The Global South’s Ongoing Struggle for Economic Stability
It is a very clever common device that when anyone has attained the summit of greatness, he kicks away the ladder by which he has climbed up, in order to deprive others of the means of climbing up after him. . . . Any nation which by means of protective duties and restrictions on navigation has raised her manufacturing power and her navigation to such a degree of development that no other nation can sustain free competition with her, can do nothing wiser than to throw away these ladders of her greatness, to preach to other nations the benefits of free trade, and to declare in penitent tones that she has hitherto wandered in the paths of error, and has now for the first time succeeded in discovering the truth.
– Friedrich List, 1885, The National System of Political Economy.
Under the rhetorical banner of globalization, liberalization, and free trade, the advanced industrialized nations of the world have actually disguised their mercantilist aspirations to secure their place as the dominant economic powers in the world by denying developing countries all of the means by which they themselves industrialized. This pattern of international political and economic behavior is neither inevitable nor accidental. Power is the ability to influence others and realize one’s objectives even in the face of organized opposition. “The West imposed its own accounting practices, investment policies, and commitment to privatization upon the rest of the world despite the attempt at organized opposition by the South. International trade and investment have distributed gains in favor of those who control capital and against those who contribute human labor, especially in developing countries. The south is withering under the tyranny of the missing alternative. (Patterson 2005, 384)” The global South faces the challenges of overcoming human resources, poor infrastructure, traditional culture, inefficient bureaucracy and deeply embedded corruption and greed, inexperience, lack of scientific and technological resources, and crushing international debt, to name a few, all of which it must deal with while working in a system that is inherently prejudicial to its interests and constantly shrinking the amount of development space that it can work with (Patterson 2005, 380-1).
What is Development Space?
“Policy space is defined as the flexibility under trade rules that provides nation states with adequate room to maneuver to deploy effective policies to spur economic development (Gallagher 2008, 63).” Basically, policy space is the ability of the national government to intervene in its state’s economy in order to encourage or guide development – hence the alternate and dominant term of this paper, development space. Proponents of the use of development space often cite both theoretical and empirical evidence as grounds for their position. From the theoretical standpoint the persistence of market failures in the global economy, specifically in developing countries, is used to justify government intervention into economics. From the empirical standpoint, strategic utilization of development space has been a hugely important part of the successful development process of the vast majority of upper end developing and developed states, most recently in the case of the East Asian “tigers” (Gallagher 2008, 63).
The formation of the World Trade Organization (WTO) in 1995 heralded the institution of new economic practices that greatly encourage free trade, but, by this encouragement, drastically limit the ability of Southern states to protect their domestic and/or infant firms from advanced foreign competition (Patterson 2005, 388). The new agreements that Southern nations must sign on to in order to join the WTO (a concession that the global South can hardly afford to refuse) impose constraints upon them that have never been experienced by an advanced industrialized nation at a similar stage in their development (Patterson 2005, 388). These agreements make many of the policies instituted by the recently industrialized East Asian tigers to nurture their industrial and technological development comprehensively illegal and will likely permanently secure the dominant economic position of Western countries at the expense of the global South (Wade 2003, 621).
Developing countries cite the utilization of now unavailable development space by the United States and Germany in the nineteenth century, Japan in the late nineteenth and twentieth centuries, the former Soviet Union after their 1917 revolution, and the East Asian tigers in the latter half of the twentieth century in their call for the same freedom (Patterson 2005, 385). The global South is fighting an asymmetrical battle as their development space is being sapped by the advanced industrial states under the banner of universal liberalization and privatization (Wade 2003, 622).
