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The stark reality facing the WTO and the poorest countries

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
October 2004
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IMF Survey: How does the influence that small and poor countries wield in the global trading system negotiations differ from that of larger developing countries?

Mattoo: The WTO is a mercantilist institution in the sense that countries trade off one another’s protection—you give me better access to your market, and I’ll give you better access to my market. The currency for these negotiations is market size. However, the small and poor countries don’t have much to offer either individually or collectively to the rest of the world in terms of market access. So their influence derives not from this traditional coinage of the WTO but from the fact that the WTO is a very democratic institution. Each country has one vote and to make any major decision, traditionally you need consensus. But legally you need at least a large majority—typically two-thirds of the membership. And the small and poor countries now constitute a majority of the WTO membership. Perhaps even more important, they wield a moral influence derived from generally having benefited little from the global trading system, particularly the Uruguay Round negotiations.

IMF Survey: How does small country size affect the main benefits that WTO membership offers?

Subramanian: Since the coinage of the WTO is market size, because you have less to offer, you can ask less of your trading partners, and this somewhat diminishes the extent to which you can seek greater access in the markets of your trading partners. By the same token, because one of the important benefits of the WTO is for a country to be able to open its own markets, the fact that a country has a small market means that the trading partner is less interested in the country opening up its market, resulting in fewer pressures from within the WTO on opening—including making such market openings irreversible. This makes a small country doubly disadvantaged.

IMF Survey: At the same time, you have also noted the growing influence of these small and poor countries in the world trading system. What do you think the consequences would be if the demands arising from this growing influence are not addressed?

Subramanian: Since, unfortunately, our paper has sometimes been misunderstood, we need to make it completely clear that we think that this influence is desirable. This empowerment of the small and poor countries is going to lead to more egalitarian outcomes. The real challenge is how the interests of these countries are going to be accommodated. If their interests are not accommodated, the ability of the system to deliver even broader multilateral liberalization might be stymied. These interests need to be accommodated in the most desirable way—that is, in a way that allows the system to continue to deliver broader liberalization but also to address the development needs of these countries. If that were not to happen, I think it will be a significant stumbling block to further multilateral liberalization.

It is important not to overpromise what the WTO and the Doha Round can deliver for the small and poor countries.

—Arvind Subramanian

IMF Survey: You argue that the overall impact of the liberalization of nontariff agricultural support policies on the smaller, poor countries is negligible. Doesn’t this finding contradict the conclusions of recent studies by the World Bank and others showing that large reductions in poverty would result from the dismantling of subsidies on developed countries’ agricultural exports?

Subramanian: Most such studies by the World Bank and others calculate the impact of undertaking broad-based liberalization, as well as the impact of eliminating industrial country subsidies. So they calculate the sum total of these effects—the so-called market access effects, which is the outcome when trading partners liberalize their markets and the benefits that accrue when a particular country liberalizes its own markets.

Three or four points about these studies are noteworthy. First, on the market access side, many of these studies do not take into account the fact that when industrial country trading partners reduce tariffs, in many instances this actually adversely affects the exports of small and poor countries because they already have preferential access to the industrial country markets. In fact, Most-Favored-Nation (MFN) liberalization undercuts their competitive advantage and reduces their exports.

Second, a careful examination of these studies reveals that most of the benefits to a country—roughly, two-thirds to three-quarters of the total—arise from what the country does in terms of its own market opening rather than what a partner country does. If that is the case, you’ve got to ask, for example, will these small and poor countries actually reduce their own tariffs in the course of the Doha Round by the amount suggested in these studies? For the reasons that we advanced earlier, it is probably somewhat unrealistic or optimistic to assume that all of this major liberalization is going to occur and that these countries are going to reap the projected benefits. For these reasons we argue for more caution interpreting the results of these studies.

When small When small big countries negotiate together on trade, the package of benefits should also include finance issues.

—Arvind Subramanian

Mattoo: These studies and our work also reveal that you need to take a more careful look at what the impact of multilateral liberalization is going to be on poor countries. It is true that, in many cases, small and poor countries already have preferential access, but it is also often true that preferential access is subject to conditions like restrictive rules of origin. This means that a substantial proportion of these countries’ exports come in at MFN or nonpreferential rates. There is a need for more empirical work to examine the relative impact of an erosion of preferential access, and the impact of improved access where products are, in effect, being sold at nonpreferential rates.

IMF Survey: You argue that accommodating the specific interests of small and poor countries is not only desirable in itself but would further progress in the Doha Round. Can you explain how?

Mattoo: Because the WTO is an organization that, for the most part, works by consensus or at least a substantial majority, its member countries need to agree on the launching and conclusion of any new round. So accommodating the interests of small and poor countries would further overall progress by demonstrating to this group of countries that they have a shared interest in multilateral liberalization and that the aggregate package would leave all countries better off as a consequence of the Doha Round.

IMF Survey: The “stark reality” in your paper’s title is that desirable ways of accommodating these countries’ interests—giving them more nonpreferential access to developed countries’ markets and more financial and technical assistance—are not feasible. Could you say a little bit about why this is?

Subramanian: The difficulty these countries have in acquiring further nonpreferential access to developed country markets derives from the fact that a small, poor country has less to offer. This reciprocal exchange of concessions occurs within the WTO because when a country—let’s say “country A”—liberalizes, it faces political costs from its import-competing industries. So country A therefore needs an offsetting interest or a benefit from negotiations that would accrue to other local interest groups and so countervail the power of those who lose. So if a partner country has very little to offer, then country A cannot mobilize those interested in removing trade barriers on imports from the partner country to say: It is true that the import-competing group will lose, but we will gain and therefore the political-economy problems will be better addressed. But having said that, one shouldn’t overstate that case. If you look at what’s happening in the Doha Round now, even though these countries are small, they have managed, for example, to put cutting cotton subsidies on the agenda because of the voice that they’ve acquired in different ways.

