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Note: This document is from the archive of the Africa Policy E-Journal, published by the Africa Policy Information Center (APIC) from 1995 to 2001 and by Africa Action from 2001 to 2003. APIC was merged into Africa Action in 2001. Please note that many outdated links in this archived document may not work.


Africa: Third World Network, 1

Africa: Third World Network, 1
Date distributed (ymd): 000202
Document reposted by APIC

+++++++++++++++++++++Document Profile+++++++++++++++++++++

Region: Continent-Wide
Issue Areas: +economy/development+
Summary Contents:
This posting and the next contain in two parts a presentation by the Third World Network at the World Economic Forum in Davos, Switzerland. For more information and background analysis from the Third World Network, see the Third World Network web site (http://www.twnside.org.sg). For earlier statements by Third World Network Africa, enter "Third World Network" into the search box at the Africa Policy web site (http://www.africapolicy.org/search.htm).

+++++++++++++++++end profile++++++++++++++++++++++++++++++

Rethinking Liberalisation and Reshaping the WTO

Presentation by Martin Khor (Director, Third World Network), at the World Economic Forum, Davos, 28 Jan 2000

I: The Need to Rethink Liberalisation Policies

We meet in the aftermath of a global financial crisis as well as the aftermath of the collapse of the Seattle WTO Conference. It is thus urgent and timely to examine and reexamine what is the right approach developing countries should take towards integration in the world economy, and to liberalisation of trade, finance and investment.

On financial liberalisation, there are new lessons to learn from the recent events. It is now clear that financial liberalisation, especially when done inappropriately, was the main cause of the East Asian economic crisis. Many of the affected countries, which had been in the forefront among countries of the South in global economic integration, are now cautious and reviewing their approach to financial openness.

On trade liberalisation, the issue is even more complex. The failure at Seattle provides an opportunity to re-examine the record and to reformulate what is appropriate approach for trade policy and thus also for the future role of the WTO.

There is a strong paradox or contradiction 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 liberalisation 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 liberalisation has net negative results for their economies, or has marginalised them.

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 (pg 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 the 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 terns of trade) and also on having or developing the infrastructure, human and enterprise capacity for new exports (which is a longterm 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) causes 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 or a new Round in the WTO Seattle meeting. 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.

II. The Failure of Seattle

The spectacular failure of the WTO 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 pushed by developed countries. The latter on the other hand were aggressively promoting several new issues, such as investment, transparency in government procurement, competition, a new round of industrial tariff cuts, and finally labour and environmental standards. At Seattle, the US push for labour standards led by President Clinton confirmed the worst fears of developing countries that the WTO was sought to be tilted even more against them by the big powers.

The clash of interests over substance was worsened greatly by the utter disrespect for democratic participation of the majority of Members and the great lack of transparency in the multitude of talks held in small groups that the majority had no access to. This was compounded by several manipulative tactics, including the non-incorporation of the views expressed by many Members in the negotiating drafts. It became clear that an attempt was being made to railroad developing countries into agreeing to proposals and texts they had not agreed to, had opposed or had not even seen at all. In the end 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 any Declaration or even a short statement by Ministers.

The tasks ahead include the need to address both substance and process. The grievances and complaints of developing countries -- that they have not benefitted 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 democratised and made transparent. "Green Room" meetings should be discontinued. Every Member, however small, must have the right to know what negotiations are taking place, and to take part in them. Until the reforms to the system and to the substance of the WTO take place, the organisation's credibility will remain low. And for the reforms to take place, there should be a stop to the pressures being exerted by some of the developed countries to inject yet more new issues into the WTO. The following sections touch on these issues.

III: Lack Of Benefits for Developing Countries from the Uruguay Round

Officials from many developing countries are complaining that their countries have not benefited from the WTO Agreements of the Uruguay Round. And that as a result the credibility of the WTO trade system could be eroded. What is the basis of the complaints?

Most developing countries have not developed yet to a stage where they are able to meet the challenge to significantly exporting to the world market. It was believed however that the Uruguay Round would improve their chances by increasing the market access of developing countries' exports to the rich countries' markets.

The hopes were especially on textiles and agricultural products where developing countries have some comparative advantage, and also on some other industrial products. But five years after the Uruguay Round came into effect these expected benefits have not materialised, and as a result there is a major sense of disillusionment or even betrayal that developing countries in general feel about the developed trading countries.

Some examples of this:

Market Access in Industry has not improved.

A lowering of Northern countries' industrial tariffs is supposed to benefit those Southern countries with a manufacturing export capacity. Even then, the reduction of average industrial tariffs of developed countries has only been from 6.3% to 3.8%, which means that an imported product costing $100 before duty could enter after duty at $104 instead of the previous $106, which is not a significant reduction. In contrast, many developing countries made huge reductions in their tariffs and bound them. According to WTO expert Mr Bhagirath Lal Das, India's average industrial tariff was reduced from 71 to 32 percent, Brazil from 41 to 27 percent, Venezuela from 50 to 31 percent. "Tariff peaks" (or high import duties on certain products) remain in the rich countries for many industrial products that developing countries export. For instance the US tariff for concentrated orange juice is 3 1%. 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 had for the past quarter century had agreed to subsidise 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 extremely 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 liberalisation 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 liberalise on products that are listed but which they have not actually restrained in the past. As a result, developing countries have not benefited. They are now pressing proposals 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 and bitter that the supposed improvement of market access through tariff reductions is also being offset by an increase in non-tariff barriers in the rich countries. A major problem has been the use (or rather abuse or misuse) of anti-dumping measures, especially by the US and the EU, on products of developing countries, including on textiles.

The use of such measures (anti-dumping and countervailing measures) against developing countries' products has become more frequent after the Uruguay Round. Many countries have proposed that the misuse of these measures be curbed by amendments to the Anti-Dumping Agreement. However this is stoutly resisted by the US.

Continued high protection in agriculture

The Agriculture Agreement was supposed to result in the import liberalisation 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 US (sugar 244 percent, peanuts 174 percent), EU (beef 213, wheat 168); Japan (wheat 353), Canada (butter 360, eggs 236). The rich countries have to reduce such high rates by only 36 percent 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%. 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. There is a great injustice in this very odd situation.

Conclusion

As seen from these examples, from the viewpoint of countries of the South, one of the major categories of "problems of implementation of the Uruguay Round" is the way the Northern countries have not lived up to the spirit of their commitments in implementing (or not implementing) their obligations agreed to in the various Agreements. This has led to the non-realisation of the expected benefits to developing countries of their joining the WTO.

IV: "Implementation Problems" Faced by Developing Countries from the Uruguay Round

One of the reasons the developing countries are reluctant to endorse new initiatives or new issues in the Seattle WTO meeting 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 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 general 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 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 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 IPR regime takes effect in the next few years.

(continued in part 2)


This material is being reposted for wider distribution by the Africa Policy Information Center (APIC). APIC's primary objective is to widen international policy debates around African issues, by concentrating on providing accessible policy-relevant information and analysis usable by a wide range of groups and individuals.

URL for this file: http://www.africafocus.org/docs00/twn0001a.php