As the American economist and Nobel laureate Joseph Stiglitz recently reminded us, markets are neither stable nor efficient, nor self-correcting and alone do not result in efficient, stable and socially acceptable outcomes. New types of economic architectures must be put in place for growth, stability of the real economy and the proper distribution of income.
However, international institutions have long been imposing assumptions and neoliberal doctrine on many developing countries, with mixed results. The biased use of concepts such as Global Value Chains or GVCs (OECD 2012), aimed at directly drawing inspiration from these paradigms through the promotion of the principals of the Washington Consensus (privatization, free trade, the strict control of inflation through drastic austerity policies, etc..) or by believing that markets are self-regulating and considered to have no social, political or economic constraints, are just one illustration of this.
We recommend reading this article by Faizel Ismail, Permanent Ambassador of South Africa to the WTO for the International Centre for Trade and Sustainable Development (ICTSD), of which we have published an extract here1
. It gives a conscious and intelligent approach to global agricultural realities, a far cry from the panegyrics that praise uncontrolled liberalization, which is based on the assumption that increased trade inevitably leads to development.
Exacerbated free trade just like protectionism, does not in any way constitute a viable solution and is unsuited to the specifics of agricultural markets. Confronted with the challenges of the twenty-first century, agriculture and global security particularly need global governance, driven not only by a new discourse on the multilateral trading system, but a new strategic vision of agriculture.
momagri Editorial Board
The Global Value Chains (GVC) approach currently drives the mainstream view on globalisation and trade policy. According to this perspective, GVCs have created greater global integration and interdependence as Transnational Corporations (TNC) have increasingly located their production across various countries and goods are “made in the world” rather than in a single country. Countries looking to increase their gains from trade are advised to reduce and remove all barriers to the free flow of goods and services and grow and develop by participating in GVCs.
The recent attempts by some policy makers to use the GVC concept to make a case for increased trade liberalisation is deeply flawed for three reasons. Firstly, it attempts to bring back the notion of a self-regulating market that is disembedded from society and divorced from the asymmetries in economic power. Secondly, it attempts to revive the Washington Consensus. Third, it does not provide a framework for helping developing countries to expand beyond their current comparative advantages.
The mainstream view
The utopian logic of the self-regulating market neglects the fact that economic processes and the market are embedded in social processes. Consequently, many of the proponents of the GVC approach almost totally cut their analysis of globalisation from the experiences of the majority of the people in the world suffering the effects of a continuing economic and social crisis.
The GVC approach continues to place the emphasis on static efficiency gains, lowering transaction costs and providing a friendly business environment for attracting TNCs as the goals of trade policy.
Much of this policy narrative does not appear to be based on a careful empirical assessment of the links between GVCs and development. There is an implicit and often explicit assumption that more trade inevitably leads to development and that trade linked to GVCs has the added advantage of bringing spillovers of one kind or another from hosting those TNCs that organise such chains.
However, over a decade ago UNCTAD already warned that participating in GVCs could involve “trading more but earning less.” There was, moreover, little systematic evidence to suggest that technological and other spillovers were automatic inside these chains. Recently, Robert Wade (2012) argued that in a world where technological change is the norm, parts of many industries in many economies will be infants at different times even in the most advanced economies, making the case for strategic trade and industrial policies all the more important. What is required is an integrated approach to macroeconomic, trade and industrial policy in support of productive investment and economic diversification. A paper published in 2010 by ICTSD also observes that there is a new wave of industrial policy both with the US and the EU actively seeking to design government-led industrial strategy.
Systemic challenges have increased
The major US multinationals in finance, logistics and telecoms sectors are now the main proponents of aggressive liberalisation albeit they appear to have given up on the multilateral route and are now the driving force of the plurilateral and single issue approach as an alternative to the slower multilateral and more inclusive approach. However, the inequities of the current trading regime remain a stark reminder of the ills of the past. LDCs remain discriminated and locked out of the major developed country markets. Developed country subsidies and high tariffs in agriculture still distort world trade. The case of the African Cotton Four has become a litmus test for the legitimacy of the trading system. Meanwhile, new systemic challenges confront the world trading system. The distortionary impact of unregulated finance on the trading system through, for example, exchange rate movements which dwarf changes in tariff regimes, are yet to be seriously addressed at the multilateral level. The need to develop alternative energy sources and the increasing use of measures such as border taxes to reduce carbon use will create a demand for new trade rules. High food prices have raised the specter of food shortages and a demand for new rules on export taxes and export bans of food. The proliferation of Free Trade Agreements is creating an increasingly fragmented global trading system. These and other issues demand the need for increased global cooperation.
