policy, bringing non-zero sum consequences where both immigrants and the British benefit. The entry of 600,000 eastern Europeans since 2004 is testament to this; their role as workers and consumers has been vital to this country's growth over the last 4 years. Indeed, the Labour government's decision to open its borders when the remainder of Europe (save Ireland and Sweden) refused to, is something to be commended. Let‚s just hope it doesn‚t stop there.
 
 

The failed Doha Round has set an uninspiring precedent for world trade policy as we encounter a global recession. The next important chapter on this matter will be the U.S. Presidential election. The McCain-Obama debate is one that divides the ASI office, but when it comes to trade, it's clear that McCain has the better policies.

Though Barack Obama asserts foreign trade is paramount to stimulating the American economy, he talks of only doing so to support American jobs. While this is an obvious attribute to desire, his populist rhetoric over the last 8 months (i.e. condemning NAFTA) leads me to believe his short-termism may shine through, and he will be too ready to adopt a protectionist and insular policy. He made this patent in the unpassed Patriot Employers Act which he co-wrote in 2007. In it, Obama attempts to use tax credits to coax American firms into increasing the ratio of workers in the US to workers outside of the US. By distorting the market, he would prevent American firms from hiring labour in countries that have the comparative advantage.

At the same time, Obama supports the subsidising of corn-based ethanol, which has been a significant factor in the escalation of food prices. John McCain, by contrast, has long been sceptical, and opposed the $300 billion farm bill approved by Congress this year. It was government intervention such as this which deterred India and China from making concessions at the Doha round after all.

McCain has even earned the praise of Karl Rove, being called ‘gutsy’ for championing the fundamentals of free trade in manufacturing states. For this principled position – at times when bashing trade would be politically expedient – McCain deserves our applause.

If you missed the headlines, World Trade Organization talks failed on Tuesday – disheartening news for free-traders like us.
 
The talks fell apart when the US, China and India could not agree on whether protectionist measures to defend struggling domestic products would be included in the agreement. Surely the goal here was to reduce the barriers to trade, not include new ones?

Allowing India, China and the other G33 countries to keep tariffs on agricultural imports would have been counter-productive, especially with current rising food prices. The tariffs would have encouraged this trend instead of making food and other goods more affordable for all their citizens. On the other hand, perhaps developing countries would have been more willing to bring down tariffs if the US and the EU had actually been prepared to reduce the subsidies they pay their farmers.

It's a real shame that 7 years of negotiations have amounted to nothing. But the most frustrating part is that once again governments were far too short sighted, choosing a path that would lead to popularity in the here and now, and did not consider the net benefits and long-term growth achievable through truly free trade.

I drink almost 2 litres of water a day; a glass or two during breakfast, picking up a bottle on the way to the tube, refilling my mug a couple of times from the office sink during the day and another bottle on my way home from work. Like most people, I take my access to one of life’s necessities for granted. However, water shortages are wide spread across the globe and a good article in The Economist, points out that soon a crisis in the world’s water supply coild become a real problem.
   
The article suggests a solution to this shortage and it is quite simple: the trading of water across the globe. This is a clear, open market, pro-globalization proposition. It appears that the transport of mass amounts of water is both  feasible and cost-effective.
   
An important point to take from this article is that the idea of a global water shortage is misleading. In total there is more than enough water for all…that Canada and Brazil have more water than they need is of little consolation to parched Yemen and northern China. If this isn’t an argument for free trade, I don’t know what is.

Supporting open economies allows those who can provide or produce something to specialize. In agriculture for example, economies that don’t have the natural requisites to produce their own food can import and specialize in a different productive endeavour. Yes, this may mean that a change is necessary in what may have historically been the established industry of an economy, but if anything, humans are adaptable and the most successful countries and economies have been those that adjust their output to what they can do best.
 

A few days ago I was sent an excellent paper from the Investment Bank Goldman Sachs, entitled The Expanding Middle: The Exploding World Middle Class and Falling Global Inequality. It argues that we are in the middle of an unprecedented explosion in the growth of the middle class, and that this trend is gaining pace. By 2030, it predicts that two billion new people will join the world middle class. An argument backed up by other studies (for example, click here and here).

All this comes under the rubric of globalization and has been encouraged by the nascent opening up of the BRIC (Brazil, Russia, India, and China) economies, through the acceptance of capitalism. As such, this is of course highly encouraging, and shows the extreme failure of the command economies that preceded (partial) liberalization.

Of course, as history attests, things may upset this prediction. If these countries revert to the nationalistic protectionism of the past, stark global inequalities could continue to feature. But as things stand, they are heading in the right direction. But let it not be forgotten: The road to poverty is paved with good intentions.

