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DEVELOPMENT: Market Myths Over LDCs Collapse

Sanjay Suri

LONDON, May 27 2004 (IPS) - The mantra that market reforms would pull the least developed countries out of poverty collapsed under major new findings by UNCTAD presented in London Thursday.

The 50 least developed countries (LDCs) increased gross national income (GNI) and export growth but poverty levels within the countries have also risen, or at least not declined, says the report by the United Nations Conference on Trade and Development (UNCTAD).

What was touted as far-reaching trade liberalisation that many of the countries have had to adopt has not worked, the report says. "Trade liberalisation has actually worsened the trade balance in LDCs," the report says.

The Least Developed Countries Report 2004 demonstrates that "during the 1990s, the greatest improvement in both export growth and growth of average private consumption per capita was in those countries that opened moderately during the decade, rather than in those that opened the most."

The report says: "Making trade work for poverty reduction in the LDCs requires national development with global integration, not global integration without national development. A development-led approach to trade will be more effective than a trade-led approach to development."

The report notes that there have been significant export take-offs in a large number of LDCs since the late 1980s. "But average private consumption per capita has not taken off in the same way."

This is not a country-specific phenomenon, the report says. "There are multiple cases, regardless of their export specialisation, where a surge in export growth has been accompanied by stagnation or a decrease in average private consumption per capita."

The report identifies several reasons for this. "Export-led growth is often enclave-led growth in an LDC context" often exemplified by export processing zones. And despite export growth "almost all the LDCs have large trade deficits which have been financed by aid inflows."

Sustained growth requires a strong "investment-export nexus" which has been lacking because of low investment. The kind of fiscal discipline prescribed has been damaging for LDCs. "It is very difficult for ‘belt- tightening’ to occur in very poor countries with mass poverty without a rising incidence of poverty."

The UNCTAD report notes that the usual view of the relationship between trade liberalisation and poverty is that trade liberalisation will have adverse effects in the short run as social groups that formerly benefited from a protectionist tariff regime are exposed to international competition, but that in the long run effects will be favourable because trade liberalisation will increase the growth potential.

The report finds just the opposite.

"Poverty trends during and immediately after trade liberalisation in the LDCs are in fact very mixed, and not invariably negative as some claim," it says. "But there are many grounds for concern about the long- term effects in terms of both the sustainability of economic growth and its inclusiveness."

The report points out also that "rapid and deep trade liberalisation has been associated with de-industrialisation, as import substitution industries have collapsed when they are exposed to international competition without adequate preparation."

These findings have "important implications for both the LDCs and their development partners," the report says. "Their development partners should not imagine that preferential market access or multilateral trade liberalisation will substitute for international aid as a central mechanism for supporting poverty reduction."

The LDCs still require "increased and better aid not just to meet urgent basic needs but also to build productive capacities."

UNCTAD calls for an end to "development pessimism" founded on the view that past development policies and international development assistance have failed, that if national development strategies did work they cannot work once a country has undertaken trade liberalisation, that the globalisation of production systems renders national development strategy impossible, or that WTO rules leave no room for promoting development.

The report says that "one of the most important achievements of the second half of the twentieth century was the lifting of millions of people out of poverty through the promotion of development." These achievements are being continued in China and India and "the question is how to make this happen in other developing countries as well, particularly the LDCs."

The report argues that "it is an illusion to think that mass poverty found in most of the LDCs can be reduced through global integration and trade expansion alone." The UNCTAD study points out that "trade already constitutes a larger share of the GNI in the LDCs than it does in high- income OECD countries."

The report acknowledges that international trade is the fuel for the engine. "If the fuel dries up, the engine will stop. But if the engine has missing parts, it will not run, no matter how much fuel it gets."

The report advocates a development approach to make international trade work for poverty reduction with three pillars: new post-liberal development strategies which include trade as a central component; improvements in the international trade regime to reduce international constraints on development in the LDCs; and increased financial and technical assistance for developing production and trade capacities of the LDCs.