Global Economic Prospects Realizing the Development Promise of the Doha Agenda 2004 © 2003 The International Bank for Reconstruction and Development / The World Bank 1818 H Street, NW Washington, DC 20433 Telephone 202-473-1000 Internet www.worldbank.org E-mail feedback@worldbank.org All rights reserved. 1234040303 This volume is a product of the staff of the World Bank. The findings, interpretations, and conclusions expressed herein do not necessarily reflect the views of the Board of Executive Directors of the World Bank or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of the World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. Rights and Permissions The material in this work is copyrighted. 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Workers at the Los Ausoles coffee plantation in Ahuachapan, El Salvador, clean coffee beans, August 14, 2002. iii Foreword ix Acknowledgments xi Overview xiii Abbreviations and Data Notes xxxi Chapter 1 Global Outlook and the Developing Countries 1 The industrial countries: Deficits, confidence, capital spending, and the dollar 4 The external environment for developing countries: Gradual improvement, but a bumpy road ahead 19 The developing countries: Back on track toward growth? 28 Trade, growth, and poverty in developing countries 38 Looking ahead to the Doha Round 47 Annex 1 Historical trade dynamics for developing countries 55 Notes 59 References 60 Chapter 2 Trade Patterns and Policies: Doha Options to Promote Development 63 Changing patterns in developing-country exports 65 Behind the patterns: Economic and policy determinants 73 Market access for development: The agenda 78 From Doha to Cancún and beyond: How should protection be reduced? 88 Notes 98 References 98 Chapter 3 Agricultural Policies and Trade 103 Poverty, rural households, and trade in agriculture 105 Trade and export growth in agriculture 109 Global agricultural protection: The bias against development 114 Proposals for reforms in the Doha Round 131 Notes 138 References 139 Contents Chapter 4 Labor Mobility and the WTO: Liberalizing Temporary Movement 143 The bigger picture: Global migration and remittance trends 145 Temporary movement of workers 150 Bilateral and regional approaches to labor mobility 152 Understanding the impact of temporary foreign workers 155 Mode 4 and the WTO 166 Notes 172 References 174 Chapter 5 Reducing Trading Costs in a New Era of Security 179 Why transport, trade facilitation, and logistics matter 181 The new international security dimension in trade 182 The anticompetitive effects of international transport regulations 188 Trade facilitation 191 Trade facilitation and the WTO agenda 195 Lowering transport costs, increasing security, and facilitating trade 198 Notes 200 References 202 Chapter 6 Development and the Doha Agenda 205 Special and differential treatment and the WTO 207 Market access for development 208 Toward a new regime for WTO rules 220 Putting development into the Doha agenda 227 Notes 228 References 229 Appendix 1 Regional Economic Prospects 233 Appendix 2 Global Commodity Price Prospects 257 Appendix 3 Global Economic Indicators 279 Figures 1.1 Growth in the OECD countries falters 4 1.2 OECD manufacturing shows a distinct “double dip” 5 1.3 Consumer confidence recovers from pre-war lows 6 1.4 The drop in U.S. household net worth has been offset by real estate appreciation 8 1.5 Capital spending has been hesitant in all industrial countries 9 1.6 Corporate profits have risen moderately in the United States and Japan 9 1.7 Business confidence remains poor, but better in the United States than in Europe 10 1.8 The U.S. fiscal deficit is widening quickly 11 1.9a The U.S. current account deficit is at record levels 11 1.9b The U.S. current account deficit is at record levels 13 1.10 Market interest rates have dropped 14 1.11 Is deflation a danger for Europe and the United States? 15 GLOBAL ECONOMIC PROSPECTS iv 1.12 Output gaps are widening, bringing deflationary pressures to bear 16 1.13 The dollar has fallen sharply since early 2002 16 1.14 OECD recovery begins in the United States 18 1.15 OECD-area imports have declined sharply since April 2000 21 1.16 China’s share of East Asian exports keeps rising 21 1.17 The price of oil fell sharply before the war in Iraq 23 1.18 Agricultural prices have begun to decline as crop prospects improve 25 1.19 Emerging-market spreads rallied sharply after late 2002 26 1.20 Bond issuance dominates capital market flows in 2003 27 1.21a Regional trends in industrial production are mixed 29 121b Inflation is moderating in the developing world 29 1.21c Major currencies in Latin America and East Asia are firming up 30 1.22 Developing countries are on track toward long-term growth 31 1.23 Growth rates in developing countries will rise through 2005 31 1.24 Before the SARS outbreak, East Asian GDP was growing robustly 32 1.25 Argentina, Brazil, and Chile see strong upturn in production 33 1.26 Growth will cool in CIS while picking up in Central and Eastern Europe 34 1.27 Middle East oil production has increased to prevent shortages 35 1.28 Indian production of food and automobiles recovered sharply in early 2003 37 1.29 Growth in Africa is expected to improve modestly 38 