Introduction

In all likelihood, the WTO Ministerial this November will usher in a new Round of negotiations, the ninth in a series that began in Geneva in 1947. I am delighted that Mr. Moore has called on WTO members to provide more help to developing countries, and gone so far as to describe these negotiations as a “development round.” Today, I want to reinforce Mr. Moore’s call.  I will argue that basic notions of equity and a sense of fair play require that the next round of trade negotiations be more balanced—that is, more reflective of the interests and concerns of the developing world—than has been the case in earlier Rounds.  I would go even further than this and say that unless we achieve greater balance, we will place at peril the success of future trade negotiations.

The stakes are high.  There is a growing gap between the developed and the less developed countries, highlighted in this year’s World Development Report (see Graph 1).[1]  The international community is doing too little to narrow this gap:  even as the ability of developing countries to use aid effectively has increased,[2] the level of development assistance has diminished, with aid per capita to the developing world falling by nearly a third in the 1990s.[3]  Too often, the cuts in aid budgets have been accompanied by the slogan of “Trade, not aid,” together with exhortations for the developing world to participate fully in the global marketplace.  Developing countries have been lectured about how government subsidies and protectionism distort prices and impede growth.  But all too often there is a hollow ring to these exhortations.  As developing countries do take steps to open their economies and expand their exports, in too many sectors they find themselves confronting significant trade barriers—leaving them, in effect, with neither aid nor trade.  They quickly run up against dumping duties, when no economist would say they are really engaged in dumping, or they face protected or restricted markets in their areas of natural comparative advantage, like agriculture or textiles. 

In these circumstances, it is not surprising that critics of liberalization within the developing world quickly raise cries of hypocrisy.  Developing countries often face great pressure to liberalize quickly.  When they raise concerns about job loss, they receive the doctrinaire reply that markets create jobs, and that the resources released from the protected sector can be redeployed productively elsewhere.  But all too often, the jobs do not appear quickly enough for those who have been displaced; and all too often, the displaced workers have no resources to buffer themselves, nor is there a public safety net to catch them as they fall.  These are genuine concerns.  What are developing countries to make of the rhetoric in favor of rapid liberalization, when rich countries—countries with full employment and strong safety nets—argue that they need to impose protective measures to help those adversely affected by trade?  Or when rich countries play down the political pressures within developing countries—insisting that their polities “face up to the hard choices”—but at the same time excuse their own trade barriers and agricultural subsidies by citing “political pressures”?

Let me be clear:  there is no doubt in my mind that trade liberalization will be of benefit to the developing countries, and to the world more generally.   But trade liberalization must be balanced, and it must reflect the concerns of the developing world.  It must be balanced in agenda, process, and outcomes.  It must take in not only those sectors in which developed countries have a comparative advantage, like financial services, but also those in which developing countries have a special interest, like agriculture and construction services.  It must not only include intellectual property protections of interest to the developed countries, but also address issues of current or potential concern for developing countries, such as property rights for knowledge embedded in traditional medicines, or the pricing of pharmaceuticals in developing-country markets.

Trade liberalization must take into account the marked disadvantage that developing countries have in participating meaningfully in negotiations.  For instance, as the new World Development Report points out, 19 of the 42 African WTO members have no trade representative at WTO headquarters in Geneva.  In contrast, the average number of trade officials from OECD countries is just under seven.

 In approaching the upcoming negotiations, moreover, we must look at them not in isolation, but in a historical context.  We need to address suspicions born of a legacy of past power imbalances.

Moreover, we must recognize the differences in circumstances between developed and developing countries, differences to which I have already alluded.  We know that developing countries face greater volatility, that opening to trade in fact contributes to that volatility, that developing countries have weak or non-existent safety nets, and that high unemployment is a persistent problem in many if not most developing countries.  The developed and less developed countries play on a playing field that is not level.  Thus, provisions that look fair on the surface may have very different and unequal consequences for the developed and less developed countries.  Accordingly, the power imbalances at the bargaining table are exacerbated by the imbalance of consequences.

There are other dimensions relating to inequality of outcomes that I will discuss later in my talk, but there is one that I want to mention upfront.  Standard economic analysis argues that trade liberalization — even unilateral opening of markets — benefits a country.  In this view, job loss in one sector will be offset by job creation in another, and the new jobs will be higher-productivity than the old.  It is this movement from low- to high-productivity jobs that represents the gain from the national perspective, and explains why, in principle, everyone can be made better off as a result of liberalization.  This economic logic requires markets to be working well, however, and in many countries, underdevelopment is an inherent reflection of poorly functioning markets.  Thus new jobs are not created, or not created automatically.  Moving workers from a low-productivity sector to unemployment does not — let me repeat, does not — increase output.  A variety of factors contribute to the failure of jobs to be created, from government regulations, to rigidities in labor markets, to lack of access to capital.  But whatever the causes, they have to be addressed simultaneously if we are to make a convincing case for trade liberalization.

Let me underscore this point.  There are some sectors of the economy where the standard competitive paradigm does not work well even in developed countries, let alone developing countries.  A stark lesson of the recent East Asia crisis is that weak financial institutions can wreak havoc on an economy, and that strong financial institutions require strong government regulation.  But the increased frequency and depth of financial crises in recent years—with close to a hundred countries suffering through such crises over the past quarter-century[4]—has shown how hard it is establish strong financial institutions, even in developed countries.  It has shown also that liberalization—including financial sector liberalization—without the requisite accompanying improvements in regulation and supervision can contribute to financial-sector instability.  That instability in turn has exacted great costs in terms of growth, deepening poverty in the crisis countries.

Finally, we need to recognize that while there has been enormous progress made in trade liberalization over the past fifty years under GATT and the WTO, today there exist real threats to that progress.   It is not just that future progress may be slow, but there may be, in effect, backsliding, as non-tariff barriers replace tariff barriers, with the former far less transparent than the latter.  Perhaps the most egregious of these barriers are anti-dumping and countervailing duties.  While there are few topics on which economists agree, one on which there is almost universal consensus is that, as implemented, anti-dumping duties and CVDs make little economic sense; instead, they are very thinly disguised protectionist measures.  But the sad fact is that developing countries do learn from the developed countries.  They have now learned how to use these protectionist measures, both against each other and against the more developed countries.  Indeed, last year, two out of the top four users of anti-dumping measures were developing countries.  (Not surprisingly, the US and EU head the list of developed country users.)

This call to fairness, and especially fairness to the developing countries, is one of the two themes that I want to stress in my talk today.  There is a second principle which I believe should underlie the coming round of trade negotiations, comprehensiveness.  Adherence to the principles of fairness and comprehensiveness could hold open the promise of a more liberal, and more equitable trading regime of the future.  While participants in previous Rounds have often paid lip service to these principles, they have been honored mostly in the breach.  Future adherence to these principles is, in my mind, absolutely essential for the success of the next round, and in particular if the developing countries are to become full partners in the process of trade liberalization.

[1] World Bank (1999).
[2] The World Bank’s recent study Assessing Aid (World Bank 1998) shows that in countries that have put into place the right policies and institutions, aid can be very effective in increasing economic growth and in reducing poverty.
[3] The figure was US$32.27 in aid per developing-country resident in 1990, but only US$22.41 in 1997 (World Bank Statistical Information and Management Analysis database).
[4] Caprio and Klingebiel (1996) show that 69 countries faced severe banking crises between 1977 and 1995; this count omits all those that have arisen in the past several years.  See also World Bank (1999).

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