Doha and Development

William R. Cline

From Foreign Affairs, December 2005 -- WTO Special Edition

Summary:  World leaders have dubbed Doha the "development round" because they recognize how much free trade would do to foster development -- and how urgent the need for development is. For those hopes to be realized, both industrialized and developing nations must go further toward getting rid of existing barriers.

WILLIAM R. CLINE is Senior Fellow at the Institute for International Economics and the Center for Global Development and the author of Trade Policy and Global Poverty.

WHAT'S IN A NAME?

The attacks of September 11, 2001, refocused international attention on the problem of global poverty. In the United States, the Bush administration pledged a 50 percent increase in development assistance and launched the Millennium Challenge Account. Internationally, debt relief for heavily indebted poor countries was extended to include money owed to multilateral agencies such as the International Monetary Fund (IMF), and at the 2005 summit of the G-8 group of industrialized nations in Gleneagles, Scotland, members pledged to increase official development assistance by $50 billion per year by 2010.

The Doha Round of trade talks, launched shortly after September 11, was christened the "development round" in part because of the perception that the need for development was more urgent than ever. This urgency has persisted: multilateral trade negotiations should no longer be viewed as business as usual, but as a high-stakes process with important implications for global development.

One reason for the new emphasis on development is the recognition that the initial results of the Uruguay Round of talks were modest for developing countries. Their most important gain -- elimination of textile and apparel quotas under the Multi-Fiber Arrangement -- was back-loaded and has come into full effect only this year. Agricultural liberalization ended quotas but replaced most of them with tariffs and tariff-rate quotas, resulting in little actual change. Intellectual-property agreements went too far in restricting developing-country access to medicines, a problem finally addressed in a special agreement shortly before the Cancún meeting in September 2003. It is of the utmost importance, then, that Doha provide improved trade opportunities for developing countries.

TRADE, GROWTH, AND POVERTY

There is ample evidence that trade opportunities spur growth and a clear correlation across countries between export growth and GDP growth over the past two decades: each additional percentage point in export growth has been associated with an extra 0.15 percent growth in GDP. One reason for this correlation is that a bigger export base helps countries avoid external-debt problems by providing them with a good source of foreign exchange. Another is that there are productivity gains from integration with the world economy: open trade helps spur domestic technology to world-class levels and dislodge domestic monopolies that curb growth. Meanwhile, cooperation with foreign investors helps raise product quality to international standards. Studies have also confirmed a relationship between trade and productivity gains: a rise of 1 percent in the ratio of trade to GDP has been associated with a 0.5 percent increase in long-term output per worker.

Trade also helps reduce poverty by spurring economic growth, the main engine of poverty reduction. Statistical studies show that for developing countries, there tends to be a relatively close relationship between poverty reduction and growth. For example, in Asian countries, where income is relatively equally distributed, an increase of 1 percent in per capita income tends to reduce the number of people living in poverty by 2-3 percent; this "impact parameter" is 1-2 percent in Latin America and Africa.

The Doha Round offers an important opportunity for developing countries because there is still substantial protection against their products in the markets of industrial countries, and also because their economies benefit from liberalization of their own trade barriers. Protection is especially high in agriculture. The combined influence of subsidy and tariff protection in agriculture amounts to a total tariff equivalent of about 20 percent in the United States, 50 percent in the EU, and 80 percent in Japan. Tariffs are also high in textiles and apparel (10-12 percent).

In my 2004 book Trade Policy and Global Poverty, I used a leading model of world trade and protection to quantify the impact a move to global free trade would have on global poverty. The model results provided estimates of the effects on production, trade, and unskilled wages, and of the traditional income gains from more efficient allocation of resources according to each country's comparative advantage. In addition, the estimates took account of two dynamic effects: greater investment in response to new export opportunities, and productivity gains from more open economies.

My overall estimate was that some 500 million people could be lifted out of poverty (defined at living on $2 per day or less in purchasing power) over 15 years by global free trade. That would amount to a 20 percent reduction in poverty. The impact would be especially large in India, China, Pakistan, and sub-Saharan Africa.