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WB Report Hightlights Need for Success at Cancun Talks

A trade deal that addresses the concerns of developing nations could spur growth and reduce poverty by as much as 144 million people by 2015, says a new World Bank report published on the eve of a meeting of the world's trade ministers in Cancun that will review progress on WTO negotiations on the Doha Development Agenda. 

The report "Global Economic Prospects 2004: Realizing the Development Promise of the Doha Agenda" projects anemic growth of 1.5 percent in 2003 in the industrialized world, well below potential. It foresees better performance next year, as industrial countries' growth rises to 2.5 percent. Developing countries are somewhat more buoyant than industrial countries, growing at 4.0 percent in 2003, and, if the recovery stays on track, will grow at 4.9 percent in 2004.  World trade is projected to grow by 4.6 percent, slightly more than last year, but still less than half the rate in 2000.

Although countries in East Asia lost some momentum due to SARS and saw growth decline from 6.7 percent in 2002 to 6.1 percent in 2003, the report predicts that East Asian growth will rebound later in the year and reach 6.7 percent in 2004.  Growth is expected to be spurred on by the continued strength of China, especially as an export market to regional economies; the expected pickup in world growth, higher prices for agricultural primary commodities like rice, rubber, palm oil, coconut products and lumber from late 2001; and improved emerging market sentiment benefiting countries like the Philippines and Indonesia, the report notes.

Officially, the Cancun meetings are an interim stocktaking for the negotiations, which are scheduled for completion by January 1, 2005. But the meetings occur at a time when the global economy and international trade are languishing.  As the report notes, the trade talks are stalled over disagreements on issues of particular importance to developing countries, such as agriculture, tariff reductions in manufactures, special treatment for developing countries, and drug patents in poor countries. Progress in Cancun could bolster investor confidence, and create momentum towards a more significant WTO agreement that would spur trade, and eventually raise incomes around the world, leading over time to a substantial reduction in global poverty, according to the Bank. 

World Bank Chief Economist Nicholas Stern believes it is important for the rich countries to take the lead in negotiating a fair outcome to the Cancun negotiations.

"They are the dominant players and account for two-thirds of the global market," says Stern.  "They could show leadership by reducing agricultural protection, cutting high tariffs, and ensuring that the poorest countries have access to affordable medicines on the same terms as bigger developing countries." The report also notes that developing countries, especially the dynamic middle-income ones, could contribute to a good "Doha deal" by agreeing to undertake trade liberalization measures that would help boost global trade and that are in their own interests as well.

"The talks are approaching a critical juncture," says Uri Dadush, director of the Trade Department at the World Bank. "If ministers can reach an agreement  to reduce trade barriers affecting the products that poor people produce, especially farm products and labor-intensive manufactures, it would help raise their standard of living. If not, an opportunity will be lost. "

In East Asia, Homi Kharas, chief economist for East Asia and the Pacific, adds "the development agenda is becoming increasingly entwined with the trade policy agenda and its focus on market access and competitiveness.  To take full advantage of growing economic integration, the Region needs to implement the necessary policies in agriculture, services, logistics, and trade facilitation -- while ensuring that benefits from increased integration can be broadly shared by poorer countries and the poor within countries." 

Removing barriers to developing countries' exports would accelerate their growth

The report points to inequities in the world trading system that drag down export growth of  developing countries. In agriculture, for example, Japanese support to rice amounts to 700 percent  of production cost, which effectively shuts out exports from Thailand and other producers. Direct budget subsidies to producers by the EU cost around US$100 billion annually, and depress world market prices in sugar, dairy, and wheat, while indirect support through high tariff walls further raises prices to consumers. The US spends US$50 billion annually on direct support to agriculture. Annual cotton subsidies to US farmers of more than US$3 billion (three times US foreign aid to Africa) depress world cotton prices and crowd out poor but otherwise efficient farmers in West Africa. 

"Exporters from developing countries generally have to pay more to get into foreign markets than exporters in rich countries," says Richard Newfarmer, economic adviser in the World Bank's Trade Department and Development Prospects Group, and lead author of the report.  "Industrial countries on average charge each other tariffs of about 1 percent on their imported manufactures, but collect 5 percent from East Asia, 6 percent from the Middle East, and 8 percent from South Asia.  Mongolia, for example, pays nearly the same dollar amount in tariffs to the US government as Norway, even though it sells only three percent of what Norway sells in the US," Newfarmer says.  "Can anyone argue this system is living up to its development potential?"

