UNITED NATIONS CONFERENCE ON TRADE AND DEVELOPMENT
DISCUSSION PAPERS
GLOBALIZATION AND THE SOUTH:
SOME CRITICAL ISSUES
Martin Khor
The text of this paper was circulated at the South Summit, held in
Havana, Cuba, on 10–14 April 2000.
UNCTAD/OSG/DP/147
The opinions expressed in this paper are those of the author and do not
necessarily reflect the views of UNCTAD. The designations and terminology employed are also
those of the author.
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Table of contents
INTRODUCTION
I. THE GLOBALIZATION PROCESS
II. KEY ISSUES IN TRADE
III. KEY ISSUES IN FINANCE
IV. ISSUES IN INVESTMENT LIBERALIZATION
V. GENERAL CONCLUSIONS AND PROPOSALS
REFERENCES
GLOBALIZATION AND THE SOUTH:
SOME CRITICAL ISSUES
Martin Khor
Director, Third World Network, Penang, Malaysia
This paper examines the implications of some of the main features of the
globalization process for developing countries. It also makes several proposals for developing
countries in considering national-level policies to face the globalization challenge, as well as
coordination among developing countries in facing negotiations or making proposals at the international
level.
While there are many aspects to globalization, among the most important
is the recent globalization of national policy-making not only through the normal
spread of orthodox theories but more importantly through international agencies, such as the Bretton
Woods institutions and the World Trade Organization, through which the North has leverage over the
South.
The paper examines the liberalization of trade, finance and investment as
well as policy implications and choices in each of these categories. It is argued that,
while there are some advantages to an open regime for developing countries, the impact of
openness depends on a country’s level of development and preparedness to take on the
challenges of subjecting local production units to foreign competition, of being able to break into
world markets, and of weathering the volatility and fickleness of private capital flows and their
propensity for lending recipient countries into a debt trap.
It is therefore imperative that developing countries be given the
possibility to have an adequate range of options, of when, how and to what extent to open their
economies. For them to maintain the choice of flexibility in policy options, developing countries have to
collectively press their case in international forums and institutions where decisions on the global
economy are made. Failure in doing so would mean that developing countries will continue to be
subjected to international and national policies that are unsuitable to their development, and that more
than ever close off their development prospects and options.
Introduction
Globalization has become the defining process of the present age. While
the opportunities and benefits of this process have been stressed by its proponents and
supporters, recently there has been increasing disillusionment among many policy makers in the South,
analysts and academics, as well as the community of non-governmental organizations (NGOs) in both
the South and the North. The failure of the Seattle Ministerial Conference of the World
Trade Organization in December 1999 is a signal of this disillusionment.
The reasons for the changing perception of and attitude towards
globalization are many. Among the important factors are the lack of tangible benefits to most
developing countries from opening their economies, despite the well-publicized claims of export and
income gains; the economic losses and social dislocation that are being caused to many
developing countries by rapid financial and trade liberalization; the growing inequalities of wealth
and opportunities arising from globalization; and the perception that environmental, social and cultural
problems have been made worse by the workings of the global free market economy.
This paper examines the nature of economic globalization, some of its key
aspects (financial, trade and investment liberalization), and recent developments and the
implications for the South. It also provides proposals and suggestions on what could be done to
reduce the negative aspects of globalization, and in particular what the countries of the South can
do at the national and international levels to reduce the risks involved in (and better manage)
the interface between the national economy and the global economy.
While globalization is facilitated and influenced by technological
developments such as modern information and communications technology, the paper argues that
the process is mainly driven and enabled by policy choices at the global and national levels
that in recent years have led to the rapid liberalization of finance, trade and investment. Although
developing countries have been very much a part of this process of rapid integration, the
decision-making processes in the making of these policy choices have in the main been dominated by
governments of the developed countries and by international institutions that are mainly under their
control or influence.
The latest round of financial crises, starting with what happened in East
Asia in 1997, the widespread doubts over the appropriateness of the standard policy
responses to the crisis by international financial institutions, and the failure of the WTO’s
Seattle meeting, have catalysed a serious rethinking of the orthodox policies and approach to
globalization and liberalization.
The rethinking exercise, which was most recently given a platform at
UNCTAD’s Tenth Conference in Bangkok in February 2000, provides an opportunity for the
South to take a more active role in reviewing recent developments in the global economy, their
impact on developing countries, and the role these countries can play in reversing the
negative aspects, while taking positive measures individually and collectively in pursuing more
appropriate policy options and negotiating strategies (UNCTAD, 2000).
This paper is organized into five chapters, following a brief
introduction. Chapter I summarizes the main features of globalization, including economic
liberalization, the globalization of policy-making, and the unbalanced nature and effects of the process.
The next three chapters then examine the major aspects of economic globalization. Chapter II
discusses trade liberalization, some recent findings on its effects, and recent developments in the WTO.
Chapter III discusses financial liberalization, including the recent round of financial crises,
the risks of volatile short-term capital flows, and deficiencies in the present financial system. Chapter
IV discusses investment liberalization, the nature of foreign direct investment (FDI) and the
implications of the proposals and moves for international agreements on investment. In Chapters I, II
and III, lessons to be learnt from the experiences of liberalization and proposals for improving the
situation are provided. Finally, chapter V draws some general conclusions and provides some
general proposals.
I. THE GLOBALIZATION PROCESS
A. The liberalization of trade, finance and investment
Economic globalization is not a new process, for in the past five
centuries firms in the economically advanced countries have increasingly extended their outreach
through trade and production activities (intensified in the colonial period) to territories
all over the world. However, in the past two to three decades, economic globalization has accelerated
as a result of various factors, such as technological developments but especially the policies
of liberalization that have swept across the world.
The most important aspects of economic globalization are the breaking
down of national economic barriers; the international spread of trade, financial and
production activities and the growing power of transnational corporations and international financial
institutions in these processes. While economic globalization is a very uneven process, with
increased trade and investment being focused in a few countries, almost all countries are
greatly affected by this process. For example, a low-income country may account for only a
minuscule part of world trade, but changes in demand or prices of its export commodities or a policy of
rapidly reducing its import duties can have a major economic and social effect on that country. That
country may have a marginal role in world trade, but world trade has a major effect on it,
perhaps a far larger effect than it has on some of the developed economies.
The external liberalization of national economies involves breaking down
of national barriers to economic activities, resulting in greater openness and integration of
countries in the world markets. In most countries, national barriers are being removed in the
area of finance and financial markets, trade and direct foreign investment.
Of the three aspects of liberalization (finance, trade and investment),
the process of financial liberalization has been the most pronounced. There has been progressive
and extensive liberalization of controls on financial flows and markets. The demise of
the Bretton Woods system in 1972–1973 opened up an international trade in foreign exchange that
has expanded at spectacular rates. The volume traded in the world foreign exchange market
has grown from a daily average of $15 billion in 1973 to over $900 billion in 1992 and now far
exceeds $1,000 billion. Much of this transaction is speculative in nature, as it is estimated
that only a small portion (less than 2 per cent) of the foreign exchange traded is used for trade
payments.
Due to the interconnectedness of financial markets and systems and the
vast amounts of financial flows, there is a general and increasing concern about the
fragility and vulnerability of the system, and the risk of breakdown in some critical parts or in the
general system itself as a fault developing in one part of the world or in the system can have widespread
repercussions.
The concerns about a possible global financial crisis have been
heightened by the East Asian financial crisis that began in the second half of 1997 and which spread
to Russia, Brazil and other countries, causing the worst financial turmoil and economic recession in
the post World War II period.
