Development impact of the Doha Round

There has been a lot of debate about the gains from the Doha Round. It was initially estimated that the developing countries would gain tremendously and would help them not only achieve development goals (especially poverty reduction) but also bridge the income gap with the developed world. However, the exact benefit of Doha Round is still debatable. Generally, analysts use models (like CGE) and simulate the likely Doha scenarios (the likely framework that would be agreed upon) to estimate the impact of policy changes in the future as against the situation in the base year. Integrating the service sector in the modeling is a daunting task and is highly speculative as there are not convincing models to move in that direction yet.

In 2005, a World Bank study put a bombshell on the overly optimistic estimations from gains from trade. The study showed that under the "likely Doha scenario", the global gains in the year 2015 would be just $96 billion, with only $16 billion going to the developing world. This means the developing countries would see a one-time increase in income of just 0.16 percent of GDP. Also, it showed that only 6.2 million people would be lifted above the $2 per day poverty line (it represents just 0.3 percent of those living in poverty worldwide). Worse, most of these gains would go to the developed world and those that goes to the developing world is largely distributed among few countries. Half of all the benefits are expected to flow to just eight countries: Argentina, Brazil, China, India, Mexico, Thailand, Turkey, and Vietnam. Furthermore, this study by Carnegie Endowment shows that total gains from trade to be between $32-55 billion, with rich nations getting $30 billion; middle income countries like China, Brazil and SA getting $20 billion; and poor countries getting $5 billion (about $2 per head).

Amidst the increasing momentum on resuming Doha trade talks, a study by the Peterson Institute for International Economics (PIIE) has shown that the Doha deal could deliver $300-700 billion in global welfare gains, with the benefits 'well-balanced' between the developing countries. In a new policy brief, Kevin Gallagher and Tim Wise argue that these assertions rest on "shaky assumptions, controversial economic modeling, misleading representations of the benefits, and disregard for the high costs of Doha-style liberalization for many developing countries." They wonder how the economists found another  $150-$350 billion in benefits for developing countries that the World Bank missed in 2005.

The gains in the new study from agriculture and non-agricultural market access (NAMA) are of the same order of magnitude as previous studies, about $100 billion, with the vast majority going to rich countries.

The new estimates for services, sectorals, and trade facilitation are highly speculative, use methodologies that are unproven, and assume far more ambitious outcomes than seem at all likely at this point.

Peterson finds high gains in services and sectorals because they assume that developing countries will make big concessions and that those same countries are big winners (from lower prices) even if they lose significant parts of those sectors to imports.

The estimates of $365 billion in gains from trade facilitation are particularly exaggerated, because they assume not only agreement on reforms but resources for the vast investments in infrastructure and human capital needed to make them happen.

The claims of “balance” are unfounded, as developing countries receive less than one-third of the projected income gains. Previous modeling has shown that many poorer regions, such as Sub-Saharan Africa, are projected to be worse off after an agreement.

As with most such projections, researchers disregard the costs of liberalization for developing countries. Tariff losses just from NAMA reforms are estimated at $64 billion, far more than the estimated gains to developing countries. As countries struggle to recover from the financial crisis, this is not the time to cut needed government revenues. Terms of trade for developing countries are projected to decline significantly, as they shift back toward primary production rather than forward toward industrial or knowledge-based development.

 

Their recommendations:

• The US and the EU should agree to honor WTO rulings that have found their subsidies for cotton and sugar to be in violation of existing trade rules that forbid exporting products at subsidized prices.
• The WTO should take positively "special safeguard mechanism" provision, especially granting poor countries some policy space on maneuvering tariffs in staple food items like rice, corn, and wheat. This was the main reason why the negotiations in 2008 failed.
• For manufacturing sector, "special and differentiated treatment" should be re-enshrined for developing nations.
• Real gains from trade facilitation can only be captured through significant investment in infrastructure and human capital. The existing "aid-for-trade" proposals are inadequate.
• There should be a moratorium on North-South preferential trade agreements because these deals exploit the asymmetric nature of bargaining power between developed and developing nations.

