House of Commons - International Development

Select Committee on International Development Seventh Report

2 A "DEVELOPMENT ROUND"?

Why is a "Development Round" needed?

9. A successful round of WTO trade negotiations is needed to demonstrate the value and vitality of multilateralism to the international community, and to begin to rebuild the trans-atlantic relations damaged by the build up to war with Iraq. A successful development round is needed to enable more rapid progress to be made towards achieving the MDGs.

10. Progress at the WTO has taken on much greater significance since the Iraq conflict, with trade seen as a "bastion of multilateralism."[9] As Richard Eglin, Director of the WTO's Development Division, put it: "you get the sense that politically there is an awful lot at stake in making sure that multilateral co-operation in the economic area is seen to be alive and well, and moving forward."[10] Failure would be very serious: "Not just for traders or trading countries but for the international community as a whole, and for the world system as we know it."[11]

11. Multilateral progress towards the MDGs and poverty reduction will play an important role in enhancing international security too. Poverty does not cause terrorism - there are many poor places where there are no terrorists, and there are terrorists where there is little poverty—but poverty and terror are linked in a complex process leading from poverty to frustration, a sense of injustice, bitterness, division and conflict.[12] Enlightened self-interest, as well as morality, demands that the North commit itself to poverty reduction. As Patricia Hewitt explained to the European Parliament in January, "When world security is threatened by terrorism and failing states, when political uncertainty compounds economic downturn, the need for the new world trade round is overwhelming."[13] The Prime Minister of Ethiopia put it most starkly: "The developed countries cannot shelter themselves from the impact of a continent that is in deep crisis and which has, in effect, become the continental ghetto of a globalised world. Unless Africa develops, it will spawn all sorts of criminal groups en masse, including drug cartels and terrorists, which will haunt all of us."[14]

12. But international cooperation to reduce poverty - and to harness trade for poverty reduction - is not solely about enlightened self-interest. Neither is it fundamentally about the North fulfilling its MDG commitments to develop a global partnership for development. There is a strong moral case for engaging developing countries in a multilateral approach to problem solving and poverty reduction. The UNDP reported in 1997 that the Least-Developed Countries (LDCs) would lose $600 million per year, and that sub-Saharan Africa would lose $1.2 billion per year, as a result of the Uruguay Round agreement.[15] Many developing countries feel that the Uruguay Round did not deliver what they were led to expect, and that the results were inequitable and led to serious implementation problems.[16] Developing countries had agreed to Northern demands on TRIPS, Trade Related Investment Measures (TRIMS) and Sanitary and Phyto-sanitary Standards (SPS) in exchange for as yet unfulfilled promises about Northern progress on removing barriers to trade in agriculture and textiles.[17] As the Director-General of the WTO, Dr. Supachai Panitchpadki, reported to us, some developing countries feel that the exchange has not been balanced,[18] and will expect to be reimbursed at, or preferably before, Cancún.[19] If developing countries are to be engaged, they must be able to see the developmental benefits of engagement, and be enabled to play an active role in multilateral trade negotiations.

THE WTO, CANC&UACUTE;N AND POVERTY REDUCTION

13. The current round of negotiations can play an important role in developing a framework of trade rules which will enable developing countries to harness the growth potential of increased trade, and to use the resources for poverty reduction or other national priorities. But success at Cancún will not in itself reduce poverty; neither will failure increase it. The WTO is only part of a complex trade and development picture.[20] The path from the WTO to development and poverty reduction has many steps and is complicated by many intervening factors (see figure 1). Multilateral trade rules can provide the opportunity for countries to trade their way out of poverty. But rules alone cannot ensure that developing countries achieve this.

14. The implication is not that Cancún and the WTO are irrelevant or unimportant for development; it is that although multilateral trade rules can set the framework within which national policies operate, they are not necessarily the most direct or the most appropriate route to addressing the causes of poverty. For instance, we agree that eliminating gender inequalities is vital to poverty reduction;[21] we acknowledge that trade and trade liberalisation are likely to have different impacts on men and women;[22] we share the view that any gender-differentiated impacts of trade liberalisation should be addressed; and we would want to ensure that the WTO's rules do not foreclose countries' options for gender-focused poverty reduction policies. But, in our view, it is the national-level, rather than the WTO, which is the appropriate level at which to pursue such policies. Success at Cancún will only be translated into poverty reduction if donors and developing countries support and implement appropriate national policies, which encourage and harness the dynamism of the private sector.[23] For this to occur, the trade agenda must be well integrated with other elements of the development agenda including the provision and use of aid.