1.30 Income elasticity has risen globally, but particularly in the developing world 40 1.31 Export-to-GDP ratios have risen sharply in developing countries 41 1.32 Productivity will contribute more to GDP growth through 2015 than will capital or labor 44 1.33 The pro-poor reform scenario promises substantial income gains 50 1.34 Exports should rise sharply 52 1.35 Millions of people would be moved out of poverty 52 1.36 Gains for most, but adjustment costs for some 53 1.37 Significant shifts in global output patterns 54 2.1 Developing countries have become important exporters of manufactured products 65 2.2 Manufactures account for a growing share of exports in all regions 67 2.3 Technology-laden manufactures have increased as a share of exports from each group of countries, while the share of resource-based exports has diminished 70 2.4 Global production sharing is increasingly important for China and India 71 2.5 Soaring exports from China and India had only a moderate effect on China’s and India’s terms of trade 72 2.6 Many developing countries face an adjustment when quotas are lifted 80 2.7 Antidumping barriers by sector and by country group 88 3.1 Countries that produce more cash crops also produce more food 109 3.2 Import growth rates of nontraditional export commodities decreased in industrial countries but increased in developing countries 112 3.3 Developing countries’ exports of nontraditional products have surged, but industrial countries’ exports have changed little 114 3.4 Developing countries lowered tariffs on manufactured products more than on agricultural products 119 CONTENTS v 3.5 Rich countries use non–ad valorem tariffs more often than do developing countries 122 3.6 Throughout the world, tariff rates escalate with degree of processing 123 3.7 The proportion of tariff lines containing non–ad valorem duties increases with degree of processing 125 3.8 Tariff rate quotas protect a substantial portion of output in many industrial countries 126 3.9 High protection of sugar and wheat has increased domestic production and reduced net imports 128 4.1 Workers’ remittances are an important source of income for many developing countries 149 5.1 Customs clearance takes longer in the developing world than in the OECD, lowering the competitiveness of developing-country trade 185 5.2 Higher trade costs reduce global welfare 186 5.3 Facilitating trade in less-efficient countries would bring significant gains 194 5.4 The impact of individual trade-facilitation measures differs significantly from region to region 195 5.5 Domestic reforms alone would produce many of the same gains as global reform 196 6.1 The benefits of U.S. trade preferences are distributed unequally 211 6.2 Countries “graduating” from U.S. generalized system of preferences have better export performance than those still in program 212 6.3 Preferences have not increased the share of the least developed countries in imports into the European Union and the United States 215 6.4 Market shares of countries eligible for three U.S. “deep preference” programs have not increased 215 6.5 Preferred countries’ apparel exports to the United States have risen 216 6.6 Agricultural exports from Mexico and Spain rose dramatically after the two countries joined regional trade blocs 217 6.7 The trade policies of countries in the U.S. generalized system of preferences are more protectionist than those of countries not in the program 218 6.8 Countries enjoying preferences have increased their exports of apparel to the United States 219 Tables 1.1 Global growth should accelerate, but risks persist 3 1.2 Weak fundamentals underlie sluggish growth in the rich countries 5 1.3 The difficult environment for developing-country growth should improve 20 1.4 Developing countries’ exports will grow faster than those of the high-income countries 22 1.5 GDP per capita will grow faster in the developing world than in the OECD area 43 1.6 Global poverty will decrease significantly, but not uniformly across regions 46 1.7 Tariffs could be cut clearly and simply 48 1.8 The pro-poor tariff scenario would significantly lower protection 49 1.9 A large share of real income gains comes from lowering of barriers in agriculture and food 51 1.A1 Sectoral export decomposition for developing countries 55 GLOBAL ECONOMIC PROSPECTS vi 1.A2 Regional export decomposition for developing countries 57 2.1 Developing countries are becoming exporters of high-value products 68 2.2 Developing countries’ exports became more competitive in the 1990s 74 2.3 Investment in people and in capital grew rapidly 75 2.4 Tariffs hurt exports—but less so in the 1990s than in the 1980s 77 2.5 Quota abolition in China will move resources from other activities to textiles and clothing 81 2.6 Industrial countries levy higher tariffs on imports from developing countries than from other industrial countries—and some regions have high tariff walls 82 2.7 Developing countries pay large amounts in tariffs to their neighbors 83 2.8 Most antidumping actions are filed by developing countries against other developing countries 86 2.9 Antidumping rates are much higher than tariff rates 86 2.10 Antidumping duties are high 87 2.11 Competing formulas make a big difference for