Mar 15, 1993




Geneva 11 March (Chakravarthi Raghavan) -- The efforts at trade policy reforms undertaken by a large number of Third World countries need intensified and expanded external support to ensure success, according to the UN Conference on Trade and Development (UNCTAD).

In a report to the Trade and Development Board meeting next week, the UNCTAD secretariat has said that such support should be provided through assurances of unhindered access to export markets and the development of an equitable, secure and predictable international trading system, through promotion of competitive marketing structures by trading partners and through incentives and assistance to promote technology transfer and foreign direct investment.

The report brings out that a large number of developing countries have undertaken trade policy reforms, including trade liberalization, as part of far-reaching economic reforms to accelerate development.

But only a relatively small number, mainly more advanced economies among them, have succeeded in achieving the objectives of the trade policy reforms by expanding their exports, particularly manufactured exports on a sustained basis, by acquiring technological capabilities and by accelerating capital formation.

In this success, besides their own coherent and imaginative domestic policies, availability of external support played a critical role.

Enlarging the number of successful countries, the report adds, could be one of the major objectives of international economic cooperation in coming years and this would need intensification and expansion of external support.

The trade policy reforms undertaken have been part of a broader economic reform process consisting of stabilization, deregulation of domestic economy, privatization, liberalization of the financial sector, promotion of FDI and improving flexibility of labour markets. 

The trade policy reforms have involved substantial liberalization, foreign exchange reforms and devaluations, reforms of export incentives and other promotional measures, and adoption of international standards.

The 'liberalization' has involved reduction of export controls and state trading, removal of import quotas, import licensing and other quantitative restrictions (sometimes replaced by tariff equivalents), and reductions of level and variability of import tariff rates.

The expansion of exports out of these policies was expected to give a new impulse to economic activities, raise foreign exchange earnings to service debt and mitigate the severe constraints on import capacities, expand investment at a more rapid pace and thus accelerate economic development.

The extent of trade policy reforms carried out, UNCTAD notes, has been "impressive" and the trade liberalization has been carried out under very special and difficult circumstances: slowing down of the world economy and the demand for exports from the Third World, substantial fall in real and nominal terms in commodity prices and severe deterioration in import capacity; increasing protectionist pressures in industrial countries against products of export interest to developing countries; intensified import compression due to the debt burden and its servicing which need trade surplus on external account. 

Even the net financial flows of international financial institutions have been negative in recent years.

According to an OECD study, while the outcome of the reforms have been diverse, the risk of not achieving progress may be higher in low-income countries and these would need longer time periods and larger support for a successful completion of their reform programmes.

The study has underlined the importance of adjustment costs associated with reforms and has suggested OECD countries could extent support through development finance, market access etc.

Analysing the performance of a sample of countries with structural adjustment and trade policy reforms, the report brings out that while these countries had accelerated real export growth in the second half of the 1980s as compared to the decade as a whole, this faster expansion occurred at a time when the developing as a countries as a group had experienced accelerated export expansion due to the stronger economic growth in the world economy. 

Fourteen countries in the reform sample actually recorded slower export growth in 1985-1990 than developing countries as a group and in most of the reform countries export growth rates were significantly below the rates achieved by the group of all developing countries. And four of the reforming group (Mexico, Senegal, Sri Lanka and Turkey) recorded in 1985-1990 slower or even negative export growth as compared to the decade as a whole.

Progress in these countries in building up industrial export capacity has not been too encouraging either. While for developing countries as a whole, share of manufactures in exports increased by 16 percentage points, only two of the reform group (Mexico and Morocco) recorded increases in excess of ten percent, while that of sub-Saharan African countries share of manufactures in total exports stagnated.

GDP growth of the 14 reform countries however presented a more favourable picture, but growth in manufacturing value added was less satisfactory. Investment performance in some sample countries (chile, Jamaica and Ghana) improved significantly in 1985-1990 as compared to the whole decade, but in others investment growth accelerated only slightly while in two (Cote d'Ivoire and Nigeria) it continued to decline.

Trade policy reforms gave rise to issues of level and incidence of economic costs and benefits of reforms and time paths of costs and benefits. Usually costs came immediately, while gains accrued only over a longer period. An ILO study has brought declines in per capita incomes particularly in low-income countries.

Trade liberalization in low income countries did not always stimulate manufactured exports, but was frequently accompanied by inflation, output failure and in many cases de-industrialization. In over 60 percent of countries for which data are available, rate of growth in manufacturing sector declined during the 1980s as compared to the 1970s. Hence low-income countries needed even greater international support.

In countries with a higher level of development, a significant industrial base and no severe import compression, pursuing policies with a mixture of import substitution and export promotion and "selectivity" in protection and trade liberalization, the results on balance have been favourable.

The first and second tier of Asian NICs (usually held out in Fund/Bank literature as free marketeers and free traders), the report says that the record of their trade policies indicate that a "skilful mix" of markets and state intervention, use of targeting in industrial and trade policies, including targeting of export subsidies, tax holidays and credits and promotion of technological capacity building, have been among the crucial factors in the success of these countries in achieving export expansion.

Countries suffering from import compression, due to lack of foreign exchange resources, failed in attempts to stimulate exports and gain from policy reform and in addition they experienced considerable social costs due to inflation and slow or negative output growth.

All these underline the need for substantial external support.

In the area of market access, support needs to be provided through reduction or elimination of tariff and non-tariff barriers in the industrial countries and effective adjustment measures in these countries in line with shifts in international competitive positions. 

The report suggests that national transparency mechanisms could be important instruments for liberalizing domestic economies and promoting structural adjustment.

There is also need to ensure security of market access through an international trading system based on clear and effective multilateral rules and disciplines rather than economic and trade weight. Areas of conflicts include agricultural measures and trade-distorting effects of subsidies, use of anti-dumping measures adopted unilaterally and selectively to harass trade competitive exporters and the use of trade-related environment measures.

Solutions to these need actions both within the GATT framework and the Uruguay Round. 

Action is also needed at multilateral level to ensure competitive market structures, and greater consistency between trade and competition policies.

At the interface of restrictive business practices (RBPs) and intellectual property protection, there was the question of how the IPR protection could be balanced with free trade and competition.

The study also calls for support through transfer of technology through policies of home countries including use of marked-based price incentives for transfer of specific, critical technologies to the developing countries. In this area, the report suggests use of a "price wedge" separating supply and demand prices from the market price to be applied when a specific technology is sold to the developing countries or financial assistance or subsidy on royalties owed for technologies purchased by developing countries.

Another area of concern and needing policy incentives, the study suggests, is in strategic technology alliances being formed and promotion of such alliances involving enterprises in developed and developing countries.

The consequences of strategic alliances on general availability of the new technology they might generate, the study underlines, is not at all clear. If the new technologies are sold through commercial channels, they would be subject to monopolistic distortions. The science-based interdisciplinary R & D in such alliances might diminish flow of scientific knowledge now available as public goods. 

"The worst outcome of all is that technology might remain closely held inside the alliance," the report adds.

The report also expresses concern over the technological marginalization of many developing countries, particularly the least developed countries. The classic avenue of technology transfer, namely, FDI, has virtually closed to them. Access to technology might be further restricted if strategic alliances among enterprises and major regional trading blocs exclude those outside their arrangements.

The creation of telecommunications networks also threatened to exclude non-members from an extremely rich source of information.