B. NEED FOR AN APPROPRIATE APPROACH TO THE INTEGRATION OF DEVELOPING COUNTRIES IN THE WORLD ECONOMY
Perhaps the most important, and most difficult, set of development policies that a developing country has to decide on, is in the interface between domestic policies and the world economy. Whether, how, when, to what extent, in which sectors, and in which sequence, to integrate the domestic economy and society with the international economy and society, are simple but large questions and issues that face developing countries. In the international discussion on these issues, there is no consensus and instead there is much debate and many controversies on the definition, nature and consequences of globalisation.
The dominant approach of the past two decades, favoured by the "Washington Consensus", or the major developed countries and the agencies under their influence, is that full, rapid and comprehensive integration of developing countries into the global economy is both beneficial and essential for their development. The dominance of this paradigm is now rapidly eroding, due to the empirical record of developing countries that have followed (or attempted to follow) the policies of rapid liberalisation. The East Asian financial crisis of 1997-99 and other subsequent crises (including in Argentina and Uruguay) have undermined the policy prescription that developing countries should rapidly liberalise their financial system. It is now more widely recognised that financial liberalisation is qualitatively different from trade liberalisation, and that developing countries should be cautious in how to (or even whether to) open their capital account.
In the area of trade liberalisation, there is also empirical evidence that excessive import liberalisation has caused dislocation to local industries and farms in several developing countries, and at the same time there has not been an increase in export opportunities or performance to offset these adverse developments. There is now an emerging trade-policy paradigm that stresses the importance of addressing other factors (such as the need to tailor the rate of import liberalisation to the increase in competitiveness of local firms, and the need to increase the supply-side capacity of local firms in order to realise the country's export potential). Failure to address these can lead to serious problems of domestic economic dislocation and worsening trade imbalances, should a country liberalise its imports (TWN 2001).
In the area of foreign direct investment, host developing countries are now being cautioned to take an even-handed approach and to have policies that seek to maximise the benefits (for example, through equity-sharing and profit-sharing and technology-transfer arrangements) and to take account of and minimise the risks (especially of potentially large drains on foreign exchange through high import content and large profit repatriation).
The emerging paradigm calls for development countries to take a pragmatic approach to globalisation and liberalisation, and to be selective and deliberate in choosing how and when, and in which sectors and to what extent, to integrate their domestic economy with the global economy, in the areas of finance, trade and investment. This approach recognises that interaction with the global economy can benefit (and potentially be of significant benefit) to a developing country. However, the terms of interaction are crucial if the potential benefits are to be realised, and if costs and damage is to be avoided. Too rapid a rate of integration, or integration in the wrong areas and in the wrong way, can be harmful rather than helpful. For example, too great a dependence on commodity exports, and an increase in export volume when there is a global over-supply of a particular commodity, can be detrimental. Excessive financial liberalisation (for example, in allowing local institutions to freely borrow from abroad in foreign currency) can lead to a debt repayment crisis if the right regulations and conditions are not in place. The approach of selective integration, done carefully and appropriately, suited to the needs and particular conditions of a country, is therefore of the utmost importance. It should replace the still-dominant approach of "big-bang" rapid liberalisation, done inappropriately in a one-size-fits-all manner.