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China’s & Developing Countries’ Political Economy

What are the global community’s criticisms about the WTO’s treatment of developing countries? Are their complaints valid?

The World Trade Organization was set up to liberalize trade in the world by being the body that regulates trade between nations. It must make sure trade flows smoothly. It is also responsible for correcting conflicts among countries that relate to trade. When a country joins the WTO chooses to liberalize its international trade. The WTO enshrines practices of fairness in trade yet it turns a blind eye of years of subsidies that have given rich countries an upper hand when it comes to their trade with developing countries. Although the actions by WTO are noble, as they introduce an open and free marketplace globally, they are not catering for the imbalance that already existed in trade. This essay explores the global community’s criticisms of the WTO has opted to treat developing countries. It recognizes their plight as they try to catch up with developed countries in their development.1

Free trade ideas that govern the action of the WTO come from ideas of reform that began in the seventieth century. At the time, the effort was to promote welfare systems by governments. John Calvin, a religious preacher at the time said that governments had the duty to promote the economic well-being of all God’s children. Otherwise, they would be Satan’s governments.2 Extending the same thought to the global trade, one sees that the role of the WTO as the world’s governing body for trade is to promote the economic well-being of all member countries. Therefore, it’s evident that the WTO should be looked upon as a governance system for global trade, and the criticism it receives will be analyzed based on this point.

Another hindsight that helps to understand the problem of the WTO is the criticism that was directed to early banking regulations in the 20th century. At the time, the banking system was not the problem as many viewed it. However, the manner in which the government promoted monopolies in banking investments was questionable and that was the biggest cause for criticism.3 Today, the WTO role is noble as it was when the organization was formed. Besides its noble intention, WTO ought to do better, to make sure that there is a level playing field yet by its conduct and delays in reacting, it is failing, and this is one of the criticisms from the global community. Therefore, the manner at which it promotes the supremacy of some nations over others calls for a review.

Since the start of global trade and involvement of governments in the regulation of business affairs, it has been the interest of the government to maintain a positive balance of trade. They want exports to surpass imports. A consequence of such imbalance is the strengthening of a country’s currency value, as other countries demand it to pay for their imports from the given country. 4Countries like South Korea grew first to occupy the 14th position as the world’s largest economy in the world because they are exporting many high valued goods to the rest of the world. They pursue an export-oriented strategy that seeks to maximize their gains.

Based on the laws of demand and supply, countries that have goods and services that are in great demand by other countries experience a surge in exports while those that have greater demand than they can supply locally end up having a high import demand. The WTO works to ensure that only fundamentals of trade such as this balance of demand and supply are the factors affecting trade and international prices for goods and services. According to Jean-Baptiste Say, “good products will produce more efficient products”, but this can only take place when the good produce is allowed to reach the markets and function as required.5

For participation in the WTO, countries should have a free market economy or elements of it that will allow an unhindered market to function where prices are dictated by demand and supply, while there are no incentives used to manipulate prices. Since the setup of WTO, trade and country development imbalance continues to exist. Some countries have managed to improve their development status as a result of being participants in the WTO, but many still fight against poverty. Also, it has been decades since the formation of the WTO. It is not understandable that many countries are not seeing major benefits as they would have expected.

The biggest agent for global trade is a multinational corporation. With the ability to impact management of subsidiaries firms in different countries, multinational corporations have a power that manifests in different ways in the globalized economy. For example, multinationals can be the main raw material producers in one country and manufacturers of finished goods in another country. They set up operations to act as major exporters from the producing country and major importers in the receiving country, for the particular produce. In addition to international trade, they also make cross-border investments and are engaged in the economic product.6 This implies that if they are left on their own, they can build or destroy a country’s development capacity based on their business choices.

When multinationals emerged, they were mainly from the British Empire with interests in the United States, Latin America, and Asia. They set up the initial trading routes and popularized commodities for exchange. Unfortunately, at the time, they remitted most of their profits to their home country, which was Britain. Thus, Britain developed while the other countries with the MNC operations only saw marginal development in sectors relating to what the MNCs did. In 1969, there were almost 7,300 MNC parent firms globally.7 After two decades, the number had multiplied by four. Today, there are almost a million foreign affiliate companies related to MNCs operations globally. From this statistic, it is reasonable to say that multinationals are the custodians of global trade.

