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close this book Free trade, foreign aid and sustainable development (1993)
close this folder Introduction
View the document Unregulated Foreign Trade and Free Markets
View the document Foreign Aid and Investment
View the document Concluding Remarks
View the document Notes

Unregulated Foreign Trade and Free Markets

According to conventional economic theory, trade promotes development because by definition it is voluntary and mutually beneficial to all the parties involved. The validity of this view has been contested by many economists (eg. Daly and Cobb, 1990; Singer, 1992; Ekins, 1991). For example, Daly and Cobb (1990) argue that the very notion of comparative advantage which forms the basis of international trade has been rendered inoperative by free transnational movement of capital. Secondly, the conventional theory of international trade underestimated the role of state policy and political, economic and military factors in setting prices and imposing tariff and non-tariff barriers to trade. Huge subsidies on agricultural commodities in developed countries have led to surpluses which have been dumped in world markets. This has led to depression of world food prices while the prices in the developed countries have been kept high by various kinds of barriers to imports. A recent study of the IMF and the World Bank indicated that protectionism in the industrialised countries costs the Third World twice as much in lost export earnings as they receive in development assistance (Stoltenberg, 1989 : 22).

Measures taken to promote exports have brought about increases in the supply of agricultural commodities in developing countries. The export demand for many of those commodities is inelastic and hence their prices have fallen relative to the prices of the commodities that developed countries export to developing countries. Thus, the international trade has benefited developed countries at the cost of developing countries (Ekins, 1991:66).

In addition, the price mechanism is increasingly being by-passed both by the phenomenon of counter-trade and intra corporate trade. In the former, goods are exchanged directly at implicit prices rather than sold on world markets and the latter which now accounts for 30 percent of all trade is not trade at all as it does not involve any exchange of goods; it is in the nature of book-keeping operation within a single organisation. All these factors have made the global trading a means of exploitation of developing countries by developed countries and their transnational corporations. Needless to say, this process also undermines traditional culture and social structures conductive to self-reliance and thereby enhances the dependency of developing countries on developed countries and imposes the western life styles on poor countries which cannot afford those styles (Ekins, 1991:66).[1] According to Ekins (1991:66-68), global trade, aid and debt are all inimical to the interests of the poor in the Third World countries. It is only the rich in the North and the rich in the South who benefit from all these three power instruments of the North.[2]

In the opinion of the World and IMF, the free market is the key to economic growth of developing countries. In a world where the ecological limits to growth have already reached, growth-oriented free market-based policies serve primarily to intensify competition for the finite stock of natural resources. Economic growth in such a situation is a zero sum game; there cannot too much of it somewhere without too little of it being else where. If markets are not regulated, such competition leads to concentration of control of resources in the hands of those who have economic and political power and consequent widening of disparities between the rich and poor. The end result of such policies will be environmental degradation and depletion of natural resources both of which will reduce the real wealth of the society and impair the future productive potential of the economy. This is exactly what is happening now in most developing countries including India that have been forced to adopt SAPs and integrate their national economies into the world economy by removing all barriers to the free flow of goods and capital across their borders.[3]

The trade in tropical timber, for example, is one factor underlying tropical deforestation. Needs for foreign exchange encourage many developing countries to cut timber faster than forests can be regenerated. This over-cutting not only depletes the resource that underpins the world timber trade but also causes the loss of forest-based livelihoods, increases soil erosion and downstream flooding, and accelerates the loss of species and genetic resources. International trade patterns can also encourage the unsustainable development policies and practices that have steadily degraded the crop-lands and range-lands in the dry-lands of Asia and Africa.