The Traditional Use of Development Space:
The East Asian success story is one of the most impressive and well-recorded accelerated economic developments. From 1971 to 2004, East Asia experienced an average 4.5 percent annual per capita income growth, and also a corresponding improvement in the general quality of life (reductions in inequality and class divides, along with improvements in many other social indicators) throughout the region (Gallagher 2008, 64). Most political economy experts attribute the East Asian growth to four general categories of policies: targeted industrial policies with reciprocal control mechanisms where nations selectively secluded certain industries that they wanted to have time to gain dynamic comparative advantages, loose intellectual property rules where nations encouraged learning from foreign nations through government research and development efforts and reverse engineering of goods from foreign counterparts (though only at times), the movement of people across borders for higher education and temporary work before having them return to work in targeted industries or government, and investment in human capital and public infrastructure where heavy investments were made in the education sector and in infrastructure such as roads and sea ports (Gallagher 2008, 64-5).
Japan had two industrialization periods in which its government coordinated the acquisition and assimilation of foreign technologies, the first just after the Meiji Restoration and the second consequent to World War II. In the second instance the Ministry of International Trade and Industry was formed to calculate the priority of industries to support, technologies to purchase, and fair prices for acquisitions. The MITI entered Japan into as many as 1,000 licensing agreements per year in the post-World War II restoration and development period (Patterson 2005, 386-7).
“Taiwan’s comprehensive industrial strategy included import protection, credit to indigenous firms, selective acceptance of foreign direct investment, extensive support for development of indigenous skill and technology, and aggressive export promotion. (Patterson 2005, 387)” Taiwan specifically specializes in electronics and computer industries today and its products in these sectors are very successful internationally (Goldstein 2009, 466). Oddly enough, Taiwan, a state that is formally recognized by most other states as a defecting Chinese territory, today holds one of the world’s largest hard-currency reserves (Goldstein 2009, 466).
South Korea used its natural iron and coal resources to develop steel and automobile industries that are now internationally competitive and creating an annual trade surplus (Goldstein 2009, 465). South Korea remained heavily involved in industrial policy throughout its development in order to protect and promote its infant industries, sometimes subsidizing interest rates by as much as 40-60 percent of the market rate to promote the technological advancement of these infant industries (Patterson 2005, 387). South Korean based automotive giant Hyundai was created and fostered during this development and has now become a vigorously competitive MNC (multinational corporation), selling cars and trucks worldwide (Goldstein 2009, 465).
It is important to note though that the concern with countries modeling their behavior after the East Asian tigers is partially legitimate. Not all governments are wise or prudent enough to pick ‘winners’ to aim their industrial policy at. Government backing of the wrong economic sections or the wrong individual businesses can lead to government failure. Also, many governments have trouble with letting go of their failed projects in order to cut losses. But, just because it is risky and requires a lot of skill, foresight, prudence, etc., does not mean that it isn’t a valid option (Gallagher 2008, 65-6).
Although it is easy to recall that not too long ago Japan, Taiwan, and South Korea were each known as ‘the counterfeit capital’ of the world, it is much more difficult to remember that countries like the United States also earned such titles. In the nineteenth century (during its rapid industrialization) the United States was known – even to such prestigious (and aggrieved) authors as Charles Dickens – as a bold pirate of intellectual property (Wade 2003, 626). The interesting part of the story is that these states (which are now developed), and specifically the United States, continue to utilize development space in ways that are unavailable to least-developed countries (LDCs).
When gas prices shot up in the 1970s – and OPEC first came to real power – Japanese cars, which were much smaller and more fuel-efficient than US cars, gained a great competitive edge and began to threaten the U.S. auto industry. The United States responded quickly and used a variety of measures, including voluntary import quotas negotiated with Japan and loan guarantees, to protect its automotive industry and give it time to catch back up with its competition (Goldstein 2009, 288-9). This is blatant protectionism and would never be allowed under WTO regulations, or even GATT regulations, but the United States could get away with such actions because it was and is in a position of power as an advanced industrialized nation, and thus could convince Japan to acquiesce and accept a voluntary import quota. An LDC would have almost no way to compel or deter another nation into acquiescing to voluntary import quotas and thus, under WTO regulations, cannot use import quotas at all.
