South Korea succeeded where WTO often failed

By Lea Sawaya

NICOSIA - The failure of the World Trade Organization’s (WTO) five-days talks in Cancun, Mexico, in mid-September proved that the win-win notion and a world free of trade barriers is an idealistic if not romantic concept that in practice is just trying to reach freer trade and not free trade.

According to the World Bank, free trade is supposed to be of benefit to all the world and, particularly, developing countries. According to the same source, the reduction of trade barriers discussed in the Doha session in 2001 but could not be completed in Cancun, was supposed to raise the world’s income between $290 billion and $520 billion a year.

Half of these gains were expected to go to poor countries lifting 144 million people from poverty. However, the free-trade model promoted by the WTO, the World Bank and the rest of the “Washington Consensus” could never come true the way the historic experience of developed countries shows and since the theoretical underpinnings of the model are far from the real world.

On the theoretical level, the free trade model is based on a number of flawed premises. One of them is the assumption that a country has fixed resources in terms of labor, capital and technology.

The model does not look how each country reached this resource division. In reality, resources are changing all the time through human development and capital accumulation.

Instead, the model reinforces the current international division of labor with the developed world accumulating more capital and technology versus a developing country with abundant unskilled labour and low value-added products.

Absolute free trade has never been the trigger of economic growth in almost all the developed world.

The causality between trade and growth is still not clear as no direct relationship exists between the two variables. Instead, there are main elements to economic growth such as savings and investments, technology and other variables that are directly related to production.

The history of the developed countries have proved that free trade was not part of their development process but was rather part of their tarrif protection which was employed to achieve economic growth.

The United States, which is now the main promoter of free trade as being an engine for the growth of developing countries, has used the exact opposite model for its own development. In the 1930s, the US proved to be one of the most restrictive trading nations of the world with its ‘level of duties on imports’ reaching around 53 percent during that date.

Meanwhile, examples of real economic success in the last few decades came from the spectacular export success of countries like South Korea and Taiwan.  Though the WTO free trade model has no room for political or state intervention and selective trade policies, the success of the mentioned countries and the policies they followed encourage analysts to think of alternative models. 

Though not endowed with extensive raw materials, South Korea pursued an export policy by establishing niches for itself in the world market. These niches were based on taking advantages of possibilities of production. 

The possibilities of production were greatly facilitated by an active government role in the identification of such niches and in export promotion, something that has been recognized even by the most pro-market governments.

South Korea initially focussed on producing low-level consumer goods for the export market, taking advantage of its low wage cost.  For example, it started with television receivers manufacturing. Korea’s world volume exports in this product increased by 290% over the ten-year 1985-1994 period. 

A continued ‘industrial policy’ by a farsighted authoritarian regime established more sophisticated niches over time.  Its road motor vehicles exports was $5 million in 1985. By 1994 this figure had reached $280 million.

The argument for selective trade policies over time with a sequential lowering of tariffs as followed by South Korea raised the issue of “speed” of change and reform. 

Swiftness of change must be pertaining to each country for these is “no clear-cut” rules that may be offered. The Asian transformation is undoubtedly impressive when compared to other areas of the world. 

In the early 1960s, South Korea had a similar income per capita as India.  While India continues to follow a very closed policy with respect to world trade and has made relatively small gains in income per capita, South Korea now finds itself as a member of the OECD.

The result of the Cancun meeting can be considered a wake up call for the whole world to re-consider the free trade model it is following.

Lea Sawaya is an economic analyst at the Cyprus-based Nicosia Economic Institute. She wrote this article for Alternative