Bridges • Volume 12 • Number 5 • November 2008
FFD Review: Making Trade an Engine for Development?
by Aldo Caliari
Discuss this articleShare your views with other visitors, and read what they have to say
In late November, member states of the United Nations will have an important opportunity to rethink how to fulfil the promise they made six years ago to place the needs and interests of developing countries at the heart of the multilateral trading system.
The Review Conference on Financing for Development, scheduled for November 29-December 2 of this year in Doha (Qatar), comes at a critical moment for the multilateral trade system. Six years ago in Monterrey, governments committed to the implementation of “the decisions of the World Trade Organisation to place the needs and interests of developing countries at the heart of its work programme.” Since then, however, the Doha Round, launched in 2001, has stalled several times, including a recent breakdown last July, and experts are rather pessimistic about its prospects. The current direction and scope of negotiations give reason to doubt the extent to which the ‘needs and interests of developing countries’ will ultimately be ‘at the heart’ of the round’s outcome.
The Doha Round and the FFD Review
In the almost seven years since the Doha WTO Ministerial that launched the new round, global trade has grown a startling 70 percent. This contradicts the assertion that market access negotiations in the WTO are essential to global trade growth and, certainly, we no longer hear references to the ‘bicycle theory’, so in vogue in the late 1990s. Clearly, achieving the larger global trade volumes that market access commitments usually enable, is not an issue. On the other hand, with soaring export volumes it has become clearer that harnessing trade for development and poverty reduction is what is proving elusive for developing countries. Against this backdrop, the FFD Review has much more potential to deliver progress on developing countries’ trade interests than a conclusion to the Doha Round.
Indeed, the mandate of the WTO as an organisation fundamentally centred on market access exchanges sets inherent limitations to what it can do to address fundamental issues developing countries face in trying to cash in on the developmental benefits of trade. In contrast, the Financing for Development process has endeavoured, from the very beginning, to place all sources of finance –including trade –in a framework of development.
Moreover, the Monterrey Consensus recognised that the question of making trade work for development was not one that could be solved by trade measures alone. The overarching mandate of the process it set up was to achieve coherence and consistency among the trade, financial and monetary systems, an approach that fora with purely trade competences, such as the WTO, are not equipped to take. The comprehensive agenda of the conference, suitable to addressing the linkages among different sources of finance, and its multi-stakeholder nature, provide the right framework for facing trade issues in a holistic manner.
The Trade – Finance Linkage
In assessing implementation of the trade and other chapters, the FFD Review should give central attention to the linkages between trade and other policy areas. This is where its policy insights can make a big difference in multilateral (but also regional and bilateral) negotiations on trade and investment. Some of these are:
• To maximise trade’s contribution to building domestic capital in the long term it is crucial to inquire about the quality of exports (value-added, technology and skills content) that can generate revenue for development. Likewise, the nature of the investment regime in which export revenues are generated is critical. As shown by UNCTAD, the bulk of the windfall gains from higher commodity prices is being drained by increased profit remittances, rather than going to use by the commodity-producing countries.
• High levels of exchange rate volatility in the world economy continue to disproportionately affect the trade performance of developing countries as compared to developed ones. Preventing the negative impacts of such volatility on domestic investment processes and access to external finance for export-oriented projects, is a precondition for countries to build and profit from trading capacity.
• Foreign direct investment is highly sought by developing countries as a way to overcome debt problems and chronic balance of payments deficits. But the more ‘successful’ the foreign direct investment, the more liabilities it will generate, thereby increasing the pressure on the balance of payments. The growing number of investment provisions in both trade and investment agreements are not guided by a proper assessment of the policy tools needed to manage such outflows and to ensure that FDI supports, instead of undermines, a healthy balance of payments.
• No country can succeed in the trading system without an infrastructure level that makes its production competitive. Rightly, developing countries have been claiming the need to enjoy more ‘fiscal space’ to accommodate infrastructure financing needs. But, in far too many countries, a large debt overhang bears witness to the dangers of governments jumping into trade-related infrastructure ventures without a proper assessment of the real trade gains that can be expected. The situation is compounded when the risks are borne by public sector resources that could have otherwise supported pressing social needs, while the revenues accrue to private providers as return on riskless investment.
• Aid for Trade can play an important role in helping developing countries that choose to develop through trade overcome some of the obstacles to do so. But Aid for Trade cannot be approached as a mere add-on to a flawed trading system in the hope it will fix its imbalances. While it would be undesirable to link aid to trade negotiations in any way, it would be equally mistaken to leave aid and trade policy-making run their separate ways. Only a realistic and joint assessment of what both aid and trade can achieve will provide a sound basis for approaching the design of both trade and aid policies, but this joint assessment has so far been missing. Trade negotiations far too often overestimate the impact aid can make, while aid commitments are, in many cases, based on flawed assessments of what trade’s income-generating potential for developing countries really is.
• Recently, it has become common practice to insert clauses in bilateral trade agreements that limit the ability of the parties to adopt exactly the type of measures that, in the light of the lessons learned from the East Asian financial crisis, are necessary for the prevention and resolution of financial crises. The newest US free trade agreements, for example, contain provisions limiting the ability of sovereign parties to restructure their debt, magnifying the uncertainties should a sovereign default occur.
• Multilateral and bilateral financing agencies continue to exert enormous influence on the trade and investment negotiating space of countries that receive their financing, a constraint obviously spared for countries not in need of such assistance. For instance, the OECD-led Aid Effectiveness agenda is seeking to condition assistance on countries opening up their government procurement. This would represent a unilateral concession that developing countries have been unwilling to make in open multilateral negotiations. How could this inherent asymmetry be recognised and factored in trade negotiations? What are their implications for the trade-related activities of institutions such as the World Bank and the IMF, or the conditionality frameworks guiding aid harmonisation processes? Should creditor-controlled institutions such as these be allowed to interfere in the domestic policy space in areas that are under negotiation as trade?
The FFD Review is in a privileged position to make recommendations so, as stated in the Monterrey Consensus, “trade plays its full part in promoting economic growth, employment and development for all.” For the sake of the multilateral trading system, it is imperative that it does. But this will only happen if the conference chooses to tackle the right issues.
Aldo Caliari is Director of the Rethinking the Bretton Woods Project at the Center of Concern in Washington, D.C.
Add a comment
Enter your details and a comment below, then click Submit Comment. We’ll review and publish the best comments.