|
|
Development
Studies
Development
Studies
Unit: Development in a Global Context topic: What problems are presented to developing countries by the system of international trade in commodities and manufactures? How might a solution be found?
|
|
------------------------------------------------------------------------------------ Key
words: International
system, International trade and business,
Bretton Woods
institutions
. |
|
|
The end of the Second World War and its immediate
antecedents which provided the motivation and the occasion for the
creation of the establishment of an array of institutions of
international economic co-operation.
These institutions, near universal in scope and membership,
provided the framework for the conduct of international economic policy
during the post-war period, and were a major factor in setting the tone
of world economic development during this period and determining the
participation of individual countries therein.
The development problems and prospects facing the underdeveloped
countries could not therefore but be heavily influenced by the existence
and role of these institutions. The United States, in taking the lead and providing
the main driving force for the establishment of these institutions.
US policy markers started early planning for a post-Second World
War institutional framework that could cope with the problems of
transition to peace-time conditions and could provide a framework for a
smoothly functioning international economy. The major issues that need to be dealt with included
reconstruction finance for repairing the heavily war-damaged economies
of Europe, monetary co-operation arrangements to deal with the problem
of exchange rate stability and currency convertibility, and trade
co-operation arrangements to ensure that governmental barriers to trade
were kept under control. These
are issues that had all come to plague the international economy during
the inter-war years and had constituted a hindrance to the expansion of
world trade and prosperity.1
The United Nation was also assigned an important role
in post-war economic planning, particularly in the co-ordination of full
employment policies. This
role was never allowed to develop, however, and instead the UN became
the main forum where attempts were made to deal with the specific
problem of the less developed countries. Ideas for post-war multilateral economic co-operation
focused on two main areas: monetary
and financial institutions to deal with the problems of exchange rates,
currency stabilisation, reconstruction finance and international
investments; and a trade organisation to deal with the problems of
commercial policy and to promote the liberalisation of trade. The former led to the Bretton Woods Conference from 1th July
1944 and the establishment of the
International Monetary Fund (IMF) and the World Bank (International Bank
for Reconstruction and Development - IBRD), the General Agreement on
Tariffs and Trade (GATT), was put into effect. As originally conceived, both the ‘Fund’ and the
‘Bank’ were to play a major role in the restoration of economic
equilibrium after the war.2
It was not long after these institutions were formally
established, however, that it became apparent that they were not play
this role. The ‘Fund’
was supposed to grant assistance for short-term stabilisation, but in
the immediate aftermath of the war what was really needed was assistance
for reconstruction. And
while the ‘Bank’ made an early start in fulfilling its role, it
quickly became apparent that the resources at it disposal were far short
of what was needed for the reconstruction of Europe.
A major shift in American policy, spurred on by political
development in Europe, that led to the launching of the ‘European
Recovery Programme’ or ‘Marshall Plan’ under which the United
States undertook to provide massive reconstruction aid to Europe under
bilateral programmes outside the framework of the Bank.3
The emphasis shifted from the pursuit of world-wide
multilateralism through the Bretton Woods institution to the more
limited objective of the recovery and ‘integration’ of Western
Europe. 4
It was clear from the outset that the Bretton Woods
institutions would be under American control, notwithstanding the
obvious international character of these institutions.
The US developed the original ideas for these institutions (with
significant British inputs) and brought them into being, and the US
would be putting up the bulk of the Funds required to make them
operational. Stand-by arrangements, introduced in the policy
decision in 1952, and intended to assure a member that, on the basis of
prior negotiations with the Fund, drawings up to specified limits and
within an agreed period might be made without reconsideration of its
position at the time of drawing, were soon to became the centre-piece of
the policy on conditionality. From
the Fund’s point of view these stand-by arrangements offer more
effective opportunities for influence and control over policies of
borrowers. The preposition that free trade will produce high
incomes for national economies and improve the world economy is central
to conventional economics. Competition,
so the argument runs, will lead to specialisation, higher out-put, and
greater efficiency. This is
true for all producers, be they individual company or country, since it
will force them to concentrate resources in areas where they enjoy the
greatest cost advantage over their competitors, specialising within an
international division of labour. But free trade has never existed in the real-world.
Today’s developed countries industrialised behind high tariff
barriers and other trade restrictions, many of which remain in place.
Similarly, many efficient and competitive industries, North and
South, would never have survived without a period of initial protection. Without heavy state intervention in the 1950s and 1960s,
South Korea - one of the world’s most efficient electronics
producers - would still be dependent on exporting stuffed teddy bears
assembled in foreign-owned plants.