Figure 1: From the WTO to poverty reduction

Data source: Committee's own

What would a genuine "Development Round" look like?

15. The WTO can establish and develop multilateral trade rules, but it cannot directly reduce poverty. A proper understanding of the role of the WTO will lead to greater clarity about just what a genuine "Development Round" might look like. If the benchmark for a development round is "a round that leads directly to reduced poverty", then failure is guaranteed. If instead the benchmark is "a round that develops multilateral trade rules which are more compatible with international and national poverty reduction policies", then there is some chance of success. Pascal Lamy explained with frankness that: the "WTO is not, above all, a philanthropic organisation. It is a bargaining system. The philanthropy of the system stems from the fact that trade opening, with rules and the necessary conditions, is a win-win game."[24] We accept this analysis, and so does the Government. The questions which remain are what these rules and necessary conditions are, whether the WTO is a forum in which they can be created,—or, failing that, a forum which is compatible with these rules and necessary conditions - and also whether the WTO, whilst an imperfect forum, offers the best practicable forum to discuss these issues.

HARD-BARGAINING AND/OR A DEVELOPMENT ROUND?

16. Various witnesses commented on the apparent mismatch between the notion of a "Development Round" and the reality of concessions-trading, hard-bargaining WTO negotiations.[25] Hard-bargaining between unequal players sits uneasily with the notion of a development round, firstly because developing countries are not in a strong position to trade concessions on market access. As Prime Minister Zenawi of Ethiopia explained to us:

17. Secondly, developing countries do not have the analytical and negotiating capacities of developed countries to deal with a full and complex WTO agenda. This is exacerbated by the Single Undertaking, an arrangement which requires countries to sign up to the whole WTO agenda, rather than those agreements which suit them. The Single Undertaking does provide scope for trade-offs between countries[27] - "I'll give you a win on agriculture if you give me a win on investment" - but it also means that developing countries may find themselves signing up to a raft of agreements which they neither requested, nor wanted, and which they have little capacity to understand or implement.[28] A significant proportion of developing countries have little if any permanent presence in Geneva,[29] a situation which clearly hinders their effective participation in negotiations.[30] Those countries that do have a Geneva presence face a very demanding, if not impossible, workload[31] (see para 132). Other issues are perhaps more important right now, but we do have some reservations about the wisdom of the Single Undertaking.

18. Hard-bargaining is an inappropriate way to deal with some issues. It may have been suitable for tariff negotiations, but as WTO negotiations increasingly encompass complex "behind the border" domestic issues, the adversarial concessions-trading format becomes less suitable. Agreeing rules about how countries can regulate investment and competition is not like agreeing on tariff levels, but is about coming up with some notion of "best practice." As Ambassador Ransford Smith of Jamaica explained, a forum in which hard-bargaining is the modus operandi may not be an appropriate forum for setting rules about such qualitative matters, where countries may have their own views on what is best practice. If the definition and regulation of "best practice" - for instance, how inward investment should be regulated - is determined by the balance of negotiating power, the resulting definition of best practice may not be one which is appropriate for the less powerful negotiating countries[32] (see paras 93-96).

19. The outcome of a WTO round is a package of rules and market access commitments. The definition of a genuine development round will depend upon what is understood by development-friendly rules and market access commitments. This in turn will depend upon: first, one's reading of the evidence about the relationship between trade liberalisation, trade, development and poverty reduction; second, one's view about the extent to which multilateral trade rules can impose constraints on national policy decisions and still be development-friendly;[33] and third, for which countries the assessment of development-friendliness is being made, for instance, an advanced developing country or an LDC. Finally, the development-friendliness of the outcome of a WTO round should be assessed in comparison not with an ideal outcome, but in comparison to a non-development round, and a complex network of bilateral treaties, in which hard-bargaining between countries with vastly unequal resources remains the norm, and from which the poorest countries may well be excluded.

