Category: Issues

Economic modelling of free trade areas and zones

Economic modelling of free trade areas and zones

It is notoriously difficult to economically model the benefits of FTAs and Special Economic Zones with respect to their impact on the domestic regulatory position.

The Department for International Trade has been rightly criticised, including by me and colleagues at Cebr, Doug McWilliams and Cristian Niculescu-Marcu (see https://globalvisionuk.com/improving-the-economic-modelling-of-trade-agreements/) for its economic modelling of some of the key trade agreements it is negotiating, especially the US-UK, UK-Australia (formally launched yesterday), UK-New Zealand and UK-Japan FTAs. We argued in that article that current models were far too static in nature, and did not properly weight non-geographic distance factors such as common law and common language. We also argued that the models did not take into account the potential gains from a reduction of market distortions inside the border, which could be significantly higher than a reduction of mere border barriers (see in particular the Cebr report on market distortions behind the border here and the IEA Plan A Plus here). Current modelling does not take into account the impact of pooled markets where, for example the UK is able to secure a financial services agreement with the US leading to a transatlantic financial services area or a similar common defence area. This is ironic, because treasury models appear to value pooled markets tremendously highly in the EU context, but ignore them completely in any other context.

First, we must acknowledge that these are complex systems, akin to biological systems that are notoriously difficult to model. That is why the International Trade Commission (when the US was still a member) looking at the then Transpacific Partnership concluded that while tariff reductions could be relatively easily understood, the benefits of a reduction of behind the border barriers was much more difficult to model.

Secondly, we must also acknowledge that Treasury departments constantly underestimate the benefits of trade agreements. The NZ Treasury underestimated the impact of the China-New Zealand FTA by 500%, and the agreement reached the gains projected for 11 years in a mere 11 months.

Thirdly, this is more art and less hard science. Any practitioner of the physical sciences knows that economic modelling is by comparison educated and guided speculation. It can certainly be useful speculation, but I would not bet my life on it, however good the modelling is. It is therefore important to use multiple models to try and capture specific benefits.

Fourth, no group of trade negotiators in the world goes around with a laptop modelling potential agreements in order to decide where to negotiate. Trade negotiations support foreign policy objectives, they support geo-political realities, and often they benefit form opportunities that present themselves with narrow windows in which to act (such as the US-UK FTA for example).

Fifth, it is almost impossible to say anything useful about the economic impact of a trade agreement before it has actually been agreed and we know what it actually does. A US-UK FTA that dealt only with industrial goods tariffs would have limited benefit, but a much deeper comprehensive agreement that tackled the anti-competitive restrictions in both markets would have a much bigger impact and we cannot know which one we are modelling until we see the words on a page.

Economic Modelling in Special Economic Zones

It is even more difficult to model well Advanced Special Economic Zones which make meaningful changes to the domestic regulatory position. The Special Economic Zone in Duqm, Oman for example changes the Omanisation requirements from 35% to 10%, and eliminates a law giving significant protection to local distributors of foreign multinationals that has damaged competition and trade. Other Special Zones, such as Panama Pacifico have made significant changes to immigration law. The recently instituted Honduras Prospera operates under a completely different set of rules under the Honduras ZEDE legislation (Zones of Economic Development). A recent Ernst and Young report placed the Honduras ZEDE Prospera 9th in the World Bank Doing Business Index if it were a country, whereas Honduras itself languishes 133^rdplace. The table below illustrates the improvements made with respect to setting up a business:

The table below shows the difference in approach on permitting, which is a significant delay for business.

In Prospera, firms can essentially choose common law, or the law of other OECD members, or they can make suggestions for regulatory changes.

We have used the Productivity Simulator based on the Singham-Rangan-Bradley model (see here and here) of market distortions to model the economic impact of the zones. As these zones work to optimise their internal regulatory environments as the ones cited to above do, we can model the impact on productivity (as measured by GDP per capita), and hence their contribution in economic terms to the countries in which they are located. Zones that optimise around the three dimensions of openness to international trade, markets where competition policy is the organising economic principle, and property rights protection will do better economically.

There are a number of tools that can be used to measure the potential economic development in these zones. The potential for these to be global economic engines is clear and we need to make sure we have good ways to measure this.

Tigers, tariffs, and the tripolar delusion

Tigers, tariffs, and the tripolar delusion

“You cannot argue with a tiger when your head is in its mouth” (attributed to Winston Churchill in the film, The Darkest Hour (2011)).

