November 1, 2001--Removing barriers to trade, the topic of WTO meetings in Doha in early November, could significantly boost the long-term prospects of developing countries, many of which are suffering from the fall-out of the September 11 attacks and a worldwide slowdown. That's according to Global Economic Prospects and the Developing Countries 2002: Making Trade Work for the World's Poor, the World Bank's yearly report on prospects for developing countries released on Wednesday.
The report paints a grim picture of the short-term outlook for poor nations because of the simultaneous downturn in the US, Europe and Japan. Growth in developing countries is expected to fall to 2.9 percent in 2001, nearly half the 5.5 percent recorded in 2000. Latin America, East Asia, and Sub-Saharan Africa are particularly hard hit this year. Nonetheless, if industrial countries begin to recover by mid-2002, as the report projects, growth in developing countries may edge up to 3.7 percent in 2002.
But the report says reshaping the world's trade system and reducing barriers to trade could accelerate medium-term growth and reduce poverty around the world. Expanding trade could well increase annual GDP growth by an additional 0.5 percent over the long run - and by 2015 lift 300 million people out of poverty in addition to the 600 million escaping desperate poverty with normal growth.
"To make this happen, we need a new trade architecture," World Bank Chief Economist Nicholas Stern told reporters Wednesday [see transcript]. "The WTO discussions at Doha should be a round that's focused on the interests of developing countries and, in particular, market access of their exports, with agriculture and textiles being high on that list."
Trade matters more in today's integrated world than ever before. Indeed, performance in 2002 could be threatened by lower growth in the volume of world trade if consumers and businesses in industrial countries do not respond to lower interest rates or net fiscal spending, or if unpredictable events associated with the terror attacks prove disruptive.
"The terrorist attacks put a huge drag on the already sputtering engines of the global economy. What makes this situation unusually risky is that this is the first time since 1982 that the US, Europe, and Japan have all turned down at the same time," Richard Newfarmer, principal author of the report, said in a statement.
As a result, growth in trade in 2001 has undergone one of the severest decelerations in modern times - from 13 percent in 2000 to perhaps 1 percent in 2001. Developing countries are confronting a 10 percentage point drop in the growth of demand for their exports, seriously undermining their growth this year. Newfarmer adds, "On the upside, the volume of world export growth is expected to pick up to 7.2 percent over 2002-3."
Citing the cost of subsidies to agriculture imposed by rich nations, which amount to estimated US$1 billion a day, or more than six times all development assistance to poor nations, the authors list numerous barriers that adversely affect developing countries, including subsidies, high tariffs on selected products of developing countries, and tariff codes of high-income countries that discourage forward processing in developing countries.
The report proposes a four-part policy agenda to "reshape global trade architecture to promote development": launching a Development Round in the WTO, promoting global cooperation to expand trade outside the WTO, encouraging new policies in high income countries to provide assistance that will expand trade, and advocating for trade reforms within developing countries to accelerate development.
"If this four-point program were to be successfully implemented," said Senior Economist Aaditya Mattoo, "there are likely to be substantial gains, both from the elimination of inefficiencies arising from protection and from the realization of productivity gains arising from greater openness. Our estimates suggest that over the ten years following liberalization, world income could increase by as much as $2.8 trillion, and more than half these gains would accrue to developing countries."
Global Economic Prospects says the outlook for 2002, though subject to unusually high risks, is that the global economy will recover: Developing countries are expected to grow by 3.7 percent if the external environment holds, up from 2.9 percent in 2001, while it is expected that the world economy will grow by 1.6 percent.
"The harsh external environment translates into lower growth for all the world's six developing regions this year compared to 2000," said World Bank Lead Economist Hans Timmer at Wednesday's press briefing. "The slowdown for East Asia is especially sharp."
The weakness in Europe and declining commodity prices also put additional pressure on countries in Latin America, Central Europe, and Sub Saharan Africa. South Asia, less integrated into the world economy and with a vibrant service sector, has been less affected by the deteriorating global environment, while in the Middle East and North Africa oil revenues - which account for almost two-thirds of the region's export revenues - provide a better short-term outlook than in other regions. Still, because of the double whammy of simultaneous downturn in US, Europe and Japan and the terrorist attacks, all regions have suffered slower growth. This is because of the deceleration in trade, drop in tourism, and the higher costs of capital, as lending to higher risk developing countries has virtually ceased for all but the best borrowers.
The report says that, despite the tough circumstances in 2001, the long-term prospects for developing countries are promising. This is to a large extent due to improved macroeconomic management, rising savings, increased openness, and greater diversification. Average per capita growth of 3.6 percent is forecast for 2005-2015 for developing countries and 2.5 percent for high-income nations. Export markets are expected to recover robustly by 2003, but commodity prices may remain depressed for some time.
However, even with these favorable growth prospects in most regions, some could be left behind, making it difficult to meet development goals of reducing child mortality, halving poverty and raising literacy rates. Non-oil commodity exporters, countries with high debt levels, and nations with poor credit histories will find themselves at a disadvantage in trade and financial markets. Sub-Saharan Africa in particular confronts enormous problems in all of these dimensions - as well as the public health epidemic of AIDS. For these reasons, invigorating the global trade agenda, granting preferential access to low income countries, and providing aid to expand trade is imperative, even in these times of uncertainty, the authors stress.
Useful links: The report summary and related materials
available at worldbank.org/prospects/gep2002.