International Conference on Financing for Development
A GRAND BARGAIN: A NEW INTERNATIONAL DEAL
I come to you with a clear and simple message: Poverty in all its forms is the greatest single threat to peace, democracy, human rights and the environment. It is a time-bomb against the heart of liberty; but it can be conquered and we have the tools in our hands to do so, if only we have the courage and focus to make proper use of them.
One of these tools is trade liberalisation. It can make a huge contribution to the generation of resources for the financing of development. Study after study has shown the enormous impact of trade liberalisation. Let me cite but one example. Everyone, globaliser or opponent, NGO or multinational, left or right on the political spectrum, would agree that health and education are the fundamental bases of any development programme. Recent studies have estimated that the cost of achieving the core Millennium Development Goal of universal primary education could be in the region of US$10 billion per year. Yet developing countries would gain more than 15 times this amount annually from further trade liberalisation, according to one study by the Tinbergen Institute.
Indeed, the staff of the IMF and World Bank estimate that reaching all seven of the Millennium Development Goals would require an additional US$54 billion annually - just one-third of the Tinbergen estimate of developing country gains from trade liberalisation. And the World Bank's Global Economic Prospects report estimates that abolishing all trade barriers could boost global income by $2.8 trillion and lift 320 million people out of poverty by 2015.
Of course, these are only estimates and we can quibble about the figures. But the basic message is clear: if governments put their minds to it, the new trade round launched at Doha can bring huge benefits. It is this immense magnitude of the benefits of trade liberalisation, which makes the work your governments are doing in implementing the Doha Development Agenda so potentially important as a source of finance for development.
Poor countries need to grow their way out of poverty and trade can serve as a key engine of that growth. But currently products of developing countries face many obstacles in entering the markets of rich countries. Rich countries need to do more to reduce trade distorting subsidies and dismantle their existing barriers on competitive exports from developing countries. So a basic priority of the international trade community must be - as the Doha Development Agenda recognised - the creation of conditions in which developing countries can maximise the gains they are able to reap from trade. This requires action in four key areas:
• Agriculture: this is the backbone of almost all developing economies. The poorest part of the population - living in the rural areas - depend for their incomes on the development of a sustainable and productive agricultural sector. Nearly 50 developing economies depend on agriculture for over one-third of their export earnings. Nearly 40 of them depended on agriculture for over 50 percent of their export earnings in 1998-2000. Yet massive agricultural support in the OECD countries undercuts the developing countries and forces even the most efficient producers out of markets where they would otherwise be earning foreign exchange. The number one element of a true development agenda will therefore be to reduce substantially such support (and to eliminate the specific export subsidies - but these are only a very small fraction of total agricultural support payments which reach a billion dollars a day). In addition, the average OECD bound tariff rate for agricultural products is four times that on industrial products. The return to developing countries in this one area would be eight times all the debt relief granted developing countries thus far. Complete liberalisation in all sectors, agriculture, services and manufactures, would amount to about eight times ODA. Rapid action is also needed on this.
• Textiles and clothing: this is the greatest export earner for many developing countries, and the negotiations must ensure that the sector is cleanly "integrated" as planned for 1 Jan 2005. Given the back-loading of this agreement, with the bulk of changes substantively improving export prospects of developing countries being left until the final year, there is every reason to be extremely vigilant.
• Tariff peaks: study after study has shown how, despite low average non-agricultural tariffs, the products in which developing countries are competitive nevertheless continue to attract relatively high tariffs (in both developed and developing countries); these must imperatively be beaten down in the negotiations if trade is to provide the needed boost to resources for development.
• Tariff escalation: even more insidious an issue than tariff peaks is that of tariff escalation, which tilts the tables against the development of indigenous processing/transformation (and thus movement up the value-added chain). If developing countries are ever to diversify their economies away from the dependence on a few primary products for most of their foreign exchange earnings, cutting them off from the most dynamic part of world merchandise trade, such escalation must be rooted out.
How do we pay for our dreams and the vision of this conference? The restrictions I've outlined are costly to the countries that maintain them. For example, protection costs the European Union, the US and Japan, from between US$70 to US$110 billion each annually. The net losses to the US associated with its textile and clothing import restrictions alone amount to over $10 billion annually.
This conference is about financing development in an era when private foreign direct investment outnumbers ODA four-fold, and is ten times the World Bank's development lending. Knowing that no country has too much invested, we should encourage an international agreement on investment. It's on the Doha Development Agenda, but many countries don't yet feel they have the ability to cope with the complexities of such negotiations.
Other important development and good governance issues such as transparency in government procurement, competition policy and trade facilitation, need direction from the highest political levels. Trade facilitation, according to APEC and UNCTAD studies, will generate huge returns. An InterAmerican Development Bank study showed how in South America a truck delivering product to markets across two borders took 200 hours, 100 hours of which were bound up in bureaucratic delays at the border.
The need for this public service infrastructure improvement is desperately urgent to protect and promote domestic property rights and justice systems. Domestic red-tape and bad governance is costly and corrosive.
The poor's assets need to be legitimised. In Latin America 80% of all real estate is held outside the law. The extra-legal sectors in developing countries account for 50% - 70% of all working people. In the poorest nation in Latin America, the assets of the poor are more than 150 times greater than all foreign investment since their independence in 1804. In one African country, it took 77 bureaucratic procedures at 31 public and private agencies to legally acquire land.
And if the US were to raise its ODA to the UN target of 0.7% it would take the richest country on the planet 150 years to transfer to the world's poor resources equal to those they already possess.
Unlocking and securing these investments, this talent and skill is the challenge. This is where we can converge with the ambitions of NEPAD and other bold initiatives.
Developing countries need not wait until the conclusion of the Doha Development Round. South/south trade in the 1990s grew further than world trade and now accounts for more than one third of developing country exports, or about $650 billion. The World Bank reports that 70% of the burden on developing countries' manufactured exports result from trade barriers of other developing countries. The quicker those walls come down, the quicker the returns to developing countries.
So the way forward is clear: you, Excellencies, should resolve at this Conference to instruct your trade ministers to ensure that their officials cast aside the petty mercantilist methodology, which has pervaded trade negotiations for so many decades, in favour of a grand bargain that would see the barriers I mentioned above (and others which persist in areas I have not mentioned) dismantled. Then trade can play its important role in generating finance for development - a role which, not incidentally, would also reduce significantly the burden on other facets of the finance for development equation.
I have good news to report from Geneva. Donor governments have kept their word, giving us increased funding in our core budget for additional technical assistance to ensure developing countries can participate fully in the new Round. On top of this our Pledging Conference gave us CHF 30 million, double our target. We must redirect ODA and technical assistance to train negotiators, build efficient customs regimes and plug porous tax systems. We must give as much attention to building up the intellectual infrastructures of skilled public servants, as we did filling in potholes, building roads and dams.
The UN agencies have been very supportive of the WTO, and partnerships with sister organizations have been formed, increasing institutional coherence and making better use of your resources. The round is successfully under way and everything, from negotiating structure, time-tabling of meetings, to consensus on chairpeople for all committees, is on schedule. The Doha Development Round can be achieved and implemented on time. Conditionality was improved by developing countries at Doha, the condition for success will be improving capacity to provide for good governance to enable them to participate, negotiate, conclude and implement our agenda. This is being done. We must and we can succeed.
Statements at the Conference