A rollback of the Third World?

Chakravarthi Raghavan


(IFDA Dossier 52 March-April 1986, International Foundation for Development Alternatives, Nyon, Switzerland)


1985 was the 40th anniversary of the founding of the United Nations and the postwar order that the victorious allies created. While the UN provided the political underpinning for that order, the economic framework was that of the Bretton Woods and GATT systems, covering the areas of Money, Finance and Trade, and charged with promotion of full employment and growth, through interventionist government policies, in order to prevent a repetition of the 1930s. 

Within two decades, and totally unanticipated by the founders of the UN, the countries of Asia and Africa became independent, and joined the system. They began with the naive view that with independence would come prosperity and rising living standards for their peoples, but were soon disillusioned. 

At first, they sought concessions and minor changes in the systems - commodity agreements, generalised system of preferences for their exports, codes of conduct (liner shipping, transfer of technology, restrictive business practices etc), BOP financing, and ODA targets as percentage of GNP. These did not challenge the international economic system as such, but merely sought some reforms in them. (1) 

Soon these countries discovered that these minor changes did not suffice to change the basically inequitous relations that thwarted their development, and saw the need for basic changes in the system, and specifically in the 'decisionmaking process which affects the production and price levels and the international distribution of income'. (2) 

This led to the 1974 Declaration and Programme of Action for the NIEO, and the convening of the Conference on International Economic Cooperation (CIEC) at Paris on 16 December 1975. The CIEC ended two years later, achieving little. Individual issues were taken up in different forums for negotiations, and talked to death in endless debates. There were a few, minor, marginal gains for the South, but overall there was an impasse. 

By 1979, the Third World saw the futility of sectoral negotiations, and sought Global Negotiations, which were agreed to in principle, but blocked in disputes about 'forums'. Most OECD countries, meanwhile, had changed course, virtually abandoning full employment and growth objectives in favour of attack on inflation via monetarist policies. The policy-induced recession was used to attack the working classes and the welfare state at home, and the Third World and its demands for NIEO abroad. Through the IMF and the World Bank, severe adjustment policies were forced on the Third World, affecting mainly the poor and the marginalised people in these countries. At the same time, the US launched a drive to bring into GATT new issues like 'services', 'investment', 'intellectual property rights', etc. 

The US choice of GATT as the preferred forum was not without reason. Though Keynesian in its origins (in the Havana Charter and its International Trade Organisation), GATT has become the foremost exponent of laissez faire economics, and a champion of private enterprise and of TNCS. 

The US drive in GATT began in 1981, and initially met with some resistance on the 'services' and 'investment' issues, not only from the Third World but the EEC too. Ultimately, a compromise was reached at the GATT Ministerial Meeting in 1982, for (a) interested countries undertaking national studies on services, (b) for exchange of information on such national studies inter alia through international organisations such as GATT, and (c) for the GATT contracting parties (CPs), in the light of such exchange of information, to decide whether any multilateral action on services is 'appropriate' and 'desirable'. 

But disagreements on GATT Secretariat's role blocked the exchange of information, and this became possible only in 1985, under an agreed procedure by which the Chairman of the CPs (who was then Felipe Jaramillo of Colombia), was authorized to organise the meetings, and with a very limited role for the Secretariat. This exercise became known as the 'Jaramillo track', emphasising its separateness from the other GATT activities in its traditional areas of competence, and is yet to be completed. 

Since mid-1984, the US with varying support from other OECD countries has been trying to launch a new round of Multinational Trade Negotiations (MTNs), and include within it new issues and themes. It is seeking negotiations on 'trade in services', 'high-technology', and 'intellectual property issues', though without specifically spelling out details of what it wants. 

