Address by Ebrahim Patel General Secretary - South African Clothing and Textile Workers Union.

27 August 2005

Thanks, Eddie for that interesting summary of the other three Speakers' main points.

I'm going to start with a statistic, released by the United Nations, that was published two days ago.

The UN report is called the Inequality Predicament. It points to the fact that currently 80% of the world's GDP belongs to one billion people living in the developed world. And 20% of the world's GDP is shared by 5 billion people in developing countries.

I think that statistic throws into relief the challenge that we are placing on trade, investment and other elements of policy. I am also reminded of the data released by the ILO that said that in 2003 there were 186 million people unemployed globally. This was 6.2% of the total working population. And it had risen by about 46 million in the decade of the 90s.

Now, Rob started with a very, I thought, interesting and useful evaluation of where we are - kind of a tactical sense of the issues of trade.

I want to step back a little bit and say that in November last year we had an unusual debate at the International Labour Organisation which brings together Business, Government and Labour. And the ILO decided to have a topic or a discussion on trade, foreign investment and productive employment in developing countries.

They commissioned some research to see what has been the experience of developing countries over 2 decades of trade liberalization and very significant growth in FDI. And it was quite an interesting analysis that emerged, one that I think a number of the participants were surprised by. This analysis by the ILO drew on work done by other multi lateral institutions: the IMF, the World Bank, academic studies, country studies, a range of work that had been done in the public debates between the various groups that made submissions to the World Commission on Social dimension of globalization. There were some lessons and insights that were distilled.

I want to start with trade. And the first point it made is this massive rise in trade. Trade reached 50% of world GDP in the year 2000 from 38% a decade before that. Manufactured goods increased its share of merchandised trade. Developing countries increased their share of trade in total manufactured goods and there was significant trade liberalisation. And yet the study also found that the overall effect of trade liberalization has been to polarize developing countries into two groups.

A small number of large countries had derived very significant benefits from trade liberalization and a large number of mainly, but not exclusively, small countries had been adversely affected by trade liberalization. And they pointed out that the countries that have now emerged as important exporters of manufactured goods had developed considerable manufacturing capacity, under protectionist regimes prior to trade liberalization.

It was an insight that was first grudgingly offered in the public debates in about 1993-1994 when the World Bank published the Asian miracles, a seminal study of the effects of various policies on the East Asian economies.

But in this ILO debate, discussion and evaluation, they also found that the impact of trade on employment has been uneven and varied. There were 23 countries that were categorized as essentially beneficiaries of trade liberalization. But even within those beneficiaries, there were striking differences in the impact that trade liberalization had on employment. And, attention was drawn to the significant distinction between two regions of the world. The Asian emerging economies, including China, India and Malaysia, had shown growth in employment, sometimes very significant growth in employment. Particularly amongst low skilled Labour. Very important.

In the Latin American emerging economies, Brazil, Mexico and others, while export performance was strong, employment grew very slowly or even declined. And the reasons given in the literature included two quite interesting points. The first is that a stagnant or even a decline in domestic demand in some of the Latin American economies meant that export growth did not translate to significant aggregate growth of manufacturing output.

And secondly, that trade liberalization did not produce a clear pattern of specialisation according to comparative advantage. In short, many of the export items that emanated from Latin America were largely capital intensive rather than Labour intensive. So even though you had a surplus of Labour the structure of your exports didn't reflect the absorption of your abundant capacity. And trade liberalization was associated with increased wage inequalities within countries.

But there were also quite interesting observations on investment, which is the second leg of the topic that we have been asked to address today. And on investment, what these studies show is what is self evident - that there has been a dramatic increase in FDI flows. Annual FDI inflows increased from 44 billion in 1985 to 1.5 trillion in the year 2000. I should note of course that since 2000 there has been a rather significant drop in FDI.

Within developing countries, FDIs inflows have been highly concentrated in a small number of countries. Significantly, developing countries that account for the bulk of foreign investment inflows are precisely those ones that emerged as important exporters of manufactured goods, suggesting a very strong link between trade and foreign direct investment.

The international experience of the impact of foreign direct investment and economic growth and employment was examined but there were not many unambiguous conclusions. Some of the more interesting observations were multi national corporations generally employ more highly skilled Labour and also pay higher wages.

Rise in foreign direct investment is also associated with rising wage inequality within a country and with firms.

Empirical research does not show that foreign direct investment inflows are particularly sensitive to the degree of capital account liberalization. There was quite a strong body of evidence in that regard.

And finally the spill-over effects of FDI inflows were found to be generally quite insignificant in several studies. Domestic firms did not seem to derive much benefit in the form of improvements in technology, or management from the presence of multi national corporations in the economy.

Now, with 85% of the world's workers in developing countries, the study concluded that there are two challenges flowing out of distilling the experience of trade and investment. The first one is that the international community should ensure that developing countries have the possibility of the policy space to use trade and foreign direct investment as instruments of employment promotion. Leaving it simply to the current multi-lateral processes has not had the desired effect.

Secondly, that developing countries themselves need to acquire, where they don't have it, the ability to use trade and foreign direct investment more effectively.

And that brings me to a couple of very broad conclusions.

The first is that there is sometimes a false choice that is posed to us. The choice is not between two kinds of fatalism. The first kind of fatalism among those who are opposed to globalization that has a view that virtually says stop the world - I want to get off. And a fatalism among those who support globalization - who say, we can't change the world and we must fit in.

