Trade and Development: Aspects of the Doha Agenda

A submission from the New Economics Foundation to the International Development Select Committee

Summary

This evidence to the committee concerns the wider framework within which international trade occurs. It looks at the history, politics, environmental implications and possible new directions for trade and economic development. The evidence is intended to complement contributions from development organisations that address the detailed provisions of the current trade round. It steps back to look forward and its conclusions are that:

· International trade and financial liberalisation do not per se benefit developing countries. In fact, for many, these dynamics have been harmful.

· The freedom to integrate into the world economy on their own terms, pursuing a mix of policies specifically designed to meet their domestic development objectives, would benefit the poorest countries most. Such countries should be free to identify and engage in markets of a size and structure in which the distribution of benefits from economic activity will be in their favour.

· Given the historical record, industrialised countries are, and continue to be, deeply hypocritical in denying poor countries the same freedom to manoeuvre in terms of market protection that they themselves enjoyed in their early periods of development.

· Especially where barriers to success in global markets are significant, but also under other circumstances, localisation and targeted local development stand the best chance of bringing significant gains to some of the world’s most economically marginalised people.

· International trade, like all aspects of the global economy, is a wholly owned subsidiary of the world’s natural environment. Poor people suffer first and worst from environmental degradation, and, for example, from the rising disasters associated with global warming. For this reason trade, like all economic activity, must work within the limits of environmental tolerance and, in this case, the need to make radical reductions in carbon dioxide emissions.

New Economics Foundation

The New Economics Foundation (NEF) was founded in 1986, following the international event known as T.O.E.S (The Other Economic Summit). Its founding objects in its memorandum of association are to “advance the education of the general public in economic and social studies as they relate to individuals, communities and the planet as a whole, with special reference to their inter-relationship with ecology, health, technology, agriculture, sustainable development, philosophy and psychology.” NEF is an internationalist organisation, with strong links to Europe and the majority world.

NEF (Think Tank of the Year 2002/3) plays a leading role in pushing forward new thinking on the global economy. It chaired the Jubilee 2000 campaign for debt relief from the beginning and is now home to its continuing research department – Jubilee Research. It has pioneered work on climate change and corporate accountability putting new models of business responsibility into practice. This year NEF will publish the first Real World Economic Outlook - a new annual alternative to World Bank and International Monetary Fund reports.

Introduction: context and history

‘A shark swims up to a fish and says, ‘you can take a bite out of me if I can take a bite out of you’

Free trade should be exactly that, free and not compulsory. Otherwise small fish can invite their own demise by having to swim into the mouths of bigger fish. Economic integration is not a panacea for global poverty and many countries that have opened themselves up to trade and capital flows have been rewarded with financial crises and disappointing performance. According to economist Dani Rodrik, turning away from world markets is surely not a good way to alleviate domestic poverty, but countries that have scored the most impressive gains are those that have developed their own version of the rulebook while taking advantage of world markets.

Since the 1960s, every attempt by developing countries to engage with the global economy on terms that would help them develop, such as managing investment, regulating foreign multinationals and stabilising commodity prices, has been resisted and opposed. It’s another echo of the nineteenth century when, according to Mike Davis, author of Late Victorian Holocausts – El Nino Famines and the making of the Third World, “From about 1780 or 1800 onward, every serious attempt by a non-Western society to move over into a fast lane of development or to regulate its terms of trade was met by a military as well as an economic response from London or a competing Imperial capital.”

Average tariff rates on manufactured products in the early stages of development

	1820	1875	1913	1925	1931	1950
UK	45-55	0	0	5	n.a.	23
USA	35-45	40-50	44	37	48	14

Source: Chang

Protectionism in Britain 1821-1913 (measured by net customs revenue as a percentage of net import values)

1821-5

53.1

1826-30

47.2

1831-5

40.5

1836-40

30.9

1841-5

32.2

1846-50

25.3

1851-5

19.5

1856-60

15.0

1861-5

11.5

1866-70

8.9

1871-5

6.7

1876-80

6.1

1881-5

5.9

1886-90

6.1

1891-5

5.5

1896-1900

5.3

1901-5

7.0

1906-10

5.9

1911-13

5.4

Source: Chang

The hypocrisy of this situation is laid bare by the historical facts on domestic market protection. Ha-Joon Chang produced these tables (above) to show how both the two dominant economic powers of the last two centuries employed protectionist measures to establish their dominance before preaching free trade to the world. As J.K. Galbraith commented:

“Free trade was for the first arrival, where, as in Britain, it was, indeed, an attractive design for confining the later contenders to their earlier stages of development.”

