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SOUTH STYMIED BY WTO SYSTEM, PROTECTION IN NORTH

by Chakravarthi Raghavan


Geneva, 20 Sep 99 -- THE CLOSER INTEGRATION OF DEVELOPING COUNTRIES INTO THE GLOBAL TRADING AND FINANCIAL SYSTEMS, BY FOLLOWING THE EDICTS OF THE WASHINGTON CONSENSUS, HAS NOT WORKED, and the present pattern of developing countries maintaining open markets, sucking in imports and financing it through hot money or selling domestic assets, is not sustainable.

And there will be an inevitable backlash against the trading system and developing countries may be forced to opt out, unless industrial countries change course, open up their own markets to exports from South, provide developing countries with real market access and special and preferential treatment on a temporary basis to enable them to establish competitive industries and export.

This is the central message of UNCTAD's 179-page Trade and Development Report 1999 (TDR-99) made public today.

In a reference to the upcoming Seattle meeting of the WTO, and negotiations that may be kicked off there, UNCTAD says that market access for the South in the industrialized world must be the centrepiece of a "positive trade agenda."

There must be an assault on tariff peaks and their frequency and escalation with every stage of processing in areas of export interest to the developing world, a dismantling of the annual $350 billion agricultural subsidies of the industrialized world (or twice the value of exports of developing countries), and confronting anti-dumping procedures, possible abuse of health and safety standards to control imports, and the signs of backsliding by industrial countries on their commitments under existing agreements, such as "voluntary" export restraints.

The upcoming reviews of the TRIPS and TRIMs agreements of the WTO, should be used to remove elements in them that are detrimental to developing countries, and the Special and Differential (S&D) Treatment principle should be made into a WTO contractual obligation.

WARNING AGAINST EXCESSIVE TRADE AND FINANCIAL LIBERALISATION, TDR-99 ADVOCATES DEVELOPING COUNTRIES RETAINING THEIR POLICY OPTIONS AND INSTRUMENTS, LIKE CONTROLS ON CAPITAL INFLOWS AND OUTFLOWS.

The report calls for rethinking policies for development and, in an under-stated way, challenges some of the voodoo economic policy prescriptions (of the Washington Consensus) pushed on the South by the OECD, IMF, the World Bank and the WTO (and UNCTAD's TNC division which promotes FDI) - get prices right, deregulate the economy, liberalise trade and open markets to imports of goods, services and capital, and allow foreign investors and TNCs a free hand, and development will be automatic.

Analysing empirical evidence of their experience in pursuing such liberalization policies for more than a decade, TDR-99 points out that developing countries are ending the 1990s with a slower rate of growth than in the 1970s, with poverty and unemployment again on the rise everywhere in the developing world, and the income and welfare gaps within and among countries widening further.

"Since UNCTAD's first assessment of globalization in TDR 1997, conditions in the developing world have deteriorated drastically," says UNCTAD Secretary-General Rubens Ricupero in the overview.

The few bright spots, mainly in East Asia and Latin America, he points out, have been dimmed, and the much hoped for turning point in Africa has not been reached. The predicted gains to developing countries from the Uruguay Round have proved to be exaggerated and, as feared, international capital movements have been particularly disruptive.

"As the twentieth century comes to an end, the world economy is deeply divided and unsteady," says Ricupero. "The failure to achieve faster growth that could narrow the gap between the rich and the poor must be regarded as a defeat for the entire international community. It also raises important questions about the present approach to development issues."

Development thinking and policies need a radical review, if developing countries are to be assured better growth prospects, narrow the income gap with the advanced industrial countries, and remove the scourge of widespread and persistent poverty, says TDR-99 in a final chapter "Rethinking Policies for Development."

Developing countries need to manage better their integration into the global economy, if they are to overcome the imbalances and instabilities associated with international flows of goods and capital - "by a reorientation of their policies to regulate capital flows, and establish competitive industries that would not only increase exports but also reduce the import content of growth."

But actions by developing countries alone would not be a complete answer and serious attention should be given to the systemic biases and asymmetries in the working of the international trading system which impact on their growth prospects.

In underscoring the conclusions, the leader of the team that produced the TDR, UNCTAD's chief macro-economist Yilmaz Akyuz said: "It is not possible for the South to maintain open markets, without open markets in the North to exports from the South. Basically, the South has been maintaining open markets, sucking in imports from the North and paying for it through inflows of 'hot money' and foreign investments from abroad (through mergers and acquisitions) by selling domestic assets.

"This is just not sustainable. If developing countries don't earn money, and cannot and do not export, eventually they would be forced back into protectionism, and forced to opt out of the trading system."

On present trends, the countries of the South would eventually be faced with large external payments deficits and slowing growth, or getting out of the system.

"This is not something that UNCTAD is advocating," Akyuz emphasized.

But if other measures are not taken by the industrialized countries, there would be a backlash in the developing world, and countries would be forced to adopt ad hoc restrictions.

