Essays

The idea that the 10 year transition period on intellectual property rights mentioned in the Uruguay round agreement for developing countries like India should be brought forward will no doubt be welcomed in the U.S., but will be controversial in India. Under the existing regime, all developing countries are allowed five years from Hie dak- of entry of the TRIPS agreement to put its provisions into effect, while countries like India, which do not have laws protecting product patents in chemicals and Pharmaceuticals, are given an additional five year transition period. Given the strong controversy the Uruguay round agreements have raised in India, WTO Director General Ruggiero's suggestion is not likely to win him many friends in the country.

To be fair, the new Director General has also said that the textile agreement should be revised, a proposal that ought to find favour in India, but will no doubt be strongly opposed by the textile lobby in the U.S. The Uruguay round agreement provides for a ten-year phase out period for the Muiti Fibre Agreement (MFA), with most of the benefits to India coming towards the end of this period. During the Uruguay round negotiations, India had tried to speed up the process of winding up the MFA restrictions but had to settle in the end for a 10 year phase out. The MFA allows developed countries such as Europe and the U.S. to place quotas on imports of textiles from the developing countries in order to protect their local industries.

The U.S. textile industry has been strongly opposed to any attempts to wind up the MFA, and given their influence in Washington, any attempt to increase the speed at which MFA restrictions will be reduced will be opposed by the U.S. Mr. Ruggiero, as Director General of the WTO, has no power to change the Uruguay round agreements, which can only be done at the Ministerial level by consensus. Therefore, it is not quite clear why lie had chosen to enter into a political minefield even before taking over office. This is not the first time that Mr. Ruggiero has aroused unease through his statements. Earlier, just before his appointment, the developing countries were taken aback by his apparent support for discussions on the social clause in the WTO. When questioned about this by developing country representatives, 'Mr. Ruggiero apparently said the social clause was one of the issues for possible inclusion in the WTO agenda, and that it was up to the WTO members to ultimately decide.

Mr. Ruggiero takes over the WTO when there are a number of potentially divisive North South issues such as the social clause, and trade and environment which will take on increasing importance. The new Director General will un- doubtedly have to exercise a great deal of diplomatic skill to avoid treading on the toes of WTO member countries.

On issues of interest to developing countries the World Trade Organization appears to be following much the same approach as the General Agreement on 7'ariffs and Trade did during the Uruguay Round of Multilateral Trade Negotiations. This is apparent from the position taken by the new Director-General of the WTO, Mr. Renato Ruggiero, on the two issues of financial sector liberalization and temporary migration of skilled personnel. During his visit to India, Mr. Ruggiero has asked for a delinking of the timetable for negotiations on the two issues, though this is contrary to what was agreed to on the even of completion of the Uruguay Round in December 1993.

Financial services were on the agenda of the Uruguay Round, but this was one area on which agreement was not reached. To get round the problems posed by the two-track offer on financial services made by the U.S.—a greater opening up of the market promised to one group of countries and a more limited offer made to the other, a commitment that violated the basic WTO/GATT principle of the most- favoured—nation status—it was agreed in December 1993 that talks on the financial sector would be continued beyond the Uruguay Round. The extended deadline is now only a month away. While some of the differences between the U.S. and other countries have been ironed out, there remain differences with India, Brazil and a few other developing countries. However, the main problem is that while it was earlier decided that talks on liberalizing the rules governing temporary movement of skilled personnel would be simultaneously extended, there has been very little progress in this area.

It is one of the ironies of the agenda of trade liberalization that while there has been a tremendous drive by the developed countries towards freer cross-border movement of one factor of production—capital—there has been an equal amount of resistance to a similar movement of the other factor of production—labour. The presence of 'foreign worker' is a volatile economic, political and social issue, especially in Europe. But this should prevent temporary migration on a small scale of computer professionals, nurses, etc. Yet, it is an illustration of the iniquitous nature of the trade talks that very little has been achieved in this area because Europe and the U.S. are not willing to go very far. Mr. Ruggiero's call for a delinking of the two sets of negotiations only legitimizes the position of the developed countries. Though India and the Philippines are the only two major developing countries insisting on making financial liberalization conditional on easier movement of skilled personnel, it would be an error to succumb to pressure at the WTO talks.