Trade liberalization has also gradually increased, but not at such a
spectacular pace as with finance. World exports rose from $61 billion in 1950 to $315 billion in
1970 and $3,447 billion in 1990. The share of world exports in world GDP rose from about 6 per
cent in 1950 to 12 per cent in 1973 and 16 per cent in 1992 (Nayyar, 1997). The increased role
of trade has been accompanied by the reduction in tariff barriers generally in both
developed and developing countries, due partly to autonomous policies and partly to the series of
multilateral trade Rounds under GATT. However, high tariffs still persist in developed countries in
sectors such as agriculture and textiles and for selected manufactured products, which
are areas in which developing countries have a comparative advantage. Moreover, there has
been an increased use of non-tariff barriers which have affected the access of developing
countries to the markets of developed countries.
There has also been a steady growth in liberalization of FDI, although
again on a smaller scale than in international financial flows. Much of FDI and its increase
are due to flows among the advanced countries. However, since the early 1990s, FDI flows to
developing countries have risen relatively, averaging 32 per cent in 1991–1995 compared with 17
per cent in 1981–1990. This coincides with the recent liberalization of foreign investment
policies in most developing countries. However, much of this FDI has centred in only a few developing
countries. LDCs in particular are receiving only very small FDI flows, despite having
liberalized their policies. Thus, FDI is insignificant as a source of external finance to most developing
countries, and is likely to remain so in the next several years.
A major feature of globalization is the growing concentration and
monopolization of economic resources and power by transnational corporations and by global
financial firms and funds. This process has been termed “transnationalization”, in which
fewer and fewer transnational corporations are gaining a large and rapidly increasing proportion of
world economic resources, production and market shares. Where a multinational company used to
dominate the market of a single product, a big transnational company now typically produces or
trades in an increasing multitude of products, services and sectors. Through mergers and
acquisitions, fewer and fewer of these TNCs now control a larger and larger share of the global market,
whether in commodities, manufactures or services. The top 200 global corporations accounted for
$3,046 billion of sales in 1982, equivalent to 24 per cent of world GDP ($12,600 billion) that
year. By 1992, their sales had reached $5,862 billion, and their equivalent value to world GDP
($21,900 billion) had risen to 26.8 per cent.
B. The globalization of policy-making
Perhaps the most important and unique feature of the current
globalization process is the “globalization” of national policies and policy-making mechanism.
National policies (including in economic, social, cultural and technological areas) that until recently
were under the jurisdiction of States and people within a country have increasingly come under the
influence of international agencies and processes or by big private corporations and
economic/financial players. This has led to the erosion of national sovereignty and narrowed the ability of
governments and people to make choices from options in economic, social and cultural policies.
Most developing countries have seen their independent policy-making
capacity eroded, and have to adopt policies made by other entities, which may on balance be
detrimental to the countries concerned. The developed countries, where the major economic players
reside, and which also control the processes and policies of international economic agencies,
are better able to maintain control over their own national policies as well as determine the
policies and practices of international institutions and the global system. However, it is also
true that the large corporations have taken over a large part of decision-making even in the developed
countries, at the expense of the power of the State or political and social leaders.
Part of the erosion of national policy-making capacity is due to the
liberalization of markets and developments in technology. For example, the free flow of capital,
the large sums involved, and the unchecked power of big players and speculators, have made it
difficult for countries to control the level of their currency and the flows of money in and out of
the country. Transnational companies and financial institutions control such huge resources, more
than what many (or most) governments are able to marshal, and thus are able to have great policy
influence in many countries. Certain technological developments make it difficult or
virtually impossible to formulate policy. For example, the establishment of satellite TV and the
availability of small receivers, and the spread of the use of electronic mail and the Internet make it
difficult for governments to determine cultural or communications policy, or to control the spread of
information and cultural products.
However, an even more important aspect is the recent process by which
global institutions have become major makers of an increasingly wide range of policies that
are traditionally under the jurisdiction of national governments. Governments now have to
implement policies that are in line with decisions and rules of these international institutions. The
key institutions concerned are the World Bank, the IMF and the WTO.
There are also other influential international organizations, in
particular the United Nations, its agencies, treaties and conventions and world conferences. However, in
recent years, the UN has lost a lot of its policy and operational influence in economic and
social matters, and correspondingly the powers and authority of the World Bank, IMF and
GATT/WTO have expanded.
The Bretton Woods institutions wield tremendous authority in a majority
of developing countries (and countries in transition) that depend on their loans. In
particular, countries requiring debt rescheduling have to adopt structural adjustment policies (SAPS)
that are mainly drawn up in the Washington institutions. SAPS cover macroeconomic policies and
recently they also cover social policies and structural issues such as privatization, financial
policy, corporate laws and governance. The mechanism of making loan disbursement conditional on
these policies has been the main instrument driving the policy moves in the indebted developing
countries towards liberalization, privatization, deregulation and a withdrawal of the State
from economic and social activities. Loan conditionalities have thus been the major mechanism for
the global dissemination of the macroeconomic policy packages that are favoured by governments of
the North.
The Uruguay Round negotiations greatly expanded the powers of the GATT
system, and the Agreements under the GATT’s successor organization, the WTO, have
established disciplines in new areas beyond the old GATT, including intellectual property rights,
services, agriculture and trade-related investment measures. According to several analyses, the
Uruguay Round has been an unequal treaty, and the WTO Agreements and system (including the
decision-making system) are weighted against the interests of the South. The existing agreements
now require domestic legislation and policies of member States to be altered and brought into
line with them.
Non-compliance can result in trade sanctions being taken against a
country’s exports through the dispute settlement system, thus giving the WTO a strong enforcement
mechanism. Thus, national governments have to comply with the disciplines and obligations in the
already wide range of issues under WTO purview. Many domestic economic policies of developing
countries are thus being made in the WTO negotiations, rather than in Parliament,
bureaucracy or Cabinet at the national level.
There are now attempts by Northern governments to expand the jurisdiction
of the WTO to yet more areas, including rights to be granted to foreign investors,
competition policy, government procurement practices, labour standards and environmental standards. The
greater the range of issues to be taken up by the WTO, the more will the space for national
policy-making (and development options) in developing countries be whittled away.
Another major development is the proposal for a multilateral agreement on
investments (MAI). The attempts at an MAI in the OECD have failed so far and attempts
have been made to begin negotiations at the WTO for an international investment agreement.
The original MAI model would require signatory States to remove barriers to the entry and
operations of foreign companies in almost all sectors, allow them full equity ownership, and to treat
foreign investors at least as well as local investors and companies. There would also be no controls over
the inflow and outflow of funds, and requirements for technology transfer or other social goals
would be prohibited. The MAI and similar types of investment agreements would be another major
instrument in getting developing countries to open up their economies, in this case in the area
of investment.
However, while the World Bank, IMF, WTO and the OECD are the most
powerful, the United Nations and its agencies also form an alternative set of global
institutions. Recent years have seen several UN World Conferences on Environment (1992), Population,
Social Development (1995), Women (1995), Habitat (1996), Genetic Resources
(1996), Food (1996), and the UNCTAD Conferences (1996 and 2000). The UN General Assembly and
its subsidiary bodies, its agencies, Conferences and legally binding Conventions, which
are much more transparent and democratic, also influence the content of globalization
and as well as national policies, at least potentially.
The UN approach in economic and social issues is different from that of
the WTO and Bretton Woods institutions. The latter promote the empowerment of the
market, a minimal role for the State, and rapid liberalization. Most UN agencies on the other hand
operate under the belief that public intervention (internationally and nationally) is necessary to
enable basic needs and human rights to be fulfilled and that the market alone cannot do the job
and in many cases hinders the job being done.