TRADE RULES, TRADE POLICIES, TRADE AND POVERTY REDUCTION

Interpreting the evidence

20. There is no consensus on the relationship between trade rules, trade policies (liberalisation or protectionism) and poverty reduction. "Trade optimists" believe that trade and trade liberalisation can be major contributors to poverty reduction. "Trade pessimists" believe trade liberalisation, and in extreme cases even trade itself, will not lead to poverty reduction and are more likely to exacerbate inequalities and heighten poverty.[34] The optimists' were well-represented by Richard Eglin, the Director of the WTO's Development Division. His belief is that "all rounds are development rounds, in the sense that they deliver better market access to developing countries; that they assist developing countries to integrate into the international economy."[35] For the Confederation of British Industry (CBI), processes of liberalisation offer opportunities to all countries "to benefit from greater economic growth, to increase living standards and work towards sustainable development."[36]The UK Government is more circumspect in its support for trade liberalisation. But consistent with the view that recent progress by China and India is due to increased economic openness,[37] it does have "a general presumption in favour of trade liberalisation as one mechanism to reduce poverty", a presumption backed up by its view that "[m]ost development specialists and practitioners would agree that trade openness is a necessary condition for national economic prosperity."[38]

21. Towards the other end of the spectrum are those organisations which are less optimistic about the likelihood of trade, and specifically trade liberalisation, offering a route out of poverty for developing countries. These critics point to what they see as the unrealistic and excessively abstract models which are used to predict the gains from trade liberalisation,[39] and emphasise a particular reading of the historical evidence.[40] The pessimists argue variously that the models: are inconclusive in their findings;[41] fail to demonstrate convincingly the poverty-reducing effects of growth; neglect the role of the domestic institutional environment;[42] confuse cause and effect in their analysis of the relationship between trade liberalisation and development;[43] and employ different meanings of trade "openness".[44]

22. The pessimists point to the historical experience of most developed countries - the UK, the USA, South Korea and Taiwan for instance - each of which developed behind protectionist barriers. Some commentators suggest that the developed world's current efforts to persuade developing countries to liberalise now, amount to "kicking away the ladder" of development.[45] Trade liberalisation pessimists also cite more recent evidence from Haiti, Mali, Nepal, Peru and Zambia (countries where rapid liberalisation has failed to deliver poverty reduction) and contrast this with the poverty reduction successes of China, Mauritius and Vietnam (countries which have been much more cautious liberalisers).[46] In addition, the failure of development in Africa over the last few decades, despite widespread liberalisation, suggests to the pessimists - who overlook the role of corruption and poor governance—that liberalisation is not a reliable route to development. As Prime Minister Zenawi of Ethiopia put it: "Some would argue that across-the-board and reciprocal trade liberalisation is the right thing. The economic reforms in Africa over the past 20 years have been guided by such a view. The results, I believe, can speak for themselves."[47] In our view this factor has to be seen as one of a number contributing to Africa's lack of development.

23. As a Committee, we are optimists and enthusiasts for the benefits of trade, but more cautious as far as trade liberalisation is concerned. From our reading of the evidence, we would concur with the statement made by Claire Melamed of Christian Aid: "The one clear message that comes out of a review of the evidence is that there is no single relationship between any given policy, be it trade liberalisation or any other trade policy, and economic development".[48] There is a complex pattern with both rapid liberalisers and non-liberalisers performing poorly, whilst cautious liberalisers seem to do best.[49] As the Government acknowledged in its memorandum: "The relationship between trade reform and poverty is complex and very country-specific."[50]

Dealing with the down-sides

24. The "optimists" and the "pessimists" agree on one point: that the distribution of any gains from trade will be uneven, both between and within countries. The World Bank, for instance, predicts that out of an increase of $335 billion in global income by 2015 as a result of trade liberalisation, developing countries would enjoy 50 percent of these gains. But sub-Saharan African and South Asia would receive minimal net gains, in both cases lower than the aggregate losses resulting from displacement due to liberalisation.[51] Within countries, the immediate impact of trade liberalisation on people and groups will depend on its impact on prices, profits/employment/wages, government revenues, and how different individuals and groups and individuals are socially positioned.[52] That is, whether they are consumers or producers, employers or employees, employees with or without rights,[53] tax-payers or subsidised consumers, men or women.

