Three decades of trade liberalization, any lessons for the world?



Roshan Madawela


Traditional theory purports that trade liberalization, regional or bilateral, extends global production frontiers outward, thereby opening the gates of opportunity to both developing and developed nations. Nevertheless, liberalization has not been reciprocal and the expected benefits unforthcoming. Under the circumstances, the question remains, what has been achieved and is a better deal possible in the future?

Trade theory

Complete trade liberalization could raise worldwide economic growth by $287 billion per year by 2015 according to the most recent Word Bank study. It states that two thirds of this expansion would go to the industrialized countries. Despite being lower than earlier calculations, the role of trade in spurring the global economy cannot be underestimated according to the report.

Trade liberalization invariably leads to the creating of new markets in the domestic economy with employment generation and consequent reductions in poverty whilst concurrently diminishing other markets and having the reverse impact on poverty. Sri Lanka is a case in point. The net impact may be positive or negative at the macro level depending on how the process is managed, but the transformation is invariably painful at the micro-level, to those that bear the brunt of change.

Other factors such as labor absorption are also significant. For instance, where the market that thrives from trade liberalization is labor intensive, we can conclude that the impact on poverty alleviation will be positive. Evidence also suggests that export led strategies have tended to favor the industrial sector rather than the agricultural sector. Moreover, small scale agricultural producers were found to be worse off following Sri Lakna’s trade liberalization initiatives in 1977 according to the IPS.

However, with the global economy expanding at between two and three per cent and Asia in particular experience double digit growth rates, liberalization connects the domestic economy to the wider world. On the down-side, it exposes the domestic sectors to greater risks and external shocks. For example, the July 2006 war in Lebanon resulted in the return of thousands of Sri Lankan housemaids who had been affected by the conflict.

Liberalization has also tended to raise the overall standards of organizations, human resources and produce. For instance, Sri Lakna’s tea sector, for long at the frontline of the exports is now having to obtain health, safety and quality certifications like the H.A.C.C.P in order to stay in the European market. Certification calls for higher standards of hygiene, better machinery and technical expertise and serves to improve working conditions.

Reality gap

However, in reality, the rhetorical position of trade theory has not materialized in a global context at the WTO level. Fading support for the WTO, even amongst INGO’s like Oxfam who recently withdrew its support for the talks, is an indication that the WTO critics are winning the debate. The ostensible consensus has been that no deal is preferable to a ‘bum deal’. Moreover, accusations of sidelining the all-important issues of poverty and farmer livelihood concerns in the developing world due to brinkmanship between the EU and the USA have been voiced by critics in the UK and elsewhere.

One of the main factors that can be attributed to the unsatisfactory performance of the least developed countries (LDC’s) since the Uruguay round (1986-93) is the gap in information and knowledge that is required to capitalize on possible synergies. Here, the figures speak for themselves. According to trade data, the share of developing country manufactured goods in the total imports of developed countries has fallen from 23.2 per cent in 1990 to 9.9 percent in 2004. So why then are developing nations striving to partake in an exercise that has proved thus far to be fruitless?

According to some analysts, current ‘aid for trade’ packages that are given to the LDC’s are valued in the range of four billion US$ and are aimed at meeting the cost of regulatory and intuitional adjustment. However, it is said that the mechanisms in which these funds are distributed tend to promote corruption amongst the ruling elites and officials. Thus, far from serving to alleviate poverty, the net impact will tend to further limit agricultural livelihood opportunities.

Gaps between theory and reality could be explained by such phenomenon. Dr. Posh Pandey writes that liberalization alone does not measure a developing countries ability to capitalize on the openings due to multifarious shortcomings in the financial and regulatory environment, macroeconomic instability, social distribution mechanisms, dissemination of information, and supply capability to respond to market opportunities.

Navigate strategy

Given the past record that stirs little enthusiasm, what can officials who are ’batting’ for the LDC’s and emerging countries expect under a new initiative. According to some analysts, ‘aid for trade’ can lead to gains for LDC’s if they take a more holistic approach to the problem.

What needs to be firmed at the negotiating table is a package that can be distributed with tangible benefits to all segments of a countries population. Therefore, rather than placing all the ‘pennies’ into technical assistance or capacity building ‘piggy bank’, support for LDC’s under ‘aid for trade’ will need to include grants that can address the real constraints facing agricultural producers that deter them from capitalizing on new opportunities gained on paper.

Central to such a strategy would be gaining funds for infrastructure development of utilities, communications, roads, bridges, ports, railways and air ports that will secure connectivity to markets. Without this, service sector and agriculture players in the developing world will not be on an equal footing and real gains are not likely to be realized. At present rural livelihood activities are hardly connected to local markets let alone markets overseas.

Taking Sri Lanka, we can note that fruit and vegetable producers in many parts of the island are physically marginalized and cannot adequately transport their produce to local town markets. Many producers have to ferry their produce on un-mechanized transport through difficult terrain in order to reach their buyers. Critically, there is little or no scope to expand production due to the long length of time taken to transport perishable goods.

Devinder Sharma writes that the WTO is pressing for a two tier global agricultural system where the developed nations produce staple foods for the worlds six billion plus population and the rest grow cash crops like tomatoes, cut flowers, peas and strawberries.


Politics, raison d'être

Trade has additional benefits that can serve towards reducing conflict. According to academic studies, it has been shown that gradual increases in trade between nations reduces the risk of conflict by a proportionate and significant degree. Recent history is filled with trade agreements that have been motivated by political factors like the EU to reduce risk of war between Germany and France, ASEAN to lower tension between Malaysia and Indonesia, and MERCOSA to expel fears of conflict between Argentina and Brazil.

