Trade, the Third World, UNCTAD and the New International Economic Order

1
Trade, the Third World, UNCTAD and the New
International Economic Order
EC246 International Trade Institutions and
Policy

• Holger Breinlich
• University of Essex

2
Overview of Lecture

• Trade and development
• The key issues
• The Prebisch-Singer hypothesis
• Policy response import substitution
• Development issues in multilateral trade
  negotiations
• Developing countries in the GATT
• The Nonaligned Movement, UNCTAD and the NIEO
• Export price instability and commodity agreements
• The shift to export-led growth policies NICs and
  ASEAN4

3
Trade and Development
4
Trade Development The Main Issues

• Is trade an engine of growth and development?
• Trade pessimists (protectionists)
• Trade optimists (free-traders)
• Neutralists institutions, geography and other
  fundamentals more important than trade
• Should LDCs adopt
• An inward-looking policy, i.e. industrialisation
  with import substitution
• An outward-looking policy, i.e. export promotion
  with free(r) trade
• Or some combination of both?

5
Trade and Development Early Theories

• Late 18th and early 19th century first
  intellectual debate between free traders and
  protectionists (until then, mercantilism
  dominant)
• Adam Smith (1776) and David Ricardo (1817)
  advance ideas about the benefits of trade and
  comparative advantage
• Alexander Hamilton (1791) and Friedrich List
  (1841) argue for infant industry protection
• Smith and Ricardos ideas prevailed in the UK,
  Hamilton and Lists in the U.S. and Germany

6
Trade and Development Early Theories

• Late 1930s
• D.H. Robertson trade is unlikely to play the
  role of an engine of growth in the 20th century
  (which it did play in the 19th century)
• Jacob Viner, by contrast, pleaded for a liberal
  trading system, removal of trade barriers and the
  principle of nondiscrimination (this was also the
  position of the U.S. government)
• Partly revival of the nineteenth century argument
  about free trade vs. protectionism, partly part
  of the wider debate on capitalism vs. socialism
• 1950s Economists (Nurske, Prebisch, Singer,
  Myrdal) generally sceptical about the benefits
  of trade, favour import substitution strategies

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The Prebisch-Singer Hypothesis

• Independently of one another, Prebisch (in
  theoretical work) and Singer (in empirical work)
  argued that there was and will continue to be a
  secular decline in terms-of-trade of
  primary-commodity exporters
• Due to low income and price elasticities of
  demand (edi, edp )
• Definitions
• edi (-change demand)/(-change income)
• edp (-change demand)/(-change price)
• Estimates
• edi 0.6 (foodstuff), 0.5 (agricultural raw
  materials), 1.9 (manufactured goods), 2.4
  (petroleum other fuels)
• edp usually estimated lt 1 for food (inelastic
  demand, i.e. 1 reduction in price ? lt1 increase
  in demand)
• Illustrations (supply-demand diagram)

8
Prebisch-Singer Illustration
pF/pM
pF/pM
D
D
S
S
D
D
P
P
P
Food/Manuf.
Food/Manuf.
High (relative) price elasticity
Low (relative) price elasticity
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The Prebisch-Singer Hypothesis

• This decline results in a long-term transfer of
  income from poor to rich countries
• Can be combated only by protecting domestic
  manufacturing industries through a policy of
  import substitution
• Note other ways of addressing these problems are
  commodity agreements and primary-good cartels
  (more on this later)

10
Import Substitution The Idea

• Behind the protection of high barriers on
  manufacturing imports LDCs should industrialise
  by substituting domestic production for
  previously imported goods
• 1st stage simple consumer goods
• 2nd stage more sophisticated goods
• Thus achieving greater domestic industrial
  diversification and less dependence on primary
  good exports (balanced growth)
• Will also ultimately gain the ability to export
  such goods as their prices become more
  competitive

