Building an Iron Cage

The Bretton Woods Institutions, the WTO, and the South

by Walden Bello

excerpted from the book

Views from the South:

The effects of globalization
and the WTO on the Third World

edited by Sarah Anderson

Walden Bello is co-director of Focus on the Global South, a Bangkok-based research, analysis, and advocacy program on North-South issues connected with the Chulalongkorn University Social Research Institute. A professor of sociology and public administration at the University of the Philippines, he is author or co-author of ten books, including Siamese Tragedy Development and Disintegration in Modern Thailand (London Zed Press, 1998); Dark Victory The United States, Structural Adjustment, and Global Poverty (London Pluto Press, 1994); and Dragons in Distress Asia's Miracle Economies in Crisis (London Penguin Books, 1991).

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Supporters of the World Trade Organization (WTO) often claim that this multilateral institution protects weaker and poorer countries from unilateral actions by the stronger ones by providing a set of uniform rules and dispute settlement mechanisms for global trade. Nevertheless, the WTO elicits fear, anger, and exasperation throughout the global South, where it is widely believed that this institution, rather than helping to level the playing field, is deeply biased against the development of the South. This bias was recently epitomized for many by the resistance of key northern countries, led by the United States, to the appointment of Thai Deputy Prime Minister Supachai Panitchpakdi as WTO director general.

This southern attitude toward the WTO can best be appreciated if the emergence of the institution is placed in the context of the South's struggle for development over the last 50 years. Situated in this broad historical canvas, the Uruguay Round Agreement of 1994 emerges not so much as the triumph of enlightened free trade over benighted protectionism but, more importantly, as the culminating point of a campaign of global economic containment of the legitimate aspirations to development on the part of Third World countries.

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THE 1980s AND EARLY l990s: RESUBORDINATION OF THE SOUTH

A. STRUCTURAL ADJUSTMENT

When the Reagan Administration came to power in 1981, it was riding on what it considered a mandate not only to roll back communism but also to discipline the Third World. What unfolded over the next four years was a two-pronged strategy aimed, on the one hand, at dismantling the system of "state-assisted capitalism" that was seen as the domestic base for southern national capitalist elites and, on the other, at drastically weakening the UN system as a forum and instrument for the South's economic agenda. The opportunity came none too soon in the form of the global debt crisis that erupted in the summer of 1982, which drastically weakened the capabilities of Southern governments in dealing with northern states and corporations and northern-dominated multilateral agencies.

The instruments chosen for rolling back the South were the World Bank and the IMF This was an interesting transformation for the World Bank, which had previously been vilified by the Wall Street Journal and the right wing as one of the villains behind the weakening of the North's global position by "promoting socialism" in the Third World via its loans to southern governments. But the liberal McNamara, by that time faulted by the right for losing Vietnam and failing to contain the southern challenge, was replaced by a more pliable successor, and ideological right-wingers seeking the closure of the Bank were restrained by pragmatic conservatives who wished to use the Bank instead as a disciplinary mechanism.

"Structural adjustment" referred to a new lending approach that had been formulated during McNamara's last years at the Bank. Unlike the traditional World Bank project loan, a structural adjustment loan was intended to push a program of "reform" that would cut across the whole economy or a whole sector of the economy. In the mid-l980s, IMF- and World Bank-imposed structural adjustment became the vehicle for a program of freemarket liberalization that was applied across the board to Third World economies suffering major debt problems. Almost invariably, structural adjustment programs (SAPs) had the following elements

* radically reducing government spending, ostensibly to control inflation and reduce the demand for capital inflows from abroad, a measure that in practice translated into cutting spending on health, education, and welfare liberalizing imports and removing restrictions on foreign investment, ostensibly to make local industry more efficient by exposing them to foreign competition

* privatizing state enterprises and embarking on radical deregulation in order to promote more efficient allocation and use of productive resources by relying' on market mechanisms instead of government decree

* devaluing the currency in order to make exports more competitive, thus resulting in more dollars to service the foreign debt and

* cutting or constraining wages and eliminating or weakening mechanisms like the minimum wage that protected labor, to remove what were seen as artificial barriers to the mobility of local and foreign capital.

