Developing country trade experience

Although much of the content of the Guide is for reference purposes, there is also an important story here. It is a story about recent dramatic changes in the world trading system - as embodied in the WTO - and in developing country economic policies and development strategies. It is a story about the joint evolution of these economic frameworks and the positive ways in which they interact for the benefit of developing countries and of the world trading system itself.

In the past two decades, developing countries have opened their markets to international trade in goods and services.

A remarkable change

This topic draws on research papers by Sam Laird and Zdenek Drabek of the WTO Secretariat as well as on other WTO, World Bank and UNCTAD sources.

In the past decade, developing countries have made some dramatic changes to their economic management policies and development strategies based, in part, on extensive trade liberalization. Although much of this liberalization has been autonomous, the World Trade Organization provides a unique framework of reciprocal obligations and benefits, which supports and reinforces developing country efforts.

Many developing economies have now abandoned policies of import-substitution which were characterized by high levels of tariff and non-tariff protection for 'infant' manufacturing industries and which dominated development strategies during most of the 1950s to the 1980s. At this point, governments are tending towards the implementation of sectorally neutral policies that favour export-led growth, based on comparative advantage.

Better macroeconomic management has brought greater exchange stability to many developing country economies and has helped to create a more attractive environment for foreign investors. In turn, foreign direct investment is making a stronger contribution to the development of globally competitive industries and is contributing to healthier trade balances.

These changes, which are supported by the trade liberalizing framework of WTO rules, have occurred in Asia, Latin America, Eastern Europe and parts of Africa; at this time, it appears likely that they will continue to gather momentum as the new millennium brings continued global economic expansion.

The 'new liberalism' in developing and transition economies has also affected developed country policies. Greater competition in global markets and attractive opportunities for investment in rapidly expanding developing and transition economies has advanced the case for global trade liberalization measures. Such measures include the further liberalization of developed country policies addressing the agriculture and textiles and clothing sectors, as agreed in the Uruguay Round.

Developing countries, which already comprise the majority of WTO membership, are being encouraged to expand their participation in the WTO in order to secure the advances that the 'new liberalism' promises for their economic growth and development.

Trade barriers slow development

Barriers to imports are the most common form of assistance for domestic industries in both developed and developing countries. Many business people imagine that these barriers are good for the domestic economy and a problem for foreign economies. But almost the reverse is true!

The experience of developing countries over many years demonstrates that the costs of trade barriers are greatest at home, in the protected market – as economic theory predicts. Trade barriers increase producer and consumer costs, make the economy less flexible and reduce the profit opportunities that drive sustainable development.

Barriers to exports of developing countries - particularly in sectors such as labour intensive manufactures and services – are also harmful. These barriers reduce developing country opportunity to profit from their comparative advantage: that is, their capacity to produce certain goods at lower cost compared to the costs of production in the economies of their trading partners.

Historical effect of trade liberalization

In a series of groundbreaking studies in the 1980s, the World Bank described successful, and unsuccessful, trade liberalization episodes in 16 countries in the period from the mid-50s to the early 1980s (Papageorgiou, Michaely and Choksi, 1991).

Although the countries studied had different initial circumstances and diverse liberalization experiences, some surprisingly clear and strong conclusions emerged from a review of the studies:

1. Liberalization undertaken under 'distress' was usually radical, administered rapidly and the effect lasted longer than liberalization undertaken under more comfortable economic circumstances

2. Trade liberalization had a very small impact, if any, on the level of unemployment in the countries studied: whether or not unemployment was a problem before liberalization. In many of the countries studied, employment in manufacturing increased following liberalization

3. One strong, clear-cut factor in trade liberalizations studied was that "liberalization leads to a fast and substantial increase of export growth" (Papageorgiou, Michaely and Choksi, Vol 7 p275). This result was sustained: "the aggregate period of three years following the implementation of liberalization manifests an unmistakable and strong trend of expansion of exports".

4. A long-term commitment to trade liberalization was closely associated with exchange rate stability

Development policies change

Until the 1980s, industrialization policies in many developing economies were based on import substitution to promote so-called ‘infant industries’. Barriers to trade and controls on exchange rate movements were put in place to achieve this.

Import controls included

• quantitative import restrictions and prohibitions
• restrictive import licensing
• high tariffs
• subsidies and tax incentives.

Export restrictions on primary products ensured that raw materials were available for domestic processing industries.

According to Drabek and Laird

…this myriad of interventionist policies often worked at cross-purposes. A nationalist approach was adopted to foreign investment, with legal and constitutional obstacles placed in the way of foreign participation in the development of natural resources, financial and other services. While the resulting anti-export bias in industrialization and the implicit taxation of the agricultural sector were obvious, what also happened was that industry failed to keep in touch with markets, fell behind in adopting new technologies and lost any sense of fiscal responsibility. (WTO, 1997)

This resulted in the 1980s being a 'decade of lost growth' with most developing economies experiencing

• very high levels of external debt,
• low growth
• deteriorating current accounts.

The developing country debt crisis of the early 1980s prompted a fundamental reassessment of development strategies (UNCTAD Trade and Development Report, 1996). Many developing countries sought to follow the example of the most successful East Asian economies and some in other regions - such as Chile - that had autonomously liberalized their import barriers, deregulated domestic markets and redirected their efforts towards export oriented growth.