11
Import Substitution How it Should Work

• First impose high barriers (tariffs, quotas etc.)
  on manufacturing imports
• Then set up a local industry producing the same
  goods (usually in cooperation with foreign firms
  which get investment incentives like tax breaks)
• In the short run, production costs high ?
  implicit transfer from consumers to producers
  (figure)
• But in the long-run, everyone gains as domestic
  industry becomes more competitive due to
• Economies of scale
• Positive externalities of learning by doing
• Incentives for human physical capital
  accumulation

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Transfers Consumers - Producers
Home Supply
price
PT
PT
B
C
D
PWM
Home Demand
quantity
Z
C
Z
C
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Import Substitution Why it Didnt Work

• Behind protective walls, industries (both
  publicly and privately owned) remain inefficient
  and never grow up
• Constant need for protection and government
  intervention fosters corruption
• Gains accrue to foreign firms and a few local
  industrialists
• Balance-of-Payments problems due to large imports
  of often government-subsidised capital goods and
  intermediate products from abroad
• Overvaluation of domestic currencies acts as an
  implicit tax on agricultural products and thus
  the poor

14
Development Issues in Multilateral Trade
Negotiations
15
Initial Reaction to ITO/GATT

• Developing countries denounced the pre-Havana
  draft for an ITO charter as motivated by a desire
  to keep them in dependence
• On their insistence, the final charter adopted by
  the conference contained a chapter on economic
  development
• Specified circumstances and conditions under
  which developing countries would be freed from
  the principle of reciprocity
• But no unconditional exceptions ? seen as
  insufficient by most LDCs (which were almost all
  pursuing import substitution strategies)
• GATT adopted passages of this chapter but
  generally less emphasis on developing countries
  trade issues

16
Nonaligned Movement and the Haberler Report

• 1958 GATT panel of exports (Haberler, Meade,
  Tinbergen, Campos) appointed to analyse trade and
  development problems of LDCs. Main Conclusions
• Developed countries trade barriers (tariffs and
  others) limit exports from developing countries
• Contributes to the foreign exchange gap
• GATT responded by establishing Committee III
  which
• Reviewed the trade measures restricting LDCs
  exports
• Recommended a programme for trade expansion by
  reducing barriers

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Responses to the Haberler Report

• Positive reaction of developed countries but not
  followed up by substantial lowering of trade
  barriers
• 1963 21 developing countries introduce
  resolution in the GATT, calling for action
  program on tariff and non-tariff barrier
  reductions for their products
• In response, GATT Ministerial Meeting in 1963
  appointed committee to draft amendments to GATT
  rules
• Approved in 1964 New Part IV on Trade and
  Development included in GATT
• Essentially about nonreciprocity and preferential
  treatment for developing countries
• Little effect in practice and undermining fight
  against GATT-inconsistent barriers in developed
  countries

18
Generalised System of Preferences (GSP)

• Next major achievement of developing countries
  the Generalised System of Preferences (GSP)
• 1971 Grant of a 10-year waiver from the MFN
  clause w.r.t. to tariff and other preferences
  became known as the GSP.
• Each developed country chooses developing
  countries to be favoured, the commodities to be
  covered, the extent of tariff preferences and the
  period for which privileges were granted (often
  linked to non-trade related conditions!)
• Negative effects
• Looser discipline in the rule-based MTNs
• Further undermining the case for reduction of
  GATT-violating barriers of developed countries

19
GATT and Developing Countries Two Views

• Developed countries unwilling to address
  developing countries concerns under GATT
• Their import barriers towards other developed
  countries declined by much more
• Products in which developing countries had a
  comparative advantage were basically taken out of
  GATT altogether (agriculture, textiles and
  apparel)
• Even GSP heavily qualified and quantitatively
  small
• But could also argue that
• Developing countries basically opted out of GATT
  in their pursuit of import substitution
• Should have pursued export-oriented strategies
  and participated fully in reciprocal tariff
  reductions rather than to demand exemptions