By the late 1980s, more than seventy Third World countries had submitted to IMF and World Bank programs, making stabilization, structural adjustment, and shock therapy from distant Washington the common conditions of the South. The main justification for structural adjustment was to enable Third World countries to repay their debts to northern banks. There was also a more strategic objective, and that was to dismantle the system of state-assisted capitalism that served as the domestic base for

the national capitalist elites. In 1988, a survey of SAPs carried out by the UN Commission for Africa concluded that the essence of SAPs was the "reduction/removal of direct state intervention in the productive and redistributive sectors of the economy." As for Latin America, one analyst noted that the United States took advantage of "this period of financial strain to insist that debtor countries remove the government from the economy as the price of getting credit." Similarly, a retrospective of the decade of adjustment published by the Inter-American Development Bank in 1992 identified the removal of the state from economic activity as the centerpiece of the ideological perspective that guided the structural reforms of the 1980s. The book describes the post-war period in Latin America as "the history of a collective error in terms of the economic course chosen, and of the design of the accompanying institutions" and proposed the following remedy "the withdrawal of the producer state and state-assisted capitalism, the limiting of the state's responsibilities to its constitutional commitments, a return to the market for the supply of goods and services, and the removal of the obstacles to the emergence of an independent entrepreneurial class."

By the end of the twelve-year-long Reagan-Bush era in 1992, the South had been transformed. From Argentina to Ghana, state participation in the economy had been drastically curtailed; government enterprises were passing into private hands in the name of efficiency, protectionist barriers to northern imports were being radically reduced; and, through export-first policies, the internal economy was more tightly integrated into the North-dominated capitalist world markets.

B. BRINGING THE NlCs to HEEL

There was one area of the South that was relatively untouched by the first phase of the northern economic counterrevolution.

That was East and Southeast Asia. Here, practically all the economic systems displayed the same features of state-assisted capitalism found elsewhere in the South an activist government intervening in key areas of the economy, a focus on industrialization in order to escape the fate of being simply agricultural or raw material producers, protection of the domestic market from foreign competition, and tight controls on foreign investment. Where the key East and Southeast Asian economies appeared to differ from other economies in the South was mainly in the presence of a fairly strong state that was able to discipline local elites, the greater internalization of a developmentalist direction by the state elite, and the pursuit of aggressive mercantilist policies aimed at gaining markets in First World countries, particularly the United States.

The frontline status in Asia of many of these so-called "Newly Industrializing Countries" (NlCs) during the Cold War ensured that Washington would turn a blind eye to many of their deviations from the free-market ideal. But as the Cold War wound down, the United States began to redefine its economic policy toward East Asia as the creation of a "level playing field" for its corporations via liberalization, deregulation, and more extensive privatization of Asian economies.

It was a goal that Washington pursued by various means in the late 1980s and early l990s. However, countries like South Korea, Thailand, and Indonesia were able to avoid accepting formal SAPs during the debt crisis because of increased access to Japanese capital. At that time, Japan was relocating many of its industrial operations to East and Southeast Asia to offset the loss of competitiveness in Japan after the 1985 Plaza Accord triggered a rapid appreciation of the yen. This left unilateralism in trade and financial diplomacy as the principal U.S. mechanisms for dealing with the increasingly successful Asian "tigers." Washington's aggressive mood was aptly captured by a senior U.S. official who told a capital markets conference in San Francisco, "Although the NlCs may be regarded as tigers because they are strong, ferocious traders, the analogy has a darker side. Tigers live in the jungle, and by the law of the jungle. They are a shrinking population."

Indeed, unilateral pressure, with some assistance from the IMF and the World Bank, succeeded in getting key Asian countries to liberalize their capital accounts and to move to greater liberalization of their financial sectors. But when it came to trade liberalization, the results were meager, except perhaps in the case of Korea, whose trade surplus with the United States had been turned into a trade deficit by the early 1 980s. But even this development did not change the assessment of Korea by the U.S. Trade Representative (USTR) as "one of the toughest places in the world to do business." As for the Southeast Asian countries, Washington's assessment was that while they might have liberalized their capital accounts and financial sectors, they remained highly protected when it came to trade. Some were dangerously flirting with "trade-distorting" exercises in industrial policy, among which were Malaysia's national car project, the Proton Saga, and Indonesia's drive to set up a passenger aircraft industry.