The report argues that a "good" WTO agreement could produce about US$290-520 billion in income gains to both rich and poor countries,  lifting an additional 144 million people out of poverty by 2015 (see box). For East Asia alone, earlier research suggests that if the right policies were put in place on agriculture, services, logistics, and trade facilitation by the countries in the region, annual benefits amounting to roughly US$300 billion or 10 percent of GDP could be realized within a decade -- and that these benefits could be even higher if a global trade agreement is reached.  If properly shared, this would mean over 50 million fewer poor people in East Asia. (www.worldbank.org/eaptrade)

How much would tariff cuts raise incomes?

GEP 2004 presents a simple scenario that shows how lower trade barriers in agriculture and smaller tariff peaks could promote growth and poverty reduction. 

Under this scenario:
· Rich countries cut tariffs to 10 percent in agriculture, and to five percent in manufacturing;
· Developing countries reciprocate with tariff cuts to 15 and 10 percent in agriculture and manufacturing, respectively;
· All countries eliminate agricultural export subsidies, averages, "decouple" domestic subsidies to minimize the trade distortions, and eliminate specific tariffs,quotas, and anti-dumping duties.

This formula generates gains which amount to about three quarters of  those from full liberalization. If these reforms were implemented progressively over five years to 2010 and accompanied by a realistic productivity response, developing countries would gain nearly US$350 billion in additional income by 2015. Rich countries would benefit, too, with gains on the order of US$170 billion.

All of this would mean that there would be 144 million fewer people living below US$2 per day by 2015.

The international community has to work together to get a positive outcome 

Stern emphasizes that realizing these gains requires all countries take responsibility for the outcome.

"Rich countries have to lead -- by reducing agricultural protection, by cutting high manufacturing tariffs, and by expanding access to affordable medicines," says Stern.  "It makes no sense for rich countries to encourage developing countries to adopt policies that will promote growth, and then adopt trade policies that reduce the growth prospects of those same developing countries."

The GEP notes that developing countries, especially dynamic middle income countries, could contribute to a good "Doha deal" by putting on the table measures in their own interests. By opening to trade they can lower the cost of imported inputs, and become more competitive internationally. This creates new opportunities for small farms, and for small and medium-sized businesses, which means more jobs for poor people.

"High protection in middle-income countries hurt their poor neighbors in the same way as trade barriers in rich countries," says Dadush.  Latin American exporters of manufactures face average tariffs in Latin America that are seven times higher than tariffs in industrial countries.  East Asian exporters face tariffs in other East Asian countries that are 60 percent higher than in industrial countries. 

The report challenges all segments of the international community to offer "concessions" that will in the end benefit themselves as well as trading partners.

Industrialized countries will benefit by cutting protection and agricultural subsidies-most of which go to large farmers who already make more than the average family in the EU, Japan and US.  Slashing agricultural protection would result in cheaper food and labor-intensive manufactures for consumers in those countries. At the same time, it would help raise incomes of poor farmers in developing countries. In return, rich countries might get greater access to still protected services markets in middle-income countries.

Middle-income countries will have better telephone and financial services if more foreign competitors were allowed to enter services markets-and, at the same time, they would get access on better terms to the rich countries and the dynamic markets of other developing countries. Middle-income agricultural exporters would be among the biggest winners from agricultural liberalization, as the reduced subsidies and over-production by industrial countries would create new opportunities.

In East Asia, certain policy actions relating to the service industry can help make firms more competitive by helping to reduce business costs-such as through competitive producer services like logistics and accounting-and by lowering the costs of cross-border business operations and trade through policy actions on efficient customs, paper-less clearance, electronic processing, safety measures.  All of these can create more dynamic regional trade and investment flows to generate greater economic growth. 

Donors and multilateral agencies have to do more in the World Bank's view.  "Just because a foreign market lowers its trade barriers, it doesn't mean a country can suddenly export," says Newfarmer.  "It takes investments in ports, roads, and education, and improvements in local institutions like the customs and tax authorities.  International donors can provide resources -- financial and human -- to  undertake these critical investments."