Rodrik also observes that, “US import tariffs during the latter half of the nineteenth century were higher than in all but a few developing countries today.” To economic historians like Robert Heilbroner, the contradiction between historical reality and current mainstream economic rhetoric on the benefits from competitive international trade is not a surprise. He points out that for much of the last millennia, the: "notion that a general struggle for gain might actually bind together a community would have been held as little short of madness".

Even conservative philosopher Karl Popper could see in the operation of free markets, pursued to their logical conclusion, a fundamental threat to an open global society. He talked of:

“The paradox of economic freedom, which makes possible the unrestrained exploitation of the poor by the rich… results in the almost complete loss of economic freedom by the poor.”

In today’s global economy, incurable problems with depressed commodity prices, beggar-thy-neighbour South-South competition, environmental stress and the reluctance of rich countries to assist or open their markets to any significant degree, are still dismissed as minor irritations in the face of the long term promised gains from liberalisation.

A dirty secret

“For many LDCs external trade and finance relationships are an integral part of the poverty trap.” UNCTAD, The Least Developed Countries Report 2002, Escaping the Poverty Trap

Trade and development economists have disagreed with the dominant view of large, guaranteed benefits from trade liberalisation for many years. For example, leading trade economist Paul Krugman wrote that there is a “dirty little secret” in the analysis of international trade which hides the fact that the costs of protectionism “are not all that large”, while the “empirical evidence” of great benefits from liberalisation “is at best fuzzy.” Former World Bank chief economist, Joseph Stiglitz, said that “it is not surprising that critics of liberalisation… raise cries of hypocrisy.” [i]

There is a sense that, not only are rich countries pulling up the ladder, they are also mocking poor countries from their comfortable heights. According to Stiglitz, rich countries play down political problems faced by developing countries telling them to "face up to hard choices" - but then excuse their own trade barriers and agricultural subsidies by citing "political pressures." And it is not only political problems that poor countries face, including high unemployment and "weak or non-existent safety nets," but greater economic volatility, and that "opening to trade in fact contributes to that volatility."[ii]

Rodrik observes that some of the best success stories from the majority world contradict the standard view:

“Economic development often requires unconventional strategies that fit awkwardly with the ideology of free trade and free capital flows. South Korea and Taiwan made extensive use of import quotas, local-content requirements, patent infringements, and export subsidies – all of which are currently prohibited by the WTO. Both countries heavily regulated capital flows well into the 1990s.”

China, too, considered a great success story, ignored the Washington rule book. Refusing to liberalise its trade it integrated with the world economy on its own terms. In spite of this, universal deregulation is still the mantra of mainstream economics. Behind the international trade system, overseen by the World Trade Organisation, is still a belief in the automatic benefits of liberalisation. Within this belief is a largely unrecognised dynamic – that we are moving towards a utopian endgame - a market free of ‘red tape’, of any rules constraining the private sector. An underlying theory is that progressive liberalisation leads to progress. In reality, power, market failure and real world problems get in the way.

Economists like Herman E Daly realise that the scale of growth beyond a certain point is “ushering in a new era of ‘uneconomic growth’ that impoverishes rather than enriches.”[iii] Even the OECD has said that, “the negative scale effects of globalisation may turn out to be very large, effectively swamping any positive…effects.”[iv] This observation is perhaps most clearly demonstrated in the case of the economic ‘externality’ of global warming.

Climate change and environmental limits to trade

Global warming demonstrates one way in which trade systems must work within the limits of environmental tolerance. It is described in full in NEF’s report Collision Course – free trade’s free ride on the global climate.

International trade is particularly fossil fuel-dependent. And the world has committed to reducing the emissions from fossil fuels to prevent catastrophic global warming. But trade as a share of total world economic output has consistently grown, increasing our collective dependence on fossil fuels.

