The concept of competitiveness has attracted a lot of attention by scholars, policy makers and international economic institutions in recent decades. But it suffers from some misconception when applied to developing countries. In a forthcoming book, Competitiveness and Development: Myth and Realities (Anthem Press), I have explained that developed countries have been concerned with competitiveness at the high level of development by undertaking, inter alia, technological development and upgrading of their industrial and service activities. Yet, they have been imposing competitiveness at the low level of development on developing countries. They have been doing so, by advocating neo-liberal views, e.g. through Washington Consensus, and imposing across-the-board and universal trade liberalization on developing countries through International Financial Institutions (IFIs) and WTO, and regional and bilateral trade agreements.

To explain, there are two different approaches to competitiveness: static, advocated by neo-liberals and dynamic, which is the concern of ne-developments.  The static version is cost/price led, based on the theory of static comparative advantage, and the allocative function of the market forces. This theory relies on unrealistic assumptions-such as the prevalence of perfect completion, constant return to scale, and independence of present and future costs. Further, firms are assumed to be small and strategically passive; there are no barriers to entry, no externalities, no industry specific learning etc. Accordingly, economic policy should concentrate on macro-level issues e.g. wage cost and exchange rate-despite the fact that the empirical evidence shows that the level of exchange rate can be the result of competitiveness rather than its cause-a la Kaldor paradox.

In a world where production and international trade are characterized by economies of scale, barriers to entry, imperfect competition, and are influenced by the strategic behavior of large firms; being competitive in the static sense would involve production at low value added, and employment and the loss in terms of trade.

In reality, at the firm level, competition is a dynamic process of creative destruction, in its Schumpeterian sense; firms move from equilibrium to another rather than moving towards equilibrium. Each firm has different capabilities and gaining market share alone is not its objective. There are usually other objectives such as increasing profitability, productivity and real income. Innovation and upgrading of the production structure to demand dynamic and supply dynamic activities is essential for maintaining or improving competitiveness and increasing value added. The firm is a driving force in economic activities; it takes strategic actions, shapes the market and competes with other firms also on non-price factors. It acts as a coordinating agency and interacts with other firms, market, consumers, institutions and infrastructure and international environment. It is further influenced by government activities and strategies.

At the national level competitiveness is to be an element of development and the basis for nation’s standard of living; it should contribute to growth, value added, employment and high returns to factors of production.   Competitiveness at a high level of development cannot be achieved through specialization based on static cost comparative advantage. Such specialization will lock low-income countries in production of primary commodities, and at best assembly operation making them competing at a low level of development. It requires creating supply capacity in high value-added activities, making the developed capacity efficient and continuously upgrading the industrial structure. None of these can be achieved through the operation of market forces alone. It also requires proactive and conducive government policies and strategies.

The book explains the international context and conditions under which competition takes place; highlights deficiencies in the neoclassical theory of competitiveness; surveys alternative theories and develops on a framework of analysis outlined above by expanding on the principle of dynamic comparative advantage. In doing so in addition to applying the Schumpeterian approach to competitiveness, I have benefited from theories of productive power of F. List, competitive advantage of M. Porte and M. Best and, business organization of W. Lazonick. I have also benefited, inter alia, from the Kaleckian approach to the acceleration of supply capacity and the theory of Capability Building.

Possibilities for and constraints in achieving competitiveness at the high level of development by developing countries are examined. It is emphasized that in order to be able to enhance their policy space, developing countries should appreciate their need for dynamic and flexible trade and industrial policies. To be able to pursue such policies, changes are necessary at the international rules and regulations of WTO and IFIs and in practices of developed country donors in their bilateral and regional trade agreement with developing countries. The important role of government policies and practices is illustrated, in the book, by comparing contrasting experience of China and Mexico since early 1980s, and its implications for other developing countries.

In its September Communique, the UN’s Intergovernmental Group of Twenty-Four on International Monetary Affairs and Development referred to a “crisis of confidence in advanced economies”. In other words, there is a crisis of confidence in capitalism as a system. We have been witnessing a series of crises in recent years: the financial crisis, debt crisis, commodity crisis, etc. In the meantime, unemployment and growing inequality, particularly in the USA, has led to the 99% movement, “Occupy Wall Street” and upheavals in other countries unprecedented since the Civil Rights Movement.