Stated differently: a static approach to comparative advantage
ignores the potential which might be released by a period of protection. Quite apart from these considerations, there are
other forces which undermine genuinely free trade. For instance, the ‘free-market’ in which African cocoa
exporters operate in composed of two or three powerful Northern
transnational corporations (TNCs), whose turnover may exceed the
exporting countries’s entire GDP (Gross Domestic Products).
This massive discrepancy in economic power has important
implications, since it means that TNCs are able to use markets to their
advantage. Also the
technologies needed for production are often the private property of the
TNCs, are made available to developing countries only on the TNCs’
terms. For all this, free
trade has remained an ideal to which almost all governments proclaim
their commitment, even while transgressing its principles.
And it is on the principles of free trade and comparative
advantage that the General Agreement on Tariffs and trade is premised. From the outset, developing countries were unhappy
with the GATT. They felt
marginalised in the negotiations, which concentrated on industrial
products - an area which is not of great interest to the vast majority
of the Third World countries. They
also argued that ‘equal treatment of unequal is unfair’, thus
rejecting two of the GATTs fundamental principles:
non-discrimination and reciprocal trade liberalisation.
5
It soon became apparent to them that the GATT was not designed to
address their problems. Their dissatisfaction with the GATT led to the
creation of UNCTAD (the United Nation Conference on Trade and
Development in 1964. This
was set up as an organisation which would be responsible for creating an
international trading environment that would facilitate the growth of
developing countries and not thwart it.6
A year later an additional chapter was added to the GATT which
gave developing countries what is known as “special and differential
treatment - (S&D)”.7
it marked the GATT’s acceptance of the principle that Third
World countries needed discrimination in their favour.
In practice it mean that developing countries would not have to
make trade concessions which are incompatible with their development
need. Through the mechanisms such as International
Commodity Agreement (ICA), have proved largely unsuccessful to the
developing countries, which most are dependent on primary commodities.
The devastating impact that a sudden price fall on the
international market can have on the lives of individual producers.
-Even when prices are high, the producer receives only the fraction of
the amount paid for the end-product by consumers in the rich
industrialised countries. Third
World producers of primary commodities desperately need markets for
their goods yet face a daunting array of trade barriers which often deny
them access to rich world markets.
The latest round of negotiations under General Agreement on Trade
and Tariffs - the Uruguay Round - has underlined how much the interests
of developed world predominate over those of developing countries, which
many rely on primary commodities for most of their export earning, so
they are very vulnerable to the price instability in these commodities.
Even small changes in price will produce substantial variations
in their export earning, making it very difficult for them to plan from
one year to the next. With such a high level of dependence on primary
commodities, many Third World countries suffered a considerable loss in
export earnings due to the low prices of the 1980s.
Between 1981 and 1985, this loss has been estimated as US $ 553
billion, equivalent to 122 per cent of the total value of the commodity
exports of the developing countries in 1980.
The largest part of this loss was due to the fall in the value of
fuel exports, which was in turn due to the drop in oil prices,
particularly in 1982-83. However,
even excluding oil, the cumulative loss in the commodity export earnings
of developing countries was substantial:
US$ 57 billion, as compared with their value in 1980, amounting
to 54 per cent of the later.8
However, not only commodity-dependent countries lose export
earnings, they also experienced an inexorable deterioration in their
term of trade. Put simply, ‘term of trade’ can be understood as
the purchasing power of exports. If
the revenue from a given volume of a country’s exports purchases a
diminished quantity of imports, then a country’s term of trade may be
said to have worsened. Many
commodity - dependent Third World countries have suffered from this
problem, because the prices of manufactured goods, which they have to
import, have increased relative to those of primary products, which they
export. However, the
overall trend has been for term of trade to decline.
‘The decline was most marked in the first haft of the 1980s,
during which the purchasing power of sub-Saharan Africa’s exports fell
by 50 per cent.’9
‘While there was some improvement towards the end of the 1980s,
by 1989 the purchasing power of primary commodities was still 22 per
cent below its 1980 level.’10 The reasons for the failure of many of these poor
developing countries to develop their manufacturing bases are complex.
To do so they need money to invest in the necessary technology
and training, and markets to sell to.
Declining export earnings and unfavourable terms of trade mean
that many developing countries face deteriorating deficits in their
balance of payments. These
have had to financed through external borrowing and aid.
But the resulting debt-service obligations, aggravated by high
interest rates, absorb much of the poor countries’ export earnings.
This mean that ‘transfers to developing countries went from a
positive US$ 37 billion in 1980 to a negative US$ 1 billion in 1989’.11 Price instability in their export markets makes it
difficult to plan, while the world’s stock of Foreign Direct
Investment (FDI) in developing countries has declined.
