Success at Cancun Trade Talks and Trade Growth Can Boost Recovery of Latin America and the Caribbean

WASHINGTON, September 3, 2003- A trade deal that addresses the concerns of developing nations could spur growth and reduce poverty by as much as 144 million people by 2015, as well as boost the economic recovery of Latin America and the Caribbean, says a new World Bank report published on the eve of a meeting of the world's trade ministers in Cancun 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 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. World trade is projected to grow by 4.6 percent, slightly more than last year, but still less than half the rate in 2000.

The Latin America and the Caribbean region (LAC) is expected to grow 1.8 percent this year -following a 0.8 percent drop in 2002-and increase to 3.7 percent in 2004 and 3.8 percent in 2005. The relatively quick recovery expected in 2003 and 2004 is mainly attributed to the return of confidence after the electoral transition in Brazil and the beginning of recovery first in Argentina, and then in Uruguay, after their deep crises. Most of the region, and in particular, Chile, Mexico, Peru and Colombia showed significant resilience to the adverse external shocks of 2001/2002.

"The region's contraction is over," says Guillermo Perry, World Bank Chief Economist for Latin America and the Caribbean. "Improving world trade growth, coupled with increased economic growth in the industrialized countries led by the United States, should further boost the export-led recovery of Latin America. Further trade liberalization worldwide would permit even stronger export led growth in the region, as elsewhere in the developing world. That's why the WTO talks in Cancun are so important."

According to the Bank, a significant WTO agreement would increase trade, and eventually raise incomes around the world, leading over time to a substantial reduction in poverty. For Latin America, increasing trade is particularly significant as this is one of the most important factors behind the economic recovery, while liberal trade and market friendly policies have helped diversify and broaden the regional export base, according to the report.

Global Economic Prospects 2004 notes that Chile and Mexico suffered least from the 2001-2 economic downturn thanks to their effective integration in the global economy and good macroeconomic policies. But the Caribbean countries and some small Central American nations are still facing some challenges as their preferential trade agreements are expiring or are severely eroded, while their successful attempts at diversifying towards tourism and financial services received a severe setback in 2002.

According to the report, there are many inequities that drag down export growth of developing countries - Latin America and the Caribbean included.

"Removing trade barriers and subsidies in the rich countries is crucial. Exporters from developing countries generally have to pay more to get into foreign markets, and Latin America and the Caribbean is no exception," says Richard Newfarmer, economic adviser in the World

Bank's Trade Department and Development Prospects Group, and lead author of the report. "Industrial countries on average charge about 1 percent on their imported manufactures from each other, but 2 percent from Latin America, even if this is a region where NAFTA weighs heavily."

But just as rich countries should show leadership by reducing agricultural protection and by cutting high tariffs against development countries' manufactures, development countries should also make their part, says the report.

East Asian exporters face tariffs in other East Asian countries that are 60 percent higher than in industrial countries. And Latin American exporters of manufactures face average tariffs in Latin America that are seven times higher than tariffs in rich countries, according to the Bank.

d. Goods and non-factor services.  

Source: World Bank baseline forecast July 2003.

"High barriers to trade among middle income countries hurt the poor in these nations as much as the barriers put up by rich countries," says Perry. "The region should deepen liberalization, while investing more in skills and technology that are a vital complement to trade reform, as they enable countries to raise their productivity to the competitive levels needed to take full advantage of the market access that multilateral trade liberalization would offer."

The economic recovery

The relatively quick recovery of LAC can be attributed to both domestic and external factors. In addition to trade and market friendly policies, Global Economic Prospects 2004 highlights sound domestic macro-policies, such as the reduction of inflation and public deficits; the achievement of healthier current account positions, a weaker dollar that has made servicing the region's dollar denominated external debt cheaper, and the reduction of spreads on yields of foreign sovereign debt.

For 2004-5, the region is projected to grow even further thanks to the recovery of world trade and economic growth expected in the industrialized countries, and also to the fact that the region's largest economies will have surpassed the worst of their crises (Argentina and Uruguay) or potential for crises (Brazil and Colombia). According to the report, most countries should experience a recovery of domestic demand and record positive rates of growth.

These projections assume that no domestic or external adverse development reverses the easing of financial pressure on the region's most vulnerable countries.