International Trade as Engine of Growth

Uri Dadush

Director, International Trade Department

The World Bank

June 13, 2003

2

Outline

• Trade and foreign direct investment (FDI) are important for Madagascar

• Global trends in trade and FDI, and how Madagascar compares

• Policies and institutions important for trade and FDI—lessons from Integrated Framework

• Way forward for Madagascar

3

Why is trade important for Madagascar?

• Tap into global markets– Madagascar is a small player in a large and increasingly

globalized world (world economy is almost 7000 times the Madagascar economy, and almost 100 times all of SSA together)

• Doha agenda– “Development” now given center stage in multilateral

trade talks– Technical assistance provided by developed countries

(under the Integrated Framework)

4

The role of foreign direct investment (FDI) in trade

• Key role in trade in services• Key role in setting up supply chains across

countries—an increasingly important feature in global trade

• Madagascar needs much more FDI to sustain exports and growth; this requires reforms identified in IF

5

Trade has become more important in all regions

0

10

20

30

40

50

60

Developed Developing Madagascar AFR EAP ECA LCR MNA SA

89-91 99-01

Trade (exports plus imports) as share of GDP (real)

6

0

5

10

15

20

25

30

35

1970 1975 1980 1985 1990 1995

Developing countries as a group have Developing countries as a group have increased their share of the global market...increased their share of the global market...

Share of developing countries

Percent

7

Manufactures

Agriculture

Energy & other

0

5

10

15

20

25

30

35

1970 1975 1980 1985 1990 19950

400

800

1,200

1,600

2,000

Share of developing countries (lhs)

Percent US$ millions

..gaining share essentially in manufacturing....gaining share essentially in manufacturing..

8

...but the poorest countries have fared badly

0

1

2

3

4

5

6

7

Middle incomecountries

Other low income Least developed

Increase in world market share, percentage points, 1991-99Exports of non-energy goods

9

Poorest countries have failed to gain world market shares..

• Continued dependency on agriculture and labor-intensive manufactures, exports of which have not kept pace with world trade growth because of:– High tariffs in developed countries– Tariff escalation in developed and developing countries– Distorted global agricultural trade including high levels

of domestic support to agriculture– Restrictions on textile and clothing exports

• Domestic supply constraints– Border and “behind-the-border” barriers

10

Why does it matter? Integration with global markets is associated with faster growth

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

Average annual per capita growth, 1980-99

Increasing export share in GDP

Decreasing export share in GDP

11

FDI to developing countries(US$ billions)

0

50

100

150

200

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

0

400

800

1200

1600

Developing countries Global total

FDI to developing countries Global FDI

Source: GDF 2002

12

FDI is increasingly important in developing country economies

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

Developing Madagascar AFR EAP ECA LCR MNA SA

1989-1991 1999-2001

FDI as a share of GDP, in percent

13

Significant trade liberalization over the last decade

Average unweighted tariffs, in percent

0

10

20

30

40

50

60

70

High Income Developing South Asia Africa LatinAmerica &Caribbean

E.Asia Middle East& North

Africa

E.Europe &Central Asia

1988-90

1998-00

14

Trade liberalization is not enough..(1)

• Requires supporting environment and institutions: – Sound governance– Macroeconomic stability

• sound fiscal framework • stable and competitive real exchange

rates

15

Trade liberalization is not enough..(2)

• Some governance issues in Madagascar:– low capacity of the legal system to guarantee

contracts and effectively impose sanctions in the event of litigation, constraining private sector access to finance, inhibiting investments and exports

– Excessive use of discretionary measures resulting in unstable and unpredictable rules, overlapping and contradictory legislation, all of which discourage investment and trade

16

Remaining trade reform agenda

• Issues and lessons emerging from the diagnostic studies under the Integrated Framework:– Unfinished trade liberalization– Regionalism– Institutional capacity– Behind-the-border (customs, transport, other

infrastructure, supply chain logistics)– Trade and poverty

17

Unfinished liberalization (1)

