Washington, D.C, September 3, 2003
Vice President, Poverty Reduction & Economic Management Dept
Economic Adviser, Trade Dept, and Development Economic Prospects Group. Also lead author of the report.
Lead Economist, Development Economic Prospects Group
Director of Communications
MR. RICE: Good morning, everyone. Thank you for coming. I think people are still trickling in, but I think we'll begin nevertheless.
Welcome to the World Bank for the launch of the Global Economic Prospects report, entitled this year Realizing the Development Promise of the Doha Agenda. I am Gerry Rice, communications director for the World Bank, and I'd just like to introduce the speakers this morning who will be making some introductory remarks.
Immediately to my left is Gobind Nankani. He's the World Bank's Vice-President for Poverty Reduction and Economic Management Network. To Gobind's left is Richard Newfarmer, who's the World Bank's economic adviser and this year's report's lead author. And to Richard's left is Mick Riordan, who's the lead economist in the Development Economic Prospects Group of the World Bank.
I'd just like to remind you about the embargo, which expires at 1:00 p.m. Washington time today. And after the brief presentations, as usual, we will throw the floor open to questions. We're going to close around 11:00 a.m. We will try to be prompt, because, actually, there's another briefing beginning at that time from the Latin America region, led by Guillermo Perry, who's the chief economist in that region.
Anyway, with no further ado, let me reintroduce Gobind and ask him to lead us off. Thank you, Gobind.
MR. NANKANI: Thank you, Gerry.
Thank you very much for being here this morning to be with us for the launching of the 2004 Global Economic Prospects report. The overarching conclusion of this report is that the Doha round of negotiations, if successful, can have a tremendous impact on global poverty. It promises to reduce global poverty by some 140 million persons by the year 2015.
The other major conclusion of the report is that global economic prospects are looking somewhat better, although there are still some uncertainties ahead of us.
The key question for us, really, in this week preceding Cancun is what will happen at Cancun. And I think there are still some uncertainties there, because the trade system we currently have is very much biased against the poor and because global recovery still needs some structural changes in order to be firmer.
As we approach Cancun, we have to ask ourselves will the countries at Cancun come together? Will they make the compromises that are necessary to arrive at an arrangement that will form the basis of a successful Doha round? And this is critically important, because it can make a difference to millions of poor people around the world.
Let me give a little bit of perspective on how poverty and poor people interact with the global trading system. First, on average, a poor person in the world faces twice the level of trade barriers -- tariffs, sorry -- as an average rich person. And there are some 2.7 billion people who live under situations of US$2 per day in terms of their income. So 2.7 billion people are facing barriers that are twice as high as that faced by an average rich person.
Another factoid: rich country agricultural subsidies, at some US$300 billion per year, are larger than the GDP of all of Africa. That number is also equal to six times all of the global aid that is given from developed countries to developing countries.
The good news, though, is that if we do have a successful Doha round, then, we can expect major benefits, up to some US$600 billion of additional income by 2015 shared by both developed and developing countries. And as I mentioned earlier, 140 million people can be lifted out of poverty simply on account of the successful Doha round by 2015.
The key issue, as far as poverty and trade is concerned, is market access. And I think in Cancun, we'll have a major set of discussions and hopefully agreements around this. And it's very simple: market access makes a big difference to the poor, because the poor have access to rich country markets; they can export more goods, particularly agricultural exports and textiles. And if subsidies are dropped by developed countries, then, they will be exporting these goods at higher prices than today, and hence, the link to income.
For Cancun, I think the success factors are very clear. First, it's very important that all countries do their bit to make Cancun successful. But having said that, it is critically important that the rich countries take action to break the deadlock. We have seen some momentum over the weekend with respect to the agreement on patented drugs. That's extremely welcome. But the big issue in Cancun will be agriculture. And I think it's extremely important that rich countries take actions to move that forward. The most important point is that Doha, with all of the gains that it promises, is too big an opportunity to allow to let slip.
Let me close by saying a couple of things about the Bank. The Bank has been working hard to ensure that the poor benefit from the global trading system, and we are working on a number of studies, some 20-plus studies, in countries as wide-ranging as Ethiopia, Madagascar; to the other extreme, Brazil, India, to see how those countries can best benefit from global trade. We are also doing a number of loans. Some 80 trade facilitation projects are either ongoing or under preparation.
And finally, we're doing a lot of research, an example of which you will see today: the Global Economic Prospects report.
And so, let me turn to Mick, who is the senior economist in the Prospects Department, and to Richard Newfarmer, economic adviser in the Trade Department, to walk us through this. Thank you.
MR. RIORDAN: Thank you very much, Gobind.