The Bretton Woods-WTO institutions have become much more powerful than
the UN, whose authority and influence in the social and economic areas have been
depleted in recent years. As a result, the type of globalization promoted by the Bretton Woods and WTO
has predominated, while the type of globalization promoted by the UN has been sidelined.
This reflects the nature of the globalization process. The former institutions promote the principles
of liberalization, the laissez-faire market model and give high priority to commercial
interests, and thus they are given the role to lead the globalization of policy-making. The UN and its
agencies represent the principles of partnership, where the richer countries are expected to
contribute to the development of the poorer countries and where the rights of people to development and
fulfilment of social needs are highlighted. The kind of globalization represented by the UN is
not favoured by the powerful nations today, and thus the UN’s influence has been curtailed.
C. Rising inequality and the effects of globalization
“Globalization” is a very uneven process, with unequal distribution
of benefits and losses. This imbalance leads to polarization between the few countries and groups
that gain, and the many countries and groups in society that lose out or are marginalized.
Globalization, polarization, wealth concentration and marginalization are therefore linked through the
same process. In this process, investment resources, growth and modern technology are focused
on a few countries (mainly in North America, Europe, Japan and East Asian NICs). A majority
of developing countries are excluded from the process, or are participating in it in
marginal ways that are often detrimental to their interests; for example, import liberalization may
harm their domestic producers and financial liberalization may cause instability.
Globalization is thus affecting different categories of countries
differently. This process can broadly be categorized as follows: growth and expansion in the few
leading or fully participating countries; moderate and fluctuating growth in some countries attempting
to fit into the globalization/liberalization framework; marginalization or deterioration
experienced by many countries unable to get out of acute problems such as low commodity
prices and debt, unable to cope with problems of liberalization, and unable to benefit from export
opportunities.
The uneven and unequal nature of the present globalization is manifested
in the fast growing gap between the world’s rich and poor people and between developed and
developing countries; and by the large differences among nations in the distribution of gains
and losses.
The UNDP Human Development Report, 1992 estimated that the 20 per
cent of the world’s population in the developed countries receive 82.7 per cent of total
world income, while the 20 per cent of people in the poorest countries receive only 1.4 per cent (UNDP,
1992). In 1989, the average income of the 20 per cent of people living in the richest
countries was 60 times higher than that of the 20 per cent living in the poorest countries. This ratio had
doubled from 30 times in 1950.
The Human Development Report, 1996 showed that over the past three
decades, only 15 countries have enjoyed high growth, while 89 countries were worse off
economically than they were ten or more years earlier. In 70 developing countries, the present
income levels were less than in the 1960s and 1970s. “Economic gains have benefited greatly a few
countries, at the expense of many”, said the report. Since 1980, 15 countries (mainly Asian) have
had growth rates much higher than any seen during industrialization in the West. However,
economic decline for most parts of the developing world has lasted far longer and gone deeper than
during the Great Depression of the 1930s. While the rich countries mostly rebounded from
the depression within four to five years, the lost decade of the 1980s is still continuing for
hundreds of millions of people in many countries of Asia, Africa and Latin America. In some cases people
are poorer than 30 years ago, with little hope of rapid improvement.
Wider inequalities among countries as well as among income groups within
countries, which are closely associated with globalization processes, have been examined
in detail in UNCTAD’s
Trade and Development Report, 1997 (TDR.97). It shows that
since the early 1980s the world economy has been characterized by rising inequality, and North-South
income gaps have continued to widen (UNCTAD, 1997: chaps. IV-VI). In 1965 the average per
capita income of the G7 countries was 20 times that of the world’s poorest seven
countries; by 1995 it was 39 times as much. Polarization among countries has also been accompanied by
increasing income inequality within countries. The income share of the richest 20 per cent has risen
almost everywhere since the early 1980s and those at the bottom have failed to see real gains in
living standards (in many countries the per capita income of the poorest 20 per cent now averages
less than one tenth that of the richest 20 per cent) and the share of the middle class has also
fallen. The increasing inequality is noted in more and less successful developing countries, and
in all regions, including East Asia, Latin America and in Africa.
In the analysis of TDR.97, these trends are rooted in a set of
forces unleased by rapid liberalization that make for greater inequality by favouring certain
income groups over others. They include the following: growing wage inequality in both the North and the
South between skilled and unskilled workers (due mainly to declining industrial employment of
unskilled workers and large absolute falls in their real wages); capital gaining in comparison
with labour with profit shares rising everywhere; the rise of a new rentier class due to
financial liberalization and the rapid rise in debt (with government debt servicing in developing countries also
distributing income from the poor to the rich); and the benefits of agricultural price liberalization
being reaped mainly by traders rather than farmers.
There are some particularly disturbing aspects of the increased
inequality. Firstly, the increased concentration of national income in the hands of a few has not
been accompanied by higher investment and faster growth. “It is this association of
increased profits with stagnant investment, rising unemployment and reduced pay that is the real cause
for concern” (UNCTAD, 1997, chap. VI). Secondly, some of the factors causing greater inequality
in a globalizing world at the same time deter investment and slow down growth. For example: the
fast pace of financial liberalization has delinked finance from international trade and
investment; higher interest rates due to restrictive monetary policies have raised investment costs and led
entrepreneurs to focus, instead, on buying and selling second-hand assets; the premium placed by global
finance on liquidity and the speedy entry into and exit from financial markets for quick gains has
undermined the “animal spirits” needed for longer-term commitments to investment in new
productive assets; while corporate restructuring, labour shedding and wage repression have
increased job and income insecurity (UNCTAD, 1997, chap. VI).
D. Weaknesses of the South in facing the globalization challenge
Most countries of the South have been unable to reap benefits from
globalization because of several weaknesses. Nayyar (1997) examines this phenomenon of “uneven
development”, showing how globalization mainly benefits the developed world, while in
the developing world, the benefits of accrue only to a few developing countries. There are only
eleven developing countries which are an integral part of globalization in the late
twentieth century. They accounted for 66 per cent of total exports from developing countries in 1992 (up
from 30 per cent in the period 1970–1980); 66 per cent of annual FDI inflows to developing
countries in 1981–1991; and most of portfolio investment flows to the developing world. Some of these
eleven countries have since been badly affected by financial crises, debt and economic
slowdown, thus diluting further the rate of success of the South in integration in the world economy.
The South’s weaknesses stem from several factors. Developing countries
were economically weak to begin with due to the lack of domestic economic capacity and weak
social infrastructure following the colonial experience. They were made weaker by low export
prices and significant terms-of-trade decline as well as the debt crisis and the burden of debt
servicing. The policy conditionalities attached to loan rescheduling packages hampered the
recovery of many countries and led to further deterioration in social services. Given the unequal
capacities of North and South, the development of technology (especially information and communications
technologies) further widened the gap. On top of these unfavourable international factors, many
developing countries have also been characterized by dictatorships, abuse of power and
economic mismanagement, which undermined the development process. All these factors meant that
the South was in a weak position to take on the challenges of globalization, as the conditions
for success in liberalization were not present. Given the lack of conditions and preparedness, rapid
liberalization caused more harm than benefit.
The South’s weakness also stems from its lack of bargaining and
negotiating strength in international relations. Being heavily indebted and dependent on
bilateral aid donors and multilateral loan organizations, developing countries have been drained
of their capacity to negotiate (even on the terms of loan conditionalities). The powers of the
United Nations, in which the South his in a more favourable position, have been diminished,
whereas the mandate and powers of the institutions under the control of developed countries (the
IMF, World Bank and WTO) have been increased tremendously. The North has leverage in the
Bretton Woods institutions and the WTO to shape the content of globalization to serve
their needs, and to formulate policies which the developing countries have to take on.
