On March 15th through 18th, the WTO convened two symposia in Geneva to reflect on some of the major challenges confronting the world today: the linkages between trade, development and finance, and between trade and the environment, and more generally about the future of the world trading system. Simultaneously, the Inter-American Development Bank was holding in Paris its annual meeting and associated conference, which focused largely on the financial crises and the policy responses to overcome it. The intellectual climate at these symposia was characterized by a variety of different perceptions about what is going on in the world today, and provided a preview of the debate that will take place in the next round of multilateral trade negotiations. These short notes select some of the issues discussed in these events for further comment.

 

I.   TRADE AND FINANCE

One issue on almost everybody’s mind and concerns is the relationship between trade and finance. "A crisis, yes, but what should we call it? Asian, financial, economic, global?", asked UNCTAD’s Secretary General Rubens Ricupero. His preference is to call it a "crisis of development", for various reasons: it has largely so far reserved its malignant force for the developing or transition regions of the world, it has reversed the trend towards a narrowing of the gap between rich and poor and it has thus provided grounds for questioning the process of development in its present form. Also, because events have paradoxically shaken some of the most advanced among developing countries, not the extremely weak and poor. If development is a process that should steadily reduce the degree of vulnerability of economies to external shocks, how then can one explain that some of the worst affected have been precisely countries in the avant-garde of development?

Ricupero is right in pointing out that this is not what traditional development theories told us. But is this really a crisis of development? The "vulnerability paradox" is easily explained. The answer lies in the new forms of interdependence that characterize the global economy, precisely the relatively most advanced sectors and countries. The present crisis adds to the lessons we had learned from previous episodes. From the Tequila crisis we learned that liberalization plus macroeconomic discipline is not enough to reap the benefits of financial integration, and that the composition of consumption and of capital flows is important. The Tequila crisis started in Mexico and claimed Argentina as a victim, but, partly as a result of the rapid international reaction in support of Mexico, and the back-up funds provided, the rest of the world was largely unaffected.

The Asian crisis began in Thailand and spread all over Asia. However, at least initially, it had important real effects throughout Latin America through increased competition by cheaper goods and reduced demand for exports but it did not cause major capital outflows from Latin America. This partly reflected the fact that Latin America has been working hard over the years pursuing economic reform and strengthening its economic fundamentals. It was until the Russian crisis, however, that the immune system of Latin America could not resist contagion. The analysis of contagion has fallen on a combination of symptoms, including credit booms and asset-price bubbles, excessive accumulation of short term debt by corporations and poor quality of the loan portfolios of banks, and high unhedged foreign currency exposures. Elements such as these restricted the capacity of monetary authorities to respond with the traditional confidence building package to defend their currencies with interest rate increases. And when the interest rates finally increased, this provoked economic slowdown, collapse in asset prices and bankrupcies. The analysis of contagion has underlined the critical role of sound institutions governing the private sector. The attention has also focused on institutional issues related to corporate governance, bankrupcy laws, prudential regulation and supervision.

Market optimists seem to have discovered that just as many parts of the world were getting to the promised land of financial integration, there is a worrying side to it. This is leading to some revision of the conventional wisdom on capital markets liberalization and sequencing, and to restate the case for sound institutions and appropriate regulatory frameworks. In particular, Chilean style taxes on short term capital inflows have acquired new esteem. But this is no paradigm change, only a re-balancing of the most extreme versions of free market optimism.

This is not the first time that the financial component of the global economy disrupts the growth of trade. Financial crises have in the past been damaging to trade and growth. In the 1930s, countries erected barriers to protect themselves against the international economy. This resulted in something that we now know as the Great Depression. The main lesson for present circumstances is that protectionism would be a serious mistake. Maintaining a free flow of goods and investment is the best way to ensure an early recovery. Recently, we have seen an example of a country facing a financial crisis that did not turn inward. In the wake of the 1994 peso crisis, Mexico, partly because of its NAFTA obligations, did not raise barriers towards its North American partners. By all counts, export growth to the United States in the next year helped bring Mexico rapidly out of its 1994-95 crisis and resume normal growth.

Solutions to the financial and demand management issues fall under the jurisdiction of international financial organizations and the coordination among the major industrial countries, not under the WTO or regional trade negotiations. But, given the prospect of initiating a new round of global trade negotiations and the vitality of regional trading arrangements, a key question is: what is the role of trade and trade policy in overcoming the crisis and more largely in development? How could the agenda of the new round of multilateral trade negotiations be defined to better promote the objectives of all WTO member countries, and of developing countries in particular? These were basic concerns of many interventions in the symposia.
 

II.   TRADE AND DEVELOPMENT
 

As regards the role of trade in development, there is no major disagreement on the fundamental proposition that international trade and investment are the major engines of growth for developing countries through many mechanisms: foreign exchange earnings, learning, technology transfer, innovation, and productivity improvement. International trade rules could also have a positive effect for market development, for transparency and for good governance. However, there is also a widespread consensus in recognizing that while necessary, an outwardly-oriented policy regime is not sufficient, nor could it be a substitute for sound development policy which entails a stable macro-economy; investment in education, infrastructure, and institutions; social policies and environmental protection. And all of this based on a sufficiently strong national political consensus on these strategic orientations.