tariffs 95 2A.1 The various liberalization proposals have very different features 97 3.1 Most of the world’s poor live in rural areas outside the least developed countries 106 3.2 Rural poverty is higher in poorer countries 107 3.3 Even in subsistence economies, cash is important 107 3.4 U.S. farmers earn less from farming than from other sources 107 3.5 Manufacturing exports grew much faster than agricultural exports 110 3.6 South-South exports in agriculture are rising as South-North export shares fall 110 3.7 Developing countries have shared unequally in export market gains 117 3.8 Agricultural tariffs are higher than manufacturing tariffs in both rich and poor countries 118 3.9 Agricultural tariffs: High peaks and deep valleys 119 3.10 Most subsidies go to producers—and come from border protection 120 3.11 Subsidies account for a large share of farmers’ revenues 121 3.12 Specific tariffs are higher than ad valorem rates 123 3.13 Tariffs rise with level of processing 124 3.14 The Harbinson proposals could greatly reduce applied tariffs in the European Union and the United States 133 3.15 The Harbinson proposals would not significantly reduce protection in the developing world—if reductions were taken from bound rates 133 3.16 U.S. trade preferences—a plethora of programs 136 4.1 Migration is rising in many OECD countries 147 4.2 Workers’ remittances are the second-largest source of external funding for developing countries 148 4.3 Remittances are a significant source of income in all regions of the developing world 149 4.4 Temporary movement is rising in rich countries 150 4.5 Foreign-born workers meet skill shortages in rich countries 152 4.6 The distribution of costs and benefits associated with Mode 4 trade 157 4.7 TMNP is the smallest of the four modes of international service supply 168 4.8 Most Mode 4 commitments by WTO members are in management categories 169 CONTENTS vii 5.1 Elimination of anticompetitive private practices can cut costs drastically 190 6.1 Developing countries rarely receive significant preferences in sectors in which they would have a comparative advantage 209 6.2 Utilization rates for preference-eligible products with high MFN tariffs are low 210 6.3 Actual use of preference programs is declining 211 Boxes 1.1 Consumer confidence and U.S. private consumption 7 1.2 Financing the U.S. current account deficit: From equity to debt 12 1.3 OPEC struggles to achieve higher prices amid growing supply competition 24 1.4 Economic effects of Severe Acute Respiratory Syndrome (SARS) 33 1.5 AIDS is taking a rising toll in Sub-Saharan Africa 39 2.1 Poor export performance in 43 countries 69 2.2 Swimming upstream: The case of Vietnamese catfish 85 2.3 The scourge of the specific 89 2.4 “Average cuts,” the cut you have when you’re not having a cut 92 2.5 The implications of five tariff-cutting proposals 93 3.1 The impact of national trade integration and reform on poverty 106 3.2 Did agricultural exports slow down solely because of falling prices? 111 3.3 Decomposing export growth in manufacturing 113 3.4 Food safety standards: From barriers to opportunities 115 3.5 Decoupling agricultural support from production decisions 127 3.6 Fewer subsidies, stronger agricultural sector 132 3.7 The potential impact of real preferences 134 3.8 Rules of origin in preferential schemes are complicated—and often contradictory 136 3.9 Food aid principles 137 4.1 Population aging and migration 146 4.2 Temporary labor movement and the East Asian crisis of 1997–98 151 4.3 Recent initiatives to facilitate temporary movement of highly skilled workers 153 4.4 A trade facilitation approach to labor mobility: NAFTA and APEC 154 4.5 Initiatives to encourage return migration 160 4.6 Wages and conditions 163 4.7 E-commerce and temporary movement 164 4.8 Boosting intra-EU labor mobility 165 4.9 Measuring Mode 4 is still imprecise 167 4.10 Key impediments to Mode 4 trade 169 4.11 Elements of a possible GATS visa/permit regime 171 5.1 The evolving definition of trade facilitation 181 5.2 The logistics needs of a German car part manufacturer in Tunisia 192 5.3 Tackling corruption in customs: Peru 197 5.4 Customs reform in Lebanon 198 6.1 EU and U.S. preference programs 213 6.2 Major WTO provisions allowing developing countries greater freedom to use restrictive trade policies 221 6.3 A “development box” for the Agreement on Agriculture? 223 GLOBAL ECONOMIC PROSPECTS viii T he international community finds itself at a crossroads as it goes into the last quar- ter of 2003. Will the Doha Agenda regenerate the multilateral consensus that has been the hallmark of successive rounds of trade liberalization since 1947 and in doing so provide new impetus for global integration? Or will the Doha Agenda collapse in stalemate and perhaps be viewed as the moment when the international community retreated from multilateralism and opened the floodgates for less desirable bilateral and regional arrangements? The answers to these questions matter a great deal to the world’s poor. The round of trade talks launched in November 2001 in Doha, Qatar, is the first negotiation focused primarily on is- sues of concern to developing countries, and the first trade round since the birth of the World Trade