Can everyone hear me? Great. I'd like to review briefly some of the main messages of Global Economic Prospects 2004, the first related to the macroeconomic outlook. And that is that we feel that global recovery, although it's still fragile, is now underway, and developing countries are likely to outpace the rich countries into the forecast period as they have through the recent two years of sluggish growth.
Regarding Doha, the agenda has the potential to speed growth in developing countries further; to raise incomes and reduce poverty. And all countries, developing and advanced economies alike, have an interest in its success. But to realize this potential, governments have to tackle inequities in the world trading system and to forge an agreement that benefits the poor. Those are the key messages coming from the report.
I'd like to embellish a bit on the macroeconomic outlook as we see it currently. And looking first at the rich countries, and this slide shows GDP growth from the early 1980s through 2005, with the forecast highlighted. We see just a moderate recovery, with growth up by a percentage point, from 1.5 percent in 2003 to 2.5 percent in 2004. And indeed, the current cycle parallels very much that of the early 1990s, except this time, we anticipate a weaker recovery through 2005 this time.
It has been a difficult path to recovery. As we know, policy impetus has been substantial to mitigate the worst of the downturn over the last two years. But despite that policy support, production faltered once again at mid-2002 and into early this year, responding to difficult circumstances. The first was, of course, sharp cuts in investment and employment by corporations that were still struggling with the debt overhang of the 1990s occurred. And we had an overlay of, if you will, noneconomic events: the leadup to military intervention in Iraq; the advent of SARS, which tended to depress consumer confidence and clouded demand conditions for business.
But as consumer spending remained strong, particularly in the United States, what was a critical factor was the fall in investment spending. And for recovery to get off the ground, we looked for an improvement in business confidence and capital spending, and these were factors clearly required.
And now, we've seen that stronger than expected GDP releases for the second quarter of this year underscore a welcome pickup in investment spending in the U.S. and Japan, but we note also that the Euro area, which is basically absent here, with zero growth, has not yet reached this stage of the economy.
Among the improvements in the climate for investment, corporate profits are now advancing at double-digit rates in the U.S. and Japan. We have stronger equity markets across the OECD that have been sustained so far through this year that tend to bolster confidence, and they may also reflect improved economic expectations. And indeed, business sentiment is now picking up, and this includes Europe.
Should advances in capital spending be sustained and complemented by continued strength in consumer spending, a pickup in trade, stronger growth across the rich countries into 2004 is increasingly likely.
Well, the growth impulse from the rich to the developing countries flows through the international markets, and here, we've seen some very dramatic improvements since 2001. In trade, for example, this notion of export market growth…has risen from a decline in 2001 to growth of what we expect to be 8 percent by 2004. That's a very strong positive for developing country exports.
Non-oil commodity prices are firming as well in similar fashion, and in financial markets, international interest rates here, U.S. LIBOR, have paralleled the decline in policy rates, and LIBOR is down 250 basis points. That has made market access a bit less costly and, together with the compression of spreads on emerging market bond yields, has made access easier and, indeed, less costly. Capital flows have also showed an increase of about 20 to 30 percent over 2003 to date for developing countries.
Against this positive background, however, some risks do remain. Among these are the persistence of structural problems in the rich countries remain of concern, from widening external deficits in the United States to the battle against deflation in Japan and the fragility of the banking system there to the need for labor and product market reform in Europe. And the potential for additional shocks, given the situation in the Middle East; given the situation in oil markets, cannot be ruled out.
At the same time, the scope for additional policy stimulus has run its course as available policy leaders may be insufficient to accommodate additional challenges should they arise, and here, in particular, interest rates at historic low levels; the widening of fiscal deficits across the rich countries. And this is really suggesting that a policy focus to address go back to the structural issues, including trade, should receive some priority.
Turning briefly to the developing countries, we do see the beginnings of a robust outlook but note also that growth has been quite volatile over the last decade. And yet, at the same time, the longer-term trend remains upward. The 2001 downturn took a toll on growth but much less dramatic than in earlier episodes, and indeed, we've seen a very quick return to growth of 4 percent by 2003. This has been exceptionally swift.
We expect growth to ratchet higher still towards 5 percent over the next two years, as, on the external front, improvements in trade; greater access to international financial markets should be supportive. And on the domestic front, improving fiscal positions, moderating inflation, very large increases in international reserves should allow policy stimulus to support domestic demand if required.
Looking at the economic performance by region and comparing near-term projections through 2005 in red against recent historical numbers in blue, we note that all regions are expected to enjoy a boost in growth over the short-term forecast.
East Asia is expected to enjoy fastest growth benefiting from the quick containment of the SARS epidemic and eventual upturn in the high tech cycle and the reignition of intraregion trade.
