| A British politician, Richard Cobden once (1857) wrote: | | | | to be left behind in today's competitive world is to |
| "Free Trade is God's diplomacy and there is no other | | | | die a slow economic death. |
| certain way of uniting people in the bonds of peace" | | | | All this will be to no avail if a country does not make |
| International, free trade is particularly important to | | | | an intentional, conscientious effort to identify those |
| developing, poor, countries (among them the | | | | things that it is good at, its "relative, competitive |
| "economies in transition"). | | | | advantages". |
| Without international trade, the local economy is | | | | But should a nation leave the forces of the |
| limited. It does not manufacture and produce more | | | | marketplace to take their course, unhindered? |
| than it can consume. If it produces excess products, | | | | Alternatively, should a government determine the |
| commodities, or services - no one buys them, they | | | | priorities of the nation within a very long term plan? |
| accumulate as inventory, and they bring about losses | | | | Personally, I do not support fanatic views. The |
| to the producers and, often, a recession. So, in the | | | | market has its flaws. It is never perfect. |
| best of cases - even assuming optimal management | | | | Governments should intervene (marginally) to fix |
| and unlimited availability of capital - a firm in a closed | | | | market imperfections and failures. Otherwise, who will |
| economy can expect to grow by no more than the | | | | supply public goods like defence or education? |
| rate of growth of the local population. | | | | The same is true for trading. Japan and Israel are |
| This is where exports mitigate population growth as | | | | two prime examples of extremely successful |
| a constraint. | | | | government involvement in determining national |
| An export market is equivalent to a sudden growth | | | | priorities and in pursuing them (the current slump in |
| in the local population. Suddenly, the firm has more | | | | Japan notwithstanding). The all powerful Ministry of |
| people to sell to, additional places to market its | | | | Industry and Trade (MITI) in Japan virtually dictated |
| products in, an increasing demand which really is | | | | what should be done, where, with whom and how |
| unlimited. No firm in the world is big enough not to be | | | | for decades. Israel actively encourages the formation |
| negligible in the global marketplace. With 6.2 billion | | | | of hi-tech, labour-poor, high value added industries. |
| people and 170 million new ones added every year - | | | | But both governments recognized the limits of their |
| it is much cleverer to export than to limit oneself to | | | | intervention, and the difference between advice, |
| a market with 2, 20, or even 200 million inhabitants. | | | | incentives and coercion. |
| In sum: local firms - and, as a result, the economy as | | | | The government of a country should identify its |
| a whole, can increase their production above the level | | | | relative competitive advantages and re-orient itself to |
| of local consumption and export the surplus. | | | | materialize them. |
| This, obviously, has the beneficial effect of increased | | | | This realization phase can be successful only if the |
| employment. Export oriented industries in economies | | | | country is an active and complying member of and |
| in transition are labour intensive. The more the | | | | participant in the international community of nations. |
| country exports - the more its industries employ. This | | | | It must peacefully and willingly adhere to international |
| equation led some economists to say that a country | | | | agreements on trade and investments and it must |
| exports its unemployment when it exports products. | | | | agree to resolve its conflicts within the international |
| Every product contains a component of labour. When | | | | judicial and arbitration frameworks. |
| someone buys an imported product - he really buys | | | | Macedonia is in a difficult economic spot - but it is by |
| the labour invested in this product, among other | | | | no means unique. Almost all the newly-formed |
| inputs. See the Technical Appendix for more. | | | | countries lost almost all their previous export markets |
| But free trade cuts both ways. Some products are | | | | simultaneously. COMECON and the USSR disintegrated |
| so expensive to manufacture locally, that it is more | | | | almost at the same time as Yugoslavia did. Some |
| cost effective to import them cheaply. In aggregate, | | | | countries have not adapted to the new situation: |
| the local economy benefits from this more efficient | | | | Their GDP was halved, their industrial infrastructure |
| use of its (ever limited) resources. | | | | was demolished and they ran ever-widening trade |
| It has been proved in numerous studies that | | | | deficits. They preferred to mourn their situation and |
| countries benefit from certain kinds of imports no | | | | blame the whole world for it. Others have oriented |
| less than they benefit from exports or the resulting | | | | themselves to become a (geographical and mental) |
