Global Economic Prospects, 2005: Trade, Regionalism and Development

1. Global Economic Prospects, 2005:Trade, Regionalism and Development Uri Dadush and Richard Newfarmer World Bank December, 2004

2. Global Outlook • Developing countries experience record growth in 2004, but will face less favorable macro conditions as the world economy slows in 2005 by around 1 percentage point. • Downside risks could slow the global economy further. • Many developing countries are well placed to absorb the slowdown and the risks, but poor oil importers and indebted middle-income countries are vulnerable.

3. Growth is projected to slow Forecast Real GDP, percent change Developing countries

4. Developing economies remain above trend Real GDP, percent change Developing countries Early 1980s debt crisis 2001 Global downturn East Asia financial crisis 1990s recession Transition countries

5. Strong performance of developing countriesRealGDP per capita, percent growth Average growth 2003-2004

6. Risks remain • Developed-world debt and US current account deficit might trigger financial tensions, including higher interest rates and weakening dollar. • Oil prices could rise further, instead of the moderation foreseen in the baseline • A hard landing in China is still a possibility

7. Poor oil importers are immediately hit by high oil pricesDeviation from baseline in first year, per cent of GDP, with $10 higher oil price Domestic Demand Current Account Balance

8. Impact of 200 basis point rise in long ratesDeviation from baseline, percent of GDP

9. Trade, Regionalism and Development:Key Messages • Regional trade agreements (RTAs) are proliferating and now cover one third of world trade, but their liberalizing effect has often been modest. • RTAs can create trade and bring many other benefits for development …but results are not automatic and depend critically on design and implementation. • RTAs have systemic consequences that adversely affect excluded countries, requiring international attention.

10. Regional Trade Agreements are proliferating… Number of RTAs Percent of World Trade Covered South-South South-South US US European Union European Union

11. …but RTAs provide less new market access than it might appear Share of trade covered (%), 2003

12. …and in developing countries regional agreements are a relatively small driver of trade reform Av. Tariffs in Developing Countries Share of tariff reductions 29.9 9.3 Source: Martin and Ng, 2004

13. Drivers of autonomous liberalization • Move to a market economy • Exhaustion of import-substitution strategy • Desire to use import competition to drive productivity and technological development • Changing mindsets/New Leadership ….the prior decision to integrate has been the key driver of all forms of liberalization and trade agreements play a secondary role.

14. Multilateral process essential.. but not sufficient • Multilateral Process potentially the source of greatest gains in trade • The most credible forum to progress on agriculture and the only platform for building world trade rules • …but widely viewed as too slow, unwieldy, and low-ambition to cater to complex regional policy objectives.

15. For members: Do RTAs create trade? …. Not automatically Estimated exponential impact on trade Overall exports Overall imports Intra-regional trade Note: The bars show the magnitude of the dummy variables capturing respectively the extent to which intraregional trade, overall imports and overall exports differ from the “normal” levels predicted by the gravity model on the basis of economic size, proximity and relevant institutional and historical variables, such as a common language.

16. Agreements with high external tariffs risk trade diversion Average weighted tariffs Note: Tariffs are import-weighted at the country level to arrive at PTA averages Source: UN TRAINS, accessed through WITS

17. Design issues are crucial to achieving objectives • Design • Large ex-post market • Low external tariff barriers • Nonrestrictive rules of origin • Wide product coverage with minimal exemptions • Liberalization of services • Facilitating trade at borders • Appropriate rules • Implementation: Avoiding paper agreements ….Open regionalism

18. Evaluating alternatives and South Asia’s systemic interests Basic methodology is computer (CGE) simulations Allows simulation of relative price affects based upon demand and substitution consideration However, outcomes are static, and do not account for productivity, technological change, and other dynamic effects Moreover, simulations do not model services liberalization, trade facilitation and lowering of other trade costs, or capture non-trade benefits of regional cooperation

19. Evaluating alternatives: South Asia gains most from a multilateral agreement Change in South Asia’s real income in 2015 from baseline scenario (percent) Multilateral SAFTA (by itself) SAFTA (w/ other RTAs) Note: “SAFTA by itself” assumes that other major regions do not form trading blocs that would discriminate against South Asia. “SAFTA with other RTAs” assumes an RTA in East Asia, the FTAA in the Americas, and a Europe plus African RTA.

20. Systemic issues…uneven and discriminatory access Preferences hurt excluded countries Hub and spokes put weaker countries at disadvantage Multiple arrangements burden customs

21. Overlapping African agreements… Nile River Basin COMESA IGAD ECCAS AMU CEMAC Somalia Sao Tomé & Principe Algeria Libya Morocco Mauritania Tunisia Egypt Cameroon Central African Rep. Gabon Equat. Guinea Rep.Congo ECOWAS Djibouti Ethiopia Eritrea Sudan Burundi* Rwanda* Ghana Nigeria Conseil de L’Entente Chad Cape Verde Gambia DR Congo Kenya* Uganda* Benin Niger Togo Burkina Faso Cote d’Ivoire Angola Guinea-Bissau Mali Senegal EAC Liberia Sierra Leaone Guinea Tanzania* Mauritius* Syechelles* Malawi* Zambia* Zimbabwe* SACU Comoros* Madagascar* WAEMU Mano River Union South Africa Botswana Lesotho CLISS Namibia* Swaziland* Reunion AMU: Arab Maghreb Union CBI: Cross Border Initiative CEMAC: Economic & Monetary Community of Central Africa CILSS: Permanent Interstate Committee on Drought Control in the Sahel COMESA: Common Market for Eastern and Southern Africa EAC: East African Cooperation ECOWAS: Economic Community of Western African Studies IGAD: Inter-Governmental Authority for Government IOC: Indian Ocean Commission SACU: Southern African Customs Union SADC: Southern African Development Community WAEMU: West African Economic & Monetary Union *CBI Mozambique SADC IOC

22. Systemic issues…uneven and discriminatory access Preferences hurt excluded countries Hub and spokes put weaker countries at disadvantage Multiple arrangements burden customs Disincentives to engage in multilateral liberalization

23. Implications for South Asia’s trade strategy… • Its greatest gains are through access to world’s markets • RTA proliferation risks diminished access in other regions • Rules-based system essential for South Asia’s trade growth because its exports are sensitive • South Asia has a special interest in strengthening the multilateral system • South Asia has an interest in WTO disciplines on RTAs • Get Doha Agenda done: • lowers risk of trade diversion for members • and minimizes effects on excluded countries A 3 pillar strategy for South Asia… • Unilateral: driving competitiveness • Multilateral: seeking broad market access • Regional: deep market access and institutional reforms (customs, ports, trade-related standards)

24. Global Economic Prospects, 2005:Trade, Regionalism and Development Uri Dadush and Richard Newfarmer World Bank December, 2004