Global
Economic
Prospects
and the Developing Countries

2002© 2001 The International Bankfor Reconstruction and Development / The World Bank
1818 H Street, NW
Washington, DC 20433
All rights reserved.
01

02

03

04

05—10 9 8 7 6 5 4 3 2 1The findings, interpretations, and conclusions expressed here do not necessarily reflect theviews of the Board of Executive Directors of the World Bank or the governments they
represent.
The World Bank cannot guarantee the accuracy of the data included in this work.
The boundaries, colors, denominations, and other information shown on any map in thiswork do not imply on the part of the World Bank any judgment of the legal status of any
territory or the endorsement or acceptance of such boundaries.

Rights and Permissions
The material in this work is copyrighted. No part of this work may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying,recording, or inclusion in any information storage and retrieval system, without the priorwritten permission of the World Bank. The World Bank encourages dissemination of its work
and will normally grant permission promptly.
For permission to photocopy or reprint, please send a request with complete information
to the Copyright Clearance Center, Inc, 222 Rosewood Drive, Danvers, MA 01923, USA,
telephone 978-750-8400, fax 978-750-4470, www.copyright.com
All other queries on rights and licenses, including subsidiary rights, should be addressed to
the Office of the Publisher, World Bank, 1818 H Street NW, Washington, DC 20433, USA,fax 202-522-2422, e-mail pubrights@worldbank.org

ISBN 0-8213-4996-1
ISSN 1014-8906
Library of Congress catalog card number: 91-6-440001 (serial)

Contents

Acknowledgments
Summaryix

xi

Abbreviations and Data Notes

xxi

Chapter 1 Prospects for Developing Countries: Coping with a Global Slowdown
A simultaneous downturn in the industrial countries
4
Global environment: trade9
Global environment: financial markets
13
The outlook for developing countries
16
Risks to the outlook
24Long-term prospects: growth and poverty reduction
27
Conclusions
33
Notes
33
References
34
Chapter 2 Market Access and the World’s Poor
37
A changing landscape of merchandise trade
38
Labor-intensive exports can spur pro-poor growth38
Market access barriers limit export opportunities of developing countries
Liberalizing trade to promote development
56
Notes
63
References
64

1

44

Chapter 3 Trade in Services: Using Openness to Grow
69
Surging trade and investment in services
70
Service reforms can promote efficiency and growth76
Domestic policy: emphasizing competition and regulation
81
Multilateral engagement: buttressing domestic reforms
84
Notes
90
References
92iii

G L O B A L

E C O N O M I C

P R O S P E C T S

Chapter 4 Transport Services: Reducing Barriers to Trade
97
High transport costs penalize exports98
Why some countries pay more for transport services:
geography and income
103
Why some countries pay more: policy-driven factors
109
Unleashing competition in international transport: policy implications
Notes
123
References
125
Chapter 5 Intellectual Property: Balancing Incentives with Competitive AccessIntellectual property rights and development
130
Costs of enforcing IPRs
136
IPRs policies for promoting development
139
Other policies can support technological progress
144
Multilateral actions and IPRs in a development round
145
Notes
149
References
149

120

129

Chapter 6 Envisioning Alternative Futures: Reshaping Global Trade Architecture
for Development
153
Reshaping global trade architecture for development
154
Envisioning alternative futures
166
Conclusions
176
Annex 1
177
Notes
178
References
182
Appendix 1 Regional Economic Prospects

187

Appendix 2 Global Commodity Price Prospects
Appendix 3 Global Economic Indicators

211

233

Figures
1.1
Industrial production in the G-3 countries falls in 2000–2001
5
1.2
European industrial production falls
8
1.3
U.S. NAPM and manufacturing industrial production excluding high tech,
1994–2001
9
1.4
GDP growth in OECD countries
9
1.5
Import growth across industrial centers
10
1.6
Export shares for developing countries excluding transition economies
11
1.7
Distribution of countries by share of primary commodities in total
merchandise exports
11
1.8
Episodes of world growth slowdown and agricultural and mineralexport prices
12
1.9
OPEC output and crude oil prices
13
1.10
Gross capital market flows to developing countries
14iv

C O N T E N T S

1.11
1.12
1.13
1.14
1.15
1.16
1.17
1.18
1.19
1.20
2.1
2.2
2.3
2.4
2.5
2.6
2.7
2.8
2.9
3.1
3.2
3.3
3.4
3.5
3.6
3.7
4.1
4.2
4.3
4.4
4.5
4.6
4.7
6.1
6.2
6.3
6.4
6.5

Emerging market spreads and share of global capital flows
14
Industrial- and developing-country GDP growth, 1981–2003
17
Composition of developing-country exports
18
Major destinations for developing-country exports
19
Total external debt in developing countries, 2000
19
Emerging market stripped spreads, 1999–2001
20
Global dynamics of recessions in industrial countries
26
Income and population shares
29
World poverty, 1820–1998
31
Under-5 mortality—hopes and aspirations
32
Changing global trade patterns
39
A rising share of exports in GDP is associated with faster growth40
Increases in exports and agricultural production go hand in hand41
In globalizing economies the poor participate in stronger growth
44
Tariffs still impede trade45
Support to agriculture in the Quad is growing . . . partly due to the fall incommodity prices
51
Despite preferences, LDC exports to the Quad often face high tariffs
54
LDC exports can grow fast when tariff preferences are significant
56
Opposite patterns of tariff incidence in manufactures and agriculture56
Trade in services has grown faster than trade in goods—and developing
countries’ share in world exports has increased, 1985–98
71
Transport has declined while “other” services have increased72
FDI in services is concentrated in the OECD countries—but the growth rates
are higher for many developing countries
73
Software is cheaper to develop in India
75
Services liberalization indices: telecoms & financial services
79
Greater liberalization in services is associated with more rapid growth79
WTO members have been reluctant to make market access commitmentson the movement of natural persons
86
Transport costs are often higher than tariffs
100
Tourism earnings in developing countries, 1998
101
Potential market access explains variations in income
102
Shipping a container from Baltimore, Maryland, around the world: Distance isonly half the costs story
105
Ocean freight rates, 1970–99
106
Decomposing the costs of door-to-door shipments
108
Potential door-to-door cost savings on containerized imports in Brazil
109
Regional integration agreements are proliferating—and now span
the globe
155
Developing countries could reap income gains of over $500 billion from fulltrade liberalization
168
Unskilled wages rise substantially relative to cost of living—implying asubstantial reduction in poverty
175
Reform has costs, but they are largely outweighted by the gains
176
World trade booms, particularly in food and agriculture
177v

G L O B A L

E C O N O M I C

P R O S P E C T S

Tables1.1
Global conditions affecting growth in developing countries andworld GDP growth3
1.2
Merchandise export volumes, annual average percentage change
10
1.3
All developing countries: key indicators
18
1.4First year effects of a 2% of GDP decline in investment in the United States,
Europe, and Japan25
1.5
Short-term claims of international banks outstanding in selecteddeveloping countries26
1.6
Withdrawal of short-term lending by industrial-country banks to
selected developing regions: the first-year impact on GDP
27
1.7
Long-term prospects: forecast and scenario growth of world
GDP per capita
28
1.8
Regional breakdown of poverty in developing countries30
2.1
Major export booms in textiles and clothing and effects on economic
performance and poverty
42
4.1
Ad valorem freight rates for U.S. imports: 1938, 1974, and 1998
105
5.1
TRIPS: who gains?
133
5.2
TRIPS-consistent IPRs standards: options for developing countries
141
6.1
Agriculture accounts for the bulk of the gains from merchandise
trade liberalization
171
6.2
Global gains are sensitive to productivity—openness linkages
171
6.3
Services liberalization generates substantial windfall gains fordeveloping countries
172
6.4
Labor’s share of national income rises substantially173
6.5
Developing countries increase their market share
176
Boxes
1.1
2.1
2.2
2.3
2.4
2.5
2.6
2.7
2.8
2.9
2.10
3.1
3.2
3.3
3.4
3.5
3.6
4.1

vi

Japan and the developing countries
7
The aftermath of trade liberalization in agriculture: lessons from Haiti
43
U.S. sugar policy and its impact on imports
48
Wheat production with CAP support
49
Bringing support to agriculture and export subsidies under multilateral rules:
a long-awaited endeavor
50
A primer on the agreement on textiles and clothing
52
Anti-dumping—and better alternatives
53
Mushroom wars
55
Calculating effective tariffs faced by the poor
57
Designing appropriate safety nets to ensure trade forms are pro-poor
59
The banana dispute: good intentions . . . bad policies?
61
Why do services matter for development?
70
Whose regulations and for what purpose? Challenges in electroniccommerce
74
Welfare gains from service liberalization: the case of Tunisia
78
Challenges in implementing procompetitive regulation
83
Financial sector liberalization: the need for policy coherence
85
Ensuring barrier-free trade in electronically delivered products
88
The Kenyan-European cut-flower supply chain99

C O N T E N T S

4.2
4.3
4.4
4.5
4.6
4.7
5.1
5.2
6.1
6.2
6.3
6.4
6.5
6.6
6.7

Inefficient internal transport systems contribute to the concentration ofChina’s export industries in coastal regions
104
Lessons from customs reforms in Mexico
111
Maritime shipping in West Africa
113
How important are public and private barriers to trade inmaritime services?
115
Lessons from reforming Argentina’s ports
117
EU noise regulations and their potential effect on air service toCentral Asian countries
119
An overview of intellectual property rights
131
Pharmaceutical policies and the limits of TRIPS
138
Reshaping global trade architecture for development:
the four-part policy agenda
158
The recently renovated integrated framework
160
Environmental standards and trade161
Improving labor standards in a way that works
163
Standards development facility: coordinated action to bridge thestandards gap
165
The complexities of measuring openness and growth
169
World Bank programs: activities to support trade-led pro-poor growth

