40th Agenda 

40th Session Issues

Trade and Development

INTRODUCTION

Trade is a highly charged political issue in most countries of the world because of its direct economic impact on the population of a nation. Trade is "...the exchange of goods and services of all types between different countries. Business firms in industrial countries sell machinery and equipment to developing countries, which, in turn, sell raw materials to firms in industrial countries. The growth of international trade has been greatly helped by modern techniques of transportation and communications. These relatively new developments have brought countries closer together than they have ever been in the past and have made conduct of trade much easier. More up-to-date and complete international economic information has made the buyer and seller more knowledgeable regarding available products and markets."

For the Less Developed Countries (LDCs) the advancements in transportation and communication have made the subjugated position under which many believe they have lived under for years glaringly obvious. A nation whose people are beginning to utilize available resources in order to bring about a sustained increase in per capita production of goods and services is a developing nation. Developing is a state of existence, development is the process of improving that state of existence. Infusions of capital are needed regularly to continue the development process. Capital comes from many sources, including foreign and domestic investment. In recent years, large amounts have come in the form of loans.

The current economic crisis is a continuation of the same economic realities that have been going on for centuries. In today's hi-tech world, communication makes the reality much more visible. In the early 1600's, for example, England was a developing country seeking foreign investment. The Medici family bank of Florence, along with other Italian banks, granted loans to England. Like many of today's LDCs, England was not able to repay its loans on time. Unlike modern LDCs, which incur new loans to pay off old debt, England defaulted on their loans, forcing two Italian banks out of business and seriously damaging the Medici family bank.

The situation in colonial America was much like the creditor-debtor nations of today. England served as the creditor, and the American colonies as the debtor. This situation was part and parcel to the economic policy of mercantilism which fueled the flames of revolution, and eventually led to the founding of the United States of America.

It is currently fashionable to remark on the "new" interdependence of the world's economy. This interdependence is not new. Decisions made in one nation have always had, at the very least, the potential to impact many other nations. In today's world, where decisions made in one country will reach other countries in minutes instead of months as in earlier times, the interdependence of nations is simply more visible.

DEVELOPMENT OF THE MODERN SYSTEM

The post World War II economic system is called the Liberal International Economic Order (LIEO). Bretton Woods and the General Agreement on Trade and Tariffs (GATT) are the main components of this order. The Bretton Woods agreement grew out of The Bretton Woods Conference, held on 27 December 1945. Two organizations were the product of this conference, the International Bank for Reconstruction and Development (IBRD) and the International Monetary Fund (IMF).

The IBRD was established to give loans to war torn European nations for the purpose of reconstruction. Later, the bank took on the task of granting loans to LDCs to aid in development. In 1956 the International Finance Corporation (IFC) and in 1960 the International Development Association (IDA) joined with IBRD to form the World Bank. (See Chapter on World Bank)

The IMF's purpose is to promote international monetary cooperation. The fund does this by:

1. Promotion of exchange stability;

2. Establishment of a world wide multilateral payments system;

3. Provision of monetary reserves to help member nations overcome shortrun disequalibria in their balance of payments.

The two major stabilizing functions performed by the fund are (1) regulating currency values by controlling exchange rates and (2) providing a pooling arrangement whereby members may purchase foreign currency with their own domestic currencies to tide them over in periods of financial hardship. When a member is able to do so, it repurchases its own currency with foriegn exchange thus replenishing the fund's available resources.

Both the World Bank and the IMF use a system of weighted voting; that is, the more money a state contributes to the Fund the more votes it has. The most important monetary decisions made in the IMF are made by the Group of 10 (the 10 largest capitalist DCs) who meet under the auspicies of the Organization for Economic Cooperation and Development (OECD), and perform the executive role of the IMF. These decisions, which usually regard loans to LDCs, rarely include the LDCs for consultation.

GATT first met in Geneva in 1947 and was to be a temporary organization until the International Trade Organization (ITO) was set up as a branch of the United Nations. The United States rejected ITO because it was an organization that involved treaties, where as GATT was an organization of executive agreements not requiring Senate approval. GATT provides a forum for member nations to discuss reduction of trade barriers of all sorts, with the eventual result of tearing down all barriers and achieving free trade. GATT was formed in an effort to prevent a return to the Great Depression of the 1930's. A "beggar thy neighbor" mentality prevailed at that time; that is, each nation strove for a balance of trade surplus (exporting more than they imported). This situation made the Great Depression inevitable.

PERSPECTIVES ON TRADE AND DEVELOPMENT

The View of the Less Developed Nations

From the perspective of the LDCs, international organizations such as GATT, the IMF and the World Bank are undisputably controlled by the West. Under the liberal economic philosophy they are geared toward the prosperity of the West by exploiting LDCs. The West is able to do this by dealing with the corrupt elite of the LDCs with whom they do business. These elites are the only beneficiaries of the relationship; they live in luxury, while the rest of the country suffers in the squalor of poverty.

