Stormy MILDNER - Reasearch Fellow at Yale University and Free University of Berlin

How industrialised countries can help developing countries through trade

1. Introduction
1.2 billion people live on less than $1 a day; another 1.6 billion people live on less than $2 a day. In Africa, the region with the largest share of people living on less than $1 per day, slow growth increased both the share and the number of the poor over the 1990s. In the Middle East and North Africa, the proportion living below $2 per day increased from 25 to 30 percent of the population. Poverty also rose markedly in the transition economies during the 1990s. Due to the financial crisis in Argentina, poverty is also rising in Latin America again. In particular the least developed countries (LDCs) remain marginalized in the world economy. So far, it does not look like that the EU Millennium goals such as the reduction of the proportion of people living on less than one dollar a day by half can be met.
In the light of these developments, policy measures which will boost growth in developing countries and which will integrate them closer into the world economic system are of great importance. The successful conclusion of the trade negotiations within the Doha Development Round of the WTO in January 2005 would very well prove to be a measure to integrate the developing countries further into the world economy, since increasing trade and trade liberalization is one of the proven paths which accelerate growth and development. But to achieve this, greater cooperation between the EU and the US, the willingness to make compromises and the willingness to overcome differences between themselves as well as the provision of leadership are utterly needed.

2.Trade and Development: The Benefits Deriving from Trade
Let us first look at why trade will benefit the developed as well as developing countries. Trade theory, such as Ricardo's comparative advantage theory, predicts various benefits deriving from trade liberalization - not only from expanding exports but also from expanding imports. Firstly, free trade fosters the optimal allocation of resources and the employment of a country's comparative advantage, which will lead to cheaper and more efficient production procedures as well as to a widening of the goods supply and lower prices, which will benefit the consumer. In addition, increasing competition can lead companies to produce more efficiently and consequently to more competitiveness. Free trade also opens up new markets and can thus foster export-led growth. Furthermore, international free trade leads to international specialization, through which economies of scale can be achieved. For technical advancement, the pace at which new technologies are being introduced plays an important role. Through the opening of a country's market, more technological know-how will flow into the country, leading to a higher growth level.
There is also considerable empirical evidence that trade and trade liberalization accelerate growth. Scholars like David Dollar and Aart Kraay , Jeffrey Sachs and Andrew Warner , Sebastian Edwards and Frankel and Romer point out convincingly a strong positive causal effect of trade on growth in their studies.
Dollar and Kraay single out a group of post 1980 globalizing countries, which have experienced large increases in trade and significant declines in tariffs over the last 20 years and whose growth rates accelerated until the 1990s. These include Malaysia and Thailand, which started to liberalize in the early 1980s, Bangladesh and India, with reforms taking place mainly in the 1990s, Mexico, and Brazil. According to this study, globalizers have experienced an increase of their growth rates from 2.9% per year in the 1970s to 3.5% in the 1980s and 5.0% per year in the 1990s. In contrast to this, the developing countries, which are not in the globalizer group, faced a decline in their growth rates from 3.3% per year in the 1970s to 0.8% in the 1980s with a slight recovery to 1.4% in the 1990s. Thus, while the globalizing countries are catching up to the developed countries - growing more rapidly than the developed countries -, the non-globalizing part of the developing world is falling behind. In particular, these countries, which have been left out of the globalization process and have become more and more marginalized have to be targeted by international measures.

3. The Doha Ministerial Round: A True Development Round?
Since the integration of developing countries into the world economy is utterly important, the conclusion of the WTO Ministerial Meeting in Doha, Qatar, in early November 2001, and the launch of a new round of trade negotiations can by itself be seen as a success, in particular with regard to the failure of the start of a new Round of trade negotiations in Seattle in 1999.
The developing countries have viewed a new Round of negotiations as utterly important in order to remove some of the inherent imbalances within the WTO as well as on the world market. Thus, developing countries were rightly unsatisfied that the developed countries followed through their commitments to reduce textile and agriculture protection rather slowly. While developing countries had expected that about half of their exports of textiles and clothing would be freed from quotas by 2002, they found that most of them would remain restricted until December 31, 2005. Despite the fact that the average tariffs of the developed countries are very low, trade barriers in the areas, where developing countries have a comparative advantage such as agriculture and labor intensive manufactures (textiles), remain very high. The World Bank estimates that protectionism in the developed world costs developing countries more than $100 billion per year.
The Doha Ministerial Meeting proved to be an important steppingstone in reducing these imbalances. Thus, development was a key horizontal issue throughout the Doha Declaration and was included in the commitments made on trade-related technical assistance and capacity building, in areas of market access, as well as in special and differential treatment.

