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Accra, Ghana, April 20-25, 2008


Poverty, trade and development: a note for discussion

1. Introduction

The twelfth ministerial conference in Accra will be held at a crucial time for the world economy: it seems in fact that international relations find themselves at the crossroads of divergent powerful forces, all pointing in different directions. Some of them appear to be integrating forces, others seem to be disintegrating ones.

This framework depicts new and different scenarios for least developed economies that are attempting to gain greater access to the international economic arena. This essay briefly analyses, from a development perspective, some of the key aspects of the international economic system that are of crucial importance for low-income economies. As the purpose of the paper is to contribute to the debate in preparation for the Accra conference, we concentrate on the issues that are at the core of UNCTAD mission: trade and development and omit other equally important aspects, such as financial issues.

2. Crisis of multilateralism

In recent years, there has been a widespread crisis among multilateral institutions. The United Nations, at the political level, and the IMF, the World Bank and the WTO, at the economic level, all have been criticized on several grounds. In this regard, two types of criticism are particularly strong. The first is the problem of representation, according to which the decision making power within these institutions is not allocated in an equitable way. This is due either to the fact that the international political system is now radically different from the one that prevailed until two decades ago (as in the case of the UN), or to the fact that the relative economic importance of some countries has changed rapidly (as in the case of the IMF and the World Bank). In addition to acknowledging the importance of taking into account the changed political and economic scenario, there also is the need to carefully assure that reforms will not penalize the poorest and the most slowly growing economies (mostly African countries) in a manner that reduces the voice of such countries or their representation in the decision-making bodies of international institutions.

The second criticism refers to the lack of grassroots involvement of the society in development-oriented initiatives undertaken by multilateral institutions. Such an approach presents the risk of formulating policy strategy that is not centred on the poor but rather on governments of poor countries. A greater involvement of the civil society and of non-governmental organizations (especially those located in poor countries) would help to focus development initiatives more clearly on the needs of the poor. Even greater discriminatory treatment is imposed on faith-based organization of all sorts. Despite the fact that these organizations carry the major burden of health care and education in poor countries (particularly in Africa), they very often are excluded from receiving funds and from participating in the design and implementation of development programs by multilateral institutions. This exclusion not only provides a partial and unrealistic portrayal of development programs but also deprives government and multilateral institutions of valuable potential partners.

All the criticisms presented above are serious and important and need to be addressed carefully by political and economic leaders. Very sensitive issues are dealt with in current negotiations such as agriculture, access of non-agricultural products to markets, temporary movement of labour, and more countries are involved. In the resulting slower and more complex deal-striking process it is crucial that those who design institutions and those that work in them set aside particular interests and act in the name of the common good.

The main goal of multilateral institutions is indeed to seek the common good by respecting the dignity of every single person within a pluralist approach where a genuine sense of community emerges from the irrepressible aspiration for truth, love, and justice shared by every man and woman. Every single actor then must be in the position to give his contribution to the common goal and multilateral institutions must be the place where a truly constructive dialogue is developed.

3. Regionalism vs. multilateralism

During the latest years we have witnessed to a proliferation of Regional Trade Agreements (RTA),[1] partly as a response by many countries to the slow progress of the Doha Round of multilateral trade negotiations. In principle, if RTAs meet the full spirit of article 24 of GATT, they constitute a step toward global free trade; however, in practice there is a strong debate as to whether they favour or act as a constraint to the multilateral trading system and to poor countries’ development. To give a proper answer to this question is beyond the scope of this paper; however, we offer a few reflections to promote the debate.

3.1 The problem with asymmetric agreements

Certainly, it is true that, by entering a regional trade agreement, a country reduces the incentives to extend its efforts to achieve trade liberalization at a multilateral level. However, RTAs become even more problematic when they imply agreements between advanced and developing countries. This is one of the most critical aspects: several of the new bilateral trade agreements are, in fact, far from being truly regional and involve mainly North-South trade flows.

