World Bank Report Highlights Need for Success at Cancun Trade Talks - Europe and Central Asia Growth Prospects Prove Resilient Yet Modest

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. But the meetings occur at a time when the global economy and international trade are languishing. And as the report notes, the trade talks are stalled over disagreements on issues of particular importance to developing countries -- agriculture, tariff reductions in 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, and eventually raise incomes around the world, leading over time to a substantial reduction in global poverty, according to the Bank.

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 the dynamic middle-income ones, could 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.

Moderate growth expected for Europe and Central Asia Region

ECA's aggregate growth forecast of 4.3 percent in 2003 reflects stronger than expected growth in a number of countries, particularly in Russia, which exhibited firming domestic demand during the first quarter. The deceleration of ECA aggregate growth between 2002 and 2003 is primarily due to a projected moderation of growth in Turkey following a sharp upswing in 2002. In 2004, ECA growth is forecast to accelerate to 4.5 percent, reflecting faster growth in Central and Eastern European Countries (CEECs) and slowing activity in the Commonwealth of Independent States (CIS).

Growth in the CEECs is projected to accelerate moderately to 3.4 percent in 2003, compared with 2.9 percent in 2002, due to continued penetration in export markets and to an expected boost in consumer confidence due to progress in the EU accession process. In particular, growth is projected to accelerate moderately in Albania, Czech Republic, Poland (which represents 13 percent of the region's GDP), and Slovenia. Growth in the remaining economies is forecast to either remain flat or decelerate moderately. When Turkey is included, growth in the CEECs is projected to accelerate from 3.5 percent in 2003 to 4.3 percent in 2004.

In the CIS, growth is projected to strengthen in 2003 to 5.3 percent, as domestic demand has begun to accelerate in Russia, underpinning growth there, which in turn should support growth in other CIS countries dependent on Russia's import demand. First quarter data for 2003 show strong growth in energy exports and industrial activity in Russia, spurring stronger investment, especially in the energy sector. This, coupled with an increase in private consumption - boosted by strong growth in real incomes and falling unemployment - is leading to higher output. Further, the recent appreciation of the euro against the dollar has led to increased import prices for Russian imports from Europe, relative to dollar-denominated oil export revenues, which in turn is stimulating increased demand for cheaper domestic products.

Growth is expected to slow in the CIS from 5.3 percent in 2003 to 4.6 percent in 2004, assuming a significant decline in the oil price in 2004.

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 of developing countries. Direct budget subsidies to producers by the EU cost around $100 billion annually, and depress world market prices in sugar, dairy, and wheat, while indirect support through high tariff walls further raises prices to consumers. Beyond tariffs, other measures such as quotas, specific duties, and anti-dumping further impede world trade. In the EU, the share of specific duties for final products is almost three and a half times the share for raw goods.

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

Stern emphasized that realizing these gains requires all countries take responsibility for the outcome. The report challenges all segments of the international community to offer "concessions" that will in the end benefit themselves as well as 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 cost the average family in the EU, Japan, and US roughly $1,000 a year. Slashing agricultural protection would result in cheaper food and labor-intensive manufactures for consumers in those 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 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.

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

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

For the third year in a row, the global economy in 2003 is growing well below its potential, at an expected rate of 2 percent (see table). The pace of activity faltered at the end of 2002 and early 2003 in response to events that undermined confidence: 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," said 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 firmed, 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 the 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 achieved 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, controlling 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."