Mr. Ruggiero has been ambivalent about incorporating social standards—labour regulations and use of child labour as per international trade rules. lie has asked for a discussion on the issues in other fora like the International Labour Organization, without explicitly asking that they be put on the agenda. But this kind of discussion is a prelude to such issues being put formally on the agenda. This has been the case with trade in services as also with environmental standards in trade, the latter’s having moved to a examination by   WTO committee. India has no doubt clearly told Mr. Ruggiero that it will not agree to separating the negotiations on financial services and movement of natural persons. It has also reiterated its opposition to drawing up a social clause for inclusion in international trade rules. It is, however one thing for the Government to make known its position to the WTO Director- General during a brief visit and another to maintain this position during arduous negotiations in Geneva.

It seems sluggish economic growth has led to calls for course corrections in the economic policies major industrial countries are currently pursuing. The key question is what combination of policies will work best to achieve the two- fold aim of engendering more robust near-term economic growth followed by sustained, non-inflationary growth over a longer period Economic policies for 1993 in the major industrial countries must be formulated with a view to the likely effects upon economic outcomes for the rest of the decade.

The starting point for any discussion of what to do next should be a review of the three-part medium-term growth strategy most industrial countries have attempted to follow in recent years; prudent monetary policy aimed at securing price stability; fiscal deficit reduction in order to ease the pressure on monetary policy and free up savings for more productive uses outside the public sector; structural reform designed to remove obstacles to more efficient resources allocation and job creation.

The record implementation in industrial countries has been mixed, as have the results. Ironically, both the degree of implementation and its success rate have been far better in many developing countries than elsewhere. Monetary policy has generally been strong and consistent in industrial and developing countries alike. And the benefits in the form of greatly reduced inflation have been substantial. Overall average inflation rates for developing countries are distorted somewhat by a few hyperinflation cases, but the median inflation rates—excluding the formerly centrally planned economies—declined from an average of 12 per cent in the decade 1974-83 to a little over eight per cent in the decade since, if projections for 1992-93 are included. Inflation as measured by GDP deflators averaged 8.7 per cent in industrial countries for the period 1974-83, but has stayed in the three- four percent range since 1985.

The successful curbing of inflation was no case of gain without pain- Interest rates has risen to dizzying heights in industrial countries in the early'80s primarily because market participants were not-easily convinced that monetary policy had been firmly and irrevocably recommitted to price stability, nor that burgeoning fiscal deficits would not be accommodated in the end by Central banks. High real interest rates continued to exact a heavy toll on economic output and employment for years after excessive monetary expansion was reined in. The gradual understanding that money supply would not be heedlessly expanded has been the main reason behind the drop in real interest rates. The fact that real rates still remain relatively high appears to be due mainly to market- place scepticism over the sustainability of sound monetary policy in the race °^ mounting fiscal deficits and hesitant economic recovery in most countries.

The IMF has been pointing out for some time now that the second pillar of the medium-term strategy, fiscal consolidation as proven to be a rather weak reed in industrial countries. On the other hand, most developing countries have managed 1° reduce their fiscal imbalances in recent years, progress which holds true for developing countries with recent-debt-servicing difficulties as well as for those without such problems. The latter group has held their average Central Government fiscal deficits at or below three per cent of GD? In recent years, while those with debt service difficulties have brought their deficits down from eight-nine per cent of GDP in 1986-89 to four-five per cent since that period -

A number of major industrial countries did manage to reduce their budget deficits substantially in the '80s. Central Govern went fiscal balances as a percentage of GDP for the G- 7 shrank from about four-five per cent for the years 1984-86 to about two-five per cent for 1988-90. But some of the members of G-7 have recently lost the ground gained through earlier consolidation efforts, while others deficits have simply remained too large all along this failure to make major and sustain e(! dents in budget deficits has imposed too large a burden cm monetary policy to hold the line against' inflation. Interest "t rates have had to be kept higher than would be necessary lr fiscal policy were doing its share, while the scope for deploying fiscal stimulus to accelerate economic growth during the current economic slumps has been radically circumscribed.