The Third World countries have been resisting the new round, arguing that the first priority is for implementation of past commitments - like 'standstill' and rollback' of protectionism promised at the 1982 Ministerial Meeting - and the implementation of the GATT Work Programme for 1980s, agreed upon at the 1982 Ministerial Meeting. There has also been opposition from some of them to new themes. In the beginning the opposition came from all the Third World countries. But under intense political and other pressures, mounted by the US at capitals, some of the US allies have either remained silent or have been giving support of sorts to the US. But a number of Third World countries - including Argentina, Brazil, Cuba, Egypt, India, Kuwait, Nicaragua, Nigeria, Pakistan, Peru, Sri Lanka, Uganda and Yugoslavia have continued to voice their opposition, with varying nuances. 

At the November 1985 session of the CPs, the two sides avoided a confrontation, through a procedural device that has put off the fight to at least September 1986. They agreed to the setting up of a Preparatory Committee to determine the 'objectives, subject matter, modalities, and participation, in a new round, and report to a Ministerial Meeting in September. At the same time they agreed to continue the separate exercise on services, with the additional mandate of making recommendations on services to the CPs at their next session. All the issues will thus come up before the 1986 Ministerial Meeting. 

The term 'services', covers a wide range of very disparate activities - whose only common element seems to be that they are not 'agriculture' or 'manufacturing', and that the outcome of their activities are 'invisible'. Some of the activities sought to be included under this term are: accounting; advertising; banking; building, construction, and engineering; franchising; hotels and motels; insurance; leasing; legal services; motion pictures; telecommunications; data processing and information; tourism; transport (air); and transport (maritime). 

In many countries, both industrial and Third World, several of the services are in the public sector or monopolies subject to heavy state regulations - on grounds of national security, development objectives, consumer protection, or other public policy considerations. 

The exchange of information on services in GATT has brought out that they are heterogenous; pose difficulties in 'defining precisely' the range of activities in the term; that in many cases the services are consumed where produced (because they are intangible, and are neither storable nor transportable); that there are difficulties in defining the 'traded' or 'tradeable' services, or in identifying the 'obstacles' to the trade and distinguishing them from obstacles to 'investment' or 'establishment'; and that there is no international understanding on problems faced in data collection, classification, data needed for analysis, and problems of confidentiality. (3) 

Despite these acknowledged deficiencies, the US and its supporters want to push ahead with negotiations for an international framework on 'services', and restrict the right of countries to undertake regulatory actions in such areas as: currency and foreign exchange controls; state authorization for purchase of real estate and property; right of foreign firms to establish themselves on the territory of a country; conditions under which foreigners may enter, leave, reside and be employed; business competition; protection of intellectual property. 

Without committing itself to what its ultimate goals are, the US has said there should be an overall framework on 'services' in GATT, applying some of the rules and principles of GATT, and that within this there should be separate codes for various service sectors. It has already made clear that it does not want the GATT's fundamental provision for most-favoured-nation (MFN) treatment to apply to the services, but wants the GATT provision for national treatment to foreign service enterprises and their products. 

To begin with, under the overall framework, the US wants countries to notify all their regulations on services, and make them 'transparent', so that countries could be asked to justify the 'reasonableness' of their regulations, namely, "the balance between their regulatory requirements and their restrictive effects on 'trade' in services". 

At the same time the US wants to exclude laws that come within the purview of consular affairs, so that while the rights of countries to regulate use of foreign managerial and highly technical personnel, working in 'service establishments' in their country, would be subject to the international framework on services, the rights of countries to control 'immigration' and prevent entry of 'labour' and 'labour services' would not be affected. 

On intellectual property, the US and the EEC refer to what they call the growing menace of counterfeit products in international trade, and the need to deal with it through GATT in a multilateral way. Presented in these terms, the issue appears 'reasonable', since the term 'counterfeit' itself evokes an image of illegality and fraud. In fact what is being sought is to use GATT to impose higher obligations on Third World countries, on 'patents' and 'trademarks' rights for foreigners, than those provided in the relevant international agreement, namely the Paris conventions. Though heavily loaded against newcomers, the Third World, and their access to technology, the Paris conventions still provide a great deal of autonomy to its members, on the sectors of activities where they might allow patents and trade mark rights. Many Third World countries, for example, do not allow 'product' patents for pharmaceuticals and food products, but only 'process' patents. The life of such 'process' patents can also be smaller, and often is. Many do not allow 'plant breeders rights'. In all these sectors, if a product is produced by a different process than the patented one, there are no patent rights, and thus could be freely 'imported'. National patent laws also provide for judicial or administrative processes for alleged violations of patents and trade mark rights, and for remedies. The effort via GATT is to shortcircuit all these, and provide for certain rights and obligations, for countries, and incorporate them in a GATT code, on the same lines as the various non-tariff codes under the Tokyo Round MTNS. Those subscribing to them will get the benefits of their exports not being subject to harassment and seizure by customs, while others would have no such rights! 

