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| Review
of Trade Policy at the Crossroads: The Recent Experience
of Developing Countries |
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Author
:Mehdi Shafaeddin
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Published
by: Palgrave Macmillan. |
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| Review
by Amitayu Sengupta. |
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Click to Enlarge
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This recent book
by Mehdi Shafaeddin is a detailed study on the
contemporary issues regarding international trade.
The neo-liberal policies endorsed by the IMF-World
Bank through the Structural Adjustment Programmes
and other policy prescriptions propose an open
trade policy as the panacea for all problems of
the developing countries. The counter arguments
from the alternative schools of thought point
out the pitfalls of such policies, based on the
fallacies of the economic arguments in favour
of such policies. The book, written in this context
provides a detailed analytical study of all the
points of debate with meticulous empirical evidence
for the arguments put forward. |
The book has nine chapters (including an introduction
and a conclusion), each delving into the various
issues of the broader debate.
The first chapter, the introduction, gives a detailed
historical study of the debate. It provides a
brief summary of international events that led
to the present context, and traces the evolution
of the various schools of arguments that give
shape to the issue today. In this regard, the
author traces the arguments from Adam Smith's
An Enquiry In The Nature And Causes Of The Wealth
Of Nations to the more recent arguments of Prebisch,
Singer, Kruger and John Williamson, whose proposals
were labelled subsequently as the 'Washington
Consensus'. All the arguments are beautifully
traced in different phases, contextualising them
with respect to the international scenario to
better explain their evolution. The chapter elucidates
the conceptual differences between the various
economic terms like 'trade liberalisation' and
'export promotion', 'trade liberalisation' and
'liberal trade policy', 'outward looking', 'inward
looking' and 'export promotion' and 'import substitution',
thereby highlighting the fallacy often committed
in interchangeably using the terms. The first
chapter thus sets the background for the subsequent
analytical study that follows.
The second chapter, titled 'Growth and Diversification'
looks into different aspects of the two concepts.
The relationship between these two economic concepts
and the causality has been interpreted differently
by the neo-classical and the alternative school
of thought, thereby giving rise to differing conclusions
regarding policy prescriptions. The author briefly
highlights this matter before going into an empirical
study of the same. The data consists of a sample
study of selected developing countries for the
period of 1990s as this is the period when "reform
was intensified in most countries". 1989-91 is
taken as the base period for the study. The sample
countries have been selected on the basis of three
criteria in order to cover countries which have
a certain degree of industrial base and manufacturing
export capacities. The first criterion is that
exports of manufactured goods exceed, on average,
$90 million, taking into consideration that these
exports include re-exportation (for example, repairing
machineries). The second criterion is that, in
the base period, the share of manufactures products
in exports and GDP is greater than 10% and 5%
respectively.. However, some low income countries
that did not fulfil these criteria were also included
for better comparisons. The samples cover countries
from Latin America, Africa and Asia. The study
looks into the structural changes that have resulted
in these countries due to the new economic policies
implemented and whether this has led to any increase
in the vulnerability of the economy. Special focus
is given on the process of upgradation of the
respective export structures in these countries
and its' fallouts in this regard. The case of
Latin America is given special focus given the
fact that Maquila trade of this region is often
cited as a success story of developing manufacturing
base through trade liberalisation by neo-classical
economists. Special focus is also given on the
effects of Structural Adjustments in African regions
(with special attention on Ghana) since their
experiences were quite in contrast to the Latin
American phenomenon. The issue of de-industrialisation
as a fallout of liberalisation too is dealt with
in this chapter. The chapter concludes that slow
growth of exports and increased de-industrialisation
has resulted along with increased vulnerability
given higher import dependence in the majority
of the 46 countries studied. For the NIEs of East
Asia, trade liberalisation was followed gradually
and selectively, as an integral part of a long
term industrial policy. Expansion of supply capacity
was stressed on by these countries before opening
up the industries. Consequently these countries
reaped the maximum benefits of trade liberalisation.
In contrast, majority of the countries (especially
African countries) embarked on a rapid across-the-board
trade liberalisation, which resulted in "development
and re-orientation of the industrial sector in
accordance with static comparative advantage with
the exception of industries that were near maturity".
In fact, across the board it is seen that those
industries that were 'near maturity' before liberalisation
benefited from the process. In case of the African
countries like Ghana, liberalisation failed to
increase production and export capacity instead
leading to massive de-industrialisation, as a
result of which these countries have been reduced
to depending on exporting primary commodities
and simple processed products.