The United States made a similar move to protect Harley-Davidson, its primary motorcycle producer, from Japanese competition in the 1980s. Harley lost half its U.S. market share in four years, so the U.S. imposed a 45 percent tariff in 1983 that was to decline each year for five years and then be eliminated. In this time period Harley was to, and did, improve its efficiency and quality to the point where it could become internationally competitive once again (Goldstein 2009, 289).
Also in the 1980s the U.S. moved to protect its electronics and computer industries from the threat of being overrun by Japanese competitors, specifically because the U.S. considered these industries to be crucial to its military production. A government-sponsored consortium (monopoly) of computer chip companies called Sematech in order to promote the U.S.’s autarkical need to be able to produce the chips cheaply and domestically (Goldstein 2009, 288).
Goods Trade – The First WTO Limitation of Development Space:
Under the WTO, member-nations have to convert all of their non-tariff measures (e.g.: licenses and quotas) to their tariff equivalents and bind (put a cap on) many of their tariff categories. Most advanced industrialized nations and East Asian nations on their way to that status relied on high tariffs, along with other non-tariff measures, to sequence the integration of their infant industries into the world economy. This is no longer a feasible option for developing nations looking to protect their infant industries (Gallagher 2008, 67-8). Developing countries still maintain higher average tariff rates (12.5 percent versus the just over 4 percent average of developed nations) and only chose to bind, on average, 61 percent of their tariff lines (Gallagher 2008, 68).”
The developed countries are still not happy with the global South’s concessions here and want to lower tariffs even more significantly. In the Doha Round Western (and Northern) nations moved to do just this in the Non-Agricultural Market Access negotiations. Under NAMA all tariff lines would be bound, which would lower average tariff rates by at least 30 percent (each tariff being lowered individually based on a Swiss formula) (Gallagher 2008, 74-5). “Under a likely scenario this would lower the average developing country tariff from 12.5 percent to 5.9 percent for existing tariff lines, or from 12.5 percent to 9.2 percent if all lines became bound. (Gallagher 2008, 75)”
This is an area of negotiation that is much more important for the global South because it stands to lose so much more from the loss of tariff revenue. This is because the developing world relies heavily on tariff revenue for government revenue and expenditure. Forcing the global South to so drastically lower all of their tariffs not only restricts their ability to foster infant industries as they begin to integrate into the world economy, it could also prevent developing states’ governments from obtaining the funds they need to conduct industrial policy and maintain social programs for the poor. LDCs rely on tariffs for more than a quarter of their total tax revenue. For some smaller nations with little diversification in their economies, tariff revenue composes the core of the entire government budget. In the Dominican Republic, Guinea, Madagascar, Sierra Leone, Swaziland, and Uganda, tariff revenue comprise more than 40 percent of the whole country’s total tax revenue (Gallagher 2008, 77).
TRIPS – The Second WTO Limitation of Development Space:
“The agreement [on Trade-Related Intellectual Property Rights] refers to a range of intellectual property rights, for which it stipulates that all member countries must provide minimum protection. Among other things, it establishes twenty years as the minimum duration of patents on new products and processes. Although patents are not granted globally – the investor needs to file a patent individually in every country or region – they are de facto globalised, as the inventor has the right to file the same patent in any country for the same period… A state failing to create a system for protecting intellectual property rights can be challenged through the WTO Dispute Settlement Mechanism. (Haakonsson and Richey 2007, 73)”
“From the fifteenth to the twentieth century the great mercantile and colonial powers seized whatever resources they needed from any corner of the glove. (Patterson 2005, 380)” East Asian states relied heavily on loose intellectual property rights during their development. “In order to facilitate domestic firms’ capabilities for adapting to and improving on foreign innovations, many late industrializing nations simply refused to grant patents for key products and limited the ability of permitted patent holders to exclusively hold patents for a long period of time. Such strategies are now considerably more difficult under TRIPS. (Gallagher 2008, 69)” This has also become more difficult for developing nations because of the nature of today’s modern resources, namely scientific and technological resources, which do not lend themselves to expropriation. These resources will be critical to efficient production in the twenty-first century and it seems that they cannot be seized, only bought (Patterson 2005, 380).
