Consistency VS Rigidity in Unity
at UNCTAD I:[1]
An Assessment of the Diplomatic Process during the Negotiations
"There is only one movement in life, the outer and the inner; this movement is indivisible, though it is divided. Being divided, most follow the outer movement of knowledge, ideas, beliefs, authority, security, prosperity and so on. In reaction to this, one follows the so-called inner life, with its visions, aspirations, secrecies, conflicts, despairs. As this movement is a reaction, it is in conflict with the outer. So there is contradiction, with its aches, anxieties and escapes. Out of this movement there is a generosity and compassion which is not the outcome of reason and purposeful self-denial." –Jiddu Krishnamurti-
I. Introduction
In the early 1960s, the growing concerns about the place of developing countries in international trade and their dissatisfactions with the existing international institutions encouraged many of these countries to call for the convening of a Conference specifically dedicated to tackling these problems and identifying appropriate international actions. Their movement represented an overwhelming majority of mankind which was struggling to eliminate the inequalities between the developed and developing countries. After a long road, the movement finally achieved the formation of the first Conference of United Nations Conference on Trade of Development (UNCTAD).
The negotiating environment at UNCTAD I was quite controversial in the eye of public as many perceived it as a ‘North-South Confrontation’.[2] The United States (U.S.) position in the Conference was strongly criticized by public. It came with little to offer, little was that it offered. Developing countries were united in the Group of 77 (G-77) which came into being at the first Conference They came in unity of a bloc readily ‘prepared’ to negotiate. Altogether, these countries established the group to voice their concerns.[3]
The negotiations at the first Conference reflected the North-South multilateral development diplomacy. This essay attempts to assess and analyze the diplomatic process during the negotiations. The content of the essay covers four main parts: the origin and background of the UNCTAD I including issues raised; the key actors, their interests and ideologies, and conflicting interests; the power structures and market structures; the constraints obstructing the negotiations and the negotiating situation with each player’s tactics and positions.
II. UNCTAD I: Origin, Background, and Issues
UNCTAD is a unique agency in which Governments can concert their policies and reconcile their different interests for the greater good of the international economic community and to meet the exigencies of development.[4] It was established as a result of the need to improve the development in the
The first Conference contributed to the recognition of the movement of developing countries in addressing their needs to achieve a better economic development which had been through a long process. There were factors behind the movement that featured the idea of the Conference. The main ones were North-South dialogue; unevenness approach toward the developing countries in the General Agreement on Tariffs and Trade (GATT);[6] and poor economic performance of the Least-Developed Countries (LDCs).
The North-South dialogue had begun in 1946 when LDCs argued their need for increased aid. They voted to allocate the funds from the annual budget of the United Nations (UN) to provide technical assistance for them. The discussions and negotiations in the UN on North-South issues continued during the 1950s when LDCs started to focus on creation an alternative institution namely Special UN Fund for Economic Development (SUNFED). They pushed developed countries by stating, no matter what, that they would vote to create SUNFED – ignoring the opposition of Western developed countries. The
From the very beginning, UNCTAD’s basic philosophy, in its political and ethical content, has been one of compromise and cooperation, not one of confrontation and conflict[7] – to promote economic development and trade through international cooperation. However, the 1964 conference was regarded as the first and foremost confrontation between developed and developing countries. It was dictated by the manner in which the Conference came about and by the atmosphere that characterized its travaux preparatoires.[8]
The main issues raised at UNCTAD I were outlined by its first Secretary-General, Raul Prebisch in his report “Towards A New Trade Policy for Development”.[9] There were five committees of the whole to deal with each issue. Those issues[10] are as follows:
1. Considering measures for stabilizing commodity prices at fair and remunerative levels – establishing and maintaining uniformity between prices of primary products and manufactures goods. This proposal supplemented with one calling for a compensatory financing scheme to provide resource flows to offset sudden decreases in LDCs foreign exchange earnings. This issue was tackled by the Committee on International Commodities Problems;
2. The preferential access to developed country markets for semi-manufactures and manufactures from LDCs – the newest and most controversial issue which was discussed and negotiated by the Committee on Trade in Manufactures and Semi-manufactures;
3. The costs of invisibles to LDCs. The committee focusing on invisibles was to consider ways to reduce charges to LDCs for shipping, insurance, and debt servicing;
4. Institutional arrangement, specifically the establishment of continuing machinery to focus on trade and development issues in the future;
5. Issues associated with regional economic arrangements among LDCs to promote international trade.
III. The
The key players in the first Conference were the
An ideology reflected by the developing countries in the case of UNCTAD I would be the Dependency Theory[11] advocated by Prebisch as a result of a persistent trend faced in external disparity by developing countries associated with the process of development. This imbalance was mainly a manifestation of the disparity between the rate of growth of their primary exports and of their import of manufactured goods. Thus, the theory was viewed as a possible way of explaining the persistent poverty and the tendency of the terms of trade of developing countries to deteriorate over time relative to developed countries.