• Cascading tariffs resulting in high effective protection – Madagascar needs to reduce tariff dispersion;

most imports come in either at 5 percent or 30 percent (the minimum and maximum tariffs)

• Higher protection in agriculture and labor-intensive manufacturing (in developed and developing countries)

18

Unfinished liberalization (2)

• Incomplete services liberalization

• Trade in services becoming much more important for developing countries– Madagascar has high potential in trade in

information technology (data processing) and tourism

19

0 2 4 6 8 10

High-incomeLatin America

East AsiaSouth Asia

Europe & Central AsiaMiddle East & Africa

High IncomeLatin America

Europe & Central AsiaMiddle East & Africa

East AsiaSouth Asia

Services liberalization Services liberalization

Services liberalization index

Financial services

Telecoms

Greater competitiveness

20

Rising Regionalism (1)

• Proliferation of bilateral, regional and preferential trading arrangements (RTAs)

• Generally inferior to multilateral free trade although there could be benefits:– Larger markets than otherwise– Can help accelerate trade and investment

reforms (especially North-South arrangements)

21

Rising Regionalism (2)

• Benefits from preferential trade agreements have sofar been limited (e.g. AGOA, EBA, Cotonou) – Often only small shares of LDC export baskets

eligible for preferences– Complicated and administratively-burdensome

rules of origin requirements

22

Rising Regionalism (3)

• Madagascar—AGOA has complicated customs services: – nearly one-fourth of customs resources are

devoted to checking conformity of transactions to the AGOA rules

– Special service employed by customs is counterproductive, penalizing regular operators and benefiting semi-illegal operators

– Physical inspection approaching 100 percent and supplemented by “audits” of manufacturers’ facilities to review export/import documentation

23

Weak institutional capacity

• Policy-making capacity• Public-private dialogue

– Governments need to work with industry associations and producer groups

• Export support institutions (export promotion agencies, duty drawback schemes, business development services, etc.)

24

Key “behind-the-border” agenda (1)

• Customs– Lengthy clearance times and weak risk

assessment capacities– Informal fees– In Madagascar

• recent improvements—adopting ASYCUDA and expected adoption of preshipment inspection

• Serious problems remain—low use of information technology; abuse of physical inspection, excessive delays in customs clearance

25

Key “behind-the-border” agenda (2)

• High transport costs need to be addressed: – Increasing domestic competition – Revisiting airfreight policy and landing rights– Dealing with intra-country corridor

arrangements– Infrastructure investments– For Madagascar

• transport costs for children’s clothes exported to Paris are one-third higher than those from Sri Lanka

• reducing connection costs for information technology sector would allow sector to boom

26

Trade and Poverty (1)• Agricultural trade important for poverty reduction

– 77 percent of rural households live below $1 a day in Madagascar

• External constraints to agricultural exports– high protection and support of farmers in rich countries

reduce world prices

• Domestic constraints to agricultural exports– Transportation– Post-harvest marketing infrastructure– Water control infrastructure– Quality and standards– In Madagascar, government control of sugar and cotton

industries resulting in subsidies have negatively affected the agro-food sector

27

Trade and Poverty (2)

• Poor domestic market integration reduces benefits of global integration to the poor– Transportation bottlenecks– Informal fees and internal check points– Studies and experience of Malagasy companies

show that investments in basic infrastructure increases economic output

28

Trade and Poverty (3)

• Need to strengthen social safety net– Madagascar needs to restructure public

expenditures towards pro-poor expenditures—social sectors and infrastructure

29

Way forward for Madagascar

• Anchor FDI in Export Processing Zone– Particularly urgent in light of abolition of MFA in 2004

that reduces value of preferential schemes and hence attractiveness of Madagascar as production base

– Requires customs reforms

• Restructure public expenditures towards pro-poor expenditures (social sectors and infrastructure)

• Streamline legal and regulatory framework for firms