Open markets hit Third World hard

IN July 1944 as the end of World War II approached, representatives of the Allied powers met for a conference at the picturesque Mount Washington Hotel located in an area called Bretton Woods near the town of Carroll, New Hampshire. The conference, officially called the United Nations Monetary and Financial Conference, came to be known simply as the Bretton Woods Conference. Its purpose was to agree a template, which would form the basis for rebuilding and regulating the post war global economy.
Agreements were reached to set up the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (IBRD) — today part of the World Bank. The IMF’s role was to rebuild and maintain the post war international payments system. And IBRD would provide loans to mainly European countries to rebuild shattered infrastructure.
A third agreement known as the General Agreement on Tariffs and Trade (GATT) was also reached. It would have resulted in the setting up of a global organization to be known as the International Trade Organization (ITO). But differences amongst the sponsors prevented this from happening. GATT continued to operate as a secretariat until it was incorporated into the newly formed World Trade Organization (WTO) in 1995.
The driving idea behind the Bretton Woods conference in general, and GATT specifically, was the concept of open markets. This required mitigating or removing completely obstacles to the movement of goods between countries. The question, that we in Pakistan, and generally in the non-industrialized developing world, need to ask is this: Is the reduction of tariffs and trade barriers advantageous for us? The short answer is that it is not. In fact by removing trade barriers and lowering tariffs we have confined ourselves eternally to industrial submission.
The reason is straightforward: Newly established industries can never match established competitors either in quality or cost of their products. They are subject to what economists call the experience curve. This means that, overtime as manufacturers gain more and more experience in production, they are able to lower costs and improve the quality of their products. New manufacturers starting up with zero experience are hence at an inherent and usually insurmountable disadvantage. They just cannot compete with already established companies.
Consider the example of the innovative local car manufacturer Adam Motors which in 2006 launched Pakistan’s first indigenously designed car — the Revo. Revo was doomed even before it rolled off the assembly line. Open markets meant that it just could not take on imported or locally assembled foreign cars. Had the government been really interested in developing the local car industry it would have significantly raised tariff barriers on imported and assembled cars. This would have allowed Adam motors to continue producing and selling its cars. Over time the experience curve effect would have allowed them to improve quality and lower costs enough to take on imported cars even on a level playing field.
The upshot is that countries — like Pakistan — who want to develop their own industries will only be able to do so if they protect their markets from competing imports.
There are several examples of countries successfully using tariff barriers as an element of industrial strategy. Japan comes immediately to mind. After the war its industry lay in ruins. The strategy devised by the Japanese government to rebuild industry was to erect a “semi permeable” trade barrier around Japan. Only raw materials could get in. Finished goods whether they were cars, or trains, or watches or electronics could not. Hence Japanese industry was able to rebuild by selling their products into protected local markets. And the irony is that Japan even today, when it has become an industrial power par excellence, is often accused of protectionism.
Closer to home is India. Their strategy after independence was similar to Japan’s. If it took them longer to develop their industry it was because of their adherence to a socialist economic doctrine and excessive centralized controls. Once these controls were rolled back progress was rapid. And today Indian industrial companies have become formidable global competitors.
We in Pakistan have done the opposite. We have lowered or eliminated our tariff barriers. Our markets are open to all comers. Our nascent industry has succumbed to a flood of cheap imported products mainly from China. There is still time to change our ways. This is what has to be done: The government has to map out an industrial strategy which defines industries that are crucial to our economic development. And then the markets which these industries serve have to be protected from foreign competition by appropriate tariff barriers.

• Nadeem Mumtaz Qureshi is the chairman of Mustaqbil Pakistan Party.