News Release 2004/055/S
WASHINGTON, September 3, 2003 - A trade deal
that addresses the concerns of developing nations
could spur global growth and reduce poverty by as
much as 144 million people by 2015, according to
a new World Bank report issued today. The report
is being launched on the eve of a meeting of the
world's trade ministers in Cancun next week 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 presents
a detailed overview of the world economy, and the
near-term outlook. It also offers a rigorous analysis
of global trade issues, particularly those that
head the agenda for discussion at the WTO meeting
this month.
Officially, the Cancun meetings are an interim stocktaking
for the negotiations, which are scheduled for completion
by January 1, 2005. However, 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 on 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. Such a result would eventually raise
incomes around the world, leading over time to a
substantial reduction in global poverty.
The latest GEP 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. (Growth forecasts in
table on final page). World trade is projected to
grow by 4.6 percent, slightly more than last year,
but still less than half the rate in 2000.
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 dynamic middle-income nations, can 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. "
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 in developing
countries. In agriculture, for example, Japanese
support to rice producers 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
$100 billion annually, and depress world market
prices in sugar, dairy, and wheat. These subsidies
also have the indirect impact of raising prices
paid by consumers. The US spends $50 billion annually
on direct support to its agriculture sector alone.
Annual cotton subsidies to US farmers of more than
$3 billion (three times US foreign aid to Africa)
depress world cotton prices and crowd out poor but
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. "Industrialized
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 3 percent of what Norway
sells in the US," Newfarmer says. "Can
anyone argue this system is living up to its development
potential for the poor?"
The report argues that a "good" WTO agreement
could produce about $290 billion-$520 billion in
income gains to both rich and poor countries, lifting
an additional 144 million people out of poverty
by 2015 (see box).
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 percent and 10 percent in agriculture
and manufacturing, respectively;
* All countries eliminate agricultural export
subsidies, “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 that might be possible through
full trade liberalization. If the reforms outlined
above were implemented progressively over five years
to 2010, and accompanied by a realistic productivity
response, developing countries would gain nearly
$350 billion in additional income by 2015. Rich
countries would benefit too, with gains in the order
of $170 billion.
All of this would mean that there would be 144 million
fewer people living below $2 per day by 2015.
The international community has to work together
to get a positive outcome.
Stern emphasizes that to realize these gains, all
countries must take responsibility for the outcome
of the WTO negotiations.
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"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
middle-income countries, could contribute to a
good "Doha deal" by undertaking their
own initiatives. 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
hurts their poor neighbors in the same way as
trade barriers in rich countries," says Dadush.
For example, Latin American exporters of manufactures
face average tariffs in Latin America that are
seven times higher than tariffs in industrialized
countries. East Asian exporters face tariffs in
other East Asian countries that are 60 percent
higher than in rich nations.
The report challenges all segments of the international
community to offer "concessions" that
will in the end benefit themselves as well as
their 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. These measures cost the average family
in these regions roughly $1,000 a year. 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 the 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.
Low-income countries that today tax imports
heavily will find they benefit from domestic reforms
that lower the costs of imported inputs, increase
domestic competition that spurs productivity growth,
and lead to expanded exports. They can move away
from an over-dependence on trade preferences granted
for political convenience by rich countries, and
move toward production based on their comparative
advantages. Despite their widespread appeal, trade
preferences to expand export opportunities have
a mixed record in practice. Given complicated
rules of origin and uncertainties in administrative
regulation, only 40 percent of products eligible
for preferential access actually come into the
rich countries using these preferences.
Donors and multilateral agencies also must
help improve the world trade system
"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 $380 billion over several
years.
"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," adds
Newfarmer.
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,
including: the build up to war in Iraq, trans-Atlantic
tensions, and concerns about Severe Acute Respiratory
Syndrome (SARS).
"The world economy is still not firing on
all cylinders," says Hans Timmer, head
of the Bank's global trends team, "but
current trends point to a better 2004."
Activity in much of South Asia is holding
up well. Countries in East Asia and the Pacific
lost some growth momentum due to SARS, but its
apparent containment has opened the way to continued
rapid growth. Africa continues to struggle,
however. Although the region's commodity prices
have improved, they are still well below long-term
trends. War has affected regional performance
in the Middle East and North Africa, while
many countries in Europe and Central Asia
are undergoing sluggish growth tied to lackluster
conditions in Western Europe, especially in Germany.
Latin America is beginning to recover from
a severe recession, as growth in Argentina has
picked up, pre-election jitters in Brazil have
largely passed, and Mexico is recovering.
Global growth is projected to accelerate to 3
percent in 2004. Early signs of renewed economic
activity are appearing in the United States –
including an upturn in orders, production and
exports, as well as stronger equity markets. Japanese
output increased at 2.3 percent during the second
quarter of the year, which is stronger than expected,
yet conditions in Europe continue to be extremely
slack. Improvement in confidence across OECD centers
will prove the key to a revival in capital spending
and more robust growth.
Growth in developing countries is likely to accelerate
to 4.9 percent in 2004, spurred by a revival of
world trade, the fading of global tensions, and
the rekindling of domestic demand. Latin America
is expected to see the most substantial gain.
A return to stronger growth in India should power
the South Asia region, while more moderate gains
are expected in Europe and Central Asia, tracking
the slower pace of revival in EU activity. The
pick-up in growth will be lower in the Middle
East and North Africa, where uncertainty regarding
the regional political and economic situation
is likely to persist, and in Sub-Saharan Africa,
where only moderate gains in commodity prices
and sluggish European growth play a role. In 2005,
growth rates could ease modestly to about 4.8
percent, in line with previous peaks in 2000 and
1996–97.
"The much-improved underlying policy fundamentals
in most regions – progress on budget deficits,
contained inflation, and greater trade openness
– are a solid foundation for realizing productivity
growth in 2004," says Timmer. "But
persistent structural problems in rich countries
- such as the twin deficits in the US and weaker
performance of Japanese and European banks - risk
precipitating a disruptive fall in the US dollar
or other unexpected confidence shock that cuts
off the investment recovery. If these risks materialize,
all bets are off."
The report summary and related materials will
be available to the public on the World Wide Web
immediately after the embargo expires at: http://www.worldbank.org/prospects/gep2004/
Media outlets are encouraged to include this
Web address in their coverage of the report.
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