The indiscriminate financial liberalization demanded by Washington and the Bretton Woods institutions, coupled with the high interest rate and fixed currency regime favored by local financial authorities, brought massive amounts of foreign capital into the region. But it also served as the wide highway through which $100 billion exited in 1997 in a massive stampede in response to dislocations caused by overinvestment and unrestricted capital inflows like the collapse of the real estate market and widening current account deficits. A golden opportunity to push the U.S. agenda opened up with the financial crisis, and Washington did not hesitate to exploit it to the hilt, advancing its interests behind the banner of free-market reform. The rollback of protectionism and activist state intervention was incorporated into stabilization programs imposed by the IMF on the key crisis countries of Indonesia, Thailand, and South Korea.

In Thailand, local authorities agreed to remove all limitations on foreign ownership of Thai financial firms, accelerate the privatization of state enterprises, and revise bankruptcy laws along lines demanded by the country's foreign creditors. As the USTR proudly told Congress, the Thai government's "commitments to restructure public enterprises and accelerate privatization of certain key sectors, including energy, transportation, utilities, and communications-which will enhance market-driven competition and deregulation-[are expected] to create new business opportunities for U.S. firms."

In Indonesia, the USTR emphasized that the IMF's conditions for granting a massive stabilization package addressed "practices that have long been the subject of this [Clinton] Administration's bilateral trade policy...Most notable in this respect is the commitment by Indonesia to eliminate the tax, tariff, and credit privileges provided to the national car project. Additionally, the IMF program seeks broad reform of Indonesian trade and investment policy, like the aircraft project, monopolies and domestic trade restrictive practices that stifle competition by limiting access for foreign goods and services."

The national car project and the plan to set up a passenger jet aircraft industry were efforts at industrial policy that had elicited the strong disapproval of Detroit and Boeing, respectively.

In the case of Korea, the U.S. Treasury and the IMF did not conceal their close working relationship, with the Fund clearly in a subordinate position. Not surprisingly, the concessions made by the Koreans were identical to the goals of U.S. bilateral policy toward the country before the crisis. These included raising the limit on foreign ownership of corporate stocks to 55 percent, permitting the establishment of foreign financial institutions, full liberalization of the financial and capital market, abolition of the car classification system, and an end to government-directed lending for industrial policy goals.

As the USTR candidly told members of the U.S. Congress

"Policy-driven rather than market-driven economic activity meant that U.S. industry encountered many specific structural barriers to trade, investment, and competition in Korea. For example, Korea maintained restrictions on foreign ownership and operations, and had a list of market access impediments...The Korea stabilization package, negotiated with the IMF in December 1997, should help open and expand competition in Korea by creating a more market-driven economy. . .[I]f it continues on the path to reform there will be important benefits not only for Korea but also the United States."

Summing up Washington's strategic goal, Jeff Garten, under secretary of Commerce during President Clinton's first term, said, "Most of these countries are going through a dark and deep tunnel...But on the other end there is going to be a significantly different Asia in which American firms have achieved a much deeper market penetration, much greater access." By 1998, U.S. financial firms and corporations were buying up Asian assets from Seoul to Bangkok at fire-sale prices.

C. DISMANTLING THE UN DEVELOPMENT SYSTEM

The assault on the NICs via the IMF stabilization programs and on the broader South via Bretton Woods-imposed structural adjustment was accompanied by a major effort to emasculate the UN as a vehicle for the southern agenda. Wielding the power of the purse, the United States, which funds some 20 to 25 percent of the UN budget, moved to silence NIEO rhetoric in all the key UN institutions dealing with the North-South divide the Economic and Social Council (ECOSOC), the UNDP, and the General Assembly. U.S. pressure resulted as well in the effective dismantling of the UN Center on Transnational Corporations, whose high-quality work in tracking the activities of global firms in the South had earned the ire of the corporate community. Also abolished was the post of director general for International Economic Cooperation and Development, which had been among the few concrete outcomes, and certainly the most noteworthy, of the efforts of the developing countries to secure a stronger UN presence in support of international economic cooperation and development.

But the focus of the northern counteroffensive was the defanging, if not dismantling, of UNCTAD. After giving in to the South during the UNCTAD IV negotiations in Nairobi in 1976 by agreeing to the creation of the commodity stabilization scheme known as the Integrated Program for Commodities, the North, during UNCTAD V in Belgrade, refused the South's program of debt forgiveness and other measures intended to revive Third World economies and thus contribute to global recovery at a time of worldwide recession. The northern offensive escalated during UNCTAD VIII, held in Cartagena in 1992. At this watershed meeting, the North successfully opposed all linkages of UNCTAD discussions with the Uruguay Round negotiations of the General Agreement on Tariffs and Trade (GATT) and managed to erode UNCTAD's negotiation functions, thus calling its existence into question. UNCTAD's main function would henceforth be limited to "analysis, consensus building on some trade-related issues, and technical assistance."

