Beagle: I’m not normally for tariffs. I was amazed early on in the Clinton term when he spent oodles of political capital - for which he received and is still receiving from the right exactly zero credit - on passing NAFTA. It was the right thing to do, and he got it through Congress with an iron determination that was probably the most beautiful thing I’ve ever seen.
But this is the U.S. we’re talking about: we may have economic problems to address, but we also have tools to address those problems that no other economy on this planet has. We should lead by example (something that Bush needs to learn).
But Iraq is another story entirely. Let us pick apart the blind allegiance to “free trade” and “free markets” by seeing what choices, in the real world, Iraq actually has:
The Faulty Feedback Dilemma
This one’s a classic for supply regions. Given the floating currency regime now in place worldwide, and a commodity-based economy, the problem any supply region anywhere in the world faces is: how do you encourage industry when they are being hurt when they should be helped, and helped when it’s counterproductive for them to get any help?
Let us, ahem, elucidate.
If you’re at the head of a country with abundant supplies of some coveted natural resource, whether it’s oil, copper, bauxite, lumber, or even some agricultural commodity like coffee or cocoa, you’ve been simultaneously both blessed and cursed. Blessed, because you now have something that the rest of the world wants badly. Cursed, because it will rule your economy whether you like it or not.
As you should know, Sam, the currencies of commodity-based economies rise and fall with the fortunes of those commodities. Yours truly, being more than a little interested in the world of investment out of sheer self-interest, will look at the CRB index of commodities, which has been in a rising trend, and then look at currencies like the Australian or Canadian dollar or the South African rand to see if they are also rising. If those currencies are rising, then I know that the rise in the CRB index is real, not Memorex. In other words, the currencies of commodity-based economies rises and falls with the fortunes of the prices of commodities.
For single-commodity economies like Iraq, this poses a very big problem. Your currency doesn’t respond to the fortunes of whatever industry you’ve managed to encourage outside of the commodity that gets you your export earnings; instead, your currency responds only to the signals it gets from the price of the commodity your economy depends on. That means your industry doesn’t get the automatic price protection that a falling currency brings when there’s a recession; nor does it rise when industry is doing well, thereby forcing on your local industry the merciless price competition it needs in order to stay efficient when things are going well. The level of the currency instead is only coincidentally at the level it needs to be at to give your local industry the feedback it needs in order to grow and develop.
For an energy based supply region like Iraq, the problem is compounded by the fact that if oil is at a high price, your currency will be flying high, but your industry will have to pay that price for energy as well if you’re following a fully free market model, which will subject it to the double whammy of high energy prices and a lofty currency that will kill its chances at competing internationally. For a country like Iraq, at the stage of development at which it finds itself, only the artificial protection of tariffs will give them any chance to develop any sort of economy outside of a total dependence on oil.
The Corruption of the Elites
As I’ve pointed out, single-commodity economies, or supply regions, are singularly vulnerable to truly massive corruption, because given a single resource on which the rest of the economy depends, the natural tendency will be for the power over that resource to be concentrated in the hands of a single person and his family/clan/region/ethnic group.
In Mexico, until President Ernesto Zedillo, the predecessor of Vicente Fox, there was a pattern of a president coming in, ruling, showering his family and close friends with favors, and then leaving with as much money as he and his family could get away with. Salinas, Zedillo’s predecessor, was almost the embodiment of this, with his brother having been arrested for having plotted murder and engaged in, I kid you not, “inexplicable enrichment”. Actually the enrichment was quite easily explicable.
Anyway, Mexico is of course an oil exporter, and while Mexico has plenty of other exports, oil is up there in importance, and more than one commentator on the country has noticed the mixed blessing that oil has been.
Personally, I consider it no coincidence that the first president since the revolution to countenance a true opposition and have truly free elections was Zedillo, and that he ruled at a time when oil prices were chronically low. But an abundant and valuable natural resource is a constant temptation to corruption, unless some counterbalancing source of wealth can be created. As I believe I’ve shown in the first part of this diatribe, getting yourself a counterbalancing source of wealth is going to be remarkably difficult in a completely “free market” context, for a developing economy with an abundant natural resource.
In short, what we would call “protectionism” is the only way out for supply regions. The chances of success, even with a protectionist policy, are not terribly high. But without it, there is, I believe, no chance at all.