The third chapter titled 'The Impact of Reform
on Investment' takes on from where chapter 2 ends;
and that is to answer the question 'why did the
liberalisation process not bring in the kind of
changes that it was supposedly meant to?' The
answer lies in the difference in investment patterns
that liberalisation essentially entails. The first
section of the chapter attempts to provide an
understanding of the interrelations between investment
and exports. The second section carries on with
the empirical analysis on this issue. For countries
in a very nascent stage of industrialisation,
the role of investment is essentially to establish
and develop the industrial base. However, for
a more mature economy, structural changes in the
industrial base are important "for responding
to, or creating, new opportunities in international
markets". The author also points out that growth
of exports can have positive effects on investment
through 'income effects' 'supply effects' and
'vent for surplus effects'. However, under certain
circumstances there maybe a supplementarity between
exports and investment, for example, if material
inputs and resources are diverted from the investment
sector to exports or "if 'supply effects' of export
are not present due to 'import compression' needed
for payment of debts". The author concludes that
"the impact of investment on growth of supply
capacity depends not only on the rate of investment
(I/GDP ratio), but also on the structure of investments,
its allocative efficiency and X-efficiency, i.e.
efficient utilisation of the installed capacity.
…hence a reform programme and trade liberalisation
succeeds in accelerating growth of total output/or
output of a sector, if it achieves, inter alia,
greater I/GDP ratio, a ratio beyond what would
have been otherwise attainable, or makes the structure
of investment more conducive to growth and development".
In the context of this background, the author
then goes on to the empirical analysis. The overall
levels of investment in all the sample countries
are first looked into. Detailed break-ups in terms
of functional and sectoral allocations of such
investment, distinctions between private and public
investment, distribution of all investments amongst
the different manufacturing industries are eventually
studied to get a deeper understanding. Changes
in investment (in terms of patterns) due to structural
reforms and changes in market structure are critically
examined; the latter distinguishing between the
impact of TNCs in the domestic economy and the
manner in which domestic firms responded to the
reform policies. A special study of Brazil is
done in the latter part of the chapter. The chapter
concludes that "investment, rather than exports,
has been the main contributing factor to the expansion
of industrial activities. In the countries where
reform was guided by the 'Washington Consensus'
and/or SAPs, the structural reforms had negative
impact on domestic investment, at the early stages
of reform". It is noted that TNCs (particularly
in Latin America) are mainly interested in purchasing
existing plants and services that fit into their
international production network, namely resourced
based industries and assembly operations, instead
of Greenfield investments. Their contributions
to technological upgradation have so far been
negligible. The author further reiterates that
countries where some industrial base was developed
under import substitution policies need some competitive
pressure to make them viable in the international
market, but open market policies render them helpless
in the face of sudden and unequal competition,
increase investment risks and adversely affect
profit motives.
The author then goes on to study some basic concepts
in international trade, discussing the different
points of those arguments.
The fourth chapter titled 'Market and Government'
looks into the apparent contradictions between
the two. While neo-classical economists argue
that free market is the key to efficient allocation
of resources, their detractors point out the different
forms of market failure for a conclusive case
for government intervention. The author here deals
with the issue in detail. First, the key problems
of the developing countries are discussed, and
then the various limitations of the market and
its different inadequacies are addressed. The
issue of 'market failure' is studied extensively
identifying its main causes. The product market
and labour markets are studied separately and
the emerging trends occuring as a result of reforms
are traced through historical evidence. The theoretical
aspects of the debate too are discussed in detail.
The issue of external economies is also referred
to in this regard. The issues of government failure
and the various counterarguments are posted next.
In the conclusion the author argues that most
of the economists pit the market vis-à-vis
the government as different alternatives. Instead,
the author suggests they should be treated as
complementary to each other as proposed by the
likes of Arnd, Shapiro and Taylor, etc. This third
alternative is explained in expanse, where the
government plays the key role in shaping the economic
institutions of the country and providing the
launching pad for the domestic industries, while
the market plays the role of providing the incentive
structure for such development in accordance.
The fifth chapter of the book, titled 'Universal
Trade Liberalisation', looks into some of the
theoretical fallacies of the argument. The introduction
and theoretical background sections give the basic
premises of the argument. The next section elucidates
the unrealistic assumptions on which the argument
is based. Issues like perfect competition, increasing
returns to scale, risks and its different implications,
the case of full employment and similarities of
countries are analysed theoretically in detail.