Although the North is in a dominant position and has been prepared to use
this to further their control of the global economy, the South is also not helpless but can
better organize its responses as well as its own proposals. However, the South has a whole has not done
well in organizing itself to coordinate on substantial policy and negotiating positions, or
on strategy in relation to the discussions and negotiations in the WTO and IMF as well as other forums.
The developed countries are well placed to determine the globalization
agenda. They are well organized within their own countries, with well staffed departments
dealing with international trade and finance, and with university academics and private and
quasi-government think tanks helping to obtain information and map policies and strategies. They also have
well-organized associations and lobbies associated with their corporations and financial
institutions, which have great influence over the government departments. The developed countries also have
institutions and mechanisms helping to coordinate their policies and positions, for example the
European Commission, the OECD and the Group of Seven, and their subsidiary bodies and agencies.
In contrast, the developing countries are not well organized within their
own countries. The government departments dealing with the interface with the global economy
are understaffed, especially in relation to the rapid developments in globalization and in
global negotiations. The academic sector and the few think-tanks are not geared up to obtain and
assess information on globalization trends, and less still to formulate policy proposals that
governments can make use of. The links between these intellectual sectors, the NGOs and governments
are also often weak. The business and financial community is not organized well enough to monitor
global trends, or to lobby governments on global issues. At the regional level, there is
increasing collaboration among the countries, through regional groupings. However, cooperation is still
not as sophisticated as in the European Union. At the international level, the South is organized
through the Group of 77 and the Non-Aligned Movement. These groupings often perform reasonably
effectively within the UN framework and at UN meetings and Conventions. However, they are not
adequately staffed, they are unable to keep track adequately of events and developments, or to
formulate longer-term policies and strategies. At the WTO, IMF and World Bank, the collective
strength of developing country members has yet to be manifested in a strong way, although there
are encouraging signs of more collaboration, for example at the WTO.
II. KEY ISSUES IN TRADE
A. General
Openness to international trade is not a recent phenomenon for developing
countries. In the colonial period, they had related to the world market mainly as exporters
of raw materials while importing manufactures. This division of labour is still prevalent for a
large number of developing countries, whose exports comprise mainly a few commodities. Perhaps the
most important aspect of globalization in trade for a majority of developing countries is the
continuing decline in the terms of trade for their commodity exports vis-à-vis their imports of
manufactures. The decline has become more acute in recent years, and has been responsible for the
transfer of a huge volume of real resources from commodity-exporting developing countries through the
mechanism of income losses arising from terms-of-trade changes. Other problems facing
developing countries have been the pressures for import liberalization, under loan conditionality; the
imbalances in the Uruguay Round agreements; the lack of benefits relative to expectations accruing
from the Uruguay Round; and the problems arising from their having to fulfil several of the WTO
Agreements. These issues are discussed in this Part III.
B. Commodity prices and terms of trade
The colonial pattern of trade, in which colonies exported raw materials
and colonial master countries specialized in producing industrial products, has continued in
the main to the present. Many Southern countries still mainly export primary commodities (mainly
to the North) and import industrial products (mainly from the North). As the terms of trade of
commodities has been falling continuously against manufactured goods, many Southern countries have
suffered tremendous losses.
According to United Nations data, the terms of trade of non-fuel
commodities vis-à-vis manufactures fell from 147 in 1980 to 100 in 1985 to 80 in 1990 and 71 in
1992. This sharp 52 per cent fall in terms of trade between 1980 and 1992 had catastrophic
effects. A paper by the secretariat of the United Nations Conference on Environment and
Development (UNCED) in 1991 showed that for sub-Saharan Africa, a 28 per cent fall in terms of
trade between 1980 and 1989 led to an income loss of $l6 billion in 1989 alone. In the four
years 1986–1989, sub-Sahara Africa suffered $56 billion income losses, or 15–l6 per cent of GDP in
1987–1989. The UNCED study also showed that for 15 middle-income highly indebted countries,
there was a combined terms of trade decline of 28 per cent between 1980 and 1989, causing an
average of $45 billion loss per year in the 1986–1989 period, or 5–6 per cent of GDP (Khor,
1993).
In the 1990s decade, the general level of commodity prices fell even more
in relation to manufactures, and many commodity-dependent developing countries have
continued to suffer deteriorating terms of trade. According to Trade and Development
Report, 1999 (TDR.99; UNCTAD, 1999a: 85), oil and non-oil primary commodity prices fell by 16.4
and 33.8 per cent respectively, from the end of 1996 to February 1999, resulting in a
cumulative terms-of-trade loss of more than 4.5 per cent of income during 1997–1998 for developing
countries. “Income losses were greater in the 1990s than in the 1980s not only because of larger
terms-of-trade losses, but also because of the increased share of trade in GDP.” Moreover, the
prices of some key manufactured products exported by developing countries have also
declined. For example, the Republic of Korea experienced a 25 per cent fall in the terms of trade of
its manufactured exports between 1995 and 1997 due to a glut in the world market (UNCTAD, 1999a:
87).
The income losses from falling terms of trade probably constitute the
largest single mechanism by which real economic resources are transferred from South to North.
These losses adversely affect the sustainable development prospects of the South, as they
contribute to the debt problem and to persistent poverty in many communities.
The world trading system has been favouring the exporters of manufactured
goods, while proving to be disadvantageous to the many developing countries whose main
participation in global trade has been the export of raw materials and commodities and the
import of finished products. Many Southern countries have lost their self-reliance in terms
of producing their own food, as lands were converted to export crops that in many cases yielded
unsatisfactory results in terms of instability of price and demand.
Attempts were made by developing countries to obtain fairer prices and
more stable demand conditions for their commodities through commodity agreements involving
producer and consumer countries, under the auspices of UNCTAD. Most of these agreements
collapsed when the industrial countries, which are the main consumers of commodities,
withdrew support in the l980s. Many Southern countries, especially in Africa, are thus today even more
subjected to the vagaries of the commodity markets.
With oversupply of many commodities and stagnating demand and trend
decline in prices, many developing countries still dependent on commodity exports have been
trapped in a bad corner of the world trading system.
The commodities situation may worsen for developing countries should
major consumer countries (in the North) develop laboratory substitutes for natural
commodities through the use of biotechnology. There would be more displacement of the South’s export
commodities.
Proposals
-
The problem of trend decline in commodity prices and in the South’s
terms of trade should be seriously addressed through an international conference or
convention, or other institutional mechanisms. It is imperative that such huge income
losses incurred by poor countries should be stemmed.
-
Countries could reconsider their attitude towards commodity
agreements or other methods of cooperation between producers and consumers since leaving
commodity trade to the full force of monopoly markets has resulted in negative
social and environmental effects. One possibility is to initiate a new round of
commodity agreements aimed at rationalizing the supply of raw materials (to take
into account the need to reduce depletion of non-renewable natural resources) while
ensuring fair and sufficiently high prices (to reflect ecological and social values of the
resources).
-
In the absence of joint producer-consumer attempts to improve the
commodity situation, producers of export commodities could take their own
initiative to rationalize their global supply so as to better match the profile of global demand.
The recent sharp increase in the price of oil as a result of better coordination among
producing countries is a good reminder of the benefits that producers can derive through
greater cooperation.