Besides, there are other positive externalities related to the world of multinationals in different countries. As the previous paragraph shows, multinationals come mostly from developed countries, and they set up operations in other countries with opportunities. Lately, there have been MNCs from emerging economies setting up operations in developed countries. As they set up operations, they move capital, which is considered a foreign direct investment. Similar to exports, FDI brings in foreign currency to a country. In 1980, FDI was valued at $692.7 billion. In 2008, it had increased to $16.2 trillion. From the basic understanding of trade and its impact, the result of this FDI increase would be the betterment of economic conditions in many countries around the world.

As indicators of development capacity of countries, there were 58,783 parent-multinationals in the developed economies and 21,425 in the developing economies in the year 2008. Meanwhile, their affiliates were 366,881 and 425,258 respectively. The figures show the concentration of MNC activities in the industrialized countries, and further analysis shows that the industrialized countries are also the largest recipients of FDI.8 The picture is becoming clearer that despite the change in the overall openness of the world to trade, likely benefits are still moving to industrialized countries. It is not possible to bring in the role of the WTO into the whole imbalance issue.

Foreign Direct Investment Inflows, 1986-2008 ($U.S. Billions)9
Table 1: Foreign Direct Investment Inflows, 1986-2008 ($U.S. Billions)9

As the table above shows, there was no FDI inflow to Africa, Latin America, and Eastern Europe until 1991, while Western Europe at the time was already receiving more than half of the global share. The latest figure from the table shows that Western Europe receives as much as ten times FDI inflows than Africa. MNCs move the capital to areas where they see economic opportunities. On the other hand, governments play a role in ensuring that their economic opportunities available to firms within their jurisdiction are attractive. Opening up opportunities for trade is one way to attract MNCs as they realize that their local operations can benefit from the opportunities for exports or important and value addition to serving local markets. The WTO ought to make sure that activities by governments and MNCs in exploiting trade opportunities do not happen to the detriment of other nation’s capacity to develop.

The common market was the most attractive feature for MNCs. Establishment of an affiliate in a member country of a common market meant that the MNC has access to the entire market. The case works in two ways. The MNC can source goods and services from the market with local treatment. It is also able to sell to the market under the same conditions. It follows that, for the markets where production and sale are lucrative, many MNCs flowing into countries within that market will exploit these opportunities. The contrary is also true where consumption opportunities offer greater returns that production.10 Thus, MNCs merely represent the imbalances that already exist, and they follow business instincts to exploit opportunities.

The WTO has to safeguard countries against unfair trade by ensuring that there are no countries using subsidies to make their industries more attractive for investment, which leads to prices that are lower than true equilibrium market prices for demand and supply. With subsidies, governments lower the actual cost of the product and make it easy for their exports to compete in the international market. Governments have set up export processing zones to provide incentives for firms that are willing to service the government’s export promotion strategies. Although it is within the jurisdiction to do so, the WTO is supposed to examine every economic interaction of these zones to ensure that they do not lead to unfair trade practices.

WTO is failing to prevent market imperfections. Thus, MNCs are unable to benefit from an existing locational advantage whose exploitation would lead to the development of the host country. Through horizontal and vertical integrations, MNCs embrace sophisticated business practices to increase their earnings and exploit market imperfections.11 Thus, MNCs can exploit opportunities created by multilateral agreements on investment between their countries and host nations. They end up getting conditions that favor the establishment of subsidiaries rather than direct importation of goods and services. Thus, the host country, which here is a developing country, end up benefiting only marginally from the presence of the multinational. Meanwhile, the multinational continues to exploit the available trade opportunity for export of goods to other countries for further processing or consumption.12

WTO should have come up with rules to govern the setting up of bilateral agreements between unequal partners. So far, developing countries have to concede much of the access to their resources and markets to receive equal access to developing countries.13 The present nature of WTO supports this arrangement. Nevertheless, it fails to address the fact that a developing country, with a limited number of multinationals, limited capital for investing outside the countries and limited overall economic capacity to develop its industries is not able to capture the opportunity provided adequately. IN this regard, the WTO has failed developing nations by ignoring the existing conditionality for trade.

