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6 Better integration of developing countries into the world economy 6.1 Introduction: the policy challenge This chapter raises the question: “What can the Netherlands, acting with the EU and international organisations, do to improve the integration of developing countries into the world economy, and what ancillary policy is needed to ensure that their closer integration also helps to reduce poverty?”. This issue reflects earlier advisory reports by the Social and Economic Council, for example the “globalisation advisory letter” identifying closer integration of developing countries as the most important policy challenge (along with a stronger international rule of law), and the 1997 advisory report on the private sector and international cooperation. In 1997, the Social and Economic Council observed that despite many years of international cooperation and policy efforts to combat hardship and privation at the source, poverty is still a problem in many developing countries.1 The world poverty map is very fragmented at the moment. Now that China and India have joined/rejoined the world economy, these countries have experienced tremendous growth and, in China at least, there has been a sharp decline in extreme levels of poverty. Although poverty is on the decline in India, it remains a massive problem. It is still all-pervasive in India’s neighbour Bangladesh, despite that country’s relatively rapid economic growth. However, the number of people living in extreme poverty has increased in Africa, both in absolute and relative terms. These data give rise to the following question: how can we ensure that more countries and more people benefit from the globalisation process? The challenge can be broken down into three steps: 1 Allow products from developing countries access to markets in the developed world and gradually open up markets in developing countries for investment from developed countries. This is a very important means of promoting the integration of developing countries into the world economy. 2 Develop the private sector and good governance to ensure that the economy actually benefits from opening up the markets and that economic growth is generated. 3 Create the necessary conditions to ensure that economic growth also benefits the poor (pro-poor growth). All three of these steps are important for integrating developing countries more closely into the world economy, and all three require coherent policy. The analysis in this chapter shows that policy coherence between the trade and agriculture sectors is of particular 1 See: SER advisory report (1997) De particuliere sector in internationale samenwerking, publication no. 97/12. 119 BETTER INTEGRATION OF DEVELOPING COUNTRIES INTO THE WORLD ECONOMY importance for achieving a better integration of developing countries into the world economy. This chapter focuses on the first step towards enabling more countries and people to benefit from globalisation, i.e. market access for developing countries. Developing countries are still encountering barriers in the present multilateral trading system that prevent them from actually benefiting from new opportunities for trade. 6.2 Barriers to the market integration of developing countries A country’s external trade policy is a very important means of promoting the meaningful integration of developing countries into the world economy. Since the Netherlands has delegated authority over external trade policy to the EU, it must pursue its external trade preferences via the EU. The external trade policy must comply with the rules of the game of the global multilateral trading regime, which are laid down in WTO agreements. The wide-ranging public debate that ensued after the WTO’s Uruguay Round played an important role in identifying the constraints that developing countries – especially the least developed ones – may encounter as a result of trade liberalisation. In 1979, the General Agreement on Tariffs and Trade (GATT, the WTO’s predecessor) provided the basis for the “special and differential treatment” of developing countries.2 During the Uruguay Round, the special and differential treatment of developing countries was once again incorporated into WTO agreements. The WTO has placed development issues and the interests of developing countries at the heart of the present Doha Round. The key focus is the contribution that trade can make to development. The aim of the Doha Round is to continue the process of multilateral trade liberalisation and to integrate developing countries more closely into the multilateral trading system and global economy. In addition to the WTO multilateral trade agreements, OECD countries – including the EU – often grant tariff preferences to developing countries via regional or bilateral trade agreements. Multilateral tariff liberalisation may result in a reduction in the preference margins of developing countries. This is making the present Doha Round negotiations difficult. On the one hand, multilateral trade liberalisation is an important tool for integrating developing countries more meaningfully into the world economy; on the other, the impact of that liberalisation will not be entirely positive for developing countries. There are important differences between the various developing countries, and multilateral trade liberalisation will therefore produce both winners and losers. 