177

vii

AcknowledgmentsT

his report was prepared by the Economic Policy and Prospects Group and drew from resources throughout the Development Economics Vice Presidency and the World Bank
operational regions. The principal author of the report was Richard Newfarmer, withdirection from Uri Dadush. The chapter authors were Hans Timmer (chapter 1), Aristomene
Varoudakis (chapter 2), Aaditya Mattoo (chapter 3), Carsten Fink (chapter 4), Keith Maskus(chapter 5), and Dominique van der Mensbrugghe and Richard Newfarmer (chapter 6). Bernard
Hoekman provided ideas, suggestions, and comments on the trade chapters. The report was prepared under the general guidance of Nicholas Stern.
The report benefited from contributions from many Bank staff. Annette I. De Kleine, Caroline
Farah, Himmat Kalsi, Robert Keyfitz, Robert Lynn, Fernando Martel Garcia, Shoko Negishi,
Dilip Ratha, Mick Riordan, Virendra Singh, and Bert Wolfe contributed to the global trends;
Shaohua Chen and Martin Ravallion contributed to the poverty analysis; and David RolandHolst assisted with the international development goals in chapter 1. Ataman Aksoy, Betty Dow,
Dilek Aykut, Don Mitchell, John Baffes, Marcelo Olarreaga, Simon Evenett, and Francis Ng contributed to chapter 2. Yong Zhang, Stijn Claessens, Antonio Estache, Charles Kenny, Fernando
Garcia Martel, Cristina Neagu, Randeep Rathindran and Taizo Takeno provided inputs into
chapter 3. Shweta Bagai, Ileana Cristina Neagu and Ranga Rajan Krishnamani contributed tochapters 4 and 5. The following provided comments on chapter 4: Mark Juhel, Juan Gaviria,
Ronald Kopicki, Aaditya Mattoo, Marcelo Olarreaga, Uma Subramanian, Simon J. Evenett, andTony Venables. Ataman Aksoy, Shweta Bagai, Mirvat Sewadeh, and John S. Wilson contributed
to Chapter 6. The regional and statistical annexes were prepared by Milan Brahmbhatt, Caroline
Farah, Robert Keyfitz, Annette I. De Kleine, Robert Lynn, Mick Riordan, and benefited from theguidance of the Bank’s regional chief economists, Sadiq Ahmed, Alan Gelb, Homi Kharas,
Mustafa Nabli, Guillermo Perry, and Marcelo Selowsky. John Baffes, Betty Dow, Don Mitchell,
and Shane Streifel contributed to the analysis of commodity prices in chapter 1 and the appendix. Mark Feige edited the report with a special competence. Shweta Bagai, Yeling Tan, and Yong
Zhang provided research assistance. Awatif Abuzeid was the task assistant for the report, andKatherine Rollins assisted with chapter 1.
Many others from inside and outside the Bank provided inputs, comments and suggestions
that immeasurably improved its content. Milan Brahmbhatt and Roberto Zagha were overallpeer reviewers, and other reviews of specific chapters were invaluable: James Hanson, Odin
Knudsen, Kym Anderson, James Hodge, Elizabeth Twerk, Carlos Braga, Eric Swanson, Anneix

G L O B A L

E C O N O M I C

P R O S P E C T S

Kenny McGuirk, Todd Schneider, Ejaz Syed Ghani, Manjula M. Luthria, David Hummels,
Mauricio Carrizosa, Will Martin and T.N. Srinivasan. The report also benefited from the comments of Ian Goldin, Shahrokh Fardoust, Larry Hinkle, Ernesto May, David Tarr, Dimitri
Diakosavvas, and Edith Wilson. The Development Data Group was instrumental in the preparation of the appendix. Robert King coordinated the production and managed the disseminationfrom the Development Prospects group, working closely with Heather Worley and Susan Graham. Book design, editing and production were managed by the Production Services Unit of theWorld Bank’s Office of the Publisher.

xSummaryA

S 2001 DRAWS TO A CLOSE, THE GLOBAL

economy is slipping precariously toward recession. Developing countries
have seen their economic growth rates plunge.
Growth in trade has undergone one of themost severe decelerations in modern times—
from over 13 percent in 2000 to 1 percent in2001. Developing countries are confronting a
10 percentage point drop in the growth of demand for their exports. Though the weight ofevidence still points to a probable recovery in
mid-2002, the risks posed to recovery are thegravest in a decade. The terrorist attacks in the
United States, although it is still too early toevaluate them fully, have unleashed new andunpredictable forces that have substantiallyraised the risk of a global downturn.
Against this uncertain backdrop, world
leaders have launched an intense discussion
about whether to begin a new round of global
trade negotiations at the ministerial meeting of
the World Trade Organization (WTO) in November 2001. A round would offer an opportunity to renew progress on multilateral rulesthat open markets and expand trade. A reduction in world barriers to trade could accelerate
growth, provide stimulus to new forms of productivity-enhancing specialization, and lead toa more rapid pace of job creation and poverty
reduction around the world.
However, the fate of new trade talks is as
uncertain as the global outlook. Many developing countries have lingering doubts about
new trade negotiations. On the one hand, they

have become important actors in the global
system. In contrast to the early rounds ofglobal trade negotiations—the Dillon Roundin 1960 had only 39 participants, mostly fromindustrial countries—the next round will havemore than 142 WTO members, 70 percent of
which are developing countries. This mirrors
the increased weight of developing countries
in the global economy. They have grown to account for more than one-third of merchandise
trade—and they have much to gain from a newround.
On the other hand, they worry that themultilateral system, in leaving intact barriers
to markets whose removal would otherwise
stimulate pro-poor growth, has become lessfair and less relevant to their development
concerns; that the trade agenda is being expanded to include only issues in which the developed countries have an interest; and thatmultilateral rules are increasingly becoming amere codification of existing laws and rules
prevalent in developed countries, but which
are inappropriate or unenforceable in developing countries (Ganesan 2000).
Nor is support for new trade initiatives
universal among industrial countries. New opposition to “globalization” in general—andexpanded trade in particular—has emerged
forcefully, questioning the very premises that
more open markets can raise people’s incomes,
especially those of the poor. The downturn inthe global economy may inflame protectionist
sentiment.

xi

G L O B A L

E C O N O M I C

P R O S P E C T S

The international community thus faces aclear choice: whether now is the time to continue down the path toward greater openness
that has led to greater integration and prosperity for more than five decades, or whether
to allow the hiatus in the wake of the WTO
meetings in Seattle (1999) to endure. If tradetalks are to succeed in underpinning a newwave of global prosperity, and at the sametime contribute to raising the incomes of thepoorest in the global community, they will
have to ensure that the world’s poorest countries and poorest people will benefit.

The world’s poor could benefit fromreshaping the global architectureof trade—
Poor people—those living below the international poverty line of $2 per day—work primarily in agriculture and labor-intensive manufactures. These sectors confront the greatest
trade barriers, putting the world’s poor at aparticular disadvantage. According to estimatesin chapter 2, the average poor person selling
into globalized markets confronts barriers thatare roughly twice as high as the typical worker
in developed countries. In general, tariffs inhigh-income countries on imports from developing countries, though low, are four times
those collected from developed countries (0.8
percent as opposed to 3.4 percent). Subsidies
and other support to agriculture in the highincome countries are particularly pernicious—and are now running roughly $1 billion a
day—or more than six times all development
assistance. Distortions in tariff codes—exceptionally high tariffs on developing country
products (tariff peaks), embedded incentives
against processing abroad (tariff escalation),and tariffs that are far higher once specified import ceilings are reached (tariff rate quotas)—
and trade practices, such as frequent recourse
to antidumping actions, are often more important impediments that keep the poor from taking advantage of trading opportunities.
Other costly asymmetries in trade-relatedagreements and practices can at times work at
odds with development objectives. For exam-

xii

ple, full implementation of the Agreement on
Trade-Related Intellectual Property Rights(TRIPS) may not be suitable for all countries.
Transportation cartels enjoy official sanction
but are costly to developing countries, andsome standards may be set with little regard
for their effects on developing countries.
Protection is not solely an issue for highincome countries. Developing countries havealso placed high barriers on agriculture, laborintensive manufactures, and other products andservices. Developing-country tariffs in manufacturing average four times higher for imports
from developing countries than are tariffs in industrial countries on imports from developing
countries (12.8 percent as opposed to 3.4 percent). Restrictions on services trade are usuallymore common than in industrial countries.
This report argues for reshaping the global
architecture of world trade to promote development and poverty reduction. The report focuses on four policy domains:
1. Using the WTO ministerial to launch a “development round” of trade negotiations thatwould reduce global trade barriers. Thosebargains will only be enduring and havegreatest development impact if industrial
countries are willing to reduce restrictions
on products and services that poor countries and poor people produce—particularly
protection of agriculture (including subsidies), textiles, and clothing; and even restrictions on temporary movement of workers. Similarly, developing countries canimprove their own situation while at thesame time winning concessions by liberalizing services, and lowering barriers to importcompetition. To be sure, a trade round also
involves issues of interest primarily to industrial countries. Nonetheless, a true development round would produce win-win
gains for the entire national community, including the world’s poor.
2. Engaging in global collective action to promote trade outside the negotiating framework of the WTO. Providing market access may not by itself be enough to elicit

S U M M A R Y

new trade from developing countries, particularly the poorest. Increasing multilateral“aid for trade”—development assistance topromote trade infrastructure, adoption ofbest practice standards and rules, and ahealthy investment climate—could help. No
less important, global cooperation to improve the environment and labor standards
can most effectively be undertaken outside
the WTO.
3. Adopting pro-trade development policies ofhigh-income countries unilaterally. First, if
the high-income countries were to allow
low-income countries duty-free and quotafree access to their markets, they would provide a strong stimulus to trade that would
help these poor countries overcome their past
lackluster trade performance. Second, highincome countries could also demonstrate
good faith by reining in mushrooming antidumping cases. Third, increasing bilateral“aid for trade” can complement the multilateral effort.
4. Enacting new trade reform in developing
countries. Developing countries individually can improve their competitivenessthrough trade reforms that lower restrictive
barriers, especially in services markets. Indeed their own policies hold the largest potential for policy-induced gains from trade.
Trade reforms, especially those reinforced
with reforms in governance and in domestic investment climates, can raise productivity and incomes, irrespective of policies ofother nations.
Other aspects of global trade architecture—for example, regional trading arrangements, standards, and world institutions witheffects on trade (such as the World Customs
Organization and so on)—are also important.
However, save for brief mention in chapter 6,
they fall outside the focus of this report. Thisis for reasons of parsimony and because they
have been covered in recent Bank reports.1
Nonetheless, if the policies recommended inthese four areas were adopted, they would
move the global trade architecture in way thatwould enhance the prospects of developing
countries.