What has received less attention is the upheaval by economics students at Harvard University. They walked out of a “Principles of Economics” class objecting to the way economics was taught and protesting the “corporatization of higher education”. Their main point was that “the biased nature of Economics 101 [basic economics course] contributes to and symbolizes the increasing economic inequality in America..” and that  “Harvard graduates play major roles in financial institutions and in shaping policy around the world”. In other words, they implied that the crisis in capitalism and growing inequality in wealth and income is not only due to the way financial institutions (and the Wall Street) operate, but is also to a large extent, rooted in the way economics is taught.

What is wrong, then, with economics? Before answering this question let me quote a few figures to show the gravity of the situation. According to The Economist, income inequality in the USA has not increased much—when the top 1% of earners is excluded! But in absolute terms the income of the top 1% has increased fourfold between 1976 and 2007, and they have captured 58% of real economic growth (The Economist, September 24:84). Over 1979-2005 period, “executive managers, supervisors and financial professions accounted for 60% of the increase in the top 1 per cent income.” Those involved in the financial sector were the main beneficiaries. According to the Congressional Budget Office, from 2002 to 2007 the increase in income inequality was mainly the result of an increase in income from capital gains (mainly speculative activities), and the top 0.1 per cent earns about half of the capital gains.

Yet the federal tax rates on capital gains was reduced from 35 per cent to 28 per cent in 1978 and to 20% in 1981; after some fluctuation it was reduced to 15% in 2003.

It is not socially sustainable that “1% of the population controls more than 40% of wealth and receives more than 20% of the income”, when the poorest strata of the population has had to pay more and more for their social services such as education and health, and when the number of homeless people in the USA has increased significantly in recent years due to home foreclosures. For example, since 1998, the system-wide student fees (excluding the campus-specific fees) in California have increased by nearly four times while the indicators of the quality of education have deteriorated. There have been more than seven million foreclosures in the USA, which is about 10% of the number of households (of course it is far greater as a share of number of house owners in the middle and lower class strata).

The top one per cent has been benefiting mainly from “business income”, i.e. income from speculation in transactions in derivatives, stock options etc., which is essentially a form of gambling.  But the burden of the losses from such activities is borne by the tax payers as the government intervenes to bail out the large financial institutions and banks (e.g. Lehman Brothers Bank, UBS, ABN AMRO, etc.) In other words, the losses (negative externalities) are socialized!

Despite such realities, the teaching of economics is undertaken by adherents of the school of “neo-liberalism”, which is totally devoid of realities. It is based on some unrealistic assumptions ranging from prevalence of perfect competition in the product and factor markets, equal distribution of wealth and income, free availability of technology, lack of risk and uncertainty, availability of perfect information, etc. It is more of a science fiction. The nature of the first assumption (perfect competition) alone is enough to make economics a science fiction. It implies that firms are small and passive and have no power in the market, and there is no economy of scale and externalities. In reality each economic activity is dominated by a small number of large firms which exercise their power in the product, factor, technology and financial markets. Their sheer large size contributes to unequal distribution of rewards to factors of production. Further, it allows the managers to influence political power-including presidential elections. Their speculative activities also affect business cycles; in fact, their speculative excess brought on the 2008 financial and economic crises.

To remedy the situation, in its “declaration”, the 99% movement has suggested measures for regulating the financial market, including taxes on financial transactions (Tobin tax), an increase in taxes on high income earners, regulation of large entities, etc. But   capitalism will not be “civilized” through such measures alone. “Gambling” in the financial market should be forbidden. More importantly, some revolutionary changes in the teaching of economics are required in order to train students to analyse the realities of the situation and propose remedies. The experience shows that “communism” is not a solution, but capitalism should be civilized.

Is the governance of global economy conducive to growth, development and stability?

Would the coming G20 and WTO ministerial meetings remedy the systemic deficiencies? I doubt so.

A series of crises have hit the world economy during the last few years. There is a deadlock in the negotiations in the Doha Round. In fact, there is a lack of confidence in the governance of the global economy in general, reflected in the jump in the price of gold by over 100% between November 2008 and July 2011. Although the current economic recession is not as severe as that of the 1930s, it is the worse since then. Had the international community agreed on the proposals made by Keynes on the governance of the world economy and the establishment of International Trade Organization (ITO), the situation would have been different.

