In light of the financial crisis and in anticipation of the WTO Ministerial Conference in November, developing countries urgently need to rethink their approach to financial and trade liberalisation. When they liberalise, many countries find their imports rising rapidly but their exports fail to keep pace, leading to bigger trade deficits that limit growth. At the WTO, the existing rules must be changed to stop developing countries from being penalised. (First of a two-part article based on the writer's presentation at the recent Group of 77 Ministerial Meeting at Marrakech)

By Martin Khor

October 1999

The World Trade Organisation will be holding its third Ministerial Conference in Seattle from 30 November to 3 December. It will be a crucial meeting, as developed countries are planning to launch a new Round of talks aimed at creating new agreements. Most developing countries are wary of that, and stress instead the need to revise existing agreements to correct their biases against the poorer countries. There is thus an urgent need now to re-examine what is the the right approach developing countries should take towards the WTO and towards trade and financial liberalisation, especially in the light of recession and the financial crisis.

On financial liberalisation, there are new lessons to learn from the recent events. It is now clear that financial liberalisation, especially when done inappropriately, was the main cause of the East Asian economic crisis.

Many of the affected countries, which had been in the forefront among countries of the South in global economic integration, are now cautious and reviewing their approach to financial openness. Malaysia's imposition of a fixed exchange rate system and of selected capital controls is a prime example of this new thinking.

On trade liberalisation, the issue is even more complex. There is a contradiction in the way developing countries in general and many scholars treat this issue.

On one hand it is almost invariably repeated that 'we are committed to trade liberalisation which is positive for and essential to growth and development'.

On the other hand, many developing countries also notice and are now actively complaining (for example, at the recent Group of 77 Ministerial Meeting in Marrakech) that trade liberalisation has net negative results for their economies, or has marginalised them.

A clear explanation why trade liberalisation often leads to negative results is found in the Trade and Development Report 1999 published by the UN Conference on Trade and Development (UNCTAD).

It focuses on the behaviour of and balance between imports and exports, and finds that rapid trade liberalisation has contributed to the widening of the trade deficit in developing countries in general.

The report finds that rapid trade liberalisation led to a sharp increase in imports but that exports failed to keep pace. For developing countries (excluding China) the average trade deficit in the 1990s is higher than in the 1970s by 3 percentage points of GDP while the average growth rate is lower by 2 percentage points.

This latest important UNCTAD finding corresponds with several new studies that show there is no automatic correlation between trade liberalisation and growth. Countries that rapidly liberalised their imports did not necessarily grow faster than those that liberalised more gradually.

The problem in trade liberalisation is that a country can control how fast to liberalise its imports (and thus increase the inflow of products) but cannot determine by itself how fast its exports grow.

Export growth depends partly on the prices of the existing exported products (and developing countries have suffered from serious declines in their terms of trade) and also on having or developing the infrastructure, human and enterprise capacity for new exports (which is a long-term process and not easily achieved).

It also depends on whether there is market access especially in developed countries. Herein lies a major problem beyond the control of the South, for as is well known there are many tariff and non-tariff barriers in the North to the potential exports of developing countries. Unless these barriers are removed, the South's export potential will not be realised.

Thus, trade liberalisation can (and often does) cause imports to surge without a corresponding surge in exports. This can cause the widening of trade deficits, deterioration in the balance of payments and the continuation or worsening of external debt, all of which constrain growth prospects and often result in persistent stagnation or recession.

This should lead us to conclude that trade liberalisation should not be pursued automatically or rapidly. Rather, what is important is the quality, timing, sequencing and scope of liberalisation (especially import liberalisation), and how the process is accompanied by (or preceded by) other factors such as the strengthening of local enterprises and farms, human resource and technological development, as well as the build-up of export capacity and markets.

Developing countries must have the ability, freedom and flexibility to make strategic choices in finance, trade and investment policies, where they can decide on the rate and scope of liberalisation and combine this appropriately with the defence of local firms and farms.

This conclusion has profound implications for the WTO negotiations. It is now generally admitted that the Uruguay Round has caused serious problems for developing countries. The next stage of negotiations must address these problems that curtail the ability of developing countries to make necessary and strategic economic choices.

As the Chairman of the Group of 77 has said, the next stage of the WTO negotiations should be about the three Rs, to review, repair and reform the WTO agreements and system. This is necessary now in order to avoid further damage to developing countries.

Firstly, the developed countries must implement their commitments in areas which they made to the developing countries, and which up to now they have not implemented satisfactorily, thus giving rise to the justified charge that developing countries have been shortchanged and have not benefited from the Uruguay Round.

This is in areas such as phasing out of the multi-fibre arrangement, reducing their agriculture export subsidies and high tariffs, restraining from the abuse of anti-dumping measures, and implementation of the provisions on special and differential treatment for developing countries.

Secondly and perhaps even more importantly, developing countries should be allowed to lead the WTO to carry out a comprehensive review of the various agreements to offset the imbalances in them and the negative effects they have on development. For example:

** There should be a review of the agriculture agreement from the viewpoint of food security and rural livelihoods in developing countries, as most of these countries depend on small-scale agriculture for employing a large sector of their population and to contribute to food self-sufficiency. As part of Special and Differential treatment (to which developing countries are entitled), food produced for domestic consumption and the products of small farmers in developing countries should be exempted from the disciplines of import liberalisation and domestic support.

** In the TRIPs agreement (on intellectual property), Article 27.3b should be reviewed and amended so that all life forms are prohibited from being patented. This is in order to retain the integrity of the patent system that prohibits the grant of patents for discovery, and to prevent the increasing and unjustifiable practice of biopiracy (in which biological materials from the South and the traditional knowledge of their use are being appropriated through patenting).

Also, in conformity with the Biodiversity Convention, it should be clarified that the sui generis system for the protection of plant varieties (in the same Article) can include national laws that protect the traditional knowledge of local communities.

** In the TRIMs agreement (on investment measures), the review should enable developing countries to be exempted from the prohibition of local content requirement as well as the foreign-exchange-balancing requirement (i.e. whereby a permissible level of imports of an enterprise is linked to its exports).

This is in recognition of the need of developing countries for such measures on development grounds (e.g. the need to build the capacity of domestic firms, generate multiplier effects for the domestic economy, conserve foreign exchange and avoid excessive foreign debt).

** The WTO rules do recognise that developing countries can have 'special and differential (S and D) treatment' because of the relative weakness of their economies. However, most of the S and D provisions are not binding on the developed countries, which are only asked to undertake their 'best endeavour' to aid developing countries.

In the next phase of negotiations, the WTO must operationalise the S and D provisions so that they are legally binding and enforceable. Developing countries must be allowed a different status than developed countries in obligations under the WTO rules, so that they adapt according to their needs, ability and stage of development.

** The WTO's dispute settlement system has to be reviewed. Many recent rulings of the panels and Appellate Body have raised grave concerns as they are biased against developing countries' interests and seem to have removed or eroded their rights, contrary to the agreements. This has aroused the disaffection of many developing countries.

These are only a few examples of the changes required to enable the survival and development of the domestic food-farming and industrial sectors of developing countries. Surely the WTO agreements were not meant to, and thus should not, render the South's domestic firms, farms and economy unviable and condemned to oblivion.

Also, the changes are needed to redress a little the great imbalances and biases in the rules and the system that now work against developing countries. Without such redress, the credibility of the multilateral trading system will be eroded or may even collapse as the public and the governments in the South question whether the costs outweigh the benefits for them in the system. - Third World Network Features


About the writer: Martin Khor is Director of the Third World Network.