Elections and economy policy

We explore the impact of elections on the quality of economic policy and governance in developing countries. We argue that not only do elections likely have a positive structural effect on economic policy, but they may also have a disruptive cyclical effect. Elections introduce frictions; they are periodic events, the timing of which may affect politicians’ incentives to reform. We also argue that achieving accountability in developing countries requires more than elections. When the quality of the electoral process is poor, elections simply do not create the structural effect we would expect.

We introduce into our estimations proxies for the structural effect of elections (the frequency of elections) and for their cyclical effect (the number of years that separate each year from the nearest election). We find that elections in developing countries have both a cyclical and a structural effect on policy.

An election that is not “free and fair” is a broken technology; it cannot be expected to hold governments accountable to citizens. Hence, the overall conclusion from our analysis is that the frequency and conduct of elections matter. Our results suggest that elections are a key instrument in achieving accountability. But elections fail to achieve accountability if they are infrequent or uncompetitive.

That’s from Chauvet L. and P. Collier, 2009. More here.

Fig: Democracy, elections, and economic policy (82 developing countries, 1978-2004)

Links of Interest (11/20/2009)

China will become of the world’s largest economy in 2032 (but not in terms of income per capita!)

Forecasting macroeconomic developments (Also, see top-down versus bottom-up macroeconomics)

An interesting Turkish blog

Gambling on a sinking nation (remember a Cabinet meeting underwater in Maldives)

The effectiveness of fiscal and monetary stimulus in depression (In short, analysis of budgets and central bank policy rates for 27 countries covering the period 1925-39 shows that where fiscal policy was tried, it was effective.)

Chavez slams GDP methodology after his economy contracted in 3Q

The impact of the Doha Round on Kenya (Kenya’s GDP will boost by a 0.2 percent; it will see losses in the manufacturing and mining sectors but gain in agricultural and processed food sectors)

Zedillo Commission Report on reforming the World Bank

WDI now in Google search (try the new stuff; its cool; see a sample below)… also, try WB Data Visualizer (you can do similar stuff in Google Spreadsheet plus copy the code and use it elsewhere!)

Not satisfied playing with data? Try WB Data Finder (a sample below):

GDP growth (annual %) - 2008

Source: World Bank Data - Annual GDP Growth Rate

The lessons on reducing poverty from the BRICs

John Perkins on stopping terrorism (trade fairly!)

Global economic crisis and South Asia

Dipak Dasgupta, Lead Economist for South Asia at the World Bank lists four reasons that have helped South Asia's growth rate from plunging down drastically as a result of the global economic crisis, which took South Asia’s growth down by about 3 percentage points (from 8.6% in 2007 to 5.6% in 2009). The World Bank expects GDP growth to recover to nearly 7 percent per annum on average in 2010-2011.

1. Remittances held up much stronger in South Asia than in other regions. In Nepal, the reliance on remittances is the highest, and without these flows, growth in consumption would have collapsed.

2. The resilience of some key export-oriented sectors also helped. Garments in Bangladesh and IT software exports from India, for instance, have held up relatively well.

3. FDI inflows to South Asia suffered a decline during the peak crisis period but have since picked-up sharply in India, Pakistan and Sri Lanka.

4. Policy responded early in the crisis, helped by domestic factors such as the pre-election fiscal spending in India. The size of fiscal stimulus announced was over 3 percentage points of GDP in India and significant also in Bangladesh. Interest rates were lowered sharply in most South Asian countries.

Gupta argues that the region faces two big challenges: food price inflation and fiscal deficits.

