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| The policy-space option |
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Wednesday, November 26, 2008
Shahrukh Rafi Khan
In laying out the implementation of an alternative strategy in my last essay, I mentioned the concern of scholars who point out that the dramatic industrial successes of the East Asian economies which used such a strategy may not be possible in the changed global economic environment. The internal constraints to policy space emerge from an inadequate fiscal effort, which I discussed earlier. The focus of this essay is on external constraints on policy space.
The Pre-Uruguay Round (UR) GATT allowed for special and differentiated treatment (SDT) for low-income countries (LIC), which included preferential access to the markets of high-income countries (HIC), flexibility in application of agreements, and non-reciprocal trade relations. By contrast, the World Trade Organisation, formed in 1995 after the UR multilateral trade negotiations ended successfully, requires a single undertaking that imposes the same rules on all, to "level the playing field." SDT is now limited to the different lengths of transition periods for compliance with agreements. The obligations are far reaching and extend to standards that a HIC might impose on itself and therefore require of others (like-treatment). Since HICs have more capacity to implement such standards, they can act as a non-tariff barrier (NTB) to LIC exports. Other agreements signed on to as part of the UR are even more restrictive of policy space.
For example, TRIMs (Trade Related Investment Measures) extend the most-favoured-nation clause or like-treatment to investment. This makes it difficult to impose clauses on the foreign direct investment (FDI) of multinational companies (MNC) requiring local content, technology transfer, trade balancing (requiring equivalent exports for imports), and joint ventures. These clauses were put to very good use by the East Asian economies.
TRIPS (Trade Related Intellectual Property Rights) prohibit measures such as reverse engineering in manufacturing and generic drug development in the pharmaceutical industry. Even though present the HICs blatantly violated property rights when they were trying to catch up with industrial leaders, the WTO has imposed constraints on LICs adopting this path. The cost of patent license fees post-TRIPS for LICs has been $45 billion per year which is about half the annual foreign aid for 2004-5 ($93 billion). These two agreements hinder LICs from developing an indigenous technological capacity, the sine qua non of economic development.
The General Agreement of Trade in Services (GATS) extends like treatment to services and prohibits LICs from blocking service imports via quotas and restrictions on organisation type. However, GATS still does allow countries to liberalise services based on a positive list rather than use a negative list.
Subsidies, selectively used, could be an instrument of industrial policy and this has been blocked by Subsidies and Countervailing Measures (SCM). SCM still allows countries to provide subsidies for R&D but LICs are at a disadvantage. It has been estimated that 49 percent and 47 percent, respectively, of gross R&D in France and the USA is state-funded and 28 percent of all business R&D in the USA is state-funded. The EU plans to increase such expenditures from 1.9 percent to 3 percent of collective GDP by 2010. HICs also use tax policy, like accelerated depreciation, to attract FDI, even as SCM block subsidies in LICs to selectively attract FDI.
While the rhetoric of the UR was to create a level playing field, this is clearly not the case, as evident from the above, and also other reasons that follow. First, prior to the UR, most HICs used PR (performance requirements) on FDI to build local industrialisation and technological capacity and are now blocking this for LICs. Second, they possess enforcement mechanisms that LICs do not have. For example, USA/EU can block import access and deny aid, and this gives then bilateral leverage. They also exercise multilateral leverage via IMF/WB conditionalities; e.g., forcing actual tariffs to be much below those bound to the WTO. Third, they have the ability to commit many more resources to the DSM (Dispute Settlement Mechanism) within the WTO. Fourth, recalcitrant LICs can be given low ratings (as Pakistan recently discovered) and high-risk assessments by agencies based in HICs. This blocks the flow of credit, financial investment, and FDI.
There remains a threat of further closure of policy space in WTO negotiations. While LICs have successfully resisted further concessions on the Singapore issues (government procurement for extension of like treatment, competition policy like treatment of FDI), labour and environmental standards that match HICs, and transparency clauses, the pressure from HICs to broaden the agenda to seek advantage is unceasing.
Currently the LICs have been staving off pressure to make concessions on NAMA (Non-Agricultural Market Access) in the stalled Doha "Development" Round. There are various simulations of benefits and costs for LICs and one suggests that the benefits (gains from trade) are fourfold less than revenue losses from aggressive removal of tariffs. For many LICs, tariff revenue represents over half of total revenue. However, the direct revenue loss is less of an issue than the shrinking of the revenue base due to the deindustrialisation that NAMA will generate. Even as HICs negotiate for aggressive tariff cutting, they continue to subsidise their agricultural sector and make reluctant concessions.
Even though policy space has been severely constricted, scholars like Ha-Joon Chang point out that there remains ample wiggle room. While QRs (quantitative restrictions) are blocked and tariffs reduced, the balance of payment deficit clause can be invoked to block non-essential imports and countries can define non-essential. While targeted export subsidies are actionable, material damage has to be demonstrated in the WTO and the transaction cost of taking countries to dispute settlement is high. Also, subsidies can still be used for various activities like R&D, environmental conservation and regional development and these activities can be broadly defined. While local content requirements and compulsory licensing is prohibited, countries with PCGDP of $1,000 are exempt. While TRIPS is restrictive, the WTO allows countries to opt for an alternative property rights regime (sui generis – of its own kind) that is much less restrictive and privileges information dissemination rather than property rights. Thus, Pakistan has considerable leeway to pursue an industrial and support policy for strategically and selectively backing and creating market winners.
Most of the other tools used by East Asian countries for industrial and support policies are still available under current WTO trade rules. These include credit rationing, tax, duty drawbacks and tax deferrals, public procurement, technical education, skills and worker training, information, and infrastructure policies.
Thus, while some policy space has closed, a creative use of what is available could still enable Pakistan to selectively nurture and create industrial successes. Policymakers should also keep in mind that the WTO regime is much more accommodating than bilateral trade agreements with the USA that rule out much more of the existing policy space.
(Concluded)
The writer is a visiting professor of economic at Mount Holyoke College. Email: shahrukh.2006@gmail.com
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