In this extract from his latest book, former World Bank chief economist Joe Stiglitz argues that a trade regime based on the principle of universal reciprocity regardless of circumstances does little to help developing countries.
Doha failed. While it may be difficult to define precisely what is a fair global trade regime, it is clear that the current arrangements are not fair, and it is clear that the development round will do little to make the trade regime fairer or more pro-development. I believe, however, that it is possible to design a global trade regime that promotes the wellbeing of the poorest countries and that is, at the same time, good for the advanced industrial countries as a whole – though some special corporate interests might well suffer. This was, of course, the promise of Doha. The reforms would cost the developed countries little – in most cases nothing at all, as taxpayers would save billions from subsidies and consumers would benefit enormously.
While Doha has failed to deliver on its promise, some time in the future the challenge of creating a fair-trade regime – and a trade regime that will give the poor countries of the world the opportunity to develop through trade – remains. There is a full agenda of reforms, going well beyond the agricultural issues on which so much of the discussion has focused: reforms that are both pro-poor and pro-development. These reforms are what a true development round would look like.
Developing countries are different from more developed countries – some of these differences explain why they are so much poorer. The idea that developing countries should, as a result, receive ‘special and differential treatment’ is now widely accepted and has been included in many trade agreements. Developed countries are allowed, for instance, to deviate from the most favoured nation principle by allowing lower tariffs on imports from developing countries – though even with this so-called preferential treatment, developed country tariffs against imports from developing countries are four times higher than their tariffs against goods produced by developed countries.
Preferential treatment
The current system, however, makes preferential treatment completely voluntary, provided by each of the advanced industrial countries on its own whim. Preferences can be taken away if the developing country does not do what the granting country wants. Preferential treatment has become a political instrument, a tool for getting developing countries to toe the line.
One single reform would simultaneously simplify negotiations, promote development and address the inequities of the poorer countries, without reciprocity and without economic or political conditionality. Middle-income countries should open up their markets to the least developed countries, and should be allowed to extend preferences to one another without extending them to the rich countries, so that they need not fear that imports from those countries might kill their nascent industries.
Even the advanced industrial countries would benefit, because they could proceed more rapidly with liberalisation among themselves – which their economies are capable of withstanding-without having to satisfy the worries of the developing world. This reform replaces the principle of “reciprocity for and among all countries – regardless of circumstances” with the principle of reciprocity among equals, but differentiation between those in markedly different circumstances.
The EU recognised the wisdom of this basic approach when in 2001 it unilaterally opened up its markets to the poorest countries of the world, taking away (almost) all tariffs and trade restrictions without demanding political or economic concessions. The rationale was that European consumers would benefit from lower prices and more product diversity. While it would cost European producers a negligible amount, it could be of enormous benefit to the poorest countries, and it was a strong demonstration of goodwill.
Open up markets
The European initiative should be extended to all advanced industrial countries, and markets should be opened up not just to the poorest but to all developing countries. (In one of the high points of hypocrisy and cynicism in the Hong Kong meeting in December 2005, the US offered to open itself up to 97% of the goods produced by the least developed countries, a number carefully calibrated to exclude most of the products, such as Bangladeshi textiles and apparel that it wanted to keep put. Bangladesh would be free, of course, to export jet engines and all manner of other products, which are beyond its capacity to produce.)
Development is hard enough: we should not restrict what developing countries can do to help themselves grow. But that is what the Uruguay Round has done, as it restricts their ability to use a variety of instruments to encourage industrialisation.
There is a difference between the effects on the global economy of agricultural subsidies given by the US and Europe, which are allowed, and the subsidies that developing countries might want to give to help start new industries, or even to protect their industries and farmers against subsidised competition, which are prohibited. When the US subsidises cotton, global prices are affected; farmers in the developing world are hurt because of US generosity to its farmers. (Economists call this an ‘externality’.)
But if Jamaica protects its milk producers, global prices are unaffected. Moreover, developing countries have limited tools to deal with the consequences of liberalisation: the Jamaican dairy farmers who are put out of business as a result of America’s highly subsidised milk industry have few viable alternatives. There are few jobs in the cities, and turning to some lower-paying alternative crop may make the subsistence farmer even poorer. The government has a tough choice to make: supplement the income of the individual farmers or spend government funds on an investment that the whole country needs. There is not enough money to do both. Protection against America’s subsidised milk may be the only sensible alternative, at least in the short run.
More leeway needed
If the extended market access proposal is adopted, then countries will have the scope to pursue their pro-development strategies and policies aimed at protecting their very poor citizens. But if it is not, then there must be exceptions that allow developing countries more leeway, especially to utilise uniform revenue-raising tariffs (the effect on imports being little different from that of a change in the exchange rate) and temporary industrial subsidies.
As Europe has rightly pointed out, the US often uses its defence expenditures to subsidise a range of industries. Boeing has benefited from military expenditures in aircraft design, and the software industry has benefited enormously from a whole range of government expenditures that have helped develop the internet and even the browser.
Indeed, commercial benefits are often put forward as one of the justifications for the huge level of defence expenditures. The US is wealthy enough to afford an inefficient industrial policy hidden within its military; developing countries are not – and they should be free, if they choose, to have one appropriate to their circumstances.
Extracted from Making Globalization Work by Joseph Stiglitz, published by Allen Lane on September 7, price £20. Copyright © Joseph Stiglitz 2006. www.penguin.co.uk