Since advanced industrialized nations hold 86 percent of all the world’s patents and receive 97 percent of all patent royalties they hold a monopoly on science and technology and the South cannot enter into the innovation process without paying whatever price the developed nations ask in exchange for licensing (Gallagher 2008, 69). “Although the agreement is formulated in the language of liberal economics, it really constitutes a massive protective device for Western companies and ensures that poor countries pay far more for drugs, software, and other such items than they would pay otherwise. (Patterson 2005, 379-80)”
Although the global South was pressured into agreeing to TRIPS, there were also incentives offered to these developing countries. MNCs promised that adherence to TRIPS would increase FDI and technology transfers to developing states. The South also agreed to TRIPS in order to gain concessions from the North in other areas (specifically agriculture and textiles). These gains have so far failed to materialize (Haakonsson and Richey 2007, 73-4). TRIPS defenders also argue that the huge licensing payments to the North will encourage technological development in the North, which will then diffuse to the south. There is no credible evidence that this is the case, but rather that this new technology developed will only cost the South more and more as it has to continually pay new licensing fees in order to remain modern (Wade 2003, 624).
While TRIPS may be appropriate when applied to upper-end developing countries, it is simply a rent-extraction device for the majority of the global South that can be potentially devastating. Public education becomes more and more expensive because of book copyrights (copyrights on knowledge). Countries are left behind technologically because they cannot even adapt any modern designs to their own use. And also healthcare becomes very problematic, as almost every resource utilized by this industry is now copyrighted and constantly rising in price (Patterson 2005, 380). South-to-North payments due to WTO regulations (specifically TRIPS) equal 41 billion USD annually (Gallagher 2008, 70), mostly to the United States, which owns more than 40 percent of the world’s modern technical knowledge (Patterson 2005, 380). The World Bank estimates that by the time TRIPS comes into full effect (possibly 2016) the amount of money paid to the North and its MNCs by the South for licensing will fully offset all money granted to the global South for development assistance (Patterson 2005, 380).
The push for intellectual property rights does not stop with TRIPS though. Since the United States cannot yet successfully reopen intellectual property negotiations at the WTO, it instead relies on tighter enforcement of the current TRIPS rules using methods such as: threatening to take a state to the Dispute Settlement Mechanism of the WTO, using TRIPS review procedures in order to press states into more vigilant enforcement, using bilateral pressure, including threats to withdraw aid and to support rival states in geopolitical disputes, complaints to ministries or prime ministers about unconstructive or ‘aggressive’ ambassadors in Geneva, offering strong incentives to those who cooperate, monitoring countries more intensively under the U.S.’s super 301 trade sanctions process (a law that mandates retaliation against states that restrict the United States’ access to their markets), and regional trade negotiations. Through some or all of these methods the United States can persuade developing nations to enact national intellectual property legislation even stronger than that called for by TRIPS (Wade 2003, 625).
SCM – The Third WTO Limitation of Development Space:
The Agreement on Subsidies and Countervailing Measures limits the options for industry subsidization under the WTO. This agreement clearly defined what a subsidy was and introduced the concept of ‘specific’ subsidies. Under the SCM, specific subsidies are subsidies made solely to an enterprise, industry, or group of enterprises (also referred to as a ‘targeted’ subsidy). The SCM prohibits all export subsidies (which are simply any subsidies directly linked to exports), which were key control mechanisms implemented by many developing countries historically. Because of this prohibition of all export subsidies, it is now more difficult for states to help their infant industries break into the global market. Though, there is some concealed indication that nations may subsidize firms to the point that they become strong enough to export and then let them fend for themselves in the global economy. Under Article 8 of the SCM, there are only three types of subsidies left as ‘green light’ permissible subsidies and these are: assistance of research and development, assistance to disadvantaged regions, and assistance to promote the adaption of existing facilities to new environmental regulations (Gallagher 2008, 71).