Organization (WTO). Moreover, the Doha round is the first trade round for many new WTO members, including the world largest developing economy, China. Consequently, the round has the opportunity to remove many of the inequities in the global trading system that put de- veloping countries—and poor people in particular—at a disadvantage in their trade. Three trade barriers are of particular concern. Poor people work in agriculture, and agricul- tural products are subject to the highest barriers to trade. In addition, poor people produce labor- intensive manufactures, which are subject to peak tariffs in a world that has already reduced average tariffs in manufactures to historic lows. Poor people could benefit from greater tempo- rary migration. Governments everywhere have worked hard to create the opportunity to reduce these and other barriers. And they will have to work hard to capitalize on that opportunity. To fulfill the development promise of the Doha Agenda, rich countries will have to reduce protection of their (relatively wealthy) farmers. Their tariff walls and huge subsidies depress global prices of the products that poor farmers produce throughout the developing world. These subsidies cost the average working family in the European Union, Japan, and the United States more than $1,000 a year. Middle-income countries, though their protection is generally lower and less distorting in agriculture, have high average tariffs in all sectors, and are more restrictive in services. As south- south trade increases in importance, protection of sectors in middle-income countries undermines their poorer trading partners and often undercuts the countries’ own productivity growth. Fi- nally, low-income countries should look to the international system to meet their very reasonable demands—not for special preferences to some markets and exemptions from rules, but for nondiscriminatory market access to every market in products in which they have a comparative advantage, for appropriately phased introduction of international regulations, and for develop- ment assistance in implementing administratively costly WTO rules. Like other countries, low- ix Foreword income countries will find it in their interest to reduce their own external levels of protection as part of an integrated development strategy aimed at reducing poverty. Reducing barriers to trade is not enough to fulfill the development promise of Doha. Trade must be part of a larger development strategy for each country, a strategy that includes attention to macroeconomic policy, infrastructure, education, and health as well as to accountable and responsible governance. These elements of investment climate take time to develop but are es- sential for growth and poverty reduction and are crucial to make a sound trade strategy pay its growth and poverty reduction dividends. The World Bank, working in partnership with the other international institutions and bilateral donors, is committed to supporting a pro-poor Doha outcome. Our objectives in trade are two- fold: promoting a world trading system in which global, regional, and bilateral rules are con- ducive to development and poverty reduction, and helping individual developing countries lever- age trade to promote their own growth. The latter objective hinges on integrating appropriately sequenced trade reforms into national development and poverty reduction strategies. The Bank is increasing its investment in research, technical assistance, and lending for trade. A casual perusal of the bibliography in each chapter of this report will give the interested reader an idea of the scope of the Bank’s research program. Moreover, in the last two years, the Bank has undertaken at the request of governments more than 20 diagnostic studies of obstacles to trade integration. In conjunction with six partner institutions, the Bank has led the Integrated Framework program—studies of trade obstacles in a dozen least-developed countries to date. It has completed several regional studies of trade. In addition to studies and policy advice, the Bank has provided technical assistance in the form of lending to improve trade-related institutions and transport logistics. The Bank has programs that finance activities in 49 countries (approximately one-third of its active client countries). These projects span all regions and range from export competitiveness projects in Ghana and Bangladesh, to transport and trade facilitation projects in Eastern Europe, to support for im- proving customs–border control agencies and training the trading community in Pakistan. The Bank is also implementing projects to improve quality standards and is leading the “Standards and Trade Development Facility,” an interagency partnership with the WTO, the FAO, and the World Health Organization, to deliver technical assistance for food safety and related standards. Should trade ministers reach an agreement on the Doha Agenda, the Bank will expand its lend- ing and technical assistance to help countries take advantage of new market access, to use trade to promote their domestic competitiveness, and to manage any transitional costs—such as those arising from erosion of trade preferences, changes in prices of imports, or reallocation of domes- tic resources from inefficient sectors to more efficient ones. A pro-poor outcome in the Doha Agenda is only one step toward a world more supportive of development. But this step is an important one. And it can be achieved only if everyone under- stands what is at stake in this historical moment—and moves purposefully and together to seize the opportunity. Nicholas Stern Chief Economist and Senior Vice President World Bank GLOBAL ECONOMIC PROSPECTS x [...]