It is said that, within RTAs, trade liberalisation has a mercantilist bias: a country benefits from receiving preferential access to the partner’s market and it is hurt by giving the partner similar access to its own market. Since developed countries, in general, already have low tariffs on most products, while developing countries have higher tariffs, North-South preferential trade agreements are likely to harm developing (South) countries. According to this point of view, for small developing countries, liberalization on the basis of receiving “Most Favoured Nation” status could remain a better option than does entry into an RTA.

More generally, whenever a regional trade agreement involves advanced and developing countries, a clear asymmetry emerges since the former inevitably have a stronger bargaining power than do the latter. Therefore, if one strictly considers the negotiation process of trade deals, a fair multilateral trading system can better safeguard the interests of developing countries. The words of His Holiness Paul VI are pertinent in this regard: “The teaching of Leo XIII in Rerum Novarum is always valid: if the positions of the contracting parties are too unequal, the consent of the parties does not suffice to guarantee the justice of their contract, and the rule of free agreement remains subservient to the demands of the natural law. What was true of the just wage for the individual is also true of international contracts: an economy of exchange can no longer be based solely on the law of free competition, a law which, in its turn, too often creates an economic dictatorship. Freedom of trade is fair only if it is subject to the demands of social justice” (Populorum progressio, n. 59).

3.2 Rules of origin and regional trade agreements

RTAs are not uniformly distributed throughout the world; to the contrary, they are organized with hubs and spokes. The hubs are mainly advanced economies (such as US, EU, Japan), but also include the new emerging trade leaders (such as China, India and Brazil), and the spokes are, for the most part, the developing countries. Since advanced economies tend to apply uniform tariffs to developing countries, the result is that the web of regional trade agreements is rather simple, if analyzed from the perspective of a hub country, but extremely complicated, when analyzed from the perspective of a spoke country that has to deal with different tariffs applied by different hubs and other spokes.

The presence of Rules of Origin (ROO) in RTAs increases the asymmetry between hub and spoke countries. While a typical firm located in the EU faces a single set of ROO when exporting to any country in Africa (these are the EU rules of origin), a typical African firm faces the EU rules of origin when exporting to Europe, those of NAFTA when exporting to the US and the Japanese ROO when exporting to Japan. It is clear that this creates a strong constraint on the production of the African firm. Such constraints are strengthened by the increasing unbundling of the value chain that implies outsourcing (or offshoring) of different tasks in different places (countries). Since efficiency requires the fragmentation of production, in order to be competitive, developing countries, need to import inputs of parts for the production of goods that they plan to export in the RTA. However, in this way, they may fail to achieve the required threshold of value added to be produced within the RTA. Moreover, among developing countries, the poorest and the smallest are often able to perform only simple assembly operations and may not be able to meet the requirement of ROO that, on the other hand, can more easily be met by larger developing countries. Therefore, it would be more desirable for advanced economies to grant developing countries more flexible rules of origin.

3.3 Positive Aspect of Regional Trade Agreements: South-South trade

While the critical aspects of RTAs predominantly emerge when there are strong asymmetries among countries involved, the major benefits can be achieved within agreements that involve similar countries. Concerning those agreements, we are interested mainly with trade between developing countries, generally called South-South trade. The promotion South-South trade is desirable for several reasons. First RTAs, involving a restricted number of countries, can be concluded faster than multilateral agreements, particularly when the issues at the centre of the debate are specific and controversial topics. Second, because tariff rates, at present, are higher in poorer countries, following South-South trade liberalization, there can be room for substantial gains. Third, RTAs can be valuable arenas where developing countries can gradually adjust to the increased level of competition implied by free trade, such experiences give domestic industries more time to adjust. In addition, within RTAs developing countries can pool resources such as technology, human capital and infrastructure and thus create the basis for a development-oriented trade strategy. Finally, and more importantly, provided that countries are not too similar, within a South-South RTA, a developing country can realize comparative advantages over manufacturing goods with a relatively higher skill contents than in trade with developed countries. This is an important aspect since it could provide an opportunity for several LDCs, strongly dependent on commodity trade, to diversify their exports.

