The Report highlights the scope for making the global trading and financial milieu more development-friendly.

G. Srinivasan

The latest Unctad Trade and Development Report highlights the scope for rendering the global trading and financial milieu more development-friendly. The challenge for developing countries, it says, is to translate positive external developments into faster growth of domestic value added.

The multilateral trade talks under the aegis of the World Trade Organisation (WTO) are in a state of suspended animation for want of a consensus between developed and developing countries on the crucial issues of farm subsidy reduction in the former and industrial tariff cuts in the latter. The Doha Round of talks, launched in November 2001, remains in limbo, missing several deadlines for the negotiations to be wrapped up.

The trouble lies not merely with this trade round but also the policies of globalisation, deregulation and liberalisation that predate it, and which were perfected by the international lending agencies in the 1990s. Developing countries have for long complained that their policy-making autonomy and national sovereignty have been eroded over the years in the face of obligations stipulated by the international agreements they entered into.

It is against this backdrop that the 2006

Trade and Development Report

(TDR) of the United Nations Conference on Trade and Development (Unctad), released in Geneva on Thursday, breaks new ground in designing macroeconomic, sectoral and trade policies that could help the developing world succeed in today's global economic milieu. The Report explores the issue at a time when emerging economies such as India are finding it difficult to meet the obligation to reduce industrial tariffs when their domestic industrial sectors are not yet fully competitive. They are also constrained in fine-tuning fiscal and budgetary policies because of having to adhere to the rule-based trade and financial system.

The Unctad report notes that during the 1980s and the 1990s, most developing countries undertook far-reaching market-oriented reforms with the expectation that improved factor allocation would be key to their integration into a globalising world economy. The Bretton Woods institutions of the World Bank and the International Monetary Fund (IMF) played a dominant part in this context, both as lenders imposing their policy conditionality on borrowing countries and as `think-tanks' with considerable clout in the international policy debate.

The reform agenda focused almost exclusively on market forces for more efficient resource allocation through improvements in the incentive structure and on reduced discretionary state intervention. Efficiency in resource allocation was sought through liberalisation and deregulation at the national level and through opening up to competition at the global level.

Reform agenda

Over the years, the reform agenda has been widened to include capital account liberalisation and improvements in national governance, on the one hand, and greater emphasis on poverty reduction and social aspects of development, on the other.

The reform agenda was contingent on the fact that capital accumulation a precondition both for output growth and for changes in economic structures would follow automatically from improved allocation of extant resources, but this expectation was rarely met. Instead, the reforms were frequently accompanied by low rates of investment and deindustrialisation, often with negative social consequences.

The fast phase of trade liberalisation caused trade deficits to expand, adding to payment difficulties and increasing dependence on capital inflows. And efforts to attract capital inflows entailed raising interest rates which hindered domestic investment and slowed growth and currency appreciation, which compromised the competitiveness of domestic producers and hit trade performance. Although liberalisation and deregulation might have generated efficiency gains, these did not automatically translate into faster income growth, the report says, adding that they often led to growing inequalities. "Policies promoted with a view to getting relative prices `right' at the micro level have failed, because in too many cases they got prices `wrong' at the macro level."

Trade expansion

On trade, Unctad says developing countries' export opportunities continue to be shaped by the major industrialising countries. Besides expanding global demand, improved market access in developed countries is a key determinant of developing countries' export opportunities. These market access conditions have somewhat improved following multilateral trade liberalisation, regional trade agreements and non-reciprocal preferential trading agreements but, overall, the conditions are still biased against developing countries.

Reduction in tariff barriers has been accompanied by an increase in the use of non-tariff measures, particularly anti-dumping laws, which have emerged over the past 25 years as the major impediment to global trade and to exports from developing countries. Not for nothing does Unctad highlight the scope for rendering the global trading and financial milieu more development-friendly. Equally important is to beef up the different elements of economic governance and achieve greater coherence among them.

The challenge for the developing countries is to translate positive external developments into faster growth of domestic value added, employment and income. Without mincing words, Unctad says that meeting this challenge would call for more than "a mere reliance on market forces and strengthened social polices".

Policy constraints

Unctad unequivocally asserts that the unsatisfactory outcomes of the market-oriented reforms pursued in a majority of developing countries since the early 1980s may be largely due to the fewer policy instruments available to authorities under the development paradigm.

Stating that the reduction in policy autonomy is often linked to the commitments made in multilateral trade agreements, Unctad says that bilateral or regional trade agreements, however, often entail tighter constraints. One can only recall the loud protests by the domestic plantation industry against cheap imports from SAFTA members, the concerns of textile units about textile goods from Bangladesh and Pakistan or the India-Sri Lanka FTA or the worries of auto component units about the India-Thailand FTA! Convincingly, Unctad pitches for proactive trade and industrial policies by the affected countries and argues that "proactive trade and industrial policies should not be understood to mean inward-looking, protectionist defence mechanisms to support industries where production and employment are threatened by foreign competitors. Rather, the role of national support policies should be to strengthen the creative forces of markets and capital formation".

It says such policies should help solve information and coordination problems arising in the process of capital formation and productivity enhancement. They should also ensure that cumulative production experience is translated into productivity gains.

Rightly does Unctad contend: "Implementing some temporary protection does not imply adopting an `anti-trade' strategy, rather it should be considered a key element of a policy aimed at strategic trade integration... . The aim is not to pick winners but to identify and discipline under-performing firms."

Right fiscal framework

Support for domestic as well as foreign investment should be combined with an appropriate regulatory and fiscal framework to secure optimal gains for development, Unctad says, adding that there is greater likelihood of industrial policy measures succeeding if they are complemented by trade policies designed to achieve global competitiveness in increasingly sophisticated products. "Policy support should be provided only on the basis of established goals, observable criteria for monitoring them and within a specified time horizon", the report says.

The Unctad report, no doubt, sets store by the WTO's contribution to certainty and predictability in global trade as it provides a framework for an orderly, rule-based system with appropriate checks and balances, arbitration of inter-State disputes and determination of the sanctions to be applied. But in a more development-friendly tone, it suggests that the WTO take into account the wide disparity in structural characteristics and approaches to economic policy among the many members of the WTO and the need for greater flexibility.

(This article was published in the Business Line print edition dated September 1, 2006)
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