Developing countries in the world trade regime
Developing countries in the world trade regime

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Developing countries in the world trade regime

3.2 The costs of liberalisation in developing countries

3.2.1 Social disruption

In return for being granted enhanced market access by developed countries, which turned out to be somewhat illusory, developing countries agreed to open up their own markets. Indeed, for supporters of the UR, this was its biggest achievement. One of the central propositions of economic theory is that under certain conditions free trade is beneficial to a country – but there are inevitably winners and losers. As a country adjusts to free trade, some sectors of the economy advance, while others decline; colloquially these are referred to as sunrise and sunset sectors. Consequently, some incomes rise, some fall. Nor is this a one-time adjustment: greater openness to trade means that a country's producers will be continually buffeted by changes in technology, consumer tastes and government policies in the rest of the world.

Developed countries have unemployment benefits and retraining programmes that help to cushion the effects of these changes and, as you saw above, they have generously compensated their farmers for exposing them to greater international competition. There are no doubt several deficiencies in these provisions, and retraining is seldom effective: it is hard to retrain a displaced coal miner or steelworker for a job in information technology or financial services. But at least unemployment does not threaten the very survival of the workers and their families, and the next generation is likely to be better equipped to get the new jobs in the sunrise sectors. The point is that no developing country has a system of general unemployment benefits, much less the enhanced benefits and retraining facilities given to workers and farmers whose losses are directly attributable to import competition.

In addition to this kind of social insurance for individuals, the European Union allocates generous ‘structural funds’ to its poorer regions, especially those that have been badly hit by the closure of industries. Few developing countries can afford this kind of transfer from richer to poorer citizens. Nor do most developing countries provide national health services, old age pensions, food stamps, and financial assistance to families with young children. The absence of these ‘safety nets’ means that a family can be completely devastated if its earning members lose their jobs. The prospects of the displaced workers, and even of their children, in the new sunrise activities are blighted by their lack of access to health facilities, education and nutrition.

As the Harvard economist Dani Rodrik has pointed out, greater trade liberalisation among developed countries after the Second World War went together with a substantial enhancement of social spending by their governments – which was more generous in countries that were more open to trade (Rodrik, 1997). Instead of being able to set up these safety nets, governments in developing countries are under pressure from organisations such as the IMF to cut government spending. Although the stated targets of these cuts are inflated bureaucracies and inefficient government corporations, too often the axe falls on what little these countries have been spending on health, education, anti-poverty programmes and social services.

Thus, even if trade liberalisation had been carried out even-handedly in both developed and developing countries, it would have had very different social consequences. As it happens, the massive increase in subsidies to agriculture in developed countries has not only deprived developing countries of expanding farm exports, but it has also turned the tables and allowed European and American produce to invade developing country markets, displacing millions of small farmers. Wrenching dislocations, growing economic insecurity, and widening inequalities in countries with no safety nets exacerbate social divisions and tensions within those countries. This becomes a source of concern for developed countries when it shows up in the form of political instability and extremism and in waves of desperate migrants fleeing poverty and violence in their native countries.

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