In the end, I see WTO as sluggish, and the slow response to fundamental imbalances is causing great harm to the economic development potential of developing countries. As a governing body, WTO seems to care more for the welfare of some countries more than others. It is punishing developing countries by letting them suffer from the inadequate capacity to sustain appropriate foreign exchange reserves. Without sufficient export revenues, they are disfavored in a free-floating exchange rate system of the world, and they continue to remain primary target zones for extractive industries and production agriculture. They should instead be getting value adding FDI inflows that can fundamentally change their balance of payment hence improve their fortunes to match those of industrialized countries. Based on this review, the global community’s criticisms about the WTO’s treatment of developing countries are valid.

What kind of economic reform is occurring in China? Is it both good and bad for China as well as the global economy?

China has been able to emerge as a global economic power because it is willing to set aside its social economy principles and embrace liberalization. The economic reform that is occurring in China involves state-run corporations opening up to market-based principles of operation while the government still maintains control of the centrally planned economy. China is moving to trade liberalization and economy liberalization using a controlled strategy that is transforming it into a mixed economy. The mixed economy was introduced in 1947. British Prime Minister Sir Harold Macmillan hailed it as the appropriate alternative. This was for either a free market economy or a controlled economy. However, expression of a mixed economy happens in many ways that were not articulated in its formation.14

The economic reforms in China have allowed the country to catch up with the industrialized worlds in some aspects of manufacturing. It can now compete effectively with countries like Japan and Germany in the production of goods. China began by seeking collaborations for its companies, and it was able to copy the technology. It also concentrated on research and development within its factories. As a result, it can outdo other countries by creating and selling the same items as them.15 China aggressively pursued special economic zones and industrial clusters that allowed centralized coordination of economic activity within regions to make them globally competitive for particular industries. The reforms in China are good for the country because they have helped improve its competitiveness and overall economic growth as demonstrated by the graph below.

China's GDP Growth from 1980 to 200816
Table 2: China’s GDP Growth from 1980 to 200816

The growth of China represents the potential of a mixed economy. Its government has significant control over the direction of the economy. It ensures that the general welfare of citizens is looked upon even as companies continue to pursue selfish profit interests. However, given that state-run corporations mainly drive the reform implementation, the level of control may not be very good for China. Too much government control can stifle opportunities for growth of private businesses.17 Government control exposes citizens and businesses to more agendas of the ruling political elite and limits their freedom.

In Britain, the introduction of mixed economy principles led to the passing of bills to give laborers higher wages. In itself, the act is good because it leads to higher incomes for the workers. It also leads to fewer levels of poverty. However, it also leads to higher costs of production. Therefore, embracing a mixed economy reform is not good unless there are sound practices in place to ensure a balance of welfare and business interests.18

Mixed economies have manifested in different ways across the world. Asian countries like South Korea and Malaysia have favored more of the free market than government intervention, but they still adhere to mixed economy principles. For China, the leaning to government control offers unique advantages such as rapid response to growth opportunities in the economy. The government can push businesses and laborers to accept particular terms to help improve overall production. They can follow Adam Smith’s principles of giving businesses incentive money and lowering their taxes.19 This has been the case for China, and it is, therefore, a good thing for the country’s economic growth.

Reforms in China follow three pillars that include the implementation of market incentives that help to improve agricultural production in the country. In the early 1980s, farmers got incentives to lease land and help boost production of agriculture. As a result, economic growth estimates were between 6 to 10 percent annually.20 A positive externality of the growth was the increase in per capita incomes of the population. The majority of farmers that were now receiving rent got increased incomes and was able to move out of poverty, which is a good thing.

