Does the WTO help a poor nation become rich? Economic History in Small Doses 4

 Girish Menon*

Today, when we look at the world that we live in, we find that Huawei (a Chinese technology company) is being subjected to a systematic campaign of defamation and discrimination among the US led group of developed countries. And the WTO watches on helplessly. Yet, in its “WhatWe Stand For” page the WTO (The World Trade Organisation) states it’s first principle as:

Non-discrimination

A country should not discriminate between its trading partners and it should not discriminate between its own and foreign products, services or nationals.

The question this article attempts to explore is whether the WTO’s purpose is compatible with the desire of developing countries to join the ranks of the developed world.

 Let’s start with India and it’s Hindustan Motors (HM) company. Today HM’s cars are as ubiquitous as the dodo. Till the early 1990s it was so popular that it even enabled G D Birla to get a seat in heaven**. Ever since the Narasimha Rao government was forced to open up the Indian economy, after the economic crisis of the late1980s, HM has entered the books of Indian corporate history. The Indian government failed to protect HM because of the non-discrimination clause of the WTO and today there is no Indian car manufacturer visible on the horizon while her roads are choked with foreign brands.

The globalisation rhetoric dictates that countries stick to what they are already good at (theory of comparative advantage). Stated bluntly, this means that poor countries are supposed to continue with their current engagement in low-productivity activities. But their engagement in those activities is exactly what makes them poor. If they wish to leave poverty behind they have do the more difficult things that bring them higher incomes. And the WTO’s non-discrimination principle stops them from improving their earning capabilities.

 Today Toyota is the leading global brand in car manufacturing. It took Toyota more than 30 years of protection and subsidies to become competitive at the lower end of the car market. It was a good 60 years before it became one of the leading car makers in the world. It took nearly 100 years from the days of Henry VII for Britain to catch up with the Low Countries in woollen manufacturing. It took the US 130 years to develop its economy enough to feel confident about doing away with tariffs. Without such long time horizons, Japan might still be mainly exporting silk, Britain wool and the US cotton.

Unfortunately, poor countries are not allowed to adopt such time frames for developing their industries. The non-discrimination clause of the WTO demands that poor countries compete immediately with more advanced foreign producers, leading to the demise of their domestic firms before they can acquire new capabilities.

Like any other investment, investment in capability building is fraught with risk and does not guarantee success. Some countries make it and some don’t. And even the most successful countries will bungle things in certain areas.

However, economic development without investment in enhancing productive capabilities is a near impossibility.

 

* Adapted and simplified by the author from Ha Joon Chang's Bad Samaritans - The Guilty Secrets of Rich Nations & The Threat to Global Prosperity

 

** When GD Birla died his secretary tried to get him a seat in Vaikuntha. The Dwarapalaka (gatekeeper) asked the secretary to state the reason why GD should be let into heaven.

The secretary: ‘GD is one of the biggest industrialists in India’.

Dwarapalaka: ‘Usually that involves doing acts which are not acceptable here. This is Vaikuntha; not some unquestioning tax haven for moneybags! Please let me know what he has done in the name of God’

The secretary: ‘GD has established many Birla temples all over India’

Dwarapalaka: ‘Birla is worshipped in these temples. Not good enough!’

The secretary: ‘GD is the owner of Hindustan Motors’

Dwarapalaka: ‘I am confused. How is that a case for entering heaven?’

The secretary: ‘Because whenever someone gets into an Ambassador car he says “Oh God” and whenever someone reaches her destination she says “Thank God”.

Dwarapalaka: That has definitely advanced the cause of God. Please ask him to come in’

This anecdote was first narrated by the late Sharu Rangnekar. It has been modified by the author.