WTO Beached at Cancún

Breaking Poverty's Vicious Cycle

The World Trade Organization (WTO) negotiations at Cancún have failed. The rich countries were not willing to reduce the US$300 billion-a-year subsidies being given to their farmers. This is more than the annual income of Argentina and nearly two-thirds that of India. The poor countries insisted that the rich countries reduce these subsidies. On the other hand, rich countries insisted that issues of investment, competition, and government procurement be included in the WTO. The resulting stalemate led to the collapse of the talks.

So who is the loser? Singapore’s Trade Minister George Yeo said the poor countries are the “most disadvantaged by the failure of Cancún.” Have the poor countries really made fools of themselves?

Let us examine the issue of agriculture. Reduction of agricultural subsidies in the rich countries would have provided entry to the cheaper produce of the poor countries and led to higher prices. But that is theory. The reality is exactly the opposite, because free trade also leads to greater competition among the poor countries. This competition leads to a decline in prices of produce. Thus free trade would have two opposite effects. The dismantling of the subsidies in the rich countries would lead to price increases in agricultural commodities, while intensified competition would lead to a decline in the same. The experience so far has been that the negative effect has been stronger.

A number of exercises on the post-Uruguay Round scenario have concluded that the expected rise in prices for farm products on account of reduction commitments by the developed countries would be mitigated and even neutralized by the surge in output. The recent price trends are consistent with the above prognoses. Thus, in the end, poor countries would have gotten little, even if they had succeeded in getting a reduction of the subsidies by the rich countries. To say that poor countries are most disadvantaged by Cancún is true, but it ignores the fact that they would remain similarly disadvantaged by the successful conclusion of Cancún as well.

They would have lost much by the inclusion of the so-called Singapore issues in the WTO agenda. [In 1996, at the ministerial conference in Singapore, the WTO formed working groups to examine the issues of trade and investment, competition policy, and transparency in government procurement; these are known collectively as the “Singapore issues.”—WPR] The benefit of these issues (namely, competition and investment) to the poor countries is not clear. Theoretically, bringing investment into the WTO should make it easier for the poor countries to attract world capital. But the reality is exactly the opposite. An agreement that allows free flow of capital can become a window out of which the capital of the developing countries will fly.

The Global Development Finance report of the World Bank says the developing countries have become net exporters of capital in the last two years. One, they have sent huge amounts of money to the rich countries to hold large foreign-exchange reserves. Two, there have been illegal remittances on a large scale. These illegal remittances would become legal if world capital is allowed to roam freely as envisaged under the Singapore issues. Governments of poor countries would lose control over the capital of their own country.

The net impact of the failure of Cancún for the poor countries, therefore, is as follows. On the minus side, they have deprived themselves of the potential gains from increased prices of commodities. On the positive side, they have retained their freedom to prevent legal outflow of capital and to provide support to their domestic businesses. In this background, Cancún should be seen as a gain for the poor countries.

That said, the question remains, where do the poor countries go from here? The central question is how to escape the pressure of competition among the poor countries in the world agricultural markets. Most poor countries continue to have predominantly agricultural economies. Whether free trade or not, they are in a trap. Their only solution is to diversify into manufacturing and services sectors. We have to examine how the failure of Cancún affects them in this regard.

The basic mantra of free trade is every country should do what it does best. Bangladesh should specialize in jute production and Sri Lanka in tea.

It is forgotten that the prices of these commodities have been declining. As
a result, greater specialization would not lead to higher incomes. In fact, it would lock countries into poverty.

Take, for example, a man who is a potter. Plastic and aluminum pots have rendered his products uncompetitive. He is doomed to remain poor despite being the world’s best if he “specializes” in making earthen pots. The same applies to specialization in agriculture by the poor countries. They are doomed to poverty if they continue to specialize in the production of coffee, tea, wheat, and sugar.

The development of new trades requires protection. Just as an infant needs protection to be able to take on the bully later, so also entrants into a trade need protection until they can face global competition. Of course, there is a danger that the poor countries may descend into negative protectionism—that is, protecting rent extraction and corruption by the local elites, as in Russia or pre-reform India. But such wrong use of protectionism does not mean that it is not required, just as overeating does not mean one can do without food.

The solution to this problem will not come from free trade, because that replaces the evil of rent extraction with the evil of specialization in a declining sector. The poor countries have only one way out. They have to provide good governance behind protectionist borders and diversify their economies. They have achieved a victory at Can-cún. Now it is time to follow it up with domestic good governance behind protectionist borders.