Prebisch's solution, which had influenced LDCs’ government policies, was that LDCs should have to reduce their reliance on primary product exports and embark on programs of import substitution so that they did not need to purchase the manufactured products from developed countries[12] if they were to realize the benefits of growth. LDCs would still sell their primary products on the world market, but their foreign exchange reserves would not be used to purchase their manufactures from abroad, and employed to protect infant industries[13] in developing countries. Many LDC governments at that time adopted policies of Import-Substitution Industrialization (ISI)[14] as a first move of their development.
To achieving these policies, LDCs demanded the establishment of international commodity agreement as their initial interest, the very idea which was vociferously opposed by the
Another prominent LDCs interest was the expansion of LDCs’ exports to developed countries since their pressures for increased foreign aid was not likely to achieve; and opportunities for ISI in many LDCs had already been unsuccessful because of the ineffectiveness of infant industry argument and the small scope of markets of a number of LDCs. Besides, an attempt to expand their markets through economic integration schemes was not a real success. Hence, their need to create a new international trade organization focused specifically on their concerns was increasing. The issue of better access to developed country markets had become one of favored access to those markets for LDC exports.
All these issues, which constituted main issues raised at UNCTAD I, reflected another ideology: Positive Discrimination. Basically, it was an appeal by developing countries addressed to developed countries to be positively discriminated in terms of trade and development in order to benefit the former who had no obligation to give equal reimbursement to the latter. Related to this ideology was, for instance, the issue of preferential access to developed country markets for LDCs to which the
From my perspective, the
The core assumption of Neo-liberalism is that state always seeks to maximize its interests in all issue-areas.[22] The schemes proposed by the developing countries at UNCTAD I were not something that could maximize
In foreign policy, the basic feature of Neoliberal thinking favors the opening of foreign markets by political means, using economic pressure, diplomacy, and or military intervention, individual freedoms are guaranteed by freedom of the market and of trade.[24] Such thinking has long been dominated the
The ideologies and interests of both key players in UNCTAD I were opposite to each other therefore causing conflicting interests. Such conflict affected the negotiation process at the Conference. What had been the conflicting interest in this case was basically the fact that the LDCs had been suffering the economic decline, thus they needed to achieve all those issues to improve their economic development. Unfortunately, the
The new approach to international commodity adopted at UNCTAD I was generally opposed by many developed market-economy countries based on the laissez-faire philosophy of the Havana Charter, which argued that any regulation of the free play market forces would inevitably lead to a misallocation of resources and eventual economic catastrophe.[27] By the time of the Conference, trade and development issues were not major international economic issues for the
III. Power Structures and Market Structures
The power structure in global politics around the time of the first Conference was divided into two blocs that was the competition between the two major ‘superpower’[29] of East and West: the
This essay also highlights the importance of power structure in the multilateral development diplomacy at UNCTAD I where the position of a group is presented by a spokesman or coordinator who presents the views of the States members of the group. At the Conference, developing countries united in a form of a “bloc” namely the G-77 – composed of African, Asian, and Latin American states – against the
The market structure in the years of the establishment of UNCTAD I is best described as a free market economy. The conventional perception about international trade then was grounded in Neo-classical Political Economy. Classical economic theory holds that free trade is the surest way to make an economy grow, but that says nothing about who benefits from the growth. It asserted that spontaneous forces were always tending towards a benevolent equilibrium, and that any motion a self-correcting process of adjustment.[31] In addition, full employment, economic growth and the optimal use of resources were assured. In reality, the rules and principles on which the post-war international economic institutions were founded and functioned assumed that the expansion of trade to the mutual benefit of all merely required the removal of obstacles to the free play of market forces in the world economy.[32]
The power of initiative and change rested with the developed countries at the centre of the world economy, while the LDCs at the periphery merely responded passively to the motivation generated at the centre. The hegemony of the centre was manifested both in the composition of its trade with the LDCs and in the terms on which that trade took place.[33] Structural inflexibility in the composition of trade between the developed countries and the LDCs had major implications for the growth and the terms of trade in developing countries – which led to the Dependency Theory argued by Prebisch.