The GEP notes that improvement in ports, customs, and other trade-related infrastructure could raise global trade by some US$380 billion over time.  "Moreover, the development agencies have a responsibility to help poor countries as they adopt policies to cope with erosion of preferential access, rising prices on food imports, or lower tariff income due to domestic reforms," Newfarmer adds.

An issue of key interest to East Asia is the mobility of labor markets -- and its impact on growth

According to the GEP, increased service delivery through increased labor migration, particularly the temporary movement of unskilled labor (Mode 4), has advantages for both developed and developing countries, notwithstanding tensions surrounding migration. To date, however, even with the liberalization of trade in services during the Uruguay Round, little has been done to loosen conditions governing the temporary movement of labor supplying services. Present commitments refer almost exclusively to higher level personnel, of less significance for many of the developing countries of East Asia whose comparative advantage lies in the export of medium and low-skilled, labor-intensive services. If a system were introduced that permitted movement of labor up to 3 percent of the total labor force in rich countries, developing countries would stand to gain as much as US$200 billion in additional income. To encourage this, developing countries could actively expand their requests and offers in the Doha Round under Mode 4.

The global recovery is tentative, but headed in the right direction

For the third year in a row, the global economy is growing well below its potential, at an expected rate of 2 percent in 2003 (see table).  The pace of activity faltered at the end of 2002 and early 2003 in response to events that undermined confidence:  the build up to war in Iraq, trans-Atlantic tensions, and concerns about Severe Acute Respiratory Syndrome (SARS). 

Global growth is projected to pick up to 3 percent in 2004.  Early signs of renewed economic activity are appearing in the United States, yet although conditions in Europe and Japan continue to be weaker. Improvement in confidence will prove the key to a revival in capital spending and growth.

As for East Asia, "The years since the 1997 financial crisis have been ones of extraordinary volatility and uncertainty in the world economy -- but East Asian economies have actually come through this period reasonably well," said Kharas. He noted that simple average growth in the five crisis countries was 4.6 percent in the four years 1999-2002; including China and Vietnam it reached 5.1 percent. "Contributing to this reasonably positive experience has been a broad array of efforts at policy reform-albeit often gradual and incomplete-accompanied by a gradual strengthening of domestic demand.  Financial sector restructuring has assisted the emergence of new consumer credit markets, a positive development from a long run development standpoint, although bank management and regulators will need to ensure it does not become a new source of vulnerability." 

Furthermore, he commented that East Asia has been generating strong trade momentum on its own account, led by China. Chinese nominal imports (excluding oil) have grown at a compound rate of 12.2 percent since 1995, with much of the demand being met by regional producers. China's share in the merchandise exports of East Asia (Korea, Taiwan, China, Malaysia, Thailand, and Indonesia) has doubled over the last two years and quadrupled over the last ten.  "This should bode well for future growth, and we expect that East Asia will remain the fastest growing region in the world in 2003 and 2004, with growth rates above 5 percent each year."

Global GDP projections, 2003-2005

Pecentage change 2000 2001 2002 2003 2004 2005
World 4.0 1.3 1.9 2.0 3.0 2.9
High income countries 3.7 0.9 1.6 1.5 2.5 2.4
OECD countries 3.6 1.0 1.6 1.5 2.5 2.3
United States 3.8 0.3 2.4 2.2 3.4 2.8
Japan 2.8 0.4 0.1 0.8 1.3 1.3
Euro Area 3.5 1.5 0.8 0.7 1.7 2.1
Non-OECD countries 6.6 -1.1 2.4 2.1 4.1 4.4
All developing countries 5.1 2.9 3.3 4.0 4.9 4.8
East Aisa and Pacific 7.2 5.5 6.7 6.1 6.7 6.6
Europe and Central Asia 6.6 2.2 4.6 4.3 4.5 4.1
Latin American/Caribbean 3.5 0.3 -0.8 1.8 3.7 3.8
Middle East/North Africa 4.1 3.2 3.1 3.3 3.9 3.5
South Asia 4.2 4.9 4.2 5.4 5.4 5.4
Sub-Saharan Africa 3.2 3.2 2.8 2.8 3.5 3.8
Developing excl China/India 4.6 1.7 2.0 3.1 4.1 4.1

Source: World Bank, Development Prospects Group.
Note: GDP in constant 1995 US dollars.

(China.org.cn September 5, 2003)



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