Between Trade and Development

by Michael J. Trebilcock

In my recent Robert Hudec public lecture to the Society for International Economic Law at its biannual conference in Bern, Switzerland (“Between Theories of Trade and Development: The Future of the World TradingSystem”), I focus on the role of developing countries and the multilateral trading system.  First, I briefly trace the legal status of developing countries in this system, beginning with the emergence of special and differential treatment on the import side in the 1950s (with respect to the protection of infant industries), and on the export side in the 1960s (with respect to non-reciprocal preferences granted by developed countries), to the single undertaking approach adopted in the Uruguay Round culminating in 1993, where all countries were essentially required to sign on to a broad range of commitments extending well beyond border measures to a variety of internal domestic regulatory policies, to the current Doha Round where a major fault-line has emerged between developed and developing countries with respect to multilateral commitments. 

I then trace a parallel set of shifts in thinking in development economics in the post-war period, beginning with big push, state-led theories of development and import substitution industrialization from the 1950s through to the 1970s, then the converse of these policies reflected in the Washington Consensus that prevailed in development circles throughout the 1980s and much of the 1990s, which emphasized the ubiquitous virtues of private markets and a limited role for government; then the currently prevailing New Development Economics, which emphasizes the shortcomings of both earlier schools of development economics in their commitment to universal or generalizable theories of development, and instead focuses on country- and context-specific impediments to development, recognizing that some of the most economically successful developing countries in the post-war period (including the East Asian and Chinese high-growth economies) have adopted highly eclectic and unorthodox policies that seem to have been effective in their particular contexts.  These shifts in thinking in development economics map closely the evolving role of developing countries in the multilateral trading system.

This evolution in thinking amongst development economists suggests that a one-size-fits-all multilateral trading system must be abandoned, as is already reflected in the dramatic proliferation of preferential trade agreements (PTAs) between developed and developing countries, and between and among developing countries themselves.  To reinvigorate and render sustainable the multilateral trading system, I argue that this system should provide more scope for plurilateral agreements amongst sub-sets of members (“coalitions of the willing”) and making provision for signatories to PTAs to designate, at their option, the WTO dispute settlement system as the dispute settlement regime for their PTAs, hence promoting stronger integration and coherence of international trade law.  In turn, I argue that developing countries, other than the least developed countries, should abandon claims for extreme forms of special and differential treatment, especially on the export side, and be prepared to bargain reciprocally with developed countries for improved market access.

A response to Michael Dowdle or "How the BRICS Bank proves that Santa Claus exists"

In his most recent post, Michael Dowdle, the most prolific contributor to this blog, argued that the BRICS Bank can be conceived as an example of my concept of institutional bypass. Moreover, he adds that the Bank has a strong potential to actually undermine the field of law and development by refusing to engage with the "good governance" discourse and specially by refusing to use the main instrument that current promotes the "good governance" agenda, conditionalities.

Michael is not alone in conceiving the BRICS Bank as a bypass. Indeed, a person had suggests that to me on facebook last week and the media has also used the word "bypass" to describe the new Bank (see here). But Michael considers this an irony, as he believes that in this case an institutional bypass is actually being used to destroy the field that I care so much about. Indeed, he conveys this idea clearly in the title of his post: "The BRICS Bank as Inverse Institutional Bypass, or "Christmas comes early for Mariana Prado, but did she get what she really wanted?""

Actually, I am not overly concerned with that. While the concept of institutional bypass may be productively used to promote fruitful and desirable changes, I also acknowledge that there are undesirable institutional bypasses. So, the concept itself basically describes mechanisms of institutional change without necessarily attaching a normative judgment to them. Bypasses are not intrinsically good or bad. They are just bypasses. 

But most importantly, Michael suggests that the BRICS Bank likely rejection of the modus operandi of the World Bank will necessarily be detrimental to the field of law and development. I am not so sure. First, it is not clear whether a full rejection of the modus operandi of the World Bank by the BRICS will necessarily happen. And if it does, it is not certain that it will produce negative results. As a matter of fact, I have recently published a paper with Fernanda Cimini Salles mapping out possible strategies that could be adopted by the BRICS Bank. For each of these strategies, the paper discusses its interaction with the World Bank and the potential outcomes. Those interested in the full argument can read the full paper here. I am pasting below a summary of the argument, published in another blog:

Fernanda Cimini and I ask whether the new bank has the potential to bypass the World Bank, destabilizing the current development finance framework. Our answer is: it depends on how it will operate. If we look at the existing practices in development finance, the BRICS Bank has at least three options:

1) Adopting the current paradigm, which is guided by institutional concerns. An example is the World Bank (IBRD), which tries to improvea country’s institutional framework by engaging in a process of creation of rules, norms, organizations and procedures that can directly or indirectly promote development.

2) Adopting a compliant passiveness type of operation, which, in contrast to the first one, has not actively engaged with an institutional agenda for development. An example is BNDES, the Brazilian Development Bank, which operates within the existing framework, forcing borrowers to follow existing rules and norms.

