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Lessons of the Asian Financial Crisis, with Supachai Panitchpakdi

Dr Supachai Panitchpakdi (Elsa Ruiz/Asia Society)

Dr Supachai Panitchpakdi (Elsa Ruiz/Asia Society)

Dr Supachai Panitchpakdi is the Secretary-General of the United Nations Conference on Trade and Development (UNCTAD). He previously served as Director-General of the World Trade Organization (September 2002 to August 2005).

This interview was conducted by the Asia Society's Nermeen Shaikh on September 14th, 2006.

 

You were Deputy Prime Minister of Thailand during the Asian financial crisis in the 1990s. How, if at all, did this experience working in a developing economy affect the policies you pursued as head of the WTO or now as the Secretary General of UNCTAD?

The Asian financial crisis has taught us several useful lessons. One of the lessons is that we have to be prepared for some abrupt changes within the global system. Asian economies enjoyed such buoyant growth in the 1990s that they at times became complacent. So I think lesson number one is that you can never become complacent. Lesson number two is that we need to have good rules on both sides - not only on the trade side but also on the financial side. Because as much as we have achieved on the trade side in setting up the rules, market access and everything, it could just be ruined overnight because of a lack of financial rules, wherein funds can just rush around and destroy the basis of confidence in any Asian currency. Number three is that trade and finance will have to be brought together at a certain point because you need finance to back up trade - short-term financing, letters of credit and things like that. In an emergency, finance tends to dry up for trade, so we should be making arrangements to ensure that there are always sufficient financial resources.

Other lessons like this have been very useful. The last point -- about trade and finance - has became part of the work that we have been doing at the WTO as part of the Doha negotiations on trade and finance. On the issue of globalization and the need for rules, UNCTAD is doing a lot of work to try to make a point that there is an asymmetry between trade rules and financial rules. Trade rules are highly disciplined and highly intensive whereas financial rules are not really at the same level. We are working on this now.

Prior to assuming the position of Secretary-General of UNCTAD, you served for three years as Director General of the World Trade Organization (WTO). Some would argue that your present mandate, with its emphasis on development, differs and at times even conflicts with your previous mandate as the head of the WTO. How would you compare the two?

Actually, yes when one looks from the outside at both institutions, the WTO and UNCTAD, one will certainly be reminded of the fact that the two institutions are different. But being different doesn't mean that they cannot be complementary. I look at my mandate at UNCTAD as being complementary to what I was doing at the WTO.

It is certainly quite useful and certainly essential to establish good rules and regulations for the multilateral trading system to prosper, as the WTO does. But good rules and regulations will have to be understood by countries. And all countries should participate or should be enabled to participate as actively as possible in the setting up of the rules. So I consider it as my task, an extension of what I did at WTO, to be continuing under the UNCTAD remit to work in a way that would integrate developing countries into the negotiations to create a set of rules and regulations that would be fair to everyone. This would be helpful for countries to advance their own development strategy and at the same time have the opportunity to make use of those rules by having better supply capacity, which the WTO could not create. But UNCTAD could help to generate that supply capacity so that developing countries could reap the benefits of more market access.

So people might be thinking that I may be trying to put in some of the WTO thinking into the UNCTAD research. But I have the experience that I hope can be used by UNCTAD to address how we can better integrate developing countries into the world trading system.

What role do you think UNCTAD should play in global trade as opposed to WTO? What you said now suggests that it's almost an interpretive function, that the organization plays an interpretive and explanatory role. What are the principal concerns of UNCTAD and how does this organization have a distinctive identity, as you see it?

UNCTAD's main concerns are that in spite of the liberalization effort, countries that are not well-prepared or well-adapted will not be able to enjoy the fruits of trade liberalization. So we help build capacity. We help implement the rules, the laws. We help to streamline the logistic network so that the cost could be reduced. We help to educate negotiators so that they could be capable of taking the kinds of negotiating positions that would serve them well. We help to explain the assessment of the negotiating positions to these developing countries so that they would understand better where they should position themselves.

So UNCTAD concerns are more or less in the areas of making developing countries ready to join in the multilateral trading system, making them suitable or prepared in terms of having the right sets of principles and rules that can be applied so that they can participate profitably in the whole system.