An alternative approach of trade, development and multilateralism
The GVC approach attempts to bring back a narrative of trade and the virtues of trade liberalisation that was constructed to advance the interests of the US and EU. The challenge will be to construct an alternative narrative of trade and the multilateral trading system - one that speaks to challenges currently faced by millions of people in the world today - unemployment, poverty and inequality.
Where should such an alternative analysis begin? We need to recognise that markets are not self-regulating, or a disembedded sector from society. Each national economy is different. Liberalising trade therefore does not have the automatic effect of creating new opportunities for all by creating new efficiencies by reallocating resources from one sector to another. The WTO should make development the overarching objective of WTO rules and obligations. Drawing on the work of Amartya Sen (1999) who defines development as the process of expanding human freedoms, there are four Dimensions of Development that should become the principles that guide the WTO mandate:
• Fair trade: To provide developing countries with economic opportunities to export in global markets, we have to create a level playing field. In Agriculture, we have to remove the distortions caused by subsidies in developed countries that prevent and undermine developing countries from pursuing their comparative advantage. In a recent seminar, Joseph Stiglitz argued for the introduction of the concept of a Right to Trade.
• Capacity building: Poor countries can do little to take advantage of market access opportunities if they do not have the capacity to produce and export. Thus Sen has argued that poverty should be understood as a deprivation of basic capabilities. The Hong Kong Ministerial Declaration recognised the importance of Aid for Trade and called on the Director General of the WTO to a) create a Task Force that “shall provide recommendations on how to operationalise Aid for Trade and b) to consult with members as well as the IMF and World Bank and other relevant international organisations “with a view to reporting (…) on appropriate mechanisms to secure additional financial resources”. This Task Force submitted its recommendations to the General Council at the end of July 2006. However, a great deal still remains to be done to implement the recommendations, to provide additional aid for trade, to ensure the existing aid is effective, and there is ownership for partner countries. An Aid for Trade facility that monitors and evaluates the effectiveness of Aid for Trade should be located in UNCTAD.
• Balanced Rules: While strengthening a rules based system for all to benefit, the global trading system should provide sufficient flexibilities to prevent developing countries from bearing the cost of these rules. Whilst Sen argues for government regulation to enable markets to work more effectively, he states that a system of ethics, based on social justice is required to build vision and trust for the successful use of the market mechanism. It is even more important to recognise differences that exist in the social, economic and political relations and institutions of countries. Rule making should not seek to average out and impose external standards but recognise differences, applying these rules with flexibility and retaining policy space for development.
• Good governance: The participation of developing countries in the negotiating process is crucial to ensure that they are engaged in negotiating new rules in a fair and democratic manner. In the early years of the GATT, the participation of developing countries was merely procedural and the substantive decisions were taken by the major developed countries. This has changed in the Doha Round as developing countries have become more organised. However, some major players not accustomed to genuine participation by all are attempting to return to the old practices of negotiating only amongst some and hoping to then impose this on the rest - this is the so-called plurilateral approach used in the Tokyo Round. Other observers frustrated at the need to address the complexity of negotiations in a multilateral setting based on consensus have argued for a short circuiting of democracy through the variable geometry approach where a small group of major players first shape the deal. As spelled out above, participation is however essential for development.
In sum, the current mantra of the GVCs approach and its underlying conception of a global market free of social, political and economic constraints to advance the interests of specific mercantilist interests is not an appropriate reflection of the current reality. The only basis for a revival of support for multilateral trade will be one that recognises trade as a tool to advance the social and economic objectives of societies; one that recognises the differences and diversity of the countries’ needs and interests and builds rules of cooperation that do not impede or undermine the policy space required to build economies in both the South and North. A trading system that is perceived as being inequitable and undermines the development interests of the poorest members will not gain legitimacy. A new narrative on how to re-build the multilateral trading system on a more sustainable basis can only succeed if it is based on the principles of Fair Trade, Capacity Building, Balanced Rules and Good Governance.