Global Policy Forum

The IMF and World Bank Orthodoxy Is Increasing Global Poverty

By Stephen Byers *

In November 1999, during the World Trade Organization ministerial conference in Seattle, I watched from my hotel room as thousands demonstrated against the evils of globalization. Anarchists clad in black marched alongside grandmothers dressed as turtles and steelworkers from Philadelphia. They saw international trade as a threat - to their jobs, the environment or simply as part of a capitalist conspiracy.

As leader of the delegation from the United Kingdom, I was convinced that the expansion of world trade had the potential to bring major benefits to developing countries and would be one of the key means by which world poverty would be tackled.

In order to achieve this, I believed that developing countries would need to embrace trade liberalization. This would mean opening up their own domestic markets to international competition. The thinking behind this approach being that the discipline of the market would resolve problems of underperformance, a strong economy would emerge and that, as a result, the poor would benefit. This still remains the position of major international bodies like the IMF and World Bank and is reflected in the system of incentives and penalties which they incorporate in their loan agreements with developing countries. But my mind has changed.

I now believe that this approach is wrong and misguided. Since leaving the cabinet a year ago, I've had the opportunity to see at first hand the consequences of trade policy. No longer sitting in the air-conditioned offices of fellow government ministers I have, instead, been meeting farmers and communities at the sharp end.

It is this experience that has led me to the conclusion that full trade liberalization is not the way forward. A different approach is needed: one which recognizes the importance of managing trade with the objective of achieving development goals.

No one should doubt the hugely significant role that international trade could play in tackling poverty. In terms of income, trade has the potential to be far more important than aid or debt relief for developing countries. For example, an increase in Africa's share of world exports by just 1% could generate around £43m - five times the total amount of aid received by African countries.

This has led President Museveni of Uganda to say: "Africa does need development assistance, just as it needs debt relief from its crushing international debt burden. But aid and debt relief can only go so far. We are asking for the opportunity to compete, to sell our goods in western markets. In short, we want to trade our way out of poverty."

The World Bank estimates that reform of the international trade rules could take 300 million people out of poverty. Reform is essential because, to put it bluntly, the rules of international trade are rigged against the poorest countries.

Rich nations may be pre pared to open up their own markets, but still keep in place massive subsidies. The quid pro quo for doing this is that developing countries open up their domestic markets. These are then vulnerable to heavily subsidized exports from the developed world.

The course of international trade since 1945 shows that an unfettered global market can fail the poor and that full trade liberalization brings huge risks and rarely provides the desired outcome. It is more often the case that developing countries which have successfully expanded their economies are those that have been prepared to put in place measures to protect industries while they gain strength and give communities the time to diversify into new areas.

This is not intervention for the sake of it or to prop up failing enterprises, but part of a transitional phase to create strong businesses that can compete on equal terms in the global marketplace without the need for continued protection.

Just look at some examples. Taiwan and South Korea are often held out as being good illustrations of the benefits of trade liberalization. In fact, they built their international trading strength on the foundations of government subsidies and heavy investment in infrastructure and skills development while being protected from competition by overseas firms.

In more recent years, those countries which have been able to reduce levels of poverty by increasing economic growth - like China, Vietnam, India and Mozambique - have all had high levels of intervention as part of an overall policy of strengthening domestic sectors.

On the other hand, there are an increasing number of countries in which full-scale trade liberalization has been applied and then failed to deliver economic growth while allowing domestic markets to be dominated by imports. This often has devastating effects.

Zambia and Ghana are both examples of countries in which the opening up of markets has led to sudden falls in rates of growth with sectors being unable to compete with foreign goods. Even in those countries that have experienced overall economic growth as a result of trade liberalization, poverty has not necessarily been reduced.

In Mexico during the first half of the 1990s there was economic growth, yet the number of people living below the poverty line increased by 14 million in the 10 years from the mid-1980s. This was due to the fact that the benefits of a more open market all went to the large commercial operators, with the small concerns being squeezed out.

The evidence shows that the benefits that would flow from increased international trade will not materialize if markets are simply left alone. When this happens, liberalization is used by the rich and powerful international players to make quick gains from short-term investments.

The role of the IMF and World Bank is also of concern. The conditions placed on their loans often force countries into rapid liberalization, with scant regard to the impact on the poor.

The way forward is through a regime of managed trade in which markets are slowly opened up and trade policy levers like subsidies and tariffs are used to help achieve development goals.

The IMF and World Bank should recognize that questions of trade liberalization are the responsibility of the WTO where they can be considered in the overall context of achieving poverty reduction and that it is therefore inappropriate to include trade liberalization as part of a loan agreement.

This represents a departure from the current orthodoxy. It will be opposed by multinational companies who see rich and easy pickings in the markets of the developing world. But such a change would benefit the world's poorest people and that's why it should happen.

About the Author: Stephen Byers is Labor MP for North Tyneside. He is a former trade and industry secretary and was a cabinet member from 1998 to 2002.

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