The current debate over possible fiscal measures to aid economic recovery in some of the industrial countries rightly focuses on four issues: timing, scope, linkage to the medium term and content. None are easily resolved. In terms of timing, complicated uncertainty about the price phase of the business cycle has complicated policy making. Factors that tend to delay the effects of simulative policies have also had to be taken into account. These include both the requirement in some countries for lengthy legislative deliberations before fiscal changes can be adopted and the slow-disbursing character of a number of public expenditure programmes under consideration.

The need to exercise fiscal restraint is more pressing in some countries than in others, with the urgency of budget deficit reduction being more pronounced in the US, Germany and Italy, for example, than in Japan. A corollary is that successful recovery for the industrial countries as a group will depend upon the complementarily of their policies, rather than upon simultaneous and equivalent actions in the same direction. The latter course would almost certainly produce uneven results and serve to weaken confidence in the longer- run economic prospects.

One possible way to alleviate the confidence-impending impact of short-term simulative measures might be to marry any increased outlays or tax reductions to medium-term cost recovery measures, preferably self-executing ones. The problem is, however, that the market is fully aware that most previously announced programmes for deficit reduction have not been fully and consistently implemented. Meanwhile IMF staff have highlighted the risk the global savings in the period ahead will be insufficient to meet accumulating investment opportunities. The world saving rate, and therefore world investment, has declined by 3.5 per.

Cent of GDP since 1970. Most industrial countries could benefit by reducing the public sector's absorption of available savings in order to free more resources for investment at home and abroad. Some also need to consider modifying policies which tend to induce a lower level of private saving. The US, for example, had a private saving rate for the period 1975-85 equal to a little over 19 per cent of its GDP. Since 1986, however, private saving has fluctuated within a range of 15.5- 17 per cent of GDP. Tax incentives and other public policies appear to have had a significant impact upon the savings and investment behaviour of the private sector. This phenomenon has promoted policy proposals intended to give a fillip to savings and investment instead of consumption.

Such measures may be preferably to consumption-inducing measures, but they are only second best if they are not combined with steps to reduce the fiscal deficit. Otherwise, added government dissaving is likely to offset any gain in private saving. A more fundamental response to the need to encourage private investment may lie in reducing the barriers to its success, rather than in subsidizing its return. The preceding observation makes it all the more poignant that progress in construction the third pillar of the medium-term strategy, structural reform, has been almost non-existent in the industrial countries. Trade liberalization, for example, has been a powerful force contributing to world economic growth since World War II.

Developing countries have recently discovered that important liberalization and openness to foreign investment can tone up efficiency in previously sheltered domestic industries. An IMF analysis of 74 developing countries shows that the rate of economic growth has tended to increase with the degree of openness. But the very countries which many years ago launched the trade and capital markets liberalization process are at risk of fore getting its lessons. Barriers to trade in industrial countries have increased, not decreased, since the Uruguay round of trade negotiations began. Successful’ conclusion and implementation of those negotiations should bring substantial benefits, but additional large economic gains could be realized through further liberalization.

Domestic structural reforms could enhance productivity growth, which has been uneven and faltering in most industrial countries. Here, too, wealthier nations should take a few pages from the economic programmes of developing countries that have been vigorously reforming their economies. Take labour market reform, for example.

