House of Commons - International Development

Select Committee on International Development Minutes of Evidence

Memorandum submitted by the World Development Movement

SUMMARY OF KEY RECOMMENDATIONS

In its deliberations on agriculture and market access, WDM urges the International Development Committee to:

— Recognise the continuing need to examine the fundamental assumptions lying behind the pursuit of further trade liberalisation in all countries. Mounting evidence demonstrates the importance of strategic government intervention in achieving development and the need for developing countries to have flexibility in their use of trade policy instruments.

— Treat studies on "openness" with caution and, in particular, look carefully at the definitions used.

— Be cautious in using the results of economic modelling to support particular policy conclusions. The assumptions used in order to make models work are such an abstraction from the real world as to make the resulting predictions a highly inaccurate representation of the impacts of policy changes.

— The Committee should reiterate its recommendation made in the previous trade inquiry in 2000 that a review of the historical and case study evidence of trade liberalisation be undertaken, and that the outcomes inform the EU's position on negotiations.

— Take into account the "bargain" that will be demanded of developing countries as part of the "single undertaking". In return for modest agricultural reform in Europe, developing countries will be required to give up their ability to use the same kinds of trade and investment policies that industrialised countries used to develop. WDM believes this is not a fair or acceptable deal for the poor. The Committee should recommend unilateral agricultural reform without demanding further legally binding liberalisation commitments from the developing world in areas like agriculture, services and industrial tariffs or the development of new binding rules. In particular, the Committee should recommend the UK does not press, at the Cancun Ministerial, for negotiations to establish new rules on investment, transparency in government procurement, competition policy and trade facilitation.

In its deliberations on Special and Differential Treatment (S&DT), WDM urges the Committee to:

— Recommend moving beyond "traditional" S&DT—ie setting arbitrary extended timetables for implementation. S&DT should entail different rules for countries at different stages of development. This is a key test of the "development round" rhetoric. Further, developing countries should not have to give "concessions" in order to achieve effective S&DT.

— Conduct an inquiry into World Bank and IMF policy conditionality in order to make recommendations for UK input into Bank and Fund policy-making. The achievement of S&DT in the World Trade Organisation is being undermined by conditions imposed on developing countries by the IMF and World Bank in return for debt relief and new loans. Developing countries have effectively been forced to unilaterally and extensively liberalise trade. These policies have demonstrably failed to deliver development.

In its deliberations on developing country capacity, WDM urges the Committee to:

— Recommend reforms are undertaken along the lines of those proposed in the "Like Minded Group" paper submitted to the WTO in April 2002. Ensuring developing countries can effectively participate in trade negotiations is not just a case of providing money for "capacity building". It also requires action to, for example, reduce the number of meetings, open up the "green room" process and keep the negotiating agenda manageable.

— Recommend the UK does not press, at the Cancún Ministerial, for negotiations to establish new rules on the issues of investment, transparency in government procurement, competition and trade facilitation. Adding these issues to an already overloaded agenda will further undermine the ability of developing countries to effectively engage in the talks.

— Call for abolition of so-called "mini-ministerials" and press for alternative forms of decision-making that allow all WTO members to be involved. "Mini-ministerials" are not a transparent and inclusive way to forge agreement on trade policy.

In considering the decisions to be taken at the Cancún Ministerial Conference, WDM urges the Committee to:

"The WTO can best be understood...as the product of intense lobbying by specific exporter groups in the United States or Europe or of specific compromises between such groups and other domestic groups. The differential treatment of manufactures and agriculture, or of clothing and other goods within manufacturing, the anti-dumping regime, and the intellectual property rights (IPR) regime, to pick some of the major anomalies, are all results of this political process. Understanding this is essential as it underscores the fact that there is very little in the structure of multilateral trade negotiations to ensure that their outcomes are consistent with development goals, let alone that they be designed to further development." (Prof. Dani Rodrik, 2001).

1. INTRODUCTION

The World Development Movement (WDM) welcomes the International Development Committee (IDC) Inquiry into "Trade and Development: Aspects of the Doha Agenda". WDM is an organisation campaigning to tackle the root causes of poverty and has been working on trade and development issues for many years. Over this time, WDM has built considerable expertise on trade agreements and their implications for pro-poor development policy, and is grateful for the opportunity to present its views to the IDC.

