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World Bank Report Highlights Need for Success at Cancun Trade Talks

WTO Breakthrough Would Spur Confidence, Boost Incomes, Reduce Poverty
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Press Release No:2004/055/S

News Release 2004/055/S

Amy Stilwell
Lawrence MacDonald

WASHINGTON, September 3, 2003 — A trade deal that addresses the concerns of developing nations could spur global growth and reduce poverty by as much as 144 million people by 2015, according to a new World Bank report issued today. The report is being launched on the eve of a meeting of the world's trade ministers in Cancun next week that will review progress on WTO negotiations on the Doha Development Agenda.

The report Global Economic Prospects 2004: Realizing the Development Promise of the Doha Agenda presents a detailed overview of the world economy, and the near-term outlook. It also offers a rigorous analysis of global trade issues, particularly those that head the agenda for discussion at the WTO meeting this month.

Officially, the Cancun meetings are an interim stocktaking for the negotiations, which are scheduled for completion by January 1, 2005. However, the meetings occur at a time when the global economy and international trade are languishing. As the report notes, the trade talks are stalled over disagreements on issues of particular importance to developing countries, such as agriculture, tariff reductions on manufactures, special treatment for developing countries, and drug patents in poor countries. Progress in Cancun could bolster investor confidence, and create momentum towards a more significant WTO agreement that would spur trade. Such a result would eventually raise incomes around the world, leading over time to a substantial reduction in global poverty.

The latest GEP projects anemic growth of 1.5 percent in 2003 in the industrialized world, well below potential. It foresees better performance next year, as industrial countries' growth rises to 2.5 percent. Developing countries are somewhat more buoyant than industrial countries, growing at 4.0 percent in 2003, and, if the recovery stays on track, will grow at 4.9 percent in 2004. (Growth forecasts in table on final page). World trade is projected to grow by 4.6 percent, slightly more than last year, but still less than half the rate in 2000.

World Bank Chief Economist Nicholas Stern believes it is important for the rich countries to take the lead in negotiating a fair outcome to the Cancun negotiations.

"They are the dominant players and account for two-thirds of the global market," says Stern. "They could show leadership by reducing agricultural protection, cutting high tariffs, and ensuring that the poorest countries have access to affordable medicines on the same terms as bigger developing countries."

The report also notes that developing countries, especially dynamic middle-income nations, can contribute to a good "Doha deal" by agreeing to undertake trade liberalization measures that would help boost global trade, and that are in their own interests as well.

"The talks are approaching a critical juncture," says Uri Dadush, Director of the Trade Department at the World Bank. "If ministers can reach an agreement to reduce trade barriers affecting the products that poor people produce - especially farm products and labor-intensive manufactures, it would help raise their standard of living. If not, an opportunity will be lost. "

Removing barriers to developing countries' exports would accelerate their growth

The report points to inequities in the world trading system that drag down export growth in developing countries. In agriculture, for example, Japanese support to rice producers amounts to 700 percent of production cost, which effectively shuts out exports from Thailand and other producers. Direct budget subsidies to producers by the EU cost around $100 billion annually, and depress world market prices in sugar, dairy, and wheat. These subsidies also have the indirect impact of raising prices paid by consumers. The US spends $50 billion annually on direct support to its agriculture sector alone. Annual cotton subsidies to US farmers of more than $3 billion (three times US foreign aid to Africa) depress world cotton prices and crowd out poor but efficient farmers in West Africa.

"Exporters from developing countries generally have to pay more to get into foreign markets than exporters in rich countries," says Richard Newfarmer, economic adviser in the World Bank's Trade Department and Development Prospects Group, and lead author of the report. "Industrialized countries on average charge each other tariffs of about 1 percent on their imported manufactures, but collect 5 percent from East Asia, 6 percent from the Middle East, and 8 percent from South Asia. Mongolia, for example, pays nearly the same dollar amount in tariffs to the US government as Norway, even though it sells only 3 percent of what Norway sells in the US," Newfarmer says. "Can anyone argue this system is living up to its development potential for the poor?"

The report argues that a "good" WTO agreement could produce about $290 billion-$520 billion in income gains to both rich and poor countries, lifting an additional 144 million people out of poverty by 2015 (see box).

How much would tariff cuts raise incomes?

GEP 2004 presents a simple scenario that shows how lower trade barriers in agriculture and smaller tariff peaks could promote growth and poverty reduction.

Under this scenario:

  • Rich countries cut tariffs to 10 percent in agriculture, and to five percent in manufacturing;
  • Developing countries reciprocate with tariff cuts to 15 percent and 10 percent in agriculture and manufacturing, respectively;
  • All countries eliminate agricultural export subsidies, “decouple” domestic subsidies to minimize the trade distortions, and eliminate specific tariffs, quotas, and anti-dumping duties.

This formula generates gains which amount to about three quarters of those that might be possible through full trade liberalization. If the reforms outlined above were implemented progressively over five years to 2010, and accompanied by a realistic productivity response, developing countries would gain nearly $350 billion in additional income by 2015. Rich countries would benefit too, with gains in the order of $170 billion.

All of this would mean that there would be 144 million fewer people living below $2 per day by 2015.

The international community has to work together to get a positive outcome

Stern emphasizes that to realize these gains, all countries must take responsibility for the outcome of the WTO negotiations.

"Rich countries have to lead – by reducing agricultural protection, by cutting high manufacturing tariffs, and by expanding access to affordable medicines," says Stern. "It makes no sense for rich countries to encourage developing countries to adopt policies that will promote growth, and then adopt trade policies that reduce the growth prospects of those same developing countries."