IV. The Negotiating Environment and the Constraints:
Consistency VS Rigidity in Unity
The negotiations at UNCTAD I were a type of developmental diplomacy which refers to the processes whereby developing countries attempt to negotiate improvements in their position in the and largely takes the form of bargaining with the developed countries.[34] The diplomatic scenario of the confrontation at UNCTAD I was rather simple and straightforward. Some of the most vital decisions of the Conference were the result of informal negotiations among the three groups – either avoiding the vote or following one,[35] which were presented in a joint resolution by LDCs to elaborate a unified position in the Conference.
(i) Constraints Obstructing the Negotiations
Negotiating international trade agreements has become a full-time job for developing countries who often negotiate in a group or regional groups where they make up the majority of members.[36] The unity of the group was an important aspect for the negotiations. There were variable aspects of the negotiation process that affected the outcome and were considered as constraints obstructing the negotiations. Altogether those variables shaped the process and in turns it outcome. The first constraint is the wide disparities – economic, political, social, and cultural – within LDCs which obviously existed among most of the member countries of G-77 that attended the first Conference.
In their effort to prepare themselves on the issues, and to manage their negotiating positions and strategies prior to the conference, they had met regionally to produce common positions. It was difficult to shaping a common position among them with such diversities of economic needs, goals, and conditions since every country had to have something to gain which was not equally the same. For example, the issues of foreign aid and commodity stabilization was important for the poorer country, while the most prominent issue for the more advanced ones was of trade preferences.
The unity among the G-77 particularly on the issue of preferences was fragile since the countries that had already enjoyed the preferential access to developed country markets were unwilling to give it up. These countries were a group consisting mainly of Commonwealth countries and a number of African countries that had just committed to continue their preferential access to the European Economic Community[37] (EEC) market. Conversely, the Latin Americans were strongly against preferences for special groups of LDCs. Yet, they had made appeals for a special preferential access to the U.S market.
Another constraint related to their disparities was language differences on which language on especially contentious issue was left unclear. It was related to the role of information wherein the role that information plays in accounting for crisis behavior and outcomes is crucial. It considers the difficulties of bargaining under conditions of incomplete and asymmetric information, and the counterintuitive relationship between preferences and outcomes that can arise under uncertainty.[38]
Those disparities caused a condition on which the G-77 approached UNCTAD I in a remarkably weak position to negotiate with developed countries. Because of the large numbers of compromises they already contained, their positions were rigid. The fact that the negotiations would be virtually public further reduced the flexibility of the group because of their need to carry on solidarity. They did not want to appear to be obedience to the demands of the developed countries. Thus, they approached the UNCTAD I negotiations on condition of rigidity in unity.
(ii) The Negotiations: Tactics and Positions
In my opinion, differences in the perspectives of a conceptual and substantive nature blocked, to some extent, the entire process of negotiations. The issues raised at the negotiations were so numerous and complex and the negative and hostile posture of the U.S. – as regards as both new substantive ideas and the notion of setting up a new UN Nations body on trade and development – was so strong. Given the time constraints, it was perhaps unavoidable that many of the decisions of the Conference were taken by vote.[39] The developing countries had realized that the Conference would not be able to deal in any but a preliminary manner with the substantive issues before it. Thus, they decided to attach the highest priority to the establishment of permanent machinery for the further formulation and implementation of the new trade policy for development.[40]
The most prominent issue in the negotiations was the establishment of UNCTAD. Other two issues emphasized at the negotiations are: international commodity problems; and the issue of preferential access to developed country markets for semi-manufactures and manufactures form LDCs. The latter issue was the most debated issue during the negotiations as there was a controversy on whether preferences would really provide developing countries with significant benefits. Another debate on the institutional question was that the U.S. insisted and pressed hard for a system of a weighted voting[41] since the developed countries was called upon to offer more aid and the market access, and they accounted for a greater proportion of world trade and industrial and financial power as well, thus, from the side of U.S., it should be reflected in the decision-making power.