South Asia should benefit from renewed growth in India, which growth had been depressed earlier largely due to weather-related factors but also a burgeoning growth in the Bangalore high-tech services sector and manufacturing. This should power the South Asia region.
There are mixed developments in Europe and Central Asia, where we anticipate a pickup in growth in the Central European countries that are EU accession candidates while, at the same time, a slowing of growth for some of the CIS countries, including Russia, that have had very strong growth rates based on oil exports over the last year or so.
And Latin America, we expect to see the most substantial change in the wake of recent financial difficulties and election outturns and moving to a stronger recovery over the forecast period.
Finally, for both the Middle East and North Africa and for Sub-Saharan Africa, the gains are likely to be lower: In the former region, as economic uncertainties may persist as well as political uncertainties; in Sub-Saharan Africa, where weaker commodity prices or those commodity prices for Sub-Saharan Africa and still-sluggish European growth may play a role.
Finally, we would like to shift gears and look at the longer-term outlook, and here, we compare growth in per capita terms. And here, longer-term trends through 2015 remain upbeat for most regions, contrasted with the performance of the nineties here in blue. And this supports, in part, the expected achievement of the Millennium Development Poverty Goals for developing countries as a group, though Africa, in particular, is expected to fall far short of this target.
And the notable exception to the sectoral advance in growth is East Asia, where you have maturing economies growth slowing modestly.
What are the factors behind this? Well, it's continuation of favorable trends in domestic policies yielding productivity gains and, importantly, further opening to trade and hope for broader trade liberalizations are the main factors.
I'll turn it over to Richard for his comments.
MR. NEWFARMER: Thank you very much, Mick.
One of the policy levers that the international community has to influence the long-term growth prospects that Mick just outlined, of course, is international trade and what is going on at the WTO. We wanted to ask the question, well, what would a good WTO agreement look like, a good agreement on the Doha agenda?
So we did a global simulation that brought down tariff peaks in agriculture; brought down tariff peaks in manufacturing. It lowered averages. And we found out that a good agreement could boost incomes anywhere from US$270 billion to US$520 billion, depending on the assumptions. These models are open to interpretation because of assumptions, but basically, developing countries would stand to gain anywhere from half to two-thirds of the total benefit from a good Doha agreement. That's US$350 billion of additional income that we could expect in addition to normal growth, the income that normal growth would produce by 2015.
The importance of this is underscored when we look at the 140 million people that Gobind talked about at the beginning and the allocation of them. Remember, Africa, as Mick said, is one of the regions that is unlikely under current projections to meet the Millennium Development Goals. A good Doha agreement that lifted 140 million additional people out of poverty could markedly help Africa. Indeed, nearly half of the total projected increase of the number of people lifted above poverty would accrue in Africa.
But to realize the development promise of the Doha agenda means reducing the barriers that face poor people all over the world. And here, agriculture is a priority, particularly border protection and subsidies in the rich countries. Reducing protection on manufactures -- and here, tariffs tend to be higher in developing countries against developing country exporters as well.
And then, finally, low-income countries have to reduce their reliance on trade preferences and, indeed, work hard to increase the competitiveness of their exports.
Let me say a word about each one of these areas. In agriculture, one of the striking features about the international trading system is that developing countries have failed to penetrate agricultural markets of rich countries, in contrast to what they have done in virtually every other market. If you look, for example, at manufacturing, the developing countries' share of total world exports in manufacturing to rich countries has risen from about 12 percent to over 22 percent in 2000. Similarly, intraregional trade in developing countries has also expanded. So their share of manufactures in each others' markets has increased.
They also have increased in agriculture, but only in trade with each other. Meanwhile, exports to rich countries during this period have fallen.
One of the important reasons for this is that the high level of protection in rich country markets has remained virtually unchanged since the mid-1980s. This is a stark contrast to what has happened in manufacturing protection. Remember, at the end of World War II, in 1945, the average level of protection in manufactures globally was on the order of 40 percent. That's come down to about 4 percent today. Meanwhile, in agriculture, the level of protection has remained high, on the order of 60 percent.
This graph shows the producer support, that is, the level of protection that rich country farmers get in the U.S., Japan and other industrial countries -- that's Switzerland, Norway, and the like -- divided between border protection and direct subsidies from the treasury. And as you can see, in the U.S., the average level of protection is on the order of 35 or so percent by this measure. In the EU, it's substantially higher, and, of course, Japan is the highest of all, save for Norway, Switzerland and so forth.
The other remarkable thing about this is that the level of protection has remained virtually unchanged. This is quite a sharp contrast to what has happened in developing countries. This shows the average tariffs for agriculture in developing countries, and they have gradually brought down their tariffs. They are still high, but they brought it down rather substantially in the 1990s. And that explains, in part, the pattern that I showed you a bit earlier about the increasing cross-penetration and trade in agricultural markets in developing countries.