WDM recognises that it is difficult for one committee inquiry to examine the full range of trade and development issues and the need, therefore, to focus the inquiry on particular aspects of the trade debate. WDM will, as far as possible follow the Committee's suggested outline of topics. However, given the timing of this inquiry (ie nine months before the WTO Ministerial Conference in Cancun), WDM feels that it is important also to comment on issues most relevant to decisions that will be taken in Cancun—in particular, whether or not to begin negotiations to establish new WTO rules on investment, competition, transparency in government procurement and trade facilitation.

WDM will therefore structure its submission broadly along the lines proposed but with additional comments on these so-called "Singapore issues".

2. AGRICULTURAL REFORM AND MARKET ACCESS

2.1 Introduction

WDM believes that agricultural trade can play a useful role in improving the livelihoods of the poor in the developing world. Reform of the Common Agricultural Policy (CAP) is a high priority (for both domestic and development reasons) and should continue to be pursued by the UK Government.

In particular, there is no justification for paying European agricultural producers subsidies to export. These subsidies should be abolished. Similarly, the practice of tariff escalation has no justification in the industrialised world and should be abandoned.

However, while there is broad and steadily growing support for such agricultural reform (at least in the UK), there continues to be debate over the degree to which developing countries themselves should commit to binding liberalisation (both in agriculture and in other sectors) and how this issue should be treated in the negotiations. WDM would therefore like to examine this issue—which is intimately linked with the agriculture and market access negotiations—in more depth.

2.2 The evidence on developing country liberalisation

"In the last forty years, those developing countries which have managed to be more open and trade more in the world economy have seen faster growth rates than those which have remained closed". (Speech by Gordon Brown at the Commonwealth Finance Ministers Meeting, September 2002).

The implication in the above quote is that successful developing countries are those that liberalise their economies. In other words, developing countries need to reduce their own barriers to trade in order to reduce poverty. However, closer examination of the evidence suggests the opposite.

During the period 1996 to 2000, four of the top five fastest growing developing countries (Equatorial Guinea, China, Mozambique, and the Dominican Republic) were classed as having trade restrictive policies by the Wall Street Journal (no data was available on the fifth, the Maldives). [2]Similarly, in Mauritius, between 1975 and 1999, annual per capita growth averaged 4.2% and income inequality fell, yet, during the 1990s, the IMF ranked Mauritius as one of the most protected economies in the world. [3]

In contrast, according to the IMF's "Trade Restrictiveness Index" 16 sub-Saharan African countries have lower trade barriers than the EU, yet are struggling to improve living conditions for their people.

For example, in 1992, in return for IMF loans, the Zambian Government agreed to undertake an economic restructuring programme. [4]Between 1992 and 1997 maximum tariff levels were cut from 100% to 25% and all quantitative restrictions on imports and exports were abolished. [5]In 1995, the IMF praised the Zambian Government for making "great strides . . . notably in freeing markets and by eliminating government intervention and control." [6]Yet, during this period, formal sector employment in manufacturing fell by 40% and manufacturing declined as a proportion of GDP. [7]Between 1990 and 1999, Zambia's annual per capita growth rate was minus 2.4%.[8] Between 1990 and 2000, imports of goods and services increased from 37 to 46% and exports fell from 36 to 31%,[9] worsening the country's trade deficit.

More recently, provision of debt relief has been made conditional on Zambia implementing these free market policies. [10]

"It is a cruel irony that to get any debt relief at all, the IMF and World Bank are forcing us to follow unsuitable trade policies, which are driving us further into poverty. At the same time, rich countries are pushing for international trade rules which are making these policies effectively irreversible." Francis Ng'ambi, Chair of the Malawi Economic Justice Network

Incredibly, despite the massive failure of liberalisation in Zambia, the WTO Secretariat concludes in its recent "Trade Policy Review" that, "Continued structural reforms, including privatization, and further tariff rationalization would contribute to better resource allocation. Such efforts will improve Zambia's ability to attract investment." [11]

It is hard to see how the WTO can come to this conclusion based on an examination of the evidence. Also, it is not as if this case is a "one-off"—Zambia is not alone in its experience of the failure of liberalisation. In reviewing development successes and failures, the United Nations Conference on Trade and Development (UNCTAD) states, "A few [developing] countries have seen sharp increases in their shares in world manufacturing value added which matched or exceeded increases in their shares in world manufacturing trade. This group includes some East Asian NIEs which had already achieved considerable progress in industrialization before the recent shift to export drive in the developing world. None of the countries which have rapidly liberalized trade and investment in the past two decades is in this group." [12]