Conflicts between trade and the environment have risen to the top of the agenda over the past decade. Most discussion have focused not on the impacts of trade itself – through the transport of goods across national borders – but on the ways in which internationally traded goods are produced. The blind spot about freight has led to a double failure: first, to appreciate the real impacts of rising freight movements and second, to introduce the necessary policies to shift freight onto a sustainable path.

The planes and ships used to move goods around the world are one of the fastest growing sources of the greenhouse gas emissions responsible for climate change. Since international air and marine freight fuels are not taxed or included in agreed targets to reduce greenhouse gas emissions, this worrying trend is likely to continue.

Each year, we ship, truck and fly ever more stuff across national borders. Standing now at an annual total of $7 trillion, flows of trade have expanded far faster than economic output. And freight activities have been growing in accordance with trade flows. The environmental impacts of this growth are mirrored in the growing share of transport related greenhouse gas emissions. A study in 1997 by the OECD and IEA estimated that the transport sector accounted for 20-25 per cent of carbon emissions from energy use for the year 1995. The average annual rate of growth of transport related carbon emissions – including international aviation bunker fuels but excluding the marine equivalent – was 2.4 per cent between 1990 and 1995. Within the transport sector, freight transport – including marine, aviation, rail / inland water and heavy duty road vehicles – accounted for 55 per cent of carbon dioxide emissions in 1990.

General projections for growth in the transport of internationally traded goods indicates that in 2004, the year of the full implementation of the Uruguay Round commitments, there will be an increase by 70 per cent over 1992 levels. This is over 15 times greater than the 4.5 per cent directly attributable to the specific consequences of the Uruguay Round. If the projected 70 per cent increase in international freight transport was to materialise by 2004, the resulting increase in emissions would make a mockery of both the reduction targets set for industrialised countries, and the current exclusion of international freight from Kyoto controls.

Other negative side effects related to export orientation

A study of the more immediate environmental impacts of trade liberalisation in developing and transition economies by the United Nations Environment Programme concluded that there were ‘serious negative environmental, and related social, impacts of expanded trade activity.’ These included:

- land degradation,

- water pollution,

- biodiversity loss,

- displacement of local, community-serving economic activity,

- loss of common property rights in the shift to export led activity,

- social instability resulting from structural economic changes,

- the failure and obstruction of policies designed to mitigate environmental impact.

Commodity prices

“If world commodity markets are left to the free play of market forces…the downward trend in real prices is likely to persist. Indeed… the downward trend might even be reinforced,” Alfred Maizels – Oxford University

Falling commodity prices have lead to severely declining terms of trade for many commodity producing countries. Consequently, large increases in export volume by commodity producers have not translated into commensurately greater export revenues. Primary commodities account for about half of the export revenues of developing countries and many developing countries rely heavily on one or two primary commodities for the bulk of their export earnings. In addition to low prices, commodity dependent countries also suffer from market volatility.

According to UNCTAD, compared with their value in 1980, the prices of coffee, tea and cocoa are now less than half. Agricultural raw materials have lost around a third of their value and other food products half. This means that while we enjoy cheap commodities a country like Ghana might increase cocoa production by 80 per cent over a ten year period and only see its earning increase 2 per cent.

A decline in purchasing power of a country’s exports means that a country is unable to purchase imported goods and services as necessary for its sustenance, as well as generating income for the implementation of sustainable development programmes. In addition, it also prevents primary commodity producers from investing in safe and environmentally sound methods of production.

It should be pointed out that the problem of collective adjustment – in which most developing countries followed IMF and World Bank advice to export their way to economic growth – has still not been addressed. It did, perhaps, not require the highest qualification in economics to predict that a group of countries increasing exports of like products, would help depress prices and leave those same countries running faster to stand still, or actually backsliding economically.

With the minor exception of price insurance schemes, and suggestions to destroy stockpiles resulting from overproduction, there remains no significant proposal to deal with the scale of the problem of low commodity prices.

Intellectual Property Rights

“Of all things knowledge is that which should be most freely shared, because in sharing it is multiplied rather than divided” Former World Bank economist Herman E Daly

All markets are framed by rules concerning property rights. Rules concerning property rights in international trade are written in such a way that tilts the field of play in favour of those countries that are already economically dominant.

