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Italian Presidency Document (Beyond Debt Relief):
Contents
2001
The existence of a close relation between trade and economic growth has been largely explored in the analytical as well as in the empirical literature. Openness to trade affects growth and welfare by improving production efficiency through specialization based on comparative advantages. Three additional channels have also been identified: i) higher level and efficiency of investment, stimulated by the increased market size and greater access to capital goods; ii) higher productivity, resulting from the diffusion of technological advances and faster knowledge growth; iii) greater competition, leading to more efficient allocation of resources both in production and consumption.(1)
Empirical evidence confirms that openness and growth are positively related.(2) Comparative studies carried out on the economic performance of different groups of developing countries show that the poorest, slowest growing countries are on average less open compared to the faster growing, middle income countries which have been better able to take advantage of the opportunities provided by increasing trade and globalization.(3)
In the past two decades, a number of developing countries have not been able to sustain and diversify their exports and have been marginalized in world markets (table A.1). The countries that have not been able to benefit from globalization are the poorest ones that are also in the greatest need of improving their trade performance as a means for boosting growth. The least developed countries (LDCs), which account for 10 percent of the world population and 0.6 percent of global GDP, barely reach a share of 0.5 percent of world exports, down from 0.8 per cent in 1980. This pattern is also confirmed for other subsets of countries such as HIPCs and other IDA-eligible countries which partly overlap with LDCs.
Several factors account for LDCs' loss of market share. LDCs' production and export structure is heavily concentrated in sectors, such as agriculture and low value added industrial processing (table A.2), where world demand has been growing at a lower pace than income.(4) Developed countries, the main destination markets for LDCs' exports, impose high tariffs, combined with quantitative trade restrictions and heavy recourse to domestic subsidies, on a number of sensitive products particularly in agriculture and low technology manufacturing where many poor countries have the greatest potential to expand their exports (table A.3) (5). Contrary to the experience of a number of successful emerging economies in Asia, LDCs have not been able to overcome these obstacles to trade as attempts at export diversification have been hampered by low internal capacity, inadequate infrastructure, badly regulated markets and weaknesses in domestic trade-related policies. External developments have not been favorable either. LDCs have been hit hardest by the failure of both developed and developing countries in November 1999 in Seattle to jumpstart a new round of multilateral trade negotiations addressing development issues. The paralysis of the WTO is disastrous when seen from the perspective of the poorest countries, which continue to face substantial barriers to trade.
LDCs will not be able to benefit from expanded trade as an engine for growth unless concrete action is undertaken on the part of the industrial countries to improve LDCs exports' access to their markets and the infrastructure necessary to sustain export expansion. A comprehensive, simple and transparent initiative is needed to eliminate all remaining barriers to trade with these countries by extending unrestricted, across the board, duty free and quota free access for all products originating in LDCs. To maximize its effectiveness the liberalization should be accompanied by the commitment to avoid using contingent protection mechanisms such as antidumping and safeguard actions against LDCs.
i) The context of the multilateral trading system
The liberalization initiative would not be incompatible with the set of rules disciplining the multilateral trade system. The possibility for special and differential treatment for developing countries in general and the LDCs in particular has been established within the WTO in recognition of the fact that many developing countries could not compete on equal terms with developed countries.(6)
ii) The focus on market access
The current system of rules for international trade based on 'Generalized System of Preference' (GSP) schemes and other preferential trade arrangements adopted by the industrial countries in favor of developing countries has had only limited success in generating significant export growth or improving the trade shares of beneficiaries. In particular, the preference system has not prevented LDCs' marginalization in world trade. There is scope for improving the preference system and reducing tariff barriers imposed by industrial countries against LDCs' exports, as discussed below.
The liberalization initiative should be carried out jointly and should be simple, transparent and comprehensive, eliminating exemptions and special regimes that raise the level of effective protection of industrial countries.(7) It should lead to the abolition of "tariff peaks" (rates above 15 percent or 3 times the OECD average) that are more frequent for agricultural goods and low-technology manufactures and therefore affect disproportionately LDCs exports, and to a curb on the phenomenon of tariff escalation (i.e. tariffs rising with stages of further processing) so as to encourage further processing and increased value added in these countries.
Preferences are not bound in the WTO and can be withdrawn unilaterally for instance in case of a sudden, strong rise in exports. The new initiative should provide for an open-ended liberalization so as to achieve maximum certainty and predictability in the treatment of LDCs' exports.
iii) Awareness of the need for action is spreading
In recent months a number of market opening proposals have been launched by major industrial economies to facilitate the access of exports by LDCs' and other subsets of developing countries to their markets.(8) However, single-handed, unilateral initiatives are bound to have limited impact. The need for a new initiative that would represent the outcome of coordinated action within the G7 was flagged by Prime Minister Amato in the Okinawa summit of July 2000.
iv) The selection of the beneficiaries
The definition of the beneficiaries of a market opening initiative launched in unison by the major countries can lead to different options. One can start by identifying a "minimum common denominator" set of countries that have been targeted by the recent initiatives composed by Sub-Sahara African countries that are also LDCs and HIPC-eligible. LDCs constitute a category of beneficiaries which is already identified in the WTO. There are also valid arguments for extending this proposal to other vulnerable poor countries,(9) for instance HIPC-eligible countries characterized by high external indebtedness,(10) or other IDA-only countries, which should not be penalized by the advantage granted to their close competitors and which, like LDCs, suffer from low internal capacity and weak institutional frameworks that hamper their efforts at export growth and diversification.
