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Slow global recovery calls for quick action

The sluggish economy makes it more important that governments and the international community remove barriers to the creation of new jobs and opportunities for poor people in developing countries, say Nicholas Stern and Sadiq Ahmed

A SLOWDOWN in the global recovery is focusing the attention of economic policymakers on short-term measures to ensure a strong and sustained recovery. While these efforts are important they should not distract the international community from the pressing need to remove barriers to trade and investment that hurt poor people in developing countries.

A new World Bank study warns that economic growth will be slower than previously anticipated over the next 12 to 18 months, and that this will impede poverty reduction in developing countries. According to the report, Global economic prospects and the developing countries 2003: Investing to unlock global opportunities, uncertainties in global financial markets have sapped the momentum of the modest recovery that began in late 2001.

After exceptionally slow growth in 2001 (1.1 per cent) and 2002 (1.7 per cent), global GDP is now expected to rise by 2.5 per cent in 2003, still well below the 3.9 per cent expansion recorded in 2000 and significantly below long-term potential growth rates. There is a significant risk that the global rebound might quickly lose momentum and that the world could slip back into recession.

The South Asia region should average 5.4 per cent growth in 2003, an increase from the expected 4.6 per cent average for 2002. This improvement in growth prospects is premised upon a return to normal weather patterns, an improvement in political stability and regional security aspects thereby facilitating faster implementation of reforms, and a recovery in world trade volumes. However, without adequate reforms, the downside risks are substantial.

The sluggish economy makes it more important that governments and the international community remove barriers to the creation of new jobs and opportunities for poor people in developing countries. Trade barriers and other impediments to investment top the list. It would be unfortunate indeed if a myopic focus on short-term actions and the distraction of other agendas hindered progress on these core issues.

European, Japanese and U.S. agricultural subsidies and barriers to agriculture and textile exports from developing countries prevent developing countries from exploiting their comparative advantage. Removing these barriers would expand the market for products from the developing world, increase investment in these labour-intensive sectors, and thereby enable more people to improve their lives and to escape from poverty. The benefits to poor people in developing countries of removing rich country trade barriers would be more than twice the current $50 billion in annual development assistance that rich countries now provide.

Removing developing country barriers to trade would offer even larger benefits. Tariffs and other barriers to trade that developing countries erect against one another are much higher than the barriers erected by rich countries. These barriers rarely benefit poor people, who do not work in the large firms and state-owned enterprises that are the main beneficiaries of such protection. For a developing country to maintain these barriers because of protectionist actions in the rich countries is like saying "you are shooting yourself in the foot, so we are going to shoot ourselves in the foot as well!'' Even so, the rich countries' "do as we say not as we do'' approach to trade liberalisation makes reform in the developing countries more difficult politically. The U.S. Farm Bill and recent E.U. decisions on agricultural subsidies have raised doubts about the willingness of the rich countries to follow through on their pledges to put development at the center of global trade talks. People in developing countries understandably ask: "if trade liberalisation is such good medicine, why don't the rich countries swallow more?''

This dynamic is part of the reason that the global trade talks launched at Doha in November last year to address the needs of poor people in developing countries are showing signs of becoming bogged down.

For South Asia, our global projections of a recovery in world trade prospects also translate into strengthening external demand. We forecast, in our long-term prospect, that trade liberalisation is expected to continue with the easing of tariff and non-tariff barriers across the region. Further liberalisation, combined with the recovery in global demand, would spur export growth, and positively impact trade balances in the region.

World Trade Organisation (WTO) ministers plan to review progress at the next global trade summit in Cancun, Mexico, in September 2003. The summit could provide strong impetus for joint action on the core issues affecting developing countries.

But there is a risk that discussions may be side-tracked by proposals to negotiate two new agreements: an international investment agreement and multilateral rules on competition.

The investment agreement is intended to liberalise market access and strengthen protection for investors against adverse changes in government policy. The competition agreement would disallow discrimination between foreign and domestic firms in application of domestic anti-trust laws. Neither is necessarily inimical to developing countries' interests, and many developing countries might benefit.

The problem is that the benefits of these measures pale in comparison to the benefits of action on the core trade issues that are the main competencies of the WTO. Global Economic Prospects 2003 shows that removing rich country barriers to developing country exports would do more to boost investment in developing countries than any of the new investor protections being proposed. Half of foreign investment is already covered by bilateral treaties and the report's statistical analysis indicates these have done little to boost investment flows.

Straying too far into domestic regulatory issues without first addressing core trade issues risks delaying an agreement or producing outcomes that do not really help poor people.

For people everywhere who want poor people to have a fair chance to improve their lives, the implications are clear: barriers to developing country trade, whether imposed by the rich countries or by the developing countries themselves, are barriers to investment, growth, jobs and poverty reduction. Removing the barriers should be our top priority.

(The authors are World Bank Chief Economist and Senior Vice President, Development Economics, and World Bank Chief Economist for the South Asia Region.)

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