Does WTO Accession Raise Income?

1. Does WTO Accession Raise Income? May 22, 2006 M.K. Tang Shang-Jin Wei Personal views, not necessarily shared by the IMF

2. Motivation I Accessions often involve extensive and sometime politically difficult policy changes (in recent years) • It took China 14 years to join • The median time gap b/n application and accession was 71 months for countries that joined after 1995

3. Motivation II Diverse Views on the Consequences • Beneficial (if sometimes bitter)? • “WTO accession provides a predictable business environment and gives a powerful guarantee to investors that there will be no policy reversals.” An advisor to the Ethiopian government • Irrelevant? • Andrew Rose (2004): “Do we really know that the WTO has promoted trade?” American Economic Review • Worse than irrelevant? • Developing countries squeezed for the benefits of rich and powerful nations, Jawara and Kwa (2003) Behindthe Scenes at the WTO: the Real World of International Trade Negotiations

4. Regime change for developing country applicants • Before the Uruguay Round: Very little policy change needed • After the Uruguay Round: Much more extensive policy changes typically demanded by existing members (except for countries qualified for GATT Article XXVI 5(c))

5. Value of accession • Market access in exchange for political support from reform-opposition • Commitment against future policy reversal • Previous work: on trade volume • Subramanian and Wei, 2004 • This paper: Effects on growth and investment

6. Methodology: Difference-in-differences in spirit • Change in growth before/after 43 accessions • Change in growth for non-accession developing countries during the same period Results: • Higher annual growth and Inv/GDP than before, especially for those undergoing more rigorous accession procedures

7. Addressing Endogeneity Concerns • Accessions with and without reforms • Application vs. actual accession • Formal statistical test using Heckman selection equation • Varying effects along commitment/ governance dimensions

8. Roadmap • Brief Description of Data and Specification • Statistical Results • Extensions and Robustness Checks • Conclusions

9. Data and Specifications Data • Per capita GDP, gross fixed capital formation, trade from WEO • Institution quality from WB’s “Governance Matters” • 1981-2003, exclude all industrial and OPEC countries

10. Empirical Specifications • i: country, t: year • s: “Time-profile” of accession, #years from accession {null, -2, -1, 0, 1, 2, 3, 4, 5, beyond} • Country and year fixed effects included • Treatment group: accession countries • Control group: other developing countries • Beginning period: 8 years before accession

11. Accessions: 1990-2001 Results for All Accessions • Growth sped up from 1 year before accession to 3 years after • Little effect on Inv/GDP though • Positive coef. est. but insignificant

15. Article XXVI 5(c) of GATT 1947 “If any of the customs territories, in respect of which a contracting party has accepted this Agreement, possesses or acquires full autonomy in the conduct of its external commercial relations and of the other matters provided for in this Agreement, such territory shall, upon sponsorship through a declaration by the responsible contracting party establishing the above-mentioned fact, be deemed to be a contracting party.”

16. Article XXVI5c vs. Non-Article XXVI5c Co’s • Heterogeneity in accession procedures • Article XXVI 5(c) – 18 countries • Upon becoming independent, former colonies of GATT members were entitled to formally join GATT almost automatically • The option can be exercised any time (up to the founding of the WTO) • Non-Article XXVI5(c) – 25 countries • Acceded by normal procedures (Article XII), meaning lengthy negotiations!

17. Results for AXXVI5c vs. non-AXXVI5c • Faster growth after accession than before: 72% non-Article XXVI5c vs. 47% Article XXVI5c • Higher Inv/GDP after accession than before: 59% non-Article XXVI5c vs. 38% Article XXVI5c

18. Non-Article XXVI 5c countries • Growth became stronger since 1 year before accession • Inv/GDP became higher since 2 years after accession • Article XXVI 5c countries • Growth: Weakly positive, insignificant effects on change in growth • Inv/GDP: Negative, insignificant effects on change in Inv/GDP

22. Extensions and Robustness Checks Timing of Spurs • Median interval b/w application and accession: 71 months after 1995, or 55 months since 1990 • Pickups in Growth and Investment after application die down gradually • But Growth and Investment rise again around accession

26. Testing Selection Bias Formally • Does the endogenous nature of membership status bias our results? • Employ 2-stage estimation a la Heckman • 1st stage: Probit estimation of membership status as a function of lagged GDP and Trade/GDP ratio • 2nd stage: Add in the inverse Mills ratio as an independent variable • Coef. est. on the inverse Mills ratio are insignificant => No evidence that selection biase is quantitatively important

28. Effects of Policy Commitments • Sample: Accessions after WTO formation • More standardized documents • 15 accessions • Commitments touch on general policies • Wide-ranging: e.g., TRIPs, transparency, competition policy, price controls, etc. • Might spillover to other non-trade areas • Clearly incorporated in Protocol – enforceable thru’ WTO dispute settlement mechanism

29. Measure of degree of policy commitments • # commitments explicitly stated in Protocol • Transparent, non-subjective • Not one-size-fits-all: “…accessions to the WTO will be ‘on terms to be agreed’… essentially a process of negotiation,” WTO.org • Alternative measure: # words in WP Report

31. Differential effects of policy commitments • First View: Countries w/ weak governance • May lack incentives to implement reforms • May lack credibility to follow through • Second View: Accession commitments may be a partial remedy for weak governance • So, effect of #commitments is stronger or weaker for countries w/ weak governance?

32. Differential Effects: Results • Interact the commitment variable w/ governance measure • Interaction terms negative and significant in both growth and investment regressions • Support the interpretation that accession-related commitment may partly offset the shortcomings of weak governance

34. Discrete categorization • Governance • Above world median (3): Good governance • Otherwise: Poor governance • Policy commitments • Above sample median (27): Many com. • Alternatively, #words > sample median: Many com. • Otherwise: Few com. • Basic results hold: Policy commitments have stronger effects among poor-gov countries (Table 13)

35. Conclusions • Accessions entail wide-ranging reform commitments • We yield affirmative results of accession benefits by • Distinguishing countries by the degree of accession requirements • Tracing out the trajectories of performance changes • Considering the endogenous nature of membership • Showing the differential effects of accession requirements on countries with different governance quality

36. ~The End~ Thank You

37. Stronger effects among poor-gov. countries on both growth and Inv/GDP • Difference in year 2 after accession among: Poor-gov.: 7.3 perc. points (change in growth) 40% (change in Inv/GDP) Good-gov.: -0.8 perc. points (change in growth) -52% (change in Inv/GDP) • Basic results hold with #words • Caveat: based on only small sample