There are many who suggest that we now have a tripolar world: the three poles being the US, EU and China. These poles are all equivalent – or so the thinking goes – equivalent morally and in terms of economic impact and importance.

But that is not how the world actually works.

Instead, a better way of looking at the world is through the lens of the approach of different countries to market competition as a defining or organising economic principle. Here there is a spectrum of countries with at one end, full market competition with a minimum of anti-competitive market distortions.

On the other end we have countries like China which embrace a state-led economic model with a high level of market distortions. It is possible for the same country to manifest at either end of the spectrum depending on the sector (see the US on technology versus farm policy). Countries or sectors characterised by market competition models are more likely to seek to work with each other on the basis of mutual recognition, adequacy and equivalence.

Countries, however, that adopt a more state-led approach have a tendency to wish to co-operate on the basis of regulatory harmonisation or regulatory coercion. Often they use the size of their markets to force regulatory adoption by others of their standards. Because they are less inclined towards competition, they are also less inclined towards regulatory competition (or more accurately see no benefit to it).

Given the importance of ensuring that the regulatory system rests on the most consumer welfare-enhancing equilibrium point: it is the competition between systems that is most likely to deliver that result, and therefore the most likely to lead to wealth creation and poverty alleviation.

Impact of common law approaches and cabining of real economic forces

Our recent GENNsight on the rise of Singapore hinted at a major governance advantage: English common law. Some of the most successful countries in the world have adopted English common law and our recent GENNsight piece highlights its importance. From the US, to Singapore, Hong Kong, the UAE, and right across the Commonwealth, the principle of stare decisis (following legal precedent) has enabled a system to emerge that holds in balance the competing economic forces of market participants in a way that maximises consumer economic and thus delivers economic growth and wealth creation. This system has propelled the global economy forward, lifting billions out of poverty in the process.

How we handle China will define us

One of the most significant questions of our time relates to what we do when confronted by a major economic power that adopts a very different approach to market competition than the previously successful economies of the post-war world The so-called China question is a variant of the first section of this blog. If we get the answer wrong, we risk losing the global economic battle between competitive markets based capitalism and state-led capitalism, and therefore in the long term condemning people to both poverty and conflict. There are three crucial pathways to a successful result for the world economy, and its people.

Establish demonstration models of what economic success looks like. As we note in both our Singapore GENNsight as well as our recent GENN report, nothing succeeds like success.
Use platform agreements like CPTPP to bring together aligned countries that are committed to competitive markets, property rights protection and trade liberalisation. This will challenge China and others that seek regulatory harmonisation or coercion. These platform agreements can also challenge the static and collapsing international economic order, and the multilateral institutions that carried it, such as the WTO, IMF and World Bank.
Incentivise the reformers in those state-led economies to embrace market reforms by real carrots and sticks. Real sticks would include measures to use tariffs to eliminate the market distortions that their economies create. As the (alleged) Churchill remark reminds us, nobody should live in a fantasy world where we can by persuasive argument convince an aggressive Chinese Communist Party to adopt a competitive market approach. However we can present China with a choice: that if it seeks access to the biggest and most lucrative markets in the world, that access will be limited by its own internal anti-competitive market distortions. Merely presenting that choice will give oxygen to reform-minded people in China.

In future GENN reports and GENNsights, we will examine these issues in greater detail, and provide recommendations that governments can and should follow.

Singapore’s success is a lesson to the world – and it’s built on English law

Singapore’s success is a lesson to the world – and it’s built on English law

‘Singapore on Thames’ has become a pejorative term in certain circles, but there is much that Britain and the rest of the world can learn from the city-state’s economic miracle.

Wealth is hard to create and easy to destroy, and during the pandemic most governments seem bent on tearing down what it has taken so long to build up. Singapore represents a wonderful example of the opposite. In 1965 it had an economy roughly equivalent to Tangiers, now it’s a global powerhouse whose citizens enjoy a standard of living far in excess of many European countries. It’s also fared remarkably well during the pandemic, with only 28 deaths so far.

As the world continues to struggle with Covid-19, governments are becoming ever more indebted and the importance of stimulating real and rapid private sector growth is becoming ever more urgent. A new report from the Global Economic Neural Network (GENN), which I chair, analyses its success and considers what lessons can be drawn from Singapore’s rapid growth.