Historical evidence demonstrates conclusively that most, if not all, of todays industrialised and newly industrialised countries used a wide variety of what would now be considered "trade distorting" policy interventions during their development process. [13]This has led some to critically re-evaluate the timing, scope and reversibility of developing country liberalisation. For example, the 1999 Trade and Development Report calls for the concept of infant industries to be extended beyond the earliest stages of production, to include more advanced protection and support for industries entering international markets. [14]

That said, the prevailing orthodoxy in the industrialised world continues to be that strategic industrial policy and government intervention in the economy are not the best policies for developing countries to adopt. Many developing country governments are advised that such policies would not be in their best interests. Even if this belief had some justification—and the evidence suggests otherwise—there is still a big step between saying that these policies are ill-advised and enacting international agreements that would prohibit governments from using these policies. Yet this is increasingly occurring under bilateral investment treaties and international agreements (eg existing WTO agreements on intellectual property rights, investment, services and subsidies), even though there has been little rigorous examination of the implications, particularly in terms of constraints on poverty reduction.

Prohibiting the use of certain trade and investment policies through legally binding rules denies current and future developing country governments the opportunity for an iterative policy process. One of the lessons from the experience of the most successful economies in the last century (eg Japan and the East Asian economies) has been the importance of learning. "When a policy works, pursue it: when it fails, change it. That a government makes mistakes is inevitable. That it does not learn from those mistakes means that it needs to find ways to learn. Government learning, not government minimising is the object." [15]

WDM believes the weight of evidence demands a rethink of the prevailing orthodoxy in the industrialised world. This continues to be just as important in the agriculture and market access debate as the need to press for reform of the CAP. It is therefore important that, when examining and making recommendations on these issues, the Committee recognises the need for developing country flexibility in using trade-affecting government intervention.

It is also worth considering why there continues to be such a discrepancy between the conclusions of those advocating rapid developing country liberalisation and binding rules, and those advocating caution and flexibility. WDM believes part of the explanation lies in the use of different forms of evidence. Those who favour greater flexibility in the use of trade policy instruments tend to cite case studies and historical evidence. Those who favour liberalisation for developing as well as industrialised countries, tend to cite aggregate statistical analyses looking at "openness and growth" or the results of economic models attempting to predict the outcome of tariff and non-tariff barrier cuts. The next section examines the reasons why the latter evidence should be treated with a great deal of caution.

For further information, WDM urges the Committee to read and take note of Harvard University Professor Dani Rodrik's short report and recommendations for the UNDP entitled "The Global Governance of Trade As If Development Really Mattered".

The Committee should recognise the continuing need to examine the fundamental assumptions lying behind the pursuit of further trade liberalisation in all countries. Mounting evidence demonstrates the importance of strategic government intervention in achieving development and the need for developing countries to have flexibility in their use of trade policy instruments.

2.3 Statistical analysis and economic modelling

The quote at the start of section 2.2 uses the concept of "open" and "closed" economies, equating "openness" with low trade barriers. This is a natural inference to make, yet openness in the academic literature is mostly used to describe how much a country trades. This is measured by the contribution that imports and exports make to GDP and does not directly relate to government trade policy. It is therefore misleading to conclude that a study correlating "openness" with growth is evidence in favour of developing country trade liberalisation. It is quite possible to be "open" (ie trade a lot) whilst maintaining tariff and non-tariff barriers to trade.

According to UNCTAD, Least Developed Countries (LDCs) are more open to trade than developed nations. Trade as a share of GDP in the 49 LDCs is 42.9%, compared with 40.2% in the high-income OECD countries. [16]Increasing "openness" (ie exports and imports) is clearly not a precondition for being a rich country.

In Sub-Saharan Africa (SSA), trade is even more important to their economies. In 1990, trade as a share of GDP in SSA was 53%. In 2000, both imports and exports had increased so that trade accounted for a massive 65% of GDP. [17]Africa doesn't seem to be suffering from a lack of "openness" or "integration into the world economy". However, during the period 1990-2000, while trade was seemingly booming, per capita income growth was minus 0.3%.[18] Increasing "openness" is clearly not a precondition for increasing growth and reducing poverty.