Andrew Mitchell, Shadow Secretary of State for International Development, was our guest at a Power Lunch in Westminster this week.

Adam Smith wrote that nothing was necessary to lift a state from the deepest 'barbarism' to an advanced society, other than peace, 'easy taxes' and 'a tolerable administration of justice'. Mitchell too recognizes the importance of conflict resolution in providing the right soil on which economic achievement can grow. States in political and military turmoil don't create or export economic goods – rather,  they export terrorism and desperate migrants. That is why Conservatives are going to integrate foreign, development and security strategies with the creation of the National Security Council. Under this joined-up policy, DfID would be more than just an aid agency: it would be a partner in development, trade and security.

Quite right. Development isn't just about giving people money. The Conservatives also intend to set up an evaluation agency to make sure that UK taxpayers' money is spent effectively and transparently, rather than ending up in the pockets of politicians and officials.

And, thank goodness, they recognize that the engine of growth is trade and enterprise. I feel that they rather like what Peter Mandelson has been saying – that EU farm subsidies and trade restrictions keep people in poor countries impoverished – which is hardly good for traders in the richer countries either. But I think that even with the formidable Mandelson on side, getting the EU to sort out its spaghetti of trade barriers is a pretty tall order.

G8 meetings follow a predictable pattern. In the months beforehand, campaigners call for more aid to Africa to fight diseases of poverty such as malaria. G8 leaders make grandiose speeches, commit billions of their citizens’ money, which then pours into the coffers of African governments. The health of Africans stubbornly remains poor. Campaigners accuse the G8 of not giving enough, and so on.

The foreign aid situation is becoming increasingly farcical. As William Easterly, author of The White Man’s Burden put it: “The status quo — large international bureaucracies giving aid to large national government bureaucracies — is not getting money to the poor.” As Prof Easterly intimates, the failure stems from the insistence of OECD government donors to give the lion share of aid directly to governments, who they then rely on to plan, manage and deliver healthcare.

The brutal truth is that most health ministries are not up to the job. They have almost no data to tell them if their work is effective and are riddled with corruption.

Donors, meanwhile, judge their own effectiveness by ‘input’ factors such as the number of bednets or drugs distributed, but they often have no information about whether or not health is improving as a result of their activities.

It’s time to scrap this system which is doing little for patients, other than enriching people lucky enough to have jobs in ministries. 

We could, for instance, insist that all British aid is henceforth spent on output-based competitive contracts for delivering healthcare, open to profit and non-profit groups alike. Where this has been tried, as in Cambodia, it’s been an immense success, and is particularly useful for getting services to groups that have been neglected by government provision, such as the rural poor.

The obvious advantage is that if the contract-holder does not deliver results, they don’t get paid.

DfID is currently moving in the opposite direction, increasing the amounts it pays to subsidise general government healthcare. Its blind optimism is rather touching, were it not taxpayers’ money being wasted.

So far, President Sarkozy has turned out to be something of a disappointment. In the model of previous incumbents of the Élysée Palace, he is impetuously protectionist, uploading agricultural protectionism to the European level, while trying to undermine the Doha Development Round.

I'm not a big fan of Peter Mandleson either, although he may be the best EU trade commissioner we're going to get. Regardless, in a choice between Sarkozy’s protectionism and Mandy’s attempt to reach agreements on World Trade negotiations, I take the side of Tony Blair's former right-hand man without hesitation.

On the one side of the fence we have Sarkozy, who believes that: "It would be highly unrealistic to keep wanting to negotiate a deal where we have not received anything on services, nothing on industry . . . and which would cut farm output by 20 per cent while 800 million people are dying of hunger."

While on the other side, we have Mandleson who believes that reducing trade barriers will "stimulate agricultural production and trade in other parts of the world, particularly amongst needy developing countries."

Free trade needs defending now as much as ever. As Rosemary Righter argues in The Times, "politicians need to confront popular anxieties about free trade by doing a far better job of explaining how much we gain from the global expansion of wealth and markets that it stimulates." Let’s see if Prime Minister Brown can show the courage that he has so far lacked. Needless to say, I am not hopeful.

It's a common enough trope: x causes problems so we've got to do something about x. Fair enough you might say, but it does rather depend upon how much of a problem x actually is and how many other problems (of what magnitude) there will be with the solutions. One example might be the vexing issue of food miles. To hear some talk the very idea of eating food from a field you couldn't walk to is what is killing Gaia: more rationally, yes, of course the transport of food creates emissions and yes, there's some reason to think that this might cause problems.

