Global Policy Forum

By Duncan Green

Have the gates to the developed world clanged shut for good? The obstacles to new countries joining East Asian tigers such as Taiwan and South Korea have piled up. The path to development has never looked so steep.

Fifty years ago, Korea was poorer than Sudan. Its main export was wigs made with human hair. Today it is an industrial leader, shrugging off a financial crisis in 1998. Taiwan has achieved the unique feat of combining high-speed growth with one of the fairest distributions of income in the world.

At least until the onset of the Asian financial crisis, the World Bank attempted to claim the tigers as success stories for free market economics. In fact, countries such as Malaysia, Korea and Taiwan proved adept at combining a high level of state intervention in allocating credit, nurturing new industries and acquiring new technology, with the strengths of market forces in encouraging competition and efficiency. Above all, the East Asian "miracles" have been built on a clear industrial policy aimed at developing locally owned industries, if necessary through protection and laws which give them privileges compared to foreign investors.

But are these lessons still relevant? "Doing a Korea" is becoming increasingly difficult. The speed and scale of technological innovation is accelerating, making it harder for poor countries to reach the "technological frontier" as Korea did in the 1970s thanks to massive state support for its nascent hi-tech industries. These days it costs billions to develop a new product, and firms have only a few years (sometimes only months) to recoup the investment. The costs of failure are huge.

It is harder for developing countries to acquire and adapt the latest technology as international patent law has become more restrictive. Protectionism may be out of favour in trade, but it is alive and well in the knowledge economy.

Most worryingly, the international system governing trade and investment is closing down the ability of poor-country governments to follow the kind of policies that lay behind the East Asian miracle. Countries which have opened up to international capital markets find themselves at the mercy of that elusive entity "market confidence". Any step away from the Washington free market consensus can trigger a mood-swing among investors and a run on the currency. As one Brazilian economist observed: "Here the people get to vote every four years, the markets every four seconds."

Structural adjustment programmes, often imposed on countries by the IMF and World Bank, have opened up economies to foreign trade and investment, reducing the levels of protection for local industries. These days, the World Trade Organisation covers much more than trade, since barriers to trade can comprise almost anything a government does inside its own borders, such as subsidies, investment laws or tax regimes. For WTO officials, the fact that governments are prohibited from reversing free market reforms bar exceptional circumstances prevents states falling prey to vested interests. It can just as easily prevent them from doing what is best for their people.

Pessimists conclude that the rich countries have pulled up the ladder behind them, using the global trading system to keep poor countries in their place as providers of raw materials and cheap labour. Optimists point out that the WTO still leaves plenty of options open, such as funding research, or setting up science parks for fledgling companies. The real dangers are twofold. The first is that, if developing country governments swallow the story that only deregulation and market forces are permitted, they will fail to exploit the room for manoeuvre that still exists.

The second is what happens next at the WTO. Once the US elections are over, the rich countries will return to the negotiating table abandoned at Seattle. They want agreements on areas that could severely reduce the remaining space for national development policies - for example, barring governments from favouring local companies in their procurement policies or setting even tighter rules against different treatment for foreign over national investors.

Campaigners, north and south, should be making the case for an international system that protects and encourages, rather than undermines, national development strategies.

Duncan Green is a policy analyst at Cafod, the Catholic aid agency.

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