Good morning. I am very pleased to be here. Actually, I am humbled and honored to share the stage with such a distinguish group of experts in the region. My remarks will focus on three topics:
- The impact of trade on poverty and shared prosperity
- My own experience as a former Minister of Foreign Trade (Costa Rica) & how smaller countries have gained from CAFTA-DR
- How the Trade & Competitiveness (T&C) Global Practice can support the South Asian Region
The impact of trade on poverty and shared prosperity
Promoting freer and more inclusive trade is a critical part of the World Bank Group’s plan to end extreme poverty by 2030. Our plan to end poverty includes two objectives:
- Expanding opportunities for low- and middle-income countries (like those in South Asia) to participate in trade.
- Reducing ‘trade costs’ that are critical obstacles preventing the poor and the vulnerable from participating in trade and therefore constraining them from seeking opportunities that would help realize their full potential.
We know that providing these poor people access to trade opportunities has a dramatic impact on reducing extreme poverty. For example, since 2000, developing countries’ share of world trade has grown from 33 to 48 percent. This helped stimulate growth in low- and middle-income counties, and accelerated poverty reduction. In fact, pro-poor trade is one reason we have made enormous progress over the last 25 years in our mission to end extreme poverty.
An example of effective trade reforms in two countries:
In Bangladesh, there are many examples of targeted reforms and openness to trade that have helped the poor. Trade policy related reforms taken by Bangladesh have greatly benefited its ready-made garments sector which is today one of the most competitive in the world. Between 1990-91and 2013-14, employment in the ready-made garment sector soared ten-fold, from 0.4 million to 4 million, almost entirely for exports!
Looking East from South Asia, Cambodia is another example where a combination of reforms and openness helped poor rural farmers to sell rice to international markets. It also created new jobs in urban areas through the garment sector, where over 80 percent of the workers are women. Between 2007 and 2011, extreme poverty in Cambodia fell from 30.8 percent to 10.1 percent.
There are three steps countries in the region can take for trade to continue to have a poverty-decreasing effect:
- Decrease trade costs: Research shows that poorer countries have higher trade costs. For example, it is more costly for South Asian countries to trade with each other than to trade with distant Brazil! Policies to reduce these costs would need to address non-tariff barriers, trade facilitation measures, harmonization of regulations and standards, and information-sharing. Lowering trade costs would help to deepen producers’ and consumers’ connectivity to the global marketplace. Moreover, to be fully effective, policies should also address trade costs within countries—for example, to create more opportunities for the majority of poor people that live in rural areas that are usually not as well connected as urban areas. Also, for landlocked regions such as Nepal and Bhutan, and NE India, reducing costs of access to ports and global and regional markets can be critical for reducing prices of critical products (directly affecting real income, especially for the poor), and improving competitiveness and hence job prospects.
- Connect people to regional (and global markets): Government and multilateral institutions must help finance local programs that connect entrepreneurs to markets. Supporting the activities of poor and small traders, particularly women, can widen the benefits of trade, particularly for those in rural areas. Evidence suggests that increasing competition in the transport sector in West Africa could reduce the cost of transporting agricultural commodities by 50% within a decade.
- Manage and mitigate risks faced by the poor: This can be done by ensuring adequate social safety nets. For instance, we could increase people’s ability to withstand external shocks and seize opportunities to improve their lives. Trade policies can also play a greater role in helping manage risks to food security associated with climate change.
Gains for small countries from integration with large neighbors
Let me share with you the experience of a small country from integration with a large neighbor, the U.S. A couple of facts about Costa Rica first. This is a 4.5 million person country (75 times smaller than the U.S.), with a $50 billion economy (340 times smaller than that of the U.S.). A country originally dependent on exports of coffee and bananas some 25 years ago, Costa Rica has structurally transformed its economy and now is very much connected to global value chains, exporting over 4500 different products to 150 countries all over the world. Despite facing many challenges, it has significantly reduced poverty rates and its social indicators are on par with those of developed countries. Trade policy and trade agreements and foreign direct investment have been key drivers of this transformation.
