Free Trade Regime in Developing Countries - Literature review Example

Free Trade Regime in Developing Countries Free trade dis is based on what proponents see as the ability of liberalization to improve the economic development of a country therefore transforming lives of the people within a jurisdiction. In this respect, economic development as perceived by trade liberalists involved the measurement of the average per capita income of citizens of a given country to determine their standard of living (Thirlwall and Pacheco-López, 2008). The neoclassical assumption that informs the quest for trade liberalization asserts that people will always act in a manner that is most likely to guarantee protection of their interests since they are in the best position to make an assessment of their needs and the means to achieve such needs (Rapley, 2007). Rapley (2007) argues that based on this assumption the economic output by individuals improves when they are accorded great freedom to perform their activities. Rapley (2007) uses an example of a study in a number of West African and Southeast Asian countries where famers had recorded low levels of output since they did not act to maximize on their new opportunities. The author notes that this was determined to be the case due to the existing government policies which limited the number of new opportunities that the farmers had. Government policies in this case are seen as impediment to entrepreneurial achievements as it reduces the amount of profit for the farmers. Trade liberalization focuses on improving incomes for the citizens through a process of resource redistribution that is based on the laws of comparative advantage in addition to other gains from trade with partners which is thought to be key driver of competitiveness, flow of new knowledge, superior rate of capital accretion. By opening up the local markets to internal markets, a country creates an economical environment that is based on a rational market structure. This is because the accrued benefits from opening up the market for free trade are also reflected in resultant scale economies and economies of scope that arise in wider markets. Additionally, markets in developing countries which have not adopted free trade are characterized by narrow options for trading as well as lack of competition which translates into oligopoly and inefficiency in such markets. Domestic firms in markets characterized by protectionism might assume certain powers that might not be present when international plays are introduced. This was the case in the Mexican market where liberalization resulted in domestic firms being put under pressure by competition from imported goods and services. The result was rationalization of domestic firms whose activities were forced to improve to such extend that they became export competitive as a result of the realisation that they needed to look to export markets to develop a scale that would make them to competitive (Middlebrook and Zepeda, 2003). The neoclassical approach to strong economies through fiscal austerity is an effective means by which developing countries can improve their economic fortunes. These policies calls for governments to cut down on their spending through approaches such as retrenchments whose effect is reduced government dependency on taxes and borrowing to fund operations. Cutting down on government borrowing ensures banks and corporate bond issuers have enough to finance private enterprises while the country’s interest rates are also lowered to stimulate consumption and investments. Government spending also fuel inflation due to rapid increase of money in the economy, which does not reflect the country’s economic productive capacity as it is based on increased grants, welfare payments and salaries to the civil service and other functions such as the military (Rapley, 2007). The economic development of developing countries depends upon their balance of trade which involves the difference between the returns from export and expenditures due to imports. In this case, countries that have successfully improved their returns from export have undertaken significant reforms in areas such as relaxation of export levies, tax concessions, reforming of tariffs to reduce the export bias which makes production for export as profitable as production for local markets, introduce export processing zones and introduction of regulations governing foreign direct investment (Thirlwall and Pacheco-López, 2008). This is true of countries such China and India which have recorded a rapid increase in their economic development after introducing measures to promote free trade since the 1980s. China has been able to spur economic development through measures that have enhanced the countries entrepreneurial development leading to improved level of production for export thereby reducing poverty levels within the country (Panagariya, 2002). Panagariya (2002) argues that developing countries that have implemented openness in their international trade but still recorded low levels of economic development should assess other contributing factors that are outside the controls but affect trade with international partners. According to the author, international trade works in the background of the country’s macroeconomic and political stability. Consequently developing countries that have stable political environments will attract increased levels of international trade as people are a sure of continued business while those with unstable political environment results in security concern which makes partners to avoid investing in