A key recommendation – backed by the findings of Bim Afolami’s Unlocking Britain Commission, on which I also served – is that basic trade, economic and regulatory frameworks are essential for stimulating private sector growth.

Singapore embraced open trading regimes, open and competitive markets, property rights protection and the rule of law. In doing so it put massive regulatory distance between itself and its neighbours, and became a magnet for global capital.

This was the result of deliberate choices made by political leaders, in particular Lee Kuan Yew, who, as Prime Minister from 1959 to 1990, embedded English common law. Having returned from Cambridge, he was impressed by the power of the common law to support business and encourage investment by balancing the competing rights of market participants in a flexible and yet certain way. By contrast civil law, which operates on the basis of statutes rather than precedents, can be rigid and legalistic – often privileging form over substance.

It is no coincidence that the most powerful economy of the 18^th and 19^th centuries and the most powerful economy of the 20^th and 21^st centuries are both use the common law. But there are no guarantees that the UK and the US will continue to succeed. Common law countries are adopting more and more legal code, statutes and statutory instruments. In the US, the number of executive orders issued by the US President has skyrocketed since the 1990s, from 970 executive orders and proclamations under Bill Clinton, to 1504 under Obama with Trump continuing at a similar rate. The tension between the executive and the legislature, often held up as an example of western failure, is actually necessary for holding the rights and obligations of all economic actors in balance. In the case of the UK, the tradition that treaties are only valid once enacted by domestic law has been eroded by the EU’s principle of direct effect. Brexit is a golden opportunity for the UK courts to reclaim supremacy.

While Singapore is often held up as an example of an autocratic state with no democratic controls, this misunderstands the fact that it operates more like a corporation with a strong CEO than a country. Those who claim it is not democratic should ask where is economic agency strongest, in Singapore or in a western democracy where people have less and less economic control of their lives. When we talk about democracy it is important to tease out how countries do on economic democracy. Are individual people economically empowered? Much of that turns on whether rights and obligations are held in a consumer welfare enhancing equilibrium. What Lee Kuan Yew saw as a student at Cambridge is what we in the UK and US take for granted – that the common law is uniquely able to deliver that balance. This was perhaps his greatest single insight, and on that the whole edifice of Singaporean success is built.

There are many other unexpected places that have embraced English common law, such as the UAE, the Dubai International Financial Centre (which even has English judges) and the Abu Dhabi Global Market – and these will be examined in future GENN reports.

The second key recommendation of this GENN report is the need for openness. Singapore is one of a premier league of hubs that are becoming progressively more connected by ‘trade superhighways’. This trend will likely be accelerated by the pandemic – which has exposed the need for much more resilient supply chains. This will have a major impact on free trade zones like the EU, and represents a huge opportunity for the UK as it leaves. Opening up business corridors to both goods and people will be crucial to the recovery, and yet countries are moving in the opposite direction with pointless quarantines that have little impact on Covid cases.

For all the natural advantages we enjoy in the west, empires have risen and fallen in the past. Learning from emerging powers like Singapore can help us renew our economic democracy and ensure our future prosperity.

The Extraordinary Rise of Singapore

This paper was originally published on Global Economies – click here to access the full document

In the first of series of briefings, we identify some of the key transformative processes and features that have elevated Singapore from a low-income port city state to a dynamic, high income node within a premier league of global cities, including London, New York, Dubai and Hong Kong.

A key argument we make is that incumbency and status as a global city is not guaranteed, Aspiring cities – a future Singapore for instance – can attain premier league status within a relatively short space of time through investment led growth, an attractive incentivisation structure and highly trusted economic policy based on open trade, competitive markets, property rights protection and the rule of law.

Click here to read the full paper

Economic Resilience & the Coronavirus

This paper was originally published on Global Economies

This paper looks at how the pressing questions of global economic outlook have moved from the stagnating nature of global trade to the resilience and recovery of economies in the face of the pandemic. This enquiry is more applicable to high- income, leading economies that are forecast to see a return to pre-crisis levels of output much later than their developing and lower income counterparts.

To download a copy of the paper, please click here.

Christian Persecution in Nigeria

Integrating Foreign Policy, Development Policy and Human Rights Objectives

The UK Foreign Office and the Department of International Development have merged. This results
from a UK government initiative to ensure that its foreign and development policy goals are aligned.
This is very important because the UK is a development superpower as the third largest provider of
Overseas Development Assistance in the world. If the UK’s development priorities are inconsistent
with or worse, in opposition to the rest of its foreign policy including its foreign trade policy, then
this will send conflicting signals to its partners and make it less likely that those foreign policy goals
are realised.

