Issue No.587
Economy
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23 -29 May 2002 Issue No.587 Economy |
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'Biases and asymmetries'
As the multilateral trade system risks ending up a monument to global inequity, Niveen Wahish looks through a UN report that criticises the gap between slogan and action in world trade policy
A lot has happened since the United Nations Conference on Trade and Development (UNCTAD) issued its 2001 Trade and Development report. A comprehensive programme of multilateral trade talks, which promised to give priority to development concerns, was launched in Doha, Qatar, during the World Trade Organisation's (WTO) fourth ministerial conference. Then the world was struck by economic slowdown. The events of 11 September caused the US economy to stumble, and its shakiness filtered through to the rest of the world, through international trade and capital flows. Amid these events, the 2002 Trade and Development report examines the state of the world economy and attempts to offer realistic recommendations.
To illustrate the scale of the problem, the report starts by citing that last year world economic growth fell to 1.3 per cent from the 3.8 per cent growth rate of 2000.
Growth in developing countries accordingly dropped from 5.4 per cent in 2000 to 2.1 per cent in 2001. India and China largely escaped the malaise, mainly because they are large and relatively closed economies, the report said.
According to the report's overview, international trade flows played a major role in transmitting the slowdown in rich countries to developing countries. The report said that developing country export growth shrank from 14 per cent in 2000 to less than one per cent in 2001. The exports of countries like East and South Asia, which sell electronic products and semiconductors to the US, were worst hit. The drop in commodity prices also exacerbated the situation for commodity exporters in Latin America.
The fallout from 11 September also affected capital flows to developing countries, already in a dismal state thanks to the Asian financial crisis of 1997. The report overview said that "since growth in developing countries today is more directly linked to that of the US, those countries provide less scope for diversification to investors." China again was the exception; not only did it see its net inflows rise in 2001, but those inflows are expected to grow further now it has joined the WTO.
The key to ameliorating the overall situation, according to the report, lies in improving growth rates. The report suggests that growth rates in developed nations should not drop below three per cent, while in developing nations growth needs to be kept to at least six per cent if standards of living are to improve and the recession is to be overcome.
In such circumstances, developing countries are in an unenviable position. Mounir Zahran, Egypt's former permanent representative at the WTO, who launched the UNCTAD report in Egypt recently, believes that the situation in developing countries could be bettered and the target growth rates reached if barriers to import in rich countries came down.
Zahran points out that the UNCTAD report makes mention of a World Bank study which admits that in the aftermath of the Uruguay round of multilateral trade talks, developed countries were the biggest winners. According to Zahran, the World Bank study also says that improved access to developed country markets must be the cornerstone of future negotiations in the WTO. The study says that developing countries can gain $700 billion annually from their exports if developed nations lift trade restrictions, which come mostly in the form of safeguard measures.
To emphasise his point, Zahran said that official development assistance (ODA) worldwide was worth less than $50 billion. Even the pledges made during the Finance for Development conference in Monterey earlier this year have hardly made a difference. "They add a mere $10 billion to annual ODA," he said. He also recalled that UN secretary-general Kofi Annan, in his opening speech to the conference in Mexico, urged donor countries at least to double their annual ODA.
Zahran also quoted Horst Kohler, managing director of the International Monetary Fund, who is cited by the UNCTAD report. Kohler had stressed that the credibility of developed countries depends on whether they opened their markets and ended subsidies in areas where developing countries enjoyed a relative advantage such as farming, food, clothing and light industries.
This is an issue which, according to Zahran, the WTO work programme must accommodate if it is to end the inequities that developing countries complain is built into the international trade system.
The UNCTAD report also says developing countries should not accept the results of the multilateral trade negotiations in toto, but should opt out where they will not benefit. "They should not agree to accept a whole package of agreements as was the case in the Uruguay round," he said.
To take a stand, Zahran recommended that developing countries make common cause in order to "tame the global trade system to service the majority of world population." He added that 80 per cent of the world's population is in developing countries and that their wishes must be considered and their standards of living improved.
But while the UNCTAD report also calls for better access for the exports of developing countries, it says those exports must be managed differently. The report points out that, although developing country exports have grown to account for a third of world merchandise trade, that growth has not been accompanied by equal growth in value. The report argues that developing countries are still exporting "resource and labour-intensive products, effectively relying on their supplies of cheap, low-skilled labour to compete." And despite some exceptions in East Asian countries, as a whole, developing countries still account for only "10 per cent of exported products which score high in research and development content, technological complexity and/or economies of scale."
According to Zahran, the report also finds that developing countries rely on imported components in their manufacturing process, a factor which affects those countries' income. Nor do they use the latest technology: a well- kept secret of multinational companies and developed nations. "Only the outdated technologies go to developing nations," Zahran lamented.
Moreover, developing countries compete with each other in the same markets, which means they must lower prices against each other. The solution suggested by the report is for developing countries to try to acquire the latest technologies for their production processes so the added value of their products enables them to compete in developed markets.
The report also argues that increased exports do not necessarily lead to greater income for developing countries, and nor does increased foreign direct investment (FDI).
This is clearly seen in the example of the Chinese market where, according to the report, the low labour and infrastructure costs have proved attractive to foreign investors. However the report says this is unlikely to generate a large number of jobs because although exports from foreign-owned firms now account for more than 10 per cent of China's Gross Domestic Product (GDP), those firms employ less than one per cent of the total labour force. Moreover, the report reveals that these firms depend heavily on imports which represent half the value of their exports and that this, combined with repatriation of profits, results in a new outflow of foreign exchange.
Zahran recommends investment in export- oriented industries rather than in industries targeted at import-substitution.
The report recommends that to make the most of their resources, developing countries should develop their local and regional markets. And although this may contradict calls for a multilateral trade system, the report sees "these arguments [for multilateral trade] as much less convincing when domestic firms still have weak technological and productive capacities and the global economic context is characterised by systemic biases and asymmetries."
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