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RTAs Must Create Trade to Reduce Poverty: WB Report

With regional trade agreements (RTAs) having increased six folds since the 1980s and now covering more than one-third of global trade, the World Bank’s Global Economic Prospects 2005 advises countries concluding bilateral and regional trade pacts to keep them “open,” so as not to divert trade or cause market distortions that penalize other developing countries.

Regional trade agreements, including North-South bilateral free trade deals as well as South-South preferential agreements, can improve prospects for rapid poverty reduction, the report says, but only if developing countries integrate them into a strategy for liberalization of trade on three fronts -- unilateral, multilateral, and regional.

“Regional trade agreements offer some benefits to some developing countries, provided they do not occur behind a wall of protection,” said François Bourguignon, the Bank’s Senior Vice President for Development Economics and Chief Economist, in launching the GEP 2005, entitled Trade, Regionalism and Development. “However, preferences favoring some countries discriminate against others. Nearly all agreements have adverse consequences on excluded countries. The most effective way to curb these negative effects is to open markets more broadly.”

Multilateral market openings -- which are being sought in the Doha Round of WTO negotiations -- hold the promise of greater potential gains to all developing countries, the report says.

“A multilateral agreement is the only way to open agricultural markets and reduce or end subsidies in rich countries. Bourguignon said. These reforms are of critical importance to the poor but they are not on the table in regional trade talks.”

Developing countries’ 6.1% growth in 2004 best in three decades, but expected to moderate

In addition to its analysis of regional trade agreements, the report notes in its review of global prospects that 2004 is likely to be the best year for growth in developing countries since 1974. Growth is estimated to be 6.1 percent, due to a strong cyclical global rebound from the 2001-02 slowdown and a solid performance spanning all regions. Global growth in 2004 is also strong at 4.0 percent, and the report forecasts that it will decelerate to 3.2 percent in 2005, and 2006. Slower growth is expected in developing countries too, down from 6.1 percent in 2004 to a projected 5.4 percent in 2005 and 5.1 percent in 2006.

East Asian growth will continue to outrun that of other regions, if at a somewhat slower pace, with 7.1 percent growth in 2005. South Asia is close behind with growth of six percent expected in 2004. China’s growth is forecast to slow modestly, in response to the government’s effort to prevent overheating; similarly, East Asian countries that had gained from a 30 percent increase in Chinese import demand this year, are also expected to experience moderating growth. Russia and oil-producing countries of the Middle East and North Africa, beneficiaries from high petroleum prices in 2004, are expected to grow at about the same pace in 2005 as oil prices move downwards.

In the medium-long run, the report predicts that developing countries could nearly double their 1990s growth rate as their investments in structural reforms begin to pay dividends. A sustained improvement in their macroeconomic stability, greater flexibility in moving resources to competitive opportunities, a better investment climate, and further reductions in reducing trade barriers, together with continued progress in the transition countries, should help developing countries reach an average annual per capita growth rate of 3.4 percent between 2006 and 2015, up from less than two percent in the 1990s. Although subject to global and country-specific risks, this growth rate would enable all regions except Sub-Saharan Africa to halve poverty by 2015, the first of the eight Millennium Development Goals.

The report warns that some countries, particularly in Africa, have not participated in this higher growth. This upbeat forecast is also vulnerable to risks, such as high and volatile oil prices, abrupt increases in interest rates associated with adjustments in the U.S. current account and government deficits, and possible stumbles in the effort to cool China’s rapidly growing economy. But the report sees these risks as manageable and concludes on a positive note. The rapid growth of developing economies, most concentrated in East and South Asia, has produced a spectacular drop in poverty, though some countries remain seriously off-target.

Use “open regionalism” to complement unilateral trade reforms, and multilateral reforms to gain broad market access, countries urged.

RTAs are most effective when they complement a unilateral and multilateral trade strategy and anchor domestic reform programs to improve competitiveness and reduce poverty, the report states.

“Most trade liberalization -- some two-thirds of the average reduction in tariffs since 1983 -- has occurred through unilateral government reform programs. Governments want to make their economies more efficient,” said Uri Dadush, Director of Development Prospects, and the International Trade Group at the World Bank.

“Whether we are talking about Chile, China, or more recently India, Egypt and Madagascar, governments choose to lower trade barriers to increase import competition, bring in more technology embodied in imports, and raise productivity,” Dadush said. “This spurs exports and growth. If, in the process, they can get their trading partners to do the same as part of a global or regional deal that gives their exporters more market access abroad, the prospects for poverty reduction are improved.”

The report says that key ingredients of RTAs that promote development include low external border barriers, promotion of new cross-border competition, nonrestrictive rules of origin, few sectoral and product exemptions, and more open services markets. Effective RTAs can help reduce regional political tensions, exploit economies-of-scale in infrastructure provision, and lead to joint programs to improve border crossings.

Successful experiences range from NAFTA to the EU’s agreements with Eastern European countries, and the ASEAN Free Trade Area in East Asia. But all arrangements have room for improvement. Indeed, the world’s most successful case of deep integration – the European Union – has evolved progressively and at times fitfully toward greater integration.

“Neither North-South bilateral agreements nor South-South arrangements get universally high marks,” said Richard Newfarmer, Economic Adviser in the Bank’s Trade Department and lead author of GEP 2005. “U.S. and EU bilateral agreements often fall short of full free trade because they exclude sensitive products, commonly agriculture, or they adopt restrictive rules of origin that effectively deny market access. South-South agreements are sometimes more liberal in goods trade, but rarely expand competition in services and often lag in implementation. And few agreements seize the opportunity to provide for temporary movement of workers.”

The report finds that regions with lowest external border barriers have been most successful in diversifying and exploiting the emergence of global production chains in manufacturing. East Asia, for example, is the region with the lowest external tariffs and highest ratio of intra-regional trade to GDP. Eastern Europe, which has undertaken reforms to integrate its economies with the global market since the demise of the Soviet bloc, is not far behind. Finally, Latin American countries have benefited by abandoning earlier import-substitution policies, opening markets to outside import competition and integrating into the global market – a process that has stimulated a large rise in interregional trade.

In the Middle East and North Africa, and in South Asia, external MFN liberalization has lagged behind other regions, and external tariffs often remain high. Together with regional conflicts, this has impeded trade integration in these regions. Improved Indo-Pakistan relations, however, open opportunities to promote development through greater regional integration. The South Asian Free Trade Area could form part of a strategy for greater openness, but is likely to be successful only if it learns the lessons of failed agreements in other parts of the world.

“Open” regional agreements can complement multilateral liberalization, the report argues. Joint reforms of customs at the border can cut costs of trading that at times are more onerous than tariffs, but implementation often lags.

“Delays at the border between South Africa and Zimbabwe still cost the same as shipping cargo from South Africa all the way to the United States,” Newfarmer said. “It is cheaper to ship wine from Australia to Moscow than from near-neighbor Moldova to Moscow; the reason is that protectionist transit requirements across Ukraine drive up the cost of Moldovian wine, despite Moldova-Ukraine trade agreements.”

A novel feature of this year’s report is Prospects for the Global Economy, an online companion to the report’s global outlook section (see www.worldbank.org/globaloutlook). This new website carries additional information on regional trends and commodity prices, and tools to customize scenarios according to individual specifications.

(China.org.cn November 17, 2004)

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