NEO-CLASSICAL PRESCRIPTIONS FOR GATT.

Mar 28, 1985

NEO-CLASSICAL PRESCRIPTIONS FOR GATT.

BY CHAKRAVARTHI RAGHAVAN, AN IFDA SPECIAL FEATURES, GENEVA, MARCH 27 (IFDA) – The report by a group of seven "eminent persons" on "trade policies for a better future", published by the GATT secretariat, is a mixed bag of recommendations on some of the immediate problems in the general agreement.

The report, expected to be used to further the U.S.-Japan moves for "a new GATT round", has viewed the problems of international trade from a neo-classical economic perspective, and viewing impediments to international trade as solely arising from activities of governments and their trade policies.

It has thus not addressed either the original weaknesses of GATT (in ignoring commodity trade issues or restrictive business practices of private enterprises), or the problems of the system arising from new structures of production and trade in the world.

As UNCTAD and other studies have underlined, apart from the original problems, these current problems of the trading system arise also from the emergence of Third World countries and their structures of production, the problems of production and trade from the centrally planed economies, and problems of countries with mixed economies (as in most of the Third World), grappling with development.

The report essentially preaches a Ricardian view of world trade based on comparative advantage, enunciated at a time when only goods could move across frontiers in international exchanges.

It has not taken into account the post-GATT phenomenon of transnationalisation of world production, capital, technology, and fostering consumer societies in the Third World through patterns of intra-corporate global trade, and the vertical integration policies of TNCs based on "maximisation of global profits".

It does not also address the impediments to Third World exports and trade arising from the global asymmetries in the infrastructures of trade like shipping, trade finance, insurance, etc., which favour industrial exports to the Third World and not the other way around.

While supporting the Third World views on the multifibre arrangements and protective "safeguard" actions, the report calls for end to the GATT provisions for "special and preferential treatment" to the Third World, and integrating these countries "more fully into the trading system", with all the appropriate rights and responsibilities for this action.

In making this recommendation, the group has underlined that the Third World, far from receiving this special and differential treatment, has been subject to discriminatory measures directed against them.

Thus while the report uses the industrial countries’ failure to implement their obligations under Part IV of GATT to call for its abolition, it has not dealt with the reasoning that led to this concept being introduced in international economic relations or how the circumstances have now changed, to warrant their abolition.

The whole concept of special and preferential and differential treatment to the Third World arose in the early 60’s, against the background of Third World dissatisfaction with the GATT and Bretton woods systems, and led to the convening of the UN conference on trade and development in 1964.

At that time, in the report to UNCTAD-I, Raul Prebisch had analysed the problems of the world economy and of the Third World as due to:

* Constant adverse terms of trade of primary producers, worsening their balance-of-payment problems,

* The inapplicability to the Third World of the Havana charter/GATT concept that "the expansion of trade to the mutual advantage of all merely requires removal of obstacles that impede the free play of these forces in the world economy",

* The GATT free trade concept, based on the "abstract notion of homogeneity, which completely conceals the great structural differences between the industrial centres and the peripheral countries",

* The problems of Third World debt, international liquidity and development finance.

It was this analysis that led to the adoption op the development consensus at UNCTAD-I, and subsequently (with some reluctance) to the incorporation in GATT of part IV for special, non-reciprocal and preferential treatment to the Third World countries.

The failures of the Third World to get "reforms" within the existing international systems for an external environment that would be supportive of development, led to their calls for restructuring international economic relations and systems through the new international economic order.

The report in effect ignores all these developments, and harps back to the neo-classical economic analysis and solutions.

Viewing problems of the multilateral trading system "in a simplistic north-south context", it argues, has seriously impaired international economic cooperation in many fields.

While the forays of industrial countries outside multilateral rules have played the leading role in this process, "the demands of developing countries for special treatment have also damage the system by encouraging the tendency to treat them as being outside it".

Both the industrial and Third World countries have a contribution to make in reversing process.

"We believe the initial move should come from the developed countries because being the largest traders, they bear the largest responsibility for the functioning of the trading system.

"A convincing first step by the developed countries to unwind some of the restrictive measures introduced over the recent past, especially those which particularly affect the developing countries, could help to produce a climate of confidence and encourage the developing countries to move towards trade liberalisation.

While making a powerful case against protectionism and rollback of recent protection, and while noting the Third World case for protection of "infant industries", in effect the report equates protection in the industrial and Third World countries.

Decrying the powerful force of nationalism used to support protection, the report notes: "the appeals are familiar - 'buy America" (U.S. law), 'buy British’, and, in India 'Swadeshi is Swaraj'...it is easy to make protectionism appear patriotic, even though it actually weakens a nation over the long-run".

The Swadeshi movement in India in the 1920’s arose during the freedom struggle under Mahatma Gandhi, when the British free-trade policy and a rupee-sterling exchange rate favouring the British, virtually destroyed Indian village industries and their comparative advantages of local raw materials, local labour and local markets.

Even though in recent times the cry has been revived against the urban middle-class elitist craze for imported smuggled foreign goods, even second-hand, in preference to better quality and cheaper Indian goods, Mahatma Gandhi's movement was a part of his wider view of autonomous development of the impoverished Indian village and ensuring better terms of exchange between the rural and urban centres.

And while Gandhi's economics was ridiculed in his own days, and in post-independence India, development economists for need-based, self-reliant and ecologically sound alternate development have now begun to reappraise and support Gandhi and his economics, as the basis for endogenous development models, even though they run contrary to the neo-classical models.