25. The Government accepts that - at least in the short term—there will be losers as well as winners from trade liberalisation. The fact that some may lose is not a reason to prevent others winning.[54] As the Government's memorandum put it: "Growth benefits the poor, but it should be recognised that trade reforms can hurt some groups, perhaps pushing them into or deeper into poverty, and that some reforms may increase the number of the poor even though they raise incomes in general. …The important policy questions are how to implement [trade liberalisation] in a way that maximises its benefits for poverty reduction and what to do about any poverty that it does create."[55] The Government's approach to this is to "predict, pre-empt and protect";[56] predicting the impacts of trade liberalisation on particular groups of people, taking pre-emptive measures to enable potential losers to "shift easily into other lines of activities", and protecting those who are unable to help themselves.[57]

26. Moving to the dynamic effects of trade liberalisation, the final effect will depend on the response of countries, their industries and firms, to a more liberalised trading environment, which in turn will depend upon their existing level of development, their capacity to produce for export, their infrastructure, their natural resources, their human capacity, their domestic legal and financial systems, and the assistance they receive to build their export capacity.[58] Inexperienced exporters in an LDC will not respond to enhanced market access in the same way in which an experienced exporter in Switzerland might.[59] Market access is not a magic bullet.[60] It is not enough simply to let likely winners from liberalisation off the leash so that they can trade on their comparative advantages. Potential medium-term winners from liberalisation need to be helped to take advantage of enhanced trading opportunities through the provision of technical assistance and capacity-building. Probable losers from liberalisation, such as some in LDCs, need aid to protect their vulnerable populations, and assistance to move towards a position where they can contemplate becoming more active participants in the international trading system.

27. Cutting oneself off from trade is not a realistic route to development. Rather, trade and cautious liberalisation offer an important opportunity for progress on poverty reduction. They may also increase transparency and predictability, and improve governance. As far as poverty reduction is concerned, the real debate concerns the management of trade, the timing and sequencing of trade liberalisation and domestic reforms, the provision of trade-related technical assistance and capacity-building to enable countries to take advantage of trading opportunities, and the provision of aid to those countries and interest groups who are likely to lose out. In the longer term, poverty reduction also requires enabling countries to move swiftly up the value-added/industrial ladder, ensuring that the benefits are distributed in as equitable a fashion as possible. If the WTO's members are to deliver a genuine development round, it must be a round which includes sufficient flexibility for developing countries. As Richard Kozul-Wright of UNCTAD put it: "All one can say is that a certain degree of humility on the part of advanced countries, a certain respect for their own history, and a certain recognition that flexibility in the multilateral system is the defining quality of a development component of multilateralism, as it works for developing countries, are essential."[61] (see paras 135-146).

28. There is a debate about the relationship between international trade and sustainable development. Some argue that trade is bad because it increases production and consumption; that the globalisation of trade is bad because it increases transport costs and pollution; and that global trade rules are bad because they undermine more local democracy.[62] Others argue that trade, including international trade, is good because it improves resource allocation (sugar would be grown in more sensible places), and, that by increasing incomes, it will provide more resources to address environmental problems. There are important questions about the interface between the WTO and environmental issues, but there is no reason to assume that well-designed multilateral trade rules, which seek to balance economic and environmental objectives, will necessarily hinder progress towards sustainable development.

WHOSE BENCHMARKS? WHICH COMPARISONS?

29. A simple way of assessing the development-friendliness of a round might be to listen to the developing countries. But as we have often been reminded - though not by developing countries themselves—developing countries have diverse interests and views. The EU's Agricultural Commissioner, Franz Fischler, comparing Brazil's agricultural competitiveness with that of a sub-Saharan African country, suggested that it is "not very logical just to speak about 'developing countries.'"[63] There is no longer a bloc of developing countries, as Carlos Fortin of UNCTAD acknowledged.[64] At the WTO, Richard Eglin went further, suggesting that WTO negotiations have never been conducted on a North-South basis. Rather, countries have their own selfish interests at heart, which will lead them to line up with different countries for different issues.[65] But there are some issues which will be looked at in a North-South way, including Special and Differential Treatment (SDT), which is, as Richard Eglin acknowledged, "a guiding parameter for the whole Round".[66]

30. The degree of convergence or divergence between developing countries' various interests depends on the issue area. On SDT and the implementation of existing agreements most developing countries are likely to have similar interests. But on TRIPS and public health, and agriculture, interests diverge.[67] To take agriculture, for instance, it is not possible to simply read off a country's stance on liberalisation from its level of development (see figure 2 and chapter 3).[68] The "Singapore Issues" and the General Agreement on Trade in Services (GATS) fall somewhere between the two extremes of agriculture (divergent interests) and SDT (convergent interests).