Similarly, in manufacturing, there are inequities in the global trading system which work to the disadvantage of developing countries. This graph shows the average tariffs industrial countries charge to exporters from different regions. Industrial countries charge each other about 1 percent on their trade. They charge, however, East Asia 5 percent, and in South Asia, about 8 percent.
What does this mean? This means that a country like Mongolia, exporting into the United States, pays the same level to U.S. tariff authorities as does Norway, even though Mongolia exports to the United States one-twentieth of what Norway does. Or, to flip that around, looking at it differently, it means that a country like Uruguay exports into the U.K. market and pays eight times what exporters from the United States pay. So there is a fundamental inequity in the international trading system that Doha can address.
But the problem is not only in the rich countries. The problem is also in developing countries. This graph shows the protection faced by Latin American exporters, and a Peruvian exporter, for example, exporting to the Middle East is going to pay on the order of 8 percent in foreign tariffs. If Peru exports to the regional market, it's actually going to pay even more. So protection in the South is also terribly important.
If we look at this, and we put them both together, one way to think about this is what is the total amount of tariffs an exporter pays? And so, if you look at East Asia, an East Asian exporter to the global marketplace pays about 40 percent of its total tariffs to the industrialized countries. It pays about another 40 percent to other East Asian countries, and the remainder is paid to other developing countries. So this shows you the importance of both North-South trade in lowering tariffs as well as South-South trade. Developing countries have an interest in reducing protection in the South as well as the North.
Low-income countries have a lot at stake in Doha. They have relied, in the past, on preferential access to markets in the rich countries but have performed rather poorly. What do I mean by preferential access? I mean programs like the Generalized System of Preferences, which grants duty-free access to developing countries. This graph shows the share of least-developed countries, the 49 least-developed countries, in the EU and U.S. imports. And you can see there has been very little change from the marginal percentage total of imports into those countries over the period of the late 1980s and 1990s.
Moreover, if we look at preferential programs and the performance of least-developed countries in preferential programs, we don't see much increase in overall market share. This shows the CBI (Caribbean Basin Initiative), the African Growth and Opportunity Act, and the Andean Pact, and basically, you're seeing a flat performance.
This means that developing countries, the least-developed countries, particularly, have to look to other things, including reductions in their own level of border protection but also donor assistance.
And here, on the issue of donor assistance, trade logistics can be as important as cutting tariffs. Half of developing countries face a situation in which their transport costs are more important than the tariffs they face. That means if you can succeed in reducing your transport costs, improve your ports, your customs, and your internal transport costs by 10 percent, it's the same as a 10 percent reduction in tariffs.
And here, time is money. This graph, for example, just to illustrate one point on customs, this shows the average number of days it takes for sea cargo to clear customs in South Asia as compared with the rich countries. In South Asia, a good stay in the ports is on the order of 10 and a half days. In Latin America, it's on the order of nine days. And in developed countries, it's just a little over two days.
Each day in the port adds about 0.8 percent to the total cost of the landed goods. So if developing countries can marshal assistance from abroad as well as their own domestic resources to improve their trade-related institutions, they can give themselves, in effect, their own tariff cut.
Well, in summary, to realize the development promise of the Doha agenda, all countries have to take responsibility for the outcome. Rich countries, particularly, have to lead in this effort, as Gobind mentioned: in agriculture, in labor-intensive manufactures. They also have to get together on development assistance and services. This is particularly in the area of temporary movement of workers.
Middle-income countries have to be willing to lower their high external tariffs, and this would be a benefit to themselves and to their neighbors, as we have seen from the graphs. And finally, low-income countries have to rely less on trade preferences and reform their own trade-related institutions to expand their exports.
MR. NANKANI: Thank you.
MR. RICE: Thank you very much, Richard.
We can throw it open to questions now. I'd just like to remind everyone that, as normal, we do post the transcript on the Web. So to help the transcriber, if you can identify yourself in asking the question, we would appreciate it. So, the floor is open.
MS. WILLARD: Anna Willard from Reuters.
I was wondering if the Bank thinks China should change its exchange rate regime and what kind of impact that would have on world poverty and trade.
MR. NANKANI: China has had an exchange rate that's pegged to the dollar, and it's important to recognize that, around the world, we now have basically floating rates, but (in) some countries, rates that are fixed.
The dynamics are such that as countries increase their exports in the way in which China is doing, appreciation of the currency will take place. The real issue is at what point in time and with what complementary reforms.