The liberal philosophy, imbedded in GATT, propagates the inequities between DCs and LDCs with such policies as the most-favored-nation rule (MFN) and the reciprocity rule. GATT negotiations have reduced tariffs on dutiable manufactured goods produced by developed countries to five percent. But, the tariffs on dutiable manufactured goods produced by LDCs are two to four times higher. Under the MFN any tariff or trade restriction must apply to all nations that belong to GATT. According to the LDCs this rule works well between industrialized states. However, when a fledgling industry in an LDC and an industrialized state have a trade dispute, the MFN is deemed not to be applicable. For example, if the U.S. feels England is dumping pens on the American market and in retaliation the U.S. places a tariff of 25% on pens, all LDCs that manufacture pens and export them to the U.S. will be effected.

The IMF gives loans to those countries running a balance of trade deficit. The LDCs complain that the austerity programs attached to the loans hinder rather than aid development. These programs, in an attempt to regulate the economy, devalue the currency thereby making LDC exports cost less on the world market. Devaluation also makes imported products more expensive. The problem with this is that most exports by LDCs are primary products, (e.g. minerals and agriculture products) the demand for which stays at a relatively constant rate. Instead of selling more of the product the LDCs sell the same amount, but get less for it. Also, most products imported by LDCs are vital to their economy, so they must keep purchasing these imports at a higher price.

This will cause inflation in a country that implements the austerity program, and can, in turn, cause social unrest. Social unrest may manifest itself in riots dubbed "IMF riots" (eg. Venezuela in the spring of 1989) and even lead to military coups. This social unrest further retards the development of the country by scaring away foreign investors. In order for an investor to risk his money, he must feel he will realize a return. If there is a military coup and the industries of that nation are nationalized, the investor loses everything. A country must have economic and political stability as a basis for development and attraction of foreign capital.

Certain GATT and IMF policies appear to hinder the development of LDCs rather than advance it, as they claim. The LDCs allege that this is intentional, as the LIEO favors developed nations who desire to keep LDCs subjugated.

LDC Efforts to Gain Power

In order to gain more power in the LIEO the LDC's formed the Group of 77 (G-77) to provide a unified front in discussions of trade and other development issues. The first show of the G-77's strength was in the formation of the United Nation's Committee on Trade and Development (UNCTAD) in 1964. The LDCs out-maneuvered DCs with the establishment of UNCTAD as a result of their voting strength.

The UNCTAD attempted to replace GATT as the forum for international economic talks because in this committee the LDCs would have the controlling vote. The attempt failed, but the UNCTAD continues to meet every 3 to 4 years and proved to be a political, but not an economic victory for the new G-77.

Other failed attempts at gaining more power in global economics were the formation of the Special United Nations Fund for Economic Development (SUNFED), United Nations Capital Development Fund (UNCDF), the International Development Association (IDA) and using the IMF and World Bank for development.

The latest effort at gaining power is the establishment of the New International Economic Order (NIEO). The NIEO calls for global management of resources, strengthening the technological base of the developing world, debt relief and stabilization of the IMF, and limiting the extreme austerity measures required by the IMF. The NIEO was first introduced at the Sixth Special Session of the General Assembly (GA) in 1974, and has been discussed in the GA and the UNCTAD since then. The general consensus among experts is that the NIEO has failed.

Some LDCs, frustrated with their inability to deal with developed countries, are currently arguing that LDCs should follow the lead of the Organization of Petroleum Exporting Countries (OPEC) and establish cartels. They believe that the formation of cartels, be they debtor cartels or commodity producer cartels, will give the LDCs a stronger bargaining position with DCs.

The Capitalist, Developed Countries' Perspective

The DC's view of the present economic situation is more unified than the LDC's because they are the states benefiting the most from the status quo. So called liberalists see the world as a conglomerate of autonomous states that have equal opportunity in the world's economic order. While they recognize that they are not equal in economic status, they argue that this is because the industrialized states took advantage of their opportunities and were successful. The LDCs, on the other hand, have been unsuccessful in exploiting their opportunities.

Liberalists argue that present economic inequities between nations are the result of nations straying from the path of the liberal economic practices that are imbedded in GATT and the IMF. Liberalists recognize that they need to remove tariff barriers between DCs, and between DCs and LDCs. However, they point out that LDCs are often the worst offenders as they have particularily high tariffs on all imports.

Liberalists additionally state that DCs need to give Newly Industrialized Countries (NICs) a relative advantage in the market place to help foster their fledgling industries. They are working to accomplish this goal through the General System of Preferences (GSP). The GSP is a program that makes less developed countries exempt from MFN and the reciprocity rule.

According to the liberalists, in order for the LDCs to develop, they need to make their countries more attractive to transnational corporations by having well planned industrial policies and offering economic incentives (tax breaks) for foreign investors. Examples of states that have been successful with this strategy are Brazil, Mexico, Hong Kong, Singapore, Korea and Taiwan. Another common denominator pertaining to these states is political stability. Many of their governments are often authoritarian, and in several cases the same leadership has been in control for years. Wages are kept very low, and the state's currency is devalued.

