Using trade to grow and develop
By Shahid Javed Burki
Monday, 08 Nov, 2010
AN open trading system helps to increase the rate of economic growth and the pace of development. It is always helpful to distinguish between growth and development since the former concept does not fully capture the benefits that should accrue when the national income increases.
The rewards from increments to national income should be distributed as widely as possible not only among different segments of the population but should also reach the country’s more backward regions.
Empirical evidence gathered and analysed by development institutions such as the World Bank and the Asian Development Bank suggests that open trading systems also aid in the alleviation of poverty and the development of backward regions.
For a number of decades after most of the countries that achieved independence from colonial rule, the received economic wisdom was that it was better to participate in international trade after a certain amount of industrialisation had been achieved.
Some of the earlier thinkers from the developing world, most notably the Argentinean economist Raul Prebisch, had concluded that open trade would beep what they called the world’s periphery backward since the world’s industrial cores would use their economic muscle to put a downward pressure on the prices of the commodities exported by the developing world.
This would lead to the transfer of wealth from the periphery to the centre keeping the former permanently dependent on the latter. This came to be called the “dependency theory”.
This theory was applied rigorously by the countries of Latin America and South Asia; in the case of the latter for four decades after the countries in the region had gained independence from British rule. Jawaharlal Nehru, India’s first prime minister who ruled the country for 17 uninterrupted years, was the most articulate exponent of this theory. He exercised his influence through the Non-Aligned Movement he dominated to influence the international trading system as it was evolving after the Second World War.
The NAM countries were able to get the right to protect most of their industries under the “infant industry” argument according to which sometime was needed to allow the manufacturing enterprises in the developing world to mature before they faced competition from the more developed industries in rich countries.
Once again empiricism came to the help of economic theory. When the remarkable economic performance of some of the countries of East Asia was studied by the World Bank in the mid-nineties, it concluded that international trade was the real driver of growth of the “miracle economies”.
Using industrial policy, these countries were able to develop a manufacturing sector that was able to compete successfully with the more established industries in the developed world. A wide range of products were exported; they included not just cheap labour merchandise such as ready-made garments but also such highly engineered items as ships and eventually automobiles. This became possible because these countries oper ated relatively open trading systems.
It was only in the mid-eighties – more fully in the early nineties – that the countries in South Asia began to change their policy stance. They began to open their economies with Pakistan taking the lead under the financial stewardship of Sartaj Aziz who was then the minister of finance.
India under its finance minister Manmohan Singh followed even more aggressively. New Delhi dismantled what had come to be called the “license raj” and thus unshackled the economy which had kept the private sector under a very tight control of the government.
Even with more openness, the South Asians have not used international trade as the engine of growth and development to the extent done first by the miracle economies of East Asia and later by China. In terms of the making of public policy in the region two issues remain unresolved: what approach to use in opening the economy to the world outside and how to encourage exports.
Economists have debated for some time different approaches to openness. Three of these have been put forward. The purists believe in what is termed as the “unilateral approach”. This is done by lowering the barriers to trade without waiting for reciprocity from the trading partners. This is what the East Asians had done to some extent.
If they constrained imports it was more by way of the exchange rate policy. Domestic currencies were kept seriously undervalued which meant that foreign goods remained expensive in the domestic market while the products produced by domestic industry became internationally competitive.
China, to the consternation of the United States, continues to follow this approach. The second approach is to let openness come through changes in the multilateral trading system. This is the favoured view on the part of those who believe in reciprocity. This is what guided the series of multilateral trading rounds that have established the rule-bound international trading system. The latest of these – the Uruguay Round – was concluded in 1995 with the signing of the treaty at Marrakesh in Morocco that led to the establishment of the World Trade Organisation. Another round was initiated at Doha in November 2001 the specific purpose of which was to address the problems the developing world faced in the new system.
The most important of these was the restricted trade in agriculture as a result of the extensive support provided by the governments in the United States, Europe and Japan. The various kinds of subsidies by the state to the small number of people who continued to draw their living from agriculture in the developed world meant loss of great deal of income for the millions of poor farmers in developing countries.
How to produce a level playing field in the sector of global agriculture became the central issue in the Doha Round. The round remains stalled because of the differences between developed and developing countries.
The third approach to opening to the outside world has resulted in the signing of free trade agreements (FTAs) between trading partners or among countries in well defined regions (RTAs). The South Asians have tried both mechanisms. Pakistan, for instance, has free trading agreements with China and Sri Lanka and is also the member of the South Asia Free Trade Area.
The Safta was signed in January 2004 at the summit of the sevenmember South Asian Association of Regional Cooperation and was launched two years later in 2006. Pakistan was the last country to ratify the agreement. Since the launch of the SAFTA, Afghanistan was admitted as the eight member of the Saarc.
The Safta has not delivered what was expected from it. There has been only a marginal increase in the value of regional trade in part because the attention of India and Pakistan has remained diverted towards other places – India’s towards East Asia and Pakistan towards the United States and Europe.
Pakistan has heavily invested its political capital in gaining access for its traditional products in the American and European markets. The products whose access it has sought belong mostly to the textile group where there is increasing competition from the countries that have even lower wages than Pakistan.
This strategy has delivered some limited results: the Europeans have agreed to grant access to a limited set of textile manufactures for a short period of time. The Americans may do the same. I believe this approach is wrong. It may provide temporary relief to the highly stressed textile industry but it will only serve to prolong the distortions in the industry that have created problems in the first place.
International trade will not become an engine of Pakistan’s economic growth and development for as long as it does not concentrate on developing markets nearer home and promote the production of goods and commodities that have a better future than textiles in the international market place.