The Bangkok Post
GUEST COLUMN / TRADE LIBERALISATION
With many developing economies still struggling with the implications of the Uruguay Round four years ago, where's the sense in talk of further trade liberalisation?
Martin Khor
Trade liberalisation can cause imports to surge without a corresponding surge in exports. This can cause the widening of trade deficits, deterioration in the balance of payments and the continuation or worsening of external debt.
Why are there so many criticisms that the global free-market or free trade system has not benefited countries or people equally? That there is a growing gap between rich and poor countries? And that trade liberalisation has caused problems to developing countries, especially the poorer ones?It is often asserted in the mainstream literature that there has been growth for all, that liberalisation has benefited "the world", etc. But such generalisations are a fallacy. It is simply not true that "we are all gainers, there are no losers", as some leading proponents of the Uruguay Round and the WTO would have it. Some have gained more than others; and many (especially the poorest countries) have not gained at all but may well have suffered severe loss to their economic standing. In fact only a few countries have enjoyed moderate or high growth in the last two decades whilst an astonishing number have actually suffered declines in living standards (measured in per capita income). The UN Development Programme's Human Development Report 1999 (page 31) states: "The top fifth of the world's people in the richest countries enjoy 82 percent of the expanding export trade and 68 percent of foreign direct investment-the bottom fifth, barely more than 1 percent. These trends reinforce economic stagnation and low human development. Only 33 countries managed to sustain 3 percent annual growth during 1980-96. For 59 countries (mainly in Sub-Saharan Africa and Eastern Europe and the CIS) GNP per capita declined. Economic integration is thus dividing developing and transition economies into those that are benefiting from global opportunities and those that are not." One of the important things to understand about trade liberalisation is that if it is imposed upon countries that are not ready or able to cope, it can contribute to a vicious cycle of financial instability, debt and recession. A clear explanation of why trade liberalisation often leads to negative results is found in Unctad's Trade and Development Report 1999. It focuses on the behaviour and balance between imports and exports, and finds that rapid trade liberalisation has contributed to the widening of the trade deficit in developing countries in general. The report finds that rapid trade liberalisation led to a sharp increase in imports but that exports failed to keep pace. For developing countries (excluding China) the average trade deficit in the 1990s is higher than in the 1970s by 3 percentage points of GDP while the average growth rate is lower by 2 percentage points. This latest important Unctad finding corresponds with several recent studies that show there is no automatic correlation between trade liberalisation and growth. Countries that rapidly liberalised their imports did not necessarily grow faster than those that liberalised more gradually. The problem in trade liberalisation is that a country can control how fast to liberalise its imports (and thus increase the inflow of products) but cannot determine by itself how fast its exports grow. Export growth partly depends on the prices of the existing exported products (and developing countries have suffered from serious declines in their terms of trade) and also on having or developing the infrastructure, human and enterprise capacity for new exports (which is a long term process and not easily achieved). It also depends on whether there is market access especially in developed countries. Herein lies a major problem beyond the control of the South, for as is well known there are many tariff and non-tariff barriers in the North to the potential exports of developing countries. Unless these barriers are removed, the South's export potential will not be realised. Thus, trade liberalisation can (and often does) cause imports to surge without a corresponding surge in exports. This can cause the widening of trade deficits, deterioration in the balance of payments and the continuation or worsening of external debt, all of which constrain growth prospects and often result in persistent stagnation or recession. This should lead us to conclude that trade liberalisation should not be pursued automatically or rapidly and in a "big bang" manner. Rather, what is important is the quality, timing, sequencing and scope of liberalisation (especially import liberalisation), and how the process is accompanied by (or preceded by) other factors such as the strengthening of local enterprises and farms, human resource and technological development, as well as the build up of export capacity and markets. A logical conclusion must be that if conditions for success are not present yet in a country, then to proceed with liberalisation can lead to specific negative results or even a general situation of persistent recession. Thus to pressurise such countries to liberalise would be to help lead them into an economic quagmire. Developing countries must have the ability, freedom and flexibility to make strategic choices in finance, trade and investment policies, where they can decide on the rate and scope of liberalisation and combine this appropriately with the defence of local firms and farms. And this is why there should be a freeze on further steps to impose more liberalisation on developing countries through new issues. The rich countries must now correct the imbalances and inequities in the world trading system-they should increase their market access to products from developing countries, but they should not press the developing countries to further open up. Developing countries should be allowed to choose their own rate of liberalisation.
URUGUAY ROUND HANGOVERS
One of the reasons the developing countries are reluctant to endorse new initiatives or new issues at the World Trade Organisation (WTO) meeting in Seattle is because they are still struggling with serious problems in their having to implement the Uruguay Round. The Uruguay Round resulted in several new legally-binding agreements that require developing countries to make drastic changes to their domestic economies in such diverse areas as services, agriculture, intellectual property and investment measures. Many developing countries did not have the capacity to follow the negotiations, let alone participate actively, and did not really understand what they committed themselves to. Some of the agreements have a grace period of five years before implementation. That period will be over at the end of this year. The problems they will encounter from having to implement these agreements are thus only starting and are bound to get worse. The following are some of their major problems:(a) having to liberalise their industrial, services and agriculture sectors will cause dislocation to the local sectors, firms and farms as these are generally small or medium sized and unable to compete with bigger foreign companies or cheaper imports and this could threaten the jobs and livelihoods of millions;(b) the Uruguay Round removed or severely curtailed the developing countries' space or ability to provide subsidies for local industries (due to the subsidies agreement) and their ability to maintain some investment measures such as requiring that investors use a minimum level of local materials in their production (this is prohibited by the trade-related investment measures agreement);(c) the TRIPS (trade-related intellectual property rights) agreement prevents local firms from absorbing or internalising some technologies over which other corporations (mainly foreign firms) have intellectual property rights; this would curb the adoption of modern technology in the South; also, prices of medicines and other essential products are expected to rise significantly when the new intellectual property rights regime takes effect in the next few years. Martin Khor is the director of the Third World Network based in Penang. This article is excerpted from the presentation he made at the World Economic Forum meeting at Davos, Switzerland on 28 January 2000.:
