South needs more policy space in trade system, says UNCTAD

Developing countries need not only greater access to foreign markets but also more policy space to nurture dynamic domestic industries that can compete internationally, according to the UN Conference on Trade and Development (UNCTAD), which reports that Third World countries’ rapidly growing share in world manufacturing exports has thus far not translated into similarly impressive income growth.

GENEVA: More trade does not always mean more economic growth, income and development, and the challenge to policymakers is to formulate national and international policies and rules to provide not only more market access to the developing countries, but also “far more policy space” to enable them to nurture industries with high technology content and compete with the transnational corporations (TNCs).

This is the basic message of the United Nations Conference on Trade and Development in its annual flagship publication, Trade and Development Report, 2002: Developing Countries in World Trade, which was released on 29 April.

Based on a detailed analysis of empirical evidence of 225 products traded, UNCTAD finds that Third World countries have been rapidly expanding their share in world manufacturing exports, including in the rapidly growing high-technology products. However, in terms of incomes gained from such activities, they do not appear to have shared in this dynamism.

The report also shows that, ironically, the industrial countries hold, except on a few items, a greater share of the world market in agricultural products, despite the well-known advantages that most developing countries have in the agricultural sector.

Despite the rhetoric about greater participation of developing countries in international trade in manufactures, such trade is concentrated in a handful of countries that achieved considerable success before the World Trade Organization was born. After the WTO came into being, the new entrants are simply selling cheap labour, and the talk of developing countries selling high-tech goods is quite misleading, according to Yilmaz Akyüz, chief author and Director of the UNCTAD division on Globalization and Development Strategies.

Trade flows are governed not by comparative advantage, as claimed by the orthodox school, but by the trade policies of the major industrial countries (which often discriminate against products originating in the South) as well as the global strategies of the TNCs, the UNCTAD report finds, after a  careful analysis of trade data and the evidence that an increasing number of products, including high-tech exports, are assembled from parts and components produced in different locations.

No income dynamism

Analyzing the trade performance of developing countries over a 20-year time span and the contribution of trade to their growth and development (Part II, Chapter III, “Export dynamism and industrialization in developing countries”), TDR 2002 finds:

“While the share of developing countries in world manufacturing exports, including those of rapidly growing high-tech products, has been expanding rapidly, the income earned from such activities by these countries does not appear to share in this dynamism.”

“Policy makers at both the domestic and international levels must face up to this challenge if the multilateral trading system is to become more development-friendly,” the report adds.

The chapter, and the analysis in it, are the “most interesting part”, said UNCTAD Secretary-General Rubens Ricupero at a press briefing here on 26 April.

On the outcome of the WTO’s Fourth Ministerial Conference in Doha last year, Ricupero said that UNCTAD had for some time been insisting on the importance of a more balanced trade system in terms of equitable rules of international trade, and “we were practically alone.” But this is no longer so, and everyone has recognized it; the World Bank and the IMF have recognized the imbalances in the trading system. Even more, the current negotiations in the WTO aim to remove these imbalances and call for a development content.

From the analysis in Chapter III and the evidence provided, Ricupero added, anyone would conclude that developing countries need freedom of manoeuvre to implement the kind of policies that South Korea, Taiwan and Singapore adopted.

Nevertheless, he also underlined that the policies and situations of city states like Singapore or of Hong Kong China could not apply to continental economies like India and Brazil, and countries have to adapt their policies.

“Trade and investment are the most important tools to promote development, but there are no simplistic causal relationships, and we reject any simplistic approaches to the problem,” Ricupero said.

“Perhaps the most important implication of the report is not that the developing countries need more market access - although this is important to avoid the fallacy of composition - but they need far more policy space to nurture industries with high technology content so that they can compete with the transnational corporations,” said Akyüz.

“Working with TNCs adds a lot of trade, but doesn’t do much to incomes and development,” he pointed out. “Even in a country like China, where TNCs are operating in greenfield investments and export industries, their operations are in the red as far as the balance of payments is concerned. They generate $20 billion in profits, but only $2 billion as export surpluses.”