Gradually a new ‘consensus’ development strategy – sometimes known as the ‘Washington consensus’ - emerged that favoured

• sectorally neutral development policies that did not seek to support one sector – such as machinery – at the cost of another – such as agriculture
• export-led growth
• industrialization based on comparative advantage

According to UNCTAD (Least Developed Countries Report, 1998), opening a developing economy to global markets can be a “two-edged sword” bringing both benefits and risks. UNCTAD argues that this is one lesson of the financial market crisis experienced by some of the East Asian economies from late 1997. But the financial market crisis has not reversed the ‘consensus’ on the opening of domestic economies to global markets.

Better macroeconomic management has brought greater exchange stability to many developing country economies and has helped to create a more attractive environment for foreign investors.

In turn, foreign direct investment (FDI) is making a stronger contribution to the development of globally competitive industries and contributing to healthier trade balances.

The 'new liberalism' in developing and transition economies has also affected developed country policies. Greater competition in global markets and attractive opportunities for investment in rapidly expanding developing and transition economies has advanced the case for global trade liberalization measures. These include further liberalization of their own economies in the agriculture and textiles and clothing sectors as agreed in the Uruguay Round.

Developing countries are being encouraged to reinforce their participation in the WTO. Comprising two thirds of WTO membership, developing countries are in a position to secure the advances that the 'new liberalism' promises for their economic growth and development. They can do this by making effective use of the rules and procedures of the WTO.

Beginning with the Uruguay Round, developing countries' attitude towards participation in the GATT and, subsequently, in the WTO changed significantly: Many developing countries played a very active role in the Uruguay Round negotiations; and a large number decided to become members of WTO. This attitude change reflects a number of complex and inter-related developments: Developing countries, in general, have become more effectively integrated in the international trading system, and several have become major exporters of manufactures. Trade policies in many countries have been liberalized, favouring an outward orientation and lower protection. And, there has been a growing appreciation of the importance of observing international rules in the conduct of trade as well as the need to safeguard trading interests through effective participation in the activities of the new organization.

Constantine Michalopoulos – The Participation of Developing Countries in the WTO (World Bank, 1998)

By July 1999, the WTO had 134 members and 30 governments in the process of acceding. All the candidates are developing or transition economies. They include China and Russia; ex-Soviet republics in the Baltic and Central Asia; and some of the smallest island states. Accessions remain a high priority for the WTO.

Recent experience

Average economic growth in developing countries has slowed over the past two years – in part as a result of the East Asian financial market crisis. Output in the developing countries as a group expanded by only 1.6 per cent in 1998 after maintaining an annual rate of more than five per cent for most of the decade. In some of these countries, the economy contracted very sharply resulting in rapid and high unemployment, reductions in real wages and steep rises in poverty levels.

According to the latest (1999) UNDESA/UNCTAD economic analysis, the world economy as a whole is growing at its slowest rate since the early part of the 1990s. Recession in Japan, the East Asian crisis and the Russian crisis combined in 1998 to halve the world’s economic growth rate.

World trade in 1998 grew at less than half the pace of 1997 and much the same growth rate is forecast for 1999.

Growth of World Output ^a , 1981-1998 (Annual per cent age change)

	1981-1990	1991	1992	1993	1994	1995	1996	1997	1998
World	2.8	0.8	1.8	1.4	3.0	2.5	3.0	3.2	3
Developed economies	2.9	0.7	1.6	0.8	2.7	2.1	2.4	2.6	2½
Economies in transition	1.6	-8.1	-13.0	-9.2	-7.0	-1.1	-0.3	1.7	3¼
Developing economies	2.4	3.3	5.1	5.2	5.6	4.6	5.7	5.7	5

a Calculated as a weighted average of individual country growth rates of gross domestic product (GDP), where weights are based on GDP in 1993 prices and exchange rates.
From: UNDESA and UNCTAD, 1998.

The Uruguay Round framework for trade reform

In the mid-1980s, the Uruguay Round of GATT trade negotiations coincided with a widespread reorientation of developing country economic policies and development strategies towards the liberalization of trade and investment markets.

The Round provided WTO member governments with a framework to pursue trade reforms and offered the prospect that trading partners would reciprocate the market liberalization such reforms entailed.

The Agreements reached and the schedules of binding commitments that many developing countries adopted for the first time at the end of the Round ensure that the reforms will be sustained. The two most dramatic changes introduced by the Uruguay Round agreements addressed barriers and distortions that affect developing country trade most

• trade in agricultural products
• textiles and clothing

The Agreements greatly improved the operation of the trade consultations and dispute settlement mechanism which offers the same protection for developing country as for developed country interests.

They also prohibited the use of unilateral measures in trade disputes.

Developing country participation

The developing country participants in the Uruguay Round – many more than in any previous round - helped to establish its ambitious agenda and to ensure its success.

Developing countries provided momentum for the negotiations in textiles, agriculture, tropical and natural resource products and, in the latter stages of the negotiations, on services trade and intellectual property issues of importance to them.

Some 45 developing and transition economies joined the GATT or WTO after the start of the Uruguay Round negotiations.