Achieve development 

The market, simply, cannot be left alone

In November 1999 during the World Trade Organisation ministerial conference in Seattle I watched from my hotel room as thousands demonstrated against the evils of globalisation.

Black clad anarchists marched alongside grandmothers dressed as turtles and rednecked steelworkers from Philadelphia. They saw international trade as a threat – to their jobs, the environment or simply as part of a capitalist conspiracy to take over the world.

As leader of the delegation from the United Kingdom I was convinced that the expansion of world trade had the potential to bring major benefits to developing countries and would be one of the key means by which world poverty would be tackled.

In order to achieve this I believed that developing countries would need to embrace fully trade liberalisation. This would mean opening up their own domestic markets to international competition and rejecting the use of protectionist measures like subsidies and the imposition of tariffs.

The thinking behind this approach being that the discipline of the market would resolve problems of underperformance and that a strong and robust economy would emerge and that as a result the poor would benefit. This still remains the position of major international bodies like the I.M.F. and World Bank and is reflected in the system of incentives and penalties which they incorporated in their loan agreements with developing countries. But my mind has changed.

I now believe that this approach is wrong and misguided. One which is in fact dangerous for millions of people in the developing world.

Since leaving the Cabinet a year ago I’ve had the opportunity to travel and see at first hand the consequences of trade policy. No longer for me sitting in the air-conditioned offices of a fellow government minister but instead meeting farmers and communities at the sharp end.

It is this experience that has led me to the conclusion that full trade liberalisation is not the way forward. A different approach is needed. One which recognises the importance of managing trade with the objective of achieving development goals.

No-one should doubt the hugely significant role that international trade could play in tackling poverty in some of the poorest countries in the world. In terms of income trade has the potential to be far more important than aid or debt relief for developing countries. For example, an increase in Africa’s share of world exports by just 1% could generate around 70 million dollars. This is five times the total amount of aid received by African countries.

This has led President Museveni of Uganda to say “Africa does need development assistance, just as it needs debt relief from its crushing international debt burden.  But aid and debt relief can only go so far. We are asking for the opportunity to compete, to sell our goods in Western markets. In short we want to trade our way out of poverty.”

The World Bank estimates that reform of the international trade rules could take 300 million people worldwide out of poverty. Reform is essential because, to put it bluntly, the present rules of international trade are rigged against the poorest countries.  They are unbalanced, working in the interests of wealthy countries and against the developing world.

Rich nations may be prepared to open up their own markets but still keep in place massive subsidies. The quid pro quo for doing this is that developing countries open up their own domestic markets. These are then vulnerable to heavily subsidised exports from the developed world.

The course of international trade since 1945 shows that an unfettered global market can fail the poor and that full trade liberalisation brings huge risks and rarely provides the desired outcome.

It is more often the case that developing countries which have successfully expanded their economies are those that have been prepared to put in place measures to protect industries while they gain strength and provide communities with a breathing space which gives them the time to diversify into new areas.

This is not intervention for the sake of it or to prop up failing enterprises but as part of a transitional phase with the ultimate objective being the creation of strong businesses that can compete on equal terms in the global marketplace without the need for continued protection.

Just look at some examples. Taiwan and South Korea are often held out as being good illustrations of the benefits of trade liberalisation. In fact they built their international trading strength on the foundations of government subsidies and heavy investment in infrastructure and skills development whilst being protected from competition by overseas firms.

In more recent years those countries which have been able to reduce levels of poverty by increasing economic growth like China, Vietnam, India and Mozambique have all had high levels of intervention but as part of an overall policy of strengthening domestic sectors.

On the other hand there are an increasing number of countries in which full scale trade liberalisation has been applied and then failed to deliver the projected economic growth whilst allowing domestic markets to be dominated by imports. This often has devastating effects on individuals and communities.

Zambia and Ghana are both examples of countries in which the opening up of markets has led to sudden falls in rates of growth with sectors being unable to compete with foreign goods.

Even in those countries which have experienced overall economic growth as a result of trade liberalisation poverty has not necessarily been reduced.

In Mexico during the first half of the 1990’s there was positive economic growth yet the number of people living below the poverty line increased by 14 million in the ten years from the mid 1980s.

This was due to the fact that the benefits of a more open market all went to the large commercial operators with the small concerns being squeezed out.

The evidence shows that the benefits that would flow from increased international trade will not materialise if markets are simply left alone. When this happens liberalisation is used by the rich and powerful international players to make quick gains from short term investments.

The role of the I.M.F. and World Bank is also of concern.  They often make it difficult for poor countries to integrate into the world economy.  The conditions placed on their loans often force countries into rapid liberalisation with scant regard to the impact on the poorest people.

The way forward is through a regime of managed trade in which markets are slowly opened up with trade policy levels like subsidies and tariffs being used to complement and achieve development goals.

The I.M.F. and World Bank should recognise that questions of trade liberalisation are the responsibility of the W.T.O. where they can be considered in the overall context of how trade policy can be used as a means of achieving poverty reduction and that therefore it is inappropriate to include trade liberalisation as part of a loan agreement.

This represents a departure from the current orthodoxy. It will be opposed by multi-national companies who see rich and easy pickings in the markets of the developing world. But such a change would benefit the world’s poorest and most vulnerable people and that’s why it should happen.