Trade barriers bode ill for economic recovery

http://www.shanghaidaily.com/article/shdaily_sing.asp?id=394330&type=Opinion&page=0

AS much as I consider myself a realist on matters related to the global economy - indeed, some call me a pessimist - never would I have believed that in my lifetime I would be seeing anything remotely resembling the 1930s.

I did invariably remonstrate with those who in the booming last couple of decades would claim that "globalization was irreversible." Nonsense, globalization has been repeatedly reversed throughout history. But I never expected it would go quite so far.

The gravity of the current situation is beginning to be recognized. The recovery is likely to be "L-shaped": The global economy could be entering a "lost decade", comparable to what Japan experienced after its crash and financial implosion in 1991. But that was one country, now it's the world.

In reality, things could get much worse than that. The greatest threat the world economy faces is a resurgence of protectionism.



This would, as it did in the past, decrease growth and dramatically increase unemployment. This calamity would be occurring at a time of a huge increase in the youth of the developing world, when hundreds of millions of young people will be coming on to the labor market.

In the Middle East, 100 million jobs need to be created in the next decade-and-a-half. In Pakistan, between 2010 and 2020 - 10 years - the population is due to increase by 35 million! In only one decade, Pakistan's population will grow by the equivalent of 12 percent of the US population.

The ILO (International Labour Organization) estimated that in 2009 unemployment will increase worldwide by 50 million. This could end up having been too optimistic a forecast.

In the 1930s it was unemployment, following the great crash and the trade wars, that gave rise to extremist political movements, xenophobia and eventually to war.

The social protection, wealth and demographics of the West make it unlikely that a 1930s scenario will be repeated. However, the situation in the developing world is different and far more alarming. Furthermore, while the last couple of decades saw a quite remarkable decrease in global poverty, the current crisis, protectionism and unemployment could see a dramatic reversal of this process. Already the effects are being felt in many ways. According to FAO (The Food and Agricultural Organization), between 2007 and 2008 the number of under-nourished people increased by 50 million.

Business leaders

It is worth pausing briefly to recollect the words of John Steinbeck in "The Grapes of Wrath" (1939): "How can you frighten a man whose hunger is not only in his own cramped stomach but in the wretched bellies of his children? You can't scare him - he has known a fear beyond every other."

An international financial crisis, surging unemployment and protectionism were the ingredients that fueled the cataclysms that ensued in the 1930s. We have an international financial crisis, which will not go away tomorrow, unemployment is rising, protectionism is rearing its very ugly head, but there is still time to act. And this is where business leaders must stand up and be counted.

The event that sparked the outbreak of unbridled protectionism in the 1930s was the Smoot-Hawley Tariff Act (1930). More than 1,000 economists (1,028, to be exact) sent a petition to Herbert Hoover pleading that he veto the bill. They were ignored. There is no record of the business community having mobilized to exert overt pressure to prevent protectionism.

Apart from the fact that no doubt many were themselves seeking protection, there was no sign of business leadership acting in enlightened self-interest. Catastrophes occur not only because of acts of commission, but also because of acts of omission.

Had the business community taken a stand - had business leaders shown guts - history may have turned out differently. It would also have given business leadership the kind of respect it abysmally failed to deserve not only in the 1930s, but even worse in the 1940s.

In the past couple of decades, many business leaders have talked quite effusively about globalization and its benefits. It is now urgent to walk the talk.

On November 15 last year the first G20 summit was held in Washington. The leaders all pledged to promote the open global market economy, to bring the World Trade Organization Doha Round to conclusion and to prevent new protectionist practices; specifically, in paragraph 13: "We underscore the critical importance of rejecting protectionism and not turning inward in times of financial uncertainty. In this regard, within the next 12 months, we will refrain from raising new barriers to investment or to trade in goods and services, imposing new export restrictions, or implementing World Trade Organization inconsistent measures to stimulate exports."

Not only has this pledge turned out to be sheer rhetoric, but indeed since the Washington summit nearly every single member of the G20 has taken protectionist measures.

The next G20 summit is to be held in London on April 2. What the world needs to try to prevent the current crisis turning into a tragic drama is to have a minimum of 1,028 business leaders, preferably far more, signing a petition addressed to Prime Minister Gordon Brown (host of the summit) expressing the clearest and strongest rejection of protectionist measures and the imperative of maintaining, indeed enhancing, the global market economy.

The late David de Pury, a man of great vision, board member of Nestle and chairman of the Evian Group, titled the last article he wrote before his untimely death, "Let us not repeat the mistakes of the past."

We are in serious danger of doing so. Business leaders must consider not repeating the mistakes of omission they made in the 1930s.

If business leaders fail to fight against protectionism, there may be no future for capitalism at all. The consequences will be terrible and the inheritance bequeathed to future generations dreadful.

Jean-Pierre Lehmann is professor of international economy at IMD and founding director of The Evian Group. IMD is a leading global business school based in Switzerland (www.imd.ch).