-
An improvement of the South’s terms of trade vis-à-vis the North
would be a valuable mechanism to stem and reverse the current South-to-North flow of economic
resources. It would help create conditions for a more equitable trading system,
reduce resource wastage and unsustainable consumption patterns, and expand financial
resources in the South for the transition to sustainable development.
-
The relevant international agencies including UNCTAD should monitor
and analyse the implications of biotechnology for developing-country commodities.
Measures should be taken if impact assessments show significant negative effects
on incomes and livelihoods in the South. Signatory members of the Biosafety Protocol
under the Convention on Biological Diversity should exercize the protocol’s
mandate to consider the social implications of developments in biotechnology especially on
developing countries.
C. Trade liberalization
The benefits and costs of trade liberalization for developing countries
constitute an increasingly controversial issue. The conventional view that trade
liberalization is necessary and has automatic and generally positive effects for development is being
challenged empirically and analytically. It is timely to examine the record and to formulate
appropriate approaches towards trade policy in developing countries.
There is a paradox in the manner developing countries in general and many
scholars take towards this issue. On one hand it is almost invariably repeated that “we
are committed to trade liberalization which is positive for and essential to growth and
development”. On the other hand, many developing countries also notice and are now actively complaining
that trade liberalization has produced negative results for their economies, or has marginalized
them.
The notion that all are gainers and there are no losers in trade
liberalization has proven to be overly simplistic. Some countries 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. Only a few countries have enjoyed moderate or high growth in the last two
decades while an astonishing number have actually suffered declines in living standards
(measured in per capita income). The UNDP’s Human Development Report, 1999 states: “The
top fifth of the world’s people in the richest countries enjoy 82 per cent of the expanding export
trade and 68 per cent of FDI – the bottom fifth, barely more than 1 per cent. These trends
reinforce economic stagnation and low human development. Only 33 countries managed to sustain 3 per
cent annual growth during 1980–1996. 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” (UNDP, 1999: 31).
A clear explanation of why trade liberalization has had negative results
is found in TDR.99. The report found that for developing countries (excluding China) the
average trade deficit in the 1990s was higher than in the 1970s by 3 percentage points of GDP while
the average growth rate was lower by 2 percentage points. In discussing why trade deficits have
been increasing faster than income in developing countries, the report concludes: “The evidence
shows that a combination of declining terms of trade, slow growth in industrial countries and ‘big
bang’ liberalization of trade and of the capital account in developing countries has been a decisive
factor” (UNCTAD, 1999a, chap. VI).
On the role of rapid trade liberalization in generating the wider trade
deficits, the UNCTAD report said: “It (trade liberalization) led to a sharp increase in
their import propensity, but exports failed to keep pace, particularly where liberalization was a response to
the failure to establish competitive industries behind high barriers. With the notable exception
of China, liberalization has resulted in a general widening of the gap between the annual growth of
imports and exports in the 1990s, but the impact was particularly severe in Latin America, where the
gap averaged about 4 percentage points”.
One conclusion that can be drawn from the report is that if trade
liberalization is carried out in an inappropriate manner in countries that are not ready or able to
cope, or which face conditions that are unfavourable, it can contribute to a vicious cycle of trade and
balance-of-payments deficits, financial instability, debt and recession.
The UNCTAD report’s findings correspond with some recent studies that
show there is no automatic correlation between trade liberalization and growth. Countries
that rapidly liberalized their imports did not necessarily grow faster than those that liberalized
more gradually or in more strategic ways.
For example, in a study of 41 least developed countries, the UNCTAD
senior researcher Mehdi Shafaeddin (1994) found “no clear and systematic association
since the early 1980s between trade liberalization and devaluation, on the one hand, and the
growth and diversification of output and growth of output and exports of LDCs on the other. In fact,
trade liberalization has been accompanied by deindustrialization in many LDCs, and where export
expanded it was not always accompanied by the expansion of supply capacity”. By contrast,
the paper attributes success or failure of GDP and industrial growth to the volume of
investment and availability of imports. “The design of trade policy reforms has also been an important
factor in performance failure.”
The Harvard University economist Dani Rodrick (1999) argues that
developing nations must participate in the world economy on their own terms, not the terms “dictated”
by global markets and multilateral institutions. Noting the premise that reducing barriers
to imports and opening to capital flows would increase growth and reduce poverty in developing
countries, Rodrik’s study concludes: “The trouble is, there is no convincing evidence that
openness, in the sense of low barriers to trade and capital flows, systematically produces these
results. The lesson of history is that ultimately all successful countries develop their won brands of
national capitalism. The States which have done best in the post-war period devized domestic investment
plans to kick-start growth and established institutions of conflict management. An open trade
regime, on its own, will not set an economy on a sustained growth path”.
A major problem faced by developing countries in the trade liberalization
process is that a country may be able to control how fast to liberalize its imports (and
thus increase the inflow of products) but cannot determine by itself how fast its exports grow.
Export performance partly depends on the prices of the existing exported products (and developing
countries have suffered from serious declines in the prices of their commodity exports and 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).
Export performance in developing countries also depends on whether there
is market access for the country’s potential exports, 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 realized. As an UNCTAD note on
TDR.99 put it: “Developing countries have been striving hard, often at considerable
cost, to integrate more closely into the world economy. But protectionism in the developed countries has
prevented them from fully exploiting their existing or potential competitive advantage. In
low-technology industries alone, developing countries are missing out on an additional $700 billion
in annual export earnings as a result of trade barriers. This represents at least four times the
average annual private foreign capital inflows in the 1990s (including FDI)” (UNCTAD, 1999b).
Thus, trade liberalization can (and often) causes imports to surge
without a corresponding (or correspondingly large) 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, which act to constrain growth prospects and often result in persistent stagnation or
recession.
Proposals
-
Trade liberalization should not be pursued automatically, rapidly, as
an end in itself, or in a “big bang” manner. Rather, what is important is the quality,
timing, sequencing and scope of liberalization (especially import liberalization), 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
liberalization can lead to specific negative results or even a general situation of persistent
recession. Thus, to pressurize such countries to liberalize would be to help lead them into
an economic quagmire. Thus, multilateral institutions should not take the approach of
putting pressure on developing countries to rapidly liberalize their trade.
-
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 liberalization and combine this appropriately with the defence
of local firms and farms.
-
Caution must thus be exercized when considering proposals for
measures that would bind developing countries to further import liberalization, for example
through proposed new issues (such as another round of industrial tariff cuts) in
the WTO. Imbalances and inequities in the world trading system should be tackled
as a priority; in doing so, developed countries should increase the access to their
markets of products from developing countries, but they should not press the developing
countries to further open up their markets to Northern products. Developing countries should
be allowed greater flexibility to choose their own rate of trade liberalization.
D. The WTO and the multilateral trading system
1. General
The failure of the WTO’s Ministerial meeting in Seattle in
November/December 1999 is an opportunity for all countries, and especially developing countries, to
review the framework, rules and effects of the multilateral trading system, from the viewpoint of
development and the interests of developing countries. The collapse of the Seattle meeting had its
roots in both the system of decision-making and the substance of the negotiations. In the many months
of the preparatory phase, developing countries generally were more concerned about their
non-benefits from the WTO Agreements and about the need to correct the problems of
implementation. Most of them were not in the frame of mind to consider or welcome the new issues being
proposed by developed countries. The latter on the other hand were strongly promoting several
new issues, such as investment, competition policy, transparency in government procurement, a
new round of industrial tariff cuts, and labour and environmental standards. At
Seattle, the United States pushed for labour standards led by President Clinton (who linked the issue to
the use of trade sanctions) seemed to confirm the fears of developing countries that the WTO was
sought to be tilted even more against them by the major powers.
