Dagster Donal recently posted the news that a South Korea company is pursuing a deal with Madagascar to lease arable land equivalent to almost half of its currently farmed land for 99 years in order to grow crops for feed and biofuel. Chinese companies have been doing similar deals with a number of African countries but at much smaller scales. Trade deals between multinational corporations and third-world countries have been sources of controversy since the 70's, but the history of such arrangements stretches back to the Dutch East and West Indies Companies, established in the 17th century. New York City itself was founded as New Amsterdam by the Dutch West Indies Company in order to facilitate the purchase of natural resources, including fur and tobacco, from an as yet undeveloped America.

Controversial MNC deals tend to elicit knee-jerk reactions from both sides, with globalization supporters arguing that such trade deals help third world countries to grow economically and anti-globalization activists arguing that they undermine local economies and further impoverish the poor within such countries. Both sides generally base their arguments on broad assumptions which fail to account for the complex role that international trade plays in global development. Globalization supporters place naive faith in the positive effects of free markets and benign interests of MNC's. Detractors naively assume that freed from the influence of international power, third world countries would prosper on their own.

If we want to positively influence global trade policy, we need to abandon utopic dreams of happy, harmonious global markets as well idealized notions of plucky, bootstrapping third world nations. If we set realistic goals based on historical precedents, we can better evaluate the advantages and disadvantages of specific trade deals by determining whether they help or hinder the achievement of such goals. Fortunately, there are plenty of historical precedents, starting with our own country, which began as an agrarian exporter of natural resources and suffered through class conflict, political corruption, and labor exploitation before becoming a rich nation with a (formerly) healthy middle class. But more useful precedents are the contemporary ones, former third world countries like South Korea, China, Brazil, Chile, India, Malaysia, and Thailand, the so-called newly industrialized countries (NIC's), whose citizens have moved from subsistence to relative wealth and which have now reached the point of establishing their own multinational corporations. These are not perfect nations. They suffer from political repression, class differences, corruption, and environmental deprivation. Except for South Korea, none of them can yet be considered first world nations. But they are in a different world entirely from places like Madagascar, Congo, Afghanistan, Zimbabwe, Somalia, North Korea, Burma/Myanmar, and Bangladesh. Third world countries will not leap suddenly into the first world. It has never happened; there is no precedent. But we have seen countries move from third world, to NIC, to first world, often over centuries, occasionally over decades. So as a first step, let's focus on helping third world countries become NIC's.

No country has ever become an NIC on its own. Particularly in the last century, the NIC's growth has come almost exclusively from international trade. Is there no other way? There are other ideas but no other precedents, and those who base their ideas on theories without precedents run a dangerous gambit. While it's not impossible that some new strategy could accomplish something entirely new, we have seen many unproven economic theories leave nations in ruins. China's "Great Leap Forward," based on unproven Communist principles, caused an estimated 20 to 43 million deaths by starvation. So let us base our ideas on proven models. Third world countries must trade.

But that doesn't mean that every trade deal is inherently good. African nations have been "selling" their natural resources to Europe for centuries, but few if any can be called NIC's. It's not that African nations have been ripped off. Trade does not work on the charity principle. Corporations seek the best deals that they can. While some nations may negotiate poorly, and corrupt leaders may offer deals that help them personally while robbing the nation, these differences are always relative to going the rate. Nor is the problem that the proceeds do not go directly to the poor. The NIC's suffer from massive class imbalances with the bulk of benefits going to elites. But these countries are gradually developing middle classes, and standards of living for the poor of such nations have been gradually improving. The difference between productive deals and unproductive deals is that in the former case, the profit is put to work through investment in local companies. Those companies may be owned by elites who live relatively lavish lifestyles, but they grow. As they grow, they hire more people, both laborers and managers. They send taxes to their governments which invest in infrastructure that benefits the poor and, more importantly for the long run, encourage more growth. The growth thus builds on itself, encouraging yet more investment, and suddenly a once poor nation becomes an international dynamo, and its companies become multinational corporations in their own right. By contrast, in unproductive deals, the profits are wasted on lavish palaces and luxury cars for corrupt leaders and their supporters. Much of the money immediately leaves the country through purchases of expensive imports.

In light of these considerations, let's turn to the deal between Korea and Madagascar. First, this is a massive deal for Madagascar, which has a GDP of only $17B. It's expected to cost Daewoo Logistics $6B over 20 years for the lease plus infrastructure investments, including port, roads, irrigation, power plants, schools, and hospitals. Madagascar's GDP is only $17B. Second, Madagascar has been a relatively stable democracy since independence in 1960. It's smack in the middle of international democracy, press freedom, and corruption rankings, above Thailand, Georgia, and Egypt, though the corruption is slightly worse than the last two. However, the deal appears to be with four regional governments, about which we have little information, not the national government. There are of course questions about what will happen to those who currently farm the land. There are apparently plans to bring in laborers from South Africa, which would shut out local and send most of the wages out of the country. If all the crops are exported, the cost of food will surely go up for Malagasies, negating any benefits to the poor from the capital influx. The deal seems to be for "currently farmed" land although some reports list "arable" land. Even if it is the former, the increased scarcity will likely cause new farmland to be developed, which would cause deforestation, as Donal has noted. [Update: Clarified by acanuck below - new farmland equivalent to half of its currently farmland. That means that food prices won't necessarily go up, but there will be deforestation.]

But most importantly, while the infrastructure investment is good for Madagascar, it's not clear that the deal will do much of anything to fertilize local companies. The reports hint that the operation will be very top down. Daewoo will not be hiring local contractors or managers. They will run the show from top to bottom much as multinational oil and mineral companies do and as colonials have done in the past. The leases will be paid directly to regional Malagasy governments and most likely be squandered through corruption. Finally, should Madagascar manage to break into NIC ranks in the next century, the 99-year lease will become an increasing drag, depriving the nation of the resources and land that it will need to develop.

Thus, despite some benefits for a nation that may be less corrupt than its neighbors, this deal truly appears to be an example of 21st century nouveau colonialism and likely to hinder rather than help Madagascar's development. Moreover, it's a disturbing trend, made worse in the case of similar deals between less accountable Chinese corporations and more corrupt African nations.

Late update: Just want to credit Hugh Bartling who posted the story that Donal saw. Up at TPM, Hugh notes that the Financial Times claims that the Daewoo would pay nothing for the lease. The Bloomberg quote of $5 per hectare came from a Daewoo manager. Also, Acanuck clarifies below that the deal appears to include not current farms but unfarmed land equivalent to half of Madagascar's currently farmed land. There is also some debate about what Daewoo is paying for the lease, if anything.