3) Adopting a consistent pragmatism type of operation. This is illustrated by theChinese Development Banks (CDB and Exim Bank), which have actively engaged with institutions, but they have done so in rather creative ways, always driven by the goal of achieving the concrete objectives of the operation.

There are still uncertainties regarding how the BRICS Bank will operate. So, we do not know which of these three, if any, will be adopted. But these uncertainties should not stop us from speculating about the new bank and how it could change the development scene. In this speculative spirit, we could consider that the most significant change may come from the interaction of the BRICS Bank with the World Bank. In this interaction, there are the possible scenarios:

1) If the BRICS Bank adopts the agenda and modus operandi under the current paradigm, it will become a direct competitor of the World Bank, but it will not offer the risk of rupture with the field. This is not to say that the competition process between the two banks may not generate innovations in the field. On the contrary, the BRICS Bank, by becoming a competitor under the current paradigm, could be create incentives for the creation of innovative mechanisms of development finance that promote institutional reforms while addressing the problems that have reduced the effectiveness of World Bank mechanisms.

2) If the BRICS Bank adopts the compliant passiveness model, it would offer an alternative to the World Bank without directly challenging the current paradigm.  However, by choosing this model, the BRICS Bank would not try to compete directly with the World Bank or to imitate its modus operandis. As a consequence, the incentives for innovation in finance mechanisms would be lower, as there would be less chances of the BRICS Bank’s operation clashing with those proposed by the BRICS Bank. A possible outcome is a peaceful co-existence of the two institutions, or even a partnership.

3) If the BRICS Bank adopts the consistently pragmatic model, its operations will clash directly with the normative and operative structures of the World Bank. In this case, not only the World Bank will be “threatened”, but also will the organizations that have been pushing for the institutional turn in the field and a particular model of development. This consistent pragmatism may bring a refreshing blow of flexibility and effectiveness, generating a much-needed renovation of the entire field.

The table below summarizes the scenarios identified in the paper

World Bank	BRICS Bank	Dynamic	Possible Outcomes
Current Paradigm	Current Paradigm(Unlikely)	Direct Competition (with or without collaboration)	No rupture with the field - Operational Innovation
Current Paradigm	Compliant Passiveness	Peaceful Coexistence without direct competition	No rupture with the field - Possible partnership
Current Paradigm	Consistently Pragmatic	Tense Coexistence with no collaboration	Rupture with the field - Potential structural innovation

In sum, independently of what kind of approach the BRICS Bank adopt, if it is indeed created, we are likely to see changes in the field of development cooperation in the near future. The impact of a new world multilateral development bank controlled by emerging countries goes beyond financial and political considerations. The BRICS Bank has the potential to call into question the basic normative and operational structures of the field of development and even to provoke a rupture with the existing architecture. The intensity of such changes remains to be seen.

In sum, as the Guardian nicely put, the bank "has the potential to change how development is done, but the devil is in the details". So, my response to Michael is that I still believe in Santa Claus!

The BRICS Bank as Inverse Institutional Bypass, or "Christmas comes early for Mariana Prado, but did she get what she really wanted?"

So, as you may be aware, the BRICS nations – Brazil, Russia, India, China and South Africa – will be establishing their own developmental Bank, which is being called the BRICS Bank.  The motivation behind the BRICS Bank is a dissatisfaction with the way the World Bank is organized and run.  There are three principal sources of dissatisfaction.  The first is the degree to which World Bank governance is dominated by that Bank’s largest shareholder (and contributor of capital), the United States.  Relatedly, they are also dissatisfied by the WB’s lending policy, which focuses on neo-liberal private market development rather than on infrastructural development.  And finally, there is also dissatisfied with the WB’s use of conditionalities – i.e., with its frequent demands that recipient countries undertake neo-liberal governance reforms as a condition for getting a developmental loan.

As many may be aware, our own Mariana Prado has spent the last couple of years developing an innovative developmental strategy that she calls “institutional bypass”.  The basic gist of this strategy is that instead of focusing on reforming existing but problematic governance institutions, law and development could focus on developing functionally parallel institutions and having them compete with the existing institution.  She believes that the superior economic and social efficiencies that law and development strategies will bring to these parallel institutions will give them a competitive advantage over their older, corrupt counterparts, and that competition will thereby cause the new and better designed institution to ultimately end up replacing the older corrupt institutions.

I think it easy to see that the BRICS Bank is exactly of this kind of thing:  a new institution brought about to compete with an older and, at least to some, dissatisfactory institution. 

But there’s a twist:  because the BRICS Bank, in rejecting the use of conditionalities, it is effectively rejecting rather than promoting the general law and development agenda.  It is what we might call an 'inverse' institutional bypass -- a bypass that is challenging rather than promoting 'law-and-development', at least in its neo-institutionalism guise, as a developmental strategy.  

