Trade Reform, the Doha Development Agenda, and the World Bank

1. Trade Reform, the Doha Development Agenda, and the World Bank Kym Anderson University of Adelaide, Australia and Development Research Group, World Bank John Nash Agriculture and Rural Development Department, World Bank Global Issues Seminar series, 20 April 2006

2. 1. Some key questions • How can trade policy reform best contribute to economic growth and poverty alleviation in developing countries (DCs)? • In particular, what role can the World Trade Organization’s Doha Development Agenda play? • Does it help to reduce global poverty if rich countries provide free market access to least-developed countries (LDCs)? • What does the World Bank do to support trade reform?

3. 2. Arguments for removing trade barriers • To allow each nation’s resources to be used to exploit its comparative advantage by specializing in producing what it does best • That in turn can increase (especially in small economies): • scope for exploiting economies of scale, • competitiveness of domestic markets, • the variety of goods and services available domestically, • technological catch-up, and hence economic growth, and thereby poverty alleviation

4. 3. Arguments for removing trade barriers (continued) • There are many examples of reformed economies that have boomed • South Korea from mid-1960s, Chile from mid-1970s, China from early 1980s, India from early 1990s • There are no examples of closed economies that have enjoyed sustained economic growth • Not to say openness is sufficient for sustained economic growth, but it is a necessary condition • Also needs good domestic economic governance (macro, regulatory) • Good trade infrastructure and institutions also help

5. 4. So why do governments still retain protectionist policies? • Because some workers, and owners of some productive resources, fear that they will lose from reform, and that social safety nets will not fully compensate them • Losses in jobs, incomes and wealth would be concentrated in the hands of a few, who lobby • Gains will be small per capita for the many benefiting consumers or firms (and some may not even know they’ll be winners), so they have less incentive to counter the protectionist lobbying

6. 5. What forces tend to reduce the level of protection from import competition? • Wider dissemination of information on the net gains from trade • Technological innovations that lower trade costs (e.g. information revolution), or increased openness abroad, both of which increase the incentive for exporters to lobby for reduced protection • Such globalization forces raise the rewards from good economic governance -- and raise the cost of poor economic governance  more countries are looking to open up

7. 6. Why trade negotiations make trade reform politically easier • They offer scope for exchange of market access • and more so the larger the number of countries taking part, and the broader the product and issue coverage • WTO’s multilateral negotiations offer the most scope (principle of the “single undertaking”) • bilateral and regional negotiations may allow faster and deeper integration, but at the risk of welfare-reducing trade and investment diversion

8. 7. Estimated benefits from full global trade reform • Global economic benefit from removing current tariffs on all goods plus agricultural subsidies is estimated to be $287 billion per year by 2015 • As a % of GDP, the benefit to developing countries as a group is one-third higher than that for developed countries • and for Sub-Saharan Africa it is nearly twice as high

9. 8. Sources of gain to global economy

10. 9. Relative importance of own reform(% gain in real income)

11. 10. Take-away messages from full lib’n • Potential gains from further trade reform are large must find the political will for Doha success • DCs would gain disproportionately from reform, notwithstanding non-reciprocal tariff preferences • But DCs would gain as much from South-South as South-North trade growth importance of DC reform too, including own reform • Agricultural reforms are the highest priority for goods, from global and developing country welfare viewpoints • Removing barriers to services trade could more than double the above gains from goods trade reform • including from allowing temporary labor migration

12. 11. Agricultural liberalization is the key to a development friendly Doha Round • 63 percent of population live in rural areas • 73 percent of poor live in rural areas • Agriculture and agro-processing account for 30-60 percent of GDP in developing countries, and an even larger share of employment • Even with rapid urbanization, more than 50% of the poor will be in rural areas by 2035 • Most of the rural poor are not in countries that receive significant trade preferences

13. Average tariffs Percent 40 Agriculture and food 35 30 Manufactures 25 20 15 10 5 0 East Asia Eur. & C. Lat. Amer. Mid-East South Asia Sub-Sah. Industrial Asia & N. Afr. Afr. Source : GTAP release 6.03 12. And barriers are much higher in agriculture… tariffs

14. 13. …and non-tariff barriersPercentage of production covered by tariff rate quotasSource: OECD, Agriculture Market Access Database (AMAD)

15. 14. Agricultural exports from developing countries have stagnated Developing Countries’ share of World Exports

16. 15. Implications for Doha negotiating strategies • Need to seek ambitious outcome on agric market access (not just on cuts to subsidies) • Need to encourage developing countries, not just developed, to provide more market access

17. 16. What about economic gains from free market access for LDCs? • Non-reciprocal duty-free access for exports from LDCs to rich countries sounds generous, but: • it does not include services (especially labour) • access is typically subject to safeguards and restrictive rules of origin • much of the gain in trade will be at the expense of other poor (but not “least-developed”) countries such as China, India, Indonesia, Pakistan, Vietnam

18. 17. Other concerns with such non-reciprocal trade agreements • They encourage production in LDCs that is not internationally competitive • They provide no incentive for LDCs to liberalize their own trade regimes • They cause LDCs to become advocates for instead of against the continuation of high tariff peaks for farm and textile goods in developed countries

19. 18. Economic costs of trade reform? • Structural adjustment costs (temporary unemployment, retraining, asset losses) may arise • But evidence suggests these are much lower than typically asserted • especially if reforms are gradual (e.g. over ten years), in which case their impact is small compared with the normal on-going structural adjustments associated with economic growth

20. 19. Would trade reform reduce poverty? • Economic theory suggests that trade will raise returns to the most abundant factor of production, which in most developing countries is labor • The growth effects of trade reform help alleviate poverty • So too may the change in the international terms of trade, because the poor in DCs are producers of farm and textile products, whose relative prices in most DCs would rise from across-the-board reform • Trade in technologies also can reduce hunger • e.g. 1960s Green Revolution’s dwarf cereal varieties, and current biotechnology revolution could too

21. 20. World Bank encourages trade reform at a country level through: • Poverty Reduction Strategy Papers • Rural Development Strategies • Lending: 35 projects, $2.053 bln. (FY00-04) • Policy-based lending • Trade infrastructure and institution-building • Adjustment assistance

22. 21. World Bank encourages trade reform(cont.) • Analytical work • Global level (options in WTO negotiations; effects of preferential access agreements; poverty impacts; commodity-specific studies) • Country level (Standards cost of compliance; trade, environment, rural poverty; policy reviews) • Capacity building for trade policy analysis and negotiations (training and tools)