Options for the developing countries
A tempting option for the developing countries will be to turn inward, to take greater refuge in highly protected import-substitution industries, and to avoid the struggle for expanding trade.
But this would clearly be a mistake. There are other options which are far more promising, though admittedly they entail a great deal of resolute effort. They include: the creation of efficient export capacity; a larger South-South trade; and a continued effort to roll back the protectionist measures in the industrial nations both within, and beyond, the Tokyo Round trade agreement. Let me briefly discuss each of these options.
Some developing countries have pursued policies that have discriminated against their own expansion of exports. Regardless of the trade environment, these policies were never warranted. The fact is that there are considerable possibilities for the developing countries to increase their exports even under current restrictive conditions, as has been shown by the examples of Korea, Brazil, and Singapore.
For one thing, the developing countries can diversify their exports into products that do not face high trade barriers. For another, those countries that are less advanced should seek to upgrade their export structure in order to take advantage of the export markets being vacated by more advanced developing countries.
As for South-South trade, there are good arguments—on the grounds of comparative advantage—for the developing countries to increase the volume of trade among themselves. Developing nations have already begun to make use of these new channels of trade. There are opportunities for further expansion.
Brazil now trades more with other developing countries than with the United States, and India’s exports to developing countries are increasing at a rate higher than that of their trade with the industrialized nations.
But trade among developing countries is no substitute for greater trade with the developed world.
Developing countries’ imports continue to be heavily concentrated in machinery and transport equipment, and most of these items are produced by the industrial nations. These products are crucial for the economies of the developing world and they can be supplied only to a very limited extent by the developing countries themselves.
Finally, the developing countries must begin to play a more active role in reshaping the trade environment. Such a role would, of course, involve greater participation in the current and future trade negotiations&.
Let me turn now to the options that the industrial nations face in the current climate.
Options for developed countries
One must begin by recognizing a fundamental point. And that is that the deterioration in the current world trade environment has not been brought about by the developing countries swamping the markets of the industrialized world. Whatever the protectionists may say, the developed world is not being “flooded by cheap goods.”
On the contrary, the developing countries today supply only a miniscule portion of the manufactured goods consumed in the developed countries: less than 2 per cent. The share differs, of course, for different industries, but even in the most successful—textiles and clothing—this share is still low: 5 per cent, for example, in the United States.
The recent deterioration has been caused, rather, by a loss in the economic dynamism of the type prevalent in the 1960s in the developed countries. That dynamism made it possible for the industries in the developed world to make important structural changes—changes that were required both for efficiency and equity.
These changes enhanced efficiency because they allowed the developed countries to make better use of their resources. And they enhanced equity because they permitted the producers in the developing countries to move into kinds of production which they could not have afforded on the basis of their own domestic markets alone.
But the slowdown in the growth of industrial economies has severely hampered this process of dynamic adjustment. And the developed countries have believed that there are essentially two responses to this situation: to limit the entry of goods into their markets from more competitive sources, and/or to undertake adjustment measures.
I have already discussed the long-term costs of restrictions on the imports from the developing countries. Let me now analyze the experience of industrial nations with adjustment measures.
Past experience with adjustment measures has not been very satisfactory in most industrial countries. Often these measures have ended up freezing the existing production patterns and resisting change, rather than encouraging genuine structural improvement by retraining workers and shifting them into industries and regions where they could both be more productive and earn more.
A recent OECD study indicates that even when the policies were vigorously pursued they resulted in greater capital intensity, since the government’s funds for adjustment were utilized to buy new equipment rather than to retain labor. Attempts, on the other hand, to slow down the process of adjustment and to gain a “breathing space” were utilized to establish permanent protection, and this resulted in turn in raising the price the consumer had to pay for the protected product.
But none of this need happen.
Correctly administered adjustment policies would aim at compensating those adversely affected by increased imports from the developing countries, and would retrain displaced workers and facilitate their move from low-productivity to high-productivity industries.
In order to reduce the political resistance to change and safeguard fairness, adjustment compensation should be reliable and prompt, and should approximate the private costs imposed on those affected. This might well include owners as well as workers, especially in the case of smaller firms, although businessmen cannot, of course, expect the government to relieve them of every possible competitive risk.
A complementary, approach would be to assist local communities hit by plant closures or by large lay-offs. Successful programs of this type have been organized in the United States and in Germany. Such regional relief can both increase the indigenous supply of skilled labor and help identify new opportunities for relatively unskilled workers. Measures designed to remove obstacles to mobility—better transference of pension rights, for example—are important as well.
But what is most crucial for the success of all these policies is the existence of a high level of aggregate demand and the rapid development of new and dynamic industries. Japan, for example, has been particularly successful in making adjustments well ahead of time and thereby securing its overall momentum of trade and economic activity, rather than delaying and relying on protection to save industries that have already become troubled and inefficient.
Now, what is one to conclude from all this discussion of options?
I believe that in the end the only sensible option that any of us in the international community have is to make a determined effort to improve the trade environment itself&.
A program of action
It is imperative that we understand the basic causes of the recent protectionist trend, and the heavy costs that it imposes on the developed and developing countries alike.
We must carefully and objectively evaluate the progress made in the Tokyo Round negotiations, as well as the unfinished work that still remains.
