7:42 AM Feb 23, 1996


Geneva 23 Feb (Chakravarthi Raghavan) -- The East Asian experience shows that an active and fruitful participation in the global economy requires a deliberate approach to international integration through a measured and properly sequenced set of policies towards trade, capital flows and Foreign Direct Investment, according to the UN Conference on Trade and Development.

In a report for a Conference next week on the East Asian Development experiences, the UNCTAD secretariat says that a careful analysis of the experience of first and second tier Newly Industrializing Economies (NIEs) of East and South East Asia show that "a selective, strategic approach to the liberalization of trade and investment remains the key to success in the global economy".

This, the report notes, poses a dilemma for much contemporary thinking on development issues. On the one hand, it strengthens the consensus in favour of export-oriented development strategies. On the other hand, there is a perception that the emulation of the selective strategies of East Asian NIEs is no longer possible.

It is argued that the growing mobility of capital, prompted by increasing liberalization in international capital market and globalization of production by TNCs makes it difficult to impose regulations on enterprises for industrial policy purposes.

Also, the intensification of multilateral trade disciplines and extension of their scope as a result of the Uruguay Round prohibits use of some key policy tools like export subsidies, infant industry protection.

The WTO trading regime, UNCTAD report acknowledges, has reduced scope for some policy measures which call for trade-related subsidies, lax enforcement of intellectual property rights and strategic conditions imposed on foreign investments. Also, the more generalized protection that provided a backdrop for East Asian targeted policies is no longer possible, and many of those export promotion policies might not be permissible either.

However, the report says, current discussions on this issue tend to emphasize extremes -- either to emphasize the constraints of WTO obligations or not excessively minimise their impact on policy options.

"It would, at this juncture, seem essential for policy makers to avoid generalizations and undertake a more objective analysis of realistic policy alternatives for developing countries," the report says.

Japan, Hong Kong, South Korea, Taiwan province of China faced a range of problems and discriminations in GATT when they started their industrialization policies.

While the Uruguay Round has now increased the disciplines, it has also improved security of market access for developing country exports - an improvement over conditions initially faced by the East Asian NIEs.

"The basic argument which must be addressed is not whether the loss to developing countries in terms of policy autonomy is fully compensated by gains in terms of market access, but rather whether, in light of the changes in the global environment, there still remains a need for new policies to strengthen the prospects of developing countries and whether, regardless of past experience, the East Asian economies remain a relevant source for such policies in today's trading system."

In discussing the various new or improved disciplines, the Report notes that the WTO has imposed "a more homogeneous set of multilateral obligations" From this perspective, none of the East Asian economies used the "infant industry" clause of GATT (Article XVIII:C) but their quantitative restrictions (QRs) were covered under the balance-of-payments (BOP) provisions of Article XVIII:B. While the Uruguay Round "Understanding" on this provision strongly discourages resort to quantitative measures and provides for stricter multilateral surveillance, invoking these provisions is still available for developing countries meeting the BOP criteria. To the extent that their tariff rates remain unbound or bound at ceiling levels above currently applied rates, they can be increased to protect "infant industries".

The Agreement on Subsidies and Countervailing Measures has defined "subsidy" for the first time, tightened the disciplines on subsidies, and extends these disciplines to all WTO members. But it also contains "the most meaningful provisions" on differential and more favourable treatment which are not subject to any precise time limits. The least developed countries (LDCs) and a list of some 20 others with GDP per capita less than $1,000, are exempt from the prohibition of export subsidies so long as they remain in these categories and so long as certain thresholds, based on shares of world markets for products benefitting from export subsidies are not reached. Other developing countries are subject to an eight year phase-out of prohibited subsidies. Although "specific" subsidies (i.e. those limited to certain enterprises and not granted according to neutral, objective criteria) are "actionable", "remedies" can be applied against "actionable" subsidies of developing countries only if injury to the domestic industry of another member, serious prejudice to its interests or nullification of concessions can be demonstrated. In addition, there are a set of non-actionable subsidies including those which are intended to promote basic research, agriculture, and regional development.