There are areas in which we just straightforwardly work with WTO. Like in the JITAP program - the Joint Integrated Technical Assistance Project - that helps countries in a complementary manner: WTO from the rule-making side, UNCTAD from the developmental side, and International Trade Centre (ITC) from the private sector side. So we try to complete the picture in that way. You have the rule-making side, you have the application of the rules side, and you have the participation of the private sector.

In your view, what issues need to be addressed for the trade regime to be more development friendly? What, if any, development-related reasons could there be to actually restrict trade liberalization?

There is one, I think, very clear example, which is the application of the Intellectual Property Rights Agreement. It is a good agreement; it needs to be established to ascertain the ongoing research in innovative fields of pharmaceutical production. So we need to have that. But at the same time, we have to take into account the costs of medicines that are needed to prevent or to tackle pandemics in the poor countries. And I'm talking not only about AIDS but malaria and tuberculosis and other diseases that are not known today in the Western world. In order to make trade liberalization and rule-making in society useful other steps must be taken. Allowing poorer countries to make use of the so-called compulsory licensing approach to produce generic drugs and to be able also to export them to fellow developing countries is important. This is, I think, a great change and something which has the sort of flexibility that helps in the application of all these trade rules.

I can also cite examples of the different treatment to the LDCs (Least Developed Countries), for example; the LDCs are practically exempt from all the trade commitments that are being negotiated under the Doha development agenda. LDCs, of course, have only 0.8 per cent of the global trade share, which is not very much. It is very, very small. And so they are not asked to commit themselves to this and they can take benefit. This is another example.

In a presentation you gave at Columbia University prior to assuming the post of Director General of the WTO, you said that the WTO ought to encourage free and fair trade with an emphasis on establishing "a level playing field." What does a level playing field mean to you and what steps were taken during your tenure to ensure a more level playing field?

Well, of course, it is a difficult task to establish something which will look like any level playing field. Everyone knows that the field is not really very level. But of course, knowing that fact doesn't mean that we should not be making our best effort to make the field as level as possible. And one of the areas is in training. I tried to create a training institute and strengthen what the WTO has been delivering. There are nearly 400 projects a year now I think mainly to train negotiators and trade officials in developing countries to learn the right applications: how to apply the rules, how to make use of the dispute settlement mechanism (DSM) so that they will not be shortchanged and will not lose out when people violate the rules. We have helped to set up economic models in some of the trade ministries around the world so that they can learn how to make their own calculations of their trading positions on a more rigorous basis.

We are trying to create the knowledge capacity so that developing countries can be a bit more level in some things. There are some difficult areas, like in services, where we need to do more work because services negotiations do not involve only officials from the commerce ministries, but also from health, transportation and other ministries. So for services negotiations, it is a complicated exercise. So we try to provide guidance on how countries can formulate and present their own services negotiation position. But of course it takes a lot of time. That's why services negotiations are somewhat delayed when compared to agriculture and manufacturing. I would try to continue to do this under the UNCTAD remit. And probably UNCTAD will have greater leeway to be involved in trade-related research with developing countries.

But what about special and differential treatment, for example? Do you feel that special and differential treatment should be granted to developing countries and, if so, what form should it take?

This is an area in which UNCTAD has been doing a lot of work. It was already committed to granting special and differential treatment under the Enabling Clause of the Uruguay round, but it was not made mandatory. It was not legalized. It was just on a voluntary basis. Now, there are certain areas in which, when you do this on a voluntary basis, concessions are just not being given. So the special and differential treatment part of this Doha round of negotiations is mainly to make them, in certain areas, mandatory, precise and effective.

In the area of industrial tariffs that we are negotiating at the moment, for instance, there must be some flexibility because to ask developing countries to go all the way to reduce their tremendous tariffs at the moment would be probably too destabilizing for them. So I think there must be some flexibility and the principle is being adopted. The so-called less than full reciprocity is being adopted as part of the industrial tariffs negotiation.

The most recent Doha development round of talks have been indefinitely suspended after the core negotiators failed to agree on issues relating to trade liberalization of agricultural goods. What, in your opinion, has repeatedly led to this impasse in the development round?

I think we have made strong progress in the principal areas of adopting the so-called Swiss formula. This is a tremendous achievement because the Swiss formula indicates that you reduce the higher subsidies or tariffs with a higher rate of reduction. So you are trying to bring the high tariffs down in a more substantive manner. So this is a crucial thing. What remains to be done is to fix the numbers, how much exactly. And at the moment I can see that there are differences here and there but they're not that large so as to be insurmountable. I guess it has to do more with how this can be explained to the public back at home, to the parliamentarians so they know this is something that will help with reducing their own budget deficit, for example. Reducing their expenditures would help in creating more welfare for the consumers because prices are going to be cheaper and the tax burden will be lower, and so on.