During recent years, the food crisis, fuel crisis, and financial crisis have been followed by a recession unprecedented since the early 1930s. Unemployment reached about 10% in the USA and exceeded 20% in some European countries; from peak to the tough, the index price of (non-oil) primary commodities and crude oil declined by 38% and 68%, respectively, and the Dow Jones Industrial Average fell by 52%. A number of European countries have faced debt crises affecting confidence in the Euro as a common currency of the EU. There is also a risk of double dip recession along with upheavals in a number of developing countries.

What does the global economy suffer from? The short answer: deficiencies in governance of the global economy, particularly the international trade system. The great depression of the early 1930s, followed by the Second World War, led the British parliament to initiate the so-called Beveridge Report and, in parallel, requested Keynes to come up with proposals for achieving economic growth, stability in economic activities and enhanced employment worldwide.

Regarding the stability in economic activities Keynes proposed two main schemes: stabilization of prices of primary commodities, putting the main burden of balance of payments adjustments on surplus countries. A surplus country would be charged interest by the International Clearing Union (a sort of international bank) and would be required to revalue its currency. Deficit countries (regarded as expansionist) were encouraged to devalue their currencies by 5 % a year, but it was not obligatory.

In addition to the commodity-price stabilization scheme, the draft of the Havana Charter for the ITO included a number of developmental issues such as employment creation, regulation of restrictive business practices and foreign investment, labour standards, and commercial policies.

The U.S. Congress did not ratify the Havana Charter nor the GATT, which were supposed to be a part of ITO and become operational together with IMF and World Bank. In the language of Professor Singer, the Bretton Woods system became “incomplete” and “distorted”. It was incomplete because it lacked the stabilization schemes and many of developmental issues included in the Havana Charter. It was distorted because the GATT regulations were full of contradictions and biased against developing countries – a situation which persists after changes made in various trade rounds, including the Uruguay Round. Moreover, in the early 1970s the fixed exchange rate system was replaced by a flexible one, adding to instability in commodity prices and economic activities. And the speculative activities in the financial and commodity markets have increased due to the introduction of derivatives and other financial instruments.

Furthermore, following the recession of early 1980s, the IMF and the World Bank introduced Structural Adjustment and Stabilization Programs, putting the burden of adjustment further on deficit countries.

Thus, not only has instability in global economic activities increased, but the current GATT/WTO rules are biased against developing countries. For example, despite the fact that in the preamble to GATT, trade liberalization is regarded as the objective of the GATT/WTO system, the power of government in international trade is to be limited, but not that of transnational corporations (TNCs). (In fact, government control over TNCs has been relaxed through TRIMs and GATS.) Manufactured goods are to be liberalized, but agricultural products are exempted. Imports of labour-intensive manufactured goods from developing countries are restricted. Moreover, development of new technology is to be protected through TRIPs, but development of infant industries is restricted. Above all, developed countries have not implemented Uruguay Round rules to which they have agreed or have not often complied with verdicts of the Dispute Settlements Body of WTO.

In a nutshell, the current GATT/WTO rules and the Bretton Woods system are not conducive to development and stability in global economic activities. There is an urgent need for modifications in the system, which will be discussed in my next blog.

The Doha Development Round (DDR) negotiations at the WTO have reached a deadlock. Various views have been expressed on the issue in the media (including in CUTS-Trade Forum). Some believe that the DDR talks are ready for burial (e.g. Susan Schwab, former USA trade representative). Others, including Mr. Lamy (Director-General of WTO), proposed a plan “B” as an “early harvest” – agree on some LDCs issues by the end of the year and on continuing negotiation on other issues. Some others have argued that the lack of agreement on DDR will be at the cost of the credibility and legitimacy of the WTO. Yet others have been in favour of separating the credibility of the WTO from the DDR issues. Professor Jagdish Bhagwati, a guru of free trade, has proposed that the death of Bin Laden is an opportunity to close DDR, which started after September 11, successfully by the end of 2011! And life without the Doha could destroy the hope for fair trade.

Mr. J.P. Lehman correctly regarded Bhagwati’s comment as pure “fantasy”. So do I. And I do not intend to dwell on it. More importantly, to my knowledge, nobody has thoroughly analyzed the reasons for the deadlock in the negotiations. Following the collapse of the talks for the preparation of  the new Round in Seattle in 1999, Jeffrey Garten, a distinguished scholar, said that “What Seattle showed was that there is a lot more angst beneath the surface” (International Herald Tribune, 9 December 1999). Despite the initiation of DDR, such angst, I believe, has continued because of the lack of credibility in the GATT/WTO rules and in the position of its main developed country members in the process of the negotiations during DDR.

