[stop-imf] Washington Consensus in Doubt

[Robert Weissman]

"New UNCTAD Trade and Development Report throws Washington Consensus into
doubt"

By Tom Salfield, Jubilee Research at the New Economics Foundation
May 2002

Last month, UNCTAD released their annual Trade and Development Report. The
report addressed the following question: why are developing countries
trading more, yet earning less?

The report notes that over the past two decades we have observed a massive
increase in openness to trade in developing countries. Indeed, trade volumes
in developing countries have grown faster than the world average over the
period since the early 1980s. Developing countries now account for a third
of world merchandise trade, and much of the increase in trading volumes has
been in manufactures.

However, the UNCTAD report notes that this massive increase in the
volume of
exports has not added significantly to developing countries income. And,
while there has been a steeply rising ratio of manufactured exports to GDP,
this has not been accompanied by a significant upward trend in the ratio of
manufacturing value-added to GDP.

Some developing countries have managed to shift production into
technology-intensive manufactured exports, notably electronic and electrical
goods. However, with the exception of a few newly industrialised economies
(NIEs) in East Asia, which were already closely integrated into the global
trading system, developing country exports are still concentrated on
products derived essentially from exploitation of natural resources and the
use of unskilled labour. It is of considerable significance that none of the
countries that have rapidly liberalised trade over the past two decades are
in the group that have managed to shift production into technology-intensive
products.

Moreover, though statistics suggest that exports of technology-intensive
goods from developing countries (other than the NIEs) are growing, this may
give an exaggerated impression of the trends in technology in developing
countries and the geographical breakdown of value-added. It is often the
case that trans-national corporations have imported semi-manufactures with
technology already embodied. The value-added in the developing country may
then be due to low skilled labour and consequently create relatively little
income per capita. When the completed product is exported it is counted
as a
technology-intensive export, but very little technology has been
employed in
the country and consequently very little value-added.

Trends in developing country exports

Why then have developing countries not benefited from increased openness to
trade, the same openness which has been encouraged by developed
countries -
and is in many cases a condition for assistance from multilateral
institutions such as the World Bank and the IMF?

One reason is the trends in their export markets. Many countries have been
unable to shift production out of primary commodities such as agriculture
and natural resources. These markets have been stagnant and the general
trend in prices has been downwards over the past two decades (with the
exception of fuel).

Those who have shifted production from primary commodities to manufactures
have done so by focussing on resource based, labour-intensive products,
which generally lack dynamism in world markets and have a lower value-added.
This reliance on exports of labour intensive manufactures to galvanise
growth in the face of declining commodity prices has been a common policy
amongst developing countries. This has led to simultaneous export drives,
causing falling prices and intense competition for foreign direct
investment, and hence a weakened bargaining position for developing
countries. As a result, developing countries end up competing on the basis
of wage levels. Meanwhile, there is still excess labour in these countries.
More worryingly, these trends are occurring even while some of the larger
countries, including China, are yet to be fully integrated into the trading
system.

This tendency has been compounded by slow and insufficient trade
liberalisation in developed country markets for clothing, textiles and other
labour intensive manufactures.

The involvement in production of skill- and technology-intensive products
which has occurred in a number of developing countries has been largely
confined to the labour intensive, assembly-type processes that yield little
value added. Some of these countries actually saw a fall in their share of
world manufacturing income, while for others increases in manufacturing
income lagged behind their recorded shares in world trade.

Foreign direct investment

Along with trade liberalisation, the last two decades have also witnessed
substantial increases in flows of foreign direct investment (FDI). However,
success in attracting large amounts of FDI has not necessarily resulted in
greater growth. Mexico, for example, has experienced massive foreign direct
investment over the last few years and a corresponding increase in exports.
However, GDP per capita has not risen in response. In contrast, Taiwan has
seen lower levels of FDI and has been selective and more focussed on
building domestic investment. Here we have seen growth in exports and a
corresponding growth in GDP over the past two decades.

Conclusion

The report concludes that the liberalisation of trade and foreign direct
investment should no longer be the sole focus of development agencies.
Instead, developing countries, and the development agencies that impose
conditionalities on them, should ensure that trade policies are designed in
such a way as to maximise domestic growth and development - which may not
involve reducing external barriers. In addition, the process of designing
export oriented policies in developing countries needs to take into account
the probability of oversupply in the markets for labour-intensive
manufacturing exports from other countries.

It is important to note that the findings of this report, in relation to
trade and national income, run against the conventional wisdom of the
Washington Consensus and it neo-liberal economic doctrines. For decades, the
World Bank and IMF have be forcing countries to open up their economies to
free trade as a condition for new loans and, more recently, debt relief. The
rationale behind these conditions has been that countries will not develop
in the long-term if they do not open to trade. Now, at a time when developed
countries appear reluctant to open their own markets to free trade, this
report suggests that the World Bank and the IMF have been basing their
conditions of assistance on deeply flawed assumptions.

For more information on the work of UNCTAD, or a full text of the UNCTAD
Trade and Development Report 2002', please see http://www.unctad.org