A number of developing countries have reduced constraints on labour mobility and wage flexibility through a wide variety of measures including major reforms of the social security system (Argentina and Chile); changes in legislation governing minimum wages and labour conditions (Mexico, Sri Lanka, Thailand and Uruguay); flexible labour employment systems; and the elimination of payments to inactive civil workers (Mali, Niger, Thailand and Uruguay). Reforms of similar nature are urgently needed to improve the functioning of labour markets in industrial countries with high and entrenched unemployment. Labour compensation packages should reflect performance and a market conditions more closely. Steps could be taken to facilitate labour market mobility. Labour's social concerns could be addressed more consistently and efficiently through reform of the tax and social policies of governments than through wage bargaining. Both the formal education system and employer-operated training programmes could contribute more to the acquisition of necessary skills.

There are other examples of structural adjustment efforts under-way in developing countries to which counterparts are needed in industrial countries. Much has been said about the need to eliminate waste in the public sectors of developing countries, but the public sector in every industrial country is also replete with programmes that ought to be eliminated, paired back or, at least, made more efficient and productive. The military sector is an obvious candidate for compression in the, post-Cold War era. Social programmes need to be better targetted and more efficiently managed, something many developing countries and economies in transition are undertaking urgently.

Public infrastructure expenditures in every country are notoriously susceptible to waste, which makes it particularly important for the governments of major industrial countries to review their, systems for allocating and controlling such expenditures before launching new projects.

Finally, while all countries must consider the impact on productivity and competiveness of government regulations aimed at securing better public safety, health and environmental conditions, there is a need in a several industrial countries for more effective government rule making, notably on competition policy and regulation on financial markets.

The bottom line is that the right national economic strategy for 1993 and beyond is well-known. Industrial countries must now do more to implement the strategy. Monetary policy should continue to focus on keeping inflation low. Fiscal policy must be geared more closely to achieving budgetary balance over the business cycle. Structural reforms to enhance productivity and employment must not be delayed any longer. Adoption of credible programmes to address all three elements would brighten global economic prospects considerably.

India Confident of Defeating OCED Move: India is confident that well before the Conference of Parties to the Montreal Protocol takes place in Vienna in December "1994, the OECD countries will be forced to withdraw their proposal to amend the Protocol if they want to avoid being defeated through the ballot. The diplomatic battle against the OECD amendment was won in Geneva last week when India made a counterproposal which was backed by China, Brazil, Argentina, Venezuela and in fact all the G-77 countries. India made it clear that if the OECD countries persisted in pushing through their amendment which basically seeks to snatch the CPCs export market from the developing countries. India would move its counter-proposal- Given the composition of the Conference of parties meeting, the OECD proposal would have been defected and the Indian proposal carried with the help of the bloc of developing countries.

Trouble has arisen over the definition of 'basic domestic needs'. Under the protocol the developing countries are allowed continued use of CFCs for ten years longer than the complete phase out date for developed countries by the turn of the century. In fact developing countries can increase their consumption of CFCs till 1997 when they will have to begin the phase out to reach the zero consumption level by 2010. The developing countries were also allowed by the Protocol to meet their 'basic domestic needs' through their own production of CFCs or by importing their needs from any country with a surplus production of CFCs.

India and China as well as some other developing countries have excess CFC manufacturing capacities and have been exporting these substances to other developing countries. Through the amendment the OECD countries wanted to stop the developing countries from exporting CFCs and allow the developed countries to export CFCs. Simply put, they were simply trying to use their own surplus capacities and annex the CFC export market. At the Geneva meeting last week the consensus was that India should withdraw? their proposal to amend the meaning of 'basic domestic needs.' India has made it known that it will be more than willing to do this and thus end the controversy, but only if the OECD proposal is also withdrawn. If the OECD wants to battle they will get it through a vote at the meeting of Conference of parties in Vienna in December.

