Ministero del Tesoro, del Bilancio
e della Programmazione Economica
BEYOND DEBT RELIEF
Introduction
The enhanced HIPC Initiative launched in 1999 in Cologne has made a substantial contribution to the fight against poverty. Further steps are nevertheless needed to enable countries that have benefited from debt relief to consolidate their gains and to provide other very poor countries that do not have a debt problem an opportunity for accelerating their development and closing the gap with the more advanced economies.
Moving forward, the international community needs to implement an effective strategy for stimulating faster growth and poverty eradication in the poorest countries that builds on threefour, mutually reinforcing, pillars.
fourFirst, urgent action is needed to open industrial countries' trademarkets to the exports of poor countries. These countries face substantial trade barriers particularly in agriculture and low technology manufactures where their competitive advantages lie. Liberalizing market access for their exports is the only waywill to allow poor countries to exploit the benefits of specialization and contribute to faster world economic growth. Furthermore, to secure the effectiveness of the market opening process, non-tariff barriers to trade ought to be minimised, and trade-related technical assistance to LDCs strengthened.
A second important field of intervention is investment. Action needs to be taken to facilitate FDI flows and technology transfers into LDCs. The international community should support LDCs’ efforts to create a favourable environment and expand market access for foreign investment, by enhancing technical assistance for capacity building and directing financial leverage towards development programs aimed at improving human capital and infrastructures in these countries.
Third, we need to increase the mobilization and efficiency of resources channeled into the development of the social sector in the poorest countries to enable them to reduce the gap with more prosperous nations. Priority should be given to investment in health and education, where the role played by the World Bank and other Multilateral Development Institutions should be strengthened. In these two areas, we promote the creation of dedicated Trust Funds through a donation by the industrial countries to be matched by expected contributions from the private sector. This will build up a resource base for building capacity in the poorest countries and promote public-private partnerships for development programs aimed at expanding access to basic health and education services and enhancing human capital in the poorest countries.
The paper is organised in three sections. Section A illustrates the motives for and the main effects of the proposal for liberalization of market access for products originating in the poorest countries and discusses measures to reduce non-tariff barriers and enhance trade-related technical assistance for these countries. Section B analyses the role of foreign direct investment in promoting development and technological advancement and proposes measures for attracting and expanding the benefit of FDI in the poorest countries. Section C addresses issues related to the adequacy and effectiveness of aid resources for core social investment in the poorest countries. It deals first with the health sector where a number of proposals are illustrated to increase the extent and quality of financial support available to the poorest countries for improving preventive and curative treatment of diseases and expanding access to health services. Finally, it discusses the key role of investment in education and enlists proposals for enhanced support to poor countries’ strategies for strengthening education during schooling age and afterwards. The main proposals and lines of action suggested are summarized in a table at the end of the paper.
A.Remove trade barriers for the poorest countries
- Trade as an engine of growth
The relation between trade and economic growth has been largely explored in the economic literature. Trade openness enhances growth and welfare by improving production efficiency through specialization based on comparative advantages. Three additional channels can be identified: i) higher level and efficiency of investment, stimulated by the increased market size and greater access to capital goods; ii) higher productivity, resulting from the diffusion of technological advances and faster knowledge growth; iii) greater competition, leading to more efficient allocation of resources both in production and consumption.[1]
Empirical evidence confirms that openness and growth are positively related.[2] Comparative studies carried out on different groupings of developing countries show that the poorest, slowest growing countries are on average less open compared to the faster growing, while middle income countries have been better able to take advantage of the opportunities provided by increasing trade and globalization.[3]
In the past two decades, a number of developing countries have not been able to sustain and diversify their exports and have been marginalized in world markets (table A.1). The countries that have not been able to benefit from globalization are the poorest ones that are also in the greatest need for improving their trade performance as a means for boosting growth. The least developed countries (LDCs), which account for 10 percent of the world population and 0.6 percent of global GDP, barely reach a share of 0.5 percent of world exports, down from 0.8 in 1980. This pattern is also confirmed for other subsets of countries such as HIPCs and other IDA-eligible countries which partly overlap with LDCs.
Several factors account for LDCs’ loss of market share. Their production and export structure is heavily concentrated in sectors, such as agriculture and low value added industrial processing (table A.2), where world demand has been growing at a lower pace than income.[4] Developed countries, the main destination markets for the poorest countries’ exports, impose high tariffs, combined with quantitative trade restrictions and heavy recourse to domestic subsides, on a number of sensitive products particularly in agriculture and low technology manufacturing where many poor countries have the greatest potential to expand their exports (table A.3).[5] Contrary to the experience of a number of successful emerging economies in Asia, LDCs have not been able to overcome these obstacles to trade as attempts at export diversification have been hampered by low internal capacity, inadequate infrastructure, badly regulated markets and weaknesses in domestic trade-related policies. External developments have not been favorable either. LDCs have been hit hardest by the failure of both developed and developing countries in November 1999 in Seattle to jumpstart a new round of multilateral trade negotiations addressing development issues. The paralysis of the WTO is disastrous when seen from the perspective of the poorest countries, which continue to face substantial barriers to trade.