4. Agriculture

Agriculture presently is one of the major causes of the stalemate that characterizes multilateral trade negotiations. In this context, the recent strong increase of the prices of many soft commodities calls for an adjustment of position on the part of leaders in politics and in the economy. While the high level of prices has a positive impact on the revenue of many farmers around the world, the poorest among them, whose production is just enough to cover the needs of their own family, are not going to benefit from these better prices. Low income populations will also suffer from the high prices of staple food. The difficulties will particularly increase in LDCs, which are often net importing countries, and for them augmented international prices could worsen their terms of trade and cause a net welfare loss.

Therefore, the reduction of distorting subsidies in developed countries should be accompanied by reforms in the poorest countries aimed at increasing agricultural production in a sustainable way. Improving agricultural productivity can have a positive impact on the rural economy; it can lead to an increase in food availability and to a reduction of prices in the domestic market, and thus have a positive effect on livelihood in rural areas[2].

In this development process, the role of people is essential as they act through farmer’s organizations, NGOs, governmental institutions. Not to be forgotten are the women who play an essential role in the rural world. Another fact worthy of note is that African agriculture is one of the most undercapitalized in the world and deserves more attention from international organizations.

5. Need for a policy space

While it is evident that developing countries need to reform their economic system in order to maximize the opportunities created by globalization, it also is clear that these reforms should be different across countries because the needs of different countries are different: they have different histories, different endowments, different cultures etc. Development strategies should therefore be tailored to each country’s need and should be flexible enough to accompany the evolution of these needs over time.

Nevertheless, as stressed in the previous paragraphs, developing countries presently are constrained in the application of these policies, to some extent, by the rules of the international multilateral system. The adoption of standards (environmental, labour, sanitary) and the issue of rules of origin, to name a few, all could constrain the implementation of these policies. In order to negotiate these bottle-necks, developing countries claim a special and differential treatment, in other words, more policy space. Such treatment does not undermine multilateral rules. It simply provides a greater respect for the necessary sense of equity that will guarantee equality of opportunity for every one.

6. What can be done

Notwithstanding the dissatisfaction by developing countries about the current state of multilateral trade negotiations, it is fair to say that developing and, in particular, LDC countries already enjoy trade preferences by the WTO (i.e. generalized system of preferences) and by advanced economies (for example the US’ African Growth and Opportunity Act “AGOA” and the EU’s Everything But Arms initiative “EBA”). Nevertheless, the poor countries, with few exceptions, do not seem to have benefited from these preferences. Despite the fact that since the turn of the century per capita growth rate in sub-Saharian Africa has been the highest since the beginning of the seventies, it has been lower than that of other developing countries. Moreover, the current trend is certainly not adequate to reach the Millennium Development Goals. Finally, the penetration of the products from poor countries into large European or US markets has been highly disappointing.

This simple observation suggests that, in trade agreements, the establishment of preferential treatment for LDCs is not enough to generate long-lasting effects on output growth. There is a second part of this argument which is as important as the previous one: poor countries should be put in a position to reap the benefits of trade liberalization.

So far, African countries have enjoyed the most obvious direct benefit from tariff preference: the rent transfer. The preference margin, in fact, is transferred from the importing country to the exporting country. However, preferences also can induce a significant export supply response, which, in turn, can create employment and growth in developing countries. This is the most pressing problem for LDC countries: their inability to have a prompt and important supply response in the presence of trade preferences. It seems that the major obstacle to extracting the greatest gains from trade is internal (i.e. inadequate internal supply response) rather external (i.e. inadequate access to developed countries’ markets).

It is not by chance that UNCTAD’s 2006 Least Developed Countries report was centred on the idea that the key challenge for poor countries is to develop their productive capacities. Moreover the recent Aid for Trade initiative stresses that aid is a key element for making trade work for development.