Twenty years ago, when the U.S. negotiated NAFTA with its neighbors, Mexico and Canada, Costa Rica and the rest of the Central American countries became very concerned that NAFTA would divert trade and investment from the region. At the time they moved to propose to the U.S. to expand NAFTA to Central America or else to negotiate a bilateral free trade agreement. This was not a priority for the U.S. at the time and the region had to wait more than 10 years for it to happen. In the meantime, Costa Rica began to prepare itself by negotiating FTAs, first with Mexico and then with a series of other partners, which today include Canada, China, the EU and several countries in Latin America.
The negotiating process of CAFTA-DR, the FTA between Central America, the Dominican Republic and the U.S., was not easy for countries in the region. Asymmetries in terms of power, size of the economies and levels of development were evident, the negotiation of a comprehensive and ambitious FTA is a non-trivial exercise, the multidimensional character of the process makes it even more complicated and last but not least, the U.S. is a tough negotiating partner. Nevertheless, Costa Rica and the other Central American countries did it and concluded the negotiation, achieving most of their negotiating objectives.
The results were not uncontroversial, particularly in Costa Rica, as the agreement encompassed the opening of long established monopolies in telecom and insurance, which were strongly opposed by public sector unions. Approval of the agreement was ultimately subjected to the first and only referendum ever in the history of the country and with 60% of the electorate going to the polls, it was finally approved to come into force in 2009. I am proud to have been Costa Rica’s Chief Negotiator for CAFTA-DR.
Last year, before I concluded my term as Minister of Trade, I asked the World Bank for an assessment of CAFTA-DR five years after entry into force. The Bank’s main findings were:
- The agreement has succeeded to further trade integration between Costa Rica, the U.S., and other CAFTA-DR countries. Exports to the U.S. began increasing several years before the agreement, but CAFTA-DR accelerated the trend.
- Costa Rica continues attracting FDI above levels observed in other CAFTA-DR countries, with an increasing share from U.S. investors and a focus on medical devices and business services. Online surveys and interviews of high-tech firms in free trade zones found that CAFTA-DR was an important factor in the investment decisions.
- CAFTA-DR ignited an explosion of changes in the telecom and insurance sectors, bringing new regulatory frameworks, competition, product innovations, and price reductions. Consumers are reaping the benefits of improved telecom and insurance services, despite the fact that some issues remain for those markets to mature.
I could speak about this at length, but since I have a plane to catch, so let me quickly share some reflections with you:
- Economic cooperation through FTAs is not a choice, it is an imperative in today’s world, particularly for this region. External factors, including TPP, GVCs and the China factor demand it. More importantly, poverty will only be eradicated through more growth, more jobs and enhanced productivity and FTAs may play a key role in promoting the reforms that are needed, opening markets and bringing about more and better FDI.
- But not all FTAs are equal. Countries may opt to negotiate comprehensive and ambitious agreements or other types of deals. Here, like in the gym, no pain, no gain. The dynamic gains that may come from trade agreements, for instance, by liberalizing trade in services and attracting FDI, may be more significant than what traditional comparative advantage theory may dictate.
- The benefits are not automatic. Countries need to embed their enhanced economic cooperation through FTAs in a broader context of promoting competitiveness by improving their business climate, reducing the costs to trade, fostering connectivity via hard and soft infrastructure, improving the skills of the workforce, and promoting entrepreneurship and innovation, among others. Strengthening social safety nets for mitigating short term adjustment costs may be part of the strategy.
- What does it take to make this happen? A three-pronged strategy for vigorously upscaling economic cooperation requires a combination of a clear vision for success, strong political will to lead and stay the course and very importantly, to coalesce support from different groups in the private sector and civil society more broadly; and technical competencies to deal with the multiple and complex challenges associated with negotiating, implementing and taking advantage of trade agreements. Support from partners like the World Bank can help.
How can T&C support the South Asia Region’s Regional Integration Agenda?
Regional integration is a slow and incremental process. The World Bank Group provides an integrated package of services to support this agenda. In this regard, the offerings of the T&C Global Practice are particularly relevant, since they encompass topics that are central to regional integration, such as trade and investment, trade facilitation, regulatory environment, competitive sectors, and spatial competitiveness.