In this 'debate' on services, the US and its supporters have sought to make out that this is an area of growing international importance, that no one has been addressing this, that 'liberalisation' of international exchanges in this area would be of benefit to all, just as it has been in the case of trade in goods, and that GATT which has been dealing with 'trade' in goods is the best place to deal with 'trade' in services. 

All the neo-classical economists of the North and South who have been advocating liberalisation of trade in services la GATT base themselves on Ricardo's theories of free trade, and international division of labour based on comparative advantage, for the benefit of all countries. Some of them, in the South, have also advocated support to the US in GATT on 'services', on the ground of need to improve bilateral relations, hardly an economic argument. 

>From the time of Hume and Ricardo to now, advocates of free trade have always used it to advance their country's interests. '... free trade on its first premise was ... entirely preoccupied with the interests of the native country... In the construction given to the theory of foreign trade by Ricardo, the factors of production - land, labour, and capital - of a country were presumed to be mobile only within the country, but not over its boundaries. From the point of view of economic policy, however, the most important aspect to note is that it was out of a concern for the interests of their own country that free trade theorists demanded free exchange with other countries. (4)  

Theories of free trade and free market are formulated on the basis that the transactions are between independent entities in different countries. But even when Ricardo enunciated his theory, with the example of Portuguese wine in exchange for British cloth, "the wine production and distribution from Portugal at the time was not Portuguese... It was the English Bristol Wine Companies which owned the land, controlled the production of the wine, bottled it, stored it, shipped it and sold it".(5)

If the thesis of international trade being between independent enterprises was a myth in 1948 (when GATT came into being), it is even more of a myth today. When GATT came into being, the phenomenon of TNCS, and their dominance of international trade had not become so prominent as now, when a large proportion of international trade in goods are transactions within a TNC, and based on nothing else than the interests of maximisation of 'global profits' for the benefit of the TNC and the capital accumulation process of the home-country of the TNC. 

But the rise of the transnational conglomerates, linking production and distribution of goods, and finance, technology, transport, etc., have already raised issues that call into question the GATT views about 'market' and 'free trade'. Also, since the late 50s, governments of industrial countries are non- interventionist and neutral when it comes to taking actions against TNCS, but act positively abroad for furthering the interests of their TNCS. 

At least in the area of 'free trade in goods', Ricardo and his successors had sought to present an image of comparative advantage among countries in different goods. To get around the difficult questions being raised about what would be the differing comparative advantages for countries in different service sectors or in services as a whole, the advocates of 'free trade in services' have hit upon the idea of comparative advantage, viewing both goods and services as one. This is on

the basis of the three-step theory of economic growth, propounded by Fisher and Clark, that the process moves from agriculture to manufacturing and then to a service economy. 

But as UNCTAD has pointed out, this is at best a partial explanation of the service phenomenon, and one that ignores the vital role of services in the process of growth. It also ignores the fact that through control over the supply of services, the existing comparative advantage of a country in production and exports of goods can easily be negated and reversed. Even the determinants of trade flows in services, applied by some of the 'free trade' theorists, are challenged be several others.(6) 

These theories about services being a higher stage of economic growth, and that free trade in goods and services on the basis of comparative advantage would benefit all, really amounts to consigning the Third World for ever to the position of hewers of wood and drawers of water, for the benefit of the industrial countries and their prosperity. 