Rather than lumping all South Asian countries in the same basket (because high growth from three countries among eight in South Asia jacks up the regional average), there is a need to differentiate the countries into two blocs: high growth countries (India, Bangladesh and Bhutan) and low growth countries that suffer from instability (Pakistan, Nepal, Sri Lanka, and Afghanistan). This way it is easier and accurate to get a clear picture of each country’s constraints on growth, business environment, macroeconomic stability, institutions, governance structure, and bureaucracy . This WB blog post does take a differential look as required, which is not common among South Asian analysts (who actually exclusively look at India and Pakistan and refer it as South Asia; there are six other countries that are member of SAARC!)

Anyway, below are trend of some economic indicators for Nepal (compared with South Asian average).

Institutions, Incentives, Poverty and Inequality

Daron Acemoglu explains why and how there is persistent inequality and what can be done about it (fix incentives and governments):

The question social scientists have unsuccessfully wrestled with for centuries is, Why? But the question they should have been asking is, How? Because inequality is not predetermined. Nations are not like children — they are not born rich or poor. Their governments make them that way.

Economist Jeffrey Sachs, director of Columbia University's Earth Institute, attributes the relative success of nations to geography and weather: In the poorest parts of the world, he argues, nutrient-starved tropical soil makes agriculture a challenge, and tropical climates foment disease, particularly malaria. Perhaps if we were to fix these problems, teach the citizens of these nations better farming techniques, eliminate malaria, or at the very least equip them with artemisinin to fight this deadly disease, we could eliminate poverty. Or better yet, perhaps we just move these people and abandon their inhospitable land altogether.

Jared Diamond, the famous ecologist and best-selling author, has a different theory: The origin of world inequality stems from the historical endowment of plant and animal species and the advancement of technology. In Diamond's telling, the cultures that first learned to plant crops were the first to learn how to use a plow, and thus were first to adopt other technologies, the engine of every successful economy. Perhaps then the solution to world inequality rests in technology — wiring the developing world with Internet and cell phones.

And yet while Sachs and Diamond offer good insight into certain aspects of poverty, they share something in common with Montesquieu and others who followed: They ignore incentives. People need incentives to invest and prosper; they need to know that if they work hard, they can make money and actually keep that money. And the key to ensuring those incentives is sound institutions — the rule of law and security and a governing system that offers opportunities to achieve and innovate. That's what determines the haves from the have-nots — not geography or weather or technology or disease or ethnicity.

Put simply: Fix incentives and you will fix poverty. And if you wish to fix institutions, you have to fix governments.

Unemployment numbers for Nepal

It has been reckoned that around 350,000 new work forces enter into the job market each year and around 200,000 of them are finding jobs in foreign countries. Finding jobs for fresh 150,000 youths that enter the employment market is one of the major problems…

The Labor Survey conducted last year had showed 49 percent of urban and 26.9 percent of rural population was underutilized, which means they are not getting sufficient works. It also showed that unemployment has gone up to 2.1 percent of the total population from 1.8 percent in 1998/99.

Source here

Don’t believe that there are just 0.588 million people unemployed (out of about 28 million) in Nepal. The real number is much more higher. It has to do with how we calculate unemployment rate (=percentage of total labor force who are unemployed but are actively seeking and willing to do a job). Students, military personnel, retired people, parents staying at home, prisoners, people working in places that do not report income, and discouraged workers are not included. This means a whole lot of people are not included. A lot of the people in Nepal are discouraged workers, who gave up searching for jobs, thus excluding them from the labor force (which is the sum of employed and unemployed people).

Moreover, millions of workers in the agricultural sector (such as ‘hidden’ unemployed, non-wage workers, in-kind contract workers, etc) are not counted because their status does not fit within the definition of unemployed people. There are many of them because over 70 percent of the population depend on agriculture for living. Otherwise, won’t you be surprised to hear that unemployment rate in the US is 10.2% and in Nepal it is only 2.2%!

Trade distortions, the Doha Round, and food price volatility

Kym Anderson has an interesting piece about the relationship between trade distortions and food prices. He argues that sudden rise in global food prices are driven by major policy shifts like tariffs and subsidies, leading to a tit-for-tat behavior by countries that produce them.