Development Goals: Technical Assistance and Capacity Building
Capacity building was seen as utterly important since smaller developing countries and LDCs are still facing various problems. Some of them cannot cope with the complexity and diversity of the issues as well as the density of the negotiations and meetings. For others it is also impossible to participate effectively in more than a few small issues since they are lacking the necessary expertise and personnel. Therefore, the ministers agreed in Doha that the integration of developing countries into the negotiations should be fostered by trade related technical assistance, capacity building, and training people. These are areas where the EU and US can help greatly. Technical assistance is by far not as expensive as general financial aid and it is very much directed to specific projects. It is also an area where a common agenda can be struck more easily and in which interests of the US and EU are not diverging as greatly as in other area.
In this context, three different kinds of capacity building have to be named:
1. Negotiation capacity: Firstly, negotiating capacity has to be created to ensure that developing countries can participate in the WTO-negotiations as equal partners. Technical help, informational and educational workshops in Geneva as well as on the national level are to enable the developing countries and in particular the LDCs to train more people for the negotiations at the WTO. The increase of information and knowledge is also important for many LDCs to effectively single and point out their needs as well as to form a negotiation agenda.
2. The built-up of production capacity: Trade liberalization in many sectors within the developed countries often does not benefit the developing countries since they do not have any production capacity in this area. Therefore, it needs to be ensured that the necessary production capacities are formed and that technology transfers are increased. The EU and USA should also provide expertise to single out the production-strengths and weaknesses of a country. Furthermore, market analysis has to be provided to estimate demand on the world market for specific products and to single out future-oriented products. It is also important that the developing countries diversify their exports to reduce dependency on one sector and the vulnerability to the impact of price fluctuations. Lastly, the developing countries also have to be assisted marketing their products since without the proper marketing their products will go unnoticed on the world market.
3. Implementation capacity: To enable developing countries to implement lengthy and complicated agreements such as the GATS or the TRIPs, technical and financial assistance have to be granted besides longer implementation periods.
For the success of the capacity building programs, the EU and US should cooperate closely with the decision-makers of the developing countries in order to ensure that the programs reflect the regional necessities and priorities of the recipient countries. The training programs in Geneva, which host over 50 representatives from developing countries for a period up to 12-weeks, are a welcomed initiative in this area. These workshops offer lectures on the WTO agreements, practical exercises and simulations and cover trade related subjects. With regard to these workshops, continuity has to be established and follow-up training and workshops should be offered. It would be favorable to create permanent regional information and training centers through which the interests, priorities and problems of one region could be reflected more effectively.
While these development goals are very important, it should not be forgotten that the WTO is not a development organization. Thus, the WTO lacks the necessary knowledge and financial resources in this area. The main task of the WTO is and should remain trade liberalization and regulations closely related to trade liberalization. Consequently, the cooperation between the WTO and World Bank, UNCTAD and UNDP has to be strengthened considerably in this area. Greater cooperation is also necessary to increase the consistency among the programs developed by the various organizations. Some progress has already been achieved: in October 2002, UNCTAD Secretary General Rubens Ricupero and Trade Center Executive Director Denis Belise offered support to the WTO and Development Round. They will meet twice annually with WTO Director General Supachai Panitchpakdi. Meetings of senior officials will also take place on a regular basis. The World Bank also announced its cooperation with the WTO in October 2001. However, these initiatives and this cooperation are only just at the beginning. It will take considerable time until efficient and well-functioning networks are built up. Therefore, the efforts have to be continued and be strengthened to achieve early results.

