Structural imbalances justify opening up WTO ‘Black Box’

by Yilmaz Akyuz*

Geneva, 17 Sep 2000 —Developing countries have been raising a number of questions and issues about ‘implementation problems’ at the World Trade Organization.

Looking at it from a purely economic point of view, the developing countries have a legitimate reason for ‘opening up the Black Box’— the various multilateral trade agreements (MTAs) in the WTO - since the present trading system is unviable and cannot assure developing countries ability to grow at a 5-6 percent growth rate under conditions of stability.

Not being a trade expert or a trade negotiator, I will not address what most people have in mind when they refer to difficulties in implementation i.e. in areas TRIPS, TRIMs etc nor even on the impact on the developing world of commitments, import liberalization, lack of market access, deindustrialization, jobs, income distribution, and the rest.

But what I want to focus on is about what the agreements and the system means for the Balance-of-Payments (BOP), thus putting the whole thing in the macro-context.

In the past ten years, some developing countries believed that in a world of free movement of capital, BOP constraint is irrelevant. In fact this idea was promoted from Washington, that is if you leave yourself to the free world market forces, you receive capital on the basis of your long-term comparative advantage, production etc which will comfortably finance any trade deficit or current account deficit you may be running as a result of the trade policy that you yourself are implementing or your trade partners are implementing.

We in UNCTAD, in the Division on Globalization and Strategies for Development, looked at this question in a comprehensive way, in the 1999 Trade and Development Report.

What we found was that developing countries today are sucking in a lot more imports than in the past, as soon as they start growing say at 4-5 percent, whereas their exports are hitting protected stagnant markets.

And given that we are no longer in the 1960s when only a few Asian Tigers were doing it, given that we have everybody pushing for exports, there is a fallacy of composition even in manufactures, and everything that is produced in the developing world appears to be behaving like primary commodities with highly volatile prices, and sometimes downward trend in terms of trade.

Then we looked at finance. And, what we found was that despite all the hype about capital flows, developing countries did not receive, even before the Asian crisis, as a proportion of their income more capital flows than they had before the debt crisis. In fact this hype was because we were suffering from a sharp cutback in bank lending and other forms of capital flows to developing countries in the 1980s. In fact it was a recovery from that unusual situation, but did not represent an upward trend compared to what we saw in the 1975-82 period.

As a result, what we saw was that developing countries were running more trade deficits while growing less. And so we proposed, going back from trade liberalisation in the North and in the South, although we asked for reconsideration of S&D treatment in a number of areas, that the best thing was to ask for greater market access in areas of export interest to developing countries.

We made some calculations and we ended up with some numbers of 500-700 billion dollars of additional export earnings by developing countries in textiles and clothing and other labour-intensive products (and we did not include agriculture in our simulations), if Europe, Japan and the US and others open up their markets.

This was about 3-4 times the annual average capital flows to developing countries.

So we thought let us earn the money rather than go after hot money which effectively makes matters worse, because it generates sharp fluctuations in exchange rates, gyrations in real exchange rates, and in a world where developing countries are relying on exports this is the worst thing that can happen.

More recently, after the Asian crisis, a more subtle, nuanced position has been developing, and it is going to come soon from Washington (IMF/World Bank). That new position is that the reason why developing countries really suffer from increasing trade deficits is because they liberalised finance, which effectively created this gyrations in exchange rates.

According to orthodox thinking any country that liberalises trade should simultaneously devalue its currency. What happened (when countries did so) is exactly the opposite.

Therefore there is a tendency among the orthodox to accept that a developing country can have actually some controls over capital flows as long as it does not hurt or restrict trade and that will allow the country to devalue the currency and take care of the trade and current account deficit.

Unfortunately, this notion that a country can have any trade regime provided that it has a right exchange rate is neither historically nor theoretically correct.

It is certain that one can devalue one’s currency with considerable control on capital movements; but if one’s export capacities are limited and the export sectors do not respond very strongly what one ends up with is a very low economic growth. This means currency devaluations are not a recipe for structural trade deficits.

This takes us to an important issue that is being discussed here, in the seminar, namely, that the BOP safeguards provisions in the WTO are designed for temporary disturbances and disequalibria. That is countries can apply certain trade measures on the basis they have an unviable BOP. This is an exception and the whole thing is formulated as a measure to counter a temporary disturbance.

But what we are talking about here is a structural deficit which the WTO provisions do not allow.

In my view if one takes an economic point of view, rather than a legalistic point of view, the fact that developing countries are running structural deficits without growing faster under the existing trade regime is a very legitimate reason to open up the ‘black box’ (the provisions of the WTO/MTA rules).

This is why we put our effort, in the report, on the trading system.  For, what it means is that the system is not viable. If developing countries are running structural deficits under the existing trading system independent of what they do on the side of financial policy and exchange rates—and I can quote a number of countries that devalued their currencies but still are suffering from large structural deficits -- then the question is how do we approach this question of BOP in the context of WTO.

From a purely economic point view, that should give legitimate reason to question the existing trading arrangements, because what we are facing is not a temporary BOP disequilibria as is incorporated in the WTO provisions but a structural BOP disequilibria which makes growth and development unviable and the trading system unsustainable in developing countries.

Now, we have had some disputes in the WTO on the BOP safeguards and we made some comments in our TDR 1999. One of those cases was that of India and we remarked that the existing WTO/GATT provisions on BOP actually did not recognize that we are living in a world of open capital markets.

If you go to Washington, developing countries are advised to hold reserves sufficient for them to survive for a year without any need to borrow. Certainly this notion of reserves in Washington which is linked to the question of financial architecture is linking reserves to capital account risks and vulnerability. If BOP provisions of WTO are linking these reserves to current account.

So there is a case of incoherence on the side of finance and on the side of trade.

So whichever way we look at, it appears in today’s trade regime whether a country imposes financial restrictions on capital flows and has some room to adjust its currency or leave it to the free market so that its currency can go up and down with capital flows, the fact remains that developing countries do not face a trading system that promises them a 5-6 percent growth with stability.

To my mind, that gives developing countries a legitimate reason to open up the agreements at the WTO.-SUNS4742

[* Mr. Yilmay Akyuz is UNCTAD’s Chief Macroeconomist and officer-in-charge of the Division on Globalization and Development Strategies. The above is based on his oral presentation during a panel on WTO ‘implementation issues’ at the Third World Network seminar last week on “Current Developments in the WTO: Perspectives of Developing Countries”]

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