Trade-related policies contribute to agricultural market volatility and the volatility around the long-run-trend terms of trade slows national economic growth, he argues. The main point of the piece: continue with agriculture liberalization. Here is a similar argument. The disagreements on agriculture liberalization has been holding up Doha for eight years now. The author says that the more barriers in this sector, the more volatility. So, seeking a Special Safeguard Mechanism (SSM) is not good to reduce volatility. [But, how can the Doha Round pass without addressing these issues?]

The price hike of 2008 was also partly a consequence of policy changes in the US and EU, namely their decision to subsidise biofuels and set mandates/targets for their use domestically in response to rising fossil fuel prices. It led other governments to impose food export restrictions to insulate somewhat their consumers from the price rise, which pushed international food prices even higher and, domino-like, drove more exporting countries to follow suit. Some food-importing countries also lowered temporarily their import tariffs, to reduce the rise in their domestic food prices.

The parallel movement of food and energy prices is consistent only after the previous half-century. The author finds that the coefficient of correlation between 1960 and 1999 is -0.18, compared with 0.84 for 2000-07. The comparison may not be quite accurate because of the timeframes between these two periods but the high and positive R-squared value for 2000-07 gives us some information about the way food and energy prices move (in tandem). Note that agriculture constitutes around 3% of global GDP, 6% of global trade, and 8% of global exports (exports of non-farm primary products is 31% and all other merchandise exports is 25%).

Governments of many developing countries harmed their farmers directly by taxing their exports and indirectly by encouraging manufactures and overvaluing their currencies. This meant that price incentives facing farmers in many developing countries were depressed by both own-country policies and the protective policies of high-income countries.

The good news is that many developing countries have reduced hugely their anti-agricultural export policies, and even some high-income countries have lowered their trade-distorting assistance to their farmers – albeit replacing part of it with more-direct assistance to farmers that are only somewhat decoupled from production.

The argument against SSM and giving some policy space to deal with contingencies in the developing countries are not consistent with the evolving consensus among experts that such measures need to incorporated in the Doha Round. Without these measures it would be hard to deal with national crisis triggered by disruptions in agriculture production and trade. For instance, what happens if there is extended drought in a country and producers chase after higher priced markets abroad-- this will lead to starvation. To check the population from starving, some contingency measures are essential. Some hooks to full agriculture trade liberalization is required for the survival of the Doha Round.

Even a recent WTO World Trade Report emphasized for inclusion of “trade contingency measures”. The report argues for “trade contingency measures” that would give some policy maneuver for countries to deal with domestic pressure to prop up domestic markets affected by the crisis. The contingency measures discussed in the report include safeguards measures, anti-dumping and countervailing measures, the re-negotiation of tariff commitments, the raising of tariffs up to their legal maximum levels, and the use of export taxes. These are needed because too little flexibility in trade agreements may render trade rules unsustainable.

Also, note that the drastic rise in food prices was not necessarily triggered by protectionist measures, which was the resulting response to the food crisis (which was especially caused by demand factors).Trade distortion is one of the many causes of the drastic rise in food prices:

• Rising incomes per head in the emerging economies
• Changing pattern of food consumption (shift from food to meat reduces food supply as it is being used to rear animals)
• Subsidised biofuels production in the West raise demand for maize
• Aggregate maize, rice, and soybeans production stagnated in 2006 and 2007 (partly due to drought)
• Increasing speculation because of declining stock

Martin Wolf dismisses the idea that liberalization is the only answer:

The political focus of the Doha round on lowering high levels of protection is largely irrelevant. The focus should, instead, be on shifting the farm sector towards the market, while cushioning the impact of high prices on the poor.

The move towards genetically modified food in developing countries is as inevitable as that of the high-income countries towards nuclear power. At least as important will be more efficient use of water, via pricing and additional investment. People will oppose some of these policies. But mass starvation is not a tolerable option.