... 20 10 Agricultural exports (%) 0 19 81 1982 19 83 19 84 19 85 19 86 19 87 19 88 19 89 19 90 19 91 1992 19 93 19 94 19 95 19 96 19 97 19 98 19 99 2000 20 01 In low-income countries, manufactures make up 80 percent of exports Low-income countries’ share of world exports, 19 81 20 01 (percent) 90 Manufacturing exports (%) 80 ᮡ 70 Resources exports (%) 60 ᮡ 50 40 Agricultural exports (%) 30 ᮡ 20 10 0 19 81 1982 19 83 19 84 19 85... Resources exports (%) 60 ᮡ 50 40 Agricultural exports (%) 30 ᮡ 20 10 0 19 81 1982 19 83 19 84 19 85 19 86 19 87 19 88 19 89 19 90 19 91 1992 19 93 19 94 19 95 19 96 19 97 19 98 19 99 2000 20 01 Source: UN COMTRADE to date have freed up only 15 percent of the quotas, obliging them to implement major changes at the end of the phase-in period Average antidumping duties are seven to ten times higher than tariffs in industrial... integration, and that the benefits of integration are transmitted to the poor Put differently, trade policies must be embedded in a coherent national development strategy—they are not a substitute for it For all of these reasons, realizing the development promise of the Doha Agenda requires the participation of all groups of the international community This report: toward a pro-poor Doha outcome This report... type of deal would go far toward fulfilling the development promise of the Doha Agenda Notes 1 Global Economic Prospects 2002: Making Trade Work for the World’s Poor (World Bank 20 01) , in addition to analyzing agriculture, labor-intensive manufactures, and services, dealt with regulatory impediments in transportation (chapter 4) and intellectual property rights and TRIPS (chapter 5) Global Economic Prospects. .. developing countries is to aggravate global income inequalities Said differently, subsidies make the relatively rich even richer and the poor even poorer Realizing the development potential of Doha requires phased reductions of border protection and subsidies Of these, border protection is the most important These reductions ought to be done in a way that cuts off antidevelopment tariff peaks, reduces... confidence in the short term, a Doha Round agreement that slashed trade barriers, particularly in agriculture, would stimulate trade and raise incomes around the world, leading to a substantial reduction in global poverty The open question is whether a new multilateral agreement will live up to the development promise of the Doha Agenda Several issues under discussion are pivotal to development outcomes They... multilateral efforts Trade facilitation is fundamental to realizing the expanded trade promise of Doha, but the WTO agenda constitutes a small part of the challenge • Finally, the issue of special treatment for developing countries cuts across all of these policy domains and affects trade preferences and exemptions from WTO regulations The pursuit of trade preferences and exemptions from multilateral rules... tariff structures around the world The choice of the formula, and of its coefficients of reduction, is important Applying these cuts to bound rates will effectively credit developing countries that have unilaterally reduced their applied tariffs since the end of the Uruguay Round Services liberalization could raise productivity Services are the fastest-growing component of the global economy Even in... 1 to 2 percent of the global pharmaceuticals market In the 12 months to October 2002, developed countries accounted for more than 95 percent of the US$270 billion of sales in the world’s leading 20 country markets worldwide The group of developing countries that may benefit from a WTO agreement on importing generic drugs under compulsory licensing probably accounts for less than 1 or 2 percent of global. .. European banks Other problems may prove more transitory The cessation of conflict in Iraq has not yet produced complete calm, and the inability to reach consensus at the UN Security Council xiii G L O B A L E C O N O M I C P R O S P E C T S Figure 1 The recovery is building but slowly GDP growth, percent per annum Forecast 5 Developing economies 4 ᮡ Realizing the development promise of the Doha agenda 3 . (%) 19 86 19 87 19 88 19 89 19 90 19 91 1992 19 93 19 94 19 95 19 96 19 97 19 98 19 99 2000 20 01 ᮡ ᮡ ᮡ In middle-income countries, manufactures make up 70 percent of exports Middle-income countries’ share of. exports, 19 81 20 01 (percent) In low-income countries, manufactures make up 80 percent of exports Low-income countries’ share of world exports, 19 81 20 01 (percent) 19 81 1982 19 83 19 84 19 85 19 86 19 87 19 88. Global Economic Prospects Realizing the Development Promise of the Doha Agenda 2004 © 2003 The International Bank for Reconstruction and Development / The World Bank 18 18 H Street,