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My writing in Jakarta Post, the struggle is never end…

http://www.thejakartapost.com/yesterdaydetail.asp?fileid=20070129.F04

Questioning free trade & liberalization

Nowadays, pressure is mounting for developing
countries to adopt "good policies" to foster their
economic development. These policies include the
liberalization of trade, finance, and investment.
These ideas are imposed on developing countries by the
developed nations using strong and external bilateral
and multilateral pressure. The argument is that these
policies are good for developing countries because
they are how developed nations became rich.

The nature of economic liberalization has been
facilitated by the Structural Adjustment Programs
(SAPs) where the International Monetary Fund (IMF) and
World Bank play an important role. The World Trade
Organization (WTO), a development of the General
Agreement on Tariffs and Trade, was set up in order to
reduce tariffs in international trade and to eliminate
all other measures that prevent free trade.

Contrary to conventional wisdom, history shows that
rich countries did not develop on the basis of the
policies that they now recommend to, and often force
upon, the developing world. According to Ha-Joon
Chang, an historian and economist from Cambridge
University, almost all of today’s rich countries used
tariff protections and subsidies to develop their
industries.

Interestingly, Britain and the U.S., the countries at
the forefront of promoting free trade were formally
the two most aggressively protected and subsidized
nations. Britain had used aggression and in certain
areas was a pioneer of activist policies intended to
promote its industries during the 14th and 15
centuries and from the 18th century onwards.
Furthermore, between the American Civil War and World
War 2, the U.S. was one of the most heavily protected
economies in the world.

Britain and the U.S. may be the most dramatic
examples, but almost all of the rest of the developed
world today uses tariffs, subsidies and other means to
develop their industries in the early stages.
Countries like Germany, Japan, Korea and even Sweden,
which later came to represent the "small open economy"
to many economists, have strategically used tariffs,
subsidies, cartels, and state support for research and
development to develop key industries, especially
textiles, steel, and engineering. Lately, developed
countries have become interested in free trade but
only among themselves.

The history of GATT/WTO shows that this institution is
skewed to fulfill the needs of developed countries.
Economist C. Fred Bergsten in a 1998 study shows that
the initial creation of the European Common Market in
the late 1950s was one of the motivations for the
American initiative to launch the Kennedy Round. At
that time, the U.S. wanted to reduce the newly created
discrimination against American exports. Similarly,
the expansion of the European Community to include the
United Kingdom and other nations was an important
reason for America to insist on the Tokyo Round in the
1970s.

Protection was progressively reduced on exports from
developed countries, but remained on goods exported
intensively by developing countries. It is no surprise
that GATT came to cover trade over all goods except
agriculture and textiles. These two goods are most
often produced by developing countries.

Textiles were covered by the Multifiber Arrangement
(MFA), through which developing countries bargained
bilaterally to establish quotas on the quantities of
exports that they could export to developed countries.
However, developed countries did not impose any
restrictions on textile imports from other developed
countries. Correspondingly, agricultural trade was
excluded from the GATT and developed countries still
continue to pursue protectionist policies and
subsidies.

Writing about developed countries preaching free trade
to less-advanced nations, Friedrich List compared it
to a person trying to "kick away the ladder" that they
had used to climb to the top. Economist Dr. Ha-Joon
Chang then argues it is no coincidence that economic
development has become more difficult during the last
two decades when developed countries started putting
pressure on developing countries to adopt these
so-called "global standard" policies and institutions.

Mainstream economists will likely argue that China and
India, the two rising giants, have benefited from
trade liberalization or free trade. However, one
should consider this statement carefully. To be sure
China is advantaged by trade liberalization, but trade
liberalization certainly did not cause China’s growth.

China began to grow rapidly in the late 1970s, but
trade liberalization did not begin until the late
1980s, and only took off in the 1990s after economic
growth had increased markedly. The Indian story is
similar. Growth there increased in the early 1980s
while tariffs were actually going up in some areas and
did not begin to come down significantly until the
major reforms of 1991-1993.

Reflecting on these facts, the conditions attached to
bilateral and multilateral financial assistance to
developing countries should be radically changed. It
should be accepted that the orthodox recipe is not
(always) working. There are no "best practice"
policies or a panacea that everyone should use. By
being allowed to adopt policies and institutions that
are more suitable to local conditions, developing
countries will change faster. This will also benefit
developed countries in the long run, as it will
increase their trade and investment opportunities.

The writer is director of the Centre for Humanity and
Civilization Studies (CHOICES) and is actively
involved in Bina Swadaya Foundation.