Guest blogger Richard Kozul-Wright lays out an agenda for G20 leaders to address developing country needs in global economic governance.
When the latest efforts to close the Doha Round ended abruptly in December 2008, entrenched negotiating positions were a factor; but underlying systemic issues, ignored in many accounts of the stop-and-start history of the Round since 2001, were of greater significance: these include countries trading more but earning less; the dangers of premature deindustrialization; a growing technological divide and diminishing policy space. While addressing these systematic challenges will be key to the future stability of the multilateral trading system, the immediate threat to international trade comes from a deeply dysfunctional system of unregulated finance. Fixing that should be the urgent priority of the international community.
There have been persistent concerns among developing countries about the Doha Round’s development content and the reluctance of the advanced countries to allow them to define that content, as originally envisaged in the 2001 Doha Ministerial Declaration. The lop-sided bargain that eventually emerged from the Uruguay Round has stood as a warning to developing countries against compromising on development principles. Concerns surfaced relatively early in the Doha process over the treatment of such issues as cotton subsidies, as well as over the perceived neglect of a series of development-related issues, which were either left outstanding at the end of the Uruguay Round (as was the case with agriculture) or emerged during its implementation (particularly around so-called “trade-related” issues such as intellectual property).
In July 2007, the Secretary-General of the United Nations Conference on Trade and Development (UNCTAD) proposed five key objectives that needed to be attained for the Doha Round to realize its development promise. These objectives embraced critical issues such as real market access for developing countries’ exports of goods and services; improvements in multilateral trade rules to address existing asymmetries between developed and developing countries; adequate policy space for developing countries to align trade agreements with national development strategies and to allow a more effective special and differential treatment of developing countries; “development solidarity” in meeting the implementation costs of the adjustments that developing countries would be required to undertake; and coherence between regional and multilateral trade agreements.
The failure of governments to make headway on these objectives goes a long way to explaining why the Doha negotiations have struggled to reach a successful and balanced conclusion. In his assessment of the breakdown in the July negotiations on agriculture, Ambassador Falconer warned against the “illusion” of a quick technical solution, pointing instead to persistent and serious political divisions. Since then, the mounting global economic crisis has not only deepened those divisions but added new ones.
Already in July 2008, there were clear signs, particularly in the United States, that financial markets had become fragile, with potentially catastrophic consequences for all countries if a crisis were to break and spread to the real economy. The July (mini) ministerial meetings of the World Trade Organization (WTO) also coincided with concerns in many developing countries about food and energy security. In addressing these concerns, some net importers of grains were overwhelmed by the skyrocketing costs of food subsidies, while many food producers introduced new export restrictions to enhance national food security. It hardly seems surprising, therefore, that one of the stumbling blocks leading to the halt of negotiations related to provisions that allowed developing countries to temporarily increase tariffs on agricultural products in times of economic and social difficulty (see http://ictsd.net/news/bridgesweekly/volume12/number27/).
With the global crisis now in full swing, the overriding issue that economic policy makers (including trade negotiators) must confront is the threat to long-term growth and stability. Countries are seeing a sharp drop in trading volumes, commodity prices have already dropped significantly, and trade credits have begun to dry up. Growth forecasts across the developing world are being revised drastically downward.
At the international level, one response has been to try to separate the good and bad parts of the global economy, with calls for further liberalization of trade along with greater regulation of finance. But in today’s interdependent world that would seem to be a debatable distinction. The strong growth in trade volumes after 2002 was itself the result of the lop-sided and unsustainable finance-led boom. The spread of toxic financial assets that helped sustain that boom was made possible, in part, by the liberalization of financial services. Moreover, it is now clear that the current rules and safeguard arrangements in the trading system are unsuited to serious economic downturns associated with instability in financial flows, gyrations in currencies and commodity prices, and increases in debt service obligations that arise from large scale and widespread shocks.
Leaving countries to respond as best they can to shocks in a largely liberalized trading system has proved a failure. Further liberalization in the middle of the most severe global economic shock in 80 years is more likely to prolong than resolve the crisis.
The original architects of the Bretton Woods system understood that a well regulated system of global finance and currency exchanges had to be in place if growth and employment objectives were to be consistent with moves towards a more open trading system. Indeed, Keynes explicitly recognized that “It is very difficult while you have monetary chaos to have order of any kind in other directions…” (J. M. Keynes, “Letter to Lord Addison, May 1944″). As in this earlier period, the big challenge facing the international community today is correcting the global economic destruction and imbalances left by the “juggernaut” of international finance.
There is a genuine concern that “beggar-thy-neighbor” trade policies, among which tariff protection is the most visible though not necessarily the most damaging, will become the policy response of choice if the crisis continues. However, the real question on which the economic prospects of all countries depends is whether, after three decades of responding to the siren call of the self-regulating market, multilateral mechanisms can be quickly put in place to support rapid and inclusive recoveries.
At present there is no assurance that international liquidity will be supplied on a sufficient scale to enable countries to make measured adjustments to economic shocks; no forum where difficult national policy choices can be discussed without degenerating into propaganda wars. Nor is there a system of multilateral surveillance and coordination that can insist on greater coherence among monetary, fiscal and exchange-rate policies, particularly of the richest countries. Mechanisms to bring stability to commodity markets, on which many of the world’s poorest countries still rely, or to ensure orderly debt work- outs are completely missing. Development finance to help economies diversify their output and trading profiles, the surest safeguard against shocks, is woefully inadequate.
What is certain is that this time around, addressing these gaps cannot rely on a single political and economic hegemony, particularly one which is itself so heavily indebted. This time around any “new deal” to promote and sustain a broad-based recovery can only succeed by extending full representation in the institutions of international economic governance to the whole family of states, strengthening their voice, and ensuring sufficient resources to preempt beggar-thy-neighbor responses and support a more inclusive development agenda.
Discussion of how to move towards a properly regulated international economic system is underway in various fora, including among the G-20 leaders. Still, the global institution that possesses the most credibility for implementing an integrated approach to multilateral reform is the United Nations. The member states of the United Nations recognized the need for such an approach at the Follow-up International Conference on Financing for Development to Review the Implementation of the Monterrey Consensus, held in Doha in late 2008. They agreed that a serious debate was needed to find ways to improve “the inclusiveness, legitimacy and effectiveness of the global economic governance structures” and to strengthen cooperation among the United Nations, the Bretton Woods institutions and the WTO. As the world economy faces its greatest threat since the Great Depression, the fierce urgency of holding that debate can no longer be ignored.
Richard Kozul-Wright is a senior economist at UNDESA in New York. His latest book (with Paul Rayment) The Resistible Rise of Market Fundamentalism was published in 2007 by Zed. The opinions expressed are his own.
This article is part of a forthcoming compilation on a trade agenda for G20 leaders edited jointly by Dr. Carolyn Deere Birkbeck (Global Economic Governance Programme) and Ricardo Meléndez-Ortiz (International Centre on Trade and Sustainable Development (ICTSD)). The compilation will be published in mid-March 2009.
These crystallise the issues and the attendant challenges, and also assist in providing a broader appreciation of the changing global economic landscape.