such markets. This was the case with Ivory Coast during the 1980’ and 1990s where introduction of free trade failed to have the desired impact on the country’s economy due to security concerns at the time. However concern has been noted over the effects of subsidies offered to producers in developed countries such as the US and Canada. Some, opponents of the free trade regime have argued that developing nations do not benefit from free trade because their products are not competitive in the international markets due to their high prices (Panagariya, 2002). Wade (2002) points out the negative effects of subsidies on developing countries based on the example of European Union where every cow has been subsidized to the tune of 2.50 US Dollar per year. Additionally, wheat farmers in European have been made more competitive in the international markets through subsidies that ensure they derive half of their income from subsidies. The consequence of such subsidies is that countries such as Argentina have had to default on their debts as they because it impossible for them to export enough to facilitate repayment schedules. Consequently, it is argued that for international trade to benefit developing countries there should be a removal of the quotas on foreign important as well as subsidies to domestic producers to increase the global prices of the products making it possible for developing countries to benefit from improved access to international trade. Panagariya (2002) warns there is no guaranteed benefits from removal of subsidies by developed countries since data from international trade since 1999 had indicated as many as forty five out of forty nine developing nations imported more agricultural products than they exported. Therefore developing countries will also be affected when developed countries such the US remove subsidies offered to farmers as it will lead to a dramatic increase in the amount sent to important food. This will greatly affect countries such as Senegal which spent around 450 million US Dollars in importing food in 2001 with the figure representing 10 percent of the country’s GDP and one third of overall earnings from export for the same period. Another point of interest for developing countries concerns the dumping of products whose cost of production is lower than the selling price (Panagariya, 2002). While developed countries have initiated measures against dumping of products which might affect markets for their locally produced commodities, developing countries have continued to face difficulties in protecting their markets. Such moves by developed countries include the use of Multi Fiber Agreement (MFA) under the WTO rules which imposed quotas on the important of apparel and textiles to protect their industries. Wade (2002) notes the use measures such as the MFA played a significant role in strengthening the textile and apparel sectors in developed countries but would face strict sanctions if employed by developing countries. This is because MFA has since been burned but the agreement has already strengthened these sectors while existing tariffs and quotas have also continued to make them more competitive in the international markets. Thirlwall and Pacheco-López (2008) argue that measurement of economic development based on income does not provide a true scenario of the situation within a country that has undertaken trade liberation. The authors claim this is because the measure of economic development based on this approach does not include the distribution of the income within the economy. Achieving a given level of economic development does not imply all the sectors of the economy within a nation has benefited. This is because trade liberalization creates a situation where some sectors of the economy benefit while others loss due to aspects such a reduced income and creation of unemployment. Thirlwall and Pacheco-López (2008) assert trade liberalization fails to account for improved welfare of the people when the rise in per capita income translates in a situation where there is higher loss to the income of the poor while the income of the already rich increased. This difference in gain from trade liberalization is transferred to international trade where the first world countries gain more than developing countries based on the higher competitive strength possessed by the already wealthy nations. Thirlwall and Pacheco-López (2008) claim economic development accrued from liberalization should be investigated based on life sustainability, freedom and self-esteem of the countries involved. Life Sustainability involves the country gaining the ability to provide the citizens some core human needs that include shelter, clothing and housing which means countries that cannot guarantee basic needs and transform the lives of its citizens has failed. Although developing countries might seem disadvantaged based on the argument that many have been unable to guarantee basic needs to their citizens, it is apparent that free markets provides the countries with a chance to improve the variety and quality of available goods and services available to them while also making it possible for them to access essential commodities at a cheaper price. Additionally free market makes it possible for the citizens to easily access basic goods and services that the country does not have the technology to produce or when the cost of production will be higher than the expenditure on importation (Jain, 2008). Self-esteem involves having countries whose international practices are based on independence and assertion of self-worth. This according