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Paving the Road For Third World Prosperity

Dan Tortorice

In Quebec City this past weekend, President Bush met with leaders of 33 nations to discuss the establishment of a free trade zone in the western hemisphere. As Starbucks seem to appear on every corner, and large multi-national corporations seem to grow larger and larger each passing day, individuals have developed a distinct distrust of large business. They see free trade as just another extension of this corporate influence, an influence, they claim, that sacrifices human dignity on the altar of corporate greed. But this view is misguided, for free trade is an engine of economic growth that lifts developing nations from poverty to prosperity. In fact, Americans need to look only at their neighbor to the South to see free trade spurring economic growth.

In 1995, after a dramatic fall in the value of the Mexican peso, Mexican Gross Domestic Product, the total income generated in Mexico, plummeted to a level seven percent lower than in 1994. This dramatic reduction of Mexicans’ income had the potential to last for a very long time. The only two governmental policies available to remedy the situation would have proved ineffective. The Mexican government, having run long standing budget deficits, no longer had the fiscal resources to spur growth through government spending. The central bank could not cut interest rates, since such a move would have reduced demand for Mexican assets further weakening the beleaguered peso.

Yet there was hope for the Mexican economy. The United States, its neighbor to the north and the world’s largest economy, was experiencing an economic boom of epic proportions. This economic boom resulted in increased demand for Mexican goods. This demand increase, coupled with the strong dollar relative to the Mexican peso, had the potential to increase Mexican exports, reviving Mexico’s ailing economy. And that’s exactly what happened. After 1995, Mexico saw an average yearly GDP growth rate of five percent, and, as William C. Gruben of the Federal Reserve Bank of Dallas rightly points out, the main force behind this growth was growth in Mexican exports. For exports grew at an astonishing rate of 20 percent after 1995, and exports make up one-fifth of the entire gross domestic product of Mexico. Moreover, 80 percent of all Mexican exports go to the United States. If it were not for the trade liberalization of NAFTA, this export-oriented growth could never have taken place. Mexico would still be mired in poverty, instead of on the path to prosperity.

Now some will rightly point out that increased overall growth for Mexico doesn’t mean that everyone benefits, maybe some people are made worse off by free trade. This may very well be true. However, the solution to this problem is not to restrict free trade. Restricting free trade would only have made Mexico as a whole poorer, reducing the resources available to help those most in need. Instead, we should support free trade and hope that the democratic government on Mexico will redistribute income to help those who are hurt by free trade. And if the government fails to do so, then we should blame the government, and not free trade itself.

But who are the people that are hurt by free trade? Though individuals maintain that free trade marginalizes the working poor, logic dictates that free trade will benefit the working poor of developing countries. The reason is fairly simple. Developing countries have an abundance of unskilled labor, and when you open up to free trade, foreign investors will move into developing countries hiring workers. This increased demand for unskilled labor will drive up wages in developing countries helping unskilled workers in developing countries. More people in developing countries will have jobs and at higher wages

As you may have realized, the opposite effect is seen in developed countries. As business leaves, demand for unskilled labor in the developed country falls, reducing the wages of unskilled labor. That’s why the AFL-CIO sent protesters to the World Trade Organization meeting in Seattle and to Quebec City this past weekend. However, they aim to restrict free trade and advance their prospects, harming the prospects of workers in developing countries in the process. One must question the morality of such an action. It seems much more morally palpable to have wealthy, developed countries provide job training to their workers who lose their jobs to free trade than it does to harm some of the poorest people in the world by restricting free trade.

Free trade provides the opportunity for developing countries to become developed. The developed world, by allowing free and unrestricted trade with developing countries, can pave the road to prosperity for the developing world.