So I think this is the ultimate calculation. But of course, all these calculations have been made. That's why I remain quite optimistic in a way that we have differences in these numbers and you have differences in subsidies, in tariffs. For some countries it's a subsidy, for some countries it's a tariff. I do think that somewhere there will be a middle ground where we will be able to converge. Of course, one must always be aware that the middle ground should not be the lower middle ground. It must be the high middle ground because this is something that would produce the real results. If we aim for somewhere in middle ground, which is just an average, it would not produce the kind of results that we all are looking for. We need full, real, effective cuts on support and intervention. We need that. We don't need just a legal cut. We need a real cut. So that has to be substantial.

Since agriculture is central to the livelihoods of innumerable people, there are many who argue that it ought to be exempted from the imperatives of trade globalization. Do you think that special dispensations ought to be made for that reason?

Yes, and there are exemptions under the themes of special products, products that are essential for subsistent farmers or for non-commercial production. There are special safeguards in case you have an influx of foreign commodities that would injure your producers. So there are already some of the dispensations for this flexibility and more special and differential treatment in the agricultural deals. Of course, the ultimate effects when the deal is done are on the prices of agricultural commodities. Commodity prices might go up because if you take away the subsidies international prices might go up. The effects of this on net food importing poor countries, that could be something which we really need to take care of. Because while we are looking at those producing countries that may be benefiting from this liberalization effort we have to take into consideration also the net food importing countries that will need special backup. That's why the Aid for Trade issue that has been floated recently is an important issue. Because that fund could be part of the Aid for Trade program and could be used to facilitate all this adjustment and alleviate the concerns that some countries will be more adversely affected than others.

It is widely recognized that the gains from trade can be very unequally distributed if countries lack internal redistributive mechanisms. What has UNCTAD done to strengthen internal redistribution systems or more generally to assist countries in adjusting to shocks associated with trade liberalization?

UNCTAD tries to determine the gains and losses in countries and in which sectors they occur and tries to work on a strategy with the developing countries that would mitigate their losses. This includes retraining opportunities and working on the diversification of the economy. We work a lot on diversification. Biotrade is a good example because there are some new and what we call dynamic sectors that countries can resort to to strengthen their own production network. We also worked on the adjustment facilities that could be given to those firms that would need to make adjustments themselves, for example, information technology. We worked a lot on bridging the digital divide so that, again, these enterprises can gain internal productivity and avoid being hurt by new liberalization agreements.

So this is what UNCTAD is trying to do. But at WTO I think we have to stay neutral in terms of helping countries directly. The WTO may not be able to embark upon these sort of projects, as UNCTAD could do. Of course whatever UNCTAD signs, we can recommend options for countries. That's why in all our flagship reports this year we emphasize a lot on the so-called need for the building of productive capacity. Although we say social investment is important and education, health we still emphasize productive capacity building because it would be contributing to growth. And growth can help to contribute to social investment. So that's why we keep hammering on this point of employment creation as a result of competitiveness policy within and outside of the countries. Within the country it means that you must have investment-friendly policies to attract FDI or to create domestic savings and domestic investment and at the same time, externally you have to be competitive, particularly when you work on your exchange rate policies. And these days exchange rates are floating so governments tend to have little control on exchange rates. So there needs to be some other way for countries to ensure their external competitiveness as well.

At a recent UNCTAD meeting, Joseph Stiglitz argued for the creation of a Global Trade Facility and said, "Financial assistance to help poorer nations cope with increasingly open world trade- a concept known as "aid for trade" - should be expanded, quantified and guaranteed by industrialized countries." Do you think that efforts along these lines have thus far been adequate?

The members of WTO have mandated Director-General Lamy to work on the concept by setting up a task force. The task force had already completed its work in July. So at the moment we are looking at the report of the task force and in the next couple of months WTO, together with Bretton Woods institutions and UN agencies, will try to come to grips with the implementation part of it.

The task force has determined the scope that covers nearly all the areas that Joseph Stiglitz has been mentioning. We agree with that at UNCTAD, we think it will have to be an extensive comprehensive coverage, covering the loss of revenues, erosion of preferences, the need to implement new commitments, new rules and things like that. So it has to be comprehensive.