20
In the meantime UNCTAD

• 1955 Nonaligned Movement emerges from the
  Bandung conference, led by heads of newly
  independent states of Africa and Asia (Nasser,
  Nehru, Sukarno) and demands
• Decolonisation of the remaining dependent
  territories
• An international role of the Third World,
  independent of the First and Second Worlds and
  their Cold War
• Ideas for an UNCTAD were gaining support among
  developing countries, as their number and voting
  power grew within UN
• 1961 (Belgrade) nonaligned countries conference
  Tito voiced an UNCTAD idea
• 1962 (Cairo) nonaligned countries conference the
  idea got more concrete

21
UNCTAD

• In the preparations for UNCTAD, the Group of 77
  Third World member countries of UN became an
  effective bargaining unit turning the new
  organisation into a trade union of LDCs
• 1964 Western countries conceded to pressures
  from developing countries ? UNCTAD founded (
  United Nations Conference on Trade and
  Development)
• 1964, the 1st meeting of UNCTAD (UNCTAD I) was
  held
• 75 developing countries, Prebisch as the 1st
  Secretary-General
• Aim Integration of developing countries into the
  world economy

22
UNCTAD

• As the best means to close the foreign-exchange
  gap, UNCTAD I voted nearly unanimously for
• A managed international market
• Trade arrangements that are fair (in fact,
  often discriminatory against the developed
  countries)
• UNCTAD I initiatives
• Were supported strongly by the socialist
  countries
• Moderately supported by some developed countries,
  notably France and EEC
• Opposed by other developed countries, the U.S. in
  particular

23
UNCTAD since 1964

• UNCTADs role and tasks
• Based in Geneva, 400 staff members, budget of 75
  million
• Focal point within UN for trade development
• Forum for intergovernmental discussion, supported
  by discussions with experts and exchanges of
  experience
• Undertakes research, publishes reports and
  analyses (on e.g. trade and environment,
  economic development in Africa)
• Conducts various technical cooperation programmes
  (e.g. help with trade negotiations, technology
  transfers ...)
• UNCTAD meets every 4 years at its conference
• The conference is UNCTADs highest
  decision-making body
• Sets priorities and guidelines for the
  organization
• Provides an opportunity to debate key economic
  and development issues

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The New International Economic Order (NIEO)

• October 1973 war between Israel and Egypt
• Successful OPEC cartel action, causing the first
  oil shock
• Suggested that the Third World was in a position
  to actually force industrialised countries to
  make concessions
• April 1974 6th special session of UNCTAD adopts
  Declaration on the Establishment of a New
  International Economic Order
• Formulation of 20 demands, among which
• Sustained improvement of ToT for primary products
• Favourable conditions for transfer of financial
  resources
• Promotion of transfer of technology
• Reform of the international monetary system

25
The New International Economic Order (NIEO)

• NIEO demands (continued)
• Preferential and nonreciprocal treatment in
  economic relations
• Full sovereignty over natural resources and right
  to nationalisation
• Regulation and supervision of the activities of
  transnational corporations
• Feb 1975 Nonaligned Movement Dakar conference
• The ideological high water-mark of NIEO
• The development of the rich capitalist countries
  is intimately related to the colonial and
  neocolonial exploitation of the periphery (Anell
  and Nygren, 1980)

26
Third World losing political cohesion

• A last success agreement to create the UN Common
  Fund, the chief plank of the NIEO commodity
  programme
• Since late 1970s, NIEO campaign looses momentum
• Monopoly power used by OPEC for oil does not
  extend to other commodities (and even oil cartel
  was breaking down)
• Economic performance and interests within the
  Third World gradually diverge (e.g. rich Arab
  OPEC countries, newly industrialising countries
  (NICs) of South-East Asia)
• Divergence of interests/performances weakens NIEO
  per se but is also evidence for the importance of
  national policies
• Realisation that NIEO campaign insisted on a
  better deal for poor states (and thus
  governments), not for poor people foreign aid
  too often a transfer from the poor in the rich
  countries to the rich in the poor countries

27
Export Price Instability and Commodity Agreements
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Export price instability