G-77 extends support: Immediately after the OECD proposal in May 1994, in Nairobi, Mr. Kamal Nath, Minister of State for Environment and Forests, had written to his counterparts in more than 40 countries to garner support against the OECD proposal. At the meeting later India made a counter- proposal which has been supported by G-77 countries. The proposal of the rich countries would have hurt not only countries like India who are net exporters of CFCs, but would have also meant that the developing countries who have to import CFCs for their domestic needs would have had to pay twice as much. India's export price for some of the CFCs is half that of the Western countries.

The move by the industrialized nations has shaken the faith in the Montreal Protocol. For one thing the Protocol Fund has remained thin with contributions not coming in the way they should have. Developing countries are not getting the expected financial support for the phaseout. A guideline system has had to be adopted for approval of projects, limiting this to the larger projects which entail a larger

phaseout. Countries with very small per capita CFC consumption and therefore small phaseout projects have had to wait. The counter-move by India and the developing countries is sure to send the correct political signal that the Protocol cannot be amended as and when the OECD countries wish to do so. It cannot be forgotten that the problem of destruction of the ozone layer has arisen because of the indiscriminate and widespread use of CFCs by the developed countries. If the developing countries have agreed to go along with the Protocol it was only in the interests of global environment but it is the developed countries which have to pay for the destruction that is caused.

The United Nations Conference on Trade and Development has opposed the imposition of trade restrictions linked to labour standards, calling them an easy way to reduce third world competition. It has cautioned that such protectionist 'solutions' to the problem of tackling unemployment will have adverse consequences for all. In its Trade and Development Report for 1995, it has been pointed out that governments may find it difficult to resist political pressures in this direction in the absence of a strategy of tackling unemployment. The rationale for improving labour standards in the South lies in protecting workers in that region, it notes, not in saving jobs in the North.

The report, which dwells at length on the problem of unemployment and low pay in the North, observes that in many quarters, these problems are being blamed on the growth of international trade and investment, especially manufactured imports from developing countries with the main culprit being the exploitation of cheap third world labour. The solutions typically advocated include imposition of higher labour standards in the developing world or other barriers to imports. Others ascribe unemployment in their own country or region to a loss of competitiveness.

The reports say that these diagnoses are a recipe for trade conflict as they imply that unemployment at home can only be lowered at the expense of one's trading partners. UNCTAD terms such approaches as 'neomercantile', running counter to the letter and spirit of the Uruguay Round, and will prevent globalization and liberalization from yielding their benefits. While all countries will be adversely affected, the threat to the developing countries in transition will be particularly serious. This is because their outward oriented strategies will only succeed if markets in developed countries are sufficiently open to accommodate rapidly.

But it point3 that the growth of North-South trade does not provide a convincing explanation of the unemployment problem as a whole. In this context, the report makes it clear that not all manufactured exports from developing countries are labour intensive. Neither does their competitive advantage always derive from 'cheap' or 'sweatshop' labour. The developing countries that have been most successful in manufactured exports have experienced rapidly rising wages and have upgraded the technological and skill content of their production. Some of them, it is pointed out, have themselves been losing market share in labour intensive goods to newcomers but without suffering unemployment as a consequence.

The solution to the unemployment problem thus has, it is felt, in raising the tempo of investment and growth. It has been estimated if the capital stock in manufacturing the European OECD countries had grown after 1973 by a modest one per cent age point more than was actually the case; by 1992 there would have been an extra 3.9 million jobs in manufacturing and about 4.1 million in services.

In any event, the report says that raising southern labour costs would not go far towards saving northern labour- intensive industries. Since productivity differentials are much narrower than wage differentials, it argues it would worsen the terms of trade and reduce incomes in the North. Besides the real wages of unskilled workers would far as import prices rose. At the same time, higher labour costs would reduce employment, output and exports in the South. Poorer countries that face difficulties in exporting would be hit hardest. The major exporters of manufacturers in the developing world have industrialized and now enjoy quite high wages and labour standards.

The report feels it would be unrealistic to expect the international trading system to evolve in the right direction, notwithstanding the Uruguay Round, unless the twin problems of unemployment and low wages in the developed countries are solved.