As for the TRIMs Agreement and its limitations on industrial policies, the Agreement has not modified GATT obligations but simply clearly identified those investment measures which were incompatible with GATT Articles. These include local content requirements (which still can be applied by countries invoking Article XVIII:B), but leave a wide range of measures untouched. For example, export performance requirements are still permitted (if they involve payments to exporters they fall under the disciplines on export subsidies).

The General Agreement on Trade in Services (GATS) only involves binding commitments with respect to market access and national treatment when these have been specifically negotiated on a sectoral and sub-sectoral basis and included in the schedules of commitments. Most of these relate to investment (i.e. "commercial presence"), and market access for foreign service suppliers can be made conditional on access to networks and technology.

While the "most dramatic extension" of the multilateral trading system is through the TRIPs Agreement establishing the basic intellectual property norms of WIPO as multilateral obligations, some key policy tools such as compulsory licensing are still permitted but confined to exceptional cases.

However, the report adds, the real impact of the TRIPs Agreement will only become evident with the experience of its implementation.

"The proponents of the TRIPs Agreement have already shown their desire to reach interpretations that would extend the constraints over developing countries' autonomy in this area to a maximum."

The report adds that while the WTO multilateral agreements have reduced the scope of policy options, policy measures comparable to those applied by the East Asian countries can still be applied, particularly by the least developed countries and the other countries listed in Annex VII to the Agreement on Subsidies and Countervailing Measures. The main constraints would seem to be those posed by the ability of the countries concerned to devise and execute such policies, particularly those which involve negotiations with developed countries or TNCs, and to do this in the time periods available which differ among countries and from one Agreement to the other.

In any assessment of designing appropriate policies under current international obligations, it should be recalled that the East Asian countries had to exercise a considerable amount of policy ingenuity and administrative and diplomatic skills to maintain some of their policies. In this respect, both formal and informal government-business links which played such an important role in East Asia's success are likely to be of growing importance in the new trading environment, and measures to strengthen government-industry partnerships deserve closer attention by developing countries, the report says.

The restrictions of the WTO agreements on State intervention have also been exaggerated, the report says.

"Government provision of information to exporters and changes to exchange rates remain permissible policy instruments. Policies can be designed in such a way that they serve both macroeconomic purposes and others such as increasing the international competitiveness of certain industries. Many of the policies identified earlier with a dynamic profit-investment nexus will still be permissible under the new trading rules. These include general fiscal concessions to corporations, the provision of subsidized R&D and measures to promote corporate savings and investment. Given that these policies can have considerable influence on promoting technological upgrading and international competitiveness, strengthening these areas of policy making cannot be emphasized too strongly. Differential taxes (VAT and excise tax) on domestic consumption and production also have a role to play in promoting exports of certain industries."

The fundamental question was not whether the WTO rules permit an emulation of the East Asian model, but rather whether the model itself is still relevant in the light of the globalization of production and the liberalization of world markets for trade in goods and services, investment and finance.

In another cautionary note about the new trade agendas, the UNCTAD report adds: "Many of the most important challenges will come in the future with pressures to direct the multilateral trade rules to deal with the phenomenon of competition between regulatory regimes. The agenda to be decided by the first WTO Ministerial meeting in Singapore in December 1996 will indicate future direction of the multilateral trading system in this respect.

"Many advanced countries (and groups of countries) still continue to pursue their objectives through bilateral initiatives aimed at subjecting developing countries to constraints beyond those provided by the multilateral rules and to influence them in the establishment of the new trade agenda. "In this context, it should not be forgotten that the evolution and impact of these rules are only part of a wider interdependence picture in the global economy. Contemporary macroeconomic conditions have created a slow-growth-high-unemployment environment, particularly in the advanced economies, which if it persists will have important consequences for the world trading system. Under such conditions, the adoption of export-oriented models by developing countries may be frustrated by stagnation in the North (although intra-developing country trade, particularly in the context of sub-regional agreements is showing increased dynamism). Such an outcome might not only make the developing countries sceptical of the real potential benefits of freer trade, it would also further weaken prospects for growth in the developed countries, which ultimately is the engine of trade expansion."

