Witch-doctor economics back again at WTO?

Despite the dearth of empirical backing for the purported benefits of open economies, the WTO has wheeled out the latest trade figures, which reveal a downturn in global commerce, to push the case for more trade liberalization as a confidence-building measure.

by Chakravarthi Raghavan

GENEVA: There was a sharp downturn in world trade in 2001, with world trade growth being negative for the first time since 1982 as world trade registered a 1.5% decline, and a continuing decline in the first half of 2002, about 2% lower than in the first half of 2001, the WTO secretariat reported on 10 October, but suggesting that the economy is recovering and will have a 1% growth.

While this positive thinking in the economic outlook by the WTO secretariat is perhaps matched by the public pronouncements out of the IMF and World Bank meetings in September, those who attended those private meetings said that privately there was some gloom, with fears of a double-dip recession in the US and that the EU and Japan may not grow fast enough to counter the US slowdown.

The WTO trade data, using IMF output data, and with the WTO trotting out value and volume data to decimal points, may give the appearance of some accuracy. However, actually, the trade data is all measured and available at the IMF in value (current dollar) terms, and volume figures are no more than estimations based on the unit value of exports and imports. And the IMF output data and forecasts are on purchasing-power-parity (PPP) basis, while the WTO trade value data is in current dollars. Some correlations can be made at a very aggregated level perhaps, but on so many assumptions and approximations that the tables, graphs and charts based on them could be misleading.

An even greater problem is that many econometrists who have been working on this are challenging the IMF/World Bank methodology of purchasing-power-parity and data calculations. None of the international organizations are willing to put money to collect meaningful data, including income, consumption, poverty or other data necessary to formulate PPP figures.

However, with the gullible and unwary media seeking to grab some headlines, and given that diplomats dealing with economic issues are not all well-equipped, anything goes. And in any subsequent revisions of initial estimations, forced by later data, the earlier ones are easily forgotten.

Promoting new trade round

Last year, when there were clear signs of an economic slowdown, the WTO economists and the establishment used it to promote the need for a new round of multilateral trade negotiations that would encompass new issues.

Having launched one in Doha (with some vague promises and dubious mandates), and with the talks in Geneva not getting anywhere given the range of subjects where the US, EC and others are neither engaging in negotiations nor willing to compromise, the WTO is now arguing that the way to avoid the slowdown and accelerate growth is by completing the new trade round within its deadlines.

Perhaps it is not feasible to exorcise Centre William Rappard (where the WTO is housed) of witch doctors and witch-doctor remedies in economics, more so when trade diplomats will pick up the jargon and use it in their speeches and statements.

In a statement, the WTO head Supachai Panitchpakdi said that the disappointing trade figures underscore the importance of making progress on the Doha Development Agenda. While the depressed levels of imports and exports reflect macroeconomic factors, policy measures must be taken to bolster confidence and provide the underpinning assurances, by political leaders sending out a strong signal that they intend to move forward in the area of further trade liberalization.

At the WTO’s press conference on 10 October to release the new trade data and projections, the Director of the Development and Economic Research division of the WTO, Patrick Low, slightly backed away from the liberalization theology.

He was reminded of the publicly stated views of the World Bank President James Wolfensohn at a public encounter with civil society groups on 27 September. At that meeting (the transcript of the proceedings are on the website of the CNBC channel), Wolfensohn said both the Bank and the IMF had now changed their “hymnbook” and had a new hymnbook that all the staff have to follow, and anyone not doing so would be fired! (See “Will Wolfensohn fire his chief trade adviser?”, TWE #291.) The two institutions are no longer promoting or pushing unilateral liberalization on the developing world, but are asking the major trading partners to reduce import restrictions and cut agricultural subsidies to increase market access, Wolfensohn said.

Low was asked whether the WTO and Supachai have changed their own “hymnbooks” or are still sticking to the WTO’s old ones.

Low claimed that the GATT (the WTO’s predecessor) and the WTO had not advocated unilateral liberalization, and the view that “trade liberalization is a virtuous policy under all circumstances has certainly fallen out of favour as a policy feature. People will no longer consider it.” However, he claimed, studies showed that countries with open economies have done better than others.

He also suggested that there are many elements involved in liberalization, trade and growth, and new questions have arisen about the kind of conditions and policies to make them work, overwhelmingly liberalization works most of the time.

However, the only two studies that have attempted to lay out some empirical evidence on this are the Sachs-Warner study and the Dollar-Kraay study. The problems and deficiencies of these studies have been looked at by other economists, who have tried to fill in the data lacunae and used the same periods of time, extending them forward and backward to enable meaningful comparison. And these (Rodrik, Rodrik and Rodriguez, Weller and Hersh, to cite a few of the several academic studies that have been published) show that empirical evidence does not back the general conclusions or policy advice that “open economies” do better and that everyone should thus open up their economies.

In dollar value terms, the WTO reported, merchandise trade fell by 4.5% in 2001 and by 4% in the first half of 2002. But with the signs of output recovery, the WTO economist Karl-Michael Finger said, for the year as a whole there could be a 1% growth in world merchandise trade.

However, recovery and expansion of trade will depend on maintaining the trend of economic recovery in the industrialized countries and Asia’s developing nations through the last half of 2002, the WTO said. The WTO also hopes that the price rise in dollars in the year’s second half extends to all principal groups of products.

To achieve a recovery in international trade, it is essential that the “deadlines [of the new trade negotiating round] be met and that these talks stay on course,” Supachai said in his statement. (SUNS5211)                                            

From Third World Economics No. 292 (1-15 November 2002)