• An important clue as to why the export
  performance of LDCs has been weak relative to
  that of developed economies lies in LDCs export
  earnings instability
• It is the result of two phenomena observed in
  trade data low income and price elasticity of
  demand of primary products
• Such export price instability leads to lower and
  less predictable rates of economic growth, hence
  attempts for price stabilisation (figure)
• Commodity agreements meant to stabilise prices
• Buffer-stock schemes
• Cartels

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Export Price Volatility for Primary Products
pF
pF
D
D
S
S
D
D
P
P
P
Food
Food
High price elasticity
Low price elasticity
30
Buffer-Stock Schemes

• Idea buy and stockpile commodity when prices
  low, sell when prices high (reduces magnitude of
  demand swings)
• Problems
• Not clear what the fair long-run price is, can
  lead to disagreement between partners
• Tendency to fix target price too high and run out
  of funds (especially given long-run decline in
  ToT for many primary products)
• Examples
• Coffee, tin
• The UN Common Fund

31
Cartels

• Idea Agree on an above-market price and cut back
  production to achieve that price (? monopoly)
• Conditions for successful operation
• Must face a price-inelastic demand (no actual or
  potential substitutes)
• All important producers must join the agreement
• Members must be willing to cut back production
  and an enforcement mechanism must be found to
  curb incentives to cheat (once price exceeds
  their marginal costs)
• Buyers must be unable (at least disinclined) to
  fight such monopoly rents
• Primary-product cartels became first prominent
  after WW I but most failed for want of one of the
  above conditions. Similar agreements (for tin,
  coffee, etc.) after WW II existed only shortly as
  well.

32
Failure of Cartels OPEC in the 1980s

• OPEC is the best known and successful
  international cartel in history
• But problems from 1981-1983 recession in the
  developed world onwards
• Oil-using countries invested in technology to use
  alternative fuels (natural gas etc.) (condition
  1)
• High prices triggered (successful) search for oil
  in other parts of the world (condition 12)
• Cartel members began to cheat by selling below
  the agreed price (condition 3)
• Oil prices fell from 34 to 29 in 1983, then
  further until 11/barrel in 1998 (though massive
  recovery since due to strong demand)

33
The Alternative of Export-Led Growth
34
The Alternative of Export-Led Growth

• Since the 1970s, switch from import-substituting
  industrialisation to export-led growth
  strategies. The later gradually became the
  dominant strategy in the Third World
• A key element in this shift was the success of
  the Asian NICs (tigers) (South) Korea, Taiwan,
  Hong Kong, Singapore which pursued more
  export-led strategies
• Following suit Thailand, Malaysia, Indonesia,
  Philippines (ASEAN4)
• Achieved massive increase in standards of living
• Per capita income (1980 USD) NICs, from 974
  (1963) to 5162 (1988) ASEAN4 from 606 (1963) to
  1546 (1988)
• World trade share () NICs, from 1.9 (1963) to
  7.7 (1988) ASEAN4 from 1.1 (1963) to 2.1 (1988)

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The Alternative of Export-Led Growth

• Basic idea
• Fully participate in world markets rather than
  try to replace manufacturing imports through own
  production
• Produce simple labour-intensive manufacturing
  goods for export markets
• Use comparative advantage in these sectors
• Escape low demand in small home markets
• In practice much more complex
• Accompanied by many other reforms (encouraging
  education, capital formation etc.) ? see Alwyn
  Young (Quarterly Journal of Economics, 1995)
• Asian Tigers initially protected their infant
  industries (Taiwans average tariff 40-50 until
  the 1980s)

36
Summary and Learning Outcomes

• Trade and development
• The key issues
• The Prebisch-Singer hypothesis
• Policy response import substitution
• Development issues in multilateral trade
  negotiations
• Developing countries in the GATT
• The Nonaligned Movement, UNCTAD and the NIEO
• Export price instability and commodity agreements
• The shift to export-led growth policies NICs and
  ASEAN4