Potential Gains from Trade in Dirty Industries: Revisiting Lawrence Summers' Memo
Johnson, Jay, Pecquet, Gary, Taylor, Leon, The Cato Journal
Lawrence Summers has a long history of controversial statements. Well before his comments in 2005 as then-president of Harvard University about the underrepresentation of women on faculties for mathematics and science, Summers was the chief economist at the World Bank. In that position, he penned a memo to his colleagues in 1991 that was leaked to the public, drawing heated criticism. (1) In 1999, when President Bill Clinton nominated Summers as Secretary of the Treasury, the controversy over Summers' memo was revived during his Senate confirmation hearings. Hundreds of articles were posted on the Internet at that time attempting to sway public opinion against Summers.
The controversy remains alive. Debate continues over the effect that free trade or globalization has on developing nations and on the environment, with the prevailing attitude that some trade must be prohibited. Most developed nations therefore abide by the 1994 Basel Convention, which bans exports of toxic wastes to developing countries, but the continuing shift of pollution-intensive production to poor countries effectively exports toxics to them. (2)
As the World Bank's chief economist, Summers ostensibly worked to promote policies designed to "reduce global poverty," (3) and his memo was supposed to advance the development of that policy. However, scanning dozens of sites addressing the World Bank memo, we could not find one defending Summers. Rather than try to understand his position, the sites tried to smear his reputation and perpetuate the misunderstandings that have long motivated criticism of free trade and economic development policies.
The statement in Summers' memo that is most often mocked is: "I think the economic logic behind dumping a load of toxic waste in the lowest-wage country is impeccable and we should face up to that." He continues: "I've always thought that under-populated countries in Africa are vastly under polluted." Critics consistently characterize this position to mean that he and the World Bank favored dumping toxic wastes on poor people without their consent. Without an understanding of how gains accrue even to trades in toxic wastes, or how economic progress occurs, his comments certainly sound heartless.
Defending Summers therefore requires a better explanation as to how these trades can result in gains to both richer and poorer nations. Although Summers' memo has been widely misinterpreted, his premise is valid and yet virtually undefended before the public by economists. Economic growth resulting from comparative advantage is impeccable evidence of gains from trade in all industries, including dirty industries, which arise from differences in values among various populations and their evaluation of risks.
Potential Gains from Trade: A Marginal Analysis
The "impeccable" logic to which Summers refers is the principle of comparative advantage applied to the handling of toxic wastes and to movements of polluting industries among countries. The principle suggests that a nation should export a good that it can produce more cheaply (at a lower opportunity cost in terms of forgone production of other goods or services) than other nations in exchange for goods it finds more costly to produce. The potential gains from trade are implied by well-documented facts about differences in standards of living between developed nations and developing ones such as in Africa, to which Summers specifically refers. The key to Summers' comment lies in the opportunity costs and forgone earnings of people of various economies. They respond differently to similar possibilities. As Summers explains, the relative consequences of hazardous waste for health in various economies depend on differences in opportunity costs among people. Summers' use of forgone earnings to measure these costs has misled those unfamiliar with the comparative advantage principle. We reserve comment on that for later. …