Developed and developing countries need to move away from the global value chains approach to trade to a more sustainable, very different view of production and job creation says South Africa’s Trade Minister, Ambassador Faizel Ismail.
July 23, 2014 Produced by Lynn Fries
LYNN FRIES, TRNN PRODUCER: Welcome back to The Real News Network. I’m Lynn Fries in Geneva. In this concluding segment of our report on global value chains, we look into deepening global challenges and future prospects for both developed and developing countries. With us to continue our conversation is Faizel Ismail.
Ambassador Ismail served as South Africa’s Permanent Representative to the World Trade Organization from 2002 through the end of June this year. While at the WTO, he authored two books, Mainstreaming Development in the WTO and Reforming the World Trade Organization. He’s currently writing a book on the history of South Africa trade policy from apartheid rule to its new democracy.
Ambassador Ismail joins us in Geneva.
AMBASSADOR FAIZEL ISMAIL, SOUTH AFRICAN AMBASSADOR TO THE WTO (2002-2014): Welcome to you, too.
FRIES: So let’s pick up where we left off in part 2. You said that developing countries have different policy objectives than the global value chain approach of the U.S./E.U. led trade negotiators, but that proponents of global value chains in the World Trade Organization blur these differences and suggest that the interests of the lead firms are the same as that of all developing countries. In your view, this is simply not the case. Why?
ISMAIL: What these people were doing was not really focusing on the concerns that they should have, which is that this increasing concentration of the global economy in a few lead firms or by a few lead firms was going to create a number of challenges and risks for the global economy, because you now are going to have an increasing asymmetry of economy power and you have less capacity in developing countries to challenge many of these larger companies. And the ability of developing countries to upgrade and increase their gains from trade and participation in the global economy was going to be even more difficult because of the increasing asymmetrical power of lead firms. So this part of the global value chains trend was ignored.
Rather, what these proponents of global value chains were arguing was that if developing countries wanted to develop, they should allow these lead firms full access into their economies by deregulating, by enabling the financial services companies from the United States and Europe, the logistics companies, the retail companies to invest and export their products in these developing countries. And if they did so, the argument was that they will ipso facto grow and develop and gain from trade.
So the whole argument of global value chains was being made in order to come back to what was a discredited theory in the 1990s and at the turn of the century: the so-called Washington Consensus had preached exactly this. It had preached in the 1980s and the 1990s that if developing countries liberalized their economies, if they deregulated their economies, if they allowed multinational firms to penetrate their economies without negotiating a hard bargain with these companies, then they would develop and grow. Of course, the evidence that we saw in many countries where World Bank and IMF structural adjustment programs were being implemented was to the contrary of this. What we saw was that rapid liberalization created significant adjustment costs for developing countries particularly the poorest. And if there wasn’t–and in many cases that was the case–there wasn’t any social support in financial assistance by the state to help these companies and workers who were thrown out of work to adjust, then of course whole sectors and parts of industry were lost. This was the case in many African countries, and several Latin American countries as well. So that was the discredited Washington Consensus, and it is being brought through the back door into the current discourse on trade and the Doha Round through the global value chains analysis.
FRIES: So you’ve given an account of the developing-country experience of the Washington Consensus. A related historical experience for developed countries was studied up by economists Lazonick and O’Sullivan, who concluded:
“The experience of the United States suggests that the pursuit of shareholder value may be an appropriate strategy for running down a company–and an economy. The pursuit of some other kind of value is needed to build up a company and an economy.”
And this study, while noting shareholder value came into its own under Reagan and Thatcher as a way to discipline and incentivize performances as U.K. and U.S. corporate managers were facing new international competitors, the point this study also makes, this Lazonick and O’Sullivan study, is that it was with the cooperation of top corporate management that shareholder value became a firmly entrenched principle of U.S. corporate governance. And this had to do with the incentive structure for management compensation. So your take on that?
ISMAIL: Yes, that is absolutely right. Companies began to provide–in fact, a greater percentage of the remuneration of company managers lay in their stock options than in their financial or cash remuneration. All this all led to more and more of a focus on finance than on production. And we saw this trend emerging not only in the United States and in the European Union in the 1990s, but it gradually began to move towards other economies in the South, including the country that I come from, South Africa.
That was a very interesting quote by O’Sullivan and Lazonick, who were arguing that this trend, this tendency towards downsizing, towards a focus on core business or core competence, and the shift towards profitability, short-term shareholder interest in higher and higher profits, resulted in increased de-industrialization, and also resulted in the loss of a large number of jobs in the North–in the United States, in Europe–and of course towards, say, lower and lower quality jobs in developing countries as well, as the lead firms tended to concentrate on increasing profits.
And so what you have is a spiral downwards in the value system. And what we do need is to change that. And the only way to change that is rather than adopt policies which appear to create or go in the same vein as a self-regulating market but moves in the other direction, of beginning to put some values and embed the world economy in a set of social values which respects the right of investors to increase profits, but to do it in a way which also addresses the concerns of countries and societies to increase production, to increase employment, to increase the quality of jobs, and to increase the sustainability of those jobs over the longer term.