In contrast to studies on "openness", a study examining trade policies (rather than trade outcomes) concludes, "Cross national comparison of the literature reveals no systematic relationship between a country's average level of tariff and non-tariff restrictions and its subsequent economic growth rate. If anything, the evidence for the 1990s indicates a positive (but statistically insignificant) relationship between tariffs and economic growth." [19](original author's emphasis)

It is therefore critical for effective policy formulation that this confusion over "openness" be recognised and evidence of the impact of policies be examined.

Examining the kind of evidence being used is also important. As already mentioned, there is a need for developing country flexibility in trade policy. This is perhaps even more important in agriculture given the complexity of agricultural production and trade and its social and environmental impacts. However, a heterogeneous approach to agricultural trade policy and market access is being undermined by the proliferation of studies based on highly generalised scenarios which tend to draw "liberalisation benefits all" conclusions.

In particular, WDM would like to draw the Committee's attention to the increasing use of Computable General Equilibrium (CGE) modelling as a tool to inform policy development. CGE models are an attempt to create a model of how economies work and interact within each other so that variables—such as tariffs—can be altered to predict the economic outcome.

Although these models tend to produce figures that are useful for pithy, publicly digestible messages, they are by no means an accurate representation of the likely real world outcomes of a particular policy change. For example, according to the World Bank, services liberalisation in developing countries will result in benefits of $900 billion dollars by 2015[20]. Such figures tend to be used as incontrovertible proof of the need for liberalisation by all countries whatever their circumstances. However, in the same document the World Bank admits that "the quantification of services sectors' trade barriers and other forms of protection is still more art than science"[21] leading the Center for Economic Policy and Research to conclude, "At this point, the projections of gains from the liberalization of services must be viewed as highly speculative. It would be foolhardy for any nation to conduct policy based on theory and evidence that is so poorly developed." [22]

More generally, CGE modelling (including modelling of goods trade) should be treated with a high degree of circumspection for the following three reasons.

(a) Questionable assumptions

The assumptions on which these models are based render their results highly inaccurate. In order for CGE models to work, they have to hold various factors constant, and make a range of assumptions to avoid dealing with the chaos of real economies. The standard assumptions used in models produced by, for example, the World Bank[23] and UNCTAD[24] include:

— Perfectly competitive markets: this involves, for example, everyone having access to perfect information, producers having no influence over prices and cost-free entry into markets.

— Consumers all having exactly the same tastes.

— Perfect substitution of capital: in other words, a set of ploughs can be effortlessly converted into a textile mill which can effortlessly be turned into a tomato canning factory which can effortlessly be converted into an office producing computer software.

— No "supply side constraints" (eg perfectly functioning transport infrastructure).

— Full use of factors of production (eg land, labour and capital are all fully employed).

These assumptions are a major abstraction from real world conditions. Markets are far from being "perfectly competitive"; consumers do not all have the same tastes and so do not allocate their income in the same way; changing the way capital is used does incur costs; developing countries often face major "supply side constraints"; and factors of production are rarely, if ever, fully employed. Assuming away these facts of life means the estimates produced by CGE models are likely to be significantly inflated. At best, therefore a CGE model can provide an indication of the direction of benefits (ie positive or negative). But to trust the figures as some sort of accepted truth—and more importantly to base policy on them—is highly irresponsible.

The prevalence of such models has also led to a tendency for theory to become more powerful than reality. Thus, if free market policies fail, governments are blamed for not correcting the various market imperfections, rather than the economists being blamed for not taking into account market imperfections in their policy prescriptions.

(b) Ignoring complexity

CGE models are an attempt to aggregate broad economic impacts across countries, groups of countries or even the whole world. They largely do not take into account different circumstances and complexities within countries.

Case studies, on the other hand, can develop a more detailed picture of what can work in different circumstances. However, the message from case studies is often not so easy to digest. Case studies often show that the world is extremely complex and what works in one circumstance may not work in another.

The rise of CGE modelling as a tool to help define policy is of concern because it tends to ignore complexity which leads to simplistic policy solutions—such as all developing countries should liberalise their economies as soon as possible.

The "end of history"—as proclaimed by Francis Fukuyama—was supposedly the final and lasting triumph of western style capitalism. However, the real triumph seems to have been convincing people that the industrialised world developed through free markets and "free trade".

