International Agreements and Development Policy

Development is No Free Lunch

Manuel ‘Butch’ F. Montes

University of the Philippines

Econ 198 2nd Semester, SY 2020-21

International Agreements and Development Policy

1. Do Obligations in international agreements promote or

hinder development?
2. What are a society’s desired development
policies?
• Practical Answer: Desired development policies are
those that are effective and stimulate development.

3. Should desired development policies be secured,

anchored, or locked through international obligations?

What are effective development policies?

(That is the question.)
Manuel ‘Butch’ F Montes | No Free Lunch | 2nd Sem, SY 2020-21 | 2
What are Effective Development Policies?

• The set of effective set of development policies

• Does it change depending on the level of development ?

• Or Is it independent of the level of development?

• International Agreements
• Are their features adjusted to the level of development?
• Are developing countries able to obtain elements that
are fit for their level of development (Should they seek
these adjusted elements) ?

Manuel ‘Butch’ F Montes | No Free Lunch | 2nd Sem, SY 2020-21 | 3

Effective development policies
And International Agreements

Effective Development International Obligations

Policies

• Does it change depending • Are the obligations in FTAs

on the level of adapted to the level of
development level? development of Parties ?

• Or Is it independent of the • Are obligations in FTAs

level of development? independent of the level of
development of the Parties
?
Manuel ‘Butch’ F Montes | No Free Lunch | 2nd Sem, SY 2020-21 | 4
International Agreements & Level of Development

• FITNESS of Agreements which are independent of level of

development rely on a model that
• Elimination of corruption and corruption platforms →
Development
• Elimination of inefficiency (-ies) → Development
• Inefficiencies are COSTLY, and rapid elimination frees up
resources of development
• Developing countries should NOT seek adjustments to their
level of development in international agreements which only
• Extend corruption
• Extend inefficiency and costly economic activities
• BASIC model: There is no such thing as Development
Economics / only Economics analyses
Manuel ‘Butch’ F Montes | No Free Lunch | 2nd Sem, SY 2020-21 | 5
Locking efficiency-seeking economics

Manuel ‘Butch’ F Montes | No Free Lunch | 2nd Sem, SY 2020-21 | 6

Historical record of effective development

• “Effective Development Policies” – from the record

of now developed countries
• Trade policies
• Government policies required to obtain benefits from
foreign investment
→ but investor protection in investment chapters
imposes restraints on these kinds of policies
• Competition policy
• State-owned enterprises and competitive neutrality
• Government procurement
• International protections for intellectual property rights
Manuel ‘Butch’ F Montes | No Free Lunch | 2nd Sem, SY 2020-21 | 7
Development is not a free lunch : Major Issues

• A Revolution is not a Dinner Party / Development is No Free Lunch

• Development effort imposes Economic and Social costs Society
decision to absorb costs is a political decision
• Not a technical decision ≡ Costs have to be borne by Society and
Distributed among population

• Technical aspects
• Based on standard models, good methods for calculating costs
• Harder to estimate (imagine) future benefits
→ Rely on previous and recent historical patterns of successful development

Manuel ‘Butch’ F Montes | No Free Lunch | 2nd Sem, SY 2020-21 | 8

Potential costs of international agreements on
development
• Domestic Cost (long run)
• Domestic employment upgrading and diversification
• Enterprise building, and
• Technological upgrading
• Revival of industrial policy, globally
• Failure of economy-wide liberalization
• Success in East Asia

Manuel ‘Butch’ F Montes | No Free Lunch | 2nd Sem, SY 2020-21 | 9

Industrial Policy

• Selective – not an economy-wide protection / liberalization

• Applies to agriculture, industry, and services
• Objective of achieving (eventual) international competitiveness

• Variety of interventions
• State protection and subsidies for some sectors
• Liberalization for other sectors
• Shifting of state-supported sectors
through the development process

Manuel ‘Butch’ F Montes | No Free Lunch | 2nd Sem, SY 2020-21 | 10

Can the development effort be a free lunch?

• Underdevelopment is itself a social cost over the long-run

• Is the dismantling government restrictions on private action relatively
costless?
FTAs shape government interventions in the following areas for
example:

• Free entry – including foreign participation

• Reducing/eliminating import tariffs | eliminating quantitative restrictions,
especially in agriculture | no export taxes
• Eliminating requirements whose costs are charged to private sector profit-
seeking behavior
• Minimum wage requirements (ISDS)
• 60-40 ownership requirements
• Performance requirements on foreign investors, such as restricting imports to
total exports or the hiring of nationals

Manuel ‘Butch’ F Montes | No Free Lunch | 2nd Sem, SY 2020-21 | 11

Paying for lunch: Costs of a development effort

• Protection of an industry or sector / lack of competition / state-

owned enterprises
• Higher prices on consumers: loss of consumer’s surplus
• Weaker analytical tools for estimating costs on producers and domestic
workers especially in long-run
• Costs on society: losses are borne by unorganized masses
• Corruption playground
• Standard evaluation approaches: estimating the costs of economy
wide policy stance between protection for all industries versus
protection for NO industries
• How appropriate as methodology for considering joining FTAs
• Is the methodology ever used as a post-mortem exercise: whether
expected benefits materialized ex post ?
• Is the methodology ever used to design government programs to facilitate
adjustment and provide resources to respond to new opportunities from
liberalization? Or is liberalization by nature a free lunch?

