Chapter

I Introduction

Author(s):
Robert Sharer, and Piritta Sorsa
Published Date:
February 1998
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Trade reform is an important aspect of the Fund’s purposes and objectives. Article I of its Articles of Agreement explicitly refers to the importance of trade for economic prosperity and growth.1 The Fund’s role in the area of trade policy is complementary to that of other international institutions, in particular, the World Bank and the World Trade Organization (WTO) (Box 1).2

This study assesses trade liberalization in Fund-supported programs based on a review of multiyear arrangements in the 1990s and on six detailed case studies. It has a review section which compares the initial degree of restrictiveness of each country’s trade regime, each program’s trade liberalization objectives, and the degree of trade restrictiveness at the end of the program. The study then discusses the main economic factors affecting trade policy targets, including in particular the impact of fiscal considerations. The case studies extend this effort to program design and negotiation, and the key factors relevant to implementation.

Box 1.The Roles of the Fund, the WTO, and the World Bank in Trade Policy

The WTO,1 successor to the General Agreement on Tariffs and Trade (GATT), is a rules-based institution that provides a common institutional framework for the conduct of trade relations among its members. Through the “binding” of negotiated tariff concessions and the application of agreed rules, it improves security and predictability of market access in world trade. The WTO commitments and rules are limitations on the maximum amount of protection, not optimal levels from the point of view of individual countries’ economic efficiency. They also provide for numerous exceptions, allow long and variable transition periods, and afford some categories of members special treatment. Moreover, they do not address fully a number of important aspects of trade policy with significant structural and macroeconomic implications that include export taxes, state trading monopolies, tariff dispersion, and import tariff exemptions. Because the WTO serves primarily as a forum for discussions among members, it is largely through periodic multilateral trade negotiations, the dispute settlement mechanism, and the accession process that trade policies of individual members are influenced; the WTO also conducts periodic trade policy reviews with members. Procedures have been set up to ensure that Fund advice in member countries’ trade reforms is consistent with their WTO obligations. Fund policy advice is oriented to improve economic efficiency and thus may go beyond WTO commitments. As a result, the IMF, through surveillance and, more specifically, within its program support, may seek broader-based and faster trade reform than provided for by WTO agreements. However, in contrast to WTO commitments, such reform would not be “bound” and may, therefore, be subject to reversals should circumstances change.

The Fund and the World Bank collaborate closely on trade policy issues in the context of adjustment programs. The Bank often takes the lead when there are complex and detailed tariff reforms or industry- and sector-specific trade policies in which the Bank has recognized expertise. Some World Bank adjustment operations have focused exclusively on trade reform. On the other hand, the Fund has focused on encouraging market-oriented policies to improve the efficiency of resource allocation and promote growth through the expansion of trade, within an appropriate macroeconomic framework, with policies to promote the liberalization of the trade system, including the removal of quantitative restrictions and other nontariff barriers and moving toward reasonably uniform low tariffs. The Fund sometimes takes the lead, particularly whenever the Bank’s operations do not address trade policy, or where Fund technical assistance is provided on the reform and administration of tariffs and trade taxes. Differences in timing between the Bank and the Fund in stabilization and structural reform programs sometimes lead to greater Fund involvement in trade reform.

1Of the 181 Fund members, 126 are members of the WTO and 29 are in accession discussions.

This study finds that there was a clear need for trade liberalization in the programs reviewed, since the majority of countries started out with restrictive trade systems. Two-thirds of programs targeted a quantifiable reduction in restrictiveness, as measured by the index used in the study. One-third of programs, however, did not target any quantifiable change, including programs for countries starting with restrictive trade regimes. Programs generally achieved their targeted trade reform objectives, and there was a marked movement in the aggregate trade policy stance of the countries reviewed toward less restrictive regimes. The strength of conditionality was related to the importance of the measure for the program, and it appears to have facilitated implementation. More liberalization, however, should probably have been targeted in a significant number of programs, particularly in countries with initially restrictive regimes.

The appropriate level of ambitiousness is discussed in relation to a country’s initial trade regime and the experience of a group of “good practice” countries that moved to open trade regimes over seven to ten years. While the programs in restrictive countries that did not target reform were clearly unambitious, extensive trade reform was achieved in a substantial number of programs. In the case study countries, virtually all trade liberalization during the 1990s occurred in the context of Fund programs. Although some statement regarding medium-term trade liberalization objectives was mentioned at the outset in two-thirds of the arrangements, they were generally insufficiently comprehensive or detailed to permit effective monitoring.

Fiscal policy concerns were often cited as an important factor limiting the extent of trade reform targeted. However, a review of fiscal indicators and evidence that more fiscally neutral trade policies may have been available do not always support such caution. At the same time, the case studies indicate that the design of successful programs was done in a way to counter fiscal or other concerns raised at the outset. This included focusing initially on the removal of nontariff barriers (NTBs), with potentially revenue-reducing tariff reform left to a later stage and by introducing broader-based taxes and targeting a reduction in exemptions. This suggests that some programs could perhaps have targeted more far-reaching trade reform.

A significant factor for successful liberalization in the countries studied was the authorities’ commitment to expeditious implementation of trade reform and liberal market-oriented policies, as well as ownership of the program. This manifested itself in trade reform being viewed as a key medium-term objective with preannounced targets, which was found to be important in program implementation. World Bank involvement was frequently cited as having influenced trade reform and the results of Fund-Bank collaboration in this area seem to have been effective.

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