The attempt to lump these heterogenous activities under one common term 'services', is really aimed at creating confusion to foster the idea that it is a field not being dealt with by anyone, and should be looked into at one place. By putting 'trade' before the word 'services', the legitimacy of GATT to deal with it is being fostered. In fact the protagonists freely admit in private that if all the issues in 'services' had been presented in their true light, namely, as issues of investment and establishment, they could not have been brought into the international debate, since these are within the 'sovereign' rights of countries, and there are no institutional mechanisms except those of the UN. 

Many of the activities now sought to be brought under the term 'services' and dealt with in GATT, are in fact governed by international conventions and treaties, and institutional mechanisms are in place to monitor and administer them. 

The ITU is dealing with telecommunications and related services, the IBI in Rome with informatics, the WIPO with intellectual property issues, ICAO and IATA with air transport and related services, and IMO and UNCTAD with various shipping issues. Some of the issues relating to foreign investments, the rights and obligations of TNCs and those of host countries, have been engaging the attention of the UN Centre for TNCS (UNCTC), for over a decade now. The UNCTC and the IBI are together involved in creating an international framework on information and data flows. UNCTAD has been involved in insurance/reinsurance issues, and in formulating a code of conduct on technology transfer. All these forums have been taking 'an integrated view, within their areas of competence, and have been formulating policy and/or enabling negotiation of new agreements to deal with issues arising in the international arena. 

But in all these forums, it is the US that has been blocking progress, and has brought the dialogue to a standstill. 

No convincing reasons or arguments have been put forward as to why these various different subjects should be put under one common heading 'services', and dealt with in GATT, allegedly on their 'trade' aspects, but in reality covering investments, rights of establishment, technical standards, and everything else. 

If the US or any other country feels the need for an international agreement on 'services', the only recourse they have is to go to the UN for the convening of a special Conference to deal with it, or go to UNCTAD, with its wider mandates on trade and development, to initiate such a move, or convene an international conference on their own initiative, in which interested states may participate. 

Ever since the US launched its drive to bring these new issues into GATT via a new round of MTNS, it has been sought to be presented as part of GATT's periodic attempts at trade liberalization. There have been repeated references to the earlier seven MTNS, and the gains to world trade from these seven rounds. 

When the General Agreement was signed in 1947, of the 22 signatories, 11 were from the Third World. Two of them ulti- mately did not join, while a third (KMT China) withdrew. For a long time, until the 60s, the number of Third World members of GATT were very small, and they played no real role. Tariff concessions were negotiated and exchanged on the basis of 'reciprocal and mutually advantageous approach', in successive trade rounds. Third World countries had little to offer and got little either. Any MFN benefit that accrued to them was not really significant, since these were mainly in industrial products, where the main suppliers were from industrial countries. 

GATT itself functioned largely as an organisation of the industrial countries who were the major trading partners. In 1958, the Haberler report made several specific recommendations and these were followed up by a report of a GATT committee, pinpointing the specific actions industrial countries should take to enable a substantial expansion in the export earnings of the Third World countries. But no actions were taken on these, and there were only promises that these too would be addressed in the impending new round of MTNS (the Dillon Round of 1961-62).  

None of the problems were addressed in the Dillon Round, but it marked the beginning of a period of discriminatory measures against imports of manufactures from the Third World, under spurious economic theories about 'low wage imports' and 'market disruption' - all alien to the theories of free trade on the basis of comparative advantage. 

This was to be the pattern over the next two decades: the Third World putting forth demands and focussing on its special handicaps, the US and industrial countries promising actions in a new round of MTNS, launching of MTNS, and trade liberalisation among industrial countries with few benefits to the Third World, and new discriminatory measures against the Third World. 

During the Dillon Round, came the Short-term Arrangements (STA) governing trade in cotton textiles and clothing, to enable import restrictions against these products from the Third World. TheSTA was soon followed by the LTA (long-term arrangement), which remained in force till 1973, and followed by the Multifibre Arrangement (MFA), which has been in force from 1973 to date. 

