Recent articles published in The Post – Cambodia’s trade deficit to worsen to $ 2.3 billion per year with RCEP, UNCTAD expert says, and Cambodia ASEAN risks imbalance with RCEP – raise a number of concerns regarding Cambodia’s possible accession to the free trade agreement. The commentary explores its effects across ASEAN, on the Cambodian economy, and discusses how to understand trade liberalization. A discussion on Cambodia’s continued integration into the global economic system is certainly needed; however, the articles overlooked some deeper questions about how the mainstream economy is formed and compelled a broader public policy debate.
In the original report, RCEP: Implications of Merchandise Market Access for ASEAN by Dr Rashmi Banga et al used World Integrated Trade Solutions (WITS) -SMART simulations and concluded that ASEAN countries would see their trade balance, i.e. the difference in value between imports and a country’s exports, increase. For Cambodia, imports are forecast to increase by 13.4 percent and exports to decline slightly. A
The expert from UNCTAD noted that there would be a loss of tariff revenue due to membership of about $ 334.6 million per year and that this could employ many more nurses in the country and thus contribute to improve the health of the population. These concerns, while important, overlook the nature of market processes.
The diagram (photo) shows how economists understand economics. It is presented as a circular flow model with the flow of goods and money between two distinct parties; a market for goods and services, where households buy goods and services from businesses in exchange for money, and a market for factors of production; labor or capital, where firms buy factors of production from households in exchange for money.
For economists, the advantages of markets are obvious, they ensure, when they are as free as possible and without government intervention, an efficient allocation of resources. This desire for efficiency concerns an increase in production and a return to investors.
There may be costs, reduced tax revenues, reduced public services, increased unemployment and externalities; these are the environmental costs that are not included in market transactions.
However, moving to an ideal economic state of rational and interested actors operating in competitive markets is an objective of public policy. This thinking stems from how economists view economic development, but leads to a number of problems.
In the case of trade liberalization and how Cambodia might be effected, it is important to note that the faith of developed countries in free trade contrasts with the strategies they have pursued to achieve their level of development. .
From 1721 to 1846 Britain used infant industry protection, export subsidies, tariff discounts on inputs to promote exports and state quality control to promote national industry. The United States is a strong proponent of free trade today, but between 1816 and the end of World War II, it had one of the highest tariffs in the world on manufactured imports.
In Asia, the success of Japan, and more recently South Korea, and Taiwan has all been achieved in defiance of the free trade mantra. While it is easy to argue that these economies were open to the world in the areas of trade, technology and finance, the openness was different for specific sectors and according to industrial policy. Here, the distinction between free trade and trade in the context of a coherent industrial development policy specific to each country is essential.
More recently, the success of China and India has confirmed, for the faithful, the virtues of free trade. While it is difficult to ignore the growth of their exports in either case, the trade reforms have taken place after high levels of
growth, internal reform and restrictions on the importation of foreign goods still apply. Ultimately, a review of prosperous economies undermines the accepted wisdom that free trade is essential for development.
Economists who despise public concerns often fall back on the theoretical rigor of their discipline, but that only creates more embarrassment. The theory of comparative advantage is often used in arguments to justify increased global economic integration.
Ricardo’s famous theory used the example of two countries – Portugal and England – to highlight how lifting trade restrictions would increase production and, therefore, increase wealth. In the model, Portugal was
absolutely more efficient at producing wine and cloth than England, and relatively more efficient at producing wine than cloth within its own borders.
If trade restrictions were lifted, more wine and cloth could be produced with England specializing in cloth and Portugal in wine, and the two countries trading increased surpluses.
Today, the theory of comparative advantage is used to justify the move to free trade and to confirm that deepening global economic integration is not so much a policy option, but a norm that all countries should follow. Yet the theory suffers from a series of shortcomings that undermine its ability to guide policy. The theory ignores the specific nature of capital and labor. Capital cannot be converted to other uses
overnight, and people’s skills can become unnecessary with the changes in production. Yet the theory assumes that both are infinitely flexible. These failures can lead to a disastrous policy and a reduction in tariffs can lead to a
flooding of domestic markets, declining domestic capacity and increasing unemployment, rather than stimulating new production.
Further, it assumes that comparative advantage stems from a country’s natural endowments and fails to discuss or envision how to create economic success. As a result, theory cannot contribute to discussions surrounding the rise or fall of a country’s economy. Here, advocates of comparative advantage stick with the way they think markets work and ignore the reality of how they actually work.
All theories make assumptions and the process of theorizing is inevitably selective. However, proponents of liberalization use comparative advantage theory as a guide for economic policy making.
limits, and seem to celebrate it as an approximation of reality when it clearly is not.
Economists like to stress the role of models in their work and use them to justify policy choices. Economic models are a simplified version of reality that aim to identify how specific variables interact with each other and then, based on that understanding, make policy suggestions.
The original report, “ RCEP: Goods Market Access Implications for ASEAN ” by Dr Rashmi Banga et al, used World Integrated Trade Solutions (WITS) -SMART simulations and suggested that the assumptions built into general equilibrium models , for example, “ perfect competition, full employment and balanced public budgets, often used to assess trade liberalization, ensure that the results are biased in favor of liberalization.
This concern for the reality of modeling is welcome, but also reveals the limits of the dominant economy. The goal of economic growth through trade does not take into account how these policies will contribute to greenhouse gases and worsen climate change. Economic growth simply cannot be separated from energy consumption. The belief that green growth, growth with decreasing use of energy and resources can in turn allow an economy to grow indefinitely is a fiction.
A 2019 report, Decoupling demystified: evidence and arguments against green growth as the only strategy for sustainability, concluded that “. .. the [is] no empirical evidence supporting the existence of a decoupling between economic growth and environmental pressures at a scale close to the scale necessary to cope with environmental degradation … “
Here one might wish to think about an agreement that if it aims to promote the expansion of regional trade, investment and contribute to development, it will also contribute to climate change.
The problem is compounded by the fact that current economic models used by the IPCC underestimate the damage likely to occur as the climate changes, and therefore minimize the urgency for politicians to act. More realistic models emphasize the need for urgent action, but the dominant economy, as the diagram above shows, is tied to the idea of an economy isolated from the natural world.
The discussion of why Cambodia’s economic integration should be at the center of the country’s development agenda must be understood in the context of today’s economy. The traditional economy suffers from a market fundamentalism that recklessly celebrates its imaginary functioning while ignoring salient critiques of its theorization, economic history and the physical world in which it operates.
Cambodia finds itself in the awkward position of being a developing country that always tries to strengthen its institutions, while providing opportunities for a growing population.
In addition, decisions about climate change and actions to be taken by developed countries are likely to be taken in forums beyond its reach. In such a context, there are no simple answers, but a more context-specific approach to Cambodia’s policymaking would reveal options that current ideology ignores.
Michael Powel is previously a rural development and agriculture consultant with local NGOs