The Hindu Business Line : In interest of developed world

The Doha round was not a failure in the negotiations as much as a failure to agree on the parameters that would govern the negotiations. If the Doha negotiations are to live up to the tag of being a development round, the EU, the US and Japan have to do much more than accuse one another of unfair trade practices. Not from magnanimity, but out of an instinct for self-preservation, says V. Anantha-Nageswaran.

WRITING FOR the Carnegie Endowment for International Peace, Mr Kamal Malhotra of the United Nations Development Programme states that though the Doha round of trade negotiations may not be regarded as a "clear-cut success for developing countries and development, the preparation and combined strength of many developing countries could be credited for an outcome that was, in many ways, more favourable to their interests than the accomplishments of all previous WTO ministerials".

Now, in April 2003, he might feel constrained to water down this even mildly optimistic conclusion. By the end of last year, the developed countries, chiefly led by the US, created a stalemate in the negotiations on the low-cost access of developing countries to vital drugs, overriding patent and intellectual property considerations. Then, on March 31 of this year, negotiators at the World Trade Organisation formally acknowledged that they had failed to agree on the parameters for negotiations on liberalising agriculture.

It is not that there was a failure in the negotiations. There was a failure to agree on the parameters that would govern the negotiations. If this takes longer to hammer out, imagine how long the negotiations themselves would take. Agriculture remains the most contentious issue in the round of negotiations launched in Doha. The logic behind free trade is easy to understand. Each country has its own comparative advantages in the production of goods and services and they should pursue those where they have the absolute comparative advantage and use free trade to procure other goods and services. Obviously, it hurts those who are producing for domestic markets and cause employment and investment to those industries that face external competition to drop. Losers protest and volubly too. They are heard and free trade is thus seen as anti-labour.

Surely, the resources that are freed up by not having to invest in a sector that faces export competition can be diverted to other sectors where the country has an export advantage or needs such resources. Employment could rise in those sectors offsetting the losses in other sectors. If the net benefit to the economy is positive, then the government should be able to receive some benefits (via taxes) from the sectors that flourish under open trade and use it to compensate the losers. This is elegant theory but in reality, things do not work that way.

Governments expend considerable energies in protecting the losers who unleash their lobbying powerto protect their personal/private gains as opposed to social gains. There are other reasons too. World over, governments are obligated to protect the underdogs. The public sees losers instinctively as underdogs rather than as contributors to resource misallocation. Hence, public sympathy rallies around losers and governments cannot be insensitive to public opinion. Second, to make the case successfully for trade openness and to find innovative ways to compensate the losers (re-training, compensation to workers, incentives to switch to other sectors, etc.) from the gains made by winners requires imagination, hard work and placing national interest above all other considerations. These require competence and integrity, which are, mostly, not the strong points of most governments in developing economies. Finally, openness to trade has resulted in exploitation of local resources and colonisation in the past. Hence, wariness of trade persists at the subconscious level in most developing countries.

Particularly in dealing with the historical fear, magnanimity of spirit and non-insistence on reciprocity on the part of the developed world would help. However, before we go down that path, we need to record what developing countries could do to boost free trade among themselves. It is a sad truth that the complaints that poor nations have against developed ones are heaped by poorer ones on them. In the case of Sri Lanka, Indian attitude to tea imports come to mind.

As of 2002, while India had allowed the import of eight million pieces of garment from Sri Lanka, in 2000, the actual number of pieces imported were only 8,000 (one-tenth of one per cent of the permitted quota). This was because India levied a duty of 35 per cent, a surcharge of 3.8 per cent and a specific duty depending on the type of clothing. In tea trade, India allowed Sri Lankan tea imports to land only in Kochi and Kolkata ports. This meant that Sri Lanka could not utilise its full quota of 11.5 million kg of exports allowed them as per the Free Trade Agreement. Indian exports to Sri Lanka were USD604 million in 2001 whereas Sri Lankan exports to India were only USD71 million.

The importance of allowing more access to those products where Sri Lanka has an absolute advantage over India transcends mere efficiency considerations. Is it possible that India could have enjoyed greater political leverage over Sri Lanka on the fair treatment of Tamils in the North, if it were more magnanimous on trade? How much could India have saved from the problem of insurgency, influx of Tamil refugees and terrorists into Tamil Nadu from Sri Lanka, had the problem been resolved sooner or more fairly at India's behest? That would be a benefit of free trade too? India's standing in its neighbourhood would improve. As a big nation, it could have set an example and used trade as an instrument of strategic foreign policy.

It is precisely such an overarching perspective that developed nations should take in free trade negotiations. They have, unfortunately, shown themselves to be keener in gaining access to others' markets rather than granting access to others for their markets. They do not recognise the importance of fighting global poverty in their fight against terrorism. Poverty and a feeling of victimisation are ideal breeding grounds for disaffection, resentment and anger that turn into a craving for revenge. Terrorist networks exploit that. If nothing else, they tap these feelings to extort the meagre savings of the poor for their own arms procurement and sustenance. Thus, poor regions are ideal recruitment centres for terror networks. Evidence that is more recent is not very encouraging either. The Centre for Public Integrity, based in Washington D.C., has published a story on how the European Commission had written to 72 countries to open up their markets to private water companies, under the auspices of the General Agreement on Trade in Services that covers areas such as energy, telecommunications, education, tourism, transportation and water. While the countries strictly do not have to accede to the requests, often such requests are tied to their loan arrangements with international financial institutions.

While this was highlighted in a leader that appeared in the International Herald Tribune on March 13, 2003, the International Consortium of Investigative Journalists (ICIJ) provides more startling evidence. Using data available from the World Bank Web site, ICIJ analysed 276 loans labelled "water supply" awarded by the bank between 1990 and November 2002. In about one third of the projects, the World Bank required the country to privatise its water operations in some form before it received funds. The ICIJ analysis also showed that the number of loans with privatisation as a condition tripled between the first and last half of that time period. Between 1990 and 1995, there were 21 loans with privatisation as a condition. From 1996 to 2002, they increased in number to 61. Water is clearly not a market commodity, which requires privatisation. Utilities are natural monopolies and are essential commodities. Water is more so than other utilities (energy, for example). While water for commercial use can be levied user charges, water for essential needs is an obligation of the government. There cannot be an automatic presumption in favour of privatisation in water distribution. It is not just a question of efficiency but also one of equity. Surely, where there is water scarcity, funding should be tied to funding indigenous and local solutions such as rainwater harvesting rather than being tied to privatisation. Thus, today, free trade in goods has been expanded to cover hitherto exclusive domains of the government where developed nations are using all their levers of unequal power, at the behest of their corporations, to gain access to developing countries. This strategy is bound to result in more disaffection and a fragmented rather than an integrated world. Pre-emptive strategies designed to enhance their national security should extend to the economic sphere. Unilateral trade concessions will lend more credibility to the professed development concerns of the first world leaders than the display of military might.

As Berkeley economist Prof Bradford de Long puts it, there is no recognition that the successful economic and organisational development of the world is essential for the long-run national security of even the strongest nation in the industrial core. If the Doha round were to live up to its tag of being a development round, the European Union, the US and Japan have to do far more than accusing one anoher of unfair trade practices. It does not have to come from the magnanimity of their hearts but out of an instinct for self-preservation.

(The author is Director of Global Economics and Asset Allocation in Credit Suisse, Asia-Pacific. The views are personal. Feedback may be sent to anantha@nageswaran.com)

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