The UK’s foreign, economic and development goals should be aligned, but this does not mean that
its economic goals are purely mercantilist or commercial in nature. The UK was present at the
creation of the Bretton Woods institutions (in 1946-7) specifically because it recognised that trade
barriers and deviations from free and competitive markets would harm economic development and
possibly lead to conflict as we saw before the war.

Central to the vision which the UK has promoted in a multitude of global institutions is the governing
principle derived from centuries of tradition and experience that wealth is created when trade is
open and liberal, when markets are governed by competitive forces and not by government
distortions and when property rights are protected.

The ultimate property right is property in your own person and in your speech. The protection of
personal property, crucial though that is for economic development as Hernando de Soto and others
have written, is secondary even to that.

It is a core objective of UK foreign policy to ensure that all countries abide by these principles
because this will lead to greater economic opportunities for the people in these countries as well as
UK businesses, farmers and consumers. It is a core objective of UK development policy to ensure
that countries abide by these principles because this has been proven to be the best (and perhaps
only) way of ensuring that people are lifted out of poverty and have economic opportunity and
hope.

Ultimately the protection of property rights is the foundation on which open trade and competitive
markets rest as economic development levers. And human rights – the right to the safety and
security of your person is the foundation stone on which property rights rest. So, the whole fragile
architecture which performs the almost magical function of creating wealth, of making something
out of nothing, rests on the most basic of human rights.

As the UK government reorganises itself, central to its foreign, development and economic policy is
this protection of the basic human right to have security in your person – the right, simply to exist.
We will look at the changes in UK law that make the expression of this policy much more feasible to
accomplish.

The Tools for Protecting Human Rights

The UK is a signatory to a range of human rights conventions, from the UN Convention on Human
Rights to the European Convention on Human Rights. Many of these conventions make a virtue of
extending the scope of what constitutes a human right (often confusing rights and privileges) but
have not done a good job of actually protecting people from persecution, violence and even
genocide. These protections should be considered as the very basic threshold issues, and when it
comes to these protections current treaties have proved wanting. The shambolic UN Human Rights
Council (formerly Commission), made up of, as it often is, by the greatest human rights violators (in
recent succession, it has counted Cuba, Venezuela, Saudi Arabia and Egypt among its recent
membership) has become a global joke with regard to effectiveness.

Similarly, development tools have only recently added a dimension protecting human rights. During
the second Bush administration, the US created the Millennium Challenge Corporation to link aid
more directly to compliance with basic norms that included a scorecard to reflect commitments to
core concepts such as rule of law and democracy as well as human rights. Countries that are
beneficiaries of MCC grants (note the MCC’s other innovation was giving grants not loans) could lose
their grants if they violated these fundamental principles. But generally, aid in the rest of the world
is not subject to these principles. It is frequently given to countries that are violators of basic human
rights, as these are often countries that are at low levels of development.

The UK should use the reorganisation to promote aid that is given to countries that are moving in a
positive direction on a scorecard of issues that carry forward UK foreign policy goals.

But with respect to dealing with human rights violators, it is hard to win this battle merely with
carrots. There have to be some sticks too and the UK has developed one such in the form of its
version of the Magnitsky Law in the US. In 2017 amendments were made to the UK Proceeds of
Crime Act, 2002 which allowed the UK to freeze the assets of, or issue travel bans to officials in
countries that had participated in gross human rights violations or who had benefited from such
violations. At the time a group of UK parliamentarians had suggested the Act should go further and
apply similar sanctions to those who had benefited from corruption. The UK in general, and London
in particular, has become a haven for oligarchs, human rights abusers and other kleptocrats who had
squirrelled away their ill-gotten gains in London property or UK based funds. The new law reflects
the desire of UK foreign policy to crack down on this practice.

If human rights violators and government officials who turn a blind eye or conspire with them
through inaction understand that there are very real repercussions that could lead to a freezing of
their UK assets and travels bans, as well as concerted action among the ever increasing number of
countries that have Magnitsky like legislation, they will be more likely to cease and desist from such
conduct. Use of this type of legislation in a targeted fashion, alongside smart and targeted use of
development funding, can set up the necessary incentives to ensure governments do not engage in
egregious human rights violations.

