The last few years have seen several influential works which highlight the importance of trade agreements that are tailor-made to the circumstances of the countries involved. These writings raise important implications for Colombia and its endeavor to implement a trade agreement with the E.U. – as well as with other countries like the U.S.
A lot of critique is uttered by labor unions and non-governmental organizations which believe that the trade agreement harms many people in society and that it gives tacit approval to human right violations. Surprisingly, the critique also now comes from the neoliberal camp itself. It comes for example from within the World Bank which traditionally promotes North-South trade agreements.
Important leaders in this movement are Justin Yifu Lin – Chief Economist and Senior Vice President at the World Bank and William Easterly – Professor of Economics at New York University and former employee of the World Bank. (See for example Lin, J.Y. & Monga, C. (2010), “The Growth Report and New Structural Economics.” Policy Research Working Paper 5336, The World Bank, Washington and Easterly, W.R. (2002) and ‘The Elusive Quest for Growth: economists’ adventures and misadventures in the tropics, The MIT Press, Cambridge.) But there are many others –scholars like Professor Ricardo Hausmann and Professor Dani Rodrik who advise against viewing North-South trade agreements as one–size–fits-all solutions. (See for example Hausmann, Ricardo, Dani Rodrik and Andrés Velasco (2004) ”Growth Diagnostics.” Reproduced, Harvard University and Rodrik, D. (2010), “Diagnostics before Prescription.” Journal of Economic Perspectives, p. 33 – 44.) The key conclusion of the debate has been that economic benefits only come about when a North-South trade agreement is implemented under the right circumstances. In other words, the agreement must be tailor made.
Was Colombia aware of the equivocal nature of North-South trade agreements when it signed the agreement on May 19, 2010? If not; there could still be an opt-out for Colombia as the agreement still needs ratification by the European Parliament and the Colombian congress. Or should it push for the approval of the agreement? Was Uribe realistic when he predicted that an economic growth of 5% to 6% will be attained through the agreement?
At the moment of writing the European Parliament is preparing its arguments, its meetings and is scheduling to decide on the ratification of the EU – CAN agreement that should occur in about three months. The issue of human rights in Colombia is the main stumbling block to approval by the European Parliament. This is not just a moral consideration –the tailor made approach to North-South trade agreements has shown the human rights record of a country heavily influences whether there will be decisive economic benefits from the agreement. This runs counter to the regularly heard argument that North-South trade agreements must be interpreted solely economically.
In my dissertation, which can be downloaded below, I have developed a conditional framework in line with modern research so that the economic benefits of a North-South agreement may be ensured. For example: Colombia scores well on the condition of strategic trade commitments: it has performed well around the negotiation table and secured many economic interests for itself. However, there are also some points of concern. The main examples of these are the conditions of an adequate form of government and an adequate environment for entrepreneurship and innovation. In relation to the first, the World Bank government indicators show that Colombia scores poorly on voice & accountability indices that measure fundamental freedoms in society. Further, Colombia’s government is not sufficiently restrained by checks and balances within the legal system, meaning that there is inadequate rule of law in that country. When a country has low scores in these matters it is more likely that policies will be interest-driven and will only benefit an entrenched group of stakeholders. The concern is therefore that the EU-CAN agreement will not yield widespread benefits for everyone, but only for a selected minority. Thus while there may well be pure economic benefits, these will be limited by governance factors.
The second worry is the adequacy of Colombia’s environment for entrepreneurship and innovation. An economic activity is only truly viable when it is able to compete internationally. This viability, a term that Lin used in his New Structural economics, determines a country’s international competitiveness. However a lack of entrepreneurship and innovation severely hampers the viability of economic activities, and this lies at the heart of the problems that developing countries face in reaping the benefits of North-South trade agreements.
If a country desires to benefit from North-South trade agreements it should have a flourishing base of ideas, entrepreneurs who are able to invest in new ideas and technology that will be able to compete internationally. This will drive the creation of new businesses. By contrast when there is lack of viable economic activities in a country it will be far less likely that a country will benefit from a trade agreement.
We can measure the viability of exports by estimating the amount of technology (reflecting ideas, R&D and entrepreneurship) that is incorporated in current exports to foreign countries. Colombia produces a relatively low score, indicating that its industries are relatively nonviable. Even then the government can play an important role in boosting innovation and entrepreneurship so that viable economic activity increases within sufficient time to profit from a North-South trade agreement. Although the Plan Nacional de Desarrollo 2011 confirms the lack of technology within its production activities there seems to be a lack of urgency about promoting these activities. Concrete proposals appear for the extraction of natural resources, but not for the expansion of investment and entrepreneurship. Hopefully practice proves differently, but as it stands now the agenda for instigating entrepreneurship and innovation is missing.
The conditional framework demonstrates that there are some major points of concern for Colombia. Therefore it is likely that the EU – CAN agreement will not meet the economic expectations. Maybe not directly, but certainly indirectly, human rights play an important role in this outcome. The EU – CAN agreement is not the tailored-made suit we are looking for, but is still rather ill-fitting. In order for Colombia to benefit from it, it would be better to postpone the EU – CAN agreement until the human rights situation has been improved.
Author Tim Dost has graduated on the topic of North – South trade agreement during his master Law & Economics at Utrecht University in the Netherlands and has worked for the Dutch embassy in La Paz, Bolivia, on international development cooperation.
