TWN Info Service on WTO and Trade Issues (Dec05/18)

15 December 2005


Below please see an analysis on the stakes for developing countries in the WTO Ministerial Conference now taking place in Hong Kong.

It was written by Chakravarthi Raghavan, editor emeritus of the South-North Development Monitor (SUNS).  He has  been following and monitoring the GATT and its successor since 1978, and wrote this commentary as a contribution.

With best wishes
Martin Khor



Chakravarthi Raghavan (Geneva 13 December 2005)

At the WTO Ministerial in Hong Kong for the sixth Ministerial conference, unless developing countries stand firm against pressures -- from the WTO leaders, the US-EC-Japan and their transnational corporate lobbies -- they may be setting themselves up for another highly imbalanced outcome and a more oppressive multilateral trading system.

The Doha Work Programme (DWP) and its agenda of negotiations (covered by the single undertaking) launched in November 2001 had in fact very little development content, and initial reactions at Doha was one of resistance to the EC and WTO calling it a development round. Subsequently, developing countries took up the claim, and began to press for actions to promote development. But four years of talks have produced nothing, only an apparent willingness to tackle peripheral issues.

There is a general consensus among all political economists, engaged in research and study of development, that developing countries need above all large "Policy Space" - ability to use a wider choice of policy instruments than is currently permitted under the rules and practices of international economic organizations - in particular of the WTO, the IMF and the World Bank.

These policy choices will be no more than what today's industrialized countries used during their period of industrialization and development, but which they now want to deny to the developing world. Market access for exports of developing countries in the developed world is important, but without policy-space and ability to produce and export value added goods, market access will not become Development (See Nancy Birdsall, Dani Rodrik and Arvind Subramaniam, in Foreign Affairs July-August 2005; Richard Kozul-Wright and Paul Rayment in their forthcoming publication, where they characterize the current neo-liberal policies advocated by the IMF, World Bank and the WTO, as well as the OECD and the leading think tanks of the North, as "market fundamentalism").

From this point of view, the Doha Round of negotiations, far from providing and expanding the policy space for developing countries (constricted by the Marrakesh Treaty and its agreements) in fact has a built-in agenda to enable the industrialized world and the majors to invoke instruments that would further restrict developing country policy space.

There was some little space envisaged in the Doha work programme (as part of the single undertaking) - the Implementation issues and those relating to operationalizing the 'best endeavour' clauses of the Special and Differential Treatment provisions in the GATT, GATS and TRIPS. But even this little remain unimplemented, with the majors (and the WTO leadership) repeatedly using sophistry not to implement them in letter and spirit, but rather use that agenda to split the developing world even further.

And on present course, despite all the repetitious statements about Development being at the heart of the new round of negotiations, any outcome of these negotiations will set back Development for a few decades.

The developing countries have been virtually bombarded over the last several days and weeks, and will probably get more of it at Hong Kong, with propagandist talk of an economic disaster, for the world economy and for developing countries, if the talks fail.

The US and the EC, aided by Mr. Pascal Lamy, the former EC Trade Commissioner, now heading the WTO, have warned and threatened that if deals are not clinched now, the majors would even increase their agricultural protection and domestic support.

Lamy, as the WTO's DG, voiced such a view at the recent Arusha preparatory meeting of the African Union Ministers for the Hong Kong ministerial conference (See SUNS #5923).

Moreover, for doing nothing or almost nothing in agriculture, the US, EC and Japan (and Mr. Lamy and his officials more subtly) are demanding that developing countries, and the majors among them, make large market access concessions by drastically reducing their industrial tariffs, and by opening up their service sectors to enable the major TNCs to establish themselves in these countries, through commercial presence (an euphemism for investment) and take over the service sectors of the developing world.

