[stop-imf] The IMF and World Bank orthodoxy is increasing global poverty - Former UK cabinet Minister Stephen Byers

[Robert Weissman]

I was wrong. Free market trade policies hurt the poor

The IMF and World Bank orthodoxy is increasing global poverty

Stephen Byers
Monday May 19, 2003
The Guardian

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.
Anarchists clad in black marched alongside grandmothers dressed as
turtles and steelworkers from Philadelphia. They saw international trade
as a threat - to their jobs, the environment or simply as part of a
capitalist conspiracy.

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 trade liberalisation. This would mean opening up their
own domestic markets to international competition. The thinking behind
this approach being that the discipline of the market would resolve
problems of underperformance, a strong economy would emerge and that, as
a result, the poor would benefit. This still remains the position of
major international bodies like the IMF and World Bank and is reflected
in the system of incentives and penalties which they incorporate in
their loan agreements with developing countries. But my mind has
changed.

I now believe that this approach is wrong and misguided. Since leaving
the cabinet a year ago, I've had the opportunity to see at first hand
the consequences of trade policy. No longer sitting in the
air-conditioned offices of fellow government ministers I have, instead,
been 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 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 =A343m - 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 out of poverty. Reform is essential
because, to put it bluntly, the rules of international trade are rigged
against the poorest countries.

Rich nations may be pre pared 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 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 give
communities the time to diversify into new areas.

This is not intervention for the sake of it or to prop up failing
enterprises, but part of a transitional phase to create 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 foun
dations of government subsidies and heavy investment in infrastructure
and skills development while 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 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 economic growth while allowing domestic markets to be dominated
by imports. This often has devastating effects.

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 that 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 1990s there was economic growth,
yet the number of people living below the poverty line increased by 14
million in the 10 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 IMF and World Bank is also of concern. The conditions
placed on their loans often force countries into rapid liberalisation,
with scant regard to the impact on the poor.

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

The IMF and World Bank should recognise that questions of trade
liberalisation are the responsibility of the WTO where they can be
considered in the overall context of achieving poverty reduction and
that it is therefore inappropriate to include trade liberalisation as
part of a loan agreement.

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

=B7 Stephen Byers is Labour MP for North Tyneside. He is a former trade
and industry secretary and was a cabinet member from 1998 to 2002.