Due to coordinated economic reforms, China has been able to grow its share of the global economy from 1 percent in the 1970s to incredible levels that are the envy of many developing countries. With a 6 percent share, it can sustain its manufacturing position. It has also become the largest global exporter of merchandise.21 Its equivalent of the private sector in other countries is a collection of state-owned companies. Unfortunately, for state-owned enterprises the need for aggressive competition is not always available. They are not very driven to make profits, and they aim to fulfill government agendas.22

With the high concentration of state-owned corporations in its economy, the Chinese government can promote its political interests. It can promote an increase in employment rates by establishing more corporations and having a liberal hiring policy. It can also sustain high wages or low wages to change the competitiveness of the Chinese market for FDI inflows. The growth of China due to the reforms has allowed it to have more power in trade negotiations with other countries. A consequence of this development is that China is becoming powerful, and its interests can be exported to become global interests, which may not argue well for other countries.23

Institutionalization of the growing influence is a bad thing for the world when abused. However, it helps to sustain balance among global economic powers. For example, the current arrangement of Africa, Caribbean, and Pacific (ACP) countries in the World Trade Organization (WTO) places them as a weak force whose interest is to protect their preferential market access to rich economies. Meanwhile, the strengthening of China offers an example to these countries on ways to eliminate their disadvantages and trade like equal partners with rich nations similar to the way China is doing.24 China can pursue self-interest within WTO. Thus, its example is good for the world. It shows other countries potentials to translate their growing economic power to influence.

The bad thing about economic reforms in China is that they lead to the increase in some developed countries that continue to exploit developing ones in trade. Even before China is officially a developed country, its interests are already changing not to represent those of developing countries. China’s economy is large, and its exports are sophisticated. It needs different market access arrangement than developing countries with ACP. It continues to form a large part of the negotiations representing developing countries. In this regard, the economic reform for China is not a good thing for the global economy.

Another problem for China’s reform is that it has concentrated much on production at the expense of looking into the growth of its consumption capacity. The country relied on exports initially to power growth. It opened up to trade by joining the WTO and, as a result, opened its market for imports. Even as it continues to grow exports, it has to balance with imports for raw materials and finished goods. As the economy matures, it has to continue making foreign direct investments in other countries to enjoy economic returns as opportunities within its economy dwindle. Overall, the experience that China is getting with its economic reform is giving its multinational corporations (MNCs) an intangible asset advantage.

Chinese MNCs are becoming better at navigating global opportunities for trade and investment because they have been nurtured by the growing economy. They understand market conditions of many developing countries. They face limited challenges for labor supply as their operations at home are not fully based on free market principles. They are also direct beneficiaries of special economic zone programs seeking to build the country’s competitiveness.25 This is good for the country’s economic growth, but goes contrary to the ideas of free and equitable competition in international trade. Direct assistance from government gives Chinese MNCs an upper hand in global trade and investments.26 This is a threat to other nations whose companies compete globally without direct government support.

For China, structural adjustment programs that were championed by the Bretton Woods system have not influenced its reforms. Unlike China, many countries in Africa and Latin America ended up with large job losses in their civil services. As a result, their domestic purchasing power declined, leading to a loss of economic activity by their private sectors. Besides, privatization of state corporations also came with additional retrenchments meant to make them more efficient. Overall, the government taxation base shrunk and most economies became distressed.27

The reforms in China were partially driven by resentment for International Monetary Fund’s policies that were having bad economic effects on other Asian countries like Thailand and Indonesia in the 1990s. On the other hand, its success could also be attributed to the predicaments that were facing its neighbors. The strong Chinese economy that survived because of its strict mixed economy principles and strong government control became the main reason for continued influence of China over political and economic affairs of the region.28 Therefore, this is another example showing that countries can pursue separate policies from those championed by the Bretton Woods System and still survive economically.

I think part of the power that China has got due to its economic reforms has gone on to influence the political economy thought of the world. Many countries are now able to pursue alternative systems of government and trade while still being in the confines of bilateral agreements and the WTO requirements. I also see the ascent of China into global politics as a consequence of its growth in economic power. Thus, the country is a savior to other developing nations mostly in Asia. It can represent their interests regarding access to international trade. It can also invest in their industries through its MNCs and may be a source of cheap financial support. Therefore, the final answer to the question regarding whether economic reform in China is good or bad for the global economy, the answer is that it is good.

