Despite reforms, per capita incomes grew slower in South

by Chakravarthi Raghavan

Geneva, 5 Dec 2000 -- Despite significant economic and trade policy reforms during the late 1980s and 1990s, the average real per capita incomes of developing countries grew by less than one percent a year compared with the more than two percent in the industrialized countries, according to the World Bank’s Global Economic Prospects 2001 Report.

The developing country performance was partially affected by political shocks and various foreign and civil conflicts, with 18 severely affected by conflict and suffering per capita declines of one percent a year. Incomes also fell in most of the transition economies.

Excluding them, according to the bank, the per capita incomes in the developing world grew by 1.5%.

The merchandise exports of the developing world saw an export growth of 6.4% a year or 2% faster than in the 1980s. East Asia, South Asia and Latin America which saw the largest declines in trade barriers also registered strong export growth. But growth in export volumes in sub-Saharan Africa was only at two percent, partly because world trade in products exported by Africa grew at half the world trade growth rate.

The Bank blames the poor export performance of developing countries on their domestic infrastructure and trade policies. It however notes that external barriers to their exports, especially agriculture and labour-intensive products, continue to impede the integration of these countries into the world economy.

The share of developing countries in world trade in manufactures grew sharply in 1990s, but their share of trade in agricultural products and processed foods declined. While partly the result of domestic policies restraining agricultural exports, the Bank underscores the high trade barriers imposed by the industrial countries on agriculture and processed food imports, and agricultural subsidies.

Some of the highest tariff rates in the industrialized countries, the report notes, are applied against products exported by the developing world.

The report cites as an example that almost $26 billion of exports from developing countries in 1999 to the world were products that would have faced tariffs above 50% in the Quad countries (Canada, EC, Japan and the USA). Only about $5 billion of these products were actually exported by the developing world to the Quad, whereas the Quad imported about $50 billion of these products from other industrial countries.

This, the Bank says, suggests the potential for expansion of exports of these products by developing countries if the tariffs in the industrial world were reduced on these products.

The report notes that product standards - governing characteristics of goods and generally imposed to protect health and safety - are critical to the effective functioning of markets and provide important support to the trade system.

However, it notes, many developing countries lack the technological and financial resources to develop product standards effectively, meet the industrial countries’ import requirements or bring disputes when standards are used to discriminate against their exports.  Enforcement of core labour standards and environmental standards, the report says, are critical for both growth and equity.

However, use of trade sanctions to support labour and environmental standards are likely to be counter-productive as they would restrict the access of developing countries to international markets while doing little to improve welfare.

Trade sanctions on particular export goods are unlikely to improve labour standards for the economy as a whole, even if the sanctions change the behaviour of particular firms, the report argues. Barring child labour from one firm or sector without addressing the fundamental causes of child labour is likely to shift children to less remunerative and more dangerous occupations in other sectors.

The report cites in this connection the example of Bangladesh where the threat of US sanctions led owners of garment factories in Dhaka to dismiss all children below 16. But anecdotal evidence suggests that many of these children found employment in workshops and factories not producing for exports or as prostitutes, brick-breakers or street vendors.

As for environmental standards and arguments about the race to the bottom, the report says that empirical studies of the patterns of trade, allocation of FDI, plant location and profitability have found little or no evidence that environmental regulations have reduced investments or lowered competitiveness. There is no evidence either than intra-country differences in environmental regulations affect investment.

The above article first appeared in the South-North Development Monitor (SUNS) of which Chakravarthi Raghavan is the Chief Editor.

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