2 Laid down in the Enabling Clause. See: http://www.wto.org/english/tratop_e/devel_e/teccop_e/s_and_d_eg_e.htm 120 BETTER INTEGRATION OF DEVELOPING COUNTRIES INTO THE WORLD ECONOMY Using tariff reductions to improve market access will not, by itself, guarantee the closer integration of developing countries (especially the least developed) into the world economy. Indeed, developing countries are often incapable of actually benefiting from new opportunities for trade. There are three reasons for this: 1 The scope of the trade agreements. There are often constraints on the duty-free and quota-free products admitted into the market. In addition, the products allowed market access may not correspond with the comparative advantages of the developing countries in question. 2 The use by developed countries of trade-distorting measures such as subsidies and non-tariff barriers. 3 Barriers in developing countries on the supply side of the economy. In addition, the differences between developing countries can also impede their closer integration into the world economy. At the moment, the biggest barriers to real market access by developing countries are high import tariffs and non-tariff barriers.3 In agriculture, efforts to improve the situation should focus on import tariffs, the “sensitive products”, the origin rules and non-tariff barriers to trade. 6.3 Recommendations on market access for developing countries The Social and Economic Council observes that actual impact of preferential access to the European market for products from developing countries remains limited. Restricted tariff reductions, stringent origin rules, tariff escalation and non-tariff barriers can weaken the impact of a trade agreement. In addition, the large number of “sensitive products” designated by the EU means that developing countries derive significantly fewer benefits from trade agreements. Economic Partnership Agreements (EPAs) The Social and Economic Council believes that the social partners in the ACP countries should be consulted regularly about the negotiations with the EU concerning the Economic Partnership Agreements (EPAs). That is important mainly because the employment effects must be taken into account in trade agreements, as well as the possibility that more people can earn a decent wage through paid work. The Council also advises the Netherlands to continue emphasising within the European Union that certain market segments in developing countries must be allowed to open up at a different pace. 3 According to the World Bank, more than 90 percent of the worldwide costs associated with the current trading systems can be attributed to high import tariffs and tariff escalation. This varies significantly per product, however. World Bank (2007), World Development Report 2008 – Agriculture for Development, pp. 104-105. 121 BETTER INTEGRATION OF DEVELOPING COUNTRIES INTO THE WORLD ECONOMY Reform of the Common Agricultural Policy and impact on developing countries The CAP reforms are intended to remove trade-distorting export subsidies and internal support schemes for farmers. OECD research shows that decoupling income support from production has made the EU’s internal support for agriculture must less tradedistorting and has significantly reduced export subsidies. The research also points out that various challenges still remain, however.4 Besides this, any further progress that the EU’s trade and agricultural policy can make in relation to developing countries (in particular the least developed) lies primarily in the area of market access. Important points are: • to reduce tariff escalation for agricultural products according to their degree of processing; • to make origin rules more flexible in preferential trade agreements; • to reduce the number of products identified as “sensitive” in trade agreements. Promoting integration by providing aid for trade Improving market access for developing countries will not, by itself, guarantee closer integration of these countries into the world economy. Other vital elements are good institutions, a positive business climate, a sound infrastructure and macro-economic stability. The most important question that can be raised in this respect is how developing countries can be encouraged to embark on institutional reform. Various initiatives have been launched that are moving things in the right direction. The “aid for trade” initiative is an example of ancillary policy that will encourage closer integration of developing countries into the global economy and in doing so contribute to productive employment growth. The EU can promote the closer integration of developing countries into the world economy by: • harmonising product standards on a worldwide scale while simultaneously helping developing countries overcome non-tariff barriers such as technical trade barriers, customs and administration procedures, and sanitary and phytosanitary measures; • encouraging economic diversification in developing countries, in particular in those countries granted preferences. Dutch policy efforts The Netherlands can help promote better market access for products from developing countries by continuing its efforts to influence the EU’s trade and agricultural policy and by focusing its bilateral policy on trade promotion. The Social and Economic Council recommends that the items described above should serve as the Dutch Government’s point of departure in these efforts. 4 OECD (2007), Reforming agricultural and trade support, Chapter 6 in OECD Economic Surveys: European Union, pp. 129-130. 122