We discuss below a case study which illustrates how the new law might be used as a stick to curb
these human rights violations.

Persecution of Christians in Nigeria

One particularly bad situation at the moment is the treatment of Nigerian Christian farmers living in
the middle belt of the country. Nigerian Christians living in the middle belt of the country are being
persecuted by a combination of Boko Haram, Islamic State in the West African Province (ISWAP) and
Muslim Fulani herders. The vast majority of farmers in the middle belt are Christian. Nigeria is the
12th highest ranked country in the Open Doors index for Christian persecution. The Nigerian
government has, at best, turned a blind eye to the issue and, at worst, has colluded in it.

A recent UK All-Party Parliamentary Group (APPG) on religious liberty highlighted some key points
about the persecution of Christians in Nigeria:

On 4th July, 2018, the Nigerian House of Representatives declared the killing of Christian farmers
in the middle belt to be genocide, and requested the government to act by establishing
orphanages and taking other critical steps. [None of this has been done].
Churches have been, and continue to, be burned in Nigeria. Five hundred churches have been
destroyed in Benue State alone. One hundred churches have been burned in Taraki and two
hundred abandoned out of fear. Sixty-five per cent of the Churches in Wakari have been
burned.
Killings continue. As recently as 20th January 2020, Reverend Lawan Andimi, Chair of the
Christian Association of Nigeria, was executed.
On the 26th December, to coincide with the Christmas holiday, ISWAP released videos of
beheadings of 10 Christian hostages and one Muslim apostate.
As recently as 2 April 2020, three hundred Muslim Fulani attacked the village of Hukke, killing
seven and setting fire to twenty-three homes.
On the 26th February 2019, the ECOWAS court censured the Nigerian government, especially
with reference to the killings in Benue state in 2016. The court found that the government had
neglected its primary duty to protect its citizens. Theophilus Danjuma, former Army Chief of
Staff and former Defence Minister said that the “Army is not neutral. They collude” in ethnic
cleansing. He urged people to defend themselves and not rely on the Army to protect them.
Indeed, there is evidence that the security forces abandon areas just before atrocities are
committed.
President Buhari obtained 97% of his votes from the Muslim North and only 5% from the
Christian south. Most of his political appointments are Northern Muslims. The APPG agreed
that this was a violation of section 14(3) of the Nigerian constitution, that there should not be a
preponderance of persons from a few states or from a few ethnic or sectional groups.

Nigeria and Foreign Aid

Despite not adopting many basic norms, and in many ways moving in the wrong direction on these
issues, Nigeria is one of the largest recipients of overseas direct assistance. By way of example, in
2015 it received $2.4bn, ranking it 8th in the world – an extraordinary statistic given its size and level
of economic development compared with the least developed countries in the world.

Given the level of support that Nigeria receives from donor nations, and given the abuses being allowed and
condoned by its government, it is imperative that the UK now acts swiftly to reign in these abuses
using the full portfolio of tools at its disposal. It is important that the major donors who subscribe to
the same philosophical approach outlined at the beginning of this paper come together in their
approaches to countries. We advise that at the very least the UK, US, Japan, Sweden and Germany
agree a common approach to the granting of development aid that includes these core principles.

The UK provides £2bn of aid per year to Nigeria – £800,000 per day. It is crucial that this be
conditional on appropriate responses from the Nigerian government.

Nigeria and Magnitsky Style Sanctions

But we must be realistic. The situation is sufficiently serious that a mere carrot approach will not
work. There need to be sticks deployed as well and they need to be credible. There are a number of
sticks beyond foreign aid conditionality.

As noted above, under the amendments to the UK POCA, the UK’s version of the US Magnitsky Act,
the UK government is empowered to freeze the assets, impose travel bans and apply other sanctions
to any foreign person guilty of human rights violations. Specifically, POCA now provides that the UK
may seize the assets of any person who has engaged in a gross human rights abuse or violation, or
for conduct connected with such abuse including directing, sponsoring or profiting from it, or
materially assisting with it. The Sanctions and Anti-Money Laundering Act (2018) (“SAMLA”)
empowers ministers to impose sanctions to provide accountability for or be a deterrent to either the
above types of conduct (which amount to a gross human rights violation).

