Economic View | Hamish McRae

Fine tuning for Qatar players
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The Independent Online

One of the side effects of the catastrophe of 11 September is that this weekend's meeting of the World Trade Organisation in Doha, Qatar, will be a calmer affair than it would otherwise have been. But do not expect the developing countries to do much better in the world trade arena during the next few years than they have.

There was never going to be much scope for violent protest there, unlike the protests at the previous WTO meeting in Seattle, or the Group of Seven Summit in Genoa. That was one of the reasons why the meeting was set in such a relatively inaccessible place. After the attacks in the US, not only will security be even tighter but the mood of the world has shifted against violent protest. It just does not now seem a very good way to make a point.

There are two other reasons why the talks will be calmer. One is that the major trading countries are much more worried about the world trade outlook than they were during the summer. This looks like being the first synchronised world recession, where the US, much of Europe and Japan all head into the downturn at the same time. That is dreadful for world trade. The other is that both the US and EU are more likely to ease trade restrictions on imports from developing countries than they were before 11 September. Some countries, such as Pakistan, are crucial to the US offensive against the Taliban. So what does Pakistan most need on the economic front? Better access for its textile exports to the US and EU. The developed world has been pretty dreadful in its attitude to trade in textiles – almost as bad at its attitude to trade in agricultural products – but expect some change in mood.

Sadly, though, a calmer debate won't help much. The damage to world trade from the collapse of business confidence is likely to hit the weakest players hardest. It always does, because when demand turns down, the business community focuses on its best prospects. Worse, the collapse of confidence highlights the structural problem of many developing countries: they are in the wrong corner of the world trade forest.

You can see this structural problem by looking at the graphs. World trade has boomed over the past generation and is equivalent to nearly 30 per cent of GDP. But virtually all that growth is trade in manufactured goods. Agricultural and mineral products have shrunk inexorably so that even added together they account for less than 15 per cent of world exports. Many developing countries have made the switch, with the result that more than 80 per cent of their exports are now manufactured goods. That is only slightly less than the proportion in developed countries. But for those that remain primary producers, life is glum. Easing trade restrictions – particularly on entry-level manufactured goods like clothes – helps but the core of the problem remains.

So how do countries make the leap to higher-valued-added goods? The key variable is access to investment funds, for these bring with them both know-how and access to markets. Think about it. The big capital flows nowadays are private sector. When companies invest in developing countries they also decide what plant to put their money in and what products to produce. Further, they do not put in funds unless they can get the products out.

Actually, taken as a whole, developing countries do not do badly. There has been an astounding surge in cross-border capital flows in the developed world (see the third graph) but much of that has been in portfolio and bank finance. Nothing wrong with that – except that these types of money do not bring expertise with them. The foreign direct investment (or FDI) flows have risen too but were only about 7 per cent of GDP in 1999.

By contrast portfolio and bank flows to developing countries were much smaller – and in the middle 1980s and in 1998 disappeared altogether. But FDI flows have grown steadily and by 1999 were nearly 4 per cent of GDP.

So, as a group, the developing countries do not do badly; the problem is that some countries attract hardly any FDI funds. China alone received one third of all FDI flows between 1970 and 2000. Add in the next five – Brazil, Mexico, Argentina, Singapore and Malaysia – and you account for nearly three-quarters of the flow.

But these, you might say, are all middle-income countries rather than developing ones. That is only partly true: China is indubitably a developing country a generation ago and parts of it still are. And at the time of independence, Malaysia had the same GDP per head as Ghana. But the sad fact remains that many of the poorest countries are unattractive places in which to put foreign direct investments.

So what is to be done? To listen to much of the protest made ahead of the Doha meeting, trade restrictions are the main barrier to development. Without seeking to downplay these concerns, many countries have been able to get round such restrictions by producing goods where trade is less restricted. If you are unable to export a product to the rich West you can do one of two things. You can complain that it is unfair. Or you can think of something else to produce. Ultimately it is surely more sensible to follow the latter course.

If I were to have one thing at the top of my wish-list for conferences like this one at Doha, it would be for the rich world to put some resources into coaching countries on how to improve their access to foreign direct investment. That would enable others to make the astounding leap that a few have already done, jumping from developing to developed status in little more than a generation.

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