Reshaping global trade architecture
for development would reduceworld poverty—
Seizing the opportunity to reshape the global
trade architecture for development would
make an enormous difference to the world’s
poor. Some 2.8 billion people today live on
less than $2 day. In the base-case long-term
projection of this report, developing countries
would grow at rates that reduce poverty to 2.2
billion by 2015, effectively lifting some 600
million people above this poverty line. This
would be an important achievement.
But better results are possible. This reportsimulated the effects of taking the mutually reinforcing actions in all four policy domains—effectively removing restrictions on trade and services in combination with the “aid for trade”
agenda and other companion policies that translate the trade impulse into rising incomes for thepoor. These exercises have methodological limitations but are indicative of what’s at stake.
Three headlines are worthy of note: First,
the pace of poverty-reducing globalization
would clearly be accelerated. This combinationof polices could spur new growth that will lift
an additional 300 million people above thepoverty line relative to the normal growth in
the base case.2 Said differently, because of faster
growth associated with trade integration, theworld would have 14 percent fewer people living in poverty in 2015 than in the base-case scenario. Faster integration through lowering barriers to merchandise trade would increase
growth and provide some $1.5 trillion of additional cumulative income to developing countries over the 2005–15 period.3 Liberalizationof services in developing countries could provide even greater gains—perhaps as much as
four times larger than this amount.
Second, the effects on income distribution ofremoving trade restrictions in the simulation
are broadly positive. The simulations show thatlabor’s share of national income would risethroughout the developing world. And un-xiii

G L O B A L

E C O N O M I C

P R O S P E C T S

skilled workers generally do better in most regions. Finally, this scenario would bring down
infant mortality more rapidly and contribute toimproved child health throughout the developing world.

Chapter Highlights
This report is dedicated to thetrade-for-development agenda
Realizing the promise of the new global initiatives to expand trade requires concerted effort
to move development to center stage in trade
policy formulation. This report is dedicated tothat agenda. It begins with a review of global
prospects and ways globalization links thefates of industrial and developing countries.
The report then considers issues in four broad
areas that are particularly important to developing countries: merchandise trade, services,transport, and intellectual property rights. A
final chapter summarizes the forward-looking
policy agenda, and assesses the potential impact of further global integration and more
rapid growth for the standards of living inpoor countries everywhere.

Global prospects
By the third quarter of 2001, the global economy was precariously close to recession. For
the first time in more than two decades, thethree major engines of the global economy—
the United States, Japan, and Europe—wereslowing at the same time. With recession already a fact in Japan and the probability ofnegative growth in the United States rising—inpart attributable to the demand and supply
shocks from the September terrorist attack—and Europe suddenly slowing, the global economy has ceased supporting rapid growth in developing countries.
Nonetheless, the outlook for 2002, thoughsubject to unusually high risks, is that the
global economy will begin to recover. Developing countries are expected to grow by 3.7 percent if the external environment improves as
expected, up from 2.9 percent in 2001. The

xiv

world economy should grow by 1.6 percent,with the recrudescence of consumer spending in
the United States, prompted by lower interest
rates and fiscal stimulus, and renewed expansion in Europe in response to recent interest
rate cuts and lower oil prices. High-income
countries, still shackled by slow growth in thefirst half of 2002 but picking up in the second,
are likely to grow at about 1.1 percent for theyear, up slightly from the anemic 0.9 percent in2001. Dynamism in major economies of the developing world—particularly China and India
and, to a lesser extent, Brazil and Mexico—will
reinforce these positive trends. South Asia
seems likely to become the fastest-growing
region, with growth at 5.5 percent, followed
closely by East Asia, at 4.9 percent. Other regions will not achieve these growth rates, but
all will predictably do better than in 2001.
The recovery of the global economy islikely to transmit new growth to developing
countries through more robust trade demand.
Although unlikely to reach the boom rates of2000, trade expansion seems likely to surpass
4 percent in 2002, up considerably from the2001 rate.
Risks to this forecast are unusually high.
The terrorist violence in the United States in
September will have negative short-run consequences for the United States and the global
economy, but could be even more severe thanthese projections indicate if unforeseen events
prove highly disruptive. These uncertainties
with enormous downside risks overlay structural risks. U.S. consumers may be less responsive to interest rates than on previous occasions; foreign investors, concerned about thehigh external current account deficit, may precipitate a sudden adjustment; European growth
may level off at a lower-than-expected plateau;
and Japan’s structural reforms may falter andcause the dip in 2001 to carry over into the next
year. Thus, with the global economy in precarious balance, unforeseen shocks from whateversource are magnified and could push the global
economy into recession.
This said, the long-term prospects for developing countries remain bright. Fundamen-

S U M M A R Ytals—savings, population growth, and investments in education—are favorable. Moreover,many of the policy distortions prevalent inmany developing countries during the 1980s
have been progressively diminished during the
1990s. Budget deficits have generally comedown, reserve levels are higher relative to debt
levels, and economies are now more open. For
these reasons, the growth rates in the base-casescenario of 3.6 percent for the 2005–15 period
are both technically feasible and realistic.
However, not all countries and regions
bask in this bright long-term outlook. Non-oil
commodity exporters, countries with high debt
levels, and countries with poor credit histories
will find themselves at a disadvantage in tradeand financial markets. Sub-Saharan Africa inparticular confronts enormous problems inall of these dimensions—as well as the publichealth epidemic of AIDS (acquired immune deficiency syndrome). For these reasons, invigorating the global trade agenda, even in thesetimes of uncertainty, is imperative.

Merchandise trade
Restrictions on agriculture and labor-intensive
manufactures, notably textiles and clothing,are particularly damaging to the world’s poor.
Virtually all major agricultural commodities
face barriers to trade on a scale that dwarfs
manufactured products. Barriers include high,steeply escalating, and nontransparent tariffs;
tariff peaks; tariff rate quotas on maximum
low-tariff imports; and a plethora of domestic
and export subsidies in high-income countries,
to say nothing about state enterprise tradingthat still survives in many developing countries. Support to agricultural producers inhigh-income countries runs in excess of $300
billion annually. During downturns—such as
the one the global economy is now experiencing—these subsidies tend to increase and force
a disproportionate share of the cyclical adjustment onto producers in developing countries.
Tariff peaks also work against the poor. Fully
one-third of exports of the poorest developing
countries face tariff peaks in at least one of thefour major markets, the United States, Japan,

Europe, or Canada. As estimated in chapter 6,
phasing out restrictions on agriculture would
produce dynamic gains that could well mean
higher incomes in 2015 by nearly $400 billion.
The Agreement on Textiles and Clothing(ATC), which replaced the Multi-Fiber Agreement in the Uruguay Round, succeeded in integrating these products into the WTO. However, the agreement provided a much delayedphaseout schedule that put off much of themarket liberalization until the very end of theprocess in 2005. And, because the implementation of the ATC allows importers much leeway in selecting the products to be freed ofquotas, forgone export earnings for developing countries are sizable. Because high tariffs
loom behind the quotas, market access will remain restricted even after the quotas havebeen abolished in 2005. Removing these barriers would, we estimate, produce increases inincome of perhaps $120 billion by 2015.
These issues provide fertile areas where reciprocal negotiations in a development round of
the WTO could provide substantial benefits fordevelopment. Developing countries would benefit from reducing their own protection in these
sectors as part of negotiated reciprocal reductions in high-income countries for agriculture
and labor-intensive manufactures. Beyond this,high-income countries could also expand tradeby enlarging the scope for preferential accessfor poor countries. Existing schemes in highincome countries have limited coverage and,
together with other impediments to trade, undermine their otherwise positive effects.