On the issue of liberalization of financial sectors and FDI as a panacea for development, the report notes that an important feature of the new global environment is the increasing internationalization of finance Greater cross-border capital flows can help reduce the balance-of- payments constraint on growth in developing countries but "they may also restrict the feasibility or scope of some policy options."

The new international financial environment, including "an indiscriminate deregulation of financial markets in some countries", the report points out, "has been an important source of volatility and financial instability."

This has been particularly so since portfolio investments, and inflows of speculative short-term capital tend to pose a threat to macroeconomic stability and produce large swings in key financial variables, including the exchange rate.

"The resulting level of uncertainty is unlikely to produce an environment supportive of new investment decisions. These effects have had a particularly detrimental impact on some developing countries where domestic financial markets are thin and domestic financial institutions are weak.

"While capital inflows picked up rapidly in the early 1990s, they included large amounts of reversible capital attracted by arbitrage opportunities arising from high interest rates and currency appreciations, sometimes brought about by stabilization policies, as well as by prospects of short-term capital gains in emerging stock markets. In some countries, the factors that attracted portfolio investment also deterred investment in productive capacity, particularly in the export sector, which was needed to lower the growing external deficits associated with capital inflows and exchange rate appreciations. When these flows were reversed, deflationary adjustments became necessary, followed by a pronounced slowdown in growth rates.

"Thus a rapid dismantling of regulations on international direct and portfolio investments is not always the best strategy for many developing countries," the report says.

"Rather, as the East Asian example shows, while attracting capital inflows can be crucial to supporting a high rate of investment and GDP growth, a careful regulation of financial flows can be beneficial, particularly where the larger objective is strengthening the export sector. A mix of monetary, fiscal and exchange rate policies, together with prudential regulations of capital flows and the judicious use of direct control measures such as limits on borrowing abroad, deposit and reserve requirements, and taxes on foreign exchange transaction have all been employed by the countries in East Asia to successful effect."

The internationalization of production, the report notes, has not reached the same levels as in finance, and in many respects the lessons from East Asia in this area are perhaps even more relevant for developing countries.

In East Asia, TNCs have been used strategically to close the technology gap with leading industrial economies. However, there are different ways of accessing technology, which in one way or another reflect the degree of dependence on TNCs.

"A key feature of all the rapidly growing countries in East Asia has been their pragmatic approach to interacting with foreign firms, including a willingness to experiment with all the different forms of cooperation.

"Even where FDI brings considerable dependence and few technological spillovers, as in some extractive industries, it can be useful to national development strategy to the extent it generates foreign exchange and that foreign exchange is used productively.

"Moreover, the package of attributes associated with FDI can be particularly attractive to countries at lower levels of industrial development where the basic infrastructure is missing.

"However, experience from East Asia and elsewhere shows that FDI lags, not leads, growth. Because FDI is more attracted by market size, and more importantly growth prospects, than the degree of business freedom allowed in the country's regulatory regime, attracting FDI should be seen against efforts to stimulate a wider growth dynamic. This is why the rapidly-growing Asian countries are attracting more FDI than other parts of the developing world, despite their foreign investment rules which are probably less liberal than those in Latin America or Central and Eastern Europe.

"Moreover, where FDI is linked to export-oriented manufacturing activities, as in the second-tier NIEs, although a relaxation of restrictions has been one factor behind increased inflows in recent years, it is rapid productivity growth which has been the main locational attraction.

"Indeed," the report adds, "given the growing difficulty in the new environment of distinguishing between short and long-term capital flows, and because radical liberalization and deregulation programmes tend to create instability and adjustment problems, a gradual liberalization of investment laws is more likely to realize the full benefits of FDI."

These concerns are particularly apparent when countries are trying to upgrade their industry beyond what is possible with existing resource endowments. While the benefits from hosting TNCs are particularly strong in sectors where specific knowledge and capital equipment are closely tied together, where entry barriers are particularly severe or the pace of technological change particularly rapid, these same concerns make the development prospects even more difficult to predict. In this case, the lessons from East Asia, both the first and second-tier NIEs, strongly suggest that the role of strategic industrial policy is important.