| enhancement of local manufacturing. This is called the | | | | bridge between East (Europe) and West (Europe). |
| theory of "comparative relative advantage". | | | | They adopted the Western mentality, Western |
| Cheap imports (only as a replacement for expensive | | | | institutions and Western legislation regarding |
| locally produced goods) have two additional effects: | | | | investments, banking and finance. They emphasized |
| they reduce the costs of operating enterprises (and | | | | their roles as transit countries in the best sense of |
| thus encourage the formation of businesses) - and, | | | | the word: having a lot to contribute within the |
| naturally, they reduce inflation. Where cheap products | | | | process of transit. |
| are available - inflation, by its very definition, is | | | | What is common to all the more successful countries |
| subdued. | | | | is that they encouraged joint ventures with foreign |
| So, instead of wasting money on purchasing | | | | investors, suppressed xenophobia and ethnic |
| expensive products, which are manufactured locally - | | | | discrimination, shared economic benefits with their |
| instead of paying high interest payments on liabilities | | | | neighbours by collaborating with them, imported |
| due to high inflation - the economy can optimally | | | | mainly capital goods (instead of consumption goods), |
| allocate its resources where they are at their | | | | adopted sound fiscal policies and really privatized. In |
| productive best. | | | | most of them, lively capital and money markets have |
| Free trade assists the economies of all players. It | | | | developed. |
| allows them to optimize the allocation of their | | | | This is the future that Macedonia should aspire to. It |
| (scarce) economic resources and, thus, maximize | | | | can become the Switzerland of the Balkans. It has all |
| national incomes. | | | | that it takes. Ask the financial markets: they are |
| Optimal allocation frees up sizeable resources which | | | | paying for Macedonian government securities (almost) |
| were previously engaged in inefficient production, or | | | | the same price they pay for Slovenian national debt. |
| dedicated to defraying financing expenses, or locked | | | | That means that they think that Macedonia is the |
| into the consumption of expensive local products. A | | | | Slovenia of tomorrow. |
| consumer allowed to buy a cheap, imported car | | | | And that, in my view- is not such a bad future, at all. |
| instead of an expensive locally manufactured one, | | | | TECHNICAL APPENDIX |
| saves the difference and invests it in a savings | | | | International Trade, Inflation and Stagflation |
| account in a bank. The bank, in turn, lends the money | | | | Situation I |
| to firms - and this is the relation between free trade | | | | The exporting country has: |
| and high savings and, hence, high investment rates. | | | | - An overvalued currency |
| Free trade reduces the overall price level in the | | | | - Low inflation or deflation as prices and wages |
| economy, more money can be saved, and the | | | | decrease to restore competitiveness |
| savings can be lent to more businesses on better | | | | The exporting country thus exports its deflation |
| terms. Plants can, thus, be modernized, technological | | | | (through the low and competitive prices of its goods |
| skills can be acquired, more comprehensive education | | | | and services) and its unemployment (through the |
| provided, infrastructure can be improved. | | | | labour component in its exports). |
| Above all, those who trade do not fight. Free trade | | | | The importing country's inflation rate is affected by |
| pacifies countries. It leads to the peaceful and | | | | the deflation embedded in imported goods and |
| prosperous coexistence of neighbouring nations. It | | | | services. Cheap imports thus exert downward |
| yields mutual collaboration on trade, investments and | | | | pressure on prices and wages in the importing |
| infrastructure. | | | | country. |
| But free trade cannot exist in a legal and | | | | This, in turn, tends to increase the purchasing power |
| infrastructural vacuum. To achieve all these good | | | | of the local currency and to cause its appreciation. |
| outcomes a country must rationalize its trading | | | | In other words: |
| activities. | | | | The macro-economic parameters of the importing |
| First and, above all, it must gradually dismantle | | | | country tend to REFLECT the macro-economic |
| regulatory and tariff barriers to allow the | | | | parameters of the exporting country. |
| unobstructed flows of goods, services, products, | | | | If the exporting country's currency is overvalued - |
| commodities, and information. | | | | the importing country's currency will tend to |
| I used the word "gradually" judiciously. A poor | | | | appreciate as a result of the export/import |
| country must make the transition from a | | | | transaction. |
| protectionist environment, heavily isolated by | | | | If the exporting country's inflation is low - it will exert |