Manuel ‘Butch’ F Montes | No Free Lunch | 2nd Sem, SY 2020-21 | 12

Approaches to Economic Policy Reform / Ideology

• Pure vs Impure policy approaches / Orthodox vs. Heterodox

• Pure Approach: reliance on market outcomes and private sector
initiatives
• Proponents consider themselves as revolutionaries / thus “orthodox”
label does not fit well
• As Prophets: proponents risk disapproval of powerful local interests / tend
to find themselves in the camp that advocates international disciplines on
national governments
• Technocratic high priesthood
• Impure Approach: state participation in development effort
• Necessary
• Unavoidable (domestic politics impossible to eliminate)

Manuel ‘Butch’ F Montes | No Free Lunch | 2nd Sem, SY 2020-21 | 13

Approaches to Economic Policy Reform / Ideology

• Free trade agreements, as exercises in

• mercantilism/modern colonialism on part of dominant countries,
• in complex interdependence on part of developing countries
• in importation of ironclad liberalization policies on part of developing
countries (Maggi 2014) ?
• Exercise of sovereignty in defense of development policy space

Krugman: Anyone who has tried to make sense of international trade

negotiations eventually realizes that they can only be understood by
realizing that they are a game scored according to mercantilist rules, in
which an increase in exports - no matter how expensive to produce in
terms of other opportunities foregone - is a victory, and an increase in
imports - no matter how many resources it releases for other uses - is a
defeat. The implicit mercantilist theory that underlies trade negotiations
does not make sense on any level, indeed is inconsistent with simple
adding-up constraints; but it nonetheless governs actual policy.
http://web.mit.edu/krugman/www/negot.html
Manuel ‘Butch’ F Montes | No Free Lunch | 2nd Sem, SY 2020-21 | 14
Paying for lunch: Costs of a development effort

• Industrial development policy as a selective policy, not a general

policy – in a domestic policy/political process

Social choices over which sectors to privilege and develop

• Choice of economic policies for each sector/ subsector

• Open to foreign competition / foreign investment
• Require upgraded government capability (cost)
• Require consultation and widespread participation for accountability (cost)
• In a democratic society consultation also required for joining free trade
agreements

Manuel ‘Butch’ F Montes | No Free Lunch | 2nd Sem, SY 2020-21 | 15

Dilemmas in the Development Effort

• Efficiency → ? Development vs existing skewed location of

competitive industries not a natural state of the world
• If uncompetitiveness is not a natural state: Developing countries
can still try to build competitive industries if they do not accept
typical “level playing field” international obligations in
• State owned enterprises
• Competition policy
• Government procurement
• Internationally enforced intellectual property protections
• Other areas
• E-commerce

• Reversal of globalization
• TPP – high point of globalization?
• Is the era of globalization enhancing global governance

Manuel ‘Butch’ F Montes | No Free Lunch | 2nd Sem, SY 2020-21 | 16

Has Globalization Peaked ?

• United States (Trump and Biden)

• Reducing dependence on international supply chains vs dependence on
lowest cost production locations
• Unilateral tariffs on steel and aluminum on Canada, European countries,
and China vs default preference for lowest cost suppliers
• In USMCA rules of origin, new Labor Value Content (LVC) based on the
US$16/hour wages rates for automobiles vs use of low cost labor overseas
• Retreat from ISDS protection on foreign investors abroad in USMCA vs
expansive investor protections in NAFTA
• Buy America program vs US leadership in international government
procurement disciplines
• In TPP, narrower definition of indirect expropriation

Manuel ‘Butch’ F Montes | No Free Lunch | 2nd Sem, SY 2020-21 | 17

Has Globalization Peaked ?

• RCEP (November 2020)

• Recognition of levels of development in many chapters
• ‘Generous’ rules of origin benchmarks
• Narrower definitions on indirect expropriation
• No ISDS
• In competition policy, efficiency and consumer welfare are separate
objectives, not the main reason for competition policy
• Conducive environment for e-commerce development vs prohibitions on
government regulation
• RCEP permits policies fit for country’s development level. Should
Philippine development policy purists reject it?
• Is RCEP approach trending?
• Existing free trade agreements and bilateral investment treaties still
enforceable

Manuel ‘Butch’ F Montes | No Free Lunch | 2nd Sem, SY 2020-21 | 18

Questions for the future

1. How to choose which free trade agreements to join?

2. What to ask for in future free trade agreements ?
3. How to fulfill existing international obligations while facilitating
development-oriented state policies?

A. Will liberalization continue to be the main tool of international

cooperation among countries in development?
B. What kind of trade and investment disputes will arise when all
countries are simultaneously using non-liberalization policies?

Manuel ‘Butch’ F Montes | No Free Lunch | 2nd Sem, SY 2020-21 | 19

Policy Issues

Costs, Intl. Prices, Competition

Supply International
Capacity Environment

Investment: Intl. Treaty Obligations

Private and Public
Participation in intl.
Efficiency: through rule setting and
Competition, standards
Technology,
Regulation

Economic
Policy
(Unilateral)
Manuel ‘Butch’ F Montes | Intl. Agreements & Development Policy | 2nd Sem, SY 2020-21 20