A brief overview of alternative views on 'comparative
advantage' as proposed by Cline, Amstden, Gomery,
Baumol etc is given. The author finally concludes
that "free trade should be the ultimate aim of
all countries. Nevertheless, as long as countries
are at different levels of development, one cannot
expect that universal trade liberalisation as
currently recommended would be beneficial to industrialisation
and development of all developing countries. …Although
some trade is better than no trade, free trade
is beneficial to all participating countries in
international trades only under certain restrictive
assumptions".
The sixth chapter titled 'Infant Industry Argument
and Import Substitution' traces the theory in
depth. It gives the background and its' origin
as expatiated by List elucidating the justifications
for the same. The different modalities of protection
and the basic features of an infant industry are
laid out next. The issue of the market size is
dealt with separately as a different section.
The concept of 'Import Substitution' as proposed
by Raul Prebisch is discussed in detail where
the various misinterpretations of the theory are
succinctly pointed out. In the conclusion the
author raises the question whether the infant
industry argument is still valid in today's context.
His opinion is that the "argument as developed
by List, within the context of its general theory
of 'productive power' is still valid if properly
applied". However the author reiterates that the
original theory stated clearly that trade should
be liberalised selectively aiming at the ultimate
goal of free trade given all countries reach the
same level of development.
Chapter seven titled 'History of Trade and Industrial
Policy' looks into the history of the development
of manufacturing industries in the major industrialised
countries. The chapter aims to establish two points:
"no developed country-city states are excluded-has
developed its industrial base without prior infant
industry protection….." and second, "in the process
of industrialisation and export expansion, functional
and selective government intervention has been
an important factor". This chapter studies the
development of Great Britain, laying stress on
its industrial and trade policies throughout history
in order to explain how it has reached the current
state that it is in. However, in this regard,
the role that the colonies played in Britain's
development is underplayed in this study. The
development history of USA is also studied next
with a detailed account of government interventions
at different points of time in this process. The
cases of Germany and France too are mentioned
in the study in a separate section. The author
also makes a comparison of recent trade liberalisation
with that of the nineteenth century. The chapter
concludes by suitably substantiating the two moot
points that it laid out at the onset.
Chapter eight titled 'The World Trading System
and Industrialisation' is a detailed study of
the GATTS and WTO. It lays special emphasis on
the contradictions of these two bodies, dealing
separately with the different sectors under WTO
negotiations such as agriculture, textile clothing
and footwear, highlighting the discrepancies that
have led to numerous controversies surrounding
the WTO as a whole. The chapter highlights how
these trade agreements limit the policy space
for developing countries thereby encroaching on
their autonomy in developing their industries.
It also points out how developed countries have
openly flouted certain rules and regulations that
are binding under the agreement. In this regard
the issue of dumping, especially in the case of
the cotton controversy is stated in detail. Through
these issues, the differential treatment meted
out to developing and developed countries is highlighted.
The final chapter titled 'Concluding Remarks:
An Alternative Approach' sums up the arguments
of the previous chapters. It draws the conclusion
that trade liberalisation as practised today under
the IFI aegis has been discriminatory and in fact
detrimental for the developing countries, especially
the LDCs. The reason for the same is stated to
be the faulty design of the reforms programme.
"Influenced by the orthodox approach, trade policy
reform has been envisaged as synonymous with 'uniform'
import liberalisation, applicable 'universally'
to all developing countries; the levels of development,
industrial base and special structural characteristics
of individual countries were disregarded". The
author concludes that the general theoretical
abstraction of all these arguments based on the
theory of static comparative cost advantage is
the major flaw of these theories. As an alternative,
the author states that trade policy should be
development oriented, with special attention on
capacity building and industrialisation. In this
process, the government has a big role to play.
Even though the author accepts the risk of government
failure, he, all the same, reiterates that given
the fact that international market is not perfectly
competitive, the market forces cannot guarantee
proper resource allocations and incentives and
hence the government has to play the role of the
regulator in the process. He talks in length about
developing the agricultural sector, identifying
industries best suited for exports and gradual
nurturing of the same, laying stress on factors
like technological upgradation and learning capacity.
He also suggests control over the activities of
TNCs and finance capital in the developing countries
in this phase of early development.
The book is an extensive study on the topic of
choice, giving a detailed picture of the issue.
The meticulous studies in all the chapters helps
one get a comprehensive picture of the broader
debate. The different theoretical debates and
their backgrounds are well elucidated throughout
the book. However the author downplays the political
economy that has historically played a big role
in shaping international trade. Moreover, the
history of colonial rule that has shaped the divide
between developed and developing countries is
overlooked. This issue is of paramount importance
in tracing the history of development of the different
countries. Even in the present context, the viability
of the alternatives suggested by the author is
hinged on the political economy of the day. |
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| June 28, 2006. |
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