Services
Services are the fastest growing components ofthe global economy, and trade and foreign direct investment in services have grown fasterthan in goods over the past decade. In virtually every country the performance of the services sectors can make the difference between
rapid and sluggish growth. More efficient services—in finance, telecommunications, domestic transportation, and professional businessservices—improve the performance of thewhole economy because they have broad link-xv

G L O B A L

E C O N O M I C

P R O S P E C T S

age effects. Collectively, they are essential toincreasing domestic productivity.
Developing countries, in particular, arelikely to benefit significantly from further domestic liberalization and the elimination of barriers to their exports. In a range of services—from financial sector and business services totelecommunications and retailing—restrictions
on foreign investment are still common, particularly in developing countries. Even more
stringent restrictions affect the export of services, such as professional and construction
services, through the movement of persons—amode of supply in which many developing countries have a comparative advantage.
As with merchandise trade, reforms in services have to be managed carefully. The largest
gains come from eliminating barriers to entry
and new competition, but many developing
countries have been content only to change
ownership through privatization while retaining limits on entry that buttress monopolies.
Privatization without competition can vitiate
well-intentioned reforms. Effective regulationis also critical to the success of liberalization.
Even though governments can initiate reforms
of services unilaterally, multilateral agreements
through the General Agreement on Trade inServices (GATS) could help accelerate domestic
reform and improve access to foreign markets
for developing countries. In parallel, global cooperation to expand trade could mobilize support for developing countries at four levels: indevising sound policy, strengthening the domestic regulatory environment, enhancing their
participation in the development of international standards, and ensuring access to essential services in the poorest areas.
The payoffs to success, however, are especially high. Studies comparing reduction of services barriers to reductions in barriers to merchandise trade find that services liberalization
can provide benefits up to four times higher.
Estimates suggest that, after controlling forother determinants of growth, countries thatfully liberalized trade and investment in finance and telecommunications grew on aver-xvi

age 1.5 percentage points faster than othercountries over the past decade.

Transport
International transportation costs to move developing countries’ exports to foreign markets
often are a far greater barrier to trade thantariffs. Both public policies and private practices exercise a significant influence on costs.
Policies toward maritime transport, such as
cargo reservation policies and limitations on
the provision of port services, often protect inefficient service providers and unduly restrain
competition. Competition-restricting practices
among shipping lines increase freight rates by
up to 25 percent on selected routes. Increasing
concentration in the market for port terminal
services poses the risk that the benefits of liberal government policies may not be passed on
to consumers.
International air transport services, despite
being at the heart of the globalization process,are one of the most protected from international competition. The current regime of bilateral air service agreements largely denies access to efficient outside carriers—and inflates
export costs for developing countries.
Countries themselves can take actions to improve management of their ports and reduce
costly delays associated with inefficient customs. In Brazil, for example, failure to deploy
efficient container services has kept costs up to
more than twice international norms in customs, warehousing, inland transport, and ports.
Recasting institutional arrangements to maximize competition in the provision of port services could also drive improvements. Adopting
non-discriminatory policies of open access ininternational air transport can enhance the efficiency of air services. At the same time, there isa need to regulate private practices of transport
service providers by competition policies, to ensure that the gains from liberalization are notcaptured by private firms.
A special responsibility for promoting competitive international transport markets falls
on the large industrial countries. These coun-S U M M A R Ytries, with their strong regulatory capacity andhistory of antitrust enforcement, are well positioned to enforce competition disciplines on
multinational transport operators. To date, they
have not done so.
Beyond this, multilateral negotiations ontransport services under the GATS can support domestic reforms by unleashing greater
liberalization and by lending credibility to domestic policies. The scope for creating binding
multilateral disciplines on transport services islarge. Only little progress has been made in
the past on maritime transport, and even lesshas been made on air transport.

Intellectual property
Intellectual property rights (IPRs) are designed
to balance the needs of society to encourage
innovation and commercialization of new technologies, products, and artistic and literaryworks, on the one hand, with needs to promote use of those items, on the other. Since theoverwhelming bulk of intellectual property iscreated in the industrialized countries, theUruguay Round TRIPS shifted the global rules
governing intellectual property in favor of developed nations. If TRIPS were fully implemented, rent transfers to major technologycreating countries—particularly the UnitedStates, Germany, and France—in the form ofpharmaceutical patents, computer chip designs, and other intellectual property, would
amount to more than $20 billion.
To be sure, there are reasons to believe thatthe enforcement of IPRs is associated positively
with growth. However, these benefits tend not
to materialize until countries move into the
middle-income bracket. Therefore, many countries, especially low-income countries, see thesepotential benefits as elusive promises against
which they have to weigh heavy, up-front costsof enforcement and administration. Administration and enforcement, together with higher
prices for medicines, agricultural inputs, andother key technological inputs, could readily
absorb a significant portion of annual public
expenditures in many low-income countries.

Moreover, enforcing all property rights is often a major problem needed to improve the investment climate, so governments have to ask
whether it makes more sense when measured
against objectives of poverty reduction toforego allocating scarce resources for enforcement of (say) land rights in agriculture—wherereturns to investments often benefit poor owners directly—in order to enforce IPRs.
Because economic advantages and capability of enforcement tend to rise as countries become more developed, and low-income countries markets are of marginal importance topatent holders, there is a compelling logic torebalance the TRIPS agreement to accommodate the problems of low-income countries.
This could take three forms: It may make sense
to recognize the validity of a phased implementation of TRIPs based upon development
capacity. Second, negotiating compulsory licensing provisions to allow poor countries withno production capability of their own to license producers in other countries for sale intheir markets would improve their competition access to critical development inputs. This
may provide small developing countries withgreater flexibility in addressing public healthcrises. Third, since industrial countries are themain up-front beneficiaries of IPRs, they may
find it in their interest to provide assistance tothe poorest countries for the implementationof TRIPS. Beyond this, developing countries
can realize concrete benefits from TRIPs by encouraging domestic intellectual property development and its protection abroad.

Reshaping global trade architecture
for development
This report thus proposes actions to reshape
global trade architecture to promote development in four policy domains: launching a development round of trade negotiations within
the WTO, moving forward on the global cooperation agenda to expand trade outside theWTO, enacting new policies in high-income
countries to provide aid for trade, and adopting trade reforms within developing countries.

xvii

G L O B A L

E C O N O M I C

P R O S P E C T S

Reshaping global trade architecture for development:
The four-part policy agenda
1. Convening a development round in the WTO
Market access
Agriculture• Reduce applied tariffs, phase out tariff rate quotas, and bind tariffs at applied rates in both developed anddeveloping countries• Phase out export subsidies in high-income countries and commit to eliminate domestic support linked to
production levels• Reduce tariff escalation and cut off tariff peaks
Manufactures• Reduce applied rates further, and bind tariffs to levels that equal or are close to applied rates• Reduce tariff escalation and cut off tariff peaks• Accelerate implementation of ATC quota eliminations and reduce tariffs in lines now covered by quotas• Negotiate tighter disciplines on antidumping and other forms of contingent protection
Services• Liberalize entry of foreign services suppliers through elimination of restrictions on entry and promoting increased
competition, with wider use of GATS to bind nondiscriminatory access and lend credibility to domestic programs• Enhance scope of services provision through the temporary movement of service providers (both skilled andunskilled)• Secure openness of e-commerce in services, through wider and deeper GATS commitments on cross-border supply• Strengthen multilateral rules to deal with anticompetitive practices in services• Adopt a nondiscriminatory trading regime for air transport, including traffic rights, under GATS
Implementation procedures and phasing• Adopt a phased implementation of TRIPS and other administrative-intensive agreements for low-income countries,
based upon development capacity.
• Establish a consensus that the TRIPS Agreement allows developing countries with no domestic production
capacity to grant compulsory licenses to foreign firms• Convert “best endeavor” promises to binding commitments to provide low-income countries with financial andtechnical assistance to implement WTO accords
Improving WTO transparency and participation• Require WTO disclosure of databases; reports and their full associated information; and analyses for particulardecisions• Provide assistance to strengthen capacity of all members to participate effectively in negotiations

2. Global cooperation to support trade outside the WTO
Provide “aid for trade” through stepped up development assistance• Expand “Integrated Framework” assistance to all low-income countries• Provide assistance to enhance the efficiency of the customs clearance process in developing countries, notably thegood customs practices that are laid out in the revised Kyoto Convention (World Customs Organization)• Expand multilateral assistance to overcome country-specific bottlenecks to improving competitiveness and trading
potential (for example, in finance, transportation infrastructure, education for low income workers, and public
sector trade-related institutions) and to promote tradexviii

S U M M A R Y• Fund mechanisms to help developing countries use intellectual property protection to their benefit by protecting
intangible assets such as traditional knowledge, designs, music, and ethnobotanicals, and patent protection forindustrial goods as well as improve enforcement of IPRs
• Establish a global health fund to purchase licenses from developers of new medicines essential to treating
debilitating diseases in poor countries
Expand global efforts beyond trade to improve environment, raise labor standards, and adopt adequate productstandards outside the WTO• Expand global environmental cooperation with financing to improve environmental protection
in developing countries, and create multilateral forum of environmental exchange• Strengthen international actions on labor standards through the International Labour Organisation (ILO), withproject collaboration from multilateral development banks• Create a Standards Development Facility to introduce science and other professional evidence into standard
setting for products, with adequate representation from developing countries; and provide assistance todeveloping countries’ standard setting bodies

3. Policies for high-income countries
Market access• Grant to all low-income countries duty-free and quota-free access to markets of all countries of OECD
• Reduce uncertainty of market access by harmonizing rules of origin, and by reducing threats of antidumping
Expand bilateral “aid for trade”• Provide financial and technical assistance to developing countries for “behind the border” trade-related investments necessary to take advantage of market access• Improve policy coherence by establishing coordinating mechanisms between development policies and trade
policies to ensure effective development outcomes• Assist developing countries to strengthen competition agencies and improve legislation, and require antitrust
agencies to provide to developing countries information on third market effects of domestic mergers as well as
pending cases of price-fixing and restrictive business practices; and review the anticompetitive consequences ofantitrust exemptions in transport and other sectors that adversely affect development
Domestic policies that facilitate adjustment of labor to economic change• Review domestic policies to ensure displaced workers have adequate social support to deal with rapid changes inlabor market conditions, including unemployment insurance, social safety nets (particularly health and pensions),
and access to training and education

