New threat to state's economic role

The economically successful developing countries are characterised as having a strong 'developmental state'.  But this role of the state is coming under attack in new trade agreements such as the TPPA.

Martin Khor

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TWO new trade agreements involving the two economic giants, the United States and the European Union, are leading a charge against the role of the state in the economy in developing countries.

Attention should be paid to this initiative as it has serious repercussions on the future development plans and prospects of the developing countries.

The role of the state, or of government, in development is a subject of longstanding and important discussion. In fact, some economists and analysts consider it perhaps the most important issue that determines the difference between economic success and failure in developing countries.

The immediate post-colonial period saw a tendency to a strong state, including government ownership of some key sectors, including industry and banking.

Past decades have witnessed a wave of privatisation across both rich and developing countries. But the state still owns or controls utilities, infrastructure, public services, banks and a few strategic industries in many developing countries.

State enterprises or commercially run companies owned by or partially linked to the government play an important role in many a developing country.

Private companies also receive state assistance and support in many ways, including loans to small and medium enterprises and farmers, subsidies and tax breaks for research and development or technology purchase, preferences in government procurement, and infrastructure provision including in special economic zones.

Countries provide incentives for foreign companies, such as tax-free status. However, the state also has special treatment for local companies, such as grants, cheaper-than-normal credit and subsidies, and government contracts.

Under attack

The developmental role of the state in developing countries is now coming under attack from developed countries.

This is promoted by the big companies in the US, Europe and Japan, which seek to enter the markets of developing countries which are the source of their future profits.

The support given by the state to domestic companies is seen by the multinational companies as a hindrance to their quest for expanded market share in developing countries. They are thus seeking to change the worldview and policy framework in developing countries, to get them to reduce the role of state enterprises as well as to curb the government's promotion of local private companies.

The two latest big attempts towards this are through the proposed Trans-Pacific Partnership Agreement (TPPA) and Trans-Atlantic Trade and Investment Partnership (TTIP).

A sub-chapter on state-owned enterprises (SOEs) is a prominent part of the TPPA. The US and Australia are leading the move to have rules to discipline the role of the government in the economy, through a two-pronged approach. The first is to get government or other monopolies to behave in a 'non-discriminatory' way, including when they buy or sell goods and services. This includes prohibition against their giving preferences or incentives to local firms.

Secondly, companies that are linked to the government (including through a minority share) should not get advantages vis-a-vis other firms in commercial activities. Of course the developed countries that are proposing this are thinking of their companies - how they can get more access to developing countries' markets.

In the TTIP, a US-EU agreement for which negotiations started in July, the EU is preparing a sub-chapter on SOEs with rules that seem quite similar to what the US and Australia are proposing in the TPPA.

Although the TTIP only involves Europe and the US directly, the rules it sets are intended to have consequences for other countries. According to press reports, the two economic giants are planning that the TTIP rules will become the standard or template for future bilateral agreements that also include developing countries. They also hope that these rules will be internationalised in the World Trade Organisation, which has over 150 member states.

The EU's position paper on SOEs says that its aim is to 'create an ambitious and comprehensive standard to discipline state involvement and influence in private and public enterprises'. It adds that 'this can pave the way to other bilateral agreements to follow a similar approach and eventually contribute to a future multilateral engagement'.

In other words, the constraints on the role of the state, and the reduction of the space for behaviour or operations of state-linked companies, will become the way of the future for all countries, if the US and European plans succeed.

What is moving these countries in this direction?  It is quite well known that the negotiating positions of the developed countries are greatly influenced and in fact driven by their big companies. Their trade policymakers and negotiators usually act on behalf of these companies.

Reports by the specialist trade bulletin Inside US Trade show how corporate groups like the US Chamber of Commerce and the Coalition of Services Industries have been pushing for the new rules on SOEs, and also how they are seeking to open up the markets of developing countries especially China.

These attempts to curb the role of the state in the economy are worthy of serious study and counter-action.

Developing countries that succeeded in economic development were able to combine the roles of the public and private sectors in a partnership that advanced overall national development. Asian countries, including Japan, South Korea, Malaysia, Singapore and China, have pioneered this model of public sector collaboration with the private sector.

Those few developing countries that managed to get development going were all driven by the 'developmental state', or the leadership role of government in establishing the framework of economic strategy, and the collaboration between the state, state enterprises and commercial companies, including those in which the state has an interest.

If developing countries have to come under new international rules that curb the role of the state and that reshape the structure of their economies, then the prospects for future development will be adversely affected.                                     

*Third World Resurgence No. 275, July 2013, pp 16-17