to Thirlwall and Pacheco-López (2008) is the basis for creation of a level ground where international trade is based on equal terms of engagement. In this regard trade liberalization does not translate into economic development when it forces poor country to be dependent on developed countries or international institutions such the IMF for loans. Additionally, trade liberalization does not lead to development when the country’s major economic sectors are owned and managed by multinationals as seen in most developing countries. This is because such a scenario implies loss of business for the citizens. Consequently, trade liberalization becomes beneficial to a country when it reduces the level of poverty, reduces income inequality by creating conditions for higher rate of income increase for the poor compared to that of the rich while at the same time ensuring the poor countries get a chance to reach development levels in first world countries. The reservations that most developing countries have over the prospect of international trade in improving their economic development have seen them introduce measures to protect their interests during international trade. Such measures include the creation of trading blocs that reflects regionalism as opposed to globalism approach to conducting trade (Rodrik 2001). Regionalism provides developing countries with a chance to come together and form a bloc through which their can gain competitive advantage over most developed countries by improving their bargaining powers when doing business with non-member states. However, Rodrik (2001) warns these forms of trade agreements based on regional blocs aiming at creating leverage is not always successful noting examples such as the African Growth and Opportunity Act (AGOA) signed between the United States and a number of African countries in 2000. Although the main aim of AGOA was to improve the bargaining power of the African countries, Rodrik (2001) notes this was not the case since access to US markets have been granted under strict rules that includes export to US markets of apparels which have been produced using fabrics and yarns produced in the US. Such conditions of trade are seen as impediments to the perceived free markets. The assertions made by Rodrik (2001) is part of the continued debate over free trade based on globalism where some authors have suggested that countries that are forming regional blocs are reacting to the failures of global free trade. Researchers such as Hurrell (2007) have argued that regionalism provides the most suitable and practical level for state and non-state actors to escape the changing and increasing pressure characteristic of capitalist oriented global competition in addition to the need to participate in a more regulated and managed business environment. Even as those who see this as proof of the fact that business are now operating in a world of regionalism and not globalism, it can be argued that in this case, Regionalism does not challenge Globalisation, but rather cooperation within particular regions is part of the necessary groundwork for an open international economy (Telo, 2007). From the analysis of the two assumptions on whether regionalism has replaced globalism in conducting business, it becomes apparent that the important aspect in the relationship between the two is the determination of the purpose that Regionalism provide to the businesses belonging to members of a given regional bloc. Given that the main function performed by Regionalism is to increase economic cooperation among members on the basis of their shared interests, norms and values, large business organization are thus provided with a lifeline to expand and prepare for global competition (Telo, 2007). However, it is still accurate to note that this form of cooperation can be facilitated easily when smaller and more similar group of states is the key actors. But this form of regional cooperation in many cases offers the requisite opportunity that enables regional businesses to be internationally competitive. The compatibility of regionalism and globalism in business undertaking can be further illustrated by the support accorded by WTO to regional trade agreements that reduce barriers on trade within the specific group. The WTO agreements that are bidding to members on a global scale recognize that the fact that regional trade agreements in addition to having a closer economic integration among countries are beneficial. Even as WTO agreements accepts the fact that there are circumstances under which regional trade agreements might hurt the trade interests of non-member countries, there are mechanisms such as the provisions of GATT’s Article 24 which permit regional trade agreements under special exception, provided the checks and balances contained in the Article are observed (Lee, 2012). Consequently both globalization and regionalism have the same foundations that can be traced from the aspirations of countries in the contemporary world to conduct businesses with others within their bloc or outside. The push for free markets in developing has been spearheaded by international institutions such as the International Monitory Funds through the application of structural adjustment packages (SAPs) which are seen as measures to eliminate existing structural threat to efficiency in operation of markets. Application of SAPs has seen many changes in the functioning of the concerned governments with measures taken towards fiscal austerity and disinflationary policies as well as the deregulation of the economy in the form of financial and labour