Why the South must develop trade closer to home

Developing countries are being warned not to flood the industrialised countries with too many cheap goods. The warning comes not from Sir James Goldsmith, the Cassandra of free trade, but from the impeccably politically correct United Nations Conference on Trade and Development.

Unctad's annual Trade and Development Report, published today, has the basically optimistic message for developing countries - the South - that they can replicate the economic success of South-east Asia's tigers. But it says the slowdown in growth in the industrialised North means there is a danger of triggering a collapse in prices, and inducing protectionism, by glutting northern markets with low-skill manufactured goods.

Yilmaz Akyuz, Unctad's chief economist, interprets the problem as primarily a northern one. Against a background of efforts to cut government budget deficits, he urges much lower interest rates to get growth going again.

"It is essential to solve high unemployment and low wages in the North or it will compromise the world trading system. It will be difficult to sustain free trade."

As an example, he cites the industrialisation of Italy and Japan in the 1960s. They penetrated developed markets at a much greater speed than the developing countries of today have achieved. But the arrival of the two newcomers was not controversial because of the background of a high rate of growth and full employment.

However, Mr Akyuz also points out that it will not be possible for the second tier of industrialising countries to follow the same path as Korea and Taiwan by exporting only low-skilled, labour-intensive products for years before upgrading to higher-skilled goods. There are just too many of them. There is already evidence in the case of some products that the increase in production for export has turned the "terms of trade" against the South by reducing prices. "An export push by the South would cause considerable dislocation," he warns.

The potential for disruption is illustrated by how small a market share the developing countries have even in goods that we in the North perceive to be "flooding" in. For example, imports of clothing from the South amounted to $89bn (pounds 57bn) in 1993, about a third of the $258bn market. In other broad categories, including textiles, the South's market share is below 5 per cent.

Unctad predicts that these shares will rise rapidly. The 10-year phasing out of the Multi-Fibre Arrangement, which protects northern clothing and textiles manufacturers, will take the South's share in clothing to 75 per cent by 2006, it forecasts.

For manufactures as a whole, the import share is likely to rise from just under 7 per cent now to between 12 per cent and 20 per cent a decade from now, depending on the North's growth and the South's export success.

The central forecast, which puts the South's market share at 14 per cent in 2006, will correspond to less than 6 per cent of the North's GDP and will affect only about 3.5 per cent of the total labour force. In addition, Northern exports of capital goods and high-technology goods to the South would grow rapidly as the emerging countries prospered.

Nevertheless, it points to further massive industrial restructuring. That small percentage corresponds to more than 13 million people who will need to find different jobs. It is not many out of a workforce of going on for 400 million, but the potential for distress and poverty is grim. And if those of the protectionist tendency are already talking about the "giant sucking sound" as imports "flood" in, what will they be saying in 10 years?

Unctad wants to prepare the developing economies for the dangers of a backlash by setting up a marketing organisation to monitor and co-ordinate different countries' export drives. It also emphasises that the two giant developing economies, China and India, do not need to export on the same scale as the first wave of newly industrialising countries. They are big enough to prosper without depending on overseas markets to the same extent as smaller countries such as Thailand.

The crucial safety valve, however, will be the growth in trade between the countries of the South. The 10 newly industrialised countries of Asia (including China and India) have a share of world trade equal to the EU's, bigger than the US's and more than double Japan's. During the next 10 years, for the first time, the fortunes of the South will not ebb and flow entirely because of what happens in the North - or so Unctad hopes.

Trade between industrialised economies is mostly intra-industry exchange - we import toothpaste from Germany and export it too, import electrical equipment and also sell it to the French. But the pattern of trade and investment between the countries of the South is shaped by their different levels of development. Thus, for example, Korea has established textiles plants in Bangladesh.

The difficult step in fulfilling the optimistic vision of burgeoning South-South trade which will stem the flood of cheap, labour-intensive goods to the North is how the most advanced newly industrialised economies are to accomplish their diversification into more sophisticated manufactures. The Asian tigers are already facing their own problems of de-industrialisation in trying to make this transition from sweatshop to hi-tech factories.

The Trade and Development Report takes a very different tack on this from the International Monetary Fund and World Bank. The UN agency favours the kind of activist government-led industrial management practised by Taiwan and Korea during the 1970s. Essentially, it argues that it is governments, not markets, that move countries up to the next rung of the development ladder. Once there, liberalisation and deregulation can deliver higher productivity and greater efficiency. But alone they are not enough to bring about a step change in prosperity.

The IMF stands by its free market advice, however. A new study of the adjustment of eight developing countries to crises concludes, like earlier research, that the more deregulated the economy, the better it coped. Thus Chile and Thailand have grown significantly faster and have more diverse economies than more heavily regulated Mexico and Senegal.

Whichever route the developing countries choose, the North will have to hope that they succeed. The prospect of the upheavals that would be caused by a genuine flood of cheap imports if the South does not progress beyond the sweatshop economy, as opposed to today's modest flow, is alarming indeed. But the best way to ensure that the developing economies mature is to allow them the access they need to northern markets.