The OECD is a trade organization whose membership consists of approximately 24 western nations and was designed to harmonize foreign and internal economic policies. Major concerns are: consumer demand, output, employment, costs, prices, foreign trade, the problem of eliciting cooperation among the members to combat inflation and OPEC oil pricing.3

The OECD has put most of its efforts into coordinating national programs of development assistance. In 1976, the members agreed to a code of ethics with much input from business and labor advisory committees. These codes dictated conduct of transnational corporations and the host state to protect both parties and facilitate development. The OECD now enforces these codes which, although voluntary, have been cited in court proceedings. The organization holds annual meetings in which ember states defend their programs and policies when challenged.

Non-Capitalist View of Development

Non-Capitalist industrialized nations generally support the LDCs view of trade and development. It is difficult, however, to assess the non-capitalist nations' true involvement in aiding LDC development. Most non-capitalist countries do not make their budgets public, so the exact amount they give to LDCs is known only to them. Some countries, such as Poland, belong to the World Bank and so must make their budgets public. As a result, there is more information on their dealings with LDCs.

While most of the East bloc is industrialized, their economies are currently very weak. The Soviets have recognized their economic deficiencies and are working toward alleviating them with policies such as perestroika (restructuring). As a result, it is difficult for the non-capitalist nations to take a leadership role in restructuring the current LIEO. In the future, however, the non-capitalist nations may play a significant part in global economic plans.

UNITED NATIONS' ACTIONS

Resolution 3201 (S-VI), Declaration on the Establishment of the New International Economic Order, and Resolution 3203 (S-VI), Programme of Action on the Establishment of a New International Economic Order were drafted and passed in 1974 to deal with the unfair treatment of LDCs in the present economic system by giving the ways and means in which it should be changed. These resolutions support those governments which are elected and supported by their people. When this support exists, each government has the right to rule its people, property and industry, without foreign interference. The resolutions also argue that trade should be made more favorable to the LDCs, that technology transfer should be encouraged, and that global wealth should be redistributed.

In addition, four major concerns were expressed in the program of action. They are:

1. International Debt,
2. Trade between DCs and LDCs,
3. Restructuring IMF decision making and,
4. Meeting United Nations' targets for development assistance.

The Report of the Trade and Development Board (A/43/15 (Vol/II) 31 October 1988 Resolution 358 (XXXV)), recognizing the link between international debt and trade and development, argued that further cooperation was needed to deal with the international debt crisis. It commended the work of the Paris Club, but stated that further reforms in policy are needed. (See Issue on International Debt.)

With resolution 363 (XXXV) the Trade and Development Board reviewed the United Nations Committee on Trade and Development's (UNCTAD) involvement in the implementation of the United Nations Programme of Action for African Economic Recovery and Development 1986-1990. The annex to this resolution directs the UNCTAD to assist in the development of Africa by facilitating technological transfer, trade between LDCs, and LDCs trade with DCs. It also addresses debt management, transportation deficiencies, and the development of human resources (e.g. entrepreneurial and structural management skills). (See Issue on Critical Economic Situation in Africa.)

During the first session of the Ad Hoc Committee of the Whole for the Preparation of the International Development Strategy for the Fourth United Nations Development Decade, (A/AC 232/3, 30 May 1989) the committee reported on changes in the economic community, the environment, and societies. It stated that a strategy for the Fourth United Nations Development Decade is needed.

SUGGESTIONS FOR RESEARCH

Finding information on non-capitalist countries will be difficult, but not impossible. In the book "The Political Economy of North-South Relations," edited by Toivo Miljan, there are several chapters on the non-capitalist view, and at the end of each of those chapters is a list of sources.

Another source of data is in the annual reports of the Bank for International Settlements (BIS). The serious scholar of this topic will want to research specialized agencies of the United Nations where specific data on spending by eastern bloc countries can be found. This will be difficult, but well worth the time.

SOURCES

1. Blake, David H. and Walters, Robert S., The Politics of Global Economic Relations. Englewood Cliffs, New Jersey: Prentice Hall, Inc. 1987.
2. Greenwald, Douglas, McGraw-Hill Dictionary of Modern Economics 3rd ed., 1983.
3. Miljan, Toivo, Ed., The Political Economy of North South Relations. Lewiston, N.Y.: Broadview Press. 1987.
4. Plano, Jack C., Olton, Roy., Eds. The International Relations Dictionary, 4th ed., Santa Barbara, California: ABC-Clio, Inc. 1988.
5. Todaro, Michael P. Economic Development in the Third World. White Plains, N.Y.: Alpine Press, Inc. 1985.
6. 3201 (S-VI), "Declaration on the Establishment of a New International Economic Order," United Nations 1, May 1974.
7. 3202 (S-VI), "Programme of Action on the Establishment of a New International Economic Order," United Nations, 1 May 1974.
8. 358 (XXXV), "Review of the implementation of the guidelines contained in Board resolution 222 (XXI)," Report of the Trade and Development Board, A/43/15 (Vol. II), 31 October 1988.
9. 232, "International Economic Co-Operation, in Particular The Revitalization of Economic Growth and Development of The Developing Countries," General Assembly, A/AC.233/3, 17 May, 1989.