Difficult Negotiation Areas
Coming now to the negotiation areas within the Doha Round, there are several areas which are of great importance to the developing countries. However, especially in these areas, negotiations are proving very difficult due to opposition by the EU and the US and greatly diverging interests. In the following I will name a couple of issues:

Agriculture
The liberalization of agricultural trade is one of the main objectives of the developing countries. They criticize rightly that overall tariff levels are still too high to be really beneficial, ensuring only minimal market access. Tariff peaks and tariff escalation also remained a common feature. Furthermore, subsidies had not been reduced substantially. Additionally, safeguards were used frequently and one could notice a greater use of standards and technical, sanitary, and phytosanitary regulations.
Therefore, the Doha declaration emphasized the necessity of 1. substantial improvements in market access; 2. reductions of, with a view to phasing out, all forms of export subsidies; and 3. substantial reductions in trade-distorting domestic support. However, negotiations are proceeding very slowly. Agriculture is an extremely sensitive area for most countries, and interests among the WTO member countries vary greatly. In particular the EU is slow to reform. While some countries within the EU such as Germany, Great Britain, Sweden, and Denmark are in favor of far reaching agricultural reforms, other countries such as France are very reluctant to reform. The EU is also a strong supporter of the multifunctionality principle of agriculture. Thus, it is argued that agriculture is a sector reflecting cultural and environmental aspects and has thus to be dealt with differently than other goods. New issues such as biotechnology and the so-called precautionary principal will also prove to be difficult issues within the agriculture negotiations.
But not only the EU is slow to reform. The "Farm Security and Rural Investment Act", which Bush signed in Mai 2002 and which replaced the FAIR Act of 1996, raised farm aid by almost 70% over the next ten years. This action has to be seen in the contexts of the congressional elections, to secure the seats of several Republican representatives coming from agriculturally dominated states. It has also been a trade-off for the Trade Promotion Authority, which Congress granted just recently to the President.
The developments in the US and EU both show the vulnerability and sensitivity to domestic pressure and decision-making. However, without a successful outcome of the agriculture negotiations, the Doha Round would not be a development round and is likely to fail. A lot is at stake with regard to the agriculture negotiations.

Market Access in Non-agricultural Products
A further very important goal is the reduction of tariff escalation and tariff pikes in non-agricultural products. In particular textile and clothing has to be named in this context. The World Bank estimated that unrestricted access to the developed country markets in textiles and clothing would result in a $9 billion annual gain to developing countries. With unrestricted access to other manufactures, developing countries would gain $22.3 billion annually. However, while the Uruguay Round agreement set out a schedule for the phasing out of the Multifiber Agreement and the reduction of tariffs and phasing out of quotas, most textile exports will remain restricted until December 31, 2005.
Another very sensitive area is steel. In March 2001, President Bush decided to use section 201, the safeguard clause in US trade legislation, on key steel products, rising tariffs to 30%, to provide relief to the domestic steel industry. The response of the EU was to 1. contest the compatibility of the US measures with WTO rules, 2. to seek compensation for loss of EU exports due to these measures through sanctions, and 3. to safeguard the EU market in the case of import surges into the EU as a result of US protectionism. Thus, the European Commission on 27 March adopted safeguard measures on steel. Despite the many exceptions which both actions include in particular for LDCs, they created great problems for the steel producing developing countries. It also further undermined the credibility of the reform willingness of the major trading countries.

Services
Another difficult area are services. The developing countries would profit from a liberalization of the temporary movement of individual service suppliers (mode IV of the GATS). Accordingly, they could export the labor component of many services. Since this transfer would be temporary, both, host and home country, would gain. After returning home, the service supplier would bring along certain knowledge and technology, which would benefit the economy. However, since this will touch upon migration rules, a very sensitive area in most developed countries, it cannot be expected that mode IV will be greatly liberalized or expanded.

