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K Subramanian

ECONOMIC integration is not an entirely new phenomenon. For thousands of years countries have traded with each other. But uncertainties attached to the interaction create fears or doubts over globalisation.

More than a decade ago, three economists published a paper on `Risk and Trade Regime' (International Organisation, No. 45, 1, 1991) after studying the response of 32 countries to risks generated by fluctuations of prices in international markets and concluded that, "the higher the level of terms of trade risk a country faces, the more it is likely to increase trade barriers" and "the greater the social insurance programme mounted by a government, the less likely the government is likely to block trade."

The study suggested that if countries wished to reform trade policies, they should reform national insurance arrangements.

Six years later, Dani Rodrik, joining the debate, observed: "Globalisation increases the demand for social insurance while constraining the ability of the governments to respond to the demand. Consequently, as globalisation deepens, the social consensus required to keep the domestic market open to international trade erodes."

This erosion was driven home harshly when crises erupted in East Asia in July 1997. More distressing than the precipitous fall in employment was the realisation that there was no safety network to take care of the unemployed.

The crisis led to the adoption of a new slogan, "Our dream is a world free of poverty." As one economist described it, the poverty issue became red-hot and every programme was ostensibly put to poverty reduction test; adjustment programmes were renamed Poverty Reduction and Social Growth (PRSG) programmes.

Unfortunately, these cosmetic policy changes have not reduced poverty but have contributed to increased poverty levels. This is the message sent out by the latest report of Oxfam: Rigged Rules and Double Standards released on April 10.

It deals with the impact of world trade on the poor, and narrates how they get poorer under the terms set for them by the richer countries. Its theoretical analysis is fully supported by evidence collected globally by the regional offices.

Even the EU Trade Commissioner, Mr Pascal Lamy, welcomed the report as "a substantive and well-researched contribution to the debate between trade and development."

Unlike many intellectuals and NGOs opposed to globalisation, Oxfam is not against trade. It holds, "World trade has the potential to act as a motor for the reduction of poverty, as well as for economic growth. The problem is not that international trade is inherently opposed to the needs and interests of the poor but that the rules that govern it are rigged in favour of the rich."

It accuses the governments of rich countries that engage in poverty rhetoric of using trade policy "to conduct what amounts to robbery of the world's poor." For every $100 generated by exports in the world, $97 goes to high- and middle-income countries, while just $3 ends up in poor countries, the report says.

The report examines closely the premises and assumptions on which openness is advocated and establishes how they are not proven theoretically or by ground realities.

It faults them for a wrong reading of East Asian experience and points out that those countries did not liberalise imports until export growth was well established.

In defence of liberalisation policies, the Fund/Bank relies on econometric models prepared in the Development Research Group after analysing growth in 80 countries for four decades. This modelling led to the result that "the average income of the poor rises on a one-to-one basis with overall growth." Oxfam is unsparing in its criticism of the manner in which the researchers define "openness" and the dubious selection made by them of the reference periods and threshold ratios. They are oblivious of distortion of results when aggregation of data is made for so many countries for long periods if other economic conditions such as size, population, are not comparable. Surely, policy prescriptions cannot flow from the barrel of econometric guns.

T. N. Srinivasan, by no means an anti-trader, expressed reservations over such attempts when he said, "... cross-country regressions, even if they are not mindless, cannot deliver conclusions about the desirability of trade liberalisation or capital flows or about the effect of openness on growth."

As Oxfam emphasises, the liberalisation programme is unbalanced. "When rich countries liberalise, their governments are highly sensitive to the views of local lobbies" and that explains why the EU and the US took several decades to liberalise in sensitive areas. "IMF and World Bank do not have to consider issues of accountability and democracy." "Northern governments are regularly urged to liberalise. However, unlike their southern counterparts with loan programmes, they are not obliged to follow the advice they receive."

More serious is the criticism that liberalisation targets are set without reference to their implications for poor people. Oxfam has reviewed 12 Poverty Reduction Strategy Papers and finds that "none offered even the most rudimentary assessment of the range of distributional outcomes that might result from import liberalisation, or reviewed alternative prescriptions for the pace, design and sequencing of reforms."

Trade, in itself, creates opportunities and not growth. How countries seize them depends on their stage of development, level of technological attainments, income distribution and entrepreneurial capacity. Oxfam provides evidence from many countries suggesting "that the expansion of trade has often resulted either in the poor getting left behind, or in the intensification of exploitative and environment-damaging systems of production which challenge the human development aspirations."

Dependence on primary exports and the instability of prices, aggravated by exchange rate volatility created by speculative flows, set limits to the expansion of exports. Unless there are schemes to ensure stability of commodity prices, the scope is even negative. Mere openness cannot change the structure of production or the basket of items for offer as exports. These have to be worked out over long periods as part of national development and poverty eradication.

Oxfam has devoted a full section (Chapter 7) to the role of multinational corporations. It provides unpleasant details of MNC operations in many countries.

While it believes that MNCs support the transfer of technologies, creating linkages between foreign and domestic firms and assisting local firms in gaining access to external markets, "much FDI fails the quality test." FDI "is locking many developing countries into the low value-added ghettoes of world trade." This conclusion is supported by evidence gathered from several export zones, the maquiladoras of Mexico and special economic zones in China and Korea.

It documents the deteriorating working conditions for labourers and how developing countries are advised to adopt "flexible" labour policies to attract FDI.

More important is the way host countries are required to forego taxes and revenues in the competitive game of attracting foreign investment. Oxfam is not hopeful that MNCs could be fitted into national strategies for development and poverty reduction.

Unlike the IMF and World Bank, Oxfam does not look upon trade as an end in itself. Its larger ends are national growth and poverty reduction and provides for a complementary role to trade. Instead of trading on the poor, it pleads for managing trade well, so that "the international trading system that can lift millions out of poverty."

Some ideas contained in the report may seem utopian. But, if it disturbs the conscience of those who feel there is no alternative to the one-size-fits-all adjustment policies, it serves its purpose.

(The author is a former Finance Ministry official with experience in international trade issues.)

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