Given the Nigerian government’s complicity in the persecution of Christians in violation of the
Nigerian constitution and international law, we believe that the provisions of POCA, as amended,
and SAMLA apply. The silence of the President of Nigeria and the Attorney-General as the chief law
enforcement officer are tantamount to consent for the violence being perpetrated against Christians
there. Their silence is certainly construed by the Fulani herders as tacit approval for their actions and
the comfort of knowing there will be no meaningful sanction from law enforcement.

The wider context is important here also. In addition to the persecution of Christians, there is a
history of the Nigerian government violating fundamental principles of property rights protection
(which I laid out in our paper on Nigeria and Economic growth, available at here). It is hardly
surprising that a government that has scant regard for human rights also has scant regard for
property rights.

It is anticipated that phase one of POCA as amended will be initiated in the summer with a focus on
the more winnable cases. However a number of parliamentarians are pushing for not only human
rights abuses but also cases of corruption and kleptocracy to be included in a phase 2 of the POCA
implementation (see here). This makes eminent sense, as the two issues are very often linked and
they do certainly seem to be so linked in Nigeria.

We advise the UK government to pursue POCA sanctions against the key officials in Nigeria
responsible by action or deliberate inaction including President Buhari, Attorney-General
Mohammed Bello Aduke, and [other officials].

Liberty Without License

There is a huge misunderstanding about the nature of freedom. In particular, this misunderstanding extends to the nature of economic freedom and the role of government to regulate mankind. These are the epic issues, not only of our time but of all time. These are the primordial struggles which man has faced since he emerged from the cave.

These struggles have summoned our greatest ideas, our greatest thinking and our greatest contributions to the fundamental questions of why we are here. Sometimes we call this work philosophy, sometimes economics, and sometimes it is far broader than both of these. The truth is that we are always standing at the cross roads on these questions. The barons of thirteenth century England stood at the cross roads when they presented King John with Magna Carta. So did the American founding fathers when they wrote that man had the right to life, liberty and the pursuit of happiness.

Freedom is a difficult concept, one that is not only worth fighting for every day, but one that is so prone to being overcome by coercive government power that it must be defended with commitment, resolution and knowledge. It is a fragile and cherished thing then, this freedom – a wrong turn and it is easily lost. Liberty, a word that describes what freedom means so well is so often abused that we have all but lost a hold on how fundamental and important a concept it is. You cannot have liberty, unless you restrain the powers that impinge on liberty. And you must understand that liberty is a uniquely individual concept. Liberty means nothing except when it is applied to the individual.

The forces that curtail individual liberty are the collective power of other men. When these men abstract for themselves coercive police power in the form of a government, the exercise of that power contains an inherent danger. But man is a fallen creature, and with no government over him, it is inevitable that he will degenerate into a collection of sins, or violent actions. Hobbes, at least in respect of this aspect was correct. Government of some kind is needed. Thomas More’s vision of Utopia is an illusion.

The question is what kind of government that should be. What is its role?

To read the full paper, please click here

On Improving US Competitiveness

Improving US Competitiveness: Eliminating Anti-Competitive Market Distortions

This paper examines what we believe to be a major challenge in global trade and the ability of the U.S. economy to grow. We believe the issues discussed in this paper constitute a national economic security issue and, if not dealt with, an existential threat to the United States. These issues have been variously described as state capitalism, regulatory protection and state-led economic development. We examine these issues under a more economic-focused paradigm – anti-competitive market distortions (“ACMDs”).

To read the full paper, please click here

A New Path for Nigeria

Now that President Buhari has won the election in Nigeria, there are real opportunities to improve the Nigerian economy, attract new foreign investment to Nigeria, and signal a new direction for economic policy. These opportunities need to be urgently undertaken. There is always an opportunity at the beginning of the term of a new administration for creative ideas to take effect. We have laid out how this might be achieved and some key areas where Nigeria could make improvements.

You can read the full paper, with a Foreword by Home Secretary of the UK Priti Patel, here – below is a short summary of its main arguments and proposals.

These reforms and actions are not exhaustive – but focus on achievable policy actions that can be taken to improve the investment climate in Nigeria, improve opportunities for Nigerian entrepreneurs and consumers, and send a strong signal that the new government is committed to building a more open economy, based on the rule of law and sound policymaking.