TRIMS – The Fourth WTO Limitation of Development Space:
The agreement on Trade Related Investment Measures is a series of WTO regulations regarding the restriction of investment, mostly FDI (Foreign Direct Investment). “As part of targeted industrial policies East Asian nations strategically relied on foreign investment as part of their strategy to gain dynamic comparative advantage in higher value added economic activity… Nations such as South Korea and Taiwan, and now China, encouraged foreign investment in certain sectors but required that the majority of the firm be owned by nationals, that certain percentages of local suppliers be used, that technology and R&D be transferred and conducted in the host country, and that a certain percentage of nationals be employed in such processes. (Gallagher 2008, 71)” The TRIMS agreement make it more difficult for developing countries to follow this model and selectively choose foreign investment and deploy local content standards, and also constrains a host country’s ability to impose trade balancing requirements. Developing nations do still have the option to require research and development, joint ventures, and technological transfers (Gallagher 2008, 72).
“The central point about TRIMS is that it moves trade rules from the principle of ‘avoid discrimination’ between countries (the ‘most favored nation’ principle of the old General Agreement on Trade and Tariffs), to ‘avoid trade and investment distortions’. It interprets most ‘performance requirements’ on foreign firms as distortions, and bands or aspires to ban them… The TRIMS agreement bans performance requirements related to local content, trade balancing, export requirements, and it also bans requirements on public agencies to procure goods from local suppliers. A country that tries to impose such requirements can be taken to the Dispute Settlement Mechanism, and will surely loose [sic] the case… Moreover the US and EU want to modify the current TRIMS agreement so as to ban all performance requirements, including joint venturing, technology transfer, and research and development. (Wade 2003, 627)”
GATS – The Fifth WTO Limitation of Development Space:
The General Agreement on Trade in Services is the extension of all of the WTO rules for trade in products to trade in services – which includes anything and everything from banking to education to sanitation and water supply to healthcare. Because trade includes companies setting up operations in foreign host countries to provide services there, GATS also functions as an investment agreement (Wade 2003, 628). GATS is at once the most flexible and the most constraining of all the WTO agreements (Gallagher 2008, 72).
Although GATS maintains a ‘positive list’ approach which allows member-states to liberalize only selected service sectors (rather than only leaving sensitive service sectors not liberalized), it has been shown that the liberalization of key service sectors usually leaves the private foreign firms that invest in them with little incentive to provide equitable access and low prices, to the point where some citizens are completely denied services (Gallagher 2008, 72).
“The central point about TRIMS is that it moves trade rules from the principle of ‘avoid discrimination’ between countries (the ‘most favored nation’ principle of the old General Agreement on Trade and Tariffs), to ‘avoid trade and investment distortions’. It interprets most ‘performance requirements’ on foreign firms as distortions, and bands or aspires to ban them… The TRIMS agreement bans performance requirements related to local content, trade balancing, export requirements, and it also bans requirements on public agencies to procure goods from local suppliers. A country that tries to impose such requirements can be taken to the Dispute Settlement Mechanism, and will surely loose [sic] the case… Moreover the US and EU want to modify the current TRIMS agreement so as to ban all performance requirements, including joint venturing, technology transfer, and research and development. (Wade 2003, 627)”
Developing countries are assured that they will receive an increase in FDI inflows (since FDI in services accounts for about half of world total of FDI) if they comply with GATS and liberalize the majority of their service sectors, but these promised benefits for relinquishing even more control never seem to materialize. UNCTAD has concluded that there is no empirical evidence to verify claims that GATS is responsible for any significant increase in the influx of FDI within developing countries(Wade 2003, 628-9).
