How to Spend $50 Billion to Make the World a Better Place
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144 How to Spend $50 Billion to Make the World a Better Place market good. This goes against the opinion of most water
planners, who see that “water is different” because it is
essential for life.
However, he also argues that the health benefits of uni-
versal water access are received not just by individuals but by communities as a whole, and that these benefits constitute a public good. Overall, therefore, his view is that water supply is a market good (and therefore can be supplied privately) but must be subject to public regulation.
He characterizes the two general opportunities pro-
posed by Rijsberman as bottom-up approaches, based on
the experience that centralized top-down initiatives have
often failed. While acknowledging the sense of this, he also argues for a comprehensive approach using appropriate
institutional reform. In his view, the problem is to understand what the barriers are to individual projects and to set up an appropriate program to deal sensitively with these.
Paying for provision of water and sanitation is nearly
always socially acceptable, as long as basic provision to the very poorest can be made at little or no cost. However, tariffs need to be designed sensitively, and there is no “one size fits all” solution.
In Boland’s view, a major problem is how to predict the
degree of successful implementation. Given that many of
the easier projects have probably already been taken up,
future extensions may well be more difficult. It is probably unrealistic to expect all goals to be fully achieved, but even falling short by a large margin would yield enormous benefits. With many of the projects, there are no economies of scale, so projects could be implemented selectively on the
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The Water Challenge
145
basis of a fuller assessment, giving even higher benefit-cost ratios in individual cases.
In summary, Boland believes the identified opportuni-
ties are manifestly worthwhile, but thinks their goals should be more realistic.
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KYM ANDERSON
9
Subsidies and Trade Barriers
The challenge
Eliminating government subsidies and trade barriers has
clear economic benefits. Despite evidence that those poli-
cies harm the economies that impose them, and are partic-
ularly harmful to the world’s poor, governments continue
to intervene in markets for both goods and services. This
chapter argues that phasing out these trade-distorting policies should be the highest priority among the opportunities assessed. Not only would this strategy have a direct effect on poverty reduction, but there would also be indirect benefits across the full range of Copenhagen Consensus challenges.
Moreover, the relatively small costs of adjustment to reform would leave plenty of the notional $50 billion to be spent on second priorities.
The most recent big surge of protectionism was about
75 years ago. Following the Second World War, govern-
ments of major industrial countries – well aware of the
economic rationale for free trade – sought ways to reduce
import tariffs. But politicians fear making changes that may 147
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148 How to Spend $50 Billion to Make the World a Better Place be associated with politically unpopular redistributions of jobs, income, and wealth. The challenge therefore involves finding politically attractive ways to phase out the remaining distortions in world markets for goods, services, capital, and, potentially, even labor.
The arguments for and against removing subsidies
and trade barriers
Free trade is often criticized by non-economists on the
assumption that it has negative social and environmental
consequences, as evidenced by the burgeoning “antiglobal-
ization” movements. But these need to be weighed against
various positive social and environmental consequences as
well as the net economic benefits – both static and dynamic –
of meeting the challenge.
Static gains arise from countries producing more of the goods and services they can provide most efficiently, and
less of what others can produce more efficiently. Each country will maximize the value of its output of goods or ser-
vices and these will be sought by trading partners because they are competitively priced. After trading, each individual country will be better off than in a world without trade.
This is commonly referred to as the principle of compar-
ative advantage. The smaller the economy, the greater the
static gains from trade tend to be as a share of national
output.
Additionally, dynamic gains result as increased trade fuels economic growth. Typically, freeing up imports of
intermediates and capital goods encourages entrepreneurs
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Subsidies and Trade Barriers
149
to make greater investments in production capacity. Evi-
dence gathered during the second half of the twentieth
century shows that countries that have liberalized their
trade have enjoyed an average 1.5% increase in annual GDP
growth compared with the pre-reform rate. Of course, gov-
ernments also need to do other things right to attract investment, such as protecting property rights and maintaining
financial and political stability. Free trade is a necessary, but not sufficient, condition for sustained economic growth.
Despite the potential gains from trade, most govern-
ments retain at least some protectionist policies. The reason is political. Although the total wealth of an economy
increases when trade is liberalized, owners of capital and workers in the most protected industries may lose, and any compensation typically covers only a small fraction of those losses. The losses are concentrated in the hands of relatively few people who are prepared to lobby the government and
support protection-minded politicians, whereas the benefits are spread widely across industries and the general population such that the recipients face a free-rider problem in banding together to lobby for reform.
Governments are also influenced by the arguments of
NGOs who claim globalization is adding to social and
environmental problems in both rich and poor countries,
despite evidence to the contrary.
There are, however, a number of ways in which trade
reform can be fostered or initiated, including:
r Better dissemination of the case for free trade by governments, thi
nk tanks, and those directly involved in import
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150 How to Spend $50 Billion to Make the World a Better Place and export, to counter lobbying by NGOs, trade unions,
and other special-interest groups.
r Technological changes – for example, the revolution
in information and communications in the last two
decades – that can dramatically lower the costs of doing
business internationally.
r Unilateral liberalization by other countries, which can
highlight the benefits of open markets.
r Opportunities to join international trade agreements,
which can provide more politically acceptable alterna-
tives to unilateral liberalization (although bilateral and regional deals have less potential to add to national
and global welfare than broader multilateral trade
agreements).
The opportunities
There are four opportunities considered here:
r Opportunity 1 is to move to a world free from subsidies and trade barriers: free trade in its purest form.