First, the GATT/WTO rules suffer from asymmetries as well as contradictions between the agreed rules and their implementation by main developed countries. Second, as far as DDR is concerned wealthy nations have not “genuinely” pursued a development agenda despite the fact that it was supposed to be a Development Round. Regarding the latter point, I have already discussed the issues related to NAMA and outlined their negative implications for the industrialization of developing countries in an earlier blog. Here, I will provide a few examples of the contradictions in the GATT/WTO rules and exceptional clauses in favour of developed countries, which remind one of the “animal farm” story. Further I will outline contradictions between the agreed rules and their implementation by developed countries.

1. While the influence of the governments in the flow of international trade has to decline, the power and influence of transnational corporations (TNCs) in the flow of international trade is allowed to increase. And according to ActionAid International TNCs of developed countries, which account for 80 per cent of the world’s biggest enterprises, have undue influence in the writing of global trade rules. The annual expenditures of their lobbyists in Brussels amount to 750 million to 1 billion dollars (Shafaeddin, 2010).

2. While trade in manufactured goods has been subject to some liberalization, agricultural exports have been exempt due to the insistence of developed countries. They justify support of their agricultural sector for social (support of the farmers) and strategic (food security) reasons. Yet it is not clear why social considerations are relevant to their farmers, some of whom have incomes of $1.5 million, but they are irrelevant to farmers of low-income countries with incomes of $1 a day.

3.  Even imports of manufactured products of developing countries (mainly labour intensive items such as textiles and clothing etc.) had been restricted until recently.

4.  According to the Uruguay Round Agreement (URA), support for infant industries are not allowed under TRIMs; yet, developed countries benefited, under TRIPs, from protection of their new (infant) technology for 20 years.  

Developed countries have not been implementing fully the rules to which they have agreed in the URA. Here are some examples: (1) The Textiles and Clothing Agreement was implemented only partially (Shafaeddin 2005). (2) Targeted export subsidies, tax holidays and industrial policies, which are restricted by URAs, have been used frequently by developed countries. In 1999, 821 different income tax credit schemes existed for promoting investment in the 50 states of the US (Reinert, 2000, 18-19).

5.  Some developed countries, particularly the USA, did not even comply with verdicts of the Dispute Settlement Body of WTO. The case against payments of cotton subsidies to farmers by the US government is an example Cotton is a major export of a few low-income African countries. Unjustified anti-dumping measures and zeroing practices (according to which negative dumping margins are set equal to zero) is another one (Shafaeddin,2010).

Not only should developing countries not worry about burying the DDR, but they should also aim to revise the GATT/WTO agreements to make them development-friendly.

The so-called Economic Partnership Agreement (EPA) being negotiated between EU and ACP countries can have more devastating impacts on industrialization and development of low-income countries than the 5 per cent rules imposed on colonies during the colonial era. It will lock the Least Developed and other low-income (ACP) countries in production and exports of primary commodities and at best in some labour-intensive industries and assembly operations.

The EPA is supposed to be a reciprocal free trade agreement between unequal partners-i.e. between countries with little or no industrial base and European countries which are already industrialized. While EPA does not provide any gain in market access for ACP countries, it restricts their policy space further. In fact, they are threatened that if they do not ratify the contract, their preferential market access to the EU will be withdrawn. Even if they do ratify EPA, their preferential market access will be lost in 5 to 10 years anyhow, while non-LDCs try to preserve their preferential market access.

As far as policy space is concerned, zero tariffs would be applied to 80 per cent of tariff lines of LDCs in 15 years. The remaining 20 per cent covers “sensitive products” which include mostly agricultural items. Thus the industrial goods will be subject to free trade after 15 years. As far as agricultural goods are concerned, although some tariffs are allowed, imports of heavily subsidized agricultural goods from the EU (through Common Agricultural Policies-CAP) to LDCs undermines agricultural development.