This drastic curtailing of UNCTAD's scope was apparently not enough for certain northern interests. For instance, the Geneva-based Independent Commission on Global Governance identified UNCTAD as one of the agencies that could be abolished in order to streamline the UN system. The commission's views apparently coincided with that of Karl Theodor Paschke, head of the newly created UN Office of Internal Oversight Services, who was quoted by Stern magazine as saying that UNCTAD had been made obsolete by the creation of the World Trade Organization (WTO). The truth of the matter is that although UNCTAD continues to survive, it has indeed been rendered impotent by the WTO, which replaced the less-powerful GATT following the conclusion of the eight-year Uruguay Round in 1994.

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THE WORLD TRADE ORGANIZATION: SEALING THE DEFEAT OF THE SOUTH

The WTO was not the first attempt at a global trading organization. Forty-six years previous, liberal internationalists had worked to create such an institution as a third pillar of the Bretton Woods system, but the threat of nonratification by unilateralist forces in the U.S. Senate led to its being shelved in favor of the much weaker GATT by the defensive Truman Administration.

By the mid- I 980s, the United States became the lead advocate of a much-expanded GATT with real coercive teeth. U.S. officials were motivated by trade rivalries with Europe and Japan, the rising import penetration of the U.S. market by Third World countries, frustration at the inability of U.S. goods to enter southern markets, and the rise of new competitors in East Asia. Central to the founding of the WTO were the twin drives of managing the trade rivalry among the leading industrial countries and containing the threat posed by the South to the prevailing global economic structure. In this sense, the WTO must be seen as a continuation or extension of the same northern reaction that drove structural adjustment.

Indeed, the WTO, by enshrining the principle of free trade as the organizing principle of the global trading system, represents the defeat of everything that the South fought for in UNCTAD fair prices via commodity price agreements; trade preferences to facilitate economic development in the South preferential treatment for local investors; the use of trade policy as a legitimate instrument for industrialization; and a more concerted technology transfer to the South.

Instead, the WTO institutionalizes free trade, the most-favored nation principle, and national treatment as the pillars of the new world trading order. National treatment, established through the General Agreement on Trade in Services (GATS) of the Uruguay Round, is perhaps the most revolutionary and the most threatening to the South. This principle gives foreign service providers, from telecommunications companies to lawyers to educational agencies, the same rights and privileges as their domestic counterparts. Although the GATT-WTO Accord does recognize the "special and differential status" of the developing countries, it does not see this as a case of structurally determined differences but as one of gaps that can be surmounted by giving developing countries a longer adjustment period than the developed countries. While northern environmental organizations are critical of the WTO for subordinating northern environmental standards to the principle that Lori Wallach of Public Citizen describes as "free trade, uber alles," the southern countries have articulated their concerns about the GATT-WTO's antidevelopmental thrust. In their view, GATT-WTO is inherently unsympathetic to industrialization at the same time that it erodes the agricultural base of the developing societies.

A. THE WTO AND INDUSTRIALIZATION IN THE SOUTH

In signing on to GATT, Third World countries have agreed to ban all quantitative restrictions on imports, to reduce tariffs on many industrial imports, and not to raise tariffs on all other imports. In so doing, they have effectively given up the use of trade policy to pursue industrialization objectives. The way that the NICC made it to industrial status, via the policy of import substitution, is now effectively removed as a route to industrialization.

The anti-industrialization thrust of the GATT-WTO Accord is made even more manifest in the Agreement on Trade-Related Investment Measures (TRIMs) and the Agreement on Trade Related Intellectual Property Rights (TRIPs). These agreements deny countries the right to pursue some of the policies that the NlCs used successfully in their drive to industrialize. For example, countries like South Korea and Malaysia used trade-balancing requirements, which tied the value of a foreign investor's imports of raw materials and components to the value of his or her exports of the finished commodity, and "local content" regulations, which mandated that a certain percentage of the components that went into the making of a product be sourced locally.

These rules enabled the NlCs to raise income from capital intensive exports, develop support industries, and bring in technology, while still protecting local entrepreneurs' preferential access to the domestic market. In Malaysia, for instance, the strategic use of local content policy enabled them to build a "national car," in cooperation with Mitsubishi, that has now achieved about 80 percent local content and controls 70 percent of the Malaysian market. Thanks to the TRIMs accord, these mechanisms are now illegal.

