Questions of Fairness

The first and most important element of an international compact, in Kapstein's view, is a free-trade regime that offers a level playing field. "Fortunately, a resource redistribution mechanism exists that is welfare-enhancing for all participants, and it is called free trade," he writes. Instituting this free-trade regime requires removing all the devices by which rich countries make it difficult for poor countries to specialize according to their comparative advantages -- especially barriers against agricultural and textile goods from developing countries.

But at the same time, the new trade regime must give more explicit recognition to "diffuse" or "relaxed" reciprocity in trade negotiations, rather than "tit-for-tat" or "strict" reciprocity. The latter is fine for trade negotiations between economic equals, such as the United States and the European Union. However, developing countries -- precisely because they are developing, with much lower incomes and economic capabilities -- should not be expected to make equivalent concessions. On the other hand, they should also not expect special and differential treatment -- that is, to be exempt from all reciprocity obligations (as many are demanding). Fairness requires that they participate in the negotiations and assume some obligations.

After trade, the second main feature of Kapstein's international compact is aid. Despite what the World Bank and many other observers and institutions preach, aid should be focused not on poverty reduction but on strengthening the capacity of poor countries to participate on a level playing field. This implies a large shift from present allocation priorities (primary education, basic health care, and the like) in favor of investment in ports, railways, and the customs and patents bureaucracies.

Third, since migration and remittance payments will become even more important for developing countries in the future, Kapstein argues for the creation of an umbrella regime covering issues related to migration, bringing consistency and justice to policies that are now determined by each state. That regime should establish arrangements to lower the presently high costs charged to transmit worker remittances, so as to raise the net amounts flowing from rich to poor countries. (Labor standards also have a place, but only as part of a comprehensive development strategy that raises productivity and growth: rich states that require poor states to comply with international standards have a duty to help them pay for such compliance.)

Fourth, Kapstein believes that international investment, especially foreign direct investment (FDI), also needs to be subject to an umbrella regime. He endorses something like the aborted Multilateral Agreement on Investment (MAI), which proposed to institute a code of conduct for governments' treatment of foreign investors. Such an agreement would bring a longer time horizon to bear on negotiations between multinational corporations and host governments. As the time horizon lengthened, the prospects for fairness would improve, since each side would become less tempted to treat each investment as a one-off deal and try to maximize the advantage it got from it.

One of the most important goals of such an international-investment agreement, in Kapstein's view, should be to limit or eliminate subsidies paid by governments in order to attract FDI. (The most glaring fault of the proposed MAI was to ignore this issue.) Investment subsidies are a prisoner's dilemma: each state has an interest in cooperating with other states to minimize investment subsidies, but because each state also wants to maximize the amount of FDI it receives, it has an incentive to defect from the agreement -- to the benefit of foreign investors and to the cost of the states.

IS VERSUS OUGHT

Anyone who wants an introduction to questions of moral economic philosophy would do well to start with his book. Kapstein writes in lucid prose, without the turgidity that often renders the subject as inviting as a cold bath. He makes a long-overdue challenge to the West's consensus that the aim of aid and of developing countries' own development efforts should be to reduce poverty, and that this reduction should be achieved not via industrialization and economic growth but by policies focused on poverty. The implicit suspicion here is that the elite consensus around poverty reduction owes a lot to the comforting way it directs attention to "the poor" as a category outside of larger power structures and inequalities. It deflects attention from the enduring injustices at the international level, such as rich-country protectionism. It also avoids the task of building self-aware, internally articulated national economies in the developing world with industrial capacities that might challenge those of the developed world.

But Kapstein's lucidity sometimes comes at the cost of engagement with empirical evidence. Kapstein tends to mix up empirical and normative statements, "is" and "ought to be." For example, in his discussion of the most important reform domain of all -- trade -- he adopts a standard neoliberal position: developing countries should liberalize trade indiscriminately and integrate fully with the world economy. Unfortunately, this position is rooted in the most fundamentalist kind of thinking in economics.