WORLD TRADE
ORGANIZATIONWT/WGTDF/W/12/Add.1
30 September 2002
(02-5202)
Working Group on Trade, Debt
and FinanceOriginal:  English
COMMUNICATION FROM THE WORLD BANK
Addendum
DEBT ALLEVIATION INITIATIVES AND THE ROLE OF TRADE POLICY
1. Questions to be addressed:
• What is the HIPC debt initiative?
• How has HIPC performed to date?
• How does trade affect HIPC?
• How does global trade policy affect debt alleviation?
• What role can developing country trade policies play in debt & poverty reduction?
2. The original HIPC debt initiative was:
• Proposed by Bank & Fund and created in 1996 by global endorsement from 180 countries
• First comprehensive approach to debt reduction with strong link to poverty
• Applies to IDA countries with unsustainable debt burden after traditional debt relief
• Requires participation/burden-sharing from all multilateral and bilateral creditors
• Active dialogue & consultation led to enhancements & procedural changes
3. These consultations led to the Enhanced HIPC initiative in 1999, which offered:
• Deeper and Broader Relief: Sustainability thresholds were lowered providing more debt relief.
More countries became eligible, and some countries became eligible for greater relief.
• Faster Relief: Some creditors began to provide interim debt relief at the decision point. Countries
could reach the completion point faster.
• Stronger Link with Poverty Reduction: Freed resources should support poverty reduction (through
PRSPs) developed by national governments in consultation with civil society.
4. The HIPC initiative has made significant progress to date:
• Relief approved for 26 (of 38) countries
• 6 have reached completion points
• 20 are receiving interim relief
• Average NPV of debt was cut by 2/3, most de bt service indicators down by half, and social
service spending has risen from less than 2 times debt service to more than 4WT/WGTDF/W/12/Add.1
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5. Trade issues figure heavily in the HIPC process:
• The pillar of the HIPC process is the Debt Sustainability Analysis (DSA), which is jointly
prepared by Bank, Fund & country
• Trade is at center of HIPC DSAs
o Debt sustainability targets are defined relative to exports (150% NPV)
o When export/GDP shares >30%, debt target linked to revenue (250% NPV)
• Export projections & global outlook lie at heart of difficult implementation challenges for HIPC
6. Concerns over actual outcomes relative to HIPC DSAs have led to a debt sustainability
review:
• Global slowdown, falling commodity prices raise c oncerns about deterioration in HIPC external
debt indicators
• NPV debt/export ratios higher in 2001 than decision point projections for 15 of 23; larger
deterioration (>15%) in 11
• No pattern or consensus on whether export fall or debt rise is to blame, domestic policy or shocks,
temporary or permanent impact
7. What can be done?
• Encourage more realistic projections: high/low scenarios
• “Topping up” of completion point relief in exceptional cases based on clear evidence of changed
exogenous conditions
• Encourage better debt management, sound policy programming through PRSPs
• Improve export prospects?
8. Global trade and the LDCs
• Global dialogue has increasingly focused on whether current system provides adequate access for
LDCs
• Research supports argument that poor are disadvantaged in trade opportunities
• WTO ministerial in Doha focused on need to make negotiated outcomes more “development
friendly”
• Developing countries as a group have become major players in world trade, but poor countries did
less well.
• Worldwide, average tariffs have been almost  ha lved in both developed and developing countries
since the late 1980s, but tariff protection on agriculture and labour-intensive goods is higher than
in manufactures.
• This hurts the poor in two ways: poorer countries remain more dependent on agriculture and
labour-intensive manufactures, and the products produced by poor people in these countries facehigher barriers to trade than those of the non-poor
9. Role of market access
• Recent analysis (Global Economic Prospects 2002, Bank/Fund paper on market access)
emphasizes market barriers to greater LDC exports
• Welfare gains from eliminating barriers are high: US$250-620b annually, up to half accruing to
developing countries
• Growth from lower protection could lower poverty counts 13% by 2015WT/WGTDF/W/12/Add.1
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10. The global bottom line
• Debt alleviation initiatives are only one aspect of poverty reduction efforts
• Potential gains from faster export growth and improved market access dwarf HIPC
• Efforts to achieve a “pro-development” outcome for the Doha agenda are critical
11. The role of domestic policies
• Must not neglect the other side of the coin – domestic policies are also critical
• HIPC can only create the conditions for debt sustainability, not guarantee it
• DSAs assume sound macro policies, prudent borrowing
• Many LDCs with debt/export ratios rising, had debt higher as well as exports lower
• Trade policies in LDCs are particularly important: while much progress has been made on
“primary agenda” of tariff reduction, NTB conver sion, compression, this is only part of the trade
policy story
• Tariff reform may be necessary, but not sufficient, for achieving growth
12. Revitalized Integrated Framework (IF) provides means to support domestic trade
reforms
• Strong bilateral and multilateral support for Trust Fund – 18 donors and US$9.1 million pledged
thus far
• Recognition that the approach holds promise to enhance the role of trade in country strategies and
donor support
• Strong demand by LDCs
13. Broad range of topics covered in IF diagnostic studies:
• Global market access
• Trade in services
• Regulatory framework
• Trade facilitation (customs, transport)
• Sector specific analyses
• Trade and poverty
• Prioritized TA needs and policy reform
14. IF diagnostic study findings
• Many constraints are country and sector specific.
• But the studies so far indicate that:
o Trade facilitation and transport have become more important constraints
o Gains from trade highly dependent on preferential market access in rich countries
• In Cambodia,
o Export procedures and payments add about 15% of export price of rice;  elimination of
just this excess cost would increase the income of the poor farmers by 2-6%.
o Port charges are four times higher than in neighbouring Thailand.
o 99% of trading firms identified customs as their biggest constraint.
• In Mauritania, costs of transporting a 40 foot container between the US and Mauritania are 3.5
times higher than between the US and Hong KongWT/WGTDF/W/12/Add.1
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15. In addition to the interplay between debt alleviation initiatives and trade, the link
between trade and poverty alleviation is important as well.
• The nature of the links between trade reforms/opportunities and poverty alleviation remains
unexplored and not well understood
• Preliminary results (e.g. Cambodian rice) suggests potential strong impact of domestic reforms on
the poor (mirroring market access)
• Such reforms may prove to be the necessary dynamic counterpart to HIPC initiatives that reduce
debt burdens now
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