The reality is quite the opposite. The development history of the industrialised world is characterised by a process of economic advancement based on active industrial policy—including the selective use of tariffs, subsidies, industrial espionage, state trading enterprises and weak intellectual property laws—all aimed at boosting the competitiveness of domestic businesses. [25]Many of the same policies were used by the newly industrialising countries during their phases of economic development and by the most successful developing countries of recent years (eg China, India, Mauritius).[26], [27], [28]

Despite this evidence, such historical economic analysis seems to play little or no part in decision-making. Governments have reinvented development as a process that can only be achieved through free market reforms and trade liberalisation. This is supported with the results of CGE models that attempt to predict the future by assuming that economic textbooks are a decent proxy for reality. The more these models are used without explaining their limitations, the more they become accepted as gospel truth, and the harder it is to have a sensible trade debate.

WDM believes that if we are to move forward on the trade debate, we have to develop a much more critical and balanced view of the evidence. While modelling can have a place, we need to be aware of—and publicise—its limitations. We need to use case studies and more qualitative evidence, and we need to look at the past to see what has worked and what has not. As the IDC recommended in 2000, "Several things must happen before a new Round can be launched which has any chance of success: First, a review of the implementation and impact of the Uruguay Round agreements must be initiated. Without this, we fail to see how the WTO can make any claim to have learned from experiences to date and apply those lessons to the new Round." [29]Suffice to say, this historical analysis has not been conducted, including in the Sustainability Impact Assessments commissioned by the European Commission. Nor have the lessons learnt from case studies on the impact of agricultural liberalisation undertaken by the FAO[30] and others[31] been incorporated into the EU's negotiating positions.

It is particularly important for the Committee to address the issue of developing country liberalisation, and the flaws in the evidence used to support it, because the purported "benefits" of such policies will be used as a fundamental justification for why developing countries should enthusiastically embrace opening their own markets (in various different ways) in return for some degree of agricultural reform in the North. The next section briefly examines the nature of this "bargain".

WDM urges the Committee to treat studies on "openness" with caution and, in particular, look carefully at the definitions used. WDM also urges the Committee to be cautious in using the results of economic modelling to support particular policy conclusions. The assumptions used in order to make models work are such an abstraction from the real world as to make the resulting predictions a highly inaccurate representation of the impacts of policy changes. The Committee should reiterate its recommendation that a review of the historical and case study evidence of trade liberalisation be undertaken, and that the outcomes inform the EU's position on negotiations.

2.4 The grand bargain

The single undertaking—which is a fundamental aspect of the negotiations—means that "nothing is agreed until everything is agreed". The European Union was perhaps the most vociferous proponent of this negotiating approach as it allows maximum opportunity for trade-offs between different issues on the negotiating table.

The question is, what will developing countries be required to "give up" in order to gain agricultural reform in Europe, the USA, Canada and Japan? Cuts in developing country agricultural tariffs and subsidies? New rules on investment, competition policy and government procurement? Further commitments under the GATS? Further cuts in industrial tariffs? Little substantial special and differential treatment? No changes to anti dumping rules?

WDM believes that the EU should implement its previously agreed commitments to reform the CAP without extracting further concessions from developing countries in return. This should be the starting point for a "development round". Yet, if the Uruguay Round experience is anything to go by, the industrialised world will use promises of agricultural reform as a way to gain acceptance for new rules aimed at restricting developing country policy flexibility.

It is likely that the European Union enlargement process would force the EU into some sort of reform process regardless of what happens in the WTO. In fact, perhaps the worst-case scenario for some European Governments and the European Commission is to be forced by enlargement and internal pressure into CAP reform without extracting market access out of the developing world (whether in agriculture, services, industrial products, new investment, competition and government procurement rules etc.). This perhaps explains the EU's eagerness to conclude a round of negotiations as quickly as possible and to maximise the possibility for trade offs through the process of the "single undertaking".

Yet such trade-offs are part of a steady erosion of the development policy options open to poor countries. As one Harvard economist concludes, "The exchange of reduced policy autonomy in the South for improved market access in the North is a bad bargain where development is concerned." [32]As already outlined, few if any countries have achieved development without the use of strategic government intervention across a range of policy areas including tariffs, subsidies, investment regulation, weak intellectual property laws and discriminatory government procurement. The EU's approach to the negotiations is forcing developing countries into a corner and, despite the Doha "Development Round" rhetoric, is likely to harm their long-term development prospects.

