Ladies and Gentlemen,
The turbulence that we have seen in the financial system these past few
weeks would make anyone's head spin! Back in 2004, a trader had
recommended a book to me, entitled “Fooled by Randomness; The Hidden
Role of Chance in Life and in the Markets”, which I simply couldn't help
but re-read once again this week. Written by a seasoned banker and
trader, who had seen just about everything there is to be seen in a
market, in terms of rises and falls, Nassim Taleb came to the conclusion
that the only viable explanation for market swings is absolute pure and
utter “randomness”. Needless to say, his book spread like wildfire on
Wall Street, giving comfort to all those whose predictions were falling
on their heads.
In his famous “Table of Confusion”, Taleb argued that in the financial
system we were all too quick to confuse luck for skills; randomness for
determinism; probability for certainty; theory for reality; coincidence
for causality; and forecasts for prophecy. And, in having witnessed the
events of the past few weeks, who can blame him — quite frankly — for
finding markets completely and utterly mind-boggling!
Just a few months ago, the world was talking about a food crisis.
Incidentally, it was also talking about an oil crisis. A world in which
food prices had risen, and would continue to rise, with a detrimental
impact on the world's poor. We had seen bread riots in various parts of
the world, serious rice shortages in others, and tens of thousands of
demonstrators marching through Mexico's capital to protest against the
rising price of tortillas. And yet, from September to October this year,
we find that food prices have fallen by 20%! 10% below last year's
prices. Who would have expected this sudden change? This sudden reversal
of fortunes?
We have gone from a world whose newspaper headlines smacked of protests
and warnings of impeding starvation to headlines announcing a potential
commodity glut — and all within the span of just a few weeks. And the
same story goes for many other commodities, not just food. Metals which
have seen their prices tumble by 26%, also in a single month, and oil by
38%! There is no doubt that the world is traversing some very uncertain
times, and that policy-makers are now faced with the formidable
challenge of restoring order — or some “semblance” of order — to a world
which seems to be largely governed by chaos.
In this chaos, we have seen international trade suffer a serious blow,
one, incidentally, which we have yet to fully quantify; with ships
leaving ports without cargo, and others anchoring-in, in anticipation of
better times. We have seen the Baltic Dry Index — a benchmark for global
freight cost — tumble to its lowest level in six years. It has fallen by
50% since the end of September amidst fears of weakening global demand,
fears of an impending recession, and difficulty in obtaining trade
finance. All this with an impact on the shipment of bulk commodities,
such as iron ore, coal and grains. Amidst this turmoil, protectionist
forces are rearing their heads, demanding governmental assistance, and
demanding that domestic markets be shut to foreigners. In other words,
we are hearing calls for less competition.
If this feels like a déjà-vu, well it is! Back in 1929, at the time of
the Great Depression, we saw a similar story unfold. The infamous
Smoot-Hawley Tariff Act of the 1930s - which I am sure you are all too
familiar with - raised US tariffs on over 20,000 imported goods to
record levels, spread through other nations which also took their own
protectionist measures. A prelude to a war that impoverished the entire
community of nations and which proved that beggar-thy-neighbour policies
are nothing but a dead-end road.
Ladies and gentlemen, I would argue that amidst the chaos that we are
witnessing today, what we need is greater regulation. What we need is
better global governance. While there is no doubt that global financial
regulation must be crafted, there is no doubt either that global trade
regulation must be reinforced. What is desperately needed at a time like
this is to restore trust in markets by reassuring investors that they
are still operating within a rules-based international trade and
financial system.
How do I situate the Multilateral Trading System in today's tumultuous
times? The Multilateral Trading System is first and foremost an
“insurance policy” against protectionism. By investing in the
Multilateral Trading System, strengthening it and increasing its
robustness, what the international community is in fact investing in is
an insurance policy against the deterioration of market conditions. An
insurance policy against our worst instincts; the instinct to shut-out
the foreigner at a time of crisis, and build higher and higher tariff
walls to hide our inefficiency.