4. Policies for developing countries• Adopt program of trade reform, including phased lowering of border protection for goods and services as part ofa poverty reduction strategy• As part of trade reform program, adopt companion policies to cushion any impact on the poor of adjustment to
new trade incentives, and ensure investment responses; solicit foreign assistance when necessary to implementadministrative requirements of programs• Spur development of industries essential to trade, such as transport, telecommunications, financial sector, andbusiness services, particularly through introduction of regulatory policies that, where feasible, harness competition• Invest in upgrading public sector institutions related to trade, including customs, administration of drawback
programs, and financial supervision agencies• Encourage domestic intellectual property development through TRIPS-consistent standards appropriate to country
needs, and pursue protection of domestic intellectual property abroad• Ensure adequate macroeconomic policy framework to provide sound investment climatexix

G L O B A L

E C O N O M I C

P R O S P E C T S

While this report focuses on global issues,
chapter 6 indicates ways regional agreements,
properly designed, can be steppingstones topromote new trade and deeper integrationthat reinforces multilateral collective action.
The box below summarizes specific measuresthat can produce faster economic integration.
Removing barriers to trade and services, inconjunction with companion policies to foment a supply response, would give a strong
growth impetus to the global economy andlong-run development. Chapter 6 quantifies
these effects, if with the large margin of uncertainty and qualifications that estimating
techniques impose. If remaining restrictions onmerchandise trade were phased out in the
2006–10 period, economic growth in developing countries would be about 0.5 faster than in
the base-case scenario—including services liberalization would add significantly to the boost
in growth. Much of the benefits come fromtrade reforms in their own countries and inother developing countries—and in that sensedeveloping countries as a group control a considerable portion of their own trade destiny. In
some regions, these new trade policies could
well make the difference between achieving
their objectives (for poverty-reduction, lowering maternal and child mortality, and improving educational attainment) and falling shortby a large margin.
The long-term promise of well-implemented trade reform is therefore tangible: aworld with a much higher standard of living,
hundreds of millions lifted out of poverty, anda greater share of children living beyond theirxx

fifth birthday to become productive citizens of
the world. Continuing down the path ofgreater integration will not be easy, but if theinternational community succeeds in doing so,
the world will undoubtedly be more prosperous and stable.

Notes
1. On regional trading arrangements, see World Bank
2000. On standards, see World Bank 2001, chapter 3.
2. Trade liberalization has a relatively small impact
on the rate of growth, but has a large impact on the net
number of poor lifted out of poverty. The reasons are
threefold as described in chapter 6: First, under thebase-case scenario, growth—assuming population were
held constant—will reduce the number of poor from
2.8 to 1.9 billion, but population growth will push that
number back up to 2.2 billion in 2015. Hence comparing the net change to the change associated with fast
integration records an impressive increment. Second,
growth has a disproportionate and positive effect onpoverty, and we have assumed a poverty elasticity withrespect to growth of two, consistent with historical experience. Finally, trade liberalization changes the composition of production to incomes of the poor.
3. This is the discounted present value in 2005 of
cumulative income gains over the decade to 2015.

References
Ganesan A.V. 2000. “Seattle and Beyond: Developing
Country Perspectives” in Jeffrey Schott (ed.) The
WTO After Seattle Washington: Institute for International Economics.
World Bank. 2000. Trade Blocs Washington DC:
World Bank———. 2001. Global Economic Prospects 2001 Washington DC: World Bank.

Abbreviations
and Data Notes

ACP

African, Caribbean Pacific Group of States

ASA

Air Service Agreement

ASEAN

Association of Southeast Asian Nations

ATC

Agreement on Textile and Clothing

CAP

Common Agricultural Policy

CAPAS

Coordinated African Program of Assistance on Services

CGE

Computable General Equilibrium

CEPR

Consortium and the Centre for Economic Policy Research

CEWAL

Associated Central West Africa Lines

CIS

Commonwealth of Independent States

CPI

Consumer Price Index

DEC

Development Economics

DFA

Duty-free access

EA

East Asia

EAC

East African Community

EAP

East Asia and the Pacific

EC

European Community

ECA

East and Central Asia

EDIElectronic data interchange

EEC

European Economic Community

ERF

Economic Research ForumEU

European Union

FDI

Foreign Direct Investment

FIAS

Foreign Investment Advisory Service

FTAA

Foreign Trade Agency of the Americas

GATS

General Agreement on Trade in Services

GATT

General Agreement on Tariffs and Trade

GDF

Global Development Financexxi

G L O B A L

xxii

E C O N O M I C

P R O S P E C T S

GDPGross domestic product

GSP

Generalized System of Preference

GTAP

Global Trade Analysis Project

GEP

Global Economic Prospects

HIV/AIDS

Human immunodeficiency virus/acquired immune deficiency syndrome

ICAO

International Civil Aviation Organization

ICT

Information and Communications Technology

ICTB

International Clothing and Textiles Bureau

IDA

International Development Agency

IDB

Inter-American Development BankILO

International Labour Organization

IMF

International Monetary FundIPRSIntellectual Property Rights

IT

Information Technology

ITA

Information Technology Agreement

JPS

Japanese patent system

LAC

Latin America and the Caribbean

LATN

Latin American Trade Network

LDCs

Least Developed Countries

MENA

Middle East and North Africa

MERCUSOR

Latin America Southern Cone trade bloc (Argentina, Brazil,
Paraguay, and Uruguay)

MFA

Multi-fiber Agreement

MFN

Most favored nation

MRAs

Mutual Recognition Agreements

NAFTA

North American Free Trade Agreement

NAPM

National Association of Purchasers and Manufacturers

NASSCOM

National Association of Software and Service Companies

NGO

Non-governmental organization

NTBs

Non-tariff barriers

PREM

Poverty Reduction and Economic Management

PRSP

Poverty Reduction Strategy Papers

PSE

Producer support estimates

ODS

Ozone depleting substanceOECD

Organization for Economic Cooperation Development

OPEC

Organization of Petroleum Export Countries

PBRS

Plant breeders’ rights

QUAD

U.S., Canada, European Union and Japan

SOEs

State-owned enterprises

A B B R E V I A T I O N S

SSA

Sub-Saharan Africa

SAR

South Asia Region

TBT

Technical Barriers to Trade Agreement

TFP

Total factor productivity

T&C

Textiles and clothing

TFP

Total factor productivity

TRAI

Telecommunication Regulatory Authority of India

TRIPS

Trade-Related Intellectual Property Rights

TRQs

Tariff Quotas

UNCTAD

United Nations Conference on Trade and Development

UNDP

United Nations Development Program

UR

Uruguay Round

URAA

Uruguay Round Agreement on Agriculture

USDA

United States Department of Agriculture

WCO

World Customs Organization

WDR

World Development Report

WHO

World Health Organization

WTO

World Trade Organization

WIPO

World Intellectual Property Organization

A N D

D A T AN O T E S

Data notes
The “classification of economies” tables atthe end of this volume classify economies byincome, region, export category, and indebtedness. Unless otherwise indicated, the term
“developing countries” as used in this volume covers all low- and middle-income
countries, including the transition economies.

The following norms are used throughout:•••Billion is 1,000 million.
All dollar figures are U.S. dollars.
In general, data for periods through 1998
are actual, data for 1999 are estimated,and data for 2000 onward are projected.

xxiii

1
Prospects for Developing
Countries: Coping with a
Global Slowdown
Global economy stalls
The global economy, already balanced precariously between recession and recovery in thesummer of 2001, received a sharp negative
shock with the terrorist attacks in the UnitedStates on September 11. The probability of amore severe global slowdown has since increased, but because of the difficulties of anticipating the responses of businesses and consumers to these unprecedented events, together
with the unpredictable ramifications of the attacks, forecasts are subject to an unusuallyhigh degree of uncertainty. Nonetheless, U.S.
consumer demand, instead of fueling a recovery in global demand in the fourth quarter,
now seems likely to decline. The September 11
events snuffed out the first signs, clearly discernible in late summer, of an incipient rebound in U.S. manufacturing production. As
perceived risks rose, stock markets fell aroundthe world, and new private lending to most developing countries has effectively ceased. Tradeflows, already depressed by slowing demand,
are under new pressures from rising securityrelated costs, disruptions in normal air traffic,
and further post-attack slackening in demand.
The origins of the global downturn can betraced to the sudden decline in U.S. financial
markets in mid-2000. This signaled the end to
the worldwide bubble in equity values and created over-capacity in global high-tech sectors. In
the ensuing slowdown of the U.S. economy,
investment demand plummeted, and consumer
confidence waned. Weakening investor confi-

dence quickly spread to Europe, first evident inequity markets but soon transmitted to businessand consumer demand. The phased contractionof U.S. and then European import demand, in
combination with the reversal of incipient recovery in Japan, heralded an unprecedented deceleration of world trade in 2001 that has adversely affected developing countries.
Growth of global trade fell from record 13.3
percent growth in 2000 to 1 percent in 2001.
Because nearly half of U.S. investment was incomputers, electronics, telecommunications,and other high technology products, the sharp
contraction of investment hit East Asia’s technology-heavy exports swiftly and hard. The
U.S. downturn also rippled through Mexico
into the rest of Latin America. The downturn
spread to the Euro area where economies werereaching the top of the business cycle in early
2001. Conditions then worsened as the technology slump cut into demand, rising oil prices
cut into the purchasing power of consumers,
and the profits of European companies in thelarge U.S. market sagged. The European Central Bank, still fearful of future inflation associated with oil prices and the Euro’s value, did
not immediately cut interest rates. In Japan,
slumping exports cut the tenuous string preventing the economy from slipping back into
recession as the government bumped up against
ceilings on fiscal headroom. These forces, together with weak commodity prices, reduced
growth in virtually all major regions of the developing world.