In the current south Asian environment that continues to suffer from frequent internal conflicts and border disputes, facilitating trade between regions and across border needs to be pursued. Heightened commercial activity between the LTTE controlled north and the GOSL controlled south and east of Sri Lanka would cement the current cease-fire agreement. Hopes are alive that greater trade between India and Pakistan will defuse tensions and be a case in point.

Regional integration agreements have additional advantages of proximity, enabling possibilities to share in joint infrastructure and energy projects, collectively combating pollution, forming a common policy on natural resource usage like fishing, and strengthening the bargaining power of the member states.

Running concurrently with the tendency towards regionalism, has been the proliferation in bilateral agreements in recent times. Such agreements can asymmetrically serve the interests of both an individual LDC and a developed economy. The US has inked FTA’s with 13 countries and is negotiating with an additional ten. Beijing has a dual policy of establishing an East Asia Free Trade Zone as well as securing bilateral agreements with individual nations. China has already signed or is negotiating bilateral agreements with all players in the region including Australia, New Zealand, Japan and the Asean states. Meanwhile, the EU is seeking to tighten up economic agreements with the 69 African, Caribbean and Pacific nations, many of whom were former colonies.


Sri Lankan experience

Sri Lanka first initiated economic liberalization in 1977 making it one of the first to do so in Asia and the impacts were felt immediately. The strategy sought to promote exports, revamp the tariff system, reform the exchange rate mechanism to a managed float, and woo large amounts of FDI with incentives like the FTZ schemes. New institutions like the Export Development Board were also formed in order to facilitate the process. The fiscal stance was also shifted towards a greater focus on infrastructure development as opposed to welfare programs.

A second wave of reforms took place in 1989/90 that saw the introduction of additional incentives for FDI, finance sector reforms, further non-tariff concessions and a new privatization drive.

The observed impacts according to the IPS were an increased share of public investment in GDP, a rising budget deficit due to the higher public investment not being accompanied by a comparable increase in saving rate, and consequently, inflation.

However, FDI picked up momentum up until 1983 when the race riots sparked off a period of instability throughout the country that also triggered the Marxist JVP activists. Nevertheless, FDI into the garment sector continued and the sector officially overtook tea as the nation’s number one export in 1986. However, the period from 1983-89 was characterized by widespread political turbulence and commercial activity was seriously stifled. In 1987 GDP growth was only 1.5 per cent.

Whilst exports grew, imports rose at a faster rate, as they still continue to do so. For example, whilst the garment sector was spearheading the export growth drive, it was also increasing the import bill as some 60 per cent of the inputs were imported. Moreover, the growth in garments took place concurrently with the demise of the textile and handloom industry. For workers who were able to switch sectors, the damage was limited but for others the human cost of transformation was difficult.

However, many found that working overseas in the Middles East was an attractive option. Between 1977 and 1982, an estimated half a million migrant workers took up employment in the Middle East. This phenomenon served to keep the country’s current account balance in surplus as these low skilled workers send back their remittances. Today, well over one million are said to be working overseas, mainly in the Middle East and they send an estimated $2.2 billion per annum. Remittance earnings account for more foreign exchange than tea exports and are only surpassed by garments. In its absences, the national economy would be in a completely unsustainable deficit situation.

However, the social cost of promoting large scale migration of labor, predominantly female housemaids, is often under scored by successive governments that need foreign currency to pay their import bills. At the household levels, families sans mothers, are known to have a high incidence of alcoholism, child abuse and school drop-outs. Families without fathers also suffer comparable problem whilst money is sent from abroad to meet their basic needs.

Conclusion, inconclusive

In Sri Lanka, it has not been possible for researchers and academics to assert with certainty the relationship between trade liberalization and poverty reduction due to the facts that mass migration, race riots, civil unrest and civil war have had a greater impact on the economy and people.

Here, perhaps it is worth returning to the relationship between trade and conflict and poverty. In 2001, a ceasefire agreement was signed between the LTTE and the GOSL. Trade between the north and east and the rest of the island stated once again to flourish with resulting benefits to the local economies and the peoples of the formerly conflict affected areas. This was reflected in the regional GDP statistics that showed the North and the East once again coming into the picture as a contributor to GDP. Trincomalle for instance started to attract tourists once again. However, the past two years has witnessed a deterioration in violence and a gradual break down of the CFA. Consequently, trade has all but ceased with the closing of the A9 highway and people lives have again been cut off from any prosperity. Moreover, it is worth noting that proper poverty data from the north has not been generated for the past two decades.

Trade per se is entirely positive, both in theory and practice. However, when the ‘devil is in the detail’, international pacts and WTO agreements can result in asymmetrical benefits or outright losses for developing nations. It is also worth noting that more and more, the human element of economic development is excluded as growth figures are churned out. Trade liberalization, even when the agreements are reciprocal, will inevitably result in transformations that will impact negatively on some people’s livelihoods. The ability for workers to switch sectors, travel geographically, acquire new skills, and other considerations such are gender bias will determine the real benefits of trade liberalization.

Trade liberalization with appropriate safety nets is a position supported by the Centre for International Trade Economics and Environment (CUTS CITEE). Further information can also be obtained fro the Law and Society Trust – www.lawand societytrust.org.

Copyrights Reserved (RIU 2007).