The GEP notes that developing countries, especially middle-income countries, could contribute to a good "Doha deal" by undertaking their own initiatives. By opening to trade they can lower the cost of imported inputs, and become more competitive internationally. This creates new opportunities for small farms, and for small and medium-sized businesses, which means more jobs for poor people.

"High protection in middle-income countries hurts their poor neighbors in the same way as trade barriers in rich countries," says Dadush. For example, Latin American exporters of manufactures face average tariffs in Latin America that are seven times higher than tariffs in industrialized countries. East Asian exporters face tariffs in other East Asian countries that are 60 percent higher than in rich nations.

The report challenges all segments of the international community to offer "concessions" that will in the end benefit themselves as well as their trading partners:

Industrialized countries will benefit by cutting protection and agricultural subsidies—most of which go to large farmers who already make more than the average family in the EU, Japan and US. These measures cost the average family in these regions roughly $1,000 a year. Slashing agricultural protection would result in cheaper food and labor-intensive manufactures for consumers in those countries. At the same time it would help raise the incomes of poor farmers in developing countries. In return, rich countries might get greater access to still-protected services markets in middle-income countries.

Middle-income countries will have better telephone and financial services if more foreign competitors were allowed to enter services markets– and at the same time they would get access on better terms to the rich countries and the dynamic markets of other developing countries. Middle-income agricultural exporters would be among the biggest winners from agricultural liberalization, as the reduced subsidies and over-production by industrial countries would create new opportunities.

Low-income countries that today tax imports heavily will find they benefit from domestic reforms that lower the costs of imported inputs, increase domestic competition that spurs productivity growth, and lead to expanded exports. They can move away from an over-dependence on trade preferences granted for political convenience by rich countries, and move toward production based on their comparative advantages. Despite their widespread appeal, trade preferences to expand export opportunities have a mixed record in practice. Given complicated rules of origin and uncertainties in administrative regulation, only 40 percent of products eligible for preferential access actually come into the rich countries using these preferences.

Donors and multilateral agencies also must help improve the world trade system

"Just because a foreign market lowers its trade barriers, it doesn't mean a country can suddenly export," says Newfarmer. "It takes investments in ports, roads, and education, and improvements in local institutions like the customs and tax authorities. International donors can provide resources—financial and human—to undertake these critical investments."

The GEP notes that improvement in ports, customs, and other trade-related infrastructure could raise global trade by some $380 billion over several years.

"Moreover, the development agencies have a responsibility to help poor countries as they adopt policies to cope with erosion of preferential access, rising prices on food imports, or lower tariff income due to domestic reforms," adds Newfarmer.

The global recovery is tentative, but headed in the right direction

For the third year in a row, the global economy is growing well below its potential, at an expected rate of 2 percent in 2003 (see table). The pace of activity faltered at the end of 2002 and early 2003 in response to events that undermined confidence, including: the build up to war in Iraq, trans-Atlantic tensions, and concerns about Severe Acute Respiratory Syndrome (SARS).

"The world economy is still not firing on all cylinders," says Hans Timmer, head of the Bank's global trends team, "but current trends point to a better 2004."

Activity in much of South Asia is holding up well. Countries in East Asia and the Pacific lost some growth momentum due to SARS, but its apparent containment has opened the way to continued rapid growth. Africa continues to struggle, however. Although the region's commodity prices have improved, they are still well below long-term trends. War has affected regional performance in the Middle East and North Africa, while many countries in Europe and Central Asia are undergoing sluggish growth tied to lackluster conditions in Western Europe, especially in Germany. Latin America is beginning to recover from a severe recession, as growth in Argentina has picked up, pre-election jitters in Brazil have largely passed, and Mexico is recovering.

Global growth is projected to accelerate to 3 percent in 2004. Early signs of renewed economic activity are appearing in the United States – including an upturn in orders, production and exports, as well as stronger equity markets. Japanese output increased at 2.3 percent during the second quarter of the year, which is stronger than expected, yet conditions in Europe continue to be extremely slack. Improvement in confidence across OECD centers will prove the key to a revival in capital spending and more robust growth.

Growth in developing countries is likely to accelerate to 4.9 percent in 2004, spurred by a revival of world trade, the fading of global tensions, and the rekindling of domestic demand. Latin America is expected to see the most substantial gain.

A return to stronger growth in India should power the South Asia region, while more moderate gains are expected in Europe and Central Asia, tracking the slower pace of revival in EU activity. The pick-up in growth will be lower in the Middle East and North Africa, where uncertainty regarding the regional political and economic situation is likely to persist, and in Sub-Saharan Africa, where only moderate gains in commodity prices and sluggish European growth play a role. In 2005, growth rates could ease modestly to about 4.8 percent, in line with previous peaks in 2000 and 1996–97.

"The much-improved underlying policy fundamentals in most regions – progress on budget deficits, contained inflation, and greater trade openness – are a solid foundation for realizing productivity growth in 2004," says Timmer. "But persistent structural problems in rich countries - such as the twin deficits in the US and weaker performance of Japanese and European banks - risk precipitating a disruptive fall in the US dollar or other unexpected confidence shock that cuts off the investment recovery. If these risks materialize, all bets are off."

Global GDP projections, 2003-2005 /1
Percentage change200020012002200320042005
High income countries3.
OECD countries3.
United States3.
Euro Area3.
Non-OECD countries6.6-

All developing countries5.
East Asia and Pacific7.
Europe and Central Asia6.
Latin America / Caribbean3.50.3-
Middle East / North Africa4.
South Asia4.
Sub-Saharan Africa3.
Developing excl China / India

Source: World Bank, Development Prospects Group.
Note: /1 GDP in constant 1995 U.S. dollars.

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