I think it's important to recognize also that in the case of China, its imports have also been rising significantly, which has been good for growth in neighboring countries, and indeed, imports from the U.S. have also been rising. So the whole question really is a question of timing and complementary reforms.
MR. SOTERO: Paolo Sotero from Estado do Sao Paolo.
I wanted to know a little bit more of the assumptions on what you call successful Cancun or Doha Round. You mentioned 140 million people being lifted out of poverty. You mentioned numbers of added income. What are the assumptions? What type of tariff reduction, non-tariff barriers? Give us some numbers on that.
MR. NEWFARMER: You'll find in the text, in Chapter 1, a rather detailed explanation of it. Basically, we collapse tariff peaks in agriculture in developing countries to 15 percent and brought down the average tariff in agriculture to 10 percent. In rich countries, we collapsed tariff peaks to 10 percent and reduced the average to 5 percent rates of protection.
In manufacturing, we brought down tariff peaks in developing countries to 10 percent across the board, with a lower of the whole average structure down to 5 percent. And in rich countries, we brought down the tariff peaks all the way to 5 percent and lowered the average to about 1 percent.
This would be a difficult arrangement to make. It's a bit of a kind of a stretch challenge, as it were, to the international community. That said, I think it's important to recognize that the numbers we put forward focus only on merchandise trade. In part, we, as economists, haven't developed global models that can model service sector liberalization. And here, the gains are likely to be very large indeed for developing countries. So these possible gains associated with the service sector liberalization are not included in that US$520 billion number.
For example, in the area of temporary movement of workers, not considered in the US$520 billion number, we estimate that should developing countries be able to take full advantage of what's called Mode 4 under the General Agreement on Trade in Services, they could reap as much as US$160 billion worth of additional income. So there's a lot of things that are not included in that overall number, which leads me to think it's an estimate on the low side.
MS. SCOTT: Heather Scott with Market News International.
I wanted to ask a couple of questions on the risks that you list. How severe of a risk do you think deflation -- you cite that in the report in saying that monetary officials have to really focus on that. The Federal Reserve has been sort of downplaying that as a severe risk.
Also, the risk of a turnaround in the current account deficit in the U.S. and a sharp dollar correction. A lot of people have mentioned that as a possible risk. But is that a real threat? Are we really worried about that? Or is that something that's sort of theoretical?
MR. RIORDAN: Well, when we look at the risk, we're looking at three or four. There's no specific very heavily-weighted down side risk, if you will, but it's a combination of those.
The first one we pointed out -- well, it's not the first that we pointed out, but the key is that it seems to us that fiscal and monetary measures basically have run their course. If you will, the Fed could push to 0.5. The Japanese could go negative on their policy rates. Clearly, the ECB could reduce rates a bit further. But on the fiscal side, in Europe, given the Maastricht criteria; in Japan, with deficits of 7 to 8 percent and the U.S. heading to 4 to 5 percent of GDP on the fiscal deficit, you're starting to lose wiggle room in terms of what ammunition you have to stave off potential shocks.
The question of -- and those shocks could, I guess, by definition, are unknown, but they could emanate from oil markets or from developments in the Middle East. So our key concern is that we are running out of ammunition, and we do have these structural issues: as we noted, the widening U.S. current account deficit; the battle against inflation in Japan; reforms in Europe that still have to go on, so I would think specifically in relation to deflation, studies have suggested that Germany may be at some risk of that occurring, given the appreciation of the euro and the, you know, three or four quarters of negative growth that we've seen there. But deflation risk in the United States seems a bit further off.
MR. RICE: Thank you. I think there was a question over there?
MS. ZIEGLER: Julie Ziegler with Bloomberg News.
I'm wondering if it's fair to say that this report is increasing the pressure a little bit on developing countries to do their part. In the past, there seems to have been more of an emphasis on what rich nations need to do. Is that a fair assessment?
MR. NEWFARMER: Maybe I wouldn't say it exactly that way. The way I would prefer to think about it is that we hope that it puts pressure on all of the international community to come to an agreement, because all of the international community has an interest in a successful outcome and will gain from a successful outcome.
The dynamics of the negotiation will take their own course. It will be interesting to watch that next week. Clearly, the rich countries have to take the lead in this process. The single most difficult issue at Cancun, now that the TRIPS agreement has been taken off of the table, is agriculture. And clearly, this is one issue where I think the onus is on the rich countries, from the numbers that I've shown you here, and from the entire dynamics of the negotiation.
We need rich country leadership to make this arrangement happen and happen in a way that benefits poor people.
MR. NANKANI: Yes; I would just reiterate that we are talking about rich country action as critical for breaking the stalemate, and developing countries need to complement that, and they need to do a lot also to increase outside trade. But rich country action is critical.
MR. RICE: I think there was a question in the middle and one down in the front.
