The Development Round That Wasn T

The Development Round That Wasn’t

Joseph E. Stiglitz

Whatever face-saving measures are taken, the meeting in Hong Kong in mid-December to wrap up the current Development Round of world trade talks will almost surely fail the only test that matters: whether such an agreement promotes the poorest countries’ development. Cynics will say that the advanced countries, in the tradition of previous trade deals, intended to provide only the bare minimum in the way of concessions, while generating the full maximum in the way of “spin,” to get the developing countries on board.

What has happened since the beginning of the Development Round at Doha in November 2001 has been a huge disappointment for me. As chief economist of the World Bank, I reviewed the Uruguay Round of 1994 and concluded that both its agenda and outcomes discriminated against developing countries. In March 1999, I went to the headquarters of the World Trade Organization in Geneva to call for a development round to redress these imbalances. For a moment, I thought my call had been heeded.

Two years ago, I was asked by the Commonwealth, a diverse group of mostly ex-British colonies, countries from both the North and the South, to prepare a study of what a true development round would look like. This month, Oxford University Press is publishing an expanded version of that report, called Fair Trade for All: How Trade can Promote Development.

Both as it was conceived, and even more as it has evolved, today’s Development Round does not deserve its name. Many of the issues that it has addressed should never have been on the agenda of a genuine development round, and many issues that should have been on the agenda have not been.

Agriculture is not the only – or even the most important – trade issue, though it is understandable why it has become pivotal. When the Uruguay Round began, there was a Grand Bargain to expand the trade agenda to include services and intellectual property rights – two issues of particular concern to developed countries. In return, developed countries were to make major concessions on agriculture – the livelihood of the vast majority of people in developing countries – and textile quotas, the only trade area (besides sugar) in which quantitative restrictions persist.

In the end, developed countries got what they wanted, and developing countries were told to be patient: eventually the developed countries would fulfill their part of the deal. Even as the rich countries urged developing countries to make quick adjustments, they claimed that they needed a decade to make the transition to a quota-free textile regime. In truth, they were just buying time; they did nothing for a decade, and when the quotas finally ended last January, they pleaded that they were still not prepared, and thus negotiated a three-year extension with China.

What happened in agriculture was even worse. While the understanding was that rich countries’ enormous subsidies and restrictions would be reduced, the United States almost doubled its subsidies. But, like any sharp negotiator, the US claimed that at worst it had violated the spirit, not the letter, of the agreement.

To be sure, the US had inserted fine print that created a category of allowed agricultural subsidies – those that didn’t distort trade – and it claimed all of its increases were of this kind. But America evidently believed that virtually anything it did was non-trade distorting. (By contrast, everything Europe did was trade distorting. Indeed, one of America’s great achievements in the charade of trade negotiations during the past year has been to portray Europe as the culprit.) America’s claims were not based on economic analysis – as the WTO concluded when it ruled on America’s cotton subsidies. A subsidy distorts trade if it increases production (unless magically, it raises consumption by the same amount.) America’s agricultural subsidies do just that.

Those in the developing world who believe that there has been a history of bargaining in bad faith have a strong case.

That leaves developing countries facing a hard choice: will they be better off accepting the crumbs being offered to them? Whatever the economics, taking this route may be harder today than ever before: with so many developing countries becoming vibrant democracies, electorates may punish governments that accept what is widely viewed as another unfair trade agreement.

Unsurprisingly, the rich countries’ negotiators throw around big numbers when describing the gains from even an imperfect agreement. But they did the same thing last time, too. Developing countries soon discovered that their gains were far less than advertised, and the poorest countries found, to their dismay, that they were actually worse off. Simply put, the advanced countries have lost their credibility.

To be sure, the great achievement of the Uruguay round was the establishment of a basic rule of law in international trade. Even the most powerful country, the US, has reluctantly yielded to its finding, for instance, that its steel tariffs violated international trade law. Presumably, the same will eventually happen with America’s cotton subsidies, illegal dumping provisions, and tax subsidies to exporters. A rule of law, even if unfair, is better than no rule of law.