- Opening markets
The poorest countries will not be able to benefit from expanded trade as an engine for growth unless concrete action is undertaken on the part of the industrial countries to improve LDCs exports’ access to their markets and the infrastructure necessary to sustain export expansion. A comprehensive, simple and transparent initiative is needed to eliminate all remaining barriers to trade with these countries by extending unrestricted, across the board, duty free and quota free access for all products originating in LDCs. To maximize its effectiveness the liberalization should be accompanied by the commitment to avoid using contingent protection mechanisms such as antidumping and safeguard actions against LDCs.
i) The context of the multilateral trading system
The liberalization initiative would not be incompatible with the set of rules disciplining the multilateral trade system. The possibility for special and differential treatment for developing countries in general and the LDCs in particular has been established within the WTO in recognition of the fact that many developing countries could not compete on equal terms with developed countries.[6]
ii) The focus on market access
The current system of rules for international trade based on ‘Generalized System of Preference’ (GSP) schemes and other preferential trade arrangements adopted by the industrial countries in favor of developing countries has had only limited success in generating significant export growth or improving the trade shares of beneficiaries. In particular, the preference system has not prevented LDCs’ marginalization in world trade. There is scope for improving the preference system and reducing tariff barriers imposed by industrial countries against LDCs’ exports, as discussed below.
- The liberalization initiative should be carried out jointly and should be simple, transparent and comprehensive, eliminating exemptions and special regimes that raise the level of effective protection of industrial countries.[7] It should lead to the abolition of “tariff peaks” (rates above 15 percent or 3 times the OECD average) that are more frequent for agricultural goods and low-technology manufactures and therefore affect disproportionately LDCs exports, and to a curb on the phenomenon of tariff escalation (i.e. tariffs rising with stages of further processing) so as to encourage further processing and increased value added in these countries.
- Preferences are not bound in the WTO and can be withdrawn unilaterally for instance in case of a sudden, strong rise in exports. The new initiative should provide for an open-ended liberalization so as to achieve maximum certainty and predictability in the treatment of LDCs’ exports.
iii) Awareness of the need for action is spreading
In recent months a number of market opening proposals have been launched by major industrial economies to facilitate the access of exports by LDCs’ and other subsets of developing countries to their markets.[8] However, single-handed, unilateral initiatives are bound to have a limited impact. The need for a new initiative that would represent the outcome of coordinated action within the G7 was flagged by President Amato in the Okinawa summit of July 2000.
iv) The beneficiaries
The definition of the beneficiaries of a market opening initiative launched together by the major countries can lead to different options. One can start by identifying a “minimum common denominator” set of countries that have been targeted by the recent initiatives composed by Sub-Sahara African countries that are also LDCs and HIPC-eligible. LDCs constitute a category of beneficiaries which is already identified in the WTO. There are also valid arguments for extending this proposal to other vulnerable poor countries,[9] for instance HIPC-eligible countries characterized by high external indebtedness,[10] or other IDA-only countries, which should not be penalized by the advantage granted to their close competitors[11] and which, like LDCs, suffer from low internal capacity and weak institutional frameworks that hamper their efforts at export growth and diversification.
- The impact of trade liberalization
Costs and benefits of the initiative have to be assessed. If implemented jointly and without restriction, the proposed liberalization could lead to a significant expansion in LDCs’ exports to the world markets and to a permanent rise in their welfare. Costs mainly fall in two categories. First, liberalizing countries may see a substitution of imports for domestic production and a loss of tariff revenue. These costs are projected to be very small since the initiative is circumscribed to a subset of countries accounting for a negligible share of world exports. The projected increase in export is proportionally large for LDCs but small relative to the size of industrial countries’ markets. Second, the initiative would increase competition for other developing countries’ export. For similar reasons, the costs associated to the trade diversion effect are also expected to be limited.
The impact of the trade liberalization proposal has been simulated on the basis of a multi-country Computable General Equilibrium model.[12] The estimation exercise leads to the following conclusions.
- A joint initiative by the major industrial countries would have a significant impact, largely exceeding the cumulative effects of any initiative singularly considered.
- As a result of the joint liberalization undertaken by the QUAD countries towards the Sub-Sahara Africa (SSA) subgroup of the poorest countries targeted in the analysis,[13] non-oil exports of the latter would rise by around $ 2.5 billion or about 14 percent (table A.4). This would lead at full regime to a 1.2 percent ($ 1.8 billion) permanent yearly welfare gain in these countries, an amount equivalent to over a fourth of the net annual ODA flow to LDCs (year 1998).