The report (Part I, Chapter I) says, on world economic trends and prospects, that a strong demand stimulus from all major industrial countries is needed for the world economy to gain growth impetus and for developing countries to avoid difficulties in reaching their growth and development goals. While the world economy has defied predictions of a deep recession (after the 11 September events), with much still riding on the performance of the US economy, a “more balanced” global growth path appears doubtful, argues UNCTAD. (See the article “Too much hangs on strength of US recovery, warns UNCTAD” in this issue.)

Short on assessment

Besides the main Chapter III assessing the performance of developing countries in world trade and the need for more policy space for developing countries, the report, in its Chapter II, “Multilateral trading system after Doha”, gives a background to the WTO’s Doha Ministerial Conference and the work programme and negotiations launched there.

Described as “an initial assessment” (page 33) of the negotiations launched at Doha, the chapter provides a summary of the work programme, but  refrains from any assessment of the work programme and negotiating agenda from the perspective of trade and development of the developing countries.

It is this last, rather than technical assistance programmes (which depend on donor funding), which is the main and only raison d’etre for the founding and continued relevance of UNCTAD.

Governments of the developing world, as also the leadership and management of the UNCTAD secretariat, have to take an active hand to ensure that the promises made at UNCTAD’s tenth session (UNCTAD X held in Bangkok in 2000), namely, that the institution will become a knowledge-based one to provide policy analysis and conclusions and present clear options and recommendations to developing-country governments on trade and development, are implemented.

The TDR also has a chapter on China’s accession to the WTO and the prospects for the “Crouching Dragon,” as an UNCTAD press release puts it. Surprisingly, the chapter shies away from providing a full description and assessment of the accession conditions, particularly the restrictions on China’s access to the markets of industrial countries (all available on public record since November 2001, when the report of the WTO working party on China was derestricted and issued at Doha).

The report notes that with Chinese exports growing at more than twice the world average for over a decade, China’s exports now account for over 4% of world trade, with heavy emphasis on labour-intensive manufactures. The report notes the concerns in both developed and developing countries that low wages give China a competitive advantage in international trade, and the Chinese accession to the WTO has heightened these concerns. However, it says, once productivity differences are accounted for, China’s advantages are less clear. UNCTAD’s own analysis suggests that China would remain a strong competitor in some labour-intensive goods, such as clothing and footwear, and assembly operations in high-tech sectors. This last may pose stiff competition to the second-tier East Asian newly industrializing economies and other middle-income emerging markets like Mexico.

While China has liberalized from a position of strength, unlike the “big-bang liberalization” approach followed by many developing countries, the Chinese economy will not be immune to the kind of difficulties experienced by countries that shifted rapidly from import substitution to outward orientation, and difficulties may arise for China mainly in sectors dominated by the state-owned enterprises and in agriculture. (See the article “Opportunities and difficulties from China’s WTO accession” in this issue.)

While not providing a detailed assessment of the Chinese accession terms, TDR 2002 brings out that the main beneficiaries of China’s accession to the WTO are the corporations of the United States and Europe, that the accession terms pose some serious risks for China, and that it needs to undertake some policy measures to ensure a smooth adjustment to new conditions.

Chinese policymakers will readily agree with many of the conclusions hinted at, and in fact a careful reading of Chinese pronouncements inside China clearly bring these out. Chinese policymakers and officials may have even welcomed such an assessment, even if it would have ruffled feathers at the WTO and the major trading powers.

At his press conference on 26 April, Ricupero was asked about the contrast between the policy analysis and conclusions in Chapter III and the absence of any assessment or conclusions in the chapter on Doha as well as on the accession terms of China.

Ricupero explained that the interesting analysis in Chapter III was of a different nature from the chapter on the Doha work programme. Any judgement on the negotiations would depend on the dynamics of those negotiations.