The costs and benefits of the initiative have to be assessed. If implemented jointly and without restriction, the proposed liberalization could lead to a significant expansion in LDCs' exports to world markets and to a permanent rise in their welfare. Costs mainly fall in two categories. First, liberalizing countries may see a substitution of imports for domestic production and a loss of tariff revenue. These costs are projected to be very small since the initiative is circumscribed to a subset of countries that account for a negligible share of world exports. The projected increase in export is proportionally large for LDCs but small relative to the size of industrial countries' markets. Second, the initiative would increase competition for other developing countries' exports. For similar reasons, the costs associated with the trade diversion effect are also expected to be limited.
The impact of the trade liberalization proposal has been simulated on the basis of a multi-country Computable General Equilibrium model.(12) The estimation exercise leads to the following conclusions:
These conclusions appear robust (16) and are broadly consistent with the results obtained by other empirical analyses undertaken at a more disaggregated product and country level.(17) In particular, more detailed and disaggregated estimations of the effect of market access liberalization at the product and country level confirm that the elimination of tariffs imposed by the major countries on some 'sensitive products' allows LDCs to substantially increase their exports in these sectors (table A.5). Given the very low initial level of LDCs' exports of these products and the supply constraints existing in these countries, the projected export increase is still small relative to the absorption capacity of the major destination markets. No conclusive evidence is found of a significant impact of the proposed liberalization on either domestic producers or other competitor developing countries for sensitive products (table A.5).(18)
The extension of duty free access for products originating in the poorest countries may have limited effect if accompanied by restrictive rules of origin, (14) by requirements of conformity to strict regulations, by standards, by testing and certification procedures or if it remains subject to the threat of antidumping, countervailing duties and safeguard actions. The costs of non-tariff barriers and the lack of adequate infrastructure to sustain export expansion are as important and critical as providing access through removal of traditional border barriers.
Specific actions are called upon to deal with these non-tariff barriers to trade.
To seize the opportunities of trade liberalization, LDCs need to develop supportive policies. Without these policies the dividends from increased access to developed countries markets cannot be fully reaped.(19) Industrial countries should assist those LDCs willing to develop consistent economic policies and give trade-related policies a high priority.
In recent years, the international community has stepped up the provision of trade-related technical assistance to LDCs.(20) However, many LDCs have expressed frustration at the multiplicity of vertical initiatives with little horizontal co-ordination. The 'Integrated Framework' Program recently re-launched by six development Agencies is a potentially powerful tool to achieve better co-ordination in mainstreaming trade policies into national development strategies such as the PRSPs. (21) An Integrated Framework Trust Fund was recently established for all LDCs but the Program remains heavily under-funded.
In order to achieve full and effective integration into the multilateral trade system, LDCs need to be helped to improve their ability to formulate appropriate trade strategies, to negotiate with trading and investment partners, to implement trade and investment rules and to effectively exploit the mechanisms available to safeguard the functioning of the multilateral trade system. Participation in the WTO is key in this regard.
With the entry into force of the WTO in 1995, negotiations to accede to the WTO have become more complex and difficult.(22) As a result, since its foundation in 1995, no LDC has so far been able to gain membership of the WTO.(23)
1 Wacziarg (1998), Ben David and Loewy (1995), and Krugman (1995). In imperfectly competitive markets, openness to trade generate additional gains relating to the exploitation of economies of scale, to rationalization of production and to increased product variety. Greater openness also favors poverty reduction and development via increased growth (Dollar and Kraay 2000).
2 Rodriguez and Rodrik (1999), Rutherford and Tarr (1998), Edwards (1998)
3 World Bank, GEP December 2000; IMF, WEO May 2000.
4 See World Bank, GEP December 2000.
5 The growth of exports of developing countries to industrial countries has been shown to be inversely related to the degree of tariff protection in the latter (see UNCTAD 1999).
6 The decision of the GATT Contracting Parties of 28 November 1979 (the "Enabling Clause") made developing countries eligible for lower rates of duty on their exports to developed countries and provided for further possible differentiation in favor of LDCs.
