Organisation de Coopération et de Développement Economiques Organisation for Economic Co-operation and Development ___________________________________________________________________________________________ _____________ English - Or. English Sustainable Development ROUND TABLE ON SUSTAINABLE DEVELOPMENT The Development Impact of Developed-World Policies on Developing Countries: The Case of Trade Vangelis Vitalis This document is a technical paper for the Global Development Network Technical Workshop on The Development Impact of Developed-World Policies on Developing Countries, 16-17 January 2003, Cairo, Egypt. The views expressed in this paper do not necessarily represent those of the OECD or any of its Member countries. English - English Or. For further information please contact Vangelis Vitalis, Chief Adviser, Round Table on Sustainable Development at the OECD, 2 rue André Pascal, 75016 Paris, tel: +33 1 45 24 14 57; fax: +33 1 45 24 79 31; email: [email protected] 2 Introduction1 Trade is a major engine of world economic growth. Reflecting the removal of many import and export barriers, the volume of international merchandise trade today is nearly twenty times greater than it was in 1950. Aside from being the source of unprecedented wealth for many countries, trade has also led to wider and deeper forms of international economic interdependence. This paper begins by briefly delineating the relationship between trade and economic growth. It then provides an outline of the state knowledge on developed countries’1 trade policies and their impact on developing countries. Particular reference is made to those areas of developed-country trade policy that the paper judges have the most negative effects on developing countries’ economic prospects. These include: tariff policies; agricultural protection; restrictions on the trade in manufactured goods, particularly textiles and clothing; the barriers to trade in services; and the distortive impact of some developed-world regulations and standards, including voluntary measures. It is argued that these five areas should form the core of any putative agenda for developed-world trade-policy reform. Potential areas of research are also identified to help fill knowledge-gaps. The call for improved policy coherence iterated in the Plan of Implementation at the World Summit on Sustainable Development (WSSD) underlines the growing international acceptance that no economic policy can function without reference to other settings, including environmental and social ones. It is against this background that the paper argues that information which offers insights primarily on one aspect of a policy’s effects may no longer be sufficient in and of itself to guide policy development in the new Millennium. A broader perspective is required to improve trade policy-makers’ understanding of the wider impact of improvements in market access and the trans-boundary effects of developed-world consumption patterns. The paper argues that research attention should therefore be focussed on the wider consequences of market access improvements with a view to assisting policy makers to design flanking measures to mitigate potential negative effects. Finally, the paper suggests that the use of trade flow data could map the cross-border effects of developed-world consumption patterns on the developing world. This could also be a valuable supplement to current knowledge and information about trade policy effects. Trade and Economic Growth The positive relationship between trade and economic development has been explored in numerous cross- sectional analyses. These have demonstrated its positive effect on per capita income growth in developing countries.2 It is estimated, for instance, that those developing countries that have experienced the fastest non-energy products related export growth have also had one-percent higher real GDP growth than those with slower growth.3 Developing countries also receive considerably more foreign exchange revenue from trade than from almost any other source. On a per capita annual basis one study concluded that developing country exports generate more than thirty times as much revenue (US$322) as aid disbursements (US$10). Similarly, least- developed countries generate 12 times as much from exports (US$113 per capita) as from aid (US$9).4 Moreover, the impact of a one percent rise in exports for the developing country group has the capacity to raise annual per capita income in South Asia by 12 percent, 4 percent in Latin America and East Asia and 1 Vangelis Vitalis is currently the Chief Adviser at the Round Table on Sustainable Development at the OECD. He is on secondment from the New Zealand Ministry of Foreign Affairs and Trade. The views expressed in this paper do not necessarily reflect those of the OECD or the New Zealand Ministry of Foreign Affairs and Trade. This paper has benefited from the comments and suggestions made by Anne Harrison, Ron Steenblik, Robert Picciotto, Sheila Page and Alan Winters and the workshop participants at the Cairo Workshop of the Global Policy Network, particularly those of Bernard Hoekman the discussant on the trade-related aspects. Needless to say, all errors, omissions and other comments are the sole responsibility of the author 3 up to 20 percent in sub-Saharan Africa.5 This could reduce the number of people living in poverty by nearly 130 million, or 12 percent of the world total, with the greatest gains likely in sub-Saharan Africa.6 In short, even relatively modest improvements in developing countries’ levels of access to developed-world markets are likely to generate expanded exports and thus improved revenues.7 The negative effects of developed-country trade-related policies are well known. Essentially, the theory is that barriers to trade raise the prices of both imports and domestic goods. Aside from limiting consumer choices in developed countries, protection also implies more expensive products through the easing of competitive pressures. More specifically, developed-world protectionism fragments markets, limiting the ability and incentives of exporters to lower production costs from specialisation and access to cheaper inputs. By raising prices, higher trade barriers are like a tax hike with attendant income effects. The burden of these kinds of policies falls particularly heavily on developing countries and has a negative impact on economic growth and poverty reduction. There is a growing consensus that improvements in international market access are in most cases a ‘win- win’ proposition for developed and developing countries. Depending on the models used, the annual static welfare gains from the elimination of all barriers to trade range from $250 billion to $620 billion, of which at least one-third to one-half (depending on the model one favours) would accrue to developing countries.8 Table 1 in the Annex provides a summary of the estimated welfare effects of liberalisation. Against the background of the ‘win-win’ argument, it is useful to consider the composition of OECD imports from developing countries. This has diversified over the past decade and the trend has been towards manufacturing products counterbalancing the weaker growth in raw materials and agricultural products. Nevertheless, the concentration of imports to OECD members from developing countries between 1990 and 2000 has increased only modestly. Underlining the point, the share of least developed countries in OECD imports over the same period has barely changed at all. Overall, roughly one quarter of OECD imports came from developing countries in 2000, but less than 5 percent of OECD imports come from low-income developing countries. Imports from least-developed economies barely figure at all, supplying a meagre 1 percent of OECD imports.9 Although there is broad agreement about the wider welfare effects of trade liberalisation, there is still disagreement about the direction of causality between trade and growth. In effect, the evidence is such that one should be extremely cautious about attributing any single economic policy tool (such as the lowering of trade barriers) as being able to accelerate economic development or poverty reduction.10 Many other domestic reforms11 are required in tandem with international (and domestic) trade policy improvements if a country is to reduce poverty. In short, trade policy is only one element of any successful growth and development strategy.12 While many developing countries are benefiting from changes in the international trading regime and are likely to enjoy further positive gains, some may not. Sub-Saharan Africa, in particular, has appeared unable to capitalise on the modest reductions in developed-world protection of, for instance, agricultural markets. There appear to be two reasons for this. The ongoing conflicts in the region provide part of the explanation. Second, while agriculture is an important component of many sub-Saharan African economies it is of the subsistence type, which does not convert easily or quickly to tradable commodities. Those commodities (e.g. coffee and cocoa) that these countries have traded in have generally suffered reductions in world prices in the past ten years with negative effects on poverty reduction. It is also worth emphasising that developed-world trade reforms may affect the poor, particularly in the short term in complex ways, some of them negative. Poor urban workers and farmers for instance may stand to benefit from the reduction of developed-world barriers as