Figure 2: Countries' stances on agricultural liberalisation: A schematic representation

Data source: Committee's own NB: Axes are not to scale. NFIDCs are Net Food-Importing Developing Countries.

31. The degree of divergence should not be exaggerated. At a general level, there are common interests and expectations, by which developing countries themselves are likely to judge whether or not a round amounts to a genuine development round. According to Carlos Fortin these are:

a) that markets, including agricultural markets, are opened to developing countries;

b) that SDT is provided to help countries during the transition towards full liberalisation;

c) that development-friendly rules are established, including in relation to the "Singapore Issues";

d) that implementation issues are addressed; and

e) that account is taken of the interdependence between trade and other issues such as technology, transport, finance and debt.[69]

32. Judgements about the development-friendliness of the "Doha Development Agenda" and the Agreements which it may deliver, ought to made in comparison to the likely alternatives—a standard WTO round or a network of bilateral trade agreements—not solely to commentators' conceptions of an ideal multilateral trading system. All the witnesses, even those who see the WTO as seriously flawed, regard a rules-based multilateral trading system as desirable.[70] A rules-based system, where developing countries' negotiating power is enhanced, is preferable to one which is solely power-based.[71] As Pascal Lamy put it:

33. However imperfectly, the WTO's Dispute Settlement Mechanism and the ability of countries who are not themselves party to disputes to benefit from generally applicable rules, attenuates the differences of power between countries.[73] Multilateral is preferable to bilateral. In bilateral negotiations, rules are more easily swayed by power, and many developing countries will—because they don't offer large enough markets to be of interest to the major players—be excluded.[74]

Benchmarks and prospects for Cancún and beyond

34. There is some inconsistency between the notion of a development round and the reality of hard-bargaining in the WTO. There is also much debate about the relationship between trade liberalisation, trade and poverty reduction. And developing countries' interests are diverse. But if the international community is truly interested in development, from whatever combination of morality, self-interest and international security concerns, it must not simply throw its collective hands up in the air and declare that the WTO and its members are inherently incapable of delivering a development round which will be accepted as such by developing countries. To do so would call into question the sincerity of WTO members in agreeing to the "Doha Development Agenda", and would not be in the interests of developing countries. Instead, pressure must be exerted on the WTO's members to deliver on their developmental promises. Similarly, we cannot simply declare that it is impossible to assess the development-friendliness of a WTO round. It is only through such assessments that WTO members can be held to their promises. Assessments require benchmarks. We urge the Government in consultation with developing countries, NGOs and others, to establish clear benchmarks by which it will assess the success or failure of Cancún and the Round as a whole.[75]

35. It is not our intention in this report to provide such benchmarks, but there are three areas where progress must be made if there is to be a genuine development round. First, there must be effective participation by developing countries (see paras 129-134), with the result that they judge the Round to have been a developmental success. Second, the rules which are agreed on, including the rules about market access, must be development-friendly. They must provide developing countries with enhanced market access, and greater opportunities to trade in goods, services and labour. They must also be flexible enough to enable countries at different stages of development to pursue their nationally-determined priorities, and give sufficient time for developing countries to enact and implement the agreed rules (see paras 135-146). Third, there must be development-friendly progress on the specific issues which are on the WTO's agenda.