Conclusion:
The global South largely agreed to give up development space in so many areas in exchange for the promise of benefits, increased influx of FDI, access to developed country markets, the North’s concessions to bring agriculture into the trading system and the Agreement on Textiles and Clothing in which the North agreed to phase-out its textile and clothing industries (Gallagher 2008, 73). But Western textile and apparel markets along with agricultural markets both remain heavily protected by tariffs, quotas, and subsidies that make it nearly impossible for developing states to begin competing in the global economy (especially in the developed states’ markets). This is exceptionally difficult for the global South because agriculture and textiles are the first two economic sectors that a state generally begins focusing on and exporting in the long process of development (Wade 2003, 632-3).
Bilateral investment treaties take all of these agreements even further, increasing the obligations of the host government to lift even more restrictions on foreign firms hoping to operate in their territory, to give even more concessions, in return for better access to the US or other powerful-party market. The bilateral agreements establish firm-state arbitration boards to resolve disputes. These boards are naturally sympathetic to the needs of the MNCs and use private contract law to levy damages against host governments retroactively. These arbitration boards make the DSM of the WTO look balanced by comparison. (Wade 2003, 632)
All of these agreements carry inherent difficulties for developing countries for at least two reasons. The first is certain areas of the agreements are left very vague and thus are open to very radical interpretation by the North. The North’s power allows it to bully the global South into accepting these interpretations, often by threats to bring a case to the Dispute Settlement Mechanism, where developing countries fear that they will, and often do, lose the dispute. The second reason is the vast gulf between the practices allowed the global South and the practices allowed the global North. Almost all advanced industrialized nations (and upper-end developing nations) went through periods of extreme protectionist policy before a policy of complete liberalization and free trade was declared to be in their national interest (Wade 2003, 630-1).
And this seems to be the biggest problem with globalization and complete liberalization in the global economy today. The path towards development has always entailed measures that are now either heavily restricted or resolutely banned. The question becomes is there a way to become an advanced industrialized nation while following WTO protocol? It would appear that, as-of-yet, there is not, and the LDCs of the world will be stuck in their positions for quite awhile longer.
“The rules for admission into the world economy not only reflect little awareness of development priorities, they are often completely unrelated to sensible economic principles. For instance, WTO agreements on anti-dumping, subsidies and countervailing measures, agriculture, textiles, and trade-related intellectual property rights lack any economic rationale beyond the mercantilist interests of a narrow set of powerful groups in advanced industrial countries. (Rodrik 2001)”
Works Cited:
Gallagher, Kevin P. “Understanding Developing Country Resistance to the Doha Round.” Review of International Political Economy 15, no. 1 [February 2008]: 62-85.
Goldstein, Joshua S. and Jon C. Pevehouse. International Relations. Eighth Edition. Longman, 2009.
Haakonsson, Stine Jessen and Lisa Ann Richey. “TRIPs and Public Health: The Doha Declaration and Africa.” Development Policy Review 25, no. 1 [2007]: 71-90.
Irogbe, Kema. “Globalization and the Development of Underdevelopment of the Third World.” Journal of Third World Studies XXII, no. 1 [2005]: 41-68.
List, Friedrich. The National System of Political Economy. Translated by G.A. Matile. Philadelphia, Pennsylvania: J.B. Lippincott & Co., 1856.
Pevehouse, Joshua S. Goldstein and Jon C. International Relations. Eighth Edition. Longman, 2009.
Patterson, Rubin. “Global Trade and Technology Regimes: The South’s Asymmetrical Struggle.” Perspectives on Global Development and Technology 4, no. 3-4 [2005]: 379-396.
Rodrik, Dani. “Trading in Illusions.” Foreign Policy [March-April 2001]: 54-62.
Wade, Robert Hunter. “What strategies are viable for developing countries today? The World Trade Organization and the shrinking of ‘development space’.” Review of International Political Economy 10, no. 4 [November 2003]: 621-644.
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