MR. PUERTAS: Yes, Jose Puertas from Agence France-Presse.
In Mr. Mick Riordan's presentation, toward the end, you show a table with the long-term prospects for different regions. My question is why is that Latin America is -- what are the reasons for Latin America's prospects to be among the worst in the developing countries, only just slightly ahead of Africa? 2.5 percent is the projection there.
MR. RIORDAN: Yes, well, I think there are a couple of things going on. The first is population dynamics, that the population growth is still rather fast in Sub-Saharan Africa. But the second is, yes, at 2.5 percent per capita growth over the very long-term; the second is you've had more or less a period of -- how shall we say? -- consolidation from the recent financial difficulties, and there still is our outlook for the industrial countries in the longer term and particularly for the United States is not as ebullient as one might imagine. It's more towards potential growth on the area of maybe 2.8 percent, 2.8 to 3 percent.
So it's a factor of somewhat less robust growth in its major partner markets and a gradual process of achieving some of the macro stabilization and reform efforts going forward.
MR. NEWFARMER: Can I just add to that? Actually, the Latin American region in the World Bank has done some wonderful analysis of this, but basically, our long-term forecasts are very much influenced by growth in total factor productivity as well as rates of capital accumulation and investment in education.
And in all of those areas, there is room for improvement in Latin America. Part of it has to do with the issues that Mick mentioned: maintaining sustained macro stability over a very long period of time, something that hasn't been true in Latin America, whereas, it has by and large been true of East Asia.
Investments in education are generally running below East Asian levels in Latin America as compared to, as I say, East Asia. And then, finally, savings rates are still on the low side in Latin America. We hope that because of recent reforms in the financial system which are becoming more common, the increased macro stability that we've seen as budget deficits have gradually come down, that that savings rate will increase, and once we get through this period of moving towards current account balance and the adjustment coming out of Argentina and the difficulties in Brazil that we'll begin to see Latin America move up.
But I would commend to you the next press conference, where we'll probably go into this in greater detail with Guillermo Perry.
MR. DUNPHY: Harry Dunphy, AP.
The EU and the U.S. have reached an agreement on agricultural subsidies in advance of Cancun, but it's very vague. And I know, Mr. Newfarmer, you have said that the negotiations will assume a dynamic of their own. But I wondered if you could be more specific about how the industrialized countries might flesh out an agreement, given the powerful constituencies that are behind the subsidies: Mississippi cotton farmers, French farmers in general?
MR. NEWFARMER: Well, I think the answer to that, in part, is given by the fact that rich countries have a lot to gain in coming together with a deal. And what that means is they have to overcome some of the particular interests. We are talking about a very small group of people in both Europe and in the United States and Japan that tend to benefit from exorbitant amounts of subsidies.
And these are not poor farmers that we are talking about. We are talking about farmers that, by and large, on average, have incomes that are higher than the average level of incomes prevailing in their own countries. So it's a situation where the general tax system, that the poor in the world are being taxed, in effect, to subsidize the richest.
Why would Ambassador Zoellick and Mr. Lamy and the other wealthy countries want to come to an arrangement? Well, it's because their industry and their services would have opportunities to gain access to markets that they wouldn't otherwise have. And we think that's a big incentive. We think that there is a good possibility that there will be a strong effort on the part of the rich countries to forge an agreement going into Cancun. Whether it will succeed or not is an open question.
MR. SITOV: My name is Andrei Sitov. I'm with the Russian News Agency ITAR-TASS.
For a country like Russia, where there is a debate, an internal debate, as to the benefits or disadvantages of joining the WTO, what would you say from the vantage point of the World Bank? What would be the advantages that would outweigh the natural advantage of having cheap energy resources, for instance? And can you quantify any of those, if you can?
MR. NEWFARMER: Well, it's very difficult to quantify exactly, but one of the benefits is bound access to European markets. As Russia becomes a more dynamic exporter in the global marketplace, and it begins to diversify out of energy, its exports will want assured access to European markets, to Western markets generally, and there is a real advantage to Russia in doing so.
On energy prices, I think it's not so clear exactly what the outcome is going to be of those discussions. That remains to be seen. It's not clear to me that it will be necessary for Russia to make a great deal of movement on domestic energy prices, but that remains to be sorted out between the working party and Russia.
We would like to see Russia join the WTO. It's hard to imagine a World Trade Organization without a country so important as Russia.
MR. RICE: I think there was another question down in the front.
MS. GREGG: Diana Gregg with BNA.
I was wondering, could you just talk a little bit about the outlook for oil prices and what the variables there are?