If the developing countries yield, this will put their economies back to the colonial era - excepting that unlike in the nineteenth and early twentieth century, developing country governments will be policing and safeguarding the interests of the foreign corporations - completing a process that began at Punta del Este in 1986 (Chakravarthi Raghavan, 1990, 'Recolonization: GATT, Uruguay Round and the Third World, TWN Penang).

Everyone now seems reconciled to the view that Hong Kong would be unable to meet its target - and agree on modalities in Agriculture, NAMA and in Services, and give ministerial decisions and guidance on the other parts of the Doha Work Programme - leaving the Geneva process to ink in the details and bring the talks to an end.

But developing countries are being threatened and warned that even this will not be possible and if they do not yield, and if the negotiations end in failure, the world economy and that of the developing world face disaster.

However, several leading academics and political economists (Gerry Helleiner, Prof. Robert Wade and Prof. Dani Rodrik, among them), who have been studying questions of Trade and Development, have challenged this doomsday scenario. In several writings, they have pointed out that failure at Hong Kong or of the Doha negotiations will be no great disaster - for the world economy or the development of developing countries.

In this background, it will be in the best interest of the developing countries, big and small, to call a halt, and end the sham of a Development trade round.

In suggesting such a course, Prof. Dani Rodrik, Professor of International Political Economy at the Kennedy School of Government, Harvard University, has provided on his website as a commentary on the Doha negotiations, what he calls a 'contrarian view'.

"Imagine that the world's trade ministers simply walked away from their forthcoming Hong Kong meeting with a simple declaration: 'We have failed to reach an agreement; we shall try to do better next time. ' This would bring the so-called Doha 'Development' Round to an unsuccessful conclusion, but it would hardly be a disaster."

However, it is unlikely that the developing world's leading personalities and ministers will heed this sane advice. For, far too many of them, including Ministers and trade officials and governments of Brazil, India and other leading developing countries have invested so much of their time and energy on these talks that they would be loath to accept and announce failure.

But they should at least not do something worse: accept and endorse in any way the Draft Ministerial Declaration text and annexes sent to them from Geneva, and with some ministerial stamp of sorts (of approval or commendation) send it back to Geneva for further work by negotiators on the basis of those texts.

They should incorporate as a part of the draft declaration text and annexes, the cover note from Geneva signed by Pascal Lamy and General Council Chair Ambassador Amina Mohamed of Kenya - which ought to have been an integral part of the texts and annexes sent from Geneva, but in the rule-less way in which the 'rules-based organization' functions, it was sent as a covering letter, but without any ministerial conference document number. The ministers at Hong Kong should make this covering letter a part of the draft declaration and annexes, put square brackets around each of the texts in the annex, without expressing any ministerial endorsement or view, and send it back to Geneva and ask negotiators to work further.

Says Prof. Rodrik in his commentary: "There is the possibility that trade negotiators will patch together a last-minute deal in Hong Kong, and emerge claiming victory. We will then end up with an agreement that will have been wildly oversold and is sure to lead to disappointment down the line - especially in developing countries. And we will have given up the opportunity to have a real development round next time around. 'Success' in Hong Kong poses perhaps greater risks than 'failure'."

In an effort to save the Doha round, the Brazilian Foreign Minister, Mr. Celso Amorim, has advocated in an article in the International Herald Tribune on 10 December, a gathering of world leaders - after Hong Kong - to take decisions and give guidance at Summit level President Luiz Inacio Lula da Silva has recently written to President George W. Bush and Prime Minister Tony Blair advocating such a course.

However, no one who saw what happened in New York at the UN Millennium summit, and the more recent one on the agreed Millennium Development Goals, can believe that world leaders and heads of governments are capable of sitting down and negotiating even one or two issues - leave aside the slew of issues unresolved in the WTO talks.

Even when the Uruguay Round was launched - on neo-liberal economic theories that had become fashionable after President Ronald Reagan came to the White House - the anti-Keynesian views in neo-classical economics advocated among others by Monetarists like Prof. Milton Friedman had run its course and the academic economic world had begun to go back to a Keynesian view. Incidentally, Friedman recently has repudiated his own monetarist view.