The situation at the negotiations accordingly ranged heatedly not only over fundamental issues, such as the nature of the regulatory instrument and the adjudicative participation; but also over specific practices covering membership, trade participation, freight rates and so on.[42] The G-77 had an important function in the multilateral negotiations. The group system has one fundamental advantage as it enabled a large number of delegations to speak with one voice.[43] Their position was demonstrated by a degree of unity and solidarity which had never happened before in international affairs. For them, as the small and poorer players, achieving their objectives is a daunting challenge.[44] Repeatedly, they made use the tactic of voting against the developed countries, realizing that they held the voting majority in the conference. The developed countries were taken by surprise by the forcefulness expressed by developing countries.
U.S. delegation to UNCTAD I was George Ball, Under Secretary of State for Economic Affairs, who strongly supported the liberal free trading system and was renowned to have limited interest in the Third World. On economic issues, he took a hard line against international economic proposals that did not fit into a liberal free trade framework or that required expanded government management of international markets although he was urged by the White House not to appear negative and indifferent to the aspirations of LDCs. The
The biggest outcome of the Conference was the establishment of UNCTAD, while issues constituted in the Final Act were still broad and required continuing review within the machinery of UNCTAD. In the end, the consistency of U.S and the unity of developing countries resulting the condition in which the issues at UNCTAD I were not negotiated among contending parties but were resolved through voting on resolutions. The ‘victory’ of the developing countries at UNCTAD I, I would say, was a case of “majority rules”. It is because within negotiations in such a Multilateral Conference, voting must be in favor of a proposal for proposal to be adopted. In other words, the positive votes must outnumber the negative votes. It was required a simple majority of the representatives present and voting for all decisions of procedure and a two-thirds majority of the representatives present and voting for decisions on substantive proposals.[45] In UNCTAD I, the majority votes were in favor of the developing countries. Thus, the
V. Conclusion
Different ideologies and interests between LDCs and
At the Conference, the developing countries began a strong diplomatic offensive behind broad demands which had never before been obtained and had never before been voiced with so much support. Their power was not laid on the financial and economic one, but on their majority of votes. By maintaining their unity, they ware able to collect large voting majorities on each resolutions. The U.S was left to express their opposition by voting against such resolutions, although they were not obliged to implement resolutions they did not support. Nevertheless, the unity among the G-77 had some constraints causing rigidity and reducing flexibility of the group in negotiations. Interestingly, the opposing position adopted by U.S at UNCTAD I was undoubtedly a consistent one – even before the conference was held. Yet, it was a “disgrace consistency” for the LDCs fundamental needs of economic development.
For the LDCs, the outcome of UNCTAD I was like “winning the battle, but not yet winning the war”. Although they won the negotiations to establish the UNCTAD by gaining the majority of votes, the outcome was not what they had wanted at the beginning. The first conference could not draw up in any detail the new trade policy for development due to the extensiveness of its endeavors, the complexity of the issues involved, and the controversies that characterized the discussion of some of its basic doctrines.
BIBLIOGRAPHY
Baldwin, David A. (Ed.) (1993) Neorealism and Neoliberalism: The Contemporary Debate.
Boisard, M.A. and E.M. Chossudovsky (Eds.), Jacques Lemoine (ed.) (1998) Multilateral Diplomacy/La Diplomatie Multilaterale: The United Nations System at
Cordovez, Diego (1975) UNCTAD and Development Diplomacy: From Confrontation to Strategy. Journal of World Trade Law.
Cutajar, Michael Zammit (Ed.) (1985) UNCTAD and the South-North Dialogue: the First Twenty Years (Essays in Memory of W. R. Malinowski).
Ferraro, Vincent (July 1996) Dependency Theory: An Introduction. Can be found at: http://www.mtholyoke.edu/acad/intrel/depend.htm
Gilpin R., (2001) Global Political Economy : Understanding The International Economic Order.
Green, Robert T. and Lutz, James M. (1978) The
Harvey, David (2005) A Brief History of Neoliberalism.
Karns, Margaret P. and Mingst, Karen A. (Eds.) (1992), The United States and Multilateral Institutions: Patterns of Changing Instrumentality and Influence (Mershon Centre Series on International Security & Foreign Policy).
Kufuor, Kofi Ateng (2004) World Trade Governance and Developing Countries: the GATT/WTO Committee System.