The clash of interests over substance was worsened by the organization of
the meeting and the lack of transparency in the multitude of talks held in small groups
that the majority of developing country members had no access to. Many developing country
delegations made it clear, including through open statements and media conferences, that they would
not join in a “consensus” of any Declaration in which they had no or little part in
formulating. The talks had to be abandoned without the issuing of a Declaration by Ministers.
The tasks ahead in the needed reform of the multilateral trading system
include the need to address both substance and process. The grievances of developing
countries – that they have not benefited from the Uruguay Round, and that the problems of implementation
of these Agreements have to be rectified – must urgently and seriously be tackled. The
process of decision-making and negotiations in the WTO has to be democratized and made transparent. “Green
Room” meetings that are not mandated by the general membership should be discontinued.
Every member, however small, must have the right to know what negotiations are taking place,
and to take part in them. The following sections cover some of these issues in more detail.
2. Lack of realization of anticipated benefits for
developing countries from the Uruguay Round
When the Uruguay Round was concluded and the WTO established, developing
countries had expected to benefit significantly from the anticipated increased
access to the markets of developed countries for products (especially in the textiles and
agriculture sectors) for which they had a comparative advantage. However, several years later, officials from
many developing countries are complaining that their countries have not benefited and the
expected benefits to them have not materialized due to the non-implementation of the commitments of
the developed countries.
The main problems include the following:
-
Tariff peaks remain
A lowering of Northern countries’ industrial tariffs is supposed to
benefit those Southern countries with a manufacturing export capacity. However, “tariff peaks”
(or high import duties on certain products) remain in the rich countries for many industrial
products that developing countries export. This means that some potential exports of developing countries
are still blocked.
-
No gains yet from the supposed phasing out of textiles quotas
The Uruguay Round’s agreement on textiles and clothing was aimed at
phasing out the
special treatment of the textiles and clothing sector, in which the
developing countries for the past
quarter century had agreed to subsidize the North by allowing quotas to
be placed on their exports
in this sector. This ten-year phase-out was supposed to be the aspect of
the Uruguay Round to
most immediately benefit the South, or at least the Southern countries
that export textiles, clothing
and footwear.
However, textile-exporting developing countries have been disappointed
and frustrated that
five years after the phase-out period began, they have not yet seen any
benefits. This is due to the
“endloading” of the implementation of developed countries (that is,
the liberalization of most of
the products they buy from developing countries will take place only in
the final year or years), and
the benefits will accrue only at the end of the ten year phase-out
period. Although developed
countries have legally complied with the agreement by phasing out quotas
proportionately, in fact
they have chosen to liberalize on products that are listed but which they
have not actually
restrained in the past. As a result, developing countries have not
benefited. They have made
proposals several times that the developed countries improve the quality
of their implementation
of the agreement on textiles and clothing.
-
Increase in non-tariff barriers such as anti-dumping measures
Developing countries are also concerned that the supposed improvement of
market access through tariff reductions is being offset by an increase in non-tariff
barriers in the rich countries. A major problem has been the use (or rather misuse) of anti-dumping
measures, especially by the United States and the European Union, on products of developing
countries, including on textiles.
Many countries have proposed that the misuse of these measures be curbed
by amendments to the Anti-Dumping Agreement.
-
Continued high protection in agriculture
The Agriculture Agreement was supposed to result in the import
liberalization and reduction of domestic support and export subsidies for agricultural products
especially in the rich countries, and this was expected to improve the market access of those Southern
countries that export agricultural products. As it turned out, however, the protection and
subsidies have been allowed to remain very high. For example, in the initial year of the agreement,
there were very high tariffs in the United States (sugar 244 per cent, peanuts 174 per cent), EU (beef
213, wheat 168 per cent); Japan (wheat 353 per cent), Canada (butter 360 per cent, eggs 236 per
cent) (Das, 1998: 59). The rich countries have to reduce such high rates by only 36 per cent on
average to the end of 2000. The tariffs have thus been still very high, making it impossible for
developing countries’ exports to gain access.
Also, the Agreement has allowed the developed countries to maintain most
of the high subsidies that existed prior to the Uruguay Round conclusion. For
example, they are obliged to reduce their very high domestic subsidies by only 20 per cent. In
contrast most developing countries had no or little domestic or export subsidies earlier. They are
now barred by the Agriculture Agreement from having them or raising them in future (Das,
1998: 62). There is a great imbalance in this odd situation.
3. “Implementation problems” faced by developing countries from the
Uruguay Round
Developing countries generally are also facing problems in their having
to implement their
obligations in the WTO Agreements. The Uruguay Round resulted in several
new legally binding
agreements that require them to make changes to their domestic economic
policies 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 fully understand what they committed themselves to. Some of the
agreements have a grace
period of five years before implementation, which expired at the end of
1999. Thus, the problems
arising from implementation may get more acute.
-
Main problems
The following are some of the major general problems:
-
Having to liberalize their industrial, services and agriculture sectors
may cause many developing countries dislocation to their 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 jobs and livelihoods of local people.
-
The Uruguay Round removed or severely curtailed the developing
countries’ space or ability to provide subsidies for local industries and to maintain some investment
measures such as requiring that investors use a minimum level of local materials in their
production. This could affect the viability of some local firms and sectors.
-
The TRIPS agreement will severely hinder or prevent local firms from
absorbing or some modern technologies over which other corporations (mainly foreign firms)
have intellectual property rights; this would curb the adoption of modern technology by
domestic firms in developing countries. Also, the prices of medicines and other essential
products are expected to rise significantly when the new IPR regime takes effect in the next
few years.
The following is a summary of some of the concerns of developing
countries regarding some
of the Agreements:
-
The Agriculture Agreement
The Agriculture Agreement could have severe negative effects on many
third world countries. Most of them (excepting the least developed countries) will
have to reduce domestic subsidies to farmers and remove non-tariff controls on agricultural
products, converting these to tariffs and then progressively reducing these tariffs. This will impose
global competition on the domestic farm sector and may threaten the viability of small farms that
are unable to compete with cheaper imports. Many millions of small third world farmers could be
affected. There is also a category of developing countries which are net food importers; as
subsidies for food production are progressively reduced in the developed countries, the
prices of their exports may increase; the net food importers may thus face rising food import bills.
A recent FAO study of the experience of 16 developing countries in
implementing the Uruguay Round agriculture agreement concluded that: “A common reported
concern was with a general trend towards the concentration of farms. In the virtual absence
of safety nets, the process also marginalized small producers and added to unemployment and poverty.
Similarly, most studies pointed to continued problems of adjustment. As an example, the
rice and sugar sectors in Senegal were facing difficulties in coping with import competition
despite the substantive devaluation in 1994” (FAO, 1999).
Proposal: Many developing countries during the preparations for the
WTO’s Seattle Ministerial meeting had proposed to amend the Agriculture Agreement to
take into account their concerns of implementation, especially the effects on rural livelihoods
and food security. Several developing countries have proposed that developing countries be given
flexibility in implementing their obligations on the grounds of the need for food security, defence
of rural livelihoods and poverty alleviation. They proposed that in developing countries, food
produced for domestic consumption and the products of small farmers shall be exempted from the
Agriculture Agreement’s disciplines on import liberalization, domestic support and
subsidies. This proposal should be pursued further by the developing countries in the future
negotiations on agriculture at the WTO.
