Global Policy Forum

By Jacques-chai Chomthongdi

As in many parts of the world, foreign trade and investment, good or bad, have a significant role in shaping not only the economic but also the social outlook of Thailand and the region. For example, the after-effects of the sharp rise in short-term foreign investment which followed the financial liberalisation in the early 1990s and the sudden capital outflows later that decade leading to a crisis, are still reverberating throughout the region.

Trade liberalisation and investment liberalisation (including financial liberalisation) need to be analysed together, yet often they are treated as two unrelated issues. In principle, the financial sector has a role to support the real sector. Therefore, since most of the poor countries have been made to believe that they do not have enough domestic financial resources to fuel their economy, financial liberalisation as a way to access the vast international financial resource were inevitable. Hence, for many, financial and trade liberalisation are reinforcing each other.

RESULTS NOT SO ROSY

In reality, the results of financial liberalisation were not as rosy as many had hoped. Although Thailand and other countries in the region that took the same step did experience rapid increases in short-term inflows, this short-term capital is of little use for long-term economic activities in the real sector. Moreover, in most cases, a sharp rise of foreign capital inflows resulted in inflation and the overvaluation of their currencies. This situation, in turn, decreased the competitiveness of export products from countries concerned. The "bubble" financial sector also hijacks resources from the real sector. For example, in the case of Thailand, several textile factories were closed after the financial crisis broke out in 1997 in spite of growing demand. Later it was revealed that many corporations had diversified their investments: instead of reinvesting the profit in the same business in order to expand the production or to increase the productivity, they invested in the bubble sectors where they can rip-off higher profit in a shorter period. Then, when the bubble finally burst, they were left with no money to finance their export production.

Certainly, the opinions on the issue discussed so far are far from uniform. There is, however, a general acceptance that the Asian financial meltdown was strongly associated with the short-term capital flows. Thus, there have been efforts from many sides, including civil society groups, to solve the problems derived from unstable hot capital. There is, though, one keynote of caution: just because short-term investment is seen as the "bad guys" it does not automatically make all long-term investment the "good guys". It might be true that long-term investments such as foreign direct investment (FDI) have some potential benefits. Since FDI tends to be more stable than other private-capital transfers, FDI can act as a crucial source of finance for developing countries' economies. Plus, FDI has the potential to provide the local affiliates of TNCs with access not merely to financial resource, but also to new skills technologies and markets.

Nonetheless, it should be emphasised that these are potential benefits, rather than automatic outcomes associated with FDI. Therefore, it is imperative for governments of the South to remain or regain the autonomy to select and regulate both short-term and long-term foreign investments in order to benefit from them. The ability of government is, however, progressively diminishing due to multilateral agreements under the WTO such as the Trade-Related Investment Measures (TRIMs) and the General Agreement on Trade in Services (GATS) For example, under the TRIMs, host governments are not permitted to use local content requirements. This has a devastating impact on the development of host country industries since local content requirements are an important mechanism for establishing linkages between FDI and domestic industry.

But neither should developing countries 100 per cent deny foreign investment nor should they deny all foreign trade. What is preferable is to have the strategy that will lead to the equilibrium point (the balance proportion between being dependent on domestic factors and external factors). In order to reach this equilibrium, we need to depart from the old question of "how to increase market access, hence increase exports?" to the essential question "how to enable people to overcome poverty?"

THE COST OF INTEGRATION

The issue that tends to be under-emphasised is the cost of integrating into the world economy. Besides dismantling barriers to trade and investment, countries now must comply with a long list of requirements, from new patent rules to more rigorous banking standards. By focusing on international integration, governments in poor nations have to divert human resources, administrative capabilities, and capital away from more urgent development priorities such as education, public health, and social cohesion. As Harvard economist Dani Rodrik reminds us:

"World Bank trade economist Michael Finger has estimated that a typical developing country must spend US$ 150 millions to implement requirements under just three WTO agreements (those on customs valuation, sanitary and phytosanitary measures, and trade-related intellectual property rights)." (1)

To short-circuit by believing and making others believe that the increase in export will automatically reduce poverty which in turn implies that trade liberalisation is good for the poor is very dangerous. Because this assumption overlooks the possibly most important part of the equation which is " how or even whether or not poor people can benefit from the rise in export?" To be fair, many export-oriented optimists did mention that the benefits of trade are not automatic - and rapid export growth is no guarantee of accelerated poverty reduction. However, just acknowledging this problematic link is far from sufficient.

The analysis in order to formulate the trade strategy must, before everything else, focus at the grassroots level. First, factors and policy choices that will enable poor people to improve their quality of life need to be identified. Then, only after the above factors and policies have been identified, the level and the kind of foreign trade and investment needed to support and reinforce the factors and policies mentioned can be decided. Coming from this approach, we can see that "market access" may not be the most important issue. Since the rise in export might not help the poor at all if the economic, social and political structures are not suitable at both national and international levels. On the contrary, in many cases, export growth has been accompanied by extreme forms of exploitation in the industrial sector as well as in the agriculture sector. For example, the experience of the small-scale farmers in Thailand shows that the more they associate with export production the more they become indebted and exposed to chemical hazards. We must not forget that the aim of human development is not merely the attempt to increase the money in poor people's pockets, but to enable them to improve their quality of life in all aspects and to regain their human dignity.

The right balance between the ability to be self-reliant and the level of external interaction needs to be established from the household level up to the community and the national levels and bargaining power has a direct correlation with the level of self-reliance. That means, the more you are self-reliant, the more you can benefit from external economic relations such as trade and investment.

In the context of trade and investment, at the national level, the autonomy and the ability to be self-reliant depends on: first, the countries' ability to use trade measures, for instance, trade barriers, both tariff and non-tariff, in order to be able to direct domestic production and foreign trade in the way that answers to sustainable development needs; second, the ability to control short-term capital and to select and regulate long-term foreign investment. This must be accompanied by a radical reform of the internal monetary and fiscal structure to revitalise the domestic economy.

From a political perspective, the development of the true democracy will not be achieved through attempts to reform the WTO, but from ensuring countries' sovereignty and strengthening peoples' participation in the decision-making processes in each country. The work of NGOs both national and international should, therefore, be directed towards empowering the poor together with dismantling the international institutions, which are now assuming the power of nation states.

* Jacques-chai Chomthongdi is a research associate with Focus on the Global South.

(1) Dani Rodrik, "Trading in Illusions," Foreign Policy, March/April, 2001)

A longer version of this paper was presented in Thai at the "Trade Forum" -- the introduction of the Oxfam International trade campaign "Make Trade Fair" to Thai civil society organised by Oxfam GB, April 25, 2002, Bangkok)

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