The role of trade in promoting inclusive growth

12 December 2016
ITC News
Speech delivered by ITC Executive Director Arancha González at the University Of Tokyo
Tokyo, Japan - 12 December 2016

I am delighted to be here in Tokyo with you today to talk about the role of trade in promoting inclusive growth especially in developing countries.

The International Trade Centre, for those of you who are unfamiliar with it, was established in 1964- more than 50 years ago- because our parent organizations, the United Nations and the GATT (now known as the World Trade Organization), recognized that developing countries and their companies needed support to better take advantage of the opening global economy. From day one, ITC has worked to foster trade-led growth and development. As WTO makes trade possible through trade negotiations, ITC makes trade happen on the ground.

Even though I head an organization committed to trade and development, it is a little daunting to address this topic while standing here in Japan. If any country embodies the possibilities of trade-led growth, it is this one.

The trade-led growth model has been described as “importing what the world knows, and exporting what it wants.” And, as you are well aware, this is precisely what Japan has done.

In the decades following the Meiji Ishin, Japan became the first non-Western country to become an industrial powerhouse. Trade played a major role in driving Japan’s economic transformation, as its production basket shifted from raw silk and mining products through to cotton yarn, clothing, and eventually steel, heavy machinery, and automobiles.

After 1945, trade again played a starring role in Japan’s economic miracle. By the end of the 1960s, Japan had become the world’s second-biggest economy. Its exports had been growing twice as fast as the OECD average. New companies like Sony and Honda became household names around the world. ‘Brand Japan’ was in full swing and very much facilitated by trade.

During the miracle decades, management gurus from around the world would come here to marvel at the coordination of the economy by the Ministry of International Trade and Industry. They examined Japanese business practices, concluding that innovations such as the keiretsu system of interlocking holdings enabled long-term thinking and investment.

The years since 1990 have been less kind to the prestige of the Japanese model. And yet: in per capita terms, Japan’s economic performance has not been dissimilar to that of countries at similar levels of development. Sluggish headline growth has had more to do with Japan’s ageing demographics than a fall-off in post-bubble productivity.

Japan also stands out for its relatively equal distribution of income. The fruits of Japan’s postwar economic miracle were very widely shared. Even though inequality has increased somewhat in recent years, the share of the highest earners in total income remains relatively low in Japan. Notably, this relative equality is achieved through its market structures, and not, as in northern Europe and Canada, through taxes and transfers. Amidst today’s widespread concern about income inequality, Japan has important lessons to offer the rest of the world.

In addition, Japan demonstrates that it is possible to offset some of the effects of a fast-ageing population by bringing more people, especially women, into the workforce. Since 2003, the number of Japanese people between the ages of 15 and 64 has fallen more than 8 million. But the number of workers in that age bracket has grown: all of this growth has been the result of women entering the labour market. Prime Minister Shinzo Abe is entirely right to talk about ‘womenomics’.

I will come back to the importance of empowering women as economic actors, but first I wouldd like to talk a bit more about why trade matters for development – and about why special efforts are often needed to make sure everyone can gain from trade.

Think about what developing countries look like. Lots of people are involved in subsistence agriculture and low-end services. A big part of the development process is about ‘structural transformation’ - about getting people and resources out of such subsistence activities and into more productive work.

This is where the global marketplace can play a key role. In developing countries, tradable activities tend to be much more productive than the rest of the economy. And international markets are way bigger than small domestic ones. As a result, getting people and capital out of subsistence work and into firms dealing in tradable goods and services tends to make for a more productive economy overall.

Japan was, of course, one of the earliest countries to achieve trade-led structural transformation. This was a function of smart domestic policymaking and the hard work of millions of ordinary Japanese. But it was also made possible by technological change that lowered shipping and communication costs. And by the rules-based global economy that kept markets predictably open. Imagine what would have happened had international markets slammed shut the moment US automakers became nervous about competition from imported Toyotas and Hondas. Or when long-established electronics companies felt threatened by Japanese upstarts like Sony. Goodbye Japanese economic miracle. Goodbye Asia miracle that has brought so much to the world economy.

In recent decades, many other countries – above all China – have followed in Japan’s footsteps, adopting market-oriented policies, and using the global economy to drive growth and development.

The result has been poverty reduction on an unprecedented scale. Global median income – median, not average – has more than doubled over the past decade. Life expectancy, to take an important example, has risen sharply, even in some of the poorest countries.

In Japan, life expectancy in 1960 was 67.6 – six years short of Norway, which was then the global leader. In what was to become Bangladesh, however, life expectancy was barely over 40. Turn the clock ahead to 2015. Japan had become home to the world’s longest-lived people, with life expectancy above 83. Bangladeshis, meanwhile, could expect to live to 72.