WDM urges the Committee to take into account the "bargain" that will be demanded of developing countries as part of the "single undertaking". In return for modest agricultural reform in Europe, developing countries will be required to give up their ability to use the same kinds of trade and investment policies that industrialised countries used to develop. WDM believes this is not a fair or acceptable deal for the poor. The Committee should recommend unilateral agricultural reform without demanding further legally binding liberalisation commitments from the developing world in areas like agriculture, services and industrial tariffs or the development of new binding rules. In particular, the Committee should recommend the UK does not press, at the Cancun Ministerial, for negotiations to establish new rules on investment, transparency in government procurement, competition policy and trade facilitation.

3. SPECIAL AND DIFFERENTIAL TREATMENT

Special and Differential Treatment (S&DT), if properly conceived and implemented, could play an important role in making trade rules fairer for developing countries. Unfortunately, as currently formulated, S&DT tends only to be couched in terms of longer implementation timetables, voluntary technical assistance and vague references to technology transfer. Whilst provisions relating to technical assistance and technology transfer could be strengthened (eg making implementation conditional on receiving technical assistance) a more fundamental change needs to take place, differentiating the rules that are appropriate for countries at different stages of development.

Currently, the general presumption is that all WTO members sign up to the same rules but that some countries (eg LDCs and developing countries) are given arbitrary "grace periods" (normally 10 or five years) in which to implement them. Examples of such rules include the Agreement on Trade-Related Intellectual Property Rights (TRIPS) and the Agreement on Trade-Related Investment Measures (TRIMS). The assumption is that the same rules are appropriate for all countries but that some countries need more time to develop the appropriate institutions and policies. However, historical evidence overwhelmingly points to the fact that different countries, at different stages of development require different approaches to trade and investment policy and institution building. [33]

Effective S&DT therefore requires a rethink. S&DT in trade rules should move beyond setting arbitrary extended timetables for implementation. S&DT should entail different rules for countries at different stages of development.

It is also important for the Committee to recognise that developing countries have to bargain for S&DT. In order to achieve fair and logical differentiation in the trade system, they have to use up valuable political capital. Once again, they have to give potentially "non-development friendly" concessions to industrialised countries in order to achieve some "development friendly" outcomes. It is virtually impossible for anyone to fully understand the overall cost/benefit outcome resulting from trade-offs between such different policy areas as tariff reform, subsidy reform, rule changes, GATS commitments etc, which calls into question the wisdom of the EU's "single undertaking" negotiating approach.

For example, how is it reasonably possible for a developing country negotiator to assess the long-term costs and benefits of more effective S&DT rules in exchange for less radical agricultural tariff and subsidy reform? The result of this process could therefore be a final agreement containing some development friendly aspects but an overall outcome that is a bad deal for development. In general, WDM questions the logic and benefits of such a "trade-off" process and, in particular, believes that treating countries differently should be such a fundamental aspect of the trade system, its incorporation into trade rules should not be the subject of such bargaining. In a so-called "development round", the issues of S&DT and implementation should be agreed prior to negotiations on new commitments to be undertaken by developing countries.

A final, and critical point to make on S&DT is that, even if developing countries are able to negotiate more effective S&DT, this is being undermined by the unilateral trade liberalisation policies imposed on them through IMF and World Bank debt and loan conditionality. The example of Zambia used earlier in this submission is a case in point. Such developing countries have effectively been forced to unilaterally and extensively liberalise trade and, despite the fact that these policies have demonstrably failed to deliver development, are coming under continued pressure to do more. It is wholly inappropriate for the International Financial Institutions to be undermining any hard-won flexibility developing countries may achieve in the WTO. WDM urges the Committee to investigate such conditionality, and the UK's role in defining it, to inform UK Government policy.

Special and Differential Treatment (S&DT) in trade rules should move beyond setting arbitrary extended timetables for implementation. S&DT should entail different rules for countries at different stages of development. This is a key test of the "development round" rhetoric. Further, developing countries should not have to give "concessions" in order to achieve effective S&DT.

The achievement of S&DT in the WTO is being undermined by conditions imposed on developing countries by the IMF and World Bank in return for debt relief and new loans. Developing countries have effectively been forced to unilaterally and extensively liberalise trade. These policies have demonstrably failed to deliver development. WDM urges the Committee to conduct an inquiry into World Bank and IMF policy conditionality in order to make recommendations for UK governance over Bank and Fund policy-making.