Specific recommendations contained within the paper include the following:

Nigeria must prepare for a coming shift in international development assistance: the UK is among several countries moving towards a U.S.-type Millennium Challenge Corporation (MCC) model based on rule of law and open investment climate
Outstanding legal claims against the Nigerian government represent a significant risk factor for foreign investors: these cases should be settled early in the new government’s term
One case alone – the “P&ID” case – represents over 20% of Nigeria’s foreign reserves and is a significant threat to investor confidence if not settled• Local Content Rules (LCRs) harm Nigerian consumers and encourage corruption and cronyism: these should be removed wherever possible
ECOWAS tariff schedules remain too high: Nigeria should work with its neighbours to reduce ECOWAS tariffs to benefit domestic consumption
Nigeria should accede to the WTO’s GPA Agreement, and adopt a more transparent approach to regulation and public procurement
The use of Special Economic Zones should be encouraged as a mechanism for testing economic reforms at local level and boosting foreign direct investment
Respect for the rule of law must be reinforced across Nigeria, starting at the highest levels of government, if corruption, a scourge on Nigeria’s young democracy, is truly to be reduced

Creating Real Prosperity in Developing Markets

Centuries of countless efforts to reduce poverty have made little progress, particularly in developing countries.

Moreover, attempts to resolve long-festering political disputes peacefully have been unsuccessful in these countries. Both issues come together in tragically torn areas like the Palestinian territories, the Horn of Africa, Yemen, Kashmir and northern Sri Lanka, plus numerous other nations in Africa, Asia, the Caribbean and Latin America.

It is our belief, based on six decades’ commercial and trade experience in developing countries, that a liberal, free-market economic development model can contribute significantly to political conflict resolution at the same time as it socially and economically enriches countless thousands of individuals in the world’s poorest precincts.

We propose that operationally independent commercial and industrial trade zones, basically similar to Hong Kong, be established in select areas of the world. The concept of quasi-independent trade zones is, in fact, one of the few ways that the poorest countries can encourage the spectrum of business activity that creates meaningful economic growth. The Honduran government has taken initial steps to create such a model, an innovative move which can lift one of the western hemisphere’s poorest countries to a position of economic well-being.

Background

Over a third of the world’s population lives on less than $2 per day. Reasons why developing countries remain impoverished include very weak governance, worse education and rampant corruption. The appalling humanitarian situation impacts not just the poor nations: developed countries feel the impact from unmanageably high rates of immigration that strain every aspect of their societies.

Good governance curtails corruption and improves education, delivering greater efficiency, eliminating waste and simultaneously creating wealth. Where the institutions are too weak to support meaningful reform and the government also pursues protectionist trade policies, inefficiency will increase and wealth will wither even further. Trade liberalization, competitive markets and property rights protection accompanied by robust institutions to channel these political and economic forces, are powerful – and proven — means for incentivizing business formation, employment and wealth creation.

Clearly, it is critical to incentivize those in power to change governance models, together with reforming education and curbing corruption. Investors and traders, the lifeblood of economic development, shy away from markets that do not guarantee certain fundamental economic rights — an open and liberal trading system, competitive markets and protection of property. Despite frequent promises, they do not trust developing country governments to provide and enforce these safeguards.

Without such trust, investment and development will not occur. International institutions, including the World Trade Organization, World Bank and International Monetary Fund have focused on this issue since their inception. Admirable progress achieved a 10 fold WASHINGTON 299123v1 2 increase in global GDP between 1947 and 2001, as contrasted with a two fold increase between 1 AD and 1913, according to recent studies by Angus Maddison.

This progress has been achieved by removing obvious barriers, including punitive tariffs and restrictive border measures. Barriers to trade and investment behind the border distort markets and are more pernicious, however. They have equivalent impact as tariffs but are much harder to identify and counter and are particularly difficult where governance is ineffective and/or corrupt.

Simply put, there is a failure of governance in many developing countries. This failure contributes to an economic climate where property rights are not protected, markets are not competitive and inefficiencies abound – all factors which drag on domestic economies and serve to deepen poverty and instability. Far from reform, anti-competitive restraints increase concentration of power and wealth in the hands of an elite, effectively exacerbating unemployment and low wages, and stimulating social unrest. The elites proceed to use their power to control local media and politicians, often interchanging political positions with their own business interests. As this happens, frail national institutions become progressively vulnerable, with governance based on contacts rather than merit. Inefficiency reigns supreme and economic wealth drains from the economy, further damaging it and pushing even more people into poverty.

History demonstrates that the governance problem can rarely be solved from the inside, qualified exceptions including Brazil, Chile, China, South Korea and Vietnam aside. The purpose of this article is to discuss how the solution may evolve.

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