MR. RIORDAN: Yes; the current ratcheting of prices appears to be largely seasonal in nature. One of the difficulties is that U.S. crude oil stocks are at very, very low levels, but product stocks have been sufficient or almost sufficient to carry us through the driving season.
If we look at the global supply and demand balance, there is clearly, with OPEC production having been ramped up to cover the loss of Iraqi output, there is clearly enough crude petroleum out there, either on the water or on the way, and U.S. imports of crude have been increasing fairly rapidly.
The difficulty has been more on the supply side in refining and processing of the fuels, and the recent ratcheting up is related both to those seasonal demand pressures, the driving season, as well as some of these technical aspects at refineries.
We do anticipate -- the higher oil price has been somewhat of a surprise to us. We anticipated that it would be easing over the course of 2003, as stocks were replenished from higher OPEC production, but we do expect that over time, over the next year, the price will be coming down.
MS. YING: Ying He, Xinhua News Agency.
Mr. Newfarmer mentioned that there are still some fundamental inequalities in the international trade system just now. Could you talk more about that, please? Thank you.
MR. NEWFARMER: Well, we've seen it in both the areas of agriculture and in manufacturing. As Gobind mentioned, poor people face twice the tariffs that non-poor face in the global marketplace.
In manufacturing, in order to get into the markets of the industrialized countries, poor countries have to pay anywhere from two and a half to seven times more than do other rich countries. Part of this has to do with how the system of tariff reductions and, going back to the GATTs, actually occurred. Originally, it was sort of a rich country club in the fifties and sixties. And so, rich countries reduced tariffs in response to products that were of interest to them, and those were mainly in manufactures, and in manufactures that they felt comfortable in trading.
As it now turns out, of course, developing countries have become very important in the membership of the WTO. And so, their interests are fundamentally different than what has led to the current situation.
Let's take, for example, the issue of antidumping. Antidumping measures affect developing countries at a rate three times what they affect rich countries. Now, recently, other middle-income countries particularly have gotten into the antidumping game and are also taking actions against imports, and they tend to file antidumping claims at a rate of two to one against developing countries, two actions against developing countries for every one action against a rich country.
So the system is emerging in such a way that developing countries' exporters have real problems in market access, and we hope, therefore, that the Doha agenda can begin to resolve that.
MR. NANKANI: Let me complement that with two examples relating to tariff escalation. The tariff system in the U.S. is such, for example, that a Chilean exporting raw tomatoes would pay a tariff of about 2 percent; canned tomatoes of about 5 percent; and processed tomatoes, about 12 percent. So as a result, more and more of the exports are raw.
Another example from Africa: cocoa bean exports. The tariff on cocoa beans into the European Union is 0.5 percent. The tariff on chocolates is 30 percent. As a result, a country like Ghana, Ivory Coast, these countries, produce the bulk of the world's cocoa, and all of the exports are cocoa beans. The chocolates are all produced outside of Africa.
MR. RICE: A question in the back?
MR. LUDWIG: Arthur Ludwig [ph], German Public Radio.
You were talking about the sluggish growth in Western Europe, and in your press release, you connected this to the especially problematic situation in Germany. Do you see any significant change in Germany coming up? And if you look at the reform efforts of the German Government, do you think that the German Government is on the right track?
MR. RIORDAN: I think a couple of interesting things have occurred recently, and that is the indicators of business sentiment have turned up, even though the recent output figures have been fairly depressing.
I think there's also the case that, aside from policy, that the euro area is beginning to adjust to the stronger value of the euro. It has made trade more difficult. It has, you know, exports have dropped fairly sharply. Extra-EU exports have dropped. But there does offer the possibility that domestic demand, should confidence increase, become the source of growth, in contrast to what we normally see for the European Union.
I think some of the reform efforts that have been proposed that are in action in Germany are on the right track, and it's clearly essential, particularly in labor markets and in product markets. Being able to shop on Sundays now, I think, is a wonderful thing. And maybe this will do something for growth.
But the interesting part is that although when you look at the current statistics, Europe looks like it's struggling, the expectations of businesses, not necessarily consumers, seems to be picking up.
MR. RICE: Yes?
MR. YOUNG: Brian Young from Nippon Television.
I have a question regarding Japanese tariffs, because, you know, lots of countries are complaining about the high tariffs on agricultural products being exported to Japan. And in the future, the upcoming Cancun meetings, what do you comment on the Japanese possible -- you know, do you think the Japanese Government should, or what is the Japanese Government going to take to react to these complaints?
MR. NEWFARMER: Well, it's impossible for us to say exactly how the Japanese Government will react to the negotiating positions in Cancun at the end of the day. We do hope, however, that the Japanese Government, along with other rich countries, moves rather assertively to reduce its external levels of protection.