And we must determine how best to seek further improvements in the world trade environment, both through the periodic reviews that the agreement itself provides for, as well as through other special negotiations.
In my view, then, the international community’s agenda should include the following specific actions:
The provisions of the Tokyo Round agreements, and the possibilities of further liberalization and expansion of trade, should be analyzed in detail from the point of view of the developing countries, both by the governments concerned, as well as by UNCTAD and GATT. We in the World Bank stand ready to extend full support for such analysis.
The Tokyo Round agreement provides for a “regular and systematic” review of developments in the international trading system between the contracting parties. This opportunity must be seized—and seized through substantive, periodic reviews, not just routine monitoring. GATT and UNCTAD can serve as fora for consultation for these reviews.
The major concerns of the developing countries should be met through future negotiations both within and outside the framework of the Tokyo Round agreement. Some of these can be met through the periodic reviews of each code by the signatories. But there are others which will require special arrangements for negotiations: the renegotiation, for instance, of existing quota restrictions, and further tariff cuts for developing countries’ exports. And there are some concerns which must be addressed in completing the remaining agreements: for example, the deletion of the “selectivity clause” from the proposed code on safeguards.
There are several areas of trade policy which are not presently covered in the Tokyo Round agreement: trading by state enterprises, for instance; intra-firm trade between multinationals; trade in services; and so forth. These are important omissions.
Some of these items are already under discussion, particularly within the framework of UNCTAD. Others require specific analysis and negotiating machinery. But the main point is that further efforts must be made to cover the presently neglected areas by specifying the negotiating machinery and a reasonable period of time over which the negotiations should be concluded.
The Tokyo Round will not result in rolling back and dismantling the nontariff barriers already in force. Obviously, such dismantling can only be undertaken in a gradual, phased manner over a period of time. But there can be no doubt that dismantling these barriers should be a top priority item on the international agenda and every opportunity should be taken to press this objective.
The Tokyo Round negotiations were conducted and finalized at a time of great economic difficulty for the industrial nations. It is possible that as and when the economic recovery in the OECD countries gains strength, it will become more politically feasible for them to start dismantling these nontariff barriers. What the international community must consider are the concrete mechanisms and fora through which the objective of progressive reduction and dismantling of existing nontariff barriers can be successfully pursued.
In order to benefit fully from an improved trade environment, the developing countries will need to carry out structural adjustments favoring their export sectors. This will require both appropriate domestic policies and adequate external help.
I would urge that the international community consider sympathetically the possibility of additional assistance to developing countries that undertake the needed structural adjustments for export promotion in line with their long-term comparative advantage. I am prepared to recommend to the Executive Directors that the World Bank consider such requests for assistance, and that it make available program lending in appropriate cases.
As additional measures are taken to protect the legitimate interests of the developing countries, and as they reach progressively higher stages of development themselves, they should, of course, be prepared to moderate their own domestic protectionist measures. The principle of reciprocity should be accepted after a certain stage of development has been reached.
Import policies should be liberalized by the more industrialized developing countries. This would give them a stronger position in their negotiations with the developed countries; it would stimulate their domestic export interests; it would give exports from poorer developing countries a better access to the markets of the more advanced members of the developing world; and it would be in line with the principle that different rules should apply to countries at different stages of economic development.
It is important to recognize that improvements in the framework of international trade are part of a continuous process which did not begin, and should not end, with the Tokyo Round. We should move systematically toward a more liberalized international trading system, and an improved charter for world trade which encompasses those areas which have been neglected in the past. At the same time it should be fully recognized that the fate of the Tokyo Round agreement, and of any further improvements in it, hinges a great deal on the strength and political acceptability of the surveillance and enforcement machinery for the agreement.
There is no simple solution to this issue. Strengthening of the GATT organizational framework and powers would help. So would a greater political awareness of trade issues in developed and developing countries. But, in the final analysis, the only effective sanction powers are those which emerge out of the perceived and enlightened self-interest of nations and which are imposed as a result of their collective consent.
Readers may obtain free copies of the following speeches by Mr. McNamara:
Address to the Board of Governors, Nairobi, Kenya, 1973.
Outlines a comprehensive strategy for rural development, and an action program to assist the small farmer to become more productive.
Address to the Board of Governors, Washington, D.C., 1975.
Analyzes the scope and complexity of urban poverty, and proposes an integrated program to reduce it.
Address to the Massachusetts Institute of Technology, 1977.
Major address on the population problem, examining its causes and current trends, and proposing solutions to deal with it.
Address to the Board of Governors, Washington, D.C., 1977.
Assesses the past record of development, and proposes a strategy to accelerate economic growth in the developing countries, and to channel more of the benefit of that growth to meet the basic human needs of the absolute poor.
Address to the United Nations Conference on Trade and Development, Manila, the Philippines, 1979.
Analyzes the costs of protectionism, outlines trade policy options for the developing and developed countries, and assesses the problems and prospects of the Tokyo Round and beyond.
“Development and the Arms Race” University of Chicago, 1979.
Argues that excessive military spending can reduce security rather than strengthen it, and that a secure world cannot be built on a foundation of human misery in the developing nations.
Please write to The World Bank, Publications Unit, 1818 H Street N.W., Washington, D.C., 20433.