Lamy, Steven L. “Contemporary Mainstream Approaches: Neo-Realism and Neo-liberalism”, in Baylis, J. and Smith, S. (Eds.) (2005) The Globalization of World Politics: An Introduction to International Relations.
Lancaster, Carol (1992) An Irresistible Force Meets an Immovable Object: the United States at UNCTAD I, Online Case Study of International Economic Diplomacy, Case 108, ISBN: 1-56927-108-9.
Love, Joseph L. (September 2001)
http://sshi.stanford.edu/Conferences/2001-2002/GlobalTrade2001/love.PDF
Loxley, John (1998) Interdependence, Disequilibrium and Growth: Reflection on the Political Economy of North-South Relations at the Turn of the Century.
Odell, John S. (2000) Negotiating The World Economy.
Odell, John S. (Ed.) (2006) Negotiating Trade: Developing Countries in the WTO and NAFTA.
Owensby, Walter L. (September 1992) The Churches and the North-South Dialogue in the Post-Cold War World. Reformed World, Volume 42/No. 43, can be found at: http://www.warc.ch/pc/rw923/02.html
Preeg, Ernest H. (Ed.) (1985) Head Bargaining Ahead:
Rosen, David C. (Undated) Diplomacy and Game Theory-Part 2: Rational Choice. Can be found at: http://www.diplom.org/Zine/S1997R/Rosen/dippap2.html
Rosen, David C. (Undated) The Game Diplomacy and International Relations Theory. Can be found at: http://www.diplom.org/Zine/S1996R/Rosen/dippap.html
Schultz, Kenneth A. (2001) Democracy and Coercive Diplomacy.
Singer, Hans W. and Ansari, Javed A. (1988) Rich and Poor Countries: Consequences of International Economic Disorder.
United Nations (1984) The History of UNCTAD 1964-1984.
Viotti, Paul R. and Kauppi, Mark V. (Ed.) (1987) International Relations Theory: Realism, Pluralism, Globalism and Beyond.USA: Macmillan.
White, Brian “Diplomacy”, in John Baylis and Steve Smith (Eds.) (2005) The Globalization of World Politics: An Introduction to International Relations.
Wikipedia – The Free Encyclopedia, “Import Substituion Industrialization”. Can be found at: http://en.wikipedia.org/wiki/Import_substitution_industrialization
Wikipedia – The Free Encyclopedia, “Infant Industry Argument”. Can be found at: http://en.wikipedia.org/wiki/Infant_industry_argument
Wikipedia – The Free Encyclopedia, “Superpower”. Can be found at: http://en.wikipedia.org/wiki/Superpower
Wikipedia – The Free Encyclopedia, “United Nations Conference on Trade and Development”. Can be found at: http://en.wikipedia.org/wiki/UNCTAD
[1] This essay is based on the Online Case Study of International Economic Diplomacy, Case 108, by Carol Lancaster, An Irresistible Force Meets an Immovable Object: the United States at UNCTAD I, ISBN: 1-56927-108-9, (Washington D.C.: The Institute for Study of Diplomacy, Georgetown University, 1992). http://data.georgetown.edu/sfs/programs/isd/
[2] The confrontation referred to the North-South dialogue. For 40 years the north-south dialogue has been carried out in the context of the east-west struggle. Even the names commonly used to combine the unique realities of scores of nations, "the third world" and the "non-aligned nations", were products of the cold war encounter. Walter L. Owensby, The Churches and the North-South Dialogue in the Post-Cold War World, Reformed World, Volume 42/No. 43, September 1992, can be found at: http://www.warc.ch/pc/rw923/02.html
[3] The group today has 131 members.
[4] Diego Cordovez, UNCTAD and Development Diplomacy: From Confrontation to Strategy, (Journal of World Trade Law, 1975), p. 2.
[5] Ibid, p. 144.
[6] .[6] In GATT rounds,
[7] United Nations, The History of UNCTAD 1964-1984, (New York: United Nations Publication, 1985), p. 10.
[8] Cordovez, UNCTAD and Development Diplomacy, p. 146.
[9] Joseph L. Love,
[10] The first two issues were the most debated issues at the negotiations.
[11] The Prebisch’s Dependency Theory is different to that of Marxists’. A brief summary of Prebisch argument of his theory related to global commodity problem at that time is further discussed in: United Nations, the History of UNCTAD, p. 56-57.