6.1 The true objective: development centred on the human being

The internal failure of developing countries helps us to refocus the debate on what is the true goal: development. Trade represents a significant opportunity for developing countries. However, it is not an end itself but rather is a means to achieve development and poverty reduction. In fact, trade opening is an essential element of the development process, but it is not per se a sufficient condition for attracting countries out of poverty. Developing countries need to be equipped in order to take the opportunity created by trade. Without the appropriate policies and prerequisites (more on this below), it is very unlikely that any country could benefit from trade.

This is why most of economic studies find a positive association between trade openness (i.e. the outcome of liberalization policies) and growth, while the evidence between trade liberalization (i.e. the policies) and growth is less clear. In other words, not all countries that liberalize trade are able to reap all its benefits. However those countries that implement the complementary policies that allow trade creation manage to grow faster.

6.2 A change in perspective: the common good as the goal for development

It must be clear that development is not only about the growth of the economy in general; it is about the development of the human being with his/her capabilities and relationships with intermediary social groups (family, social, political, cultural groups etc.) within which he/she lives. This requires a change in perspective that recognises peoples as united by a common factor, their humanity being created with the imprint of the common God creator. Only by starting from this premise can we aim, within pluralist institutions, toward the achievement of the common good, which needs to be the primary objective of any society. The common good is neither an abstract goal nor a simple list of targets. It is simply the realisation of the primary needs of the person: the need of truth, love, and justice. These needs cannot be completely fulfilled but, by nature, the human being tends to support the tension of aiming toward their fulfilment.

As the world’s bishops stated in the Vatican II Council document, “Gaudium et Spes”: “Because of the increasingly close interdependence which is gradually extending to the entire world, we are today witnessing an extension of the role of the common good, which is the sum total of social conditions which allow people, either as groups or as individuals, to reach their fulfilment more fully and more easily. The resulting rights and obligations are consequently the concern of the entire human race. Every group must take into account the needs and legitimate aspirations of every other group, and even those of the human family as a whole” (n. 26).

This is the essence of development, and it is something that concerns every person, rich and poor, because every man is always in development. In fact, development is not a target to reach; it is rather a path to follow: we can say that there is true development when persons are put in a position to follow their most important desires and needs. Following this premise, it is clear that the tension toward the common good finds its fulfilment within the relationships that human beings establish among each other. The common good, therefore, is fulfilled within belonging, within a people. As stated by His Holiness John Paul II: “Man, in keeping with the openness of his spirit within and also with the many diverse needs of his body and his existence in time, writes this personal history of his through numerous bonds, contacts, situations, and social structures linking him with other men, beginning to do so from the first moment of his existence on earth, from the moment of his conception and birth” (Redemptor Hominis, n. 14).

How can we design international rules and international institutions so that different paths for development of different peoples can be sustained and not hampered? Through two principles: solidarity and subsidiarity.

Solidarity is the responsibility of developed nations to favour economic growth in LDCs by helping less fortunate individuals to create their opportunities for development. Solidarity should be the guiding principle, not only in the definition of foreign aid, but also in the economic relationship between developed and developing countries and within regional or multilateral agreements. At present, the principle of solidarity is acknowledged by multilateral institutions in several frameworks; the generalised system of preferences designed within the WTO and other trade-related initiatives (AGOA, EBA, Aid for Trade etc.) are examples of this. However, as stressed above, there is room for extending the system of preferences to other areas such as rules of origin, non tariff barriers and intellectual property rights in order to give a real different opportunity for development to least developed countries.

While solidarity should be the spark that generates the definition of development-oriented policies both at national and at international level, subsidiarity should be the guiding principle in their design and implementation.

As stated above, development-oriented and aid policies by advanced economies and multilateral institutions mainly have been designed in accord with the principle of solidarity. However, when implemented, too may of them have failed to comply with the principle of subsidiarity. This has resulted in a marginal involvement of civil society and of its intermediate bodies, with a primary role given to the central government as recipient and manager of aid flows. This also could be a possible explanation for the fact that, at macroeconomic level, aid policies delivered far less to LDCs than was expected.