market deregulation (Rapley, 2007). It is in this area that many proponents of liberalization of markets concur developing countries are yet to achieve the preconceived economic developments. It is argued that developing countries have been forced to give up part of their autonomy by being asked to implement de-regulation, liberalization, privatization policies. The implication of these far-reaching adjustments has been abandonment of welfare state as developing nations cease implementing domestic programs such as health services, education, and environmental protection measures. Among the negative effects of such move in the developing countries include cutting down human resource in government agencies resulting in high unemployment levels (Maswood, 2008). The situation is made worse by the fact that private enterprises cannot absorb the high number of unemployed citizens in developing countries due to high costs of capital for operating businesses that result from high interest rates from banks influenced by IMF policies. By removing barriers to foreign trade, the negative effects of SAP is further reinforced by demands from WTO that allows subsidized and therefore low priced goods to enter markets in developing countries from developed countries. This further destroys the local business enterprises as cheap produce from developed countries enters local markets to compete with local manufacturers who lack government support (Gills, 2010). However a number of supporters of SAPs have argued that the effects of these adjustments should be observed on a long-term basis since most of the envisioned economical development might take some time to be experienced by the citizens. The created efficiency in government operations should be able to ensure future prosperity in developing countries as systems adjust to their new economic environment. Additionally, the negative effects in countries that have applied SAPs in have been attributed to externalities such as corruption in specific countries. The fact that corruption was deeply embedded in different societies of the world was further confirmed by a study of Tanzania’s public sector service delivery. In the case of Tanzanian, results indicated bribes received by public officers from different sectors of the economy such as the judiciary, police, tax services, and lands department amounted to about 62 percent of official public budget in these sectors. Study done in the Philippines by the Commission on Audit indicates that an annual figure of almost $4 billion from the public coffers is diverted from the intended public service expenditure due to public sector corruption (World Bank, 2004). From the foregoing exploration of free trade regimes in developing countries, it has been determined that picking whether to adopt free trade policies or not can be a difficult task. Developing countries might feel protectionist approach is the most appropriate measure to protect their interests especially when faced by important that have been produced through government subsidies. Protection of domestic firms in such cases seems as the best measure to ensure survival of local firms as they might not sustain imported competition. However, this not always the case since entrance of new players into the market creates environment where domestic firms seek to rationalize their activities to be able to continue production. Additionally it should be accepted free trade might not benefit all the concerned countries or sectors within the countries where those who import subsidized products lower cost of imports but competitors loss business. In the contemporary era of globalizations, countries have also been seen to be more accepting of free trade by developing frameworks that will result in gaining competitive advantage. Regionalism in this case is seen as an effective strategy to complement free trade that has been facilitated by globalization. References Gills, B. (2010) Globalization in Crisis. London: Routledge. Hurrell, A. (2007) One world? Many worlds? The place of regions in the study of international society. International Affairs, 83(1), 127-146. Jain, T. R. (2008). Public finance and international trade. New Delhi: FK Publications. Lee, E. S. (2012) World Trade Regulation: International Trade Under the WTO Mechanism. New York: Springer. Maswood, S. J. (2008). International political economy and globalization. Singapore: World Scientific. Middlebrook, K. J., & Zepeda, E. (Eds.). (2003). Confronting development: assessing Mexicos economic and social policy challenges. Palo Alto, California: Stanford University Press. Panagariya, A. (2002). "Think Again: International Trade." Foreign Policy,. Retrieved from http://www.foreignpolicy.com/articles/2003/11/01/think_again_international_trade Rapley, J. (2007). Understanding development: theory and practice in the third world (3rd ed.). Boulder, Colo.: Lynne Rienner. Rodrik, D. (2001), Trading in illusions, Foreign Policy, 55-62. Telo, M. (Ed.). (2007) European Union and new regionalism: regional actors and global governance in a post-hegemonic era. Farnham: Ashgate Publishing, Ltd. Thirlwall, A. P., & Pacheco-Lopez, P. (2008). Trade liberalisation and the poverty of nations. Cheltenham: Edward Elgar. Wade, R. (2003), What strategies are viable for developing countries today? The World Trade Organization and the shrinking of development space, Review of International Political Economy, Vol. 10, No. 4, 621-644. World Bank (2004) Mainstreaming Anti-Corruption Activities in World Bank Assistance: A Review of Progress since 1997. Washington: World Bank. Read More