36. The WTO continues to insist that there should be no lowering of expectations.[76] In its view, the deadline of 1 January 2005 remains achievable, progress is better than at a similar stage of the Uruguay Round, and all that is required is political commitment.[77] But progress has been very slow and appears almost stalled. The deadlines for resolving issues which were supposed to be resolved at an early stage—TRIPS and public health, SDT, Implementation—have been missed (see figure 3). Early resolution of these issues was part of the mandate delivered at Doha, and was supposed to be a key component of a development round. Such issues were to be resolved early to rebuild trust, to avoid overloading developing countries' negotiators, and to ensure that the resolution of such outstanding issues did not become subject to concessions-trading.[78] Implementation for instance is about fulfilling commitments made in the Uruguay Round. The resolution of Implementation issues should not, as paragraph 47 of the Doha Ministerial Declaration insisted, be a bargaining chip in this so-called "Development Round."[79] Regrettably, it is. The lack of progress is postponing everything until the last possible moment, stretching further the capacities of developing countries to participate effectively in negotiations, and risks overloading Cancún.[80] The WTO now appears incapable of reaching significant agreements outside the diplomatic pressure cooker of ministerial meetings. If the EU is to play its part in delivering on the promised development agenda, it should therefore call for the Cancún summit to concentrate on reaching agreements on agriculture, Trips and public health, SDT and implementation.

Figure 3: Progress with the Doha Development Agenda

Agreement/Issue	Deadline	State of Play
SDT	30 June 2002, (Recommendations) Extended to 31 December 2002	Deadline missed—14 from 88 proposals "accepted for agreement"
Implementation	31 December 2002 (To report for action)	Deadline missed - Chair's proposal
TRIPS & Public Health	31 December 2002 (To resolve and report)	Deadline missed—USA blocking agreement
Agriculture	31 March 2003 (Modalities)	Deadline missed—Chair's 2nd Draft Modalities
Services	31 March 2003 (Offers)	Requests and offers made by around 30 countries
Industrial Market Access	31 May 2003 (Modalities)	Deadline missed—Chair's 1st Draft Modalities
Dispute Settlement	31 May 2003 (Concluding agreement)	Deadline missed - Chair's 2^nd Draft Modalities. Referred to Cancún

Data source: ICTSD and IISD BRIDGES Weekly Trade Digest, various issues

37. The USA's decision to submit the EU's moratorium on the approval of genetically modified organisms to WTO adjudication, the decision by Brazil and several West African countries to query the WTO-compatibility of US cotton subsidies, and the USA and the EU's aggressive pursuit of regional and bilateral trade agreements, do not bode well for Cancún. But there are some glimmers of hope. The G8 at Evian in June singled out TRIPS and public health for agreement before Cancún. France has softened its opposition to reform of the Common Agricultural Policy (CAP) with the result that watered-down reform proposals have now been agreed, and it would seem that the UK Government, or DFID at least, no longer regards the Singapore Issues as a priority, and may be prepared to accept limited progress on them.[81] Perhaps the best hope for progress by Cancún is the desire of the developed countries to prevent a repeat of Seattle and the bitterness and resentment which Seattle's failure in 1999 produced, and the need for the EU and the USA to avoid another trans-atlantic row. The following chapters explain what was agreed at Doha, assess the current state of play, and suggest what the UK Government and the EU should be doing to ensure a development-friendly outcome.

9 Q 360 [Carlos Fortin, UNCTAD] Back

10 Q 310 [Richard Eglin, WTO] Back

11 Q 360 [Carlos Fortin, UNCTAD] Back

12 Clare Short, The dangers to Doha: The risks of failure in the trade round, speech at Chatham House, 25 March 2003 - available at http://www.dfid.gov.uk/News/Speeches/files/sp25march03.html; and Patricia Hewitt, Trade and development: Europe's role in spreading prosperity, speech to the European Parliament, 21 January 2003 - available at http://www.dti.gov.uk/ministers/speeches/hewitt210103.html Back

13 Patricia Hewitt, ibid. Back

14 Q 83 [H.E. Meles Zenawi, Prime Minister of the Federal Republic of Ethiopia] Back

15 UNDP, Human Development Report, 1997, p. 82. Available at http://hdr.undp.org Back

16 Ev 263 [Bangladesh Parliament Secretariat memorandum] Back

17 Q 403 [Lakshmi Puri, UNCTAD] Back

18 Q 335 [Supachai Panitchpadki, WTO] Back

19 Q 403 [Lakshmi Puri, UNCTAD] Back

20 Q 385 [Richard Kozul-Wright, UNCTAD] Back