What the lessons have shown is that there is some policy space. There is policy space available to utilize and we have not always, as South Africa, pushed the policy envelope. We have not always utilized the space available.

But the second and perhaps more interesting conclusion is that some successful developing countries have created policy space, even when none existed. The manner of their engagement was such that they created new space.

Examples of these are Malaysia, China, Korea and so on. And its coming to the current WTO three month period ahead - it's the question whether we decide that the Swiss formula is the only basis and the only debate is about the coefficience or whether we try to build alternative possibilities.

A third general conclusion is that from the experience there and from the experience in South Africa, trade liberalization does not in itself create winning industries. It is industrial policy that is the engine. And in that way I think we welcome the renewed emphasis, commitment and priority given to industrial policy by Government.

And I want to touch on the debate that's been started between Vishwas and our Chairman on the developmental state.

I think a case can be made - a compelling case can be made for a developmental state model in South Africa. Because the alternative to the developmental state model is to say we must go entirely the market-based approach. But a developmental state does not mean that the form of that developmental model needs to import the Korean model 100%. Just as we found the specifics of how Malaysia developed its industrial capacity, learnt from Korea who in turn learnt from the Japanese model, which they adjusted and adapted.

One of the fundamental adjustments and adaptations that would be required in South Africa for any model of the state, is one that fits it around the democratic Constitution, the values of the society and the experiences that we've had. So a developmental state is not the same as a totalitarian state. A developmental state is one that is characterized by strong technical capability - quite fundamental. Without that, the ability to do what is the agenda of a developmental state is significantly compromised.

The second one is the use of incentives and disincentives to drive, not only social policy, but also economic and industrial policy. Its not the abolition of markets - because that's the experience of Asia. (They use a clever combination of state and market and China itself currently is using quite an interesting combination of those two.) Its not about intervening in every issue, its about choosing your intervention carefully and focusing it on the most fundamental elements and levers of power. Its about quid pro quos, conditionalities in incentives that you offer. And its about expanding the role of the state to not only harvest the benefits of economic growth and channel it towards social policy but to signal, to nudge, at times to direct capital and market forces towards a broader developmental plan which has an important component, the issue of employment creation.

Now China is a complex example of it. Clothing and textiles has been an industry that has grown massively in China in the last decade. And over the last 3-4 years, China has positioned itself to be the providers of clothing and footwear for the world. Just look at the South African figures. We've had a 335% growth in imports of clothing from China in the last two years.

But, within China, the manner of growing their clothing industry has been largely state-led. Massive subsidies to Chinese companies, huge incentives to foreign investors for locating there, a strong push to keep wages low by effectively prohibiting free trade unions - incidentally picking up the cost of the social wage by providing significant hostel and other accommodation to workers, and providing in some instances, food to workers. And working very strongly with companies to move up the value chain.

So, ten years ago, what came out of China was poor quality clothing. Today, China is closing the gap between its clothing production and that of even European clothing producers. So the old model that says that China dominates the bottom end, the low value end part of the industry - and the rest is up for grabs, is something that China itself, with its industrial policies, is challenging.

The relationship between South Africa and China is complex. Its not only defined by economic relations, but by a number of other relations. But its worth looking at what has happened over the last few years. We've built up a massive trade deficit between China and South Africa. The trade deficit in 2004 was 16 billion rand. That means we were importing 16 billion rand more goods from China than what we were selling to China.

But if you scratch beneath that 16 billion rand deficit, the picture that emerges is even more worrying. Because when you look at the flow of trade, you see that we largely export to China, mineral and metals and we largely import from China manufactured goods.

We did an analysis in COSATU a few months ago where we looked at the Labour and capital intensivity trade flows between China and South Africa. What the results showed is that we are exporting capital intensive goods and we are importing Labour intensive goods. Put bluntly, the aggregate effect of that is significant job losses in the South African economy.

But ironically, its not the pattern that you'd find between Germany and China. There is also another element to it. We export largely unprocessed goods and we import highly processed goods from China. So we become the supplier of raw material to the Chinese industrial machine. And we had an interesting session with the Minister of Trade and Industry in NEDLAC towards the end of last year and in the course of his discussion, he made a very interesting point, that one of the objectives of South African policy is to break the old colonial model where the African continent becomes the supplier of raw material to Europe and to the United States. The irony is that relationship is now being replicated with China.

The final point is, on China, are we leveraging our relationship to build policy space? To extract something from the geo-political relationship? Or do we give as a part and as a consequence of geo-political consideration. There's something that's been characteristic of trade negotiators from both developed and developing world. They all recognize that global trade negotiations are often a cut throat Business in which national selflessness is dressed up as principle. And what South Africa needs is a much tougher negotiating strategy, one that is founded, I think, on industrial policy driving trade imperatives, not industrial policy adjusting to trade imperatives. But we do it in a world that we don't fully control.

Dave, or the comments that were made earlier, indicated from various people, and taking Rob Davies' analysis of the discussions in Geneva; it indicates that it's a world in which we can't completely determine the agenda.

I ask the question though, and I'm sure its something that's going to come up in the debate. Are we doing enough post DOHA and are we doing enough in our general discussions on trade to create the kind of policy space that Taiwan, Malaysia and others created and utilized at an earlier point of their industrialization?