Bibliography

Baldwin, Robert E. “Trade Negotiations within the GATT/WTO Framework: A Survey of Successes and Failures.” Journal of Policy Modeling 31, no. 4 (2009): 515-525.

David, Zweig, and Chen Zhimin. China’s Reforms and International Political Economy. Abingdon, OX: Routledge, 2007.

Ismail, Faizel. “Developing Countries Create Momentum for Change in the WTO.” Global Policy 2, no. 3 (2011): 345-346.

Lall, Sanjaya, and Manuel Albaladejo. “China’s Competitive Performance: A Threat to East Asian Manufactured Exports?” World Development 32, no. 9 (2004): 1441-1466.

Oatley, Thomas. International Political Economy: Pearson New International Edition. Harlow: Pearson Education Limited, 2013.

Seay, W. “The Origins of Political Economy” ECON 101: Virginia Commonwealth University Tisdell, Clem. “China’s rural poverty and its Entry into the WTO.” International Journal of Developmental Issues 2, no. 2 (2003): 15-36.

Walker, Aurelie. “The WTO has Failed Developing Nations.” The Guardian. Web.

Whitfield, Lindsay, Lars Buur Ole Therkildsen, and Anne Mette Kj’r. The Politics of African Industrial Policy: A Comparative Perspective. New York: Cambridge University Press, 2015.

Zeng, Douglas Zhihua. “China’s Special Economic Zones and Industrial Clusters: Success and Challenges.” The World Bank. 2011. Web.

Footnotes

  1. W. Seay, “The Origins of Political Economy” ECON 101: Virginia Commonwealth University
  2. Ibid.
  3. Ibid.
  4. Ibid.
  5. W. Seay, “The Origins of Political Economy” ECON 101: Virginia Commonwealth University
  6. Thomas Oatley, International Political Economy: Pearson New International Edition (Harlow: Pearson Education Limited, 2013), 160.
  7. Ibid.
  8. Thomas Oatley, International Political Economy: Pearson New International Edition (Harlow: Pearson Education Limited, 2013), 162.
  9. Ibid, 163.
  10. Thomas Oatley, International Political Economy: Pearson New International Edition (Harlow: Pearson Education Limited, 2013), 169.
  11. Robert E. Baldwin, ‘Trade negotiations within the GATT/WTO framework: A survey of successes and failures’, Journal of Policy Modeling 31, no. 4 (2009), 515-516.
  12. Aurelie Walker, “The WTO has failed developing nations”, in The Guardian, 2011, Web.
  13. Faizel Ismail, “Developing Countries Create Momentum for Change in the WTO”, Global Policy 2, no. 3 (2011), 345.
  14. W. Seay, “The Origins of Political Economy” ECON 101: Virginia Commonwealth University
  15. Ibid.
  16. Douglas Zhihua Zeng, “China’s Special Economic Zones and Industrial Clusters: Success and Challenges”, in The World Bank, 2011, Web.
  17. W. Seay, “The Origins of Political Economy” ECON 101: Virginia Commonwealth University.
  18. Ibid.
  19. Ibid.
  20. Thomas Oatley, International Political Economy: Pearson New International Edition (Harlow: Pearson Education Limited, 2013), 154.
  21. Ibid.
  22. Ibid.
  23. Thomas Oatley, International Political Economy: Pearson New International Edition (Harlow: Pearson Education Limited, 2013), 155.
  24. Ibid.
  25. Clem Tisdell, “China’s rural poverty and its entry to the WTO”, International Journal of Developmental Issues, 2 (2003): 30.
  26. Sanjaya Lall and Manuel Albaladejo, “China’s Competitive Performance: A Threat to East Asian Manufactured Exports?”, World Development, 32 (2004), 1441.
  27. Lindsay Whitfield, Lars Buur Ole Therkildsen and Anne Mette Kj’r, The Politics of African Industrial Policy: A Comparative Perspective (New York: Cambridge University Press, 2015), 83.
  28. China’s Reforms and International Political Economy, ed. by Zweig David and Chen Zhimin (Abingdon, OX: Routledge, 2007), 83.