Its levels of protection, as measured by the numbers that I've put up here, are substantially higher than even what they are in Europe, and Europe is already very high. The rice market is particularly important to exporters of Southeast Asia, Thailand in particular. Even exports coming from China are very important. The case of Shiitake mushrooms, you may recall, is extremely important for China.
Looking to the future, Japan has a very important role to play in making a deal happen in Cancun.
MR. RICE: There's a question right here?
MS. RABER: Pat Reber, German Press Agency.
You've talked about this ideal model that you've worked out that would bring approximately 140 million people out of poverty. What would the industrialized countries stand to gain from these concessions at the WTO, if you could just sort of outline them broadly?
MR. NEWFARMER: Number one, they would gain from the faster world growth, which, of course, means faster growth for themselves as well as the rest of the world. Secondly, they would gain the US$170 billion in additional income -- which is not a big number, by the way. I should point that out; it's not a terribly big number, but it's an important number. And thirdly, the poor in their own country would benefit from a gain.
Remember that the tariff structures that keep the products from poor people out of the market are often precisely the products that the poor in Germany, in the United States, actually consume. So, for example, a t-shirt which comes in over a very high tariff into the United States is consumed by, more often, poor people in the United States than they are, as a percentage of income, than they are middle-class people or upper-class people.
And you can actually study the distributional effects within rich countries, and you find out that they will be fairly strong. I don't know where I am on my numbers here, but let's say the (fourth) benefit is if you were able to reduce those subsidies, it would mean taxpayers in rich countries would have to pay less. We calculate the average working family pays US$1,000 in excess or in taxes to support their relatively wealthy farmers.
And when the tax system is a little unequal or regressive, that means poor people in rich countries are subsidizing rich farmers in rich countries. So there are three benefits, and we could talk about more. We would also see higher productivity growth, frankly, in the North as well.
MS. HAUSMANN: Patricia Hausmann from U.N. Wire.
Could you talk about these disadvantages that industrialized countries would have if they decide to cut subsidies and tariffs? Because, like, to me, obviously, there are disadvantages. Otherwise, they would have done it a long time ago.
MR. NEWFARMER: A little bit depends on the way tariffs and subsidies are actually cut. It is unlikely that there will be an immediate reduction in border protection and subsidies from one day to the next. This is likely to be phased in over a number of years. In fact, even in the model that we've presented to you, we assume that whatever comes out of Doha will be phased in over five years.
That gives time for people to adjust. The second thing is that if you take, as an important first set of steps, on the issue of domestic subsidies and you delink them from production, you can have an enormous impact on developing countries while preserving the incomes of those farmers you wish to protect.
For example, if you pay them not to produce more, but you simply transfer income to them and say do what you want with the income, that would allow them to back out of products where they might not have a comparative advantage and begin to shift into other products where they would.
In order for that to work, you have to reduce the level of border protection, because otherwise, there is no incentive for a Norwegian beef producer or sugar beet producer, for example, to get out of sugar beet production. Basically, you have to make sure that the price incentives work together with whatever subsidy program that you have. But there are ways of managing this.
A third thing that would be very important is targeting subsidies in agriculture to small farmers, because after all, that's often the rationale. It's not the large corporate farmers who are going to be hurt by this. But there may be some small farmers. And you could reduce subsidies and target them more effectively and thereby help manage the transition.
MR. RICE: Okay; is there a final question from anyone? Okay.
QUESTION: I apologize if I was late. I realize you were talking about the Chinese currency, and I understand that there are more than the Chinese currency in the world in current, you know, trade issues between China and the U.S. and Japan and other countries. Can you elaborate a little bit more than the Chinese currency issue, like, what other issues are going to affect the possible, you know, trade wars or something, like, between China and, you know, the U.S. and Japan or some other countries?
MR. NANKANI: Well, I think I answered this question earlier, but basically, what we have is a situation in which China's exports are growing extremely rapidly. It's a fast-growing economy. It's making a major contribution to the global economy.
And we know that in all economies in which this kind of export growth takes place, over time, the currency does appreciate. So as I said earlier, it's really a question of when and what complementary reforms the Chinese Government feels it needs to undertake to deal with that.
I think the impact that China's growth is having on neighboring countries and, indeed, on the global economy is tremendous, and in fact, Chinese trade surplus are also an important source of financing for the current account deficits in many countries, including the U.S.
MR. RICE: Thank you, Gobind.
Just a reminder: there will be a transcript, and it will be posted on the Web. The embargo is 1:00 p.m. today. And there's a follow-up briefing for those who are interested on Latin America specifically to take place on the third floor of this building. That's J-3-044, and it remains for me to thank our speakers here today: Gobind, Richard and Mick, and to thank all of you for coming.
Thanks a lot.