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OCED To BRIICS:PROTECTIONISM WON’T HALT CRISIS, by Dr. P K Vasudeva, 23 March 2009 Print E-mail

Events & Issues

New Delhi, 23 March 2009

OCED To BRIICS   

PROTECTIONISM WON’T HALT CRISIS

By Dr. P K Vasudeva

The world’s largest high-growth emerging economies are falling into the trap of protectionism amid the global crisis and they seem to forget that they have been prospering as a result of their relative openness to international trade and investment. This is an assessment of the Organisation for Economic Cooperation and Development (OECD).

The OECD report released in Geneva focuses on the world’s largest high-growth emerging economies of Brazil, Russia, India, Indonesia, China and South Africa, which the organization calls the BRIICS. It notes that the mistaken notion that the current economic crisis was the result of free trade and market failure has led to an anti-market backlash and calls for protectionism, including among BRIIC countries. Protectionism is only a temporary phase, as the countries will revert back to multilateralism once the meltdown crisis passes over in a year or maximum two years.

Douglas Lippoldt, acting head of Development Division at the Trade and Agricultural Directorate at OECD, recently said in Paris that “times of crisis are also times of opportunities. Trade protectionism is not the way to tackle the current crisis. All countries, including OECD members and BRIICS, should try more than ever to keep the international market open in order to improve economic prospects for all.” Trade openness helps in the economic growth of a country.

The report shows that all the six BRIICS countries were champions of free trade and market liberalization, but their openings to the market, barring China, have stalled. In Indonesia, trade liberalization measures imposed by the International Monetary Fund (IMF) following the financial crisis in 1997-98 have not been reversed, but there has been creeping protectionism in agriculture, textiles and steel, mainly through tariff barriers.

In Brazil, there was virtually no trade liberalization in the years since tariff reductions were introduced in the late 80s and mid-90s. In South Africa, external trade liberalization has stalled since the 90s and scepticism about liberalization has set in.

India is by far the most protected country among the BRIICS, with relatively higher average tariffs in industrial goods. New Delhi is announcing new import tariffs on Chinese aluminium, and says it is studying similar measures for other products. There is a growing risk of a trade war between the two Asian giants.

Russia is now in the process of accession to the WTO. But negotiations have been protracted and “stop-go” with no indications of being concluded in the near future, even though Moscow has taken all actions to comply with the requisite norms for early induction.

OECD suggested that BRIICS pursue market openings through multilateral mechanisms under the WTO rather than through preferential free trade agreements because FTAs may only create complications for business and for the development of multilateral rules. 

Developed country negotiators and officials at the WTO, the powerbrokers in global trade, are striving hard to impose a limited “consensus” on members of the organisation. Holding out the threat of the breakdown of the multilateral trading system and the emergence of damaging bilateralism, they are seeking an agreement on the framework for the next round of global trade talks in June 2009 after the breakdown of Doha Development Round on July 29, 2008.

OECD also noted that these six BRIICS countries excelled in opening their borders to global trade, but were still struggling to liberalize their own domestic trade and investment, or what the OECD called the behind-border reforms.

Domestic reforms in service regulations, regulation of technical standards, intellectual property rights (IPR), public procurement rules, customs administration and competition rules are a key challenge in all the BRIIC countries.

In Indonesia, the biggest problems still include labour rigidity and impediments to investment, both domestic and foreign investment. Better utilisation of labour inputs is one of the pre requisites for putting growth on a higher, sustainable trajectory. A tightening of labour legislation, especially with enactment of the Manpower Law of 2003, has contributed to poor labour market outcomes. These include high unemployment, persistent informality and a loss of dynamism in labour intensive manufacturing sectors, such as textiles, clothing and footwear, in which Indonesia has a comparative advantage.

Indonesia’s labour legislation is rigid in relation to most countries in the OECD area, and particularly in comparison with regional peers. On the basis of the OECD methodology for assessing the stringency of a country’s employment protection legislation (EPL), the Indonesian labour code is particularly restrictive on regular contracts, due essentially to bureaucratic dismissal procedures and costly severance pay requirements. There are also constraints on the use of temporary and fixed term contractual arrangements, because of strict provisions on the duration and number of extensions of such contracts, as well as on the nature of the activities and occupations to which such arrangements apply.

Alternative indicators, such as those featured in the World Bank’s Doing Business reports, also underscore the stringency of Indonesia’s EPL in comparison with regional peers and OECD countries. Several options can be considered for making labour legislation more flexible. In particular, consideration could be given to simplifying procedures for dismissals in the case of regular contracts, relaxing restrictions on temporary work and fixed term contracts, and reducing the burden of severance pay and long-term compensation on employers.

OECD picked these six emerging countries and made an update on them in this report because of their growing and leading influence in the world economy. The BRIICS concept is an extension of the idea of the original BRIC group. Goldman Sachs predicted that Brazil, Russia, India and China (the BRIC) would become a larger force in the world economy over the next 50 years and could become larger than the G6 (US, Japan, UK, Germany, France and Italy). OECD then included Indonesia and South Africa in recognition of their economic size, relative to other OECD members.

Leaving aside oil-rich Saudi Arabia and two other large emerging OECD economies  (Mexico and Turkey), the BRIICS are by far the largest economies in the developing world in transition, and the only countries in this category with gross national incomes of over US$200 billion per annum. Developments are going to be closely watched.--INFA

 (Copyright, India News and Feature Alliance)

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