However, we're also aware (Adam Smith pointed out in 1776 that you can grow grapes and make wine in Scotland but why bother when Bourdeaux will happily do it better and more cheaply for you?) that different methods and modes of food production have different emissions patterns as well. So what we really might want to know is what is the relative damage done by the transport and or the growing?

A new paper has been doing the rounds of the American blogs on exactly this subject. Here, here, here and here. Just how much (or not) do food miles matter?

We find that although food is transported long distances in general (1640 km delivery and 6760 km life-cycle supply chain on average) the GHG emissions associated with food are dominated by the production phase, contributing 83% of the average U.S. household’s 8.1 t CO2e/yr footprint for food consumption. Transportation as a whole represents only 11% of life-cycle GHG emissions, and final delivery from producer to retail contributes only 4%.

Not a lot is the answer. In fact, they're a trivial contributor. If a method of production has lower emissions (as, for example, we've found out that Spanish tomatoes as against UK hothouse ones, or New Zealand lamb as against UK grown), even if only slightly lower, then consumption of those transported and even imported foods lowers total emissions.

Good, so that's the end of food miles as a measurement of the sanctity or not of consumption habits. There's really only one thing left for the locovores to insist upon, which is that we should eat only those items which are grown locally and in season: no hothouses, no artificial conditions and no imports. I can't see that catching on to be honest (does anyone know of anywhere in the UK that you can raise tofus? And what do they graze upon anyway?) but if it does I'm going to write a recipe book.

"101 Exciting Things to do with Turnips", because for months of the year on our damp and chilly islands, that's all there is to eat that's local and not hothoused.

The Library of Economics and Liberty has a new essay up on the economics of sweatshops. An excellent piece and a great introduction to the subject. Yes, the wages received by those who work in sweatshops are certainly low and no, I wouldn't want to be working for them.

But why are wages so bad? The upper bound on their wages is the productivity of that labour itself. If people are paid more than they produce then there won't actually be any jobs at all (and as Paul Krugman points out, it's average productivity across an economy that determines the average wage level, not the productivity of either an individual worker or factory). The lower bound is the wages paid by the alternatives to said sweatshop employment. The more of such there are and the higher the wages paid so the better off those in sweatshops will be.

These boundaries explain of course why the best thing we can do for those who work in such conditions is to buy their produce as well as those things produced in other areas of the same economy. For as (again) Paul Krugman points out:

And yet, wherever the new export industries have grown, there has been measurable improvement in the lives of ordinary people. Partly this is because a growing industry must offer a somewhat higher wage than workers could get elsewhere in order to get them to move. More importantly, however, the growth of manufacturing--and of the penumbra of other jobs that the new export sector creates--has a ripple effect throughout the economy. The pressure on the land becomes less intense, so rural wages rise; the pool of unemployed urban dwellers always anxious for work shrinks, so factories start to compete with each other for workers, and urban wages also begin to rise.

Sounds like something of a plan really, doesn't it? What we most certainly should not do is, as noted, what Jagdish Baghwati says we must not:

For instance, requiring a minimum wage in an overpopulated, developing country, as is done in a developed country, may actually be morally wicked.

Because it can (and often does) price those workers out of those sweatshop jobs and thus prevents the whole beneficial cycle from ever starting.

I wish we could stop flogging a dead horse. Sadly, the politicians won’t let us. They just keep insisting that subsidies and trade restrictions are good ideas. The Independent reports today that the Common Agriculture Policy (CAP) adds almost £900 each year to UK food bills. Much has and more could be written about how these subsidies hurt the average person in the EU. But, as Maxine Firth wrote:

CAP is one of the biggest iniquities facing farmers in Africa and other developing counties. They cannot export their products because they compete with the lower prices made possible by payments. In addition, European countries dump thousands of tons of subsidised exports in Africa every year so that local producers cannot even compete on a level playing field in their own land.

All of this is not to say the EU is the only culprit. Trade policies in Africa are prohibitively restrictive. However, the EU, UN, the US, and dozens of other countries, NGOs and IGOs try to solve Africa’s problems with foreign aid. Here’s a better idea: Let them produce and compete! Let free trade work. A couple of weeks ago, The Economist reported that 250m of the 270m people lifted from poverty since 1990 were Chinese. Is this because of foreign aid to China? Absolutely not! The Chinese government made capitalist reforms, and foreign nations opened up trade. Although China has a long way to go, it has come a long way and is now freer than it has ever been. Africa is different, but requires the same approach—internal and external changes to trade policy.

Perhaps an introductory course in economics would serve our politicians well.