Structural economic imbalances justify reopening WTO rules

Developing countries have a legitimate reason for reopening the various multilateral trade agreements in the WTO as under the current trade regime they are experiencing more trade deficits while growing less, stated UNCTAD’s Chief Economist in a speech at the TWN seminar.

Yilmaz Akyuz

DEVELOPING countries have been raising a number of questions and issues about ‘implementation problems’ at the World Trade Organisation.

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 the ability to grow at a rate of 5-6% 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 like trade-related aspects of intellectual property rights (TRIPS), trade-related investment measures (TRIMs), etc., nor even the impact on the developing world of commitments, import liberalisation, lack of market access, de-industrialisation, jobs, income distribution, and the rest.

What I want to focus on is what the agreements and the system mean for the balance of payments (BOP), thus putting the whole thing in the macro-context.

In the past 10 years, some developing countries believed that in a world of free movement of capital, BOP constraints are irrelevant. In fact this idea was promoted from Washington, that is, if you leave yourself to free-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.

Higher trade deficits, lower growth

We in the UN Conference on Trade and Development (UNCTAD), in the Division on Globalisation and Strategies for Development, looked at this question in a comprehensive way, in the 1999 Trade and Development Report (TDR).

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%, 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 a downward trend in the terms of trade.

Then we looked at finance. What we found was that despite all the hype about capital flows, developing countries did not, even before the Asian crisis, receive, as a proportion of their income, more capital flows than they did before the debt crisis. This hype arose because we had suffered 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 special and differential 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 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, the US and others open up their markets. This was about 3-4 times the average annual 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, which - in a world where developing countries are relying on exports - is the worst thing that can happen.

Can currency devaluation help?

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). This new position is that the reason why developing countries really suffer from increasing trade deficits is because they liberalised finance, which effectively created these 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 actually have 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 deficits.

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 very low economic growth. This means currency devaluations are not a recipe for addressing structural trade deficits.

This takes us to an important issue, namely, that the BOP safeguard provisions in the WTO are designed for temporary disturbances and disequilibria. That is, countries can apply certain trade measures on the grounds that they have an unviable BOP. This is looked upon as 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 take into account.

In my view, if one takes an economic 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 directed our attentions in the report to 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 independently 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 are still suffering from large structural deficits - then the question is: how do we approach this matter of the BOP in the context of the WTO?

From a purely economic viewpoint, that should give legitimate reason to question the existing trading arrangements, because what we are facing is not a temporary BOP disequilibrium as is incorporated in the WTO provisions but a structural BOP disequilibrium 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 thereon in our TDR 1999. One of those cases was that of India and we remarked that the existing WTO/GATT provisions on the BOP actually did not recognise that we are living in a world of open capital markets.

If you go to Washington, developing countries are advised to hold reserves at a level 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 the financial architecture is linking reserves to capital-account risks and vulnerability, whereas the BOP provisions of the WTO are linking these reserves to the current account. So there is a case of incoherence on the side of finance and on the side of trade.

Whichever way we look at it, then, it appears that in today’s trade regime, whether a country imposes financial restrictions on capital flows and has some room to adjust its currency or whether it leaves 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 5-6% growth with stability.

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

Yilmaz Akyuz is Chief Macroeconomist and Officer-in-Charge of the Division on Globalisation and Development Strategies at the United Nations Conference on Trade and Development (UNCTAD). The above is based on his oral presentation during a panel on ‘implementation issues’ in the WTO at the Third World Network seminar on ‘Current Developments in the WTO: Perspective of Developing Countries.