-
The TRIMS (Trade-Related Investment Measures) Agreement
In the TRIMS Agreement, “investment measures” such as local content
(obliging firms to use at least a specified minimal amount of local inputs) and foreign exchange
balancing (that limit the import of inputs by firms to a certain percentage of their exports) will
be prohibited for most developing countries from January 2000. Such measures had been introduced
to protect the country’s balance of payments, promote local firms and enable more
linkages to the local economy. The prohibition of these investment measures will make the
attainment of development goals much more difficult and cause developing countries to lose some
important policy options to pursue their industrialization.
Proposal: Several developing countries proposed in the pre-Seattle
negotiations in the WTO that TRIMS be amended to provide developing countries the flexibility to
continue using such investment measures to meet their development goals. In the review of the
TRIMS Agreement, which is scheduled to begin in 1999, the problems of implementation for
developing countries should be highlighted. The TRIMS Agreement could be amended to allow
developing countries the right to have “local content” policy and to limit the import of
inputs to a certain percentage of a firm’s exports.
-
The TRIPS (Trade-Related Intellectual Property Rights) Agreement
The South’s collective loss in the Uruguay Round was most acutely felt
in the agreement on TRIPS (Trade Related Intellectual Property Rights) through which
countries are obliged to introduce IPR legislation with standards of protection that are similar
to Northern countries. This will hinder Southern countries’ indigenous technological development.
It should be noted that the present industrial countries did not have patent or IPR laws, or laws as
strict as will now be imposed through TRIPS, during their industrializing period, and this
enabled them to incorporate technology design originating from abroad in their local systems.
The agreement will also give rise to increasing technical payments such
as royalties and license fees to transnational companies that own most of the world’s
patents.
The new IPR regime will also have significant impact on raising the
prices of many products. By restricting competition, the IPR rules will enable some companies to
raise the prices of their products far beyond costs and thus earn rents in terms of monopoly
revenues and profits.
Also, most third world countries have in the past exempted agriculture,
medicines and other essential products and processes from their national patent laws, but
with the passage of TRIPS, all products are subject to IPRs unless explicitly exempted. The prices
of medicines are expected to shoot up in many countries, reducing access to consumers. The problem
of the inability of AIDS patients in developing countries to have access to patented drugs due to
their high prices has already become a major issue of concern.
The TRIPS agreement also opens the door to the patenting of life forms
such as microorganisms and modified genetic materials. Many environmentalists are concerned that
this will be detrimental to the global environment as the present lack of controls and
accountability in biotechnology research and application will likely accelerate
biodiversity loss and could threaten natural ecosystems. For plant varieties, TRIPS does permit countries the
option to either introduce patents or an alternative “effective” sui generis system of
intellectual property protection. Many governments, NGOs and farmers’ groups in developing countries are
concerned that the practice of “biopiracy” (patenting in the North of biological materials and
resources originating in the South) will intensify. Moreover, unless appropriate sui generis systems
are established in developing countries, that protect the traditional knowledge and genetic
resources of farmers, these farmers may be further disadvantaged by plant variety protection
regulations.
Proposal: Given these many problems, the TRIPS agreement should be
amended to take into account development, social and environmental concerns. Meanwhile, the
grace period before implementation should be extended. Many developing countries have made
formal proposals before and at Seattle that a review of TRIPS along these lines be made
and that there should be an extension of the implementation dateline. These and other proposals
can be pursued in the process of the review of TRIPs.
Recently there have been calls from some eminent economists and from some
NGOs to study whether the TRIPS Agreement should be taken out of the WTO. Their
argument is that TRIPS is a protectionist device, and should have no place in an organization
that is supposed to be committed to liberalization. Moreover, IPRs is not a trade issue. By
locating it in the trade system, the road is open to overload the WTO with more non-trade issues.
-
Conclusion
These are only a few examples of serious problems facing developing
countries in implementing their WTO obligations, now and especially in future. Thus,
many of the countries are arguing that they need time to digest the Uruguay Round, that some of
the rules that are imbalanced or inequitable and that generate serious problems should be
reviewed, and amended. In fact some of the Agreements themselves mandate that reviews be carried
out. The next phase of the WTO’s activities should focus on the review process, so that the
opportunity to rectify the defects of the Agreements can be taken. This review process would in
itself be a massive task, involving analyses of the weaknesses of the various Agreements,
assessments of how they have affected or will affect developing countries, proposals to amend the
Agreements, and negotiations on these proposals.
4. Pressure for new issues in WTO
A major reason for the failure at Seattle was the reluctance of many
developing countries to give the WTO a mandate for taking on new issues or negotiating new
agreements, which had been proposed by some of the developed countries.
There is much merit in the view that the WTO should focus in the next few
years on reviewing problems of implementing the Agreements and making the
necessary changes in the agreements. These will be enormous tasks. They will not be properly
carried out if there is a proliferation of new issues in a new Round. The extremely limited human,
technical and financial resources of developing countries and their diplomats and policy makers
would be diverted away from the review process to defending their interests in the negotiations
on new issues. The limited time of the WTO would also be mainly engaged in the new issues.
Moreover, most of the proposed new issues would also have the most
serious consequences for the South’s future development. Issues such as investment rules,
competition policy and government procurement are strictly not trade issues and it has been
argued that they do not belong to the WTO. There is a suspicion on the part of some developing countries
that these issues are sought to be placed there by the developed countries to take advantage of
the enforcement capability (the dispute settlement system) of the WTO, so that
disciplines can be effectively put on developing countries to open their economies to the goods, services and
companies of the developed countries. Other issues relate to labour, social and
environment standards. Most developing countries have argued that these issues should also not enter
the WTO as they could be made use of as protectionist devices against the products and services
of developing countries.
Should pressure be continued to be applied for these new issues to be
accepted into the WTO, then the WTO will continue to be split, and, moreover, other pressing
issues such as the problems resulting from the existing Agreements would not be tackled.
5. General proposals
-
In the WTO, members should take a more realistic approach towards
liberalization, with a slowdown to pressures being put on developing countries for
further liberalization. If the developed countries continue after so many years
to maintain such high protection in agriculture, textiles and some industrial products
(and argue that they need more time to adjust), then developing countries should not be
subjected to more pressures to continuously liberalize on the ground that it is
automatically good for them.
-
It should be reasserted that the main objective of the multilateral
trading system is the development of developing countries which form the majority of the
membership. Liberalization is a means, and there should be sufficient flexibility to
implement measures when appropriate. The goal and dimension of development must be
primary in WTO rules and in the assessment of proposals. The “special and
differential treatment” principle should be greatly strengthened operationally,
above its present weak State.
-
Resolving the problems of implementation of the Uruguay Round
agreements shouldbe given the top priority at the WTO. The following steps should be
taken:
-
Developed countries should greatly increase access in their markets
for developing countries’ products, such as in agriculture, textiles and
industrial products (where there are now high tariffs); moreover, they should stop
taking protectionist measures such as anti-dumping measures;
-
In the areas where developing countries face problems in implementing
their obligations, a systematic exercise to review and amend the existing rules
should be carried out as a matter of priority;
-
In the meanwhile, where the transition period for implementation for
developing countries has expired, an extension should be given at least until the
review process is completed. There should also be a moratorium on bringing
dispute cases against developing countries on issues where the reviews are taking
place.
-
There should not be pressures to introduce new issues such as
investment, competition, procurement, labour and environmental standards in the WTO
as these would overload the multilateral trading system further and lead to more
systemic stress and tensions.