Dwijen Rangnekar, from the School of Public Policy at UCL, has produced estimates indicating the scale of the imbalance. The top five beneficiaries from the TRIPS regime for the year 2000, in terms of receiving payment of ‘technology fees’ were, in order: United States, Germany, Japan, France, UK. The losers, in terms of making payments, included: Republic of Korea, China, Mexico, India and Brazil.

In another sphere, biotechnology companies claim that the engineering of plant genetic resources is needed to continue feeding the world and to help the poorest people combat nutritional disease. However, the patenting of weeds and plant varieties has merely expanded the market control of chemical, seed and biotechnology companies, without reducing starvation and malnutrition around the world. It is inhibiting research by increasing costs; limiting the availability of scientific knowledge; threatening the livelihoods of farmers; and potentially, by prohibiting them from saving, exchanging and re-sowing seeds.

Though rarely understood as such, property rights are basically a right to exclude. Patenting genetic resources has been described as the act of “committing daylight robbery on the common property of humanity”. An old UN study calculated that, ‘if a royalty was charged on biological diversity developed by local innovators in the South, the North would owe over US$300 million in unpaid royalties for farmers’ crop seeds and over $5 billion in unpaid royalties for medicinal plants.[v] Today, given the increasing importance of intellectual property in the intangible asset base of companies, those figures would need to be revised upwards.

Some argue that the stronger the protection of property rights, the better it is for economic development, as it is assumed to encourage the creation of wealth. However, there are many examples in history in which the preservation of certain property rights has proved harmful for economic development and where the violation of certain existing property rights (and the creation of new ones) was actually beneficial for economic development. What property rights are protected and under what conditions is a more important question.[vi] Broad patens can indeed have the perverse effect of stopping R&D. According to GRAIN, this has been documented in several sectors (e.g. the oilseed industry) and ‘blocking technology’ has become a strategic value of patenting today.

This argues that rather than a one-size-fits-all anglo-saxon model of property rights, which is increasingly the case, the international trading system needs an approach of locally adapted regimes to fit the specific development needs of the country, or region in question. A forthcoming paper from NEF will examine this question in more detail.

Uneven negotiation power

“People of the same trade seldom meet together… but the conversation ends up in a conspiracy against the public.” Adam Smith

Mistrust of the chief players in the global economy, transnational corporations, is at the heart of the WTO’s continuing crisis of legitimacy. Rubens Ricupero, the head of UNCTAD, argues that their impact “depends significantly on how well the host economy bargains,” but that, “…the capacity of developing host countries to negotiate with TNCs is often limited.” And “weak bargaining,” he believes “can result in an unequal distribution of benefits or abuse of market power by TNCs.”[vii]

There is a deep irony in that the liberalization mantra has been used to open up developing country economies to foreign multinationals. Daly quotes Chicago School economist and Nobel laureate Ronald Coase in a classic article on the Theory of the Firm, who noted that, “Firms are islands of central planning in a sea of market relationships”.

Daly goes on to make a critique which is yet to be answered, “The islands of central planning become larger and larger relative to the remaining sea of market relationships as a result of merger. More and more resources are allocated by within-firm central planning, and less by between-firm market relationships. And this is hailed as a victory for markets! It is no such thing. It is a victory for corporations relative to national governments which are no longer strong enough to regulate corporate capital and maintain competitive markets in the public interest.”

These dynamics might explain why the World Bank’s Head of Trade Policy once said, “WTO obligations reflect little concern for development and little appreciation of the capacities the least developed countries have… The context of the obligations imposed by the World Trade Organisation agreements… can be characterised as the advanced countries saying to the others: do it my way.” This is similar to Stiglitz’ view that countries are finding themselves in situations where they are having policies imposed on them, not unlike the 19^th century opium wars, when countries were told to open up their markets by the threat of military force, for the benefit of the dominant trading nation.

Yash Tandon, Director of the International South Group Network (ISGN), has pointed out that no system of governance is legitimate or moral unless it has a judiciary that is independent of those who exercise power in the system. A judiciary should function on the principles of justice and fair play, and defend laws and rules of governance that are arrived at democratically and protect the weak against the strong. The WTO is supposed to operate by consensus where each member country has equal say, but the reality is very different, and key decisions are often made in small “by invitation only” meetings.

