Boustead Annual Globalisation Lecture

University of Nottingham Malaysia

‘The WTO and Developing Countries’ Policy Space’

Chris MilnerSchool of Economics and GEP

University of Nottingham

The ‘Policy Space’ Issue• Criticism that WTO constrains or may in future constrain

policy options and actions of developing countries

– e.g. UNCTAD Trade and Development Report (2006), ‘…the rules and commitments of the international trading regime restrict the de jure ability of developing nations to adopt national development policy.’ (p167)

– might view any loss of choice and constraints on autonomy as undesirable

– but, more typically an issue because presented as restricting use of heterodox policies (e.g. Rodrik, 2004)

Positive and Normative Issues• How might the WTO constrain policy

space in developing countries?

• Does (or will) the WTO constrain policy space in developing countries?

• Should WTO constrain developing countries’ policy space (and by how much)?

Some Context• WTO commitments affect only trade and

trade-related aspects of ‘policy space’

• Actual trade policy space affected by other institutions and agreements– unilateral (e.g. structural adjustment reforms)– bilateral ( e.g. ACP countries and Economic

Partnership Agreements with the EU)– regional (e.g. membership of RTAs)

Potential WTO Influences on Policy Space

• Core rules of transparency, non-discrimination and reciprocity– binding of tariffs and lowering of MFN tariffs

• Constraints on instruments (e.g. NTBs, export subsidies)

• Recent disciplines on new and beyond border areas– services, TRIMs and TRIPs

Potential WTO Influences (continued)

• But also:– Exemptions to rules (e.g. regional integration,

preferences for developing countries)– Differentiation of rules for developing countries (e.g.

infant industries, balance of payments, export subsidies)

– Safeguards and defensive measures allowed– Protection of national interest through dispute

settlement mechanism and negotiating framework

Potential WTO Influences (continued)

• WTO rules seek to protect autonomy and enhance policy space, as well as constrain policy actions– defensive trade measures– protection of small countries through rules and

dispute settlement– enhancing bargaining power through coalition activity– improving export opportunities through reciprocity and

constraints on importing countries

Actual WTO Impact on Policy Space

• Membership of GATT/WTO has not had a major impact on bindings or tariffs of developing countries

• Other sources of tariff and NTB reforms (unilateral and regional)

• Very limited use of industrial and export subsidies

Binding Coverage and GATT/WTO Membership (Sub-Saharan African countries)

0102030405060708090

100

0 10 20 30 40 50 60 70

Membership (years)

Bin

din

g c

overa

ge (

%)

Bound and Applied Tariffs Compared: Sub-Saharan Africa (all products, 2005/2006)

0.0 50.0 100.0 150.0

All countries

Burkina

CAR*

Dem. Rep.

Guinea*

Lesotho

Namibia

Rwanda

South Africa

Togo

percent rate

Average (unwt) MFNApplied Tariff Total

Average (unwt) BoundTariff Total

Bound and Applied Tariffs Compared Across Product Groups: Burundi

(2006)

0 50 100 150

Animal products

Fruit, veg. & plants

Cereals etc

Sugars & confections

Cotton

Fish and products

Petroleum

Wood, paper etc

Clothing

Non-elect. machinery

Transport equipment

percent rate

Average appliedtariff

Average boundtariff

Actual WTO Impact(continued)

• Evidence of greater WTO influences on new members (e.g. Saudi Arabia, China, Vietnam)– though most developing countries are already

members– and membership is not compulsory!

• Concerns about future tightening and stricter implementation of rules– least developed countries exemptions from tariff-

cutting requirement in Doha negotiations– negotiable!

‘Policy Space’ and First Principles

• Possible positions:

– more trade policy choice is better than less?

– WTO rules restrict heterodox options, with harmful effects?

– there are positive net benefits from restricting the policy space?

More Policy Choice Is Always Better?

• Surely not – recall pre-trade reform conditions in sub-Saharan Africa– complex border taxation of imports– extensive use of NTBs– domestic firm entry restrictions– implicit and indirect taxation of exports– lack of transparency, pervasive rent-seeking,

under-utilisation of capacity, and random and systematic distortions to resource allocation

Effective Protection by Sector: Burundi (1984)

SECTOR RANGE OF RATES %

Agricultural Products -2 → 4

Food, drink and tobacco 86 → 2017

Leather and footwear -4 → 102

Textiles 12 → 124

Wood and paper products 43 → 7896

Metal products 16 →

Chemicals 9 →

Pharmaceuticals 1 →

Construction goods 63 → 72

Source: Greenaway and Milner (1990)

Selective SSA Information on Pre- and Post Reform NTBs and Exchange Rate Distortions

Pre-Reform (1) Post-Reform (2)

Country NTB Coverage Black Market Premium (average)

NTB Coverage

Black Market Premium (average)

Cameroon hundreds - hundreds -Cote d’Ivoire 38% - 38% -Ghana 100% 985% 2% 17%Kenya 71% 16% 0% 9%Madagascar 100% 37% 0% 13%Malawi 100% 51% Few 12%Mali 58% - 0% -Nigeria 100% 210% 17% 27%Senegal - - 15% -South Africa 55% 0% 23% 3%Tanzania 100% 242% 100% 119%Uganda - 303% 5% 79%Zaire 100% 71% 100% 9%

(1) Various years, usually 1980s (2) Various years, usually early 1990sSource: Dean (1995)

Restricts Heterodox Options?

• Challenge the interpretation of some of the claims made for protection (e.g. in India)

• Question whether some of the heterodox success cases (e.g. South Korea) would still have been successful with more orthodox policies

• Doubt whether many of the least developed countries have the human capital and institutional capacity to implement the East Asian model

Net Benefits of Restricting Trade Policy Space?

• Avoids costs of excessive protection and poor intervention

• Brings benefits of greater openness (subject to sensible timing, sequencing, phasing and adjustment support measures)

• Enhances policy space (export market access) if reciprocated by other countries

Overall Assessment and Conclusions

• WTO has not significantly affected developing countries’ policy space to-date

• The effects (constraints and enhancements) may increase in future– but scope for phased or gradual affects and

differentiation within WTO rules• Many of the key pro-development issues are

outside the WTO agenda– improving governance, institutions, human capital and

infrastructure

• Countries want to join the WTO club!

GATT/WTO Membership

0

20

40

60

80

100

120

140

160

180

total membership

new members