No flexibility is allowed as ACP’s tariff lines are supposed to be bound not only within 15 years but also afterwards when 80 per cent of their tariff lines will be fixed at zero rates. What is more, the agreement also contains a standstill clause on tariffs. In other words, no new custom duty can be introduced except for some items in the sensitive list. For the first 15 years temporary infant industry protection will be allowed, but not ex-ante, as a tool of industrial policy. It will be allowed “ex-post” as a safe-guard measure. In other words, if there is a serious injury or threat of injury to an industry, the importing country may under certain conditions apply protective measures for two years. Nevertheless, even then the country will not have autonomy to do so because it has to consult the EU beforehand, implying that EU approval would be required. It is interesting to note that by contrast the EU has the right to increase its tariff beyond the bound rate in case the import price declines!!

The tariff structure to be imposed on ACP would lead to the loss of nearly all of their policy space. The experience of both developed and developing countries indicates that consolidation of an industrial sector will take longer than 15 years. Further, during the course of industrialization a country needs a flexible and dynamic tariff structure to alter individual tariff rates applied to different categories of industries, i.e. consumer goods, intermediate goods and capital equipment (M. Shafaeddin, “Towards an alternative perspective on Trade and Industrial Policies”, Development and Change, 2005:36.6,1143-62).

But the loss of policy space and policy autonomy does not stop at the restrictions of import tariffs. Export taxes cannot be increased either. Again to impose new taxes on new items must be negotiated with the EU authorities. Thus the loss of export taxes together with import duties would lead to the loss of important sources of government revenues necessary for financing economic development.

Second, the EPAs include a number of “WTO-plus” conditions and so-called Singapore issues such as liberalization of capital flows, financial services and government procurement as well as competition policy. Moreover, no preference should be given to local firms despite the fact that they are in unfavourable competitive position vis-à-vis transnational corporations. This makes it difficult to build the capacity of infant local firms.

Even if a country does not sign an EPA, it will suffer from its negative impact because of the inflow of EU products through its regional borders with countries which are involved in regional FTAs with that and that also sign an EPA.

ACP countries not only lose policy space for their long-run industrialization and development, they will also be more exposed to external shocks and global business cycles and competitive pressure of TNCs. The result: further de-industrialization, human misery and tragedy.

In a recent speech to CUTS in Geneva Mr. Pascal Lamy, the Director-General of WTO, argued, inter alia, that in order to reduce its food deficits, “African Agriculture needs to become more efficient, and…to discover ‘specialization’…”, rather than opting for self-sufficiency. He implicitly drew an analogy between the division of labour between Einstein and his Assistant and Ricardo’s theory of comparative cost advantage (CA). Hence, “… it would make no sense for Africa to produce everything for itself [become self-sufficient], just as it makes no sense for Einstein to process documents too” in addition to his scientific work.

I try to remain within the framework and logic of Mr. Lamy-let alone the fact that the theory of CA of Ricardo is static, suffers from unrealistic assumptions and is inappropriate to development issues (see Shafaeddin, Trade Policy at the Crossroads).

For the OECD countries, not only the concepts of division of labour, CA, efficiency and market forces do not apply, and import substitution is justified; but also dumping “inefficiently produced” food and other agricultural products to Africa is acceptable.  According to Mr. Lamy, African agriculture has suffered because it was shield from international competition. Although in passing he refers to CAP and agricultural policies of other OECD countries, he does not talk about their impacts on the Africa.

Earlier on in an article (jointly written with F. Fischer of EU), on 8 September 2003 he clearly declared that: “Us [sic] Europeans, we refuse to submit fully agriculture to the law of comparative advantage…” In another speech on 20 January 2000 on the future of CAP, he mentioned that agriculture cannot be left “unregulated and solely based on competition”, and spelt out the need for such measure as: external protection, price support and supply control.  He added: it [price support] helped Europe become self-sufficient. On 3 October 2002 in a conference in France he said. “…if agriculture were submitted to the international division of labour [our italics], there is[sic] if we left the consumers to choose, on a global market, the good produced by the most efficient producers [my italics], the 6 million farms in Europe would be cut down to one million….”.

By contrast, according to Mr. Lamy, the agricultural sector of Africa should be subject to liberalization and domestic producers need to compete with the imported foods at “dumping prices”, as OECD countries are not subject to the operation of market forces and efficient production. The amount of agricultural support received by farmers in OECD countries in 2009 (direct and indirect subsidies, etc. and price supports) amounted to about $348 billion. In terms of per capita of rural population of OECD countries it is about $1421; nearly 2.39 times greater than per capita income of the total population of African least developed countries and Haiti. In the same year, the corresponding support received by EU farmers was $92.954 billion, and the direct support alone constituted 24 per cent of their gross receipts as compared with 22% in 2007.

