With regional trade agreements
(RTAs) having increased six folds since the 1980s and now covering
more than one-third of global trade, the World Bank’s Global
Economic Prospects 2005 advises countries concluding bilateral
and regional trade pacts to keep them “open,” so as not to divert
trade or cause market distortions that penalize other developing
countries.
Regional trade agreements, including North-South bilateral free
trade deals as well as South-South preferential agreements, can
improve prospects for rapid poverty reduction, the report says, but
only if developing countries integrate them into a strategy for
liberalization of trade on three fronts -- unilateral,
multilateral, and regional.
“Regional trade agreements offer some benefits to some
developing countries, provided they do not occur behind a wall of
protection,” said Fran?ois Bourguignon, the Bank’s Senior Vice
President for Development Economics and Chief Economist, in
launching the GEP 2005, entitled Trade, Regionalism and
Development. “However, preferences favoring some countries
discriminate against others. Nearly all agreements have adverse
consequences on excluded countries. The most effective way to curb
these negative effects is to open markets more broadly.”
Multilateral market openings -- which are being sought in the
Doha Round of WTO negotiations -- hold the promise of greater
potential gains to all developing countries, the report says.
“A multilateral agreement is the only way to open agricultural
markets and reduce or end subsidies in rich countries. Bourguignon
said. These reforms are of critical importance to the poor but they
are not on the table in regional trade talks.”
Developing countries’ 6.1% growth in 2004 best in three
decades, but expected to moderate
In addition to its analysis of regional trade agreements, the
report notes in its review of global prospects that 2004 is likely
to be the best year for growth in developing countries since 1974.
Growth is estimated to be 6.1 percent, due to a strong cyclical
global rebound from the 2001-02 slowdown and a solid performance
spanning all regions. Global growth in 2004 is also strong at 4.0
percent, and the report forecasts that it will decelerate to 3.2
percent in 2005, and 2006. Slower growth is expected in developing
countries too, down from 6.1 percent in 2004 to a projected 5.4
percent in 2005 and 5.1 percent in 2006.
East Asian growth will continue to outrun that of other regions,
if at a somewhat slower pace, with 7.1 percent growth in 2005.
South Asia is close behind with growth of six percent expected in
2004. China’s growth is forecast to slow modestly, in response to
the government’s effort to prevent overheating; similarly, East
Asian countries that had gained from a 30 percent increase in
Chinese import demand this year, are also expected to experience
moderating growth. Russia and oil-producing countries of the Middle
East and North Africa, beneficiaries from high petroleum prices in
2004, are expected to grow at about the same pace in 2005 as oil
prices move downwards.
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In the medium-long run, the report predicts that developing
countries could nearly double their 1990s growth rate as their
investments in structural reforms begin to pay dividends. A
sustained improvement in their macroeconomic stability, greater
flexibility in moving resources to competitive opportunities, a
better investment climate, and further reductions in reducing trade
barriers, together with continued progress in the transition
countries, should help developing countries reach an average annual
per capita growth rate of 3.4 percent between 2006 and 2015, up
from less than two percent in the 1990s. Although subject to global
and country-specific risks, this growth rate would enable all
regions except Sub-Saharan Africa to halve poverty by 2015, the
first of the eight Millennium Development Goals.
The report warns that some countries, particularly in Africa,
have not participated in this higher growth. This upbeat forecast
is also vulnerable to risks, such as high and volatile oil prices,
abrupt increases in interest rates associated with adjustments in
the U.S. current account and government deficits, and possible
stumbles in the effort to cool China’s rapidly growing economy. But
the report sees these risks as manageable and concludes on a
positive note. The rapid growth of developing economies, most
concentrated in East and South Asia, has produced a spectacular
drop in poverty, though some countries remain seriously
off-target.
Use “open regionalism” to complement unilateral trade
reforms, and multilateral reforms to gain broad market access,
countries urged.
RTAs are most effective when they complement a unilateral and
multilateral trade strategy and anchor domestic reform programs to
improve competitiveness and reduce poverty, the report states.
“Most trade liberalization -- some two-thirds of the average
reduction in tariffs since 1983 -- has occurred through unilateral
government reform programs. Governments want to make their
economies more efficient,” said Uri Dadush, Director of Development
Prospects, and the International Trade Group at the World Bank.
“Whether we are talking about Chile, China, or more recently
India, Egypt and Madagascar, governments choose to lower trade
barriers to increase import competition, bring in more technology
embodied in imports, and raise productivity,” Dadush said. “This
spurs exports and growth. If, in the process, they can get their
trading partners to do the same as part of a global or regional
deal that gives their exporters more market access abroad, the
prospects for poverty reduction are improved.”
The report says that key ingredients of RTAs that promote
development include low external border barriers, promotion of new
cross-border competition, nonrestrictive rules of origin, few
sectoral and product exemptions, and more open services markets.
Effective RTAs can help reduce regional political tensions, exploit
economies-of-scale in infrastructure provision, and lead to joint
programs to improve border crossings.
Successful experiences range from NAFTA to the EU’s agreements
with Eastern European countries, and the ASEAN Free Trade Area in
East Asia. But all arrangements have room for improvement. Indeed,
the world’s most successful case of deep integration – the European
Union – has evolved progressively and at times fitfully toward
greater integration.
“Neither North-South bilateral agreements nor South-South
arrangements get universally high marks,” said Richard Newfarmer,
Economic Adviser in the Bank’s Trade Department and lead author of
GEP 2005. “U.S. and EU bilateral agreements often fall short of
full free trade because they exclude sensitive products, commonly
agriculture, or they adopt restrictive rules of origin that
effectively deny market access. South-South agreements are
sometimes more liberal in goods trade, but rarely expand
competition in services and often lag in implementation. And few
agreements seize the opportunity to provide for temporary movement
of workers.”
The report finds that regions with lowest external border
barriers have been most successful in diversifying and exploiting
the emergence of global production chains in manufacturing. East
Asia, for example, is the region with the lowest external tariffs
and highest ratio of intra-regional trade to GDP. Eastern Europe,
which has undertaken reforms to integrate its economies with the
global market since the demise of the Soviet bloc, is not far
behind. Finally, Latin American countries have benefited by
abandoning earlier import-substitution policies, opening markets to
outside import competition and integrating into the global market –
a process that has stimulated a large rise in interregional
trade.
In the Middle East and North Africa, and in South Asia, external
MFN liberalization has lagged behind other regions, and external
tariffs often remain high. Together with regional conflicts, this
has impeded trade integration in these regions. Improved
Indo-Pakistan relations, however, open opportunities to promote
development through greater regional integration. The South Asian
Free Trade Area could form part of a strategy for greater openness,
but is likely to be successful only if it learns the lessons of
failed agreements in other parts of the world.
“Open” regional agreements can complement multilateral
liberalization, the report argues. Joint reforms of customs at the
border can cut costs of trading that at times are more onerous than
tariffs, but implementation often lags.
“Delays at the border between South Africa and Zimbabwe still
cost the same as shipping cargo from South Africa all the way to
the United States,” Newfarmer said. “It is cheaper to ship wine
from Australia to Moscow than from near-neighbor Moldova to Moscow;
the reason is that protectionist transit requirements across
Ukraine drive up the cost of Moldovian wine, despite
Moldova-Ukraine trade agreements.”
A novel feature of this year’s report is Prospects for the
Global Economy, an online companion to the report’s global outlook
section (see www.worldbank.org/globaloutlook).
This new website carries additional information on regional trends
and commodity prices, and tools to customize scenarios according to
individual specifications.
(China.org.cn November 17, 2004)