However, anyone who reads Chapter III can be clear on the conclusion that developing countries need freedom of manoeuvre to implement the kind of policies that South Korea, Taiwan and Singapore adopted. “More detailed conclusions cannot be drawn on the negotiations, without going into the details of the proposals on the table. This is something that is evolving gradually,” he added.

A Chinese media person expressed surprise at the TDR’s failure to mention the trade concessions that China has had to make to accede, and whether China could have sufficient policy space in view of the conditions of accession in such areas as trade-related investment measures (TRIMs), agriculture, subsidies, anti-dumping, etc.

“They are not mentioned specifically because they are well-known,” said Ricupero. There has been a broad debate both outside and inside China, and the chapter had not attempted to provide an exhaustive description of China’s negotiations, and there were many aspects, such as agriculture, that had not been covered. The aim of the report was to give some essential information about the negotiations and, of course, the challenges that lay ahead.

“We emphasize very well that these challenges are very great and we do not minimize them.” It was clear from the chapter that the Chinese authorities had shown wisdom and flexibility, and “we trust that China, which has been so successful over the last 21 years in adapting and growing, can flexibly resolve these problems. They are certainly aware of the difficulties of these challenges.”


In his overview of TDR 2002, Ricupero says: “It is a sign of troubled times when, in the search for solutions to the most pressing policy challenges of the day, it is considered necessary to look to earlier generations for guidance.” He is referring to the talk about a Marshall Plan to fight global poverty, a Tobin tax to check financial instability and a Keynesian spending package to combat deflationary dangers.

“The source of the trouble,” says the overview, “is the gap between the rhetoric and the reality of a liberal international economic order. Nowhere is this gap more evident than in the international trading system. Even as governments extol the virtues of free trade, they are only too willing to intervene to protect their domestic constituencies that feel threatened by the cold winds of international competition.”

“Such remnants of neo-mercantilist thinking have done much to unbalance the bargain struck during the Uruguay Round” of multilateral trade negotiations which established the WTO, he says.

Since the Seattle Ministerial Conference of the WTO in 1999, there has been a renewed effort to address the concerns of developing countries, “culminating in a different kind of bargain struck at Doha.”

By agreeing to a comprehensive programme of work and negotiations, developing countries “have demonstrated their commitment to tackling global political and economic threats; in return they expect that development concerns will be central to the negotiations,” Ricupero says in the overview, adding: “The challenge is now to translate an expanded negotiating agenda into a genuine development agenda.”

The overview recalls the statement of Raul Prebisch, then Secretary-General of UNCTAD, in 1964 at UNCTAD I that “developing countries must not be forced to develop inwardly, which will happen if they are not helped to develop outwardly through appropriate international policy.” Prebisch had said it would be undesirable to accept recommendations that would lower mass consumption to increase capitalization, and that the free play of market forces between unequal trading partners would only punish poorer commodity exporters at the same time as it brought advantages to the rich industrialized countries. Hence his recommendations for creating external policy conditions to accelerate the rate of growth, including new modalities for participation in the trading system, guaranteeing price stabilization and increased market access for primary commodities, greater policy space to develop local industries and reduce barriers to their exports, more appropriate terms of accession to the multilateral system and reducing the burden of debt service.

“Although the participation of developing countries in the trading system has since gone through important changes, the minimum agenda put forward by Prebisch remains the basis for rebalancing that system in support of development,” Ricupero adds in the overview.

TDR 2002 (in Chapter III) brings out the fallacy of composition (once thought to be a problem in commodity export trade) in exports of manufactures as a result of “excessive competition among developing countries.”

Developing countries, said Akyüz, are in fact competing on the basis of price and wages of labour. Labour markets in the South are more flexible than in the North, and this has effects on greater competition and instability of markets in manufactures exported by the developing countries. “In fact the burden of adjustment falls on the labour in the South,” he added.

The report argues that national trade strategies are far more important in order to make trade serve development. The report brings out clearly that the “one-size-fits-all” approach incorporated in the current trade negotiations will have serious negative effects in terms of the interests of the South. (SUNS5010)

From TWE No. 279 (16-30 April 2002)