-
As the Seattle meeting showed, there is a need for serious reform to
the system and culture of decision making in the WTO. The reform process itself should
be conducted in a manner whereby all members can fully participate. The
reform should at aim at a result whereby WTO meetings are run on the basis of full
transparency and participation, where each member is given the right to be present and to
make proposals. Even if some system of group representation is considered, all
members should be allowed to be present at meetings and have participation
rights. The secretariat should also be impartial and seen to be impartial. The system
should reflect the fact that the majority of members are now from developing countries
which have as much stake or more in a truly fair and balanced multilateral system as
the developed countries, and therefore the system must be able to provide the
developing countries with adequate means with which to voice their interests and exercize
their rights.
III. KEY ISSUES IN FINANCE
A. Financial liberalization
Globalization in the financial sector has been driven by several factors.
Among the major ones are: the policy choice of an increasing number of countries (starting
with the developed economies, then taken on by many developing countries) of financial deregulation and
liberalization (the opening up by a country to international capital flows); the development
of technology, especially electronic communications (facilitating the massive cross-border
movements of funds); the emergence of new financial instruments (such as derivatives) and
financial institutions (such as highly-leveraged hedge funds); and the collapse of the international
fixed exchange-rate system (thus making it possible for profit to be made from speculation on
changes in the rates of currencies).
Financial liberalization is a relatively recent phenomenon, but it has
contributed to severe financial turmoil and economic losses to several developing countries
that have integrated into the global financial markets. The developing countries had been drawn into
the process of financial liberalization partly due to advice given by international financial
institutions and to the mainstream view that there were great benefits to be derived from opening up to
inflows of international capital. However, the risks of also opening up to volatility of
short-term capital flows and to financial speculation and manipulation were not emphasized by the same
advisors. Many developing countries that underwent the process of financial
liberalization did not take precautionary measures or adhere to guidelines to minimize the risks.
Instead, they went the opposite direction by deregulating, removing existing capital controls,
allowing private banks and companies to take foreign-currency loans, and allowing the trading abroad
of their local currency.
Having deregulated and liberalized their capital accounts, many
developing countries were unable to defend themselves from the huge flows of international funds
whose volumes have expanded dramatically in the past two decades, and from the new financial
instruments and institutions (especially highly-leveraged funds) that have emerged in the
field of financial speculation.
B. Volatility and negative effects of short-term capital flows
The latest round of financial crises that hit emerging markets, starting
with Thailand in mid-1997 and spreading rapidly to other East Asian countries before also
affecting Russia and Brazil, has dramatically exposed the negative effects caused by volatile
short-term capital flows and the grave risks and dangers that accompany financial liberalization in
developing countries. The latest crisis has also exposed the fallacy of the orthodox view that opening up
to global finance would bring only or mainly benefits and little costs to developing countries.
The Asian crisis followed a period of financial liberalization, which contributed to a build-up of
vulnerability of the countries to external financial forces. When large inflows of short-term capital
took place, it led to an asset price bubble that broke when speculative currency attacks and large
capital outflows caused sharp depreciations which spread via contagion to other countries. The
depreciations multiplied the burden of servicing foreign debt which had built up in a relatively short
period especially by the local companies and banks. When Indonesia, the Republic of Korea and
Thailand ran out of foreign reserves to service the debts, they approached the IMF to bail
them out with massive loans.
Almost alone among international agencies, UNCTAD had been warning for
several years about the dangers and costs of financial liberalization. In the early and
mid-1990s, its Trade and Development Reports and Discussion Papers had raised the alarm
about the volatility of short-term capital and the serious destabilizing economic and social effects of
financial liberalization, especially for developing countries. The Asian crisis validated the
UNCTAD analysis and warnings. The crisis has also stimulated a general questioning of the
orthodox approach and the start of a change in opinion and perhaps of paradigm.
As UNCTAD Secretary-General Rubens Ricupero stated, in his closing speech
at UNCTAD X in February 2000: “When trouble came, starting in Thailand in
1997, it brought with it a reversal of opinion. That episode revealed the sheer size of the
financial flows that the industrial world could generate, relative to the normal size of flows of developing
countries. The swift entry, and even swifter exit, of such massive flows made clear for all to see
the havoc that can be unleashed on small and fragile financial systems that are open to such
tidal waves of finance. Despite the commitment of many international agencies to the complete
liberalization of capital markets right up to (and beyond) the hour of Asia’s crisis, the same
agencies now say that they can see some virtues in certain types of capital controls….Positive
processes of integration into the world economy are the goal. This has never changed. However, the
liberalization measures that are necessary to this end must be phased in a prudent and orderly manner.
They must take account of specific local circumstances, they must be complemented by appropriate
domestic policies and accompanied by institution- and capacity-building. Only then can they
hope to succeed” (Ricupero, 2000).
Also at UNCTAD X,Yilmaz Akyüz, Head of the UNCTAD Macroeconomic and Development Policies Branch, summed up the lessons of the crises that hit
Asia and other regions as follows: “The crisis has shown that when policies falter in managing
integration and regulating capital flows, there is no limit to the damage that international finance
can inflict on an economy. It is true that control and regulation over such flows may reduce some of
the benefits of participating in global markets. However, until systemic instability and
risks are adequately dealt with through global action the task of preventing such crises falls on
governments in developing countries” (Akyüz, 2000).
One of the most incisive analyses of the Asian Crisis is presented in Trade
and Development Report, 1998 (TDR.98; UNCTAD, 1998: 53–109). It shows that
financial crises are very much part of the global system and the Asian case is only one. It gives a
critique of why the IMF response converted a liquidity problem into a solvency crisis. Finally,
it also proposes a range of crisis management measures, including a debt standstill and capital
controls.
As TDR.98 shows, the East Asian experience is only one of a series
of many financial crises (for example, in Southern Cone of Latin America in the late 1970s and
early 1980s, Latin America in the 1980s, European countries in 1992, Mexico in 1994) of the past two
decades. These crises are caused by the intrinsic and volatile nature of the global financial
system, after the closure of the fixed exchange rate system in the early 1970s.
C. Inappropriate response to debt crises and financial crises
A significant aspect of financial crises in developing countries is that
the policy responses may often not be appropriate and could even make the situation worse. The “structural
adjustment” policies accompanying IMF-World Bank loans to heavily indebted developing
countries as conditionality have been criticized for depressing their economies
through high interest rates and large budgetary cuts; and many of the countries concerned have remained
indebted.
The policy responses in the East Asian countries that also sought IMF
assistance when the financial crisis broke in 1997 have also been widely acknowledged to be
inappropriate, Once the countries fell into crisis, the IMF’s response (monetary and fiscal
tightening and high interest rates while maintaining or even extending capital mobility) made it worse.
In one of the deepest critiques of the IMF approach, TDR.98 pointed
out that the situation was characterized by a stock disequilibrium rather than a flow imbalance that
could be corrected by expenditure reduction. The fall in the currency created a balance sheet
disequilibrium for indebted banks, property companies and firms. The value of firms and assets thus
declined. Since these assets had been the collateral for much of the increased lending, the
quality of bank loans automatically deteriorated. Rather than ease the burden of refinancing on
domestic firms by granting additional credit, the recommended policy response was to raise
interest rates. This depressed asset prices further and increased balance sheet losses of
firms and their need to repay or hedge their foreign indebtedness quickly by liquidating assets and
selling the domestic currency.
The report also pointed out that instead of the IMF loans going to
support the new exchange rates, in East Asia the exchange rates were left to float. Thus, rather
than guaranteeing the new exchange rate, the Fund’s lending was aimed at ensuring the maintenance
of the domestic currency’s convertibility and free capital flows, and guaranteeing
repayment to foreign lenders. The latter, unlike domestic lenders, e