Herman Daly, a Senior Economist in the Environment Department of the World Bank has reviewed a draft of Section 1, Chapter 1 of Agenda 21 of the UNCED: "International Policies to Accelerate Sustainable Development in Developing Countries and Related Domestic Policies." (Daly, 1992). In his review, he asserts that the entire argument of the chapter is based on the "invalid and unsubstantiated premise that an open trading system, which leads to the distribution of global production in accordance to comparative advantage, is of benefit to all trading partners." He argues that the principle of comparative advantage is irrelevant in an environment in which capital is highly mobile internationally. In such an environment "the confident assertion that an open trading system will benefit all trading partners is utterly unfounded", he further adds. Furthermore, in a free trade regime, a country that internalises the costs of using natural resources including environment into its prices will be at a disadvantage vis-a-vis a country that does not, since its prices will be higher. Therefore, there will be no incentives for any country to internalise environmental costs and thereby attain sustainable development in an open trading system. He concludes by quoting from J. M. Keynes’ essay on "National Self-Sufficiency" the following passage (Daly, 1992 : 4).

"I sympathize, therefore, with those who would minimise, rather than those who would maximise, economic entanglement between nations. Ideas, knowledge, art, hospitality, travel—these are the things which should of their nature be international. But let goods be homespun whenever it is reasonably and conveniently possible: and, above all, let finance be primarily national".

As goods and capital flow freely within an integrated global economic system seeking highest short term profits, national governments lose their ability to regulate and manage their own economies in the public interest and become puppets in the hands of the World Bank, IMF, and other financiers and subserve their interests. To attract investment funds, they offer cheap labour, weak environmental health and safety standards, low taxes, well-developed infrastructure and least restricted access to natural resources. All this results in depletion of their natural resources and degradation of their environment at a faster rate. There is a lot of evidence now available from the countries where SAPs were implemented that shows that such policies have compelled the debt-ridden governments to exploit their natural and human resources beyond their carrying capacities and drive increasing number of their people to informal sector (Antrobus, 1992: 54-55 and Ekins, 1991 : 68).

It is too early to assess the impact on economic growth and sustainable development of certain measures taken under the NEP including devaluation of the exchange value of Indian rupee by 20% adopted to encourage exports and removal of certain barriers to imports. I shall, however, attempt to do so based on a priori reasoning and whatever empirical evidence is available to me. In the first instance, India’s exports and imports constitute only a small fraction of her gross domestic product (GDP); in 1990-91, the imports accounted for 8.2% and the exports for 6.1% of the GDP (Table 1). Over the 40-year period from 1950-51 to 1990-91, the contribution of imports to the GDP varied between 3.7% and 9.2% and that of the exports from 3.1% to 7.2%. Furthermore, India’s share in the world exports is so small (0.53% in 1990-91) that a doubling or trebling of it will not cause any ripples in India and abroad. Using the relevant time series data for the period 1950-51 to 1990-91, I tried to find out if India’s imports and exports both expressed as percent of India’s GDP, were correlated with GDP. I found that no statistically significant correlation existed between GDP and imports (correlation coefficient, r = 0.38) and between GDP and exports (r = 0.27). This means that the removal of restrictions on foreign trade with a view to promote exports and imports is not going to affect India’s economy in any significant way. If any case, free trade under the existing conditions of unemployment, distorted domestic capital market and presence of multinationals is not a socially optimal policy to follow (Beladi et al. 1992). According to the latest information available, India’s real GDP is projected to increase by 4% during 1992-93 as compared to the 1.5% increase in 1991-92. This is, however, substantially less than the growth of 5.6% per annum recorded during the Seventh Plan period and 5.7% during the Sixth Plan period (CMIE, 1993 : 1-2). This means that so far there is no evidence to prove that these two measures adopted under the NEP have produced any positive impact on economic growth.

In its October 1990 report on "Trade Reform in India", the World Bank advises India to focus on producing and exporting primary commodities and not on manufactured goods (Ghosh, 1992 : 1176). This is contrary to the findings of a recent study that in the post-1980 period, export of primary commodities did not .pn9

have any significant effect on India’s GDP but that of manufactured goods did.[4] And yet it is precisely the policies recommended by the Bank that the Government of India is following.