[12] Vincent Ferraro, Dependency Theory: An Introduction, July 1996. Can be found at: http://www.mtholyoke.edu/acad/intrel/depend.htm
[13] Allocating both tariffs and quota to be employed to protect and subsidize infant industries is known as the infant industry argument. Further explanation on the argument can be found at Appendix 2.
[14] A brief definition and origin of ISI can be found at Appendix 3.
[15] United Nations, the History of UNCTAD, p. 107.
[16] Robert T. Green and James M. Lutz, The
[17] David Harvey, A Brief History of Neoliberalism, (
[18] Ibid,p. 5.
[19] Ernest H. Preeg (Editor), Head Bargaining Ahead:
[20] David A. Baldwin (Editor), Neorealism and Neoliberalism: The Contemporary Debate, (New York: Columbia University Press, 1993), p. 77.
[21] Ibid, p. 77.
[22] Steven L. Lamy, “Contemporary Mainstream Approaches: Neo-Realism and Neo-liberalism”, in John Baylis and Steve Smith (eds), The Globalization of World Politics: An Introduction to International Relations (
[23] Ibid, p. 214.
[24] David Harvey, A Brief History of Neoliberalism, p. 27.
[25] Ibid, p. 2.
[26] Margaret P. Karns, Karen A. Mingst (Editors), The United States and Multilateral Institutions: Patterns of Changing Instrumentality and Influence (Mershon Centre Series on International Security & Foreign Policy), (London: Routledge, 1992), p. 147.
[27] United Nations, the History of UNCTAD, p. 57.
[28] Hans W. Singer and Javed A. Ansari, Rich and Poor Countries: Consequences of International Economic Disorder, (London: Routledge, 1988), p. 146.
[29] A superpower is a state with the first rank in the international system and has the ability to influence events and project power on a worldwide scale. Can be found at: http://en.wikipedia.org/wiki/Superpower
[30] United Nations, the History of UNCTAD, p. 23.
[31] Michael Zammit Cutajar (Ed.), UNCTAD and the South-North Dialogue: the First Twenty Years (Essays in Memory of W. R. Malinowski), (Oxford: Pergamon Press, 1985), p. 10.
[32] United Nations, the History of UNCTAD, p.
[33] Michael Zammit Cutajar, UNCTAD and the South-North Dialogue, p. 11.
[34] Brian White, “Diplomacy”, in John Baylis and Steve Smith (eds), The Globalization of World Politics: An Introduction to International Relations (
[35] United Nations, The History of UNCTAD, p. 44.
[36] John S. Odell (Editor), Negotiating Trade: Developing Countries in the WTO and NAFTA, (
[37] European Economic Community (EEC) is the former name of the now-called European Community (EC).
[38] Kenneth A. Schultz, Democracy and Coercive Diplomacy, (
[39] Ibid, p. 44.
[40] Diego Cordovez, UNCTAD and Development Diplomacy, p. 148.
[41] Weighted Voting means a separate majority of developed and developing countries for decision-making, for equality of voting of all member states. United Nations, the History of UNCTAD, p. 47.
[42] Michael Zammit Cutajar, UNCTAD and the South-North Dialogue, p. 212.
[43] Diego Cordovez, UNCTAD and Development Diplomacy, p.
[44] As for practical purposes of diplomacy, winning is only possible through cooperation with other players. David C. Rosen, The Game Diplomacy and International Relations Theory, p. 4-6, can be found at: http://www.diplom.org/Zine/S1996R/Rosen/dippap.html. Each player seeks the same goal; while draws are possible, and unavoidable in stalemate positions, winning is the goal. David C. Rosen, Diplomacy and Game Theory-Part 2: Rational Choice, can be found at: http://www.diplom.org/Zine/S1997R/Rosen/dippap2.html
[45] M.A. Boisard and E.M. Chossudovsky (eds), Jacques Lemoine (Ed.), Multilateral Diplomacy/La Diplomatie Multilaterale: The United Nations System at Geneva, (Netherlands: Martinus Nijhoff Publishers, 1998), p. 132.
APPENDICES
Appendix 2
Infant industry argument
From Wikipedia, the free encyclopedia http://en.wikipedia.org/wiki/Infant_industry_argument
The infant industry argument is an economic reason for protectionism.
