Michael Herrmann Division for Africa, LDCs and Special Programmes UNCTAD, Geneva, Switzerland

1. Strengthening the Trade-Growth-Poverty Relationship in Least Developed Countries II:Beyond Further Trade Liberalization:The Need for Better Special and Differential Treatment (Based on LDC Report 2004) Michael HerrmannDivision for Africa, LDCs and Special Programmes UNCTAD, Geneva, Switzerland

2. The LDCs

3. This Presentation • Introduction • International policies • Further trade liberalization • Beyond trade liberalization • National Policies • More realistic predictions • More effective policies • Conclusion

4. International policiesFurther Trade Liberalization: Promises Simulation exercises suggest that trade liberalization increases income and reduces poverty. • Cline (2004): Complete multilateral trade liberalization will increase world GDP by 5%. • In Ethiopia GDP per capita would have been US$127, instead of US$ 121 in 2001. • World Bank (2004): Pro-poor multilateral trade liberalization will decrease extreme poverty in developing countries by 61 million by 2015. • In LDCs the number of extremely poor people would increase by 129 million instead of 137 million until 2015.

5. International policiesFurther Trade Liberalization: Impediments Summary table: Share of exports of LDCs and ODCs affected by adverse trade conditions, average 1999-2001 (Per cent)

6. International policiesFurther Trade Liberalization: Expectations The benefits of further tariff reductions may be overestimated for the following reasons: • LDCs continue to have weak productive and supply capacities • LDCs did not benefit much from past trade liberalization. • LDCs themselves have relatively open economies. • LDC trading partners have relatively open economies. • Tariff reductions do not affect non-tariff barriers. • Trade reductions erode market access preferences.

7. International policiesFurther Trade Liberalization: Expectations The benefits of eliminating agricultural support in advanced countries may be underestimates for the following reasons: • Focus on current pattern of production and trade; neglect past pattern of production and trade (which shows more potential). • Focus on products that receive support; neglect their substitutes (which provides limited picture of negative effects). • Disregard the importance of agricultural production for poverty reduction in rural areas (where majority of poor live). • Disregard strategic role of agricultural development for development of other sectors (dual-economy models).

8. International policiesFurther Trade Liberalization: Expectations • To phase-out support on products imported by LDCs does not work. • To phase-out support on important products produced by LDC is better. • To phase-out support on all products produced by LDCs is best.

9. International PoliciesBeyond Trade Liberalization • Generally applicable support measures • Measures to cope with commodity price instability and decline • Measures to manage mineral resources and rents LDC-specific support measures • Special and differential treatment • Trade policies • Trade-related policies • Market access • North-South • South-South • Supply-side • General • Aid for trade

10. International PoliciesGenerally Applicable Support New international commodity policy should • Enhance market access for key commodities/ deal with issue of agricultural support (short-term) • Address issue of oversupply for many commodities (short-term and medium-term) • Reduce vulnerability of developing countries to negative price shocks (medium-term) • Make compensatory finance schemes used-friendly and operational (medium-term) • Strengthen national supply/ productive capacity, and institutions supporting market entry (medium-term) • Pursue possibility of International Diversification Fund, to diversify private-sector productive capacity (long-term).

11. International PoliciesGenerally Applicable Support Extractive industry extractive industries should address • Ensure fair distribution of rents • Ensure better use of rents • Increase transparency and accountability • Collect mineral taxes, implement sound fiscal rules • Invest mineral revenues, promote economic diversification • Link production enclaves with other economic sectors • Balance economic, environmental and social considerations

12. International PoliciesLDC-Specific Support: Special and Differential Treatment

13. International PoliciesLDC-Specific Support: Special and Differential Treatment Special and differential treatment can be strengthened if • SDT is better targeted to countries in need • SDT is better targeted to problems of these countries • SDT is not compromised in the process of accession • SDT is becomes an obligation for advanced countries • SDT is complemented by other types of support measures, including e.g. • Sufficient financial/ technical assistance • Unilateral market access preferences • Unilateral/ multilateral supply-side preferences

14. International PoliciesLDC-Specific Support: Market Access: North-South

15. International PoliciesLDC-Specific Support: Market Access: North-South Market access preferences can be improved if • Preferences are extended to all products • Preferences are granted for unlimited time • Preferences are made transparent, reliable and predictable • Preferences are not undermined through • Overly stringent sanitary, phytosanitary standards • Overly stringent product standards • Overly complex rules of origin • Agricultural support measures by advanced countries • Preferences be complemented by aid for productive sector

16. International PoliciesLDC-Specific Support: Market Access: South-South Imports of LDCs from other developing countries, and imports of other developing countries from LDCs, 1980-2002 (Share of total imports; index, 1980=100)

17. International PoliciesLDC-Specific Support: Market Access: South-South South-South cooperation can be strengthened through • Improvement of market access preferences granted by advanced developing countries to LDCs • Strengthening of regional economic cooperation between advanced developing countries, including LDCs • Increase of technical and/ or financial assistance of advanced developing countries to LDCs.

18. International PoliciesLDC-Specific Support: Supply-Side: General Supply-side preferences, including e.g. home country measures: • Purpose: Help poor countries attract foreign direct investments and benefit technology transfers. • Feature: Decrease risk/ cost of investment in poor countries through provision of special benefits, including e.g. provision of tax incentives and/ or subsidies. • Challenge: Ensure beneficial linkages between foreign investors and local investors.

19. International PoliciesLDC-Specific Support: Supply-Side: Aid for Trade Aid for trade and aid for productive sector development more broadly need to increase. • Between 1990--2001 aid for trade-related infrastructure from OECD/ DAC countries to LDCs declined by 43% in real per capita terms. • By 2002 aid for trade-related infrastructure from OECD/DAC countries to LDCs accounts for only about 2% of total aid commitments. • In early 1980s 45% of OECD/ DAC aid to LDCs was committed to productive sector development; • In 2000-2002 only 23% OECD/ DAC aid to LDCs was committed to this purpose.

20. National Policies Trade may not have been integrated in the first generation of poverty reduction strategies, but trade is very important in the second generation of these strategies. • Trade performance is an essential part of the macroeconomic framework. • Problem: Predictions about future trade performance are not related to past trade performance. • Trade liberalization and capacity building are identified as policy priorities. • Problem: Expectations about future trade performance are not related to trade policies.

21. National Policies • Common trade policy objectives • Trade liberalization, • Increased competitiveness • Export diversification • Tourism development • Common trade policy instruments • Suitable exchange rate policy • Export promotion policy • Better infrastructure and regulatory framework • Regionalism

22. Conclusions The problem for LDCs is not that they have not liberalized their markets, but that they cannot effectively access foreign markets. Therefore, • Focus on further trade liberalization is too limited • Tariff reductions • Support measures • Focus on effective trade support measures is necessary • Generally applicable support measures • LDC-specific support measures • Special and differential treatment w/ resects to trade policies • Market access preferences to developed and developing countries • Supply-side preferences, including e.g. Aid for Trade.

23. Conclusions The problem for many LDCs is not only to ship products, but also to produce competitive products with adequate quality and in adequate quantities. Therefore, • Focus on supply-capacities is too limited • Transport infrastructure • Trade finance and insurance • Customs regulations, reform and facilitation • Focus on productive capacities is necessary • Productive resources • Entrepreneurial capabilities • Production linkages

24. Conclusions The relationship between trade, the development of productive capacities, employment and poverty