Examples of Progress Made so Far: T&C GP has made already made concrete progress in promoting regional integration in South Asia. For example, we are working on the South Asia Regional Trade and Investment Project (SARTI) the goal of which is to deepen economic cooperation in the eastern sub-region of South Asia through facilitating trade and cross-border investment flows. The project has had a number of achievements so far. It has achieved reforms in Customs codes in Bangladesh and Nepal to create the legal basis for reforms and align them with international agreements; a reduction of import clearance process time by 23% at Chittagong port that handles more than 90% of Bangladesh’s trade; significant reductions in fees and documentary requirements in Nepal that have cut compliance costs by $7 million annually; and is helping introduce modern, efficient customs systems including through risk management initiatives in both countries.
On the investment facilitation side, the project is supporting changes in foreign investment and industrial policy in Nepal and Bangladesh to make them more attractive for investors; it has automated key investor services such as visa/work permit approvals and foreign borrowing that have reduced processing time by 30-50%.
Our global practice also has very active engagement in advisory services in South Asia and has played an important convening role. With reform oriented governments in several countries, there are many opportunities for deepening this engagement and linking it to new lending services.
Advisory Services: A large part of the regional integration non-lending portfolio (analytical, advisory and convening services) is with T&C. This, inter-alia, includes efforts to shape a more positive regional integrative narrative in South Asia. Check out a Policy Notes Series named SARConnect which provides pointed analysis and discussion on topical cross-border issues on South Asia’s regional integration. It includes studies on FDI, studies on trade facilitation, analysis of the linkages between trade and poverty in South Asia and identifies the role that non-tariff barriers play in intra-regional trade in South Asia, etc.
This will complement well the work that is already taking place at the country level on trade policy and trade facilitation. For example, the dialogue on trade policy in Pakistan has supported the Growth and Competitiveness Development Policy Credit. The forthcoming Diagnostic Trade Integration Study in Bangladesh could provide the basis for a new dialogue on trade and export diversification and eventually inform development policy or investment loans.
Trade Facilitation: We know that trade costs in South Asia are very high, far higher than in other regions. For example, average trade costs within South Asia are 85% higher than in East Asia. Between 2006 and 2014, South Asian import costs rose by more than 50% for all countries except India. Similarly, export costs rose for all countries, except Pakistan and Sri Lanka. Landlocked countries (Afghanistan, Bhutan and Nepal) face the highest trade costs in the region. We are already working on trade facilitation in five countries through advisory services, which is complemented in three areas with lending operations. In Afghanistan, this is a self-standing lending operation, and in Nepal and Bangladesh, the interventions are embedded in larger transport operations. We would like to deepen this engagement even further, knowing how important this agenda is for continued poverty reduction.
Regulatory Environment: Countries in South Asia rank far behind their peers in Doing Business Indicators. In fact, on average, South Asia is the region with the lowest ranking, when it comes to the ‘Ease of doing business.’ FDI is, for most countries, well below levels of comparators (2% of overall FDI). There are regular complaints about non-tariff barriers which often go unresolved. Most non-tariff barriers in the region center around rules and regulations, like restrictive product standards, quality specifications, and labor and environmental standards. All of these issues are related, and addressing them would help increase, for example, the very limited intra-regional FDI that currently prevails.
There are advisory engagements in this area in most of the countries in the region with different degrees of coverage and depth. Prime Minister Modi’s ambitious target of improving the Doing Business ranking has created new momentum on business regulatory reform in India. Pakistan is a good example of how regulatory reforms at the federal and provincial levels can be supported by both advisory services and lending instruments. We are doing some in-depth analytical work on non-tariff barriers between pairs of countries.
Complementing Reforms in Trade and Business Regulations: There is great scope for T&C to foster spatial solutions, global value chains, and innovation and entrepreneurship initiatives in support of competitive industries.
When governments and the private sector in South Asia work together, they can have a major impact on ending extreme poverty and promoting inclusive growth in South Asia. We must continue to work with all of you to put our global knowledge at your service so that the dividends of trade and investment can be shared by as many inhabitants of South Asia as possible. I am excited about our collaboration going forward in a region that carries tremendous potential!