But the IMF, the World Bank and the WTO continue to advocate such views and push them on the developing world. Richard Kozul-Wright and Paul Rayment in an overview chapter in their forthcoming book call this 'Market Fundamentalism' - as dangerous as the religious fundamentalism.

It is not merely academics who suggest that a failure at Hong Kong or of Doha would not be a disaster.

Even the former Brazilian negotiator during the Uruguay Round, and former UNCTAD Secretary-General, Mr. Rubens Ricupero, now a professor at the Armando Alvares Penteado Foundation, Sao Paulo (Brazil), in an interview to Agencia Brasil, advocated that Brazil should reject the offers made in the context of negotiations in the WTO, lest the country's development be compromised. "At this moment it is better to have no agreement than a bad agreement... The Brazilian government should remain firm."

In Ricupero's view, accepting minor concessions that have been offered by developed countries with respect to agricultural products and, in return, having to forgo protecting important sectors of Brazilian industry, "is a bit like exchanging our future (as a country that can proceed to export products with greater added value and more technology) for our past (as an exporter of agricultural commodities). " Under the current proposals, Ricupero added in his interview, sectors like automobile and electro-electronic industries would be endangered, since import duties would be slashed by 50%. Even though the proposals (for accord at Hong Kong?) are insignificant, he adds in the interview, "they will be rolled up in such propaganda that it will give the impression that whoever refuses is assuming the onus of wrecking the global trade system."

And in a recent conference in Brasilia (organised by Brazilian industry), no less a person than the Vice President of Brazil was highly critical of current economic policies and what he saw as dominance of finance capital at the cost of industrial capital.

India, the other part of the developing world in the new Quad, through its Commerce Minister, and the Finance Minister, have also said that India has offered to cut its industrial tariffs by 50%. The Indian policy makers appear to be placing their faith in the future of the country in software exports, and over time, commercial agriculture. On the latter it has never been clear how such an agricultural development, and an industrial sector prematurely exposed to import competition through low tariffs, would be able to find employment for about 500-600 million now engaged in rural wage labour or subsistence farms.

Even the Minister Mentor of Singapore Lee Kuan Yew (no anti-corporate personality or anti-globalization populist), in delivering in New Delhi in November the Jawaharlal Nehru Memorial Lecture, cautioned Indians that India could never hope to become an economic power if it does not industrialize but rely on IT software and services.

There is a great deal of emphasis, and rightly perhaps, placed on agriculture chapter of the Doha negotiations. In Agriculture, despite efforts of the Group of 20, there is little prospect of achieving ambitious goals - ensuring that the US and the EU cut drastically their domestic support, eliminate export subsidies or equivalents and achieve large tariff cuts on imports.

The political and economic climate in the United States and the European Union militate against these. Even to achieve some modest goals, and eliminate practices held to be WTO illegal (like cotton and sugar subsidies), the US demands ambitious outcomes in NAMA and GATS. In NAMA, developing countries are asked to drastically cut tariffs (from current applied levels) and bind them, and agree to a zero-tariff formula in some sectors (where the US has an advantage). Countries like India have rejected it.

The EU for its part would be unable to go much beyond the current reforms in the Common Agricultural Policy - in domestic support, export subsidy or tariff cuts. The African-Caribbean-Pacific group of countries, enjoying preferential access in the EU and worried about erosion of preferences, are also against drastic cuts in EU tariffs.

The US wants ambitious outcomes in GATS via commercial presence (investments), but is not willing to do so on market access to its domestic service markets via Mode 4 or temporary movement of personnel. India has made clear that without Mode 4 concessions, there can be no deal on GATS or in the Round.