The solution lies in the industrialized countries allowing access to their markets for the exports from the South. Identifying the manufacturing industries where the developing countries can export and earn, and opening up Northern markets for them, would result in developing countries being able to earn four or five times more money than they get from private financial markets.

TDR-99 says that developing countries have been striving hard, often at considerable cost, to integrate more closely into the world economy, but protectionism in the developed world has prevented them from fully exploiting their existing or potential competitive advance.

In low-technology industries alone (footwear, textiles, metal products, wood products, rubber products, plastic products, manufctured beverage products (excluding coffee and cocoa) and tobacco says the TDR, because of the trade barriers in the North, developing countries are missing out in export earnings an average annual $700 billion or four times the private foreign capital inflows, including FDI.

But sustained improvement in external balance of developing countries can only come about through productivity growth and technological upgrading, achieved by augmenting existing stock of physical and human capital and shifting existing resources away from traditional low-productivity activities.

And while there is a need to secure a rapid growth of exports in order to expand investment and output, this may not alone remove the balance-of-payments constraint on growth, says TDR.

"A sophisticated infant-industry programme designed to reduce the import content of growth also needs to be part of the policy arsenal available to developing countries.

"The current aversion to such programmes reflects a misreading of the reasons for the failure of an earlier generation of import-substitution policies. A careful review of past experience shows that design and implementation problems, and not misguided logic, were the main sources of failure."

The experience of East Asian and other fast-growing developing economies showed that an export push often followed the buildup of domestic productive capacity for replacement of imports.

"In view of the evidence that the import content of growth in developing countries is now an even greater constraint on sustained economic growth than in the past, a rethinking of this issue is an urgent necessity in many developing countries."

The lessons of the East Asia experience - the mix and sequencing of trade, industrial and technology policies that successfully combined export promotion with import substitution - have lost little of their relevance.

And while the post-Uruguay Round trading regime has circumscribed the scope for replicating such policies in most developing countries, "there remains a need for policy advice and technical assistance to developing countries in designing strategies to promote competitive industries, rather than an emphasis on what is not possible under existing rules."

More importantly, says the TDR-99, IN VIEW OF THE GROWING PRESSURE ON COUNTRIES TO PUSH DOMESTIC PRODUCERS INTO WORLD MARKETS, THE CONCEPT OF INFANT INDUSTRY PROTECTION NEEDS TO BE EXTENDED BEYOND THE EARLIEST STAGES OF MANUFACTURING AND INCLUDE "NOURISHING MORE ADVANCED COMPETITIVE INDUSTRIES THROUGH APPROPRIATE POLICIES AND SUPPORT."

Developed countries, on the one hand, cannot justify protecting and helping mature producers in their agricultural and high-technology sectors and, on the other hand, deny such possibilities to developing countries facing their own particular problems.

"IF EXISTING MULTILATERAL RULES ARE INDEED IMPEDING THE LEARNING AND UPGRADING PROCESS IN THE INDUSTRIAL SECTORS OF DEVELOPING COUNTRIES, THEN A RE-EXAMINATION IS CALLED FOR," SAYS THE TDR. "SUCH AN EXAMINATION IS PARTICULARLY DESIRABLE IN RESPECT OF ART. XVIII, SECTIONS A AND C OF GATT 1994, WHERE THE COMPENSATION REQUIREMENTS ARE SO ONEROUS THAT THEY ARE LIKELY TO NULLIFY THE VERY INTENT OF THE ARTICLE, WHICH IS TO ALLOW DEVELOPING COUNTRIES TO PROMOTE NEW INDUSTRIES. PART IV OF GATT 1994, TOGETHER WITH THE TOKYO ROUND ENABLING CLAUSE, WHICH LAY DOWN BROAD PRINCIPLES AND OBJECTIVES OF DIFFERENTIAL AND MORE FAVOURABLE TREATMENT COULD PROVIDE A STARTING POINT, ALTHOUGH THEIR BEST-ENDEAVOUR STATUS IS NOT ADEQUATE IN THE LIGHT OF THE REMAINING BIASES AND ASYMMETRIES IN THE INTERNATIONAL TRADING SYSTEM."

[Article XVIII of the GATT 1994 relates to Government Assistance to Economic Development by countries whose economies can only support low standards of living. Part A envisages such countries being able to temporarily deviate from their obligations, and provides for recourse to Art XXII consultations if commodity export earnings fall sharply because of actions by another contracting party, but this may of little avail when financial and macro-economic policies of the centres reduce growth and consumption and demand. Part B deals with restrictions for balance-of-payments, but has been virtually whittled down by the panel and appellate body decisions in the India BOP case; and part C enables developing countries to resort to consultations for taking measures inconsistent with GATT obligations, in order to promote establishment of an industry, but envisages compensation by the developing country to trading partners. When Malaysia tried to establish petro-chemical industries and sought to raise tariffs, Singapore which had benefited lodged a complaint at the WTO, and Malaysia rescinded its orders: paying compensation to Singapore would have been too high]

[In the runup to Seattle at WTO, some developing countries have now flagged this issue of Art. XVIII:C, particularly in the context of the drive from US, EC and Japan to negotiate industrial tariffs and ensure drastic reductions in their current bound tariffs of developing countries. The EC, in some informal discussions, has said that the end objective to be agreed should be to cut industrial tariffs of developing countries to fall into three slabs (with a maximum of 15 percent), make bindings of their 'applied' tariffs. There have also been calls that as part of the launch of a new round, there should be a "standstill".]