1

G L O B A L

E C O N O M I C

P R O S P E C T S

Those countries that still depend heavily oncommodity exports were particularly hard-hit.
Many have experienced falling commodity
prices since 1997, prices that never recoveredfrom the East Asia crisis. These countries wereunable to rebuild reserves and other buffers tocushion this year’s further terms-of-trade losses,
and suffered declines in income. Sub-SaharanAfrica as a whole, for example, seems likely towitness a decline in real per capita income of
0.7 percent during 2001.
For the first time since 1974–1975, theworld’s major economies are decelerating intandem. With Japan in recession, Europe decelerating, the United States dealing with theaftermath of the attacks, and many developing countries seeing their own growth slow,
the downturn has now become global inscope. Global gross domestic product (GDP)is projected to increase by a tenuous 1.3 percent in 2001, down from 3.8 percent in 2000
(table 1.1).

The most probable scenario is a recovery
in mid-2002—
The global economy, in the most probable scenario, will begin to recover in mid-2002, probably starting in the United States and thenspreading to Europe and elsewhere. With inflation in abeyance, U.S. monetary authorities
have progressively brought interest rates down
400 basis points over the course of the year
through October and new tax cuts and spending increases provide additional stimulus forthis year and next. The European Central Bank
cautiously started to bring interest rates downin the third quarter of 2001, and, after September 11, did so in tandem with other central
banks around the world. Both the low inflationand the improved structural policies in most industrial countries have created an environment
in which technology-driven productivity growth
can gain traction rather promptly, once thecyclical downturn has reversed. Moreover, rapid
technological developments, high depreciation
rates of investment goods, and just-in-time production systems tend to generate relatively
rapid rebounds after downturns. Only Japan,

2

facing severe financial problems, is unlikely to
become a source of global growth in the shortrun. Oil prices, averaging $25 a barrel in 2001,
are likely to drift downward to an expectedlong-run equilibrium of $20 a barrel, underpinning growth in oil-importing countries.

—creating a global environment better for
developing countries in 2002–03
These developments in the high-income countries, if they evolve as anticipated, will create amoderately propitious external environment
for a rebound in developing countries in late2002, and stronger growth in 2003. Aggregate
growth rates for the developing countries are
expected to fall from 5.5 percent in 2000 to 2.9
percent in 2001; if global recovery takes holdas anticipated by mid-2002, growth in developing countries would probably pick up to
3.7 percent in 2002, and then rebound to over
5 percent in 2003. Trade and financial links,
which had transmitted weakening impulses togrowth from the large high-income economies
to developing countries in 2001, appear now
likely to reverse in 2002, and to do so sharply
in 2003.
Trade growth is likely to accelerate modestly next year to 4 percent, and then gain substantial momentum in 2003 to exceed 10 percent. The last decade of trade growth has
created structural changes that now favor expansion for many developing countries. Many
countries not only gained global market share
during the 1990s, but also diversified heavily
into manufactures. This enabled them to escape the volatility inherent in commodity tradeand price movements. It also cushioned the2001 shock, and should allow them to benefit
from high growth when the projected reboundin global demand begins to occur over 2002–
03. However, those countries remaining dependent on commodity exports are experiencing severe stress today, and can expect little relief from forecast developments over the next
years.
Developments in global financial markets
are also likely to favor renewed growth beginning in 2002, if on a more selective basis thanP R O S P E C T S

Table 1.1

F O R

D E V E L O P I N GC O U N T R I E S

Global conditions affecting growth in developing countries and world GDP growth(percentage change from previous year, except interest rates and oil price)
April 2001
Current

Current forecasts

Forecasts

estimate
2000

2001

2002

2003

2001

2002

2003

Global conditions
World trade (volume)

13.3

1.0

4.0

10.2

5.5

7.3

7.3

Inflation (consumer prices)
G-7 OECD countriesab
United States

1.9
3.4

1.8
2.8

1.4
2.2

1.5
2.3

1.8
3.0

1.7
2.6

1.8
2.7

Commodity prices (nominal dollars)Commodity prices, except oil (dollars)
Oil price (dollars, weighted average), dollars/barrels
Oil price, percent change
Manufactures export unit value (dollars)c

–1.3
28.2
56.2
–2.0

–8.9
25.0
–11.3
–4.6

1.6
21.0
–16.0
4.0

8.1
20.0
–4.8
4.4

–0.3
25.0
–11.4
5.9

5.4
21.0
–16.0
3.1

5.6
20.0
–4.8
2.4

Interest rates
LIBOR, 6 months (dollars, percent)
EURIBOR, 6 months (euro, percent)

6.7
4.5

3.6
4.1

2.8
3.3

3.0
3.3

4.8
4.3

4.7
4.2

5.0
4.5

World GDP (growth)

3.8

1.3

1.6

3.9

2.2

3.3

3.4

High-income countries
OECD countries
United States
Japan
Euro Area
Non-OECD countries

3.4
3.3
4.1
1.5
3.5
6.3

0.9
0.9
1.1
–0.8
1.5
0.6

1.1
1.0
1.0
0.1
1.3
3.2

3.5
3.4
3.9
2.4
3.6
5.7

1.7
1.6
1.2
0.6
2.5
4.1

2.9
2.8
3.3
1.8
3.1
4.9

2.9
2.9
3.2
2.3
2.9
5.2

Developing countries
East Asia and Pacific
Europe and Central Asia
Latin America and the Caribbean
Middle East and North Africa
South Asia
Sub-Saharan Africa
Memorandum items
East Asia crisis–affected countriesd
Transition countries of ECA
Developing countries
excluding ECA
excluding China and India

5.5
7.5
6.3
3.8
3.9
4.9
3.0

2.9
4.6
2.1
0.9
3.4
4.5
2.7

3.7
4.9
3.0
2.5
2.9
5.3
2.7

5.2
6.8
4.2
4.5
3.6
5.5
3.9

4.2
5.5
2.3
3.7
3.9
5.5
3.0

4.9
6.0
4.2
4.4
3.5
5.5
3.4

4.9
6.1
4.1
4.4
3.6
5.6
3.6

7.1
6.1

2.3
4.0

3.4
3.1

5.4
3.8

3.7
4.1

5.1
3.8

5.2
3.8

5.3
5.0

3.1
1.9

3.8
2.9

5.4
4.6

4.2
3.4

5.1
4.4

5.1
4.4

a Canada, France, Germany, Italy, Japan, the United Kingdom, and the United States.
b In local currency, aggregated using 1995 GDP weights.
c Unit value index of manufactures exports from G-5 to developing countries, expressed in dollars.
d Indonesia, the Republic of Korea, Malaysia, the Philippines, and Thailand.

Source: Economic Policy and Prospects Group, October 2001; and GDF 2001 projections of April 2001.

in the past. Lower international interest rates
eased the pressure on developing countries’
debt servicing, particularly in the most creditworthy countries. However, this positive news
is likely to be offset in the short run with aflight to quality, and rising risk premiums
globally. These have increased financial strains
in some highly indebted countries. Investors,
with memories of financial crises in East Asiaand elsewhere firmly in mind, are more dis-3

G L O B A L

E C O N O M I C

P R O S P E C T S

criminating, and that at least partially explains why financial stress in Turkey and Argentina have not produced more widespreadcontagion. Capital flows are thus likely toconstrain growth in some countries, but willprobably reward good policies in other countries. As in the case of trade flows, only by
2003 should growth of capital flows be expected to show a significant acceleration.

Short-term risks are high—Even though the most probable scenario is forrecovery by mid-2002, risks to this global outlook are unusually high and depend largely on
the still unfolding ramifications of the terrorist violence in the United States. Moreover
structural and policy risks persist. The U.S.
current account deficit remains large, andglobal financial markets could impose a disruptive adjustment. Japanese domestic financial strains, should improvements in policy
not be forthcoming, may have a destabilizing
effect on the global economy. Furthermore if
both monetary and fiscal policies in Europe
are insufficient to offset the worsening of market sentiment, the slump could be deeper andlonger than in present projections; a longer
and more pronounced downturn in Europe
would be especially harmful for developing
countries due to the region’s strong trade andfinancial linkages with all developing regions.
Finally, financial tensions in some developing
countries may significantly delay the recovery
in more tightly linked groups of countries.
These risks argue strongly for continued
policies in the high-income countries that will
support growth, and for policies in developing
countries that quicken the pace of structuralreforms to improve their investment climate.

—but long-term prospects are favorable
Even though today’s environment is weak andunusually uncertain, the long-term growth potential of developing countries is promising.
This is because improved macroeconomic management, rising savings, increased openness,and greater diversification create better incentives for investment, technological progress,4

and growth. Yet, with these favorable growthtrends in most regions, some will be left behind, and may find it difficult to meet development goals, such as a reduction in child mortality, without additional policy measures andexternal support.
To understand ways the global slowdown
is affecting the prospects for developing countries, the first three sections below discuss elements of the global environment that shape
the outlook for developing countries: the synchronous slowdown in the high-income countries, then deceleration of trade, and diverse
trends in financial markets. We then show
how these forces shape the short-term outlook
for developing countries, as well as the risks
that could undermine this outlook. A final section concludes with a discussion of long-term
prospects and potential consequences for reductions in poverty.

A simultaneous downturn in theindustrial countries
Downturn broadened—
For the third time in two decades GDP growthin the industrial world slowed below 1 percent
in 2001. By September, the downturn had not
become as deep as during the early 1990s andthe beginning of the 1980s. However, a worrisome characteristic of the current downturn isthat all three industrial regions are simultaneously in a downward phase of the businesscycle (figure 1.1). More pronounced weakness
in the Euro Area and recession in Japan mirrored meager GDP growth in the United States.
While the end of the high-tech boom, thecollapse of stock markets, high oil prices, andcurrency movements were factors that contributed to the downturn in all three regions,the relative importance of those factors differed across regions. Plunging sales of semiconductors and related products primarily affected the United States and Japan, as growthin Europe depended less on high-tech manufacturing. Also, the collapse of stock markets
has probably affected the United States andP R O S P E C T S

F O R

D E V E L O P I N GC O U N T R I E S

Figure 1.1 Industrial production in the G-3 countries falls in 2000–01(percent change, 3-month/3-month, saar)
12
Germany6

0–6
United States
–12
Japan
–18
Jan. 2000

April 2000

July 2000

Oct. 2000

Jan. 2001

April 2001

July 2001

Note: The G-3 countries are United States, Japan and Germany.
Source: National statistics; Economic Policy and Prospects Group calculations.