But as for Mode 4 delivery, an influential group of US Senators (all of whom have been so far supportive of trade agreements) have made clear in a letter to the USTR that Congress would never agree to put immigration policy (solely within Congressional jurisdiction in the US) into any trade agreement. In the House, the last trade agreement, the CAFTA one, was adopted by a slim margin of two votes. The shape of the House and its leadership have already changed in that the Republican majority leader, who delivered all the votes for the administration, Tom De Lay, who is now facing criminal charges, is no longer in control, and many leading Republicans are facing corruption inquiries.

It will thus BE foolhardy for anyone to think that the Bush administration, even with fast track, would be able to deliver either in agriculture or in services (mode 4, on which India is reported to be banking).

The WTO and the trade talks are driven by the faith-driven 'free trade' liberalization agendas promoted by US academic Jagdish Bhagwati and like. Cited in support of the view that 'open economies grow faster than others', is the study by Jeffrey Sachs and A. Warner (1995), which claimed that economies with trade restrictions grow slower than open economies.

Several subsequent studies have cast serious doubts over the general policy advice to developing countries to remove trade barriers and liberalize for growth.

A study by Rodriguez F and Rodrik D (1999), NBER Working Paper 7081, brought out the absence of any cross-country growth impact of trade liberalization.

A subsequent study by Romain Wacziarg and Karen Horn Welch (2003), NBER Working Paper 10152, not only confirmed the Rodriguez-Rodrik study, but found that the Sachs-Werner thesis of negative growth effects of trade barriers broke down completely in the 1990s.

An econometric analysis by Halit Yanikkaya (2003) - Journal of Development Economics No 72 (I) - found that trade barriers, while negatively associated with openness, are more positively associated with growth, particularly in developing countries.

As for services, and liberalization of financial sectors, an IMF staff study (IMF occasional paper 220, 2003), concluded that it was difficult to make "a convincing connection between financial integration and economic growth, once trade flows and political stability are taken into account... (developing countries) that made the effort to be financially integrated (into global capital markets) faced more instability."

A study by David Felix (working paper 69 , Political Economy Research Institute of Univ. Of Massachusetts) showed that financial globalization and liberalization is responsible for crisis of neo-liberalism as a development strategy.

Some of the recent studies and papers from established mainstream orthodox institutions, like the Institute of International Economics in Washington DC, even suggest that economists there are now taking it as a matter of fact that over the next two or three years developing countries with liberalised financial sectors (either by opening their capital account and inviting all kinds of foreign capital inflows, or doing so through the 'commercial presence' process of liberalising financial services through the GATS) will have recurrent bouts of financial crisis and instability.

A study by Morris Goldstein, in the IIE Working Paper series (No. WP 05-7), proceeding on this assumption addresses some speculative questions. An abstract of the paper says: "If a financial crisis affecting a group of emerging economies were to take place sometime over the next three years, where would be the crisis likely originate, how could it be transmitted to other economies, and which economies would be most affected by particular transmission or contagion mechanisms."

It goes on to provide a set of indicators to gauge vulnerability of individual emerging economies to various shocks - "including a slowdown in import demand in both China and the United States, a fall in primary commodity prices, increases costs and lower availability of external financing , alternative patterns of exchange rate changes, and pressures operating on monetary and fiscal policies in emerging economies."

In the face of all these, developing countries are being pressured by various authorities to make concessions, even unilateral concessions to conclude the Round, as otherwise the world economy and their own development is at risk, if not facing disaster.

Challenging this view at the 2004 World Bank's Annual Development Conference, Prof. Gerry Helleiner (Professor Emeritus at the Monk Centre for International Studies at the University of Toronto), suggested that "it is more important for the WTO and other rules systems to be broadly fair and acceptable, however long it may take to get them right, than to rush to further liberalization as interpreted by major economic powers.... If the current round of WTO negotiations fails it will not necessarily be, as some suggest, a disaster for development... If the Development Round fails, we shall have to try again."

(* Chakravarthi Raghavan, editor emeritus, has been following and monitoring the GATT and its successor since 1978, and wrote this commentary as a contribution.)