In other words, the prospects for a new consensus on trade and development rest on recognizing that the relationship between openness in trade and finance and development, while positive, is not as automatic or exclusive as some recommendations seem to suggest, and that development policy is something much more complex and varied. Indeed, that development is a multifaceted transformation of societies. It is also apparent from this perspective that it would be wrong to blame trade liberalization or "globalization" for the failure to achieve development goals (living standards, equity, education, nutrition, housing) that could not reasonably be expected from trade alone in the first place, or only with an excessive optimism about its power for development.

This more sober perspective on the role of trade and trade liberalization in the development process is probably at the basis of the encouraging fact that the Asian crisis has not reversed the commitment of countries throughout the world to open trade and investment policies, and has not seriously challenged the intellectual case for outward orientation nor for having trade as the engine of growth.

While recognizing the importance of systemic openness, developing countries did reiterate a number of important messages: the need for more access to developed country markets, for more flexibility and for more technical assistance.

Access. More access to markets involves mainly, in their view: elimination of high tariffs and of non tariff barriers in sectors in which developing countries have comparative advantage (textiles, clothing, footwear, leather, food, agriculture); elimination of tariff escalation; tougher disciplines in the application of trade remedy laws by developed countries; and further strengthening of dispute resolution mechanisms. It also entails more access for their skilled labor to global markets for services. In turn, it must be stressed that more access to international investment flows requires developing countries to improve their investment climate (from macro-disciplines, to investment protection, to the core factors of competitiveness).

Flexibility. More flexibility, a case often coded under the term "differential treatment", is stated by developing countries as necessary to manage the transition periods, and also to be able to use a variety of policies and instruments to promote development. This is an area of heated controversy, that will benefit greatly from developing countries being specific about the nature and scope of flexibility that is deemed appropriate.

Technical Assistance. Developing countries, some international organizations and experts, frequently argue the case for massive flows of technical assistance, and also for more finance for development needs, and these symposia were no exception. Many developed countries also recognize these technical assistance needs and are in fact providing significant amounts of it. Trade-related technical cooperation is necessary even for ensuring that countries, particularly the least developed countries, implement existing commitments. The reservations some countries express regarding the feasibility of their obtaining sufficient benefits from trade negotiations, or about being marginal participants in this process, stem partly from perceived restrictions to pursue a pro-active, fully engaged, positive agenda in trade negotiations. Technical assistance is seen as essential to overcome these restrictions.

Apart from some extreme positions particularly from certain NGOs, but also from some countries, that requested a "five year moratorium" on multilateral trade negotiations, most participants saw launching a new round of trade negotiations as vital to their interests, as well as to avoid global recession, and generally agreed to focus not on the question of whether having a new round or not, but rather on how to design the new round so that it could be more beneficial for them and for the world trading system.
 

III.   TRADE AND THE ENVIRONMENT

While protection is the ultimate goal of environmentalists, protectionism is the ultimate fear of the trade community. This reality creates a cultural gap between the two communities. However, to this observer, at least, this Trade and Environment Symposium witnessed some very specific and pragmatic proposals to help bridge this gap and to move thinking and action forward. A pragmatic agenda includes both substantive and procedural aspects. Top of the list on the substantive proposals: the refinement of Article XX --General Exceptions-- in order to rebalance trade and environmental goals, flexibility to negotiate environmental standards that relate to production processes and methods (PPMs), the negotiation of the relationship of Multilateral Environmental Agreements (MEAs) to the WTO, and the elimination of environmentally harmful and trade distorting subsidies, particularly in fisheries, agriculture and energy.

Procedural proposals include aspects such as increased transparency and allowing more NGOs participation in some WTO activities. It is a fact that civil society has now emerged as a new actor in the trade dialogue. Some of these groups have led opposition movements to freer trade and spearheaded the so-called "globalization backlash" in some countries. This poses a challenge not only for governments but also for the business communities to educate and to counteract globaphobic attitudes with arguments and convincing evidence about the benefits of free trade and open markets. More participation and transparency could go a long way in reducing the perception of the WTO or other trade negotiations as "black boxes" in which the concerns of "civil society" are not heard.

A highly controversial issue, which nonetheless deserves careful consideration, was Renato Ruggiero’s proposal to create a Global Environmental Organization (GEO): "If we want to strengthen the bridge between trade and the environment then this bridge needs two pillars. This will not be the case as long as responsibility for environmental issues is scattered among a multitude of organizations and agreements. ... I would suggest that we need a similar multilateral rules-based system for the environment – a World Environment Organization to also be the institutional and legal counterpart to the WTO."
 

CONCLUSION

In conclusion, it is heartening to see that governments and international institutions are engaged in an open dialogue that revisits all these issues and that developing countries and NGOs are fully engaged in this exercise. The debates in these events strongly suggest that this is a time, not to change, but certainly to revise our paradigms, both policy and managerial paradigms, a time to think anew about the balance of free markets and regulation, about the balance of state and private sector, about international coordination and cooperation. Particularly important, it is a time to talk about international institutions, now that so many questions have been raised about the international institutional architecture, both multilateral and regional. Thus, international institutions and governments should be commended for organizing these events.