- Costs for the preference-granting countries would be contained. It is estimated that the major industrial countries would suffer a permanent decline in domestic welfare (by about $ 6 billion yearly) which is negligible in relative terms (table A.4) and is mostly due to tariff revenue losses which also appear rather insignificant.[14]
- Trade liberalization would not lead to trade diversion. The estimated loss in export revenue for other developing countries is limited to less than 0.04 percent of their initial exports (table A.4).
These conclusions appear robust[15] and are broadly consistent with the results obtained by other empirical analyses undertaken at a more disaggregated product and country level.[16] In particular, more detailed and disaggregated estimations of the effect of market access liberalization at the product and country level confirm that the elimination of tariffs imposed by the major countries on some ‘sensitive products’ allows LDCs to substantially increase their exports in these sectors (table A.5). Given the very low initial level of LDCs’ exports of these products and the supply constraints existing in these countries, the projected export increase is still small relative to the absorption capacity of the major destination markets. No conclusive evidence is found of a significant impact of the proposed liberalization on either domestic producers or other competitor developing countries for sensitive products (table A.5).[17]
- Reducing non-tariff barriers to trade
The extension of duty free access for products originating in the poorest countries may have limited effect if accompanied by restrictive rules of origin,[18] by requirements of conformity to strict regulations, standards, testing and certification procedures or if it remains subject to the threat of antidumping, countervailing duties and safeguard actions. The costs of non-tariff barriers and lack of adequate infrastructure to sustain export expansion are as important and critical as providing access through removal of traditional border barriers.
Specific actions are called upon to deal with these non-tariff barriers to trade.
- On rules of origin, an effort is needed to promote the universal adoption of a uniform set of rules. An international agreement should be achieved to support and apply the harmonization program carried out by the World Customs Organization, expected to be concluded by the end of this year, to the trade of all countries granted duty and quota free access to industrial markets.
On technical standards and regulations, a Standards Development Forum could be created, with assistance of the relevant international development partners, to coordinate financial assistance for the modernization of standards infrastructures for poor countries.
- Promoting trade expansion through regulatory reform and removal of technical barriers in discriminatory standards, testing, and certification regimes is also needed. A systematic review of products subject to mandatory government testing and certification that can be moved to declaration of conformity status should be undertaken. A multilateral "Global Conformity Agreement" (GCA) should then be developed based on this list.
- In agricultural trade, the lack of progress toward harmonized, internationally accepted standards has the potential to seriously erode the gains obtained through removal of traditional barriers. A strategic plan to accelerate adoption of international standards for food safety set by the Codex Alimentarius Commission, animal health standards set by the International Office of Epizootics, and those for plants set by the International Plant Protection Convention (IPPC) should be developed.
- On contingent protection, efforts should be made to avoid using antidumping and safeguard actions against LDCs. The small trade flows involved should make such a promise relatively painless in practice.
- Trade capacity building
To seize the opportunities of trade liberalization, LDCs need to develop supportive policies. Without these policies the dividends from increased access to developed countries markets cannot be fully reaped.[19] Industrial countries should assist those LDCs willing to develop consistent economic policies and give trade-related policies a high priority.
In recent years, the international community has stepped up the provision of trade-related technical assistance to LDCs.[20] However, many LDCs have expressed frustration at the multiplicity of vertical initiatives with little horizontal co-ordination. The ‘Integrated Framework’ Program recently re-launched by six development Agencies is a potentially powerful tool to achieve better co-ordination in mainstreaming trade policies into national development strategies such as the PRSPs.[21] An Integrated Framework Trust Fund has been recently established for all LDCs but the Program remains heavily under-funded.
- Bilateral donors, the multilateral organizations and other development partners should combine their efforts to revitalize and enhance the Integrated Framework for trade-related technical assistance. The G7 countries could contribute with a donation of $ 100 million to the Integrated Framework Trust Fund to assist LDCs with trade capacity building. The donor community should be invited to focus on the more vulnerable, highly indebted LDCs, coherently with the overall development strategy laid out at the international level.
In order to achieve a full and effective integration into the multilateral trade system, LDCs need to be helped to improve their ability to formulate appropriate trade strategies, to negotiate with trading and investment partner, to implement trade and investment rules and to effectively exploit the mechanisms available to safeguard the functioning of the multilateral trade system. Participation in the WTO is key in this regard.
With the entry into force of the WTO in 1995, negotiations to accede to the WTO have become more complex and difficult.[22] As a result, since its foundation in 1995, no LDC has so far been able to gain membership of the WTO.[23]