Japan more severely: wealth effects are traditionally more important in the United States,
and the fragile Japanese banking sector is vulnerable to low equity prices. Inflationary pressure coming from high oil prices and the strong
dollar were a main impediment in Europe,
where the European Central Bank tried to establish a tradition of keeping inflation strictly
under control and hesitated to ease monetary
policy.

—as growth stalls in the United States—
The downturn started in mid-2000 in the
United States, with sharp corrections in thestock market ending a long period of large capital gains, especially in the high-tech sectors.
Just when an expected soft landing seemed athand, market sentiment worsened toward theend of the year. Uncertainty about future profits sharply reduced investment demand andborrowing, particularly by high-tech firms.
The resulting negative wealth effects also
sharpened the downturn in other sectors.
U.S. business investment continued to
weaken sharply during 2001, exports and imports plummeted at double-digit rates, andjobless claims rose at a recession-like pace.

Quarterly GDP growth rates flirted with recession during the first three quarters of theyear. Manufacturing production had sagged—a result of declining domestic investment andthe adverse effects on exports stemming fromthe strong dollar and weak global growth—which in turn yielded burgeoning excess inventory levels that required sharp curtailments
in output.
The terrorist attacks on September 11 exacerbated the deterioration of economic conditions. The direct loss of U.S. output in theimmediate aftermath of the September 11th
tragedy is estimated to be $25 to $35 billion.
This is about one day’s GDP (1.5 percent ofquarterly output)—as business, financial markets, and air transport effectively came to a halt
as the events of the day unfolded. Financial markets remained closed for four trading sessions, afull ban on commercial air travel lasted for aweek, and disruptions to the countries’ “normal” order of business became widespread.
The collapse of air transport aggravatedthe direct output effects, because the sector ishighly labor intensive, and air travel is an essential input to other economic activities. According to the World Bank’s sectoral Linkage

5G L O B A L

E C O N O M I C

P R O S P E C T S

Model, a 20 percent cut in air travel supply
during one month would reduce annual GDP
by more than 0.25 percentage points. Accommodations and restaurants are among the sectors that were affected severely, with “recreational services” representing over 3 percent
of national value added—some three times
that of air transport.
The indirect effects of the attacks are prospectively larger, operating through a fall in
consumer confidence and lower equity market prices. The aggressive monetary policy reactions following the attacks could well contain the deterioration of market sentiment toa limited period; but is unlikely to prevent astrongly negative impact on economic activity
during the fourth quarter of 2001.

—while Japan is in recession—
Even though the economy is likely to haveslipped back into recession in 2001, the Japanese government persevered with its plans forbadly needed reforms. It moved toward somefiscal consolidation and began disposing ofbanks’ nonperforming loans, acknowledging
that short-term economic costs are the pricefor achieving long-term gains. Bad loans havecontinued to mount in the domestic banking
system, rising by official estimates from 9.7
percent of GDP in fiscal 1997 to 12 percent of
GDP in fiscal 2000.1 Loan-loss reserve coverage of “risk management loans” dropped from46 percent in fiscal 1997 to 24 percent as of
fiscal 2000. Revised reporting criteria now
commit commercial banks and other financial
institutions to “mark-to-market” equity held
as capital, revealing losses that have likely been
substantial over the last years, and requiring
additional scale-backs in the loan portfolio (seebox 1.1). With the Nikkei at very low levels,
this adjustment could be particularly sharp.
The economy will probably contract by
0.8 percent in 2001. With limited policy instruments other than structural reforms, only
a recovery of exports can offset continued
stagnation in consumption and fall-off in public works spending, to set the stage for eventual recovery in private investment.

6—and Europe, led by Germany, weakens
The weakening in Europe has been unexpectedly sharp in the second and third quarters of2001 (figure 1.2). Germany was the first to feelthe impact of collapsing investment demand in
the United States and East Asia. Its exports to
those regions amount to almost 4 percent ofGDP, more than for any other European country. The malaise in German manufacturing isdepressing activity in other countries and othersectors. Moreover, it became increasingly clearthat Europe could not escape the sharp cyclicalglobal downturn in high-tech products. In particular the telecom sector, which had invested
heavily in infrastructure and licenses for thirdgeneration mobile communications, had to adjust its profit expectations. Trade volumes are
falling rapidly across the region, reflecting the
sharp downturn in global demand, as well as
declining intra-European Union (EU) flows.
Earlier strengthening of the dollar, remaining
high levels of the oil price and the fall in equity
markets—in addition to slowing world trade,
contributed to this recent sharpening of thedownturn in Europe.
The unexpected strengthening of the dollar
during the spring, and high energy prices both
added to inflationary pressures, and the European Central Bank (ECB) was hesitant to lower
interest rates further, even when it became increasingly clear that such a step would be necessary to stabilize the economy. But the ECB reduced its policy interest rates by 25 basis points
in late August, and lowered rates again as partof the coordinated policy response to the September 11 events.
Declines in equity markets and financing
conditions in the United States appear also tohave affected the domestic investment of globally active European firms. The EU has continued to be the major investor in U.S. equity and
fixed-income markets, as well as in mergers andacquisitions (M&A) over the last years—accounting for some 70 percent of net foreign purchases of U.S. corporate bonds, 90 percent ofequities, and over $125 billion in M&A during
2000.2 Hence fall-out from slowing export
market growth, accumulated losses in U.S. fi-

P R O S P E C T S

Box 1.1

F O R

D E V E L O P I N GC O U N T R I E SJapan and the developing countriesDuring the 1970s and 1980s, East Asia’s developing and newly industrialized countries foundthat links through Japan’s goods trade, banking
flows, direct investment, and official development assistance formed a cement that fostered robust advances in trade, financial integration, and growthwithin the region. During the 1990s Japan experienced a burgeoning problem of nonperforming loans
in its banking system and meager output growth of
1.4 percent per year. Yet, Japan’s impact on the region during bad times appears to be as strong as
during the good times of the earlier decades.

Japanese commercial bank claims by
developing region, 1990–2000(billions of current dollars)
150
125
100
75
50
25

Links through trade
Japan’s share in
region’s exports

GDP “exported” toJapan (percent)a

East Asia and Pacific
Latin America and the Caribbean
Sub-Saharan Africa/Middle East and North Africa
Europe and Central Asia

0
1990

1992

1994

1996

1998

2000

World region

1990

2000

1990

2000

Source: Bank for International Settlements, Quarterly Report
June 2001 and Annex tables.

Developing E. Asia/
NIEs
China
Korea, Republic ofSingapore

18.8
14.7
18.6
8.8

13.8
15.6
11.1
7.5

5.2
2.6
5.0
12.6

5.5
3.9
4.0
10.8

Oil exporters
North America
European Union

23.6
10.3
2.1

24.4
6.7
1.8

11.4
0.9
0.5

13.1
0.7
0.6

Major Latin America
Other major
developing**
Other developing

6.8

3.0

0.6

0.5

20.7
10.3

6.1
5.7

3.3
0.8

1.5
0.7

Japanese lending to East Asia doubled between
1990 and 1996, rising to 4.4 percent of regional GDP,and as high as 21 percent of GDP in Thailand. A critical factor contributing to the upsurge in international
lending was domestic—the demise of the traditionalor “Main Bank” lending system within Japan itself,
introducing more competition in the capital markets(Hoshi 2001). The financial crisis of 1997–98 yieldeda swift decline in Japanese bank claims on the “Crisis5” countries dropping by 30 percent between 1996
and 1998, representing a withdrawal of some 2.6 percent of GDP for these countries—although for Thailand it was 8.3 percent of GDP. From 1998 through2000, Japanese claims on developing countries continued to fall, by 53 percent to the Asia-Pacific region
and 12 percent for other developing regions. At present, the persistence of nonperforming loans in theportfolios of Japanese banks constrains its ability togenerate new lending. Indeed, domestic lending by
Japanese banks has fallen recently at 6 to 7 percent
annual rates. Financial institutions have reduced overseas exposures in order to build up capital and increase funding for loan-loss reserves (Mori and others
2001). So Japan’s share in developing countries commercial bank financing has dropped by one-half in thelast decade, lessening the importance to emerging
markets of further withdrawal of Japanese loans during the present downturn.

Note: a Calculated as the share of total exports in GDP for country“i” times the share of Japan in country “i’s” exports.
**Group includes Algeria, Arab Republic of Egypt, India, Islamic
Republic of Iran, Morocco, the Russian Federation, and South Asia.
Source: IMF Direction of Trade Statistics, Japan ERISA, WorldBank data, Economic Policy and Prospects Group calculations.

Japan has become less important as a destination
for regional exports over the last decade, as evidenced
by a 5 percentage point drop in export share for East
Asia, and sharper fall-offs for other developing regions.
This is indicative of relatively low growth of Japanese
import demand and a diversification of export markets
by Asian economies. However, the share of East AsianGDP, and particularly that of China “exported” toJapan, has risen slightly over the last decade.
On the financial front, however, the scale-backof Japanese commercial bank lending to developing
countries has continued well beyond the retrenchments of the immediate post-crisis period.