In addition, litigation in the WTO system is extremely expensive. This means that, whilst there are potentially hundreds of cases the South could bring to the WTO on non-implementation by the developed countries of their obligations to them, they cannot afford to use the disputes resolution system of the WTO. There is also a further inequality built into disputes system because of the differing relative economic size of litigants. ‘Punishment’ in the system comes in the form of various permitted sanctions allowed to the successful litigant. But there will always, for example, be far more pressure for a small sub-Saharan country to comply in the face of a US complaint, than vice-a-versa. Small, economically weak countries will always have more to lose.

Where does trade go now?

There is no simple answer to the question of what we should do. For the simple reason that in every different situation, concerning different products and trade relationships, the recipe for mutual benefit and maximum environmental sustainability will be different. This argues for a much more flexible approach to the management of international trade, especially where the most economically weak countries are concerned. It argues, for example, that there should be both more special and more differential treatment, according to the development stage and social, political and environmental challenges faced by nations and communities.

We face increasing volatility in the global economy, environment and international political community. These volatilities affect the poorest people first and worst. The new question to ask of every policy is will this increase or decrease the vulnerability of people and will it add to or take away from our collective security? Trade liberalisation has often been a disaster for the food security and economic prospects of the poorest people in developing countries.

Amidst the global economic chaos, we are witnessing the death of the assumption that all economic activity logically floats up to the global level. The future is more likely to be found by asking a different question: what is the right level at which to organise all the different aspects of our livelihoods – in the neighbourhood, or at the regional, national, bio-regional or global level?

The answers to these questions in terms of food production, manufacturing, retailing, travel and culture will describe a sustainable new world order. It will be more about localisation – in the broadest sense - than globalisation. It can also be described in terms of “subsidiarity” or the “proximity principle”, or “nearness”. It is a planned internationalism where we do globally what we must – in terms of rules and controls to distribute more equally the benefits of global economic activity, (such as competition policy to regulate multinationals and mechanisms to restore and stabilise commodity prices) and locally what we are able, in terms of economic self-determination.

· Trade and the proximity principle - alternatives to globalisation and a framework for sustainable trade

What sustainable trade might look like?

This exercise in thinking locally shows one model for economic organization that would minimise unnecessary freight transport, both domestically and internationally. It operates on the economic maxim proposed by EF Schumacher that environmental and social benefits are maximized when the scale of economic operations are at the most local feasible level. He uses the same term used to describe the founding political principle behind the European Union – subsidiarity.

The diagram above is adapted from an idea by professor of physics, John Ziman. It sketches what a framework for sustainable trade might look like. The model assumes that: lifestyles are not immediately changed; trading between units can take place through information networks, co-operatives and fair markets; low-cost capital is available for investment at all levels; and, there are mechanisms to stabilise agricultural prices.

The different zones are estimates for geo-demographic units that provide sufficient economies of scale for enterprises to succeed, but also give limits beyond which the costs of scale and economic integration can outweigh the benefits. The model implies a very different toolbox for the management of trade than the one currently available at the World Trade Organisation. The time is now right for a debate on what these policies should be.

Plugging the trade leak, internationally

Another model for trade in which poor and marginalized communities can better guarantee a good deal, is a global version of the ‘plugging the leaks’ innovation. ‘Plugging the leaks’ addresses the problem that in economies, small and large, most benefits leak out of poor areas to economically more advantaged areas and actors. This is then addressed by finding out where the leaks are, and plugging them. The model has been shown to work in local areas, but can attempts to create and keep wealth at the local level ever work as a model at the international level?

In Nilgiri, in India they think so. A scheme called Just Share, that started as a campaign to win land rights for tribal people, has grown into a model of economic co-operation between marginalised communities in different continents. Though small in scale today, it is a powerful example. In order to win control of land, the community in Nilgiri had to have permanent occupancy. For this they needed to work the land and turned to growing the big local crop, tea. They started selling their tea in a fair trade scheme, partly in order to sidestep the tea barons who they suspected would take the biggest share of any profit. But then they saw a weakness in the project. They were charging a fair trade premium price to people who they considered as their friends. And, they wanted to be able to sell fairly grown tea to deprived communities in the UK, at the lowest possible price so that both communities of people could benefit.