| regulations, customs, duties, quotas, tariffs and | | | | a downward pressure on wages and prices (on |
| discriminating standards - to completely free trade in | | | | inflation) in the importing country. |
| minute, well measured steps. The influence on local | | | | Unemployment will tend to decrease in the exporting |
| industries, the level of employment, the national | | | | country and increase in the importing country. |
| foreign exchange reserves, interest rates, and many | | | | Following the export transaction, the importing |
| other parameters - economic as well as social - | | | | country will have: |
| should be gauged regularly to prevent unnecessary | | | | - An appreciating currency |
| shocks. But these monitoring and fine tuning should | | | | - Deflation or low inflation |
| not serve as fig leaf, they should not be an excuse | | | | - Higher unemployment |
| to prevent or delay the freeing of trade. The | | | | Why would anyone import from a country with an |
| country must, unequivocally, announce its plans and | | | | OVERvalued currency? |
| intentions, replete with timetables and steps to be | | | | Because it has a monopoly or a duopoly on |
| adopted. And the country must stick by its plans - | | | | knowledge, intellectual property, technology, or other |
| and not succumb to the inevitable and forceful | | | | endowments. |
| demands of special interest groups. | | | | Situation II |
| On the other hand, the country must encourage | | | | The exporting country has: |
| foreign investment. (Foreign Direct Investment (FDI) | | | | - An undervalued currency |
| and even portfolio investments are a critical part of | | | | - High inflation as prices and wages increase (to |
| free trade. Investors build manufacturing plants, which | | | | restore equitable distribution of income) |
| export their products, or sell them locally, substituting | | | | The exporting country thus exports its inflation |
| for imports. Direct investors are usually connected - | | | | (through the higher though competitive prices of its |
| directly or indirectly - to trading networks. Financial | | | | goods and services) and its unemployment (through |
| (portfolio) investors usually come only much later, | | | | the labour component in its exports). |
| when the local capital markets have matured and | | | | The importing country's inflation rate is affected by |
| have become much safer. A country can encourage | | | | the inflation embedded in imported goods and |
| the inflow of foreign investment by providing | | | | services. Expensive imports thus exert upward |
| investors with tax incentives (tax holidays, tax | | | | pressure on prices and wages in the importing |
| breaks, even outright grants and subsidized loans). It | | | | country. |
| can provide other incentives - there are too many to | | | | This, in turn, tends to decrease the purchasing power |
| enumerate here. Above all, though, it must protect | | | | of the local currency and to cause its devaluation. |
| the property rights of investors of all kinds - | | | | In other words: |
| domestic, as well as foreign. Investors flock to | | | | The macro-economic parameters of the importing |
| secure places and no incentive in the world can | | | | country tend to REFLECT the macro-economic |
| convince them to put their money, where they do | | | | parameters of the exporting country. |
| not feel certain that they can always - and | | | | If the exporting country's currency is undervalued - |
| unconditionally - recover it. Property rights is the | | | | the importing country's currency will tend to |
| countries in transition's weak point in this respect: the | | | | depreciate as a result of the export/import |
| appropriate legislation is lacking, courts are slow, | | | | transaction. |
| ignorant, and indecisive, law enforcement agencies | | | | If the exporting country's inflation is high - it will exert |
| are immature and uncertain of their authorities and | | | | an upward pressure on wages and prices (on |
| how to exercise them. Some countries are outright | | | | inflation) in the importing country. |
| xenophobic. This is not conducive to foreign | | | | Unemployment will tend to decrease in the exporting |
| investment. | | | | country and increase in the importing country. |
| But all this is not enough. A skilled, well educated | | | | Following the export transaction, the importing |
| workforce is a prerequisite for the development of | | | | country will have: |
| export industries. Even low-tech industries (textiles, | | | | - A depreciating currency (devaluation) |
| shoes) require the workers to be literate and to | | | | - Higher inflation |
| know basic arithmetic. As industries mature, the | | | | - Higher unemployment |
| workers are required to train, retrain and re-qualify | | | | The state of higher inflation with higher |
| ceaselessly. | | | | unemployment is called "stagflation". So, in this |
| The nation must make education as a top priority. | | | | scenario, the importing country imports stagflation as |
| education is as much an infrastructure as roads and | | | | part of the goods and services it imports. |
| electricity. To think differently is to be left behind and | | | | |