The other desirable way of accommodating the interests of small and poor countries is, of course, by providing financial and technical assistance. While this is desirable, we argue in our paper that there are a number of reasons why this is not feasible. First, we know that additional aid gets promised for a number of different issues, but the question is whether offers of aid are truly an addition to what would have been given otherwise. If not, it is just aid substitution.

Second, can these offers be made credible? It is one thing for countries to promise more aid, but we’ve seen in the recent past in a number of areas—for example, in the case of aid disbursed for combating HIV/AIDS, mobilizing the additional pledged aid is not easy.

Third, in some ways, what we are proposing is somewhat radical in terms of structure, because we are saying that when small countries and big countries negotiate with each other on trade, the package of benefits should also include finance issues. This means that there needs to be much greater integration of trade and financial decisions both at the global level and at the level of individual countries. In the past, it has been quite difficult to achieve this coordination. It remains to be seen whether this can be achieved in the future.

IMF Survey: You further argue that the feasible ways of accommodating these countries’ interests—including by granting them more preferential market access and relieving them of obligations to enhance their welfare—are less desirable. What makes this option “less desirable?”

Mattoo: There is no specific evidence that preferential market access has actually enhanced the growth prospects of countries. Preferential access provides an incentive for a country to specialize in areas that are not always those in which it has a global comparative advantage. When preferential access disappears, there can be substantial switching costs. At the same time, there is evidence to suggest that preferential access relieves a country of the obligation to liberalize its own policies. Consequently, countries that have been dependent on preferential access have often had the highest domestic levels of protection. So, on these grounds, it is not obvious that preferential access is desirable.

From the point of view of the WTO moving ahead, I think granting further preferential market access would, in fact, have undesirable effects, because every time preferential access is granted, the stake of the recipient in further multilateral liberalization diminishes.

Granting further preferential market access would have undesirable effects, because every time preferential access is granted, the stake of the recipient in further multilateral liberalization diminishes.

—Aaditya Mattoo

IMF Survey: What can be done to alter this stark reality and move toward a situation where the more desirable options become more feasible?

Subramanian: That’s a good and difficult question, because if there were an easy answer, we probably wouldn’t call it the stark reality. Some progress, however, is being made toward accommodating small and poor countries’ interests through nonpreferential market access benefits—because of the voice that these countries have acquired in the Doha Round and their willingness to engage actively in negotiation. But there are limits to how much can be improved because of the structure and disadvantages of size that these countries face.

To accommodate the concerns of these countries through financial and technical assistance, the international community—both the trade and the financial wings—needs to come together and explore imaginative ways of how more financial and technical assistance could be put on the table in a way that’s credible and additional. The bargaining space has to be expanded to include finance.

Mattoo: Returning to the issue of the structural difficulty of negotiating nonpreferential access when your own market is small: a more enlightened possibility that we are beginning to see is that the rest of the world is recognizing that to be able to move on with multilateral liberalization, the richer countries must provide nonpreferential access to the poorest countries even in areas where the former have specific interests. This way, the poor countries don’t need to pay with their own access. Other developing countries, the European Union, and the United States may be willing to buy each other off to advance negotiations. So the market size of small, poor countries—where there is an awareness of the need to strike a bargain that benefits everybody—may be less of a constraint.

Turning to financial and technical assistance, it is not easy to see how such assistance can be made credible, additional, and genuinely productive. Experience with aid has not always been very positive. Arvind mentioned the need for coherence and for international organizations like the World Bank and the IMF to work more closely with the WTO. However, that multilateral coherence must, in a sense, be mirrored by coherence at the national level between the ministries of finance and the ministries of commerce, in both industrial and developing countries.

Today, negotiations proceed dichotomously and there is a need for greater internalization of the overall development objectives. The U.K. government, for example, demonstrated how fruitful it can be in terms of greater policy coherence to have stronger links between the people who look after trade and the people who look after development. More such efforts at the national level could then feed into the multilateral context.

Also, all of the international organizations have gotten together to collaborate, first of all, in a diagnostic exercise to identify exactly what is needed to make small and poor countries participate more fully in trade negotiations in a way that furthers their development. However, it is still too early to judge how much additional assistance that integrated framework has generated and how fruitful that assistance has been in remedying the bottlenecks.

Subramanian: The thrust of this paper is somewhat of a plea for moderating the goals and expectations that one can have for the WTO order or the Doha Round, because of all the difficulties that we’ve identified, including the difficulty of giving the WTO a truly pro-development agenda. I think it is important not to overpromise what the WTO and the Doha Round can deliver for the small and poor countries.

Mattoo: Arvind is right. Expectations in a purely limited trade context must be toned down. At the same time, however, we have identified a positive agenda. One of the key contributions of this paper is that it makes clear that it is important to take a more nuanced view of developing countries. There are strong differences between them, which means that their interests are not perfectly aligned. If it were possible to think of the negotiations more broadly as encompassing not just trade concessions but also a credible assurance of multilateral assistance, then we do think that from this larger context of multilateral trade negotiations, the poorest countries could conceivably benefit. However, we admit that this will be difficult in practice.

Copies of IMF Working Paper No. 04/81, “The WTO and the Poorest Countries: The Stark Reality,” by Aaditya Mattoo and Arvind Subramanian, are available for $15.00 each from IMF Publication Services. See page 308 for ordering information. The full text of the paper is also available on the IMF’s website (www.imf.org).

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