Developing countries' fixation on their export market fuels U.S. economic growth and fails to bring benefits to their own peoples. Their successful economic expansion requires a fundamental policy shift in favour of domestic markets.
ONCE again international attention is focussed on trade negotiations with hectic parleys between groups of countries before the forthcoming World Trade Organisation (WTO) Ministerial Meeting in Hong Kong. And once again it is clear that developing countries are unlikely to get much relief or advantage from these talks either in terms of being allowed greater flexibility to provide some protection to their own producers or in terms of greater market access to the markets of developed countries.
So it is worth asking the question: why are developing countries unable to extract any advantage from these international negotiations, despite their clear moral advantage, their greater numerical strength, and even the greater unity that they have recently displayed by forming pressure groups like the G-20 and the Group of African Countries?
Of course, it is true that power remains unequally distributed and dramatically skews the balance between the core group of rich nations (the United States in particular) and developing countries in general. But that is only part of the problem. One basic weakness of developing countries, and one that renders them so much less effective in international trade negotiations, is the concern they all have with increasing market access to the developed world, which stems from the obsession with exports as the engine of growth. This in turn makes developing country governments so desperate that they are willing to offer various concessions and accept problematic clauses that affect their own domestic producers, in the hope of somehow achieving the export expansion that is now seen as the key to the development project.
Across the developing world, the basic stimulus to economic growth is now seen to come from increasing access to, and getting larger shares of, the international market, rather than building up the domestic market. Even in countries that have also had a large growth of imports and therefore do not show large trade surpluses at present (such as China and much of East Asia) the stimulus to growth still is seen to come from exports. Since all countries except the U.S. are playing this particular game, it follows that the U.S. economy remains the most important stimulus not only to world trade but to world economic activity generally. Even for countries like China, where exports to the U.S. account for only around one-fifth of total exports, this remains the driving force for the accumulation of wealth which then generates such high rates of aggregate growth and in turn high aggregate savings.
But this very obsession with export growth as the means to development creates its own contradictions. It leads to heightened competitive pressure (the famous race to the bottom), which reduces unit values of exports even as export volumes may increase. It prompts technological changes in export and import-competing industries, which mean that new production tends to generate less employment and, therefore, have lower domestic multiplier effects. In any case, all developing countries together cannot really hope to increase their share of world markets unless they diversify their ultimate export destinations. Most important, this strategy prevents more sustainable and equitable patterns of economic expansion based on the domestic market.
The problem has become quite evident in world trade patterns, where the "fallacy of composition" is now widely acknowledged to be a real problem for developing country exporters. Simply put, this is the problem: while it may be possible for a small developing country to increase its exports substantially without significantly reducing world market prices, this is not true for developing countries as a whole, or a group of countries, or even large individual countries.
This means that a rapid increase in the volume of "developing country exports" (which are typically resource-intensive or labour-intensive) is likely to be associated with price falls and adverse changes in terms of trade for such exporters. In extreme cases, it is even possible to get "immiserising" growth through trade, of the kind that Jagdish Bhagwati described several decades ago, where the benefits of increased export volumes are more than offset in terms of trade losses.
While immiserising growth may not yet have occurred, there is clear evidence that the prices of manufactured exports of developing countries have been weakening relative to those of industrial countries, especially for the less skill-intensive manufactured exports. A book summarising research undertaken by the United Nations Conference on Trade and Development (UNCTAD) over some years (Developing countries and world trade: Performance and prospects edited by Yilmaz Akyuz; Zed Books and Third World Network, 2003) provides empirical substantiation of this.
This study notes that this means that the debate must shift from the concern with the terms of trade for primary producers versus manufactured goods producers, to one based on the underlying factors that affect terms of trade and world market behaviour. Earlier it was generally accepted that diversification, shifting to manufactured goods production, and export was the necessary advice for developing countries. The well-known Prebisch-Singer argument stated that developing countries would face long-term declines in terms of trade because primary products were demanded less as incomes increased, and thus could be oversupplied.
But now, it appears that the problem relates not just to the goods but to the nature of the trading countries, their technological capacity and the extent of surplus labour. It seems that the labour-intensive manufactured goods exported by developing countries (even those that appear to be "skill-intensive" and "technology-intensive" but really derive their advantage from being produced by cheaper labour) behave in very similar ways. So, a shift from primary product exports to labour-intensive manufactured exports fails to solve the problem, simply because too many other developing countries are trying to do the same thing.
In fact, global competition in labour-intensive manufacturing activities has risen sharply in the past few years precisely for this reason, and this has meant that countries have significantly increased volumes of exports without reaping much benefit in terms of their total value. This is very important because it provides a cautionary note for policymakers regarding the orientation of development strategy and the potential fallout of the export obsession.
In this context, domestic deflation in developing countries becomes almost necessary to sustain the current pattern of growth. Developing countries that have trade surpluses or capital inflows are all trying to avoid currency appreciation by holding more foreign exchange reserves with the central bank. And these reserves are usually held in what is seen as the world's safest place, the U.S., in Treasury Bills or U.S. securities. It is felt that fuelling U.S. economic expansion ensures a continuing market for exports by the rest of the world. Paradoxically, the U.S. economy then emerges as the only engine of growth and all other countries are obsessed with ensuring increases in net exports to the U.S. as the means for sustaining their own growth.
It should be noted that all this has very little to do with `free trade'. Internationally, `free market' principles are speedily abandoned by the ruling powers whenever imperialist designs are thereby affected. Thus, adherence to "free trade" by the U.S. administration has been uneven at best, essentially serving the interests of U.S. large capital, and unilateralism remains the most significant trade instrument for the Bush regime. The `free trade agreements' that the U.S. signs with less powerful countries force huge concessions upon them and provide major protection for its own large companies, including agri-businesses. And the lack of acceptance of genuine free trade principles in the WTO by the U.S. and the European Union is only too well known.
In this context, the only way for developing countries to get out of this trap is to stop thinking of exporting to the U.S. as the only or even dominant means of economic expansion, and consider other ways of growth and diversification, based on the domestic market or on alternative trade patterns, perhaps within other regional arrangements. This has special significance for large economies with potentially huge internal markets. Such a shift in policy emphasis would also provide an opportunity for developing countries to cater to the citizen's needs rather than to the needs of the international market. Changing the terms of bargaining might even bring about a better deal for them in international trade negotiations.