In 1970 30 per cent of the world’s FDI was in developing
countries. By 1988 this had
fallen to 21 per cent. Most
of this is concentrated in the richer countries of Latin America, the
Caribbean, and Asia. Only 2,5 per cent of foreign direct investment is in Africa.12 Those countries that have managed to build up a
manufacturing base face difficulties in gaining access to markets.
Industrial countries often bias their tariff structures against
processed commodities. Sugar,
for example, an important export crop for many developing countries,
faces an average tariff of more than 20 per cent if it is refined before
being exported to industrial countries.
Only about one per cent is charged on export of the raw product.13
Developing countries’ exports of both primary and processed
products also face a daunting array of non-tariff barriers which often
exclude them from Northern markets and discourage them from developing a
manufacturing base. This is the very ‘unfair trade’ that made many of
the poor developing countries have suffered a great loss.
Most of their exports are low-value commodities, so they cannot
afford to diversity into more productive economic activities.
If they do, they are penalised by the tariff structures of the
industrialised countries, which are biased against processed goods. The debt crisis and the relative decline in commodity
prices were major reason why the 1980s became known as a ‘lost
decade’ for many developing countries.
They ended it poorer than they were at the beginning.
Economic growth rates are normally measured by per capita Gross
Domestic Product (GDP), that is the annual average value of total
production within the country concerned, divided per head of population.
Fall into the ‘unjust trade’, many countries, particularly in
Latin America and sub-Saharan Africa, recorded declines in their average
per capita GNP during the 1980s. Government in the South bear responsibility for many
of the problems faced by small-scale producers, including low prices,
inefficient marketing structures, lack of credit, inadequate transport
or storage facilities, harmful legislation, and development policies
that lead to environmental degradation.
Yet Third World governments face parallel difficulties.
They lack control over international market prices for their
exports. Price swings mean
that they cannot plan for the upgrading of old industries or attract
investment for new ones. Compounding
the problems of inadequate resources, tariff structures in Northern
markets make it difficult for them to diversify out of primary
production. The impact that world recession has on commodity
prices is described in a report by the International Monetary Fund:
“When the world experienced a major recession in 1975,
responding in part to the oil price shock, commodity prices fell by 16
per cent from the record level of the previous year.
As the world economy recovered in period up to 1980, commodity
prices climbed to a new record levels, over 30 per cent higher in
nominal terms than the peak of 1974.
In 1981, with the world entering another recession, nominal
commodity prices declined by 10 per cent, with each major commodity
group participating in the fall in prices.
The recession continued in 1982 and commodity prices fell by a
further 10 per cent”.14
For many years Third World commodity producers have
relied principally on the industrialised countries to provide them with
markets for their goods. This
remain true today, 66 per cent of developing country exports are
destined for developed country markets, predominantly in the USA, EC,
and Japan. These industrial
superpowers are willing recipients of exports from developing countries,
when the market conditions are right.
Trade is essentially about meeting demand in the importing
country. One area where there is conflict is in the processing
of primary commodities, because the real value added in commodity
trading lies in the processing of commodities.
Developing countries would gain far more from their exports if
they were able to process them before exporting them.
It would help them to develop a manufacturing base.
It would encourage investment, create employment, and increase
their foreign - exchange earning. But
Northern importing countries would stand to lose
from developing countries making more of the value added from
their primary commodities. One
of the ways in which their interests are protected is through the use of
escalating tariffs. The use of escalating tariffs on processed primary
commodities just one way in which the developed countries protect their
own industries and inhibit the growth of a manufacturing base in many
developing countries. There
are many other ways. One of
these concerns control on textile import. Textiles and clothing are a
crucially important export sector for many Third World countries,
comprising between 20 and 25 per cent of their total manufactured
exports. For some of the
poorest countries this is the one area in to which they have
successfully diversified away from primary commodities.
However, development in this sector has, in many instances, been
severely impeded by the Multi - Fibre - Arrangement (MFA) is that known
as a non-tariff barrier. In
other words, the importing country has resorted to a method other than
use of the conventional tariff to limit, or exclude, unwanted goods. Under the
MFA, Northern importing countries are allowed to limit imports by
setting quotas on imports from developing countries.
While these quotas were in place, Northern countries were
supposed to ‘structurally adjust’ their own clothing and textile
industries to make them competitive under free-market conditions.
If that were not possible, they would be encouraged to diversify. Non-tariff barrier, such as Multi-Fibre Arrangement,
take many forms, and are frequently used by industrialised countries to
keep competing goods out of their own markets.
