Did Poor Countries Make a Fool
of Themselves, or What?
By
Bharat Jhunjhunwala
THE
WTO negotiations at Cancun have failed. The rich countries were
not willing to reduce the $300 billion-a-year subsidies being
given to their farmers. This is more than the annual income of
Argentina and nearly two-thirds that of India. The poor countries
insisted that the rich countries reduce these subsidies.
On
the other hand, rich countries insisted that issues of investment,
competition and government procurement be included in the WTO.
The resulting stalemate led to the collapse of the talks.
So
who is the loser? Many observers, including some from poor countries,
say the poor countries have made a fool of themselves. Singapore's
Trade Minister George Yeo said, the poor countries are the "most
disadvantaged by the failure of Cancun". A commentator wrote
in the Business Standard: "India needs a multilateral trading
system more than others". Reuters commented that though the
poor countries emerged as political winners but "they also
risk being the economic losers".
Have
the poor countries really made a fool of themselves? Let us examine
the issue of Agriculture. Reduction of agricultural subsidies
in the rich countries would have provided entry to the cheaper
produce of the poor countries and led to higher prices. But that
is theory. The reality is exactly opposite because free trade
also leads to greater competition among the poor countries.
This
competition leads to a decline in prices of their produce. Thus
free trade would have two opposite effects. The dismantling of
the subsidies in the rich countries would lead to an increase
in price of the agricultural commodities while intensified competition
would lead to a decline in the same. The experience so far has
been that the negative effect has been stronger.
A
number of exercises on the post-Uruguay Round scenario have concluded
that expected rise in prices for farm products on account to reduction
commitments by the developed countries would be mitigated and
even neutralized by the surge in output. The recent price trends
are consistent with the above prognoses.
Thus
poor countries would have in the end got little even if they had
succeeded in getting a reduction of the subsidies by the rich
countries. To say that poor countries are most disadvantaged by
Cancun is true, but it ignores the fact that they would remain
similarly disadvantaged by successful conclusion of Cancun as
well.
They would have lost much by the inclusion of the Singapore issues
in the WTO agenda. The benefit of these issues, namely, competition
and investment, to the poor countries is not clear. Theoretically,
bringing investment in the WTO should make it easier for the poor
countries to attract world capital. But the reality is exactly
the opposite. An agreement that allows free flow of capital across
the world can become a window for the capital of the developing
countries to flee.
The
Global Development Finance report of the World Bank says the developing
countries have become net exporters of capital in the last two
years. One, they have sent huge amounts of money to the rich countries
to hold large foreign exchange reserves. Two, there have been
illegal remittances on a large scale.
These
illegal remittances would become legal if world capital is allowed
to roam freely as envisaged under the Singapore issues. Governments
of the poor countries would lose control over the capital of their
own country. Competition Policy and Government Procurement would
likewise make it difficult for the governments to give preference
to domestic businesses.
The net impact of the failure of Cancun for the poor countries,
therefore, is as follows. On the minus side, they have deprived
themselves of the potential gains from increased prices of agricultural
commodities even if it is small.
On
the positive side, they have retained their freedom to prevent
the legal outflow of their capital and to provide support to their
domestic businesses. In this background Cancun should be seen
as a gain for the poor countries. They have given up the small
gains in agriculture but have prevented a much greater loss of
their capital.
That
said, the question remains, what next? Where do the poor countries
go from here? The central question is how to escape the pressure
of competition among the poor countries in the world agricultural
markets. Most poor countries continue to have predominantly agricultural
economies. Whether free trade or not, they are in a trap. The
only solution for them is to diversify into manufacturing and
services sectors. We have to examine how the failure of Cancun
affects them in this regard.
The basic mantra of free trade is every country should do what
it does best. Bangladesh should specialize in jute production
and Sri Lanka in producing tea. It is forgotten that the prices
of these commodities have been declining. As a result, greater
specialization would not lead to higher incomes for these countries.
In fact, it would lock them into poverty. Say one is a potter.
Plastic and aluminum pots have rendered his products fundamentally
uncompetitive. He is doomed to remain poor despite being the world's
best, if he "specializes" in making earthen pots.
The
same applies to specialization in agriculture by the poor countries.
They are doomed to poverty if they continue to specialize in the
production of coffee, tea, wheat and sugar. The only solution
for them is to back track and diversify into some other trade
which may have a greater potential.
The development of new trades requires protection. Just as an
infant needs protection to be able to take on the bully later,
so also entrants into a trade need protection until they can face
global competition. Of course, there exists a danger that the
poor countries may descend into negative protectionism. that is,
protecting rent extraction and corruption by the local elites
like in Russia or pre-reform India.
But such wrong use of protectionism does not mean that protection
is not required, just like overeating does not mean one can do
without food.
The
solution to this problem will not come from free trade because
that replaces evil of rent extraction with the evil of specialization
in a declining sector. The poor countries have only one way out.
They have to provide good governance behind protectionist borders
and diversify their economies.
he
poor countries must, therefore, remain firm and not be carried
away by the talk of having made a fool of themselves at Cancun.
They have achieved a victory at Cancun. Now it is time to follow
it up with domestic good governance behind protectionist borders.
- Courtesy Pioneer