Reasons for protectionism
Fledgeling industries typically require protection from the government in the form of tariffs, quotas, or subsidies in order to survive the lower prices and higher quality of the good or service produced by the industry on the international market. Proponents of the infant industry argument theorize that protectionism will allow the infant industry to grow and develop to the point at which it can compete on the international market without protectionist measures. Nurturing infant industries and import substitution policies often occur in developing nations which are aspiring to greater economic diversity.
Though this view is often criticized, it is true that such policies were pursued by many now-developed countries during their formative stages. The recent history is mixed. Though some countries that pursued infant industry promotion in Asia (
Among theoretical academic economists, the infant industry argument is often derided, whereas applied economists and economic historians are generally more charitable.
Reasons against protectionism
Infant industries are by definition those that are not strong enough to survive open competition — they are dependent on government largesse and protectionism in order to survive. At a given point in time, protectionist policy, along with inefficient industries leads to higher prices and lower quality goods for the consumer than if the good or service produced by the industry was produced on the international market.
For these reasons the infant industry argument is often criticized. Firstly it is hard for governments to know which industries will ultimately turn out to have growth potential. A lack of domestic capacity or unforeseen emergence of (even more superior) foreign rivals may, in fact, prohibit industries from becoming competitive in the long run. It is often the case that rather than developing or innovating, the protected industry becomes complacent, due to a lack of competition from the international market.
Appendix 3
Import Substitution Industrialization (ISI)
From Wikipedia, the free encyclopedia
http://en.wikipedia.org/wiki/Import_substitution_industrialization
Import substitution industrialization also called ISI is a trade and economic policy based on the premise that a developing country should attempt to substitute products which it imports, mostly finished goods, with locally produced substitutes. The theory is similar to that of mercantilism in that it promotes high exports and minimal imports to increase national wealth.
The policy has three major tenets: an active industrial policy to subsidize and orchestrate production of strategic substitutes, protective barriers to trade (namely, tariffs), and a monetary policy that keeps the domestic currency overvalued. Hence import substitution policies are not favored by advocates of absolute free trade.
Import substitution policies were adopted by most nations in
The policy was very successful from the 1950s to the 1970s in creating economic growth in Latin American countries. ISI was most successful in countries with large populations or high living standards. Latin American countries such as
In those Latin American countries where ISI was successful it was accompanied by structural changes to the government. Old neocolonial governments came crashing down replaced by more or less democratic governments. Banks and utilities and certain foreign owned companies were nationalized.
However, the ISI strategy ultimately failed for most countries. A lack of comparative advantage in many industries led to gross inefficiencies, not to mention that their domestic markets were neither large nor strong enough. Government subsidies to support domestic production led to a lack of incentive for innovation and improving efficiency.
ISI was rejected by most nations in East Asia in the 1960s, and many economists attribute the superior performance of
In addition, the focus of import substitution in promoting industrialization typically resulted in policies which benefited industrial workers at the expense of farmers which made up most of the population of the nations involved. For example to reduce the cost of industrialization, the cost of food was often fixed at an artificially low level. In addition the licensing schemes required for an import substitution strategy led also to rent seeking behaviors which increased economic inefficiency.
In order to build up their manufacturing bases, many countries imposed high tariffs on manufactured goods, so that multinational companies would instead produce or assemble them locally. One example of this was in the motor industry, in which manufacturers exported vehicles in 'completely knocked down' (CKD) kit form, for local assembly. This often resulted in products that were of poorer quality and more expensive than those imported 'completely built up'. It also became increasingly inefficient for manufacturers to have identical products assembled locally in several countries in the same region, which only served to duplicate resources and reduce economies of scale.
South Korea
One strategy that
Perceived failure
The policy began to fail in the early 1980s, as a result of overspending by the governments involved, mostly from spending foreign exchange reserves trying to keep the currency stable. As the Latin American governments failed, they began to default on their debts and were forced to turn to the International Monetary Fund for help. The failure of ISI led to the rise of the Washington Consensus.
However, some economists have pointed out that the failure of import substitution should not necessarily be taken as an endorsement of globalization. They note that most East Asian countries while rejecting import substitution also maintained high tariff barriers. The strategy followed by those countries was to focus subsidies and investment on industries which would make goods for export. The focus on export markets allowed them to create competitive industries although these policies later created inefficiencies and other problems, as seen during the Asian Financial crisis.
By the end of the 1990's, the
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