TRIPS
A further difficult area are intellectual property rights and the TRIPs agreement. Many developing countries, while appreciating the need for some sort of intellectual property rights protection in general, had criticized current TRIPs rules for leading to very high prices of patented drugs and other vital goods, placing them out of reach of the developing countries (for example not allowing parallel imports of drugs at lower prices, as was seen in the South African case). The Doha ministerial declaration provided some improvements in this area by recognized that the TRIPS Agreement does not and should not prevent members from taking measures to protect public health. Within the negotiations today it is being discussed how countries with insufficient or no production capacity can make use of this principle. A solution for this area has to be found by the end of 2002. This will not be easy.

4. Is trade all that matters?
However, trade liberalization by itself is not sufficient to ensure economic growth. Poverty reduction within the globalizing developing countries would not have been possible without a wide range of domestic reforms, including the investment climate, governance and social service provision, as well as education, technology, security, stability, and private property rights. The developing countries themselves have to meet various necessary conditions.
An important perquisites for growth are credibility and stability of governments. If there are political uncertainties and the chances of conflicts, wars and coups are high, private capital is not likely to flow into the respective country. Equally important is good governance and the establishment of legal certainty as well as transparency in decision-making. The lack of an effective and transparent legal and judicial system reduces the attractiveness of a country to foreign investment considerably. Thus, development strategies and goals cannot be regarded separately from security, political and institutional issues.
Furthermore, macroeconomic stability is of great importance for growth and development. Fiscal and monetary discipline, low inflation rates, well managed exchange rates, deregulation and privatization as well as a stable banking sectors are necessary perquisites.
Important for the success of these reforms and the opening of the country is also the speed with which reforms are implemented. The abrupt opening of economies can exaggerate the shock and lead to a downturn in growth and performance. This can be prevented by following a gradual reform path. For example, stabilization of the macroeconomic environment and the development of a sound system of prudential supervision and the stabilization of the balancing sector are necessary before starting on financial liberalization. The prospect of successful reforms will be increased considerably if the reforms are "owed" by countries. Reforms, which come from "below", i.e. from within the country, and are socially accepted are more likely to be successful than reforms, implemented purely from "above" through international organizations.

5. Conclusion
in sum, trade and trade liberalization is a win-win situation. The benefits of one country are not the costs of another. Both, the developing as well as the developed countries benefit greatly from trade liberalization, which goes hand in hand with growth and development as various empirical studies have shown. There is hardly any evidence that globalization leads to increasing income inequalities on the national or international level.
Nevertheless, globalization and trade liberalization as one of its facets have come under severe attack in recent years. There is a growing belief that trade liberalization endangers domestic jobs and the environment. In particular during recessions, the demands for protection by sensitive sectors is growing. Thus, on one hand, decision-makers in the EU and US should lobby more intensively for trade on the national level, explaining more widely the benefits deriving from trade in order to increase support. On the other hand they have to buffer the costs and adjustment pains of trade liberalization through adjustment programs, i.e. training and financial help for people who have been displaced by trade measures.
On the international level, the developed countries, in particular the EU and the US have to give clear signs of willingness to make compromises in sensitive areas and to provide the necessary leadership within the Doha Round. Therefore, they also have to overcome conflicts and disputes such as the lingering trade conflicts in steel, genetically modified foods, or foreign sales corporations. The friendly relationship between the current USTR Robert Zoellick and Pascal Lamy, the EU commissioner for trade, shows that personal connections can help to overcome long lasting differences such as the trade conflicts concerning bananas. Therefore, personal ties have to be increased. One successful way has been the Transatlantic Business Dialogue. More of these initiatives are necessary.
So far, the negotiations within the Doha Round have proven to be very difficult in most areas, and the prospects for the next Ministerial Meeting in Mexico do not look bright. The negotiators in the EU and the US should remember what is at stake by endangering the Doha Round - not only in the area of trade but for the world economy and the international political system as a whole. Thus, substantial commitment and concessions have to be made until the fifth Ministerial Meeting in Mexico next year to pave the way for a successful conclusion of the Round.