This progress in growth and human development has transformed what was once unthinkable into a realistic aspiration. In 2000, when adopting the Millennium Development Goals, world leaders pledged to halve extreme poverty. Last year, when adopting the Sustainable Development Goals, governments aimed higher: they are aiming to eradicate extreme poverty by 2030.

I should say that Japan was never just exporting manufactured goods. Its own experience served as a powerful example of success to countries across the region. Japanese companies invested in production facilities and supplier networks across East Asia, seeding the ‘East Asian miracle’ and creating the precursors of the international value chains that dominate manufacturing today. Targeted aid also played an important role: in the 1950s, Japan developed highly effective public and private sector structures for spreading technological learning and enhancing productivity across the economy. Starting in the 1960s, Japan began exporting this model across Asia: the Asian Productivity Organization was set up in Manila in 1961. And in 1978, just as China began to pursue its first market reforms, the Japan Productivity Centre opened a China Office.

But – there is always a ‘but’. Looking back across the past half-century, the countries that managed to sustain rapid growth, instead of alternating boom and bust, have been the countries that have participated actively in trade in value-added goods and services. But this story of trade integration and development has always been marked by exclusion: whether for entire countries, or for marginalized groups within them.

I will devote the remainder of my remarks to how we might act to rectify this exclusion, which will be essential if we are to successfully meet the United Nations Sustainable Development Goal of eradicating extreme poverty by 2030.

One key to this is a fairly conventional integration agenda: cut trade costs by investing in ports and roads, simplifying customs rules, and reduce tariff and non-tariff barriers at the regional and global levels.

Another key is to ensure that the gains from trade go where they make the biggest difference. This means targeted support for bringing small and medium-sized enterprises (SMEs) into trade. It also means interventions to ensure women, young people and other economically marginalized groups can start businesses and connect to international value chains.

Why do SMEs matter? Jobs are the main channel through which most people share in growth, and SMEs account for most jobs. When SMEs are able to bolster their competitiveness and connect to international value chains, they generally register particularly high productivity, wage, and employment gains. This in turn leads to inclusive growth. That is why ITC focuses on connecting SMEs to international markets. Our research points to the kinds of reforms that would yield the highest bang for the buck in terms of higher SME productivity and trade competitiveness.

Japan’s Ministry of Economy, Trade, and Industry is on a similar page: its 2016 White Paper on Small and Medium Enterprises in Japan highlights the importance of overseas expansion for bolstering SME earnings. It suggests that better information technology use and better access to capital could help SMEs reach across borders. But for Japan the challenge starts at home. The number of SMEs has fallen and they are less attractive to the youth who have less capital and are afraid of taking risks.

Another reason SMEs are so important is that they are disproportionate employers of women.

Women’s economic empowerment is a not just a moral imperative; it is a social and economic one. When women are paid for their work, and have control over how the money gets spent, they invest much more of their income in their families’ education and health than men do.

The benefits are amplified across generations. Greater representation of women at every level is good for corporate profitability; it is good for national performance on indicators of competitiveness. At the global level, discrimination against women costs us trillions of dollars every year. In Japan the cost is in te order of 12% points of GDP.

Expanding women’s participation in the economy goes beyond economic policies, access to finance, and corporate and government procurement. It also requires social policy and social change. Japan is working to foster such change, but it also underscores how progress will take time. Despite Japan’s three percentage point rise in its female labour participation rate between 2010 and 2014, it still lags behind most other countries at similar levels of development. The current figure, 66%, pales in comparison to Japan’s own male participation rate of above 80%. Only about one in ten managerial positions are filled by women. And even though Japan has introduced some of the world’s most generous paternity leave benefits, relatively few men take it up. Public policies on childcare, a change in corporate culture, addressing unpaid work and showcasing g role models would help greater participation of Japanese women in the economy and would contribute to more and better growth for its economy.

At ITC, women’s economic empowerment is an agency-wide preoccupation. Our SheTrades initiative is working to connect one million female entrepreneurs to markets by 2020. As part of the initiative, we have called on companies, governments, and civil society groups to make specific, measurable pledges that contribute to this goal, by reforming discriminatory laws, sourcing more from women-owned businesses, and ensuring that women have fair access to capital. We have also launched a web and mobile app for women entrepreneurs, called SheTrades.com that lets them showcase the goods and services they offer, and connect to buyers.

A final point on trade in the XXI century. It must be more sustainable. This is what consumers demand. This is what producers are moving into. Greater social and environmental sustainability, greater consumer protection, greater respect for privacy are the imperatives to move from trade to "good trade".

In conclusion, I want to say that Japan helped invent the trade-led growth model. It now has a chance to play a leadership role in expanding the benefits to countries and people that have been left on the margins of the global economy. That would be good for the world, and good for Japan.