Although this seems politically unlikely at present, it
gives a benchmark against which other options can be
measured.
r Opportunity 2 is to successfully complete the current round of WTO negotiations: the Doha develop-
ment agenda. This would involve a global legally binding
partial trade liberalization, with all participants on an
equal footing, as WTO members account for more than
95 percent of global trade. Success is far from assured,
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Subsidies and Trade Barriers
151
however, and the timeline for its completion is likely to
extend significantly beyond the current deadline of the
end of 2004 unless extraordinary efforts are made by the
major players.
r Opportunity 3 comprises a range of more limited,
but nonetheless important, regional trade agreements,
for example via the Asia Pacific Economic Coopera-
tion (APEC) forum or European Union (EU) enlarge-
ment. The APEC agreement is non-binding but also
non-preferential – it gives market access to all trading
partners of each signatory (a so-called ‘Most Favored
Nation’ or MFN reform) and is thus effectively a sub-
set of WTO reforms. EU expansion is an example of a
reciprocal preferential agreement: All participants have
access to each other’s markets, but their external trad-
ing partners are excluded from the deal. Following the
EU’s expansion eastward in May 2004, the most ambi-
tious reciprocal preferential agreement in prospect is
the proposed Free Trade Area of the Americas (FTAA),
which would bring together all the economies of North,
Central, and South America, so it is this agreement
which is considered here.
r Opportunity 4 covers agreements that enable preferential market access for exports from developing countries
to rich economies: so called non-reciprocal preferential
trade agreements. EU countries have allowed imports
from former colonies on this basis in the past, but the EU
proposal to provide duty- and quota-free access for all
least-developed countries is being embraced by numer-
ous advanced industrial economies.
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152 How to Spend $50 Billion to Make the World a Better Place Benefits and costs of reducing subsidies
and trade barriers
Economic benefits
Most published studies reviewed in this chapter employ
computer simulation models of the global economy of the
computable general equilibrium (CGE) type. These have
increasingly been used for analysis of multilateral trade
reform since their introduction in the late 1970s. Although by no means perfect (after all, they are only models), they capture the economy-wide nature of adjustments and yet
include sufficient detail of industrial sectors to be useful to a wide range of parties.
These models have been used by trade economists most
commonly to analyze the effects of reducing trade barri-
ers and agricultural production and export subsidies. Non-
agricultural subsidies are not considered because they are not the main focus of WTO negotiations, precise data on
them are at best patchy, and, in any case, agricultural subsidies are estimated to account for some 40% of all government subsidies.
Opportunity 1 – Removing all trade barriers
and agricultural subsidies
Relatively few studies have considered this most radical
option. The benefits derived vary with assumptions, rang-
ing from $254 billion per year from 2005 (with $108 billion of this accruing to developing countries) to $2,080 billion
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Subsidies and Trade Barriers
153
(with $431 billion to developing countries). The higher
figure assumes also liberalization of services, including
foreign direct investment. Three other studies give benefit figures falling between these two extremes.
All of the studies show agriculture to be the main con-
tributor to gains, accounting for 65–70% of the total. This reflects the high degree of protection from farm imports
in nearly all countries (both rich and poor) and the direct government support of farming in some rich countries.
None of the studies examine the effect of freeing com-
pletely the international movement of labor. However, it was recently estimated that even a modest relaxation – allowing temporary immigration to increase industrialized country
labor forces by just 3% (which would involve 16.4 million
workers from developing countries) – would increase global income by $156 billion. Most of the benefit would accrue to the developing country migrants.
Opportunity 2 – Reducing trade barriers and
agricultural subsidies in the WTO’s Doha round
This so-called “development” round of trade negotiations,
which started in November 2001, has made intermittent
progress to date. We can nonetheless consider the poten-
tial benefits.
An optimistic assumption of 50% across-the-board cuts
to bound tariffs and farm subsidies leads to predicted benefits of approximately half those to be derived from full liberalization – around $200 to $1,000 billion a year – although with a different balance of beneficiaries. No allowance has
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154 How to Spend $50 Billion to Make the World a Better Place been made in those estimates for reform-stimulated economic growth or for the effect of liberalizing labor or capital markets. If these
were included, the benefit could be much higher.
Opportunity 3 – Removing intra-American trade
barriers following the FTAA negotiations
The creation of regional Free Trade Areas (FTAs) – even one as large as the proposed Free Trade Area of the Americas
(FTAA) – has limited benefits. The gains would be a small
fraction of those to be derived from a significant liberalization of world trade via the WTO. No doubt some individual
developing countries would benefit, but no more so than if global trade barriers were modestly reduced.
There is also a downside to such areas: Some countries
benefit by being in the FTA, but this can be at the expense of excluded economies. The net global effect could even
be negative, with greater losses from trade diversions from excluded countries than gains by FTA members. Nevertheless, agreements of this type continue to be pursued, not
least because they can be brought about faster and with
less political difficulty than multilateral changes via the WTO.
Opportunity 4 – Removing developed country barriers
to exports from least-developed countries
An example of this approach is the EU’s proposal to
extend to United Nations-designated “least developed coun-
tries” (LDCs) duty- and quota-free access for exports of
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Subsidies and Trade Barriers
155
“everything but arms” (EBA). This may sound like a good
idea, but it does not include trade in services, particularly the right for LDC workers to obtain temporary work permits, and has a number of other drawbacks.
Necessarily this initiative is tiny in terms of global
impact, because LDCs are such a small part of the global
economy. Certainly it could have significant benefits for
some people in sub-Saharan Africa (SSA), where exports
could increase by perhaps $0.5 billion a year, according to World Bank estimates. A wider World Bank study suggests
that LDCs across the world could benefit by up to $2.5 billion if they had unfettered access for their exports to the EU, the USA, Canada, and Japan. However, this would be
partly at the expense of other, not necessarily poorer, developing countries. Also, it would give LDCs little incentive to reduce their own internal and external barriers to trade, and would eliminate their incentive to push for global trade liberalization at the WTO.
How can progress best be made by 2010?