Achieve development

The market, simply, cannot be left alone

By Stephen Byers
Published: Monday 15 September 2003

Achieve development

-- In November 1999 during the World Trade Organization ministerial conference in Seattle I led the delegation from the United Kingdom. I was convinced the expansion of world trade could bring major benefits to developing countries and would be a key to tackle world poverty. For this, developing countries needed to embrace fully trade liberalisation.

The thinking behind this approach goes thus: the discipline of the market would resolve problems of underperformance; a strong and robust economy would emerge and as a result the poor would benefit. This still remains the position of international bodies like the imf and the World Bank and is reflected 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 travelled and seen at first hand the consequences of trade policy. I have met farmers and communities at the sharp end. This experience has led me to conclude we need a different approach. One which recognises the importance of managing trade with the objective of achieving development goals.

International trade does have the potential -- in terms of income -- to be far more important than aid or debt relief. But reform is essential. To put it bluntly, the present rules of international trade are rigged against the poorest countries. Rich nations may 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 own domestic markets. These are then vulnerable to heavily subsidised exports from the developed world. In this way, full trade liberalisation rarely provides the desired developmental outcome.

Developing countries with successfully expanded economies have been those willing to put in place measures to protect industries -- while they gain strength -- and provide communities with a breathing space to diversify into new areas. This is not intervention for the sake of it. It is part of a transitional phase, the ultimate objective being the creation of strong businesses that can compete in equal terms in the global marketplace, without further protection.

Just look at Taiwan and South Korea, often held out as good illustrations of the benefits of trade liberalisation. In fact, they built their international trading strength on the foundations of government subsidies and heavy investment in infrastructure and skills development whilst being protected from competition by overseas firms. Those countries which have been able to reduce levels of poverty by increasing economic growth -- China, Vietnam, India and Mozambique -- have all had high levels of intervention but as part of an overall policy of strengthening domestic sectors.

On the other hand, there are countries in which full-scale trade liberalisation was applied. They then failed to deliver the projected economic growth whilst allowing domestic markets to be dominated by imports, with devastating effects on individuals and communities. Zambia and Ghana are perfect examples of this.

Even in countries which have experienced overall economic growth as a result of trade liberalisation, poverty has not necessarily reduced. In Mexico during the first half of the 1990s there was positive economic growth, yet the number of people living below the poverty line increased by 14 million in the ten years from the mid 1980s. This was because the various benefits of a more open market simply went to the large commercial operators, with the small concerns being squeezed out.

Markets, thus, cannot simply be left alone. When this happens liberalisation is used by the rich and powerful international players to make quick gains from short term investments. Add to this, the role of the imf and the World Bank. They often make it difficult for poor countries to integrate into the world economy. The conditions placed on their loans often force countries into rapid liberalisation with scant regard to the impact on the poorest people.

The way forward is through a regime of managed trade in which markets are slowly opened up, with trade policy -- subsidies and tariffs -- being used to complement and achieve development goals. The imf and the World Bank should recognise that it is inappropriate to include trade liberalisation as part of a loan agreement.

This way forward represents a departure from the current orthodoxy. It will be opposed by multinational companies, but would benefit the world's poorest and most vulnerable people. That's why it should happen.

Stephen Byers is a Labour MP in the UK, and was the trade secretary during the Seattle Ministerial conference

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