Consider, as an example, the case of Ghana, and its imports, inter alia, of chicken from EU. Under the pressure from the World Bank and IMF, Ghana reduced its tariffs on agricultural goods and liberalized its agricultural sector fully in the 1980s.  (Khor, 2008). Although the bound tariff rate for chicken is higher than the applied tariff, the IMF did not allow the Government to increase it despite the decision of Ghana’s Parliament. The country does not have any legislation to take anti-dumping, countervailing or safeguard measures on imports.

During the last couple of decades Ghana has been dumped on by imported EU chicken. For example, in 2002, total subsidies paid to the EU poultry industry constituted over 27 % of  unit value of production out of which 9.7% was in the form of export refund;  8% of the EU’s exports were directed to West Africa (out of which 2.4%-or 27.5 million tonnes) was exported to Ghana- eight times higher than in 1996. The imported chicken was supplied at a price which was sold at 57% of the price of domestically produced chicken.

As a result of dumped imports, in 2001 domestic chicken production in Ghana accounted for only 11% of domestic consumption as against 95% in 1992. Thus, domestic producers developed excess production capacity.

Chicken is not the only agricultural product, and Ghana is not the only African country, suffering from dumping prices: cereal, soya, milk, meat and other animal products, sugar, even tomato and cotton etc. have had more or less the same fate. Hence, I wish, Mr. Lamy would have indicated in which agricultural products Africa should specialize. How about EU and other OECD countries?

For more on the state of food production in Africa, see my earlier article in this blog. In the next blog, I will show the possible devastating impact of the Doha Round and the Economic Partnership Agreements – if they go through as they stand – on Africa’s agricultural sector.

The Triple Crisis blog invites your comments. Please share your thoughts below.

There is a double standard in the way the concept of “competitiveness” is applied by governments of developed countries and the manner in which they impose it on developing countries. Developed countries aim at achieving competitiveness at a high level of development through specialization based on dynamic comparative advantage. By contrast, they advocate to, and impose on, developing countries policies that will lead to specialization based on static comparative advantage and will keep them at low level of development.

Having been concerned with the competitiveness of their countries in international markets, almost all industrial countries have established competitiveness commissions, or councils, in the offices of their presidents, or Prime Ministers. In all cases they have emphasized the need to achieve competitiveness at a high level of development with the purpose of raising the standard of living of their citizens. Further, to achieve this goal government intervention for technological development and upgrading of the industrial structure and services has been the focus of their attention.

For example, the US Presidential Commission on Industrial Competitiveness (1985), refuting the narrow approaches based on exchange rate and trade balance, advocated that competitiveness is the basis for raising a nation’s standard of living and the expansion of employment. It should contribute, it is added, to labour productivity, real wage growth, and real return on capital employed in the industry in addition to improving the position of the country in world trade. In 2006, the Bush Administration approved an extensive policy framework for technological development under the “American Competitiveness Initiative” with a Federal budget of $137b. In a speech to the United Nations’ ECOSOC in 2007, the US representative clearly defended the need for protection of technology: “…technological change is driven by protection [our italics] of [Intellectual property Rights].”

The OECD Secretariat confirms this approach to competitiveness. So does the EU in 2000 in the Lisbon European Council. Similar approaches are applied by most individual developed countries. For example, the UK Government, after confirming this approach in 1996, goes even further in its 1998 white paper on competitiveness by emphasizing the role of the government. According to the UK Prime Minister “Old fashioned state intervention did not and cannot work. But neither does naïve reliance on markets”. Their framework for achieving competitiveness at a high level of development contains a new approach to industrial policy based on four main pillars: actively seeking new ideas and knowledge, innovating new products and services, investing in the workforce, utilizing knowledge and skills to the full.

Yet developed countries have been imposing on developing countries policies for achieving competitiveness at the low level of development. They have been advocating the neo-liberal ideology, e.g. Washington Consensus, based on the theory of static comparative advantage. For example, Williamson (1992) admits that “none of ideas spawned by …development literature…plays an essential role in motivating the Washington Consensus…”. More importantly, developed countries have been imposing market-oriented approaches to competitiveness on developing countries, through the IMF, World Bank and WTO, or through regional and bilateral trade agreements. The lack of government intervention, budget cuts, across-the-board trade liberalization, absence of performance requirements from multinational firms, etc., are a few elements of such approaches.