7 These also increase administrative costs in developing countries where institutional capacity is low.
8 The list includes: the "Everything but the arms" proposal by the EU Commission and the proposals by the Japanese and the Canadian governments directed to the LDCs; the African bill adopted by the US focusing on a number of countries in Sub-Sahara Africa and in the Caribbean and Central American regions. These initiatives are not WTO-bound and often include the possibility to make recourse to safeguard clauses.
9 This requires operating a selection of potentially most affected countries within the broader group of the developing countries. The preferential treatment extended by developed countries to developing countries already discriminates between different countries, often according to criteria that are not always transparent or economically meaningful. Even the criterion for differentiation among developing countries in favor of the category of LDCs explicitly recognized within the GATT/WTO is based on per capita income levels but with an arbitrary cut-off point. Additional vulnerability criteria could be considered for differentiating between non-LDC developing countries.
10 A market opening initiative would complement and enhance the debt cancellation by boosting the export and GDP variables in the denominator of the debt sustainability ratios.
11 The issue of moral hazard needs to be considered to avoid penalizing the countries that have behaved well in the past by refraining from accumulating unsustainable debt.
12 Based on the work carried out within the Development Research Group of the World Bank by Ianchovichina, Mattoo and Olarreaga (2000). Their analysis takes into consideration five alternative scenarios including the provision of duty and quota free access for exports from Sub-Sahara African countries of: 1) apparel to the US; 2) all products to the US; 3) industrial products to Japan; 4) all products except arms to the EU; 5) all products to the QUAD.
13 This subgroup includes all Sub-Sahara African countries that are also either LDCs or HIPCs and represent a "minimum common denominator" between the set of countries indicated as beneficiaries in the different liberalization proposals recently advanced by the major industrial countries.
14 For comparison, the total cost of the HIPC initiative is estimated at $ 28.6 billion, of which $ 11 billion pertaining to Paris Club creditors.
15 Preliminary estimates of a similar exercise for a wider sample of beneficiary countries including also Bangladesh carried out within the World Bank seem to show that the qualitative conclusions remain unchanged: LDCs benefit substantially from the liberalization, trade diversion is not significant and overall import growth in Quad countries will be small.
16 These include further work carried out within the Development Research Group of the World Bank by Hoekman, Ng and Olarreaga (2001), the report prepared for Oxfam on the 'Impact of the EU's 'Everything but Arms' Proposal by Stevens and Kennan of the Institute of Development studies of January 2001, the report prepared in November 2000 by the DG-Agriculture within the EU Commission containing first remarks on the possible impacts of the proposal on the agricultural sector.
17 These include apparel in Canada and US, tobacco in the US, meat, sugar and cereals in the EU and cereals in Japan. In particular, sugar is causing a debate on the potential size of the increase in exports from LDCs to Europe. Estimates vary from 100,000 (Stevens and Kennan, 2001) to 2.7 millions (EC-Agriculture 2000) of tons. The former figure appears more realistic, given that total production of sugar by LDCs today is around 1.8 million tons. Hoekman, Ng and Olarreaga (2001) estimate an increase of around 50 million dollars that at current world prices would amount to around 250,000 tons.
18 These may require for instance that an established proportion of value added originate in the country of export in order to contrast phenomena such as transshipment. Ensuring the respect of these rules usually entails high administrative costs that may be unsustainable in countries with low administrative capacity.
19 Trade expansion requires a multidimensional strategy for integrating into the global economy. LDCs need to pursue open development strategies by reducing export taxes and barriers to imports. Trade reform should be accompanied by fiscal reform aiming at shifting taxation from international trade flows to value added and consumption and by consistent macroeconomic and exchange rate policies. The elimination of the numerous distortions against investment and FDI is a necessary complement for trade liberalization to gradually generate a broad "supply response".
20 For example, the Joint Integrated Program (JITAP) involving UNCTAD, the WTO and the ITC and funded by a group of donors has successfully delivered multilateral technical assistance to eight African countries, four of which are LDCs. Bilateral trade-related technical assistance programs have also gained importance, such as those supporting reforms in LDCs seeking to join the WTO, those developed under the Cotonou Agreement, etc.
21 The Integrated Framework was set up in 1996 as a coordinating tool for trade-related technical assistance provided by six multilateral Agencies (WTO, IMF, UNDP, ITC, WB, UNCTAD) to poor countries. Recently, the Program has been broadened with a view to developing a partnership with the donor community.
22 This is because in addition to market access concessions on goods, traditionally required under the GATT, accession to the WTO includes negotiations on market access on services and the establishment of a wide range of legislative acts covering, in particular, commitments on intellectual property protection, measures relating to investment and other more technical issues.
23 Only those (30) LDCs that are already Members of the WTO have benefited from the general outcome of the Uruguay Round negotiations and have not been subject to any specific negotiating process. Only 9 of the remaining 19 LDCs are currently negotiating their terms of access under the provision of Article XII.
Source: Official website of the G8 2001 Genoa Summit (archive.org)
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