But Nassim Taleb sums up human psychology quite well when he writes
that: “As a derivatives trader I noticed that people do not like to
insure against something abstract; the risk that merits their attention
is always something vivid.”
Here is an example that proves precisely his point. In a survey of
travellers at an airport, when travellers were asked which of the
following two insurance policies they would be willing to pay more for —
a policy that covered them against absolutely all travel risks, or one
that simply covered them against the risk of a terrorist attack — the
majority opted for the policy against the attack. And, this, despite the
fact that the former would have covered them against ALL risks,
including that of terrorism. A survey, needless to say, that has been
studied by psychologists! As Taleb put it, the mental probabilistic map
of man's brain is geared towards the sensational.
This I fear is the biggest problem facing the Multilateral Trading
System right now. The risk of a return to protectionism is seeming to
some to be “too abstract” and too remote to deal with. Human memory is
short, and some have entirely forgotten the Great Depression; not least
because most of us have not actually lived through it. But we must
realize that as abstract as that risk may seem, it IS very real.
In the WTO, the Doha Round of trade negotiations promises to take this
insurance policy further. Let me give you some ballpark figures for what
is on the table in these negotiations - to make the case for it
perfectly clear to you. In agricultural goods, the developing world's
average tariff of 60% and the developed world's average tariff of 8%
would fall by a quarter and by a half respectively (these are
trade-weighted figures, I hasten to add). In industrial goods, the
developing world's average tariff of 15% and the developed world's
average tariff of 4% would both fall by 35% and 60% respectively. The
developed world's harmful agricultural subsidies would also fall, with
the worst kinds of subsidies being slashed by up to 80%.
Not to mention the trade opening that the Doha Round promises for
services vital to commodity trading, such as transportation services,
energy services and distribution services — to mention but a few. In a
chapter of the negotiations known as “trade facilitation”, the Doha
Round would also reduce the very harmful red tape — i.e. the
bureaucratic customs procedures — that delay your cargo at ports, delay
the clearance of your goods, and their delivery to the final consumer.
As an expansion of the world's insurance policy against protectionism,
these are not insignificant gains. For a world whose poorest members are
extremely dependent on the export of commodities, market access barriers
and the unfair subsidies that are given by the rich must come down. Let
us not forget that in Africa, 34 countries are today dependent on the
export of less than three commodities. These three commodities account
for more than 50% of their export. Worse, in 23 African countries, the
export of only one commodity represents more than 50% of total exports.
While such dependency calls for economic diversification, what it
clearly also calls for is a reduction of all of the factors that may
exacerbate price volatility — such as space for protectionism. This is
what the Doha Round promises to do. It also promises to reduce the
phenomenon of “tariff escalation” — i.e. of tariffs that rise with the
level of processing, such as from cocoa to a chocolate bar. An issue
vital for the industrial development of most of the world's poor, and
which resonates across nearly all commodities.
On 12 November, I have convened the providers of trade finance to the
WTO to discuss availability and affordability of finance for exports and
imports and examine measures that should be considered to restore
confidence in the market and in trade. This is in response to some of
the concerns that WTO members have raised, particularly in developing
countries, and to shipowners and traders suffering from the reluctance
of banks to issue their letters of credit. I hope that this meeting will
confirm that the effects of the banking crisis on trade finance will be
short-lived and that in the meantime providers of trade finance are
ready to take the necessary measures to address this issue, pending a
quick return to normal credit conditions on world trade and commodity
markets.
Ladies and gentlemen, to conclude, allow me to quote Taleb's work once
again. He says that “one cannot judge a performance in any field by the
results, but by the costs of the alternative (i.e. if history played out
in a different way)”. And how right he is. The cost of failure of the
Doha Round, the cost of failing to strengthen a global insurance policy
against protectionism will be high. Let us not wait for history to teach
us yet another lesson on the dangers of protectionism.
I thank you for your attention.
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