The Dillon, Kennedy and Tokyo Rounds saw a gradual tightening of the import restrictions against the Third World, mostly outside GATT, and covering footwear, leather and leather goods, electronics, steel, and other sectors where the Third World has emerged as competitive suppliers. 

Now the Third World is again being told that negotiations on some of its outstanding trade problems will be taken up in a new round, provided the Third World agrees to linked negotiations on new themes. In effect the Third World is being told that the industrial countries will carry out their GATT obligations to the Third World and remove any illegal restrictions on imports of goods from the Third World, if the Third World would accept new obligations favouring the industrial world in 'services'. 

Any such action for liberalisation of trade in services, automatically involves 'investment' and establishment rights for the TNCS. Several of the service sectors, like banking and insurance, play a vital infrastructural role in the development process of the Third World, including mobilisation of domestic capital and its channelling into areas of priority investment. Others, like informatics, are mostly undeveloped. All of them would need active state involvement. By bringing 'services' into GATT, and setting up international disciplines for them, the US is trying to prevent the development of endogenous service sectors in the Third World and thus the pursuit of autonomous development paths in the Third World. 

The service sectors are dominated now by the TNCS, and the nature of the services enables them to offer a wide range of services and an integrated package once the data network is established. For TNCS, the right of establishment is more critical than the right of access to markets. It is through relocation of production of goods that the TNCs have transnationalised the production, distribution and consumption of goods. Through their participation in banking, insurance and other financial services, and data flows, the TNCs are now seeking to transnationalise finance capital and thus dominate and control Third World economies. This in turn will enable the US to dominate and control the Third World politically and thus exercise hegemony.

As it is, even in trade in goods, the Third World countries find that the TNCs are not amenable to national disciplines and will find the TNCs are even less amenable in respect of 'services' transactions which are 'invisible'. 

Again trade in services cannot be delinked from investment. This poses serious policy questions for the Third World. Foreign private investments do not lead to transfer of capital or its accumulation inside the Third World. The main benefit is supposedly in the areas of transfer of technology and managerial skills. As against this are the costs of foreign private investments: adverse impact on balance of payments and on patterns of domestic investment, output and employment. Also, TNC operations rarely, if ever, result in any industrialisation of the country with forward and backward linkages within the economy, essential for self-sustained development. It mostly creates 'enclave' industries which are vertically integrated externally.

it is for these reasons that Third world countries have resisted international agreements in this area, preferring to keep their options open and taking pragmatic decisions on a case-by-case basis. 

The US effort to bring 'services' into GATT by prefixing 'trade' before it, is really aimed at reducing, if not eliminating, Third world options in this, and obtaining for the TNCs full freedom of 'investment' and 'establishment' on the foreign territory and the ability to operate without restraint, and without the government of the host-country being able to exercise any effective control.

The effort to bring all these new issues into GATT under threat of US disregard of its GATT obligations and taking recourse to bilateral and plurilateral measures, really amounts to an effort at hijacking the North-South dialogue from other UN forums into GATT. 

If the US succeeds in its efforts, it would enable the US to rewrite some of the postwar rules and principles of international economic relations. And instead of the world moving towards a New World Order, it would be moving towards a Transnational World Order. In economic terms the US would then have succeeded in giving the Third World a rollback' to its days under the colonial era, when the role of the State was only to keep law and order, and keep the natives quiet for the benefit of 'entrepreneurs' from the metropolitan centres.




1. Trade and Development Report, 1981, UN Sales No. E.81.II.D.9, p.24.

2. ibid p.25.

3. See Report of the Chairman of the CPs to the 41st session, GATT - secretariat document L/5911.

4. Eli F. Heckscher, Mercantilism (Londonn: George Allen & Unwin Ltd.,) Vol. 2, p. 13.

5. Stuart Holland, speech at UNCTAD's 20th anniversary symposiwn, UN document TAD/INF/PUB/85/1, p.48.

6. See UNCTAD Services and Development Process, UN Sales No E.8S.II.D.13.