Like TRIMs, the TRIPs regime is seen as an obstacle to the industrialization efforts of Third World countries. TRIPs provides a generalized minimum patent protection of 20 years; increases the duration of the protection for semiconductors or computer chips; institutes draconian border regulations against products judged to be violating intellectual property rights; and places the burden of proof on the presumed violator of process patents.

These requirements make it more difficult for developing countries to have the level of access to cutting-edge technologies that was enjoyed by the NlCs and almost all late-industrializing countries. The United States industrialized, to a great extent, by using but paying very little for British manufacturing innovations, as did the Germans. Japan industrialized by liberally borrowing U.S. technological innovations, but barely compensating the Americans for this. And the Koreans industrialized by quite liberally copying U.S. and Japanese product and process technologies.

But what is "technological diffusion" from the perspective of the late industrializer is "piracy" from that of the industrial leader. The TRIPs regime takes the side of the latter and will make the process of industrialization by imitation much more difficult from now on. It represents what UNCTAD describes as "a premature strengthening of the intellectual property system...that favors monopolistically controlled innovation over broad-based diffusion."

Southern countries perceive TRIPs as a victory for the U.S. high-tech industry, which has long been lobbying for stronger controls over the diffusion of innovations. Innovation in the knowledge-intensive high-tech sector-in electronic software and hardware, biotechnology, lasers, optoelectronics, and liquid crystal technology, to name a few-has become the central determinant of economic power in our time. And when any company in the NlCs and Third World wishes to innovate, say in chip design, software programming, or computer assembly, it necessarily has to integrate several patented designs and processes, most of them from U.S. electronic hardware and software giants like Microsoft, Intel, and Texas Instruments. As the Koreans have bitterly learned, exorbitant multiple royalty payments to what has been called the American "high-tech mafia" keeps one's profit margins very low while reducing incentives for local innovation. The likely outcome is for a southern manufacturer simply to pay royalties for a technology rather than to innovate, thus perpetuating the technological dependence on northern firms.

Thus, TRIPs enables the technological leader, in this case the United States, to greatly influence the pace of technological and industrial development in rival industrialized countries, the NlCs, and the Third World.

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D. OLIGARCHIC DECISION MAKING

There are other inequalities structured into the WTO system. The system of decision making is perhaps among the most blatant of these. Pro-WTO propaganda has projected the agency as a "one nation/one vote" organization, where the United States has no more votes than Rwanda or the Dominican Republic. In fact, it is quite undemocratic and is actually run by an oligarchy of countries, much like the World Bank and the IMF. Were majority rule to prevail, then the WTO would, like the UN General Assembly, be structurally more responsive to the needs of the South. But, as it did at the World Bank and the IMF, the North evolved other mechanisms of control. While at the Bank and the Fund the prime mechanism of control is the size of rich countries' financial contributions, which gives them enormous voting power vis-a-vis the mass of developing countries, at the WTO, northern domination is achieved via what is euphemistically referred to as "consensus."

This process was described in the following manner before the U.S. Congress by an influential WTO advocate after noting that there had not been a vote taken in GATT, the WTO's predecessor, since 1959, economist C. Fred Bergsten underlined that the WTO "does not work by voting. It works by a consensus arrangement which, to tell the truth, is managed by four-the Quads the United States, Japan, European Union, and Canada." He continued "Those countries have to agree if any major steps are going to be made, that is true. But no votes. I do not anticipate votes in the new institution."

The way that the consensus rule assures the hegemony of the North was recently on display in the selection of the successor to Renato Ruggiero as director general. The U.S.-led bloc that successfully supported New Zealander Mike Moore refused a head count, as proposed by backers of Thailand's Supachai, on grounds that this would violate the WTO's consensus tradition.

Indeed, so undemocratic is the WTO that decisions are arrived at informally, via caucuses convoked in the corridors of the ministerials by the big trading powers. The formal sessions are reserved for speeches. The key agreements to come out of the first and second ministerials of the WTO-the decision to liberalize information technology trade taken in Singapore in 1996 and the agreement to liberalize trade in electronic commerce arrived at in Geneva in 1998-were decided on in informal backroom sessions and simply presented to the full assembly as faits accomplis. It is against this dismal background that we now move to the question of reform.

Views from the South

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