As I have shown elsewhere (Shafaeddin, 2010), the experience of the last quarter century indicates that such an approach to competitiveness tends to lock the structure of production and trade of low-income countries in primary commodities, resource-based industries and at best assembly operation. It also creates constraints for upgrading of the industrial structure of those which already have some industrial base.

The process of industrialization requires creating production capacity, operating it efficiently, and eventually upgrading it. None of these can take place automatically through the operation of market forces alone. Not only is there a need for incentives and predictable industrial and development policies, but also policies for creating, or strengthening, a number of “Ins” – Investment, market Institutions, Infrastructure, provision of Inputs, Innovation and Information. It also requires pressure on enterprises for performance, in exchange for incentives, and management of foreign direct investment.

In a world of imperfect competition, a dynamic trade and industrial policy is essential. Schumpeter correctly stated that: “The problem that is usually being visualized is how capitalism administers existing structure, whereas the relevant problem is how it creates and destroys them. As long as this is not recognized, the investigator does a meaningless job.” (Schumpeter, 1976:84).

After a failure to initiate a new trade round in Seattle in 1999, the so-called Doha Development Round began before the end of 2001, in the midst of mistrust between developing and developed countries. In the text of the Doha Development Agenda, a lot of lip-service was paid to development issues. Since 2001, there has been one failure after another in reaching an agreement by the two parties.  Will the Round be concluded?  In my view, if developed countries insist on their anti-development stance, it should not.

The crisis in trade negotiation is a crisis of confidence in the intention of developed countries, which are basically concerned with their own interests rather than the mutual interests of both parties. According to Ms. Barshefsky, an ex-US trade representative: “[the] developing world is not hearing what we are saying and we’re not hearing what the developing world is saying. We’re passing like ships in the night”.

In my view, developing countries do, in fact, hear well what developed countries are saying; that is, we would like to limit your policy space so that you specialize in accordance with the principle of static comparative advantage. Such policy space limitation will lead to de-industrialization of low-income countries, locking them into the production and exports of primary commodities and at best some light, labour-intensive industries or assembly operations. To explain, developed countries have been pushing in so-called non-agricultural market access (NAMA) negotiations for:

• across-the-board liberalization of trade in manufactured goods by proposing the use of  the (non-linear) Swiss formula with low coefficients (Mehdi Shafaeddin, The Political Economy of WTO with Special Reference to NAMA Negotiations);
• thus pushing for cutting and binding tariff lines at a low level;
• limiting flexibility in the exemption from cutting some tariff lines and from leaving them unbound.

The combination of these proposals would imply that the tariffs structure of developing countries would be uniform and bound at low levels without the ability to increase them beyond a limited (bound) level. It will disarm them of an important policy tool for establishing new industries and/or upgrading their industrial structures.  They may get further access to markets of developed countries for products in which they have static comparative advantage. Nevertheless, binding tariffs at low levels deprives them of a policy tool to establish new industries in which they may wish to develop dynamic comparative advantage. The result will de-industrialization of countries which are at early stages of development. This has, in fact, been the consequence of across-the-board and uniform trade liberalization of the last quarter century in many low and middle income African and Latin American countries.

The experience of successful early and late industrializers, indicates that developing countries need a non-uniform, dynamic and flexible tariff structure. Such a structure, inter alia, will help them to establish and nurture various industries on a selective (targeted) basis during each phase of industrialization; it also allows them to upgrade their industrial structure over time starting with low-technology intensive industries and moving up the ladder of industrialization.

During each phase, there is a need for developing industrial products on selective basis because: supply response to relative prices is stronger than its response to a uniform price structure; resources, including the decision making capabilities of the government, are scarce in low-income countries; different industries involve different externalities and linkages effects. The process of industrialization requires creating supply capacity, operating it efficiently and ultimately upgrading the industrial structure. At the first phase some light industries are to be established, but intermediate goods and capital equipment are to be imported freely. As established industries gets near maturity, pressure is to put on them by various means, including gradual tariff reduction. At the same time, tariffs are to be imposed on the related intermediate products which can be produced internally and after a while be reduced. Such a dynamic process of imposing and relaxing tariffs over time should be repeated not only for various selected light industries and intermediate products, but also eventually for capital goods until the industrial structure is consolidated. A rigid tariff structure, will not allow such a dynamic strategy.