4. THE CAPACITIES OF DEVELOPING COUNTRIES

Representation of developing countries in the WTO is not just a question of the number of developing country members. It is equally a question of the degree to which those countries can actively participate in the negotiations. Unfortunately, despite the steady increase in the former, the latter is still sadly lacking. It is well known that many developing countries still lack the capacity to take part effectively in WTO negotiations. For example, in Qatar, WDM analysis revealed there were 502 EU delegates, while many developing countries had only one or two representatives.

While WDM broadly welcomes the UK Government's financial contribution to building the capacity of developing country delegations in Geneva and building trade policy capacity in developing country capitals, this is a long and slow process. Effective capacity building takes decades but the negotiations are happening now. Other actions can and must be taken immediately to address the imbalances in the WTO. For example, as the IDC recommended in 2000, "We consider that the sizes of negotiating teams at the WTO needs further examination to make such negotiations more equitable (paragraph 55)." [34]This could take the form of a limit placed on the size of delegations attending Ministerial Conferences. This would be a small step towards meeting the challenge that then Secretary of State for Trade, Stephen Byers outlined following Seattle, "There has to be fundamental and radical change in order for [the WTO] to meet the needs and aspirations of all 134 of its members."

Also, capacity needs to be reflected in the negotiating schedule and workload. Negotiations need to be realistically tailored to the ability of countries to participate. In 2001, there were an estimated 45-50 important meetings per week on trade negotiations. The last year will have likely seen an increase to reflect the agenda of nine negotiations agreed in Doha and at least nine other issues being discussed for review and/or potential future negotiations in Working Groups or Committees. This is too much for most delegations and means they cannot fully represent their interests, let alone undertake the necessary research, inter-departmental analysis and consultation with civil society in their countries that would facilitate the development of an informed negotiating position.

This implies first that there should be a more realistic timetable for negotiations, rather than the impossible aim of three years, which will ensure little opportunity for smaller and poorer countries to participate. As the IDC recommended in 2000, "the new Round should be conducted, at an appropriate pace." [35]

Second, it argues for limitation of negotiations to the agreed issues, with no start to an ambitious set of negotiations on the hugely complex and massive agenda represented by the "Singapore issues" (investment, competition policy, transparency in government procurement, trade facilitation). By next year, the capacity building efforts of the UK Government will not have made a significant difference. Adding these issues to the negotiating agenda will therefore, in reality, reduce the ability of developing countries to participate effectively. Yet, despite knowing that this will adversely affect developing country participation, the UK Government is intent on pushing to expand the agenda at the Cancún Ministerial Conference.

Effective developing country participation also requires changes to the way negotiations are conducted, both in Geneva, and at Ministerial Conferences. Past experience demonstrates that developing country interests continue to be sidelined due to untransparent processes. [36]For example, a recent report by Focus on the Global South details how developing country proposals were omitted from negotiating texts submitted to the Doha Ministerial Conference; how, in Doha, developing countries were excluded from meetings; and how the Conference was extended without agreement from the full membership meaning some delegates, who were unable to re-schedule flights, missed the final stages of the meeting. [37]

As the IDC recommended in 2000, "There are some key reforms which must be implemented immediately, and before consideration is given to holding another Ministerial Meeting. These include: drastically improving the preparatory process leading up to the Ministerial; improving the Green Room meeting arrangements; and establishing clear rules of procedure to be agreed by all members (paragraph 105)." [38]More specifically on the Green Room process, the Committee stated, "The key issue is that countries must be able to choose for themselves who will represent them, and those countries not party to discussion must have opportunities to lobby and have full access to information about proceedings in the meetings, including the possibility of observing meetings directly (paragraph 99)." [39]

The Doha experience clearly showed that no such reforms had been made. In an attempt to deal with these problems, the Like Minded Group[40] of developing countries submitted a paper to the WTO General Council in April 2002, proposing a series of reforms to negotiating procedures both in Geneva and at Ministerial conferences. [41]This paper was either ignored or dismissed by industrialised country WTO members.

Also worth noting is the proliferation of so-called "mini-ministerials" where a small group of WTO members attempt to forge an agreement, which then effectively becomes a "take-it-or-leave-it" deal for the rest of the membership. One such meeting took place in Sydney in November 2002 and two more are planned before the full WTO Ministerial Conference in Cancun. This is not a transparent and inclusive way to forge agreement on trade policy. WDM urges the Committee to call for abolition of "mini-ministerials" and press for alternative forms of decision-making that allow all WTO members to be involved.

