Breakthrough Ideas for 2004: The Loan Ranger
Feb 01, 2004 
Categories: Bottom-up Development, Economics
Tags: Iqbal Quadir
Iqbal Quadir proposes a novel approach to addressing international trade imbalances.
The Loan Ranger
February 2004
Why does widespread poverty persist in so many parts of the world? Because poor countries need trade and instead get aid. A simple, if surprising, change could fix the situation.
We all know that trade is what's needed to propel countries. When two countries engage in trade, both benefit. But rich countries discourage trade with poor countries in three major ways. First, they hold fast to the trading principle of reciprocity; that is, they offer another country a tariff reduction on a product in return for the same treatment on another item that they are hoping to sell to that country. Because the poor country's economy is vastly smaller, this "equal treatment" prevents it from bargaining for the reductions in trade barriers it needs to compete in rich countries. This is why, for instance, the United States puts a tariff on imports from Bangladesh that is nearly ten times higher than that on imports from France.
At the same time, rich countries spend, collectively, nearly $1 billion a day subsidizing the part of their economies where poor countries may have a real competitive advantage: agriculture. For most poor countries, a boost in agriculture would make a critical difference. Genuine economic development tends to be bottom-up; a surplus in agriculture produces the purchasing power and investment capital for manufactured goods, and surpluses in manufacturing similarly lead to more complex consumption and production.
Finally, rich countries use their leverage to promote free trade where they have an advantage. Instead of buying from poor countries, they're more interested in selling to them. It's a shortsighted strategy. When rich countries buy from poor countries, they not only bring costs down for their own consumers, they also raise purchasing power naturally in the poor countries leading to larger markets for the rich countries' goods.
Instead, rich countries try to artificially boost poor countries' purchasing power by providing "aid" - to the tune of nearly $1billion a week-through various bilateral channels and multilateral institutions. When aid is given to a poor country's government (and most aid does go to governments), it has the added effect of promoting statism- it contributes to the centralization of power, whereas decentralization fosters democratization and economic growth. By taking pressure off that government to achieve greater tax revenues through economic growth, it allows the poor country to live with wrong policies and therefore contributes to worsening governance.
Solving the problem requires a fresh focus on the actual bottleneck. What is it that keeps rich countries' governments from living up to their rhetoric about free trade? Just this: a limited number of special interests that lobby aggressively on the part of dying industries. People who work in these sectors, we hear, will suffer; they will have to be retrained, rehabilitated. But that, we know, can be done - provided there is sufficient funding for related projects. And there, I would propose, is where institutions like the World Bank should be offering their aid. Let's start lending to the rich countries, so they can make their own people whole. Then they can pursue genuine free trade, benefiting both rich and poor economies. With good access to rich markets, poor economies would make substantial gains and earn access to capital and know-how naturally.
Iqbal Quadir (Iqbal_Quadir@harvard.
edu) is the founder of GrameenPhone,
which provides telephone access throughout
Bangladesh, including to its rural
poor. He lectures in public policy at Harvard's
John F. Kennedy School of Government
in Cambridge, Massachusetts.