The irony is that developed countries try to impose a rigid tariff structure on developing countries, by using tactics such as time pressure, threats, blame games and even bullying. Yet, they tend to protect their technological development through TRIPs and their agricultural production and exports through subsidies and other incentives.

Of course the use of tariffs alone is not sufficient for successful industrialization. Nevertheless, a dynamic and flexible tariff structure is essential. Developing countries ought to make their choice. Reject NAMA, as it is proposed, or get locked into the production and export of primary commodities.

The recent global economic crisis has renewed interest in the debate over the role of the government in economic activities, in developed countries as well as developing countries. Rich countries had to stimulate their economies by injecting enormous amount of cash to deal with the financial crisis caused by the unregulated market and the activities of financial institutions. In the case of the United States, such injections amounted to over one trillion dollars. Yet, the International Financial Institutions continue to advocate a different policy for poor countries. The recommendation of the IMF to the Government of Malawi to impose pro-cyclical monetary and fiscal policies on the economy is only one example.

For developing countries, particularly least developed countries (LDCs), the question is not merely the role of the government in dealing with the business cycles. More importantly, it concerns the relative role of government and market in long-run development and industrialization. In fact, the global economic crisis is a wake-up call for developing countries, particularly those which are at early stages of development, to reconsider the “market-oriented” approach to industrial and development strategies. Such strategies have been advocated by the IFIs, WTO and bilateral donors, following the so-called “Washington Consensus.” Some of the African, Caribbean and Pacific (ACP) countries, which include many LDCs, are also under pressure from the EU to liberalize their foreign trade regime and internal markets through Economic Partnership Agreements (EPAs). Yet, the recent global financial crisis has revealed that market forces have deficiencies even in the case of industrialized countries, let alone developing countries, and particularly LDCs.

The market is only one element in the coordination of economic activities. The “coordination system” consists of the market, firms and government, complemented and supported by “non-price factors” (institutions, infrastructure, information and back-up services). Without the development of non-price factors the market cannot operate efficiently. The price mechanism is slow to create markets and develop non-price factors. The market mechanism can deal with gradual and marginal changes. But it is inadequate to accelerate growth of supply capacity and promote dynamic comparative advantage; to make inefficient industries efficient and competitive, particularly through shock therapy; to promote technological learning and achieve technological upgrading automatically. Hence, some government intervention is required to complement market forces at all levels of development. But the government actions and policies should complement the market, not replace it.

Meanwhile, in contrast to the neo-liberals’ presumption, firms are not passive: the firm, in my view, is the central driving force in the coordinating system since productive capacity is built- up at the firm level.

The relative roles of each element of the coordination system – the market, enterprises and government – and their interactions vary from one country to another and in each specific country over time in the process of development. Developing countries at early stages of development face a dilemma; they face great risks of market failure, entrepreneurship failure as well as government failure. There is a vicious circle: the coordination mechanism fails because of the low level of development; there is a low level of development because of the weak coordination system. In breaking this vicious circle, however, the government must play a key role to create or improve the market, to increase the organizational capacity of the entrepreneurs, to develop complementary and supporting “non-price factors”, including institutional factors, and last, but not least, to enhance the capacity of the state machinery itself.

In fact, the key to industrialization at early stages of development is to improve the learning capacity and efficiency of the government machinery in formulating, implementing, monitoring and correcting policies. At early stages of industrialization, the government may have to invest directly in areas where the private sector, including TNCs, is not prepared to take risks. As markets and enterprises develop, the role of the government in industrialization should decrease. The increasing domination of TNCs in global economic activities and their enhanced power in international markets during the last couple of decades have increased the need for government intervention at early stages of development, in contrast to the market-oriented approach which advocates reducing government’s role.

In short, the question is not market or government. It is to what extent and in what form the government should intervene to minimize government failure and market failure and inadequacies. But it is also important to avoid unnecessary, rigid and prolonged intervention as markets and enterprises are developed. Both functional and selective government intervention are required for capacity building as well as upgrading of the industrial structure as I have explained elsewhere.  (see Shafaeddin, Trade Policy at the Cross-roads, Recent Experience of Developing Countries, Palgrave, 2005).