The emphasis in the Uruguay Round agreements, away from differential treatment to allow developing countries to protect their own industries and get preferential access to northern markets, and towards an ad hoc array of special terms on implementing agreements and technical assistance to developing countries to integrate into the world economy, in the light of the findings of this report "do not represent a positive step forward," says TDR-99.

The TDR cites a recent review of the treatment of the S&D issue in the Uruguay Round, to the effect that the old approach based on the existence of endemic BOP problems in developing countries and support for infant industries, was simply ignored (in the Uruguay Round) by the proponents of conventional neo-classicism (whether because of a one-sided interpretation of the East Asian experience or a general distrust of policy-makers in developing countries) who came to dominate the intellectual scene in trade negotiations in the mid-1980s.

"Nevertheless," adds the TDR-99, "the economics behind the old approach remains valid. Serious attention should now be given to how S&D treatment could be integrated into the contractual obligations of the rule-based trading system."

ON THE ADVICE TO DEVELOPING COUNTRIES TO ATTRACT FDI, FOR THE FOREIGN TECHNOLOGIES AND OTHER ADVANTAGES ASSOCIATED WITH TNCS, TDR-99 POINTS OUT: "THE BENEFITS OF HOSTING TNCS ARE NOT AUTOMATIC AND THE POLICY OBJECTIVES OF THE HOST COUNTRY IN SUCH MATTERS AS LOCAL CONTENT, TECHNOLOGICAL UPGRADING AND BOP STABILITY MAY CLASH WITH COMMERCIAL INTERESTS OF THE CORPORATIONS. "REPLACING THE HIGH IMPORT CONTENT OF TNC ACTIVITIES IN MANUFACTURING WITH DOMESTIC PRODUCTION REMAINS AN IMPORTANT OBJECTIVE IN MANY COUNTRIES. EQUALLY, THE POTENTIAL TECHNOLOGICAL AND OTHER SPILL-OVERS, PARTICULARLY FOR MIDDLE-INCOME ECONOMIES AND IN SECTORS WHERE SPECIFIC KNOWLEDGE AND CAPITAL EQUIPMENT ARE CLOSELY KNIT TOGETHER, STILL REQUIRE THAT HOST GOVERNMENTS PRESERVE THEIR ABILITY TO BARGAIN EFFECTIVELY WITH TNCS.

"AGAIN THE OBJECTIVE OF POLICY-MAKERS SHOULD NOT BE TO ATTRACT FDI UNDER ANY CONDITIONS BUT TO CREATE A DOMESTIC ECONOMIC BASE WHICH CAN BENEFIT FROM THE PRESENCE OF FOREIGN FIRMS. THUS, WHILE TNCS CAN REMAIN IMPORTANT AGENTS TO HELP BUILD OR IMPROVE A COUNTRY'S COMPETITIVE ADVANTAGES, THE TERMS ON WHICH THIS IS DONE SHOULD REMAIN VARIABLE."

The TDR-99 adds: "As was the case with successful experiences in the past, all trade and industrial policies must be designed and implemented so as to reflect differences in levels of economic development, resource endowments and macro-economic circumstances. In both export orientation and import-substitution there are easy and difficult stages, and Governments must be ready to make timely shifts in the incentive structure as their economies graduate through different stages of industrial and economic development."

TAKEN TOGETHER, THESE CONCLUSIONS OF TDR-99 ON FDI AND ITS PLUS AND MINUSES, SUGGEST THAT NOT ONLY IS IT INADVISABLE FOR DEVELOPING COUNTRIES TO AGREE TO MULTILATERAL RULES FOR PRE- ESTABLISHMENT MFN AND NATIONAL TREATMENT RIGHTS FOR FOREIGN INVESTORS THROUGH A WTO INVESTMENT TREATY, BUT EVEN THE LATEST PROPOSALS OF THE EC, JAPAN AND OECD COUNTRIES FOR WTO RULES ON POST-INVESTMENT NATIONAL TREATMENT AND MFN RIGHTS IS AGAINST THEIR INTERESTS - OF DEVELOPMENT AND INDUSTRIALIZATION - AND SHOULD BE REJECTED. (SUNS4512)

This document was published in the South-North Development Monitor(SUNS), edited by Mr C. Raghavan. It is being circulated for the benefit of the NGO community.

For recirculation please obtain permission from Mr Raghavan at suns@igc.apc.org

 


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