Environmental Engineering Reference
In-Depth Information
Perspectives for reform
The myth of the market
Any re
airs have been managed in
the past 20 years cannot fail to observe that this period is dominated by the consolidation
of the myth of the market as a device for e
fl
ection on how economic, social and environmental a
ff
cient resource allocation. The evidence to
back this up is lacking.
A casual observer might think that economic history con
rms the idea that free
markets bring economic prosperity. However, economic history shows that it is impossi-
ble to discern where the market stops and where state intervention begins. Subsidies of all
types, protectionism and strict regulations on capital and labor mobility are inseparable
from the operation of market forces over the past 200 years (Habbakuk, 1962; Landes,
1969; David, 1975). This does not mean that markets and prices are unimportant, but
markets are not alone in explaining prosperity in Europe or the USA.
On the other hand, economic theory shows that e
fi
ciency (in the form of Pareto opti-
mality) is a feature of equilibrium positions only. Unfortunately, there is no satisfactory
theory explaining just how general equilibrium prices are attained.
3
Thus there is no ratio-
nal foundation for the belief that the market is the best system for the allocation of
resources.
Trade theory is not a scienti
fi
c truth that comes out in favor of free trade; it is marked
by the
aws of general equilibrium theory. And the simplicity of international trade
models is misleading. Proofs of the basic theorems depend critically on initial assump-
tions, and when these are relaxed, conclusions are quite di
fl
erent (Ackerman, 2004).
Perhaps the most important lacuna of all WTO agreements is lack of reference to
market concentration, oligopolies and anti-trust enforcement measures. Where collusion,
unfair business practices and market concentration have real impacts on international
market prices, WTO has really nothing to o
ff
er. In fact, its promotion of trade liberaliza-
tion in the context of imperfect competition often leads to further concentration and
intensi
ff
fi
ed oligopolic structures.
Macroeconomic policy and trade
The last three decades have witnessed the separation of
ows from international
trade: short-term transactions in the world's currency markets are 50 times greater than
trade
fi
nancial
fl
ows. Any assessment of the performance of the world's trading system and its rela-
tion to social and environmental sustainability needs to take into account growth of inter-
national monetary and
fl
nancial relations.
In general, however, trade policy analysts have been focusing too narrowly on their
subject, without giving adequate consideration to the fact that trade liberalization is part
of a bigger macroeconomic policy package. Thus they may have inadvertently left out of
their analysis the critical relationship between trade and monetary and
fi
scal policies. The
relation goes beyond the simple references to exchange rate over- or undervaluation, and
involves the wider issues surrounding
fi
fi
nance, capital
fl
ows and the policy space in the
context of capital account deregulation.
The false dichotomy between monetary aggregates and real sector variables needs to be
abandoned. A new type of economic analysis, integrating both dimensions, will be more
policy-relevant. This implies rede
fi
ning the contents of
macroeconomic policy for
