‘TRADE, NOT AID’

'Trade, Not Aid'A slogan that has been endorsed for long by developing countries in International Trade Negotiations; What is the impact of trade and is it the most important facet of globalization upon this group of countries?

Angelo Carlo Valsesia

Introduction
From the title of the essay as such we can hypothesize that the question that the essay pones is of Hegelian matrix: the thesis is constituted by the ‘Aid’, the antithesis is the ‘Trade’ instead. To say which one of them is the most beneficial is not an easy question, and probably it is not correct to put one above the other (as more important) too. What I will try to demonstrate is that ‘aid’ and ‘trade’ are both necessary – in different aspects – for developing countries.




Why Not Only ‘Aid’
The first point to underline is the historical roots of ‘Aid’: the starting point has to be put in the reconstruction post-World War II. Aid programmes were facilitated by the exportation surplus compared to the importations of the United States of America used in the field of the European Recovery Programme (ERP), most known as ‘Marshall Plan’.
Nevertheless the reasons of underdevelopment may be related to the colonialism. In those countries, the Industrial Revolution and the colonialism consequences created a so-called ‘dual’ or ‘hybrid’ economical system: the dynamic first group, is based on exportations and intensive-technology, controlled by the foreign-owned capital; instead, the second group is based on pre-capitalistic infrastructures, agricultural subsistence and intensive-labour. The colonialism exacerbated the so-called ‘vicious circle of poverty’, for which the low labour productivity did not allow the formation of the surplus of production, necessary for the indispensable private savings (Harrod-Domar Model and Rostow Model), savings that would be fixable for investments (Keynes analysis).
Not by chance, the first countries that received economical aid were Taiwan and Korea. The same conclusion can be reached nowadays for the aid provided by China to different countries in Africa - Zambia, Liberia, Sudan, Mozambique, South Africa, Angola, Namibia, and Cameroon, just to give some examples – with its FOCAC (Forum on China-Africa Cooperation). Therefore the economic aid principally has a political nature. We can say that economical means were used to achieve/ reach the political aim in the faster way possible.
That is what the exponents of ‘Structuralism’ already realized. They give us an even more interesting conclusion about the reasons why aid would not be useful for developing countries. The most important problem for them is connected with the international commercial regime that is set as to privilege the developed countries. Prebish affirms that the prices of raw materials, typically exported by developing countries, raises much less compared to the prices of manufactures.
In this way, political and academic exponents of developing countries underlined that aid and financial assistance render critical to control their own resources, principally controlled by foreigner aid-supplier (one third of economic output and trade of the Third World is controlled directly and indirectly by multinational enterprises). So, they would not even be able to appropriately manage the problems they face, facilitating the systemic mono-directional dependency of the developing countries towards the ‘North’ of the world. Foreign aid creates, moreover, excess of liquidity in the economy and lead to the expansion of the fiscal deficit causing a potentially huge inflationary effect.
To conclude this paragraph it is absolutely important to emphasize another cause of mathematical origin that makes ‘aid’ useless: It has not been demonstrate a positive correlation between aid and economic growth.

Source: World Development Indicators Online

Between 1970 and 2000 has been spent more than 400 billion USD in foreign aid in Africa (taking it as an example), but nevertheless the resulted situation in Africa is clearly worse than in the past. In 1980 Africa’s share in world merchandise exports was 6,3 percent, in 2000 it fell at 2,5 percent. In order to have a better idea, we can just compare the same data in Asiatic continent: In 1980 Asian share was 16 percent and in 2000 has grown to 27 percent.

Why not Only ‘Trade’
Undoubtedly ‘Trade’ has demonstrated to be one of the most important components of development (Smith and Ricardo analyses). It is something that potentially increases prosperity, it is the great dynamo of growth. But at the same time, the whole mechanism through which trade has been managed, brought powerful interests to capture it.
Trade between developing and developed countries is characterized by unfair rules as subsidies, trade distorting tariffs, and barriers. Inequitable rules denied a just and fair participation in the global market to developing countries. That is the real problem for developing countries’ products: nearly all the markets that those countries target, they are to some extent controlled, distorted or simply closed by imbalanced global trade regime. As it was clear during the ‘Uruguay Round’ were powerful-country pharmaceutical companies introduced excessive provisions about intellectual property rights, or during the ‘Doha Round’ that failed because the participants have not been able to reach any agreement.
In fact, in those meetings the major problem was the elimination of subsidies that powerful actors, such as United States, European Union and Japan – obviously, the most appetitive markets, provide to their internal sectors. A good example is the subsidies to the cotton industry in US. Experts agree that the current subsidies have adversely influenced world cotton prices that fall down about 30 percent between 2004 and 2005. It has been calculated that from 2001 West and Central African cotton producers – and ten millions of people who depend on cotton for their livelihood – have suffered exports losses of about 382 millions USD, due to the US policy. Therefore ‘Western’ subsidies have depressed prices and resulted in massive export losses for African producers. This entrapped countries in a circle of poverty and foreign aid dependence, as I wrote above. Another example is about subsidies to agricultural products, typical of the European Union. Because of subsidies, wheat is sold at 46 percent below production costs and corn at 20% below cost. Furthermore, taxpayers are required to pay doubly: first for the subsidies and then for aid to mitigate the impact of those subsidies.
Researches made by the World Bank and the non-governmental organization Oxfam, emphasize that develop trade barriers cost developing countries 100 billion USD a year, twice what they receive in economic assistance. The developed countries spend 250 billion USD a year for agricultural support. It is what can be called “one-way free trade”.


Why real trade and real aid should be achieved
Therefore what really developing countries need, is real trade. There are different aspects that should be achieved in order to allow developing countries to increase their economic status. Developed countries shall open their markets unilaterally to the products of low-income countries and cancel subsidies that damage the agriculture of the latter, so that African producers may compete in global markets. By just 1 percent of increasing share of world exports, they could benefit of 128 millions people out of poverty, generating 70 billions USD in Africa.
Moreover, it is necessary a general reform of trade regime. To some extent, developing countries should negotiate for guaranteed quotas of trade that can be exported to the world-market at guaranteed prices. Capital and technology transfer may be the key to growth, to appreciate the economic potential of ordinary Third World citizens operating in free market.
Real free markets improve industrial efficiency taking advantages of economics of scale. Competition – typical of free trade – ‘forces’ less competitive industries and businesses to produce a better product, and consumers will have access to better, if not higher quality, products at lower prices. These steps will boost economic growth attracting foreign and local investors. The developing countries will get out of the vicious circle of poverty, entering in the virtuous circle of development.
For what concerns real aid, it should not be used as the stick to beat developing countries into signing free trade deals. Foreign aid would be fundamental for those countries stuck into a situation of tremendous indigence without having any resources to invest for their initial development, countries like Zambia that are heavily indebted and too poor to grow without aid. Aid is helpful especially to build up essential infrastructures, such as irrigation systems and road and rail networks. In the same way foreign aid shall be directed to the vast majority of domestic small-scale farmers and consumers and not on large-scale commercial agri-business.

Conclusion
As I tried to demonstrate, answering to the questions of the title, both aid and trade – in different ways – are extremely important for developing countries. But probably an even more important facet for those countries is good governance. Just throwing money at problems never works. Money is needed, but it has to be used appropriately within a good system of governance: a more democratic governance, more oriented towards the people’s interests (with few words: Human and Economical Development), and not corrupted. A skilful governance that probably would be useful also among technicians in both western countries and international organizations.