But with that goal reached, developing countries today need to take a hard look at the details of what is being offered. Will the benefits – increased access to international markets – be greater than the costs of meeting rich countries’ demands? Many developing countries are likely to come to the conclusion that no agreement is better than a bad agreement, particularly one as unfair as the last. Let the Doha Round Fail Dani Rodrik http://www.project-syndicate.org/print_commentary/rodrik13/English

Imagine that the world’s trade ministers simply walk away from their forthcoming Hong Kong meeting of the World Trade Organization (WTO) with this simple declaration: “We failed to reach an agreement; we’ll try to do better next time.” This would bring the so-called Doha “Development” Round to an unsuccessful conclusion, but it would be no disaster.

Talk to World Bank and WTO officials, and you will get an earful of inflated claims about the benefits that a successful Doha round would bring. These officials often make it sound as if the livelihood of hundreds of millions of poor people in developing nations hangs in the balance. Look closer at these claims, and you find that they are built on sand.

The World Bank’s most recent estimate is that complete trade liberalization (including in manufactures and by developing nations themselves) would produce a net gain to the developing world of half a percentage point of their income. But that hasn’t stopped the Bank doing its best to hide this meager impact behind impressive- sounding claims.

The fact is that the world economy is more open today than it has ever been, and will remain so even if the Doha talks collapse. Most developing nations have opened themselves significantly to foreign trade and no longer employ the most damaging policies of the past (such as quantitative restrictions on imports).

The political balance in these countries has tilted decisively in favor of pro-trade groups with an outward-looking orientation. In the advanced countries, trade barriers for manufactured goods and many services are at a historic low. It would be hard to identify any poor country whose development prospects are seriously blocked by restrictions on market access abroad. Any country with a sensible development strategy has the opportunity to make its economy grow, with assistance from trade.

But what about agriculture? Don’t the farm subsidies and other forms of support in the United States and European Union undercut the livelihood of millions of poor farmers? Wouldn’t phasing them out make a big dent in world poverty?

The reality is that the global impact of agricultural liberalization in rich countries would be relatively small and highly uneven. These policies may hurt agricultural producers elsewhere, but they also benefit poor urban consumers. The balance depends on the poverty profile of individual countries and on whether they are food exporters or importers.

Of course, there would be some big gainers from agricultural reform, but they are chiefly consumers and taxpayers in rich countries. Some large middle-income food exporters (such as Brazil and Argentina) would also reap gains. Such outcomes are not unimportant, but they represent a far cry from the picture painted by free-trade fundamentalists.

Indeed the only serious risk from the Doha round’s “failure” is that rich countries would take their own rhetoric seriously and react in unproductive ways that prove self-fulfilling. The US, in particular, could intensify its pursuit of bilateral deals, by which it is able to impose increasingly inappropriate policy priorities on smaller nations.

The silver lining in an amicable break-up of the trade talks is that it would give negotiators a chance to focus on issues that are of much greater significance to developing nations. The next time around, trade talks should take up the two most glaring omissions to date:

A comprehensive effort to enhance the mobility of temporary workers from poor countries to rich countries. This is where the gains from liberalization would be the largest, because it is here that the barriers are the highest. Creation of a “policy space” for developing countries in WTO agreements. Developing nations’ pursuit of growth-promoting trade and industrial policies are increasingly running afoul of restrictive WTO rules. Growth superstars such as South Korea, Taiwan, China, and many others would not have been able to adopt the growth strategies that they did if today’s WTO strictures had applied to them. Trade officials must acknowledge the lessons from these countries’ experience and reform the rules accordingly. There remains a 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 certain to lead to disappointment in the future – especially in developing nations. We will also have given up the opportunity to have a real development round next time around.

Sometimes there is no success like failure. The Doha round is a case in point.

Dani Rodrik is Professor of Political Economy at Harvard University’s John F. Kennedy School of Government.