FRIES: And the challenge going forward?
ISMAIL: The question is what policies we employ to govern this new form in which world production and the world economy is beginning to take shape and what the overall outcome and objectives are. Now if we want to manage global firms to ensure that more and more of the profits of companies are reinvested into productive activities rather than sitting in the coffers of corporates and being used for more and more mergers and acquisitions and investment in the financial sector, then we need to bring back rules of corporate governance which will change the incentive structure of the company away from this practice of downsizing and redistributing profits to shareholders, towards reinvestment in productive activity. And this is a challenge that we all face as a global community. Otherwise you will have an increasing fragmentation of global production and a vicious cycle/spiral downwards towards lower and lower costs, lower and lower standards–both labor standards, environmental standards, and quality of life–as firms compete with each other, lead firms, to increase their profitability. They will put pressure on their supplier firms to reduce cost, and they will keep moving production from country to country to take advantage of cheaper labor costs and countries which offer them a deregulated environment which enables the rapid movement within their countries of products and services to benefit the lead firms. And so corporate governance is an issue that has to come back to not only debate at a national level, but also discussion at the global level about how it is that we could begin to introduce different norms in corporate governance that enable companies both within developing countries and developed countries to take a very different view of production and job creation.
And we can do that together, acting together. We can do it at both the national level and the global level if we begin to introduce different values. And, in fact, if we begin to introduce values and norms that have social objectives rather than simple, narrow-minded transaction cost reduction, or ideologically motivated by trying to liberalize markets in the false belief that freer and freer and deregulated markets will inevitably create jobs–that certainly hasn’t been the experience of the last few decades.
FRIES: And concluding thoughts on global value chains and the future of the World Trade Organization and the Doha Development Agenda?
ISMAIL: Yes. Well, personally, I’m very disappointed that the Doha Round and the WTO has not advanced as it should have, given the enormous effort that was made both to launch the round, and then the first eight years of negotiations were very complex but I think yielded significant advances. And it did prove that developing countries could negotiate, they could participate. And they were able to find creative solutions to very complex problems, and they were committed to multilateralism. So I’m disappointed that at a point when we were close to coming to a conclusion, a pragmatic conclusion of the round, the major developed countries decided to pull back and then to declare the round unworkable and unviable and walk away from agreements reached multilaterally. That has been the great disappointment.
However, I am very optimistic about the future, because what we saw in the last decade was this increased energy and vitality by developing countries, this determination to advance their objectives and indeed the broader objectives of society and of good citizenship throughout the world. They have maintained strong commitment for multilateral solutions, for multilateralism.
I think that the challenge now is for developing countries, particularly the larger emerging countries, to play a greater role in fashioning and building new norms, to develop their own analysis of the global economy and the way it works from the point of view of the poorest in the world, but also from the point of view of those who seek to build a fairer, more stable, more sustainable, and more balanced global order which is more inclusive. And I think that the emerging countries, together with the rest of the developing world, need to provide greater leadership, engage with the North in a manner that is not confrontational, that will not take us backwards towards to old North-South type of confrontation, but will put on the table much more pragmatic and forceful arguments for why it is that we need to move away from mercantilism, from narrow-based interests which are driving many of the developed countries in the negotiations, and towards a more sustainable path for the future. And I believe that is possible. And I believe that there are a number of thinkers, civil society groups in Europe and the United States and around the world, who today are more empowered and are more able to fashion this debate to move away from this false analysis of global value chains and false prescriptions, ideological prescriptions, towards something that is much fairer and which takes us along the path of social justice.
FRIES: Faizel Ismail, thank you.
FAIZEL: Thank you, Lynn, for the opportunity
FRIES: And thank you for joining us on The Real News Network.
Ambassador Faizel Ismail served as Permanent Representative of South Africa to the World Trade Organization (2002-2014) and as the Chair of the WTO negotiating group (CTDSS, 2004-2006) and the Chair of the WTO Committee on Trade and Development (CTD, 2006/7). He led the new democratic South Africa’s trade negotiations with the European Union, Southern African Development Community, Southern African Customs Union and several other bilateral trading partners including the US, India, and Mercusor since 1994. He is the author of two books on the WTO: Mainstreaming Development in the WTO and Reforming the World Trade Organization. He is currently writing a history of South Africa’s trade policy from apartheid rule to its new democracy. He is Associate Editor of the Journal of World Trade; Advisor to the BRICS Trade and Economic Research Network; Senior Research Associate, Centre for Rising Powers, University of Cambridge, United Kingdom; Senior Research Associate, Brooks World Poverty Institute, University of Manchester, United Kingdom; and member of the Partnership Council of the Global Alliance for Improved Nutrition (GAIN), Geneva, Switzerland. He holds a Masters in Philosopy degree in Development Studies from the Institute of Development Studies, University of Sussex, United Kingdom and an LLB and a BA degree from the University of Kwa-Zulu Natal, South Africa
Originally published at TRNN