They linked directly with community co-operatives in Britain. By ‘internalising’ the production chain within such groups, they have managed to prevent extra value being extracted by middle-men and other profit hungry retail and production companies.

The founders of the scheme imagine that this model could be extended to other crops that have to be traded internationally, and that could one day even be traded between communities in their own currency, further preventing the leakage of wealth.

“It is an attempt to link producers, consumers and investors in a cooperative manner where ownership, risk and benefit is spread across the different players of the market chain,” says Stan Thekaekara, originator of the project. “We think the time has come to take Fair Trade a step further”.

Conclusion

" I sympathize therefore, with those who would minimize, rather than those who would maximize, economic entanglement between nations. Ideas, knowledge, art, hospitality, travel--these are the things which should of their nature be international. But let goods be homespun whenever it is reasonably and conveniently possible; and, above all, let finance be primarily national." JM Keynes.

International trade isn’t working for the world’s poorest people. The Doha round of trade talks shows now signs of radically changing that situation. Instead of concentrating on details to do with market access, NEF believes it is time for the government to ask more fundamental questions about the shape, equity and sustainability of international trade.

These questions begin with the most important one: whether any existing or proposed rules will increase or decrease the vulnerability of the people in need. We believe that managing risk and reducing vulnerability will be aided by a process of localisation.

In Johannesburg in August 2002, at the tenth anniversary of the Earth Summit, NEF organised a parallel conference attended by civil society groups from 43 countries. It was part of the ‘People’s Earth Summit.’ The largest contingent of participants was from Africa, followed by a mixture of people and organisations from Europe to South Asia, North America, Latin America and a number of small island states.

Those present drafted a statement that said they were joined by a belief that international negotiations were “failing to provide real alternatives to the current unsustainable pattern of development.” They went on to make a number of proposals that shared as a common theme: “The idea that we must move away from the current model of globalisation, dominated by the finance sector, and move towards a genuinely internationalist agenda.” Most important of all was what lay at the heart of that agenda. It was: “The rights of local communities to determine their economic path and protect their cultural and environmental heritage.”

There followed a long list of measures designed to address the imbalances, systemic risks and increasing chaos of the global economy. It covered finance, trade and reform of monetary systems. It spoke of natural resource management, education and government accountability. A huge majority of the people present were from so-called ‘developing countries’. Their voices are a cold shower for critics who find it comfortable to believe that anyone opposed to globalisation is already rich and simply ‘anti-development’. Here is an illustration from the experiences of the Bangladeshi development organisation UBINIG. It shows what localisation might mean in the context of a poor country in the Southern hemisphere.

Farhad Mazhar promotes ‘Nayakrishi’ which means ‘new agriculture’. This is a form of ecological farming that attempts to undo the damage and declining returns of the so-called green revolution, whilst avoiding the economic traps and scientific uncertainty of GM crops. Apart from the complexities of farming theory, Farhad makes a point of elegant common sense about trade and globalisation that displays a pragmatism and logical set of priorities typical of groups too often written-off as merely ‘anti-globalisation’. Farhad says:

“I’m not against the market, or even international trade. It’s just that trade should be non-exploitative, and local needs should come first. Now we’ve found that Nayakrishi agriculture is more economically viable than conventional modern farming, many households are beginning to go into cash crops for the market too.”

Ever more economists, too, are questioning economic integration as a panacea for global poverty. Dr. Nigel Poole of Imperial College supports the idea of ‘selective market integration’. He says,

“targeting local development rather than global integration may… bring significant benefits to communities who’s livelihoods can best be enhanced not by costly investments aimed at overcoming almost insurmountable geographical, economic and technological barriers to market access, but by investments in local assets and initiatives: a ‘targeted local economy’”.

Critics may say that by focusing on the ‘local’, people are turning their backs on the world and pulling up the ladder of economic development from poor countries. But that would be fundamentally to misunderstand both the proposals, and what is happening in the increasingly shaky global economy. Localisation is not an absolute, but a dynamic process. Instead of encouraging the economics of large and remote organisations, it promotes an economics of nearness and human-scale in which people have more control over their lives. NEF believes this is part of a new economics capable of delivering human and environmental well-being internationally. It has common themes everywhere, but will look different wherever it grows. It will be a planned internationalism where local people are more in control.