The problem that we have to solve at the moment - and again, Lamy is looking at it - is that the sources of the funds will have to be secure and the funds will have to be arranged in a way that they should not create new debts for the participating countries. Because, again, you have to go back and try to do debt relief again. We don't want to be in that kind of vicious circle. So we are proposing that it must be a grant type of fund. And it must be substantial enough to help substantially in all these areas which Stiglitz has been talking about.

In a recent speech to international lawyers, Pascal Lamy discussed the place of WTO law in the international legal order. He suggested that the problem is not that the WTO is too strong but rather that other legal orders are too weak -- for instance, those having to do with labor standards, human rights, the environment and so on. Would you be able to shed light on the appropriate role of these broader considerations - that is, environment, human rights, labor standards - in the governance of the international trading system? And do you agree with the argument that Pascal Lamy has made?

You see, it's true that the legal binding of WTO rules is really effective and effectively carried out under the so-called dispute settlement mechanism (DSM). The DSM, I think, is a unique human invention which is really of exceptional value because it's such a complicated set of rules. But it is so effective. Earlier we were talking about a level playing field. This one helps level the playing field very much because big and small countries can bring their dispute to the DSP [dispute settlement procedures] and then each will be treated in as fair as possible a manner. This has been done, and the reliability and trustworthiness of this body is completely accepted by all. So in this way the body of legal requirements of the WTO is really substantiated by the backup of the dispute settlement mechanism.

In all those other things that you mentioned there is a great lack of this legal binding and the arbitration process, the judiciary that would help to decide the cases. So in order to strengthen all these rules they will have to create that process of judicial ability. I don't know whether this will be possible. It's easily said but in the WTO it is possible because it involves the economic interests of countries. It's a question of dollars and cents. That's why people agree on this judiciary that helps to resolve the disputes. But I don't know whether in labor or in environment areas that you will be able to develop the kind of setup that would be subscribed to by all countries.

Now, if you link that back into trade it becomes complicated because you have to think about the fairness in all these rules. Interpretation of labor laws, called labor rights, sometimes differ even among advanced countries. Environmental treatment also. I mean, if countries are poor they just can't mobilize enough support for the environment upgrading efforts in their country. So we try to bring trade and environment into our negotiations and it's part of our negotiation at the moment. But it's still very, very embryonic, very much in the initial stages. We are now trying to define the so-called environmental goods example but it hasn't yet been agreed upon. There is an effort to link environmental issues to trade. But the final outcome is not yet established. And it still, I think, will probably involve a lot more intensive negotiations. But member countries of the WTO find it difficult to accept the linking of non-trade issues to the trade issues. They find it hard to accept.

Because it's a question of dollar and cents, as you say.

That's right. Because of a question of dollars and cents. And because of the questions of the lack of acceptable criteria on other non-trade issues. On trade you have clear-cut criteria.

In his book Globalization and Its Discontents, Joseph Stiglitz has argued that, "Even when not guilty of hypocrisy, the West has driven the globalization agenda, ensuring that it garners a disproportionate share of the benefits at the expense of the developing world." Could you comment on that?

To be fair to both sides, to both developed and developing country sides, the process of globalization without any likelihood of a global governance body, and left to the market alone, can hardly be fair to everyone and can hardly be fair. There are things that market mechanisms sometimes would fail to address, particularly in the areas of environment, for example, and the impending threat of growing inequality around the world. So, again, under UNCTAD, I will do some more work along this line in trying to determine how much we could leave to the market. We do not dispute the need to strengthen the market. But we would like to help strengthen the market and at the same time leave some room - what people like to call a policy space - for national governments to adopt so that they can tackle their own development strategy according to their own means.

So this is my comment on Joseph Stiglitz's implication. I mean, it's fair or not fair. It depends on the strength of your economy to make use of globalization trends. But to make it less unfair -- I don't know whether it would be fair or not -- but to make it less unfair, poorer countries should be afforded the opportunity not only to go through the market mechanism to determine strategic needs and interests but also to develop non-traditional administrative instruments that would enable them, for example, to maintain price stability, create productive capacity and induce more foreign direct investment.

Thank you very much, Dr Supachai.

Interview conducted by Nermeen Shaikh of Asia Society.