Free Trade Is Not Enough; A New 'New Deal': After a contentious WTO meeting, the voices arguing for greater government intervention in economies are growing louder.(Cover Story)

Byline: George Wehrfritz (With Sudip Mazumdar in New Delhi)

Free trade can kill economies. Just ask Robert Sisilo, the Solomon Islands' permanent representative to the World Trade Organization. If a sweeping trade package under discussion at the global body is ever implemented, his isolated nation stands to lose a mainstay revenue source: fees for access to its territorial waters. They are but one example of the subsidies that the WTO aims to ban in the name of free trade. The long-term solution is obvious: the Solomon Islanders need their own fishing fleet, an indigenous canning industry and the means to export globally. Instead of giving them fish, to cite the old empowerment cliche, they need to be taught how to fish for themselves.

Many economists argue that free trade is a magic bullet--the quickest way to fuel growth and alleviate poverty. Yet free trade hasn't much helped the 47 least developed countries in the world, the poorest of the poor. According to United Nations data, their share of world trade has declined sharply since 1950, and now accounts for a meager 1 percent of global trade volume. Collectively, the number of people living in abject poverty in those nations is expected to rise to 471 million by 2015--up from 334 million in 2000. Even East Asia, long the poster child for export-driven growth, owes much of its rise to government-led and -financed industrial strategies, as well as outright protectionism. Japan still impedes imports of foreign rice, for example, while South Korea blocks a variety of agricultural products.

A new consensus is emerging among the developing nations of the world, expressed most forcefully at the contentious WTO meeting in Hong Kong in December. An increasing number of voices are arguing that trade is not enough to end poverty and reduce the massive income disparities that bedevil countries from China to Chile. In fact, they say, what's needed is more government intervention in economies, not less. Call it a new New Deal. And get ready to hear much more about it in 2006.

In Asia in particular, states recognize the importance of market-driven policies. Yet big government is back in vogue in the region. India aims to boost rural incomes by creating 150 million wage jobs in the country's poorest villages. Indonesia is establishing new schemes to compensate poor households for higher gas prices even as the country dismantles its massive fuel-subsidy programs. Thai Prime Minister Thaksin Shinawatra has handed cash to every poor village and asked each to specialize in making products. Asian governments demand that developed markets open more fully to their exports, but reserve the right to shield vulnerable sectors of their domestic economies from cheap imports.

This is not old-fashioned populism. Serious thinkers have concluded that neoliberal economic policies are little help to the world's poorest nations. Columbia University economist and Nobel laureate Joseph Stiglitz argues that the WTO's agenda as currently constituted should be scrapped. Poverty reduction, he and others argue, requires not just market liberalization but also massive investments in aid--less government in some areas, more in others. Many development economists advocate aggressive programs to boost literacy, improve health care and build infrastructure. All are vital prerequisites to globalization. In other words, poor countries need to have stronger economic foundations before their markets can be thrown open to international competition.

Under the rubric "aid for trade," the WTO has in fact endorsed initiatives that, ironically, resemble the protectionism and government-driven development the organization originally set out to dismantle. In Hong Kong, the United States alone pledged $2.6 billion in funding over the next five years to help the least-developed nations; Europe and Japan have floated similar packages that could add hundreds of millions of dollars to the kitty. "This is new ...