WDM urges the Committee to read and take note of the recent report "Power Politics in the WTO" by Focus on the Global South, based on testimonies of developing country delegates, detailing the lack of transparency in WTO negotiating procedures and, if possible, meet the author (Aileen Kwa) in Geneva.

Ensuring developing countries can effectively participate in trade negotiations is not simply a case of providing money for "capacity building". It also requires action to, for example, reduce the number of meetings, open up the "green room" process and keep the negotiating agenda manageable. The Committee should recommend reforms are undertaken along the lines of those proposed in the "Like Minded Group" paper submitted to the WTO in April 2002.

Adding the issues of investment, transparency in government procurement, competition and trade facilitation to an already overloaded agenda will further undermine the ability of developing countries to effectively engage in the talks. The Committee should recommend the UK does not press, at the Cancun Ministerial, for negotiations to establish new rules on these issues.

WDM urges the Committee to call for abolition of so-called "mini-ministerials" and press for alternative forms of decision-making that allow all WTO members to be involved. "Mini-ministerials" are not a transparent and inclusive way to forge agreement on trade policy.

5. NEGOTIATIONS ON THE "SINGAPORE ISSUES"

As well as undermining developing country participation in negotiations, addition of the so-called "Singapore issues" to the agenda has little justification on development grounds.

The argument most used to support the development of binding rules, particularly on investment, is that companies will be more likely to invest in developing countries once these rules are in place. The argument follows that, given it is in developing countries" best interests to negotiate these rules, the EU's pursuit of this agenda is therefore consistent with the concept of a "development round".

However, there seems to be little or no evidence to support this argument. For example, a recent study suggests that there is no significant link between making binding investment commitments in bilateral agreements and attracting more foreign direct investment (FDI). [42]There is no similar study based on multilateral investment rules such as the GATS but as the World Bank points out in relation to investment in goods, "the absence of a body of multilateral disciplines has hardly deterred cross border investment activity." [43]In fact, the evidence suggests that the main factors determining where companies invest in the developing world are the size of the economy and, for the poorest countries, natural resource endowments, not the level of government intervention or the degree and nature of multilateral commitments. [44]

In contrast to the desire for binding rules to curtail "discrimination", the evidence suggests that, in cases where governments can benefit from foreign investment, the use of strategic policies can strengthen the links between foreign investors and the domestic economy, creating short and long term benefits. [45]Once again, a look at past case history demonstrates that most governments have used a range of "discriminatory" investment regulations (eg limitations on foreign acquisition of domestic companies) to further their domestic economic development. Rather than seeking to develop further constraints on developing country investment policy flexibility, the UK Government should be seeking an effective review and reform of the existing TRIMS Agreement.

Similar arguments exist on competition policy and government procurement. The use of competition regulation and government procurement to encourage competitive domestic businesses is a potentially useful part of the development policy armoury. Again, industrialised nations created competition authorities only relatively late in their development process[46] and most are likely to have used discriminatory government procurement policies for development purposes. WDM therefore does not believe that applying WTO "non-discrimination" rules to these policy areas is either necessary or beneficial for achieving development.

If one thing is clear, it is that policy-makers do not have the final answers to the problem of under-development and poverty in all countries. WDM considers that it would be dangerous for governments to negotiate agreements that preclude democratically elected governments (as most WTO member states are) from using strategic trade policies that could make a major contribution to poverty reduction.

Many developing countries seem to be of a similar opinion. Groups of developing countries, such as the LDCs and the Africa Group, have consistently opposed starting negotiations on the "Singapore issues" through, for example, submitting papers in the run up to the Doha ministerial. The fact that these proposals from over 90 developing countries were ignored is testament to the untransparent procedures and exercise of political muscle that characterise the WTO negotiating process.

Applying the WTO's "core principle" of non-discrimination to investment, government procurement[47] and competition regulations is not appropriate for achieving poverty reduction. There is no sound evidence to suggest that establishing new rules on investment will increase investment flows to developing countries. The Committee should recommend the UK does not press, at the Cancún Ministerial, for negotiations to establish new rules on the "Singapore issues". Instead, the UK should press for reform of the TRIMS Agreement to provide more flexibility for developing countries.

World Development Movement

January 2003

1 Although the EU's stated aim for the current negotiations is for an agreement on "transparency in government procurement", previous public statements by the EU and UK clearly show that this is a first step towards the ultimate objective of applying "non-discrimination" rules to government procurement. Back

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