 Somewhat ironically, as a law and development skeptic, the reason why I really like Mariana's idea of institution bypass is precisely because it does not presume the superiority of law and development legal reforms:  by allowing for competition, it implicitly allows for the possibility that the seeming problematic institution could in fact be more efficient and effective than those advocated by law and development.  I don’t know if in developing her model, Mariana ever really considered this ‘ironic’ possibility.  But if she hasn't, now she may have to.

What is 'development' -- more thoughts on GDP

[More thoughts inspired by Diane Coyle's GDP: A Brief but Affectionate History]

One of the major problems with the discipline of 'law and development' has been its failure to identify what the 'development'  part of law and development actually refers to.  Because of this, we invariably end up equating development with growth in GDP.  But this is highly problematic, and I suspect severely compromises 'law and development' as a programmatic discipline.

The problem with using GDP growth as a proxy for development is that GDP does not measure development, its measures aggregate quantity of 'production' -- primarily material production.  It was designed as a tool for regulating a Fordist industrial system -- an industrial system that focused on exploiting economies of scale in the production of material goods.  Originally, GDP was only concerned with material production.  It has since been adapted to try take into account production of services and other non-material goods.  But how effective it is in doing so is a matter of some debate.  It is particularly bad at accounting for financial services, as revealed in the North Atlantic Financial Crisis of 2008.  

It is not completely irrational to equate GDP with development.  In consumerist economies, higher GDP equate with more material possessions for the average citizen.  Most developed economies are consumerist.  Therefore, there is a significant correlation between level of GDP and level of 'development' however commonly defined. 

But developing economies tend to be more export oriented (since their consumers have less wealth) and therefore producerist.  Here, the consumerist orientation of GDP becomes problematic, because a much higher proportion of the beneficiaries of production are outside the national economy.  

Put perhaps an even bigger problem is that the global industrial system may be moving away from a system that exploits amount of production more towards a system that exploits diversity and flexibility in production (what is sometimes called 'post-Fordism').  Indeed, a study in the 1990s by Giovanni Arrighi, Beverly Silver and Benjamin D. Brewer (see "Industrial Convergence, Globalization, and the Persistence of the North-South Divide") found that beginning not later than 1960s, industrialization stopped correlating with development.  In fact, just the opposite -- since the 1960s, industrialization in developing countries tended to correspond with developmental stagnation -- functioning as a developmental trap by trapping the developing country into what is now a low-road form of industrial organization.  (The one exception that I can think of to this trend is South Korea, but that's a topic for another day.)

We see a good example of this in China.  China's GDP growth has been legendary, and has been propelled by growth in industrialization.  But since the end of last century, China's industrial growth has decoupled from any growth in human development -- since 2000, China's HDI index has been largely stagnate, despite its high GDP growth.   Since 2000, China has been growing but not developing.  Nor is China unique in this regard: a similar observation can be made about Botswana, whose level of GDP growth over the last 40 years or so has been largely equal to that of China, was fueled by growth in industrial production (primarily diamond mining), has been held up, along with China, as another developmental success story, and whose HDI has been stagnant since the late 1990s.

Ultimately, even if we associate development with simple material benefit, GDP may be increasing measuring the wrong thing.  It is measuring what we might think of as dead-end development -- a kind of development to be sure, but one whose trajectory is ultimately on the wrong side of (economic) history. 

How much do we really know about what drives GDP growth?

Been reading Diane Coyle's GDP: A Brief but Affectionate History (Princeton University Press, 2014), when -- in my capacity as Mariana's designated 'law and development skeptic' -- I came across this little gem:

[T]he developed economies' national accounts for the most part now use a "chain-weighted" price index in the calculation of real GDP. . . . [But] historic GDP statistics such as those developed by Angus Maddison for the [OECD] have not been recalculated using chain weights.  To do so would change the accepted picture of international growth patterns.  Maddison notes, "Acceptance of the new measure for this period [pre-1950] would involve a major reinterpretation of Amerian history."  It would show U.S. productivity lower than the United Kingdom's in 1914, for example, and much lower U.S. growth and level of GDP than the United Kingdom's by 1929.  This is certainly not the received wisdom among economic historians, which matters because their explanations of what drives growth -- with great relevance for policies now -- could turn out to be based on an inaccurate understanding of what the economy was "really" doing in the ninetheenth and twentieth centuries.  (p. 33-24)

But this is not all gloom and doom for 'development'.  Coyle also notes how many sub-Saharan African countries use the older weighting system, and that:

In each case where old weights have been used for years, there will be a large upward revision in estimated real GDP when the weights are updated.. . . .[O]ne estimate suggests that for twenty years sub-Saharan African economies have been growing three times faster than suggested by the "official" data.

(The 'estimate' she cites to is Alwyn Young, "The African Growth Miracle," NBER Working Paper No. 18490 (October 2012), which is available at http://www.nber.org/papers/w18490.pdf). 

Of course, these "inaccurate understandings" of "what drives growth" are also of relevance to the law and development community, and to its understandings as to 'what drives growth' as well.