One device which has been increasingly used against
developing-country manufactured products is the ‘voluntary’ export
restraint (VER). If one
government is worried about the harm a specific import is doing to its
own producers, it requires another government, on pain of relation, to
restrict its exports of the goods in question.
The use of these voluntary export restraints has spread in the
last decade from textiles and clothing
to cover steel, cars, shoes, machinery, consume electronics and
more. The VER can be effective if the government imposing
the restraint is as powerful, or more powerful, than the one accepting
it. Hence
it is device which is used mainly by the USA and the EC and, more
recently, by Japan. They
are frequently used as a protectionism measure. In the four decades or so of post-war history.
North - South relations seem to have come full circle, from the
time of passive metropolitan-colonial relations, which prevailed at the
end of the war, through the intervening period of decolonisation rising
expectations and active pressure for change, when the North was forced
for a while into serious negotiations and into making what turned out to
be some sallow concessions, and back again, after this false start to
the new era of the South’s abject dependence of the North. The gap between North and South in the meantime has
widened. This widening gap
reflects the immense strides that have been made in the North, as higher
and higher levels of income and consumption
have been attained and a rapidly expanding stock of social and
physical capital accumulated, all made possible by a dynamic process of
technological innovation and technical change standing at the centre of
modern economic growth. It
reflects as well the relative stagnation in the South, and the inability
of the South as a whole to participate meaningfully in this process of
economic expansion. In the light of these results the question arises:
What sort of future now faces the developing world as we come to
the end of the present millennium and approach the drawn of new age and,
how might the solution be found? The answer to these question is clearly linked to the
experience of the past 50 years and to the failed efforts of the
developing countries to achieve meaningful economic growth and the
accompanying economic transformation.
This experience largely in relation to the role of the
international economic system and the determined bid by these countries
to bring about favourable changes in that system. ‘In present circumstances, where the North is so
firmly in control and there is simply no outside pressure to force their
hand, what are the chances of a shift to policies more favourable to
development? Such a shift
could only come about if it appeared to the North in their own cool
judgement, that it was in their best interest to do so.’15
The collapse in the real prices of commodities for
and inhibit the growth of a manufacturing
base since the beginning of 1980s has been disastrous for the
poorer developing countries which rely overwhelmingly on commodities for
their export earnings. Falling
prices have had severe impact, contributing substantially to the
increase in Third World poverty and to the widening gap between rich and
poor countries. Perhaps,
while the debt burden has been extensively discussed, and solutions
sought, comparable attention has not been paid by the international
community to the underlying problem of the long-term decline in
commodity prices that faces many developing countries. The future development of these commodity-dependent
Third World countries depends crucially on their ability to generate
resources. To do this they
need a substantial improvement in their export earnings, - which can
achieved only if commodity prices increase and their economies are
diversified. Developing countries should reduce their dependence
on primary commodities, because a number of structural factors make a
continuing deterioration in their buying power very likely.
One way to overcome the structural problems of declining terms of
trade would be to develop a manufacturing base. The top priority is to call-out our action for fairer trade. Today’s overriding concern is to reduce poverty and suffering. The nature and causes of poverty vary significantly from one country to another. Yet the interlinked problem of heavy dependence on commodities and declining terms of trade are shared by many of the developing countries. 
1 E.E. Penrose, Economic Planning for Peace (Princeton University Press, Princeton 1953), for an account of US planning for post-war international economic co-operation. 2
Robert W. Oliver, ‘International Economic Co-operation and the
World Bank’ (The Macmillan Press London, 1975). 3 Howard S. Ellis, ‘The Economic of Freedom’: The progress and Future Aid in Europe (Harper & Brothers, New York, 1950) 4 Gardner 5 M.J. Finger A. Olechowski: The Uruguay Round - A handbook on the Multilateral Trade Negotiation, Washington DC: The World Bank, 1987. 6 Fiona Gordon-Ashworth: International Commodity Control, London, Croom Helm, 1984. 7 Special and Differential treatment of imports from developing countries allowed after 1964 under rules of GATT, thus elimilating the requirement of reciprocity. 8 The ACP - EC courier, No 116, July - August 1989. 9 UNICEF: ‘The Social Consequences of Adjustment and Dependency on Primary Commodities in Sub-Saharan Africa’ , 1989 10 Primary Commodities - Market Developments and Outlook, by the Commodities Division of the Research Department, International Monetary Fund, Washington DC, July 1990. 11 World Bank: Global Economic Prospects and the Developing Countries,
Washington DC: World Bank 1991. 12 Ibid 13 Ibid 14 IMF: International Financial statistics - Supplement on Trade Statistics, Washington DC: International Monetary Fund, 1988. 15 Nassau A. Adams: ‘Worlds Apart’, 1988. |
|
|
|