Subsidiarity not only preserves and promotes originality in the development of social life, but also implies an act of freedom by individuals who try to follow their vocations. In fact, “the characteristic implication of subsidiarity is participation, which is expressed essentially in a series of activities by means of which the citizen, either as an individual or in association with others, whether directly or through representation, contributes to the cultural, economic, political and social life of the civil community to which he belongs. Participation is a duty to be fulfilled consciously by all, with responsibility and with a view to the common good.[3] Once the conditions are created, individuals are called to act in order to pursue their vocations.

In other words, at international level, solidarity and subsidiarity imply a double responsibility: by developed countries in helping LDCs to find their path for development and by least developed countries in implementing all the necessary policies that would allow them to take the opportunities that are offered.

In this framework, the policy space could be an instrument for the implementation of subsidiarity by allowing policy actions to be diversified according to the different needs of the society. Moreover if the policy space is extended following the principle of subsidiarity the contradictions discussed above between individual policies and the rules of multilateral institutions disappear as the former are implemented in an original tension towards the common good.

6.3 Key issues

According centrality to the human being implies that the development strategy should be centred on some key issues that imply the responsibility of every actor at all levels:

  • Education. This truly is the essence of development. Only an educated person can be fully aware of the worth and dignity of the human being. Then educated people can more easily establish among themselves social relations not based on force and abuse, but on respect and friendship. In such an environment, it is easier to reduce corruption and to develop virtuous institutions that help to achieve the common good.

  • Health. There cannot be development when poor health standards persist. High mortality rates and low life-expectancy not only weaken the desires of the heart of people, but also repress economic activity since health provides the timeframe for long-term investments, including that of education.

  • Decent work: growth strategies and policies should be centred on employment creation not only because income generating activities help individuals to exit from poverty, but also, and more importantly, because work, if one is educated to its subjective dimension, becomes an instrument of self-fulfilment of the human person. According this point of view, it is crucial that, following the ILO definition, work be decent and that it is carried out under conditions of freedom, equity, security and human dignity.

  • Economic freedom. This is granted by the institutions. Without the institutional setting that provides a stable economic environment where the rule of law is enforced and property rights are respected, economic development inevitably is repressed. Note that institutions matter not only to the develop domestic entrepreneurship but also to both attract foreign entrepreneurship via foreign direct investment and to limit capital flights that currently drain domestic resources from several developing countries. In recent years, a vast body of literature has stressed the importance of institutions in economic development. We must assure that institutions take the shape that individuals give them; the proper development of an equitable and efficient institutional setting is therefore a collective responsibility of any society. Education is a clear prerequisite to facilitate this process. An educated society is able to design institutions that are centred on the human being. Moreover, it is at the institutional level that the above-mentioned principles of solidarity and subsidiarity are shaped into rules and laws which become binding.

  • Entrepreneurship. The first step toward economic development is the promotion of entrepreneurship, and this necessarily gives a crucial role to small firms. The promotion of entrepreneurship essentially is composed of two steps: 1) the development of the entrepreneurial idea; 2) the creation of an economic environment where the idea can be put into practice and shaped into concrete production. For the first step, the centrality of the human person is crucial; at the very end the development of an entrepreneurial idea is all about somebody that has the courage of “betting” on himself. The second step requires stable and efficient institutions (see above) and the building of so-called social-overhead-capital that enables the practical development of the entrepreneurial idea.

The task faced by international institutions in sustaining the development of poor countries is enormous. The first decisive step toward achieving this goal is to implement policies that recognize and place the value of the human person at their centre.

[1] As of June 2007, 380 RTA had been notified to the GATT/WTO; of these 264 have been set up since 1995, the date of creation of the WTO itself.

[2] A successful initiative in this respect is the Comprehensive Africa Agriculture Development Programme supported by the Global Donor Platform for Rural Development.

[3] Compendium of the Social Doctrine of the Church, Rome: Pontifical Council for Justice and Peace, 2004.