Note: Crisis-5 countries are Indonesia, Republic of Korea,
Malaysia, the Philippines, and Thailand.

7

G L O B A L

E C O N O M I C

P R O S P E C T S

Figure 1.2 European industrial
production falls(growth at seasonally adjusted annualized rates)
6

Q4-00
Q1-01

4

Q2-01
2
0
–2
–4
–6
–8

Germany

France

Italy

Euro
Area

UnitedKingdom

Source: National agencies; Eurostat.

nancial markets, and unfavorable conditions
under which to mobilize new corporate affiliations have come to exert increasingly adverse effects on the European business climate. The fallin equity prices also had a negative impact on
consumer confidence, although wealth effects
are, on average, less important in Europe thanin the United States. Euro Area GDP growth isexpected to fall to 1.5 percent in 2001, following strong output gains of 3.5 percent in 2000.

Rebound next year still likely, but
probably later than earlier expected
Before September 11, there were early signs
that a recovery in the manufacturing sector
was underway in the United States. Figure 1.3
shows, for example, that manufacturing production, excluding high-tech production, hadreached a trough, confirming information coming from the purchasing managers’ index(NAPM). Since the terrorist attacks, that recovery has been postponed. But prudent use of thelevers of economic policy is likely to bringabout at least the beginnings of a rebound in
2002 for the United States and Europe. The
United States has aggressively loosened monetary policy, with the Federal Reserve having

8

lowered interest rates by 400 basis points in aseries of nine cuts over the course of 2001, carrying the Federal Funds rate to 2.5 percent by
mid-October, its lowest level since the early
1960s. European rates have also fallen, but notas swiftly. In addition, on both sides of the Atlantic increased fiscal stimuli are expected toaugment consumption. However, the U.S. recovery, while expected to begin in the second or
third quarter of 2002, will be reflected more in2003 annual growth numbers than in those for2002. Nonetheless, the U.S. recovery is unlikely
to be as quick and strong as earlier thought,
and the European recovery will likely lag one
or two quarters. European manufacturers havebeen faced with large-scale unsold inventories,
and it will take several quarters for this inventory cycle to unwind. With lower external
demand than earlier anticipated, a buoyant
export-led U.S. recovery has become less likely.
U.S. consumer demand, put on hold after September 11, is expected to lead the recovery—ifsomewhat delayed. In Japan, there is no effective scope for monetary easing through interest rate cuts. Financial problems will continue
to weigh heavily upon the Japanese economy,
though a return to moderate positive growth in2003 is expected with revival of world trade.
In the medium term, prospects for industrial
countries remain favorable. Low inflation andimproved structural policies in most industrial
countries have created an environment inwhich the potential benefits from investment
in technology can be reaped once the cyclical
downturn has reversed. Oil prices averaging$25 a barrel are expected to return slowly to
long-run equilibrium of under $20 a barrel,
further underpinning growth in the industrial
countries. And in Japan, the new government’s
tougher approach toward the “bad loan” problem should help the economy move gradually
toward potential growth rates.
Under these assumptions, the forecast anticipates continued low growth rates in the UnitedStates, Japan, and Europe for 2002, 1.0, 0.1,
and 1.3 percent respectively, but with strong
acceleration of GDP growth advancing into
2003 (figure 1.4). [Weaker annual GDP growth

P R O S P E C T S

F O R

D E V E L O P I N GC O U N T R I E S

Figure 1.3 U.S. NAPM and manufacturing industrial production excluding high tech,
1994–2001(index, sa. 3-month/3-month)(percent change saar, 3-month/3-month)
10

60
NAPM

5

55

0

50

Manufacturing
IP excluding tech

–5

–10Feb. 1994

45

40
Feb. 1995

Feb. 1996

Feb. 1997

Feb. 1998

Feb. 1999

Feb. 2000

Feb. 2001

Source: National Association of Purchasing Managers, Datastream.

rates in 2002 are due in large measure to statistical effects related to the initial conditions forthe year—a “carry-over” of sluggish or declining
growth in the final quarters of 2001. A pick-up in
the momentum of output growth across the major
OECD blocs on a quarterly basis is anticipated tocommence in the second and third quarters of
2002, in turn yielding positive “carry-over” effects and resulting in higher annual GDP figuresfor 2003.] The delayed recovery of these major
locomotives of the global economy will transform the earlier-expected outlook for the developing countries. Trade and financial markets
will be the two main channels through whichthese dynamics are transmitted. The next two
sections look at the global environment throughthe lens of trade and finance, and a following
section explores in detail the outlook for developing countries.

Figure 1.4 GDP growth in OECD blocs(percent)
5
2000

2001

2002

2003

4

3

2

1

0

–1
United States

Japan

Euro Area

Source: National agencies; Economic Policy and Prospects
Group projections.

Global environment: trade
Downturn hits manufacturing exporters—
The industrial country–downturn has led tothe sharpest deceleration of world trade onrecord, from an extraordinary 13.3 percent ad-vance in 2000 to a crawl of 1 percent growthin 2001. Import demand in all three industrial
regions slowed sharply, with the steepest decline in U.S. imports (figure 1.5). U.S. investment in equipment declined by 4.5 percent

9G L O B A L

E C O N O M I C

P R O S P E C T S

Figure 1.5 Import growth acrossindustrial centers(percent)
15
2000
2002

2001
2003

10

5

0

–5
Industrial
countries

UnitedStates

Japan

Euro
Area

Source: World Bank data; Economic Policy andProspects Group projections.

after growing by over 11 percent last year.
With almost 30 percent of such investment
being imported, and 40 percent of total investment consisting of high-tech products, this wasa major force behind the slowdown of world
trade and the collapse of the global semiconductor market. Indeed, U.S. imports of capital
goods dropped at an annual rate of 32 percent
during the first half of the year.

Table 1.2

The terrorist attacks on September 11 restrained trade flows further, exacerbating the
sharp cyclical downturn. Security concerns
translated into higher freight rates,3 and limited
air travel greatly hindered the shipment of perishables and high-tech products.4 The impact
on trade in services was significantly larger, with
tourism and business travel sharply lower.5
Growth of exports from developing countries plummeted from over 19 percent in 2000
to 2 percent in 2001. East Asian export
growth fell more sharply still, from 25 percent
to 0.5 percent (table 1.2). These effects are so
pervasive because developing countries are
now more than ever linked to global trade cycles in manufacturing. Countries increased
trade as a share of their economies, and increased their share of the global market during
the 1990s. In doing so, many developing countries diversified away from commodities tomanufactures, and further, into high-tech products. The share of manufactured goods in developing countries’ exports increased from 60
to 80 percent over the last decade, while theshare of capital goods increased from 27 to 42
percent (figure 1.6).

—and commodity exporters
Commodity exporters have been hard hit by
price declines. Although the number of countries that are highly dependent on commodity

Merchandise export volumes, annual average percentage change

World
High-income countries
United States
Euro Area
Japan
Low-middle-income countries
East Asia and PacificSouth Asia
Middle East and North Africa
Europe and Central Asia
Latin America and Caribbean
Sub-Saharan Africa
Memo: Developing x ECA

1999

2000

2001

2002

2003

4.1
4.1
3.9
3.2
4.0

13.5
11.9
11.3
12.2
12.9

0.3
–0.2
–2.1
2.2
–7.7

3.7
3.3
4.6
3.0
4.0

10.3
10.5
11.9
11.0
11.8

3.8
9.7
7.5
–2.6
–2.6
–0.8
0.0
5.3

19.2
25.5
12.3
8.0
18.9
12.0
8.8
19.2

2.1
0.5
3.0
2.1
6.1
1.9
3.4
1.2

5.0
6.4
7.0
4.1
2.8
3.8
2.9
5.5

9.7
11.5
7.6
5.8
8.4
9.3
6.4
10.0

Source: World Bank data; and Economic Policy and Prospects Group projections.

10

P R O S P E C T S

Figure 1.6 Export shares for developing
countries excluding transition economies(percent of total exports)

F O R

D E V E L O P I N GC O U N T R I E S

Figure 1.7 Distribution of countries byshare of primary commodities in total
merchandise exports
Percent of countries

100

80
80

1981–85
1996–99

70
60

60
50
40

40
Natural resources

30

Energy20

20

Agriculture
Manufacturing

10

0
1971

1976

1981

1986

1991

1996

0
<60

Source: U.N. Commodity trade statistics (COMTRADE).

60–80

80–100commodity share
Source: Staff calculations using UN COMTRADE datafrom WITS system.

exports is declining, for more than 10 percent
of developing countries commodities exports
account for over 80 percent of total merchandise exports (figure 1.7).
Non-oil commodity prices are projected
to fall by about 9 percent in 2001 following a
1.3 percent decline in 2000. Substantial increases in the supply of commodities such as
coffee, vegetable oils, and timber, and currency
weakness of major exporters relative to the
U.S. dollar,6 also contributed to the fall of commodity prices. In the case of metals, the pricedeclines come in spite of production cuts, particularly in aluminum, but also in copper andother metals.7 Using its market power, the Organization of Petroleum Exporting Countries(OPEC) was able to sustain, at least in the shortrun, prices around $25 a barrel. However,slackening demand, especially after September
11, clearly will exert downward pressure on
price. OPEC’s reassurance that it will guarantee
sufficient supply quickly, eased market concerns after September 11, but the possibility of
future supply disruptions in the aftermath of
the terrorist attacks has not disappeared, keeping uncertainty at exceptionally high levels inthe short run.

World trade expected to rebound laterin 2002—
As noted in Global Development Finance(GDF 2001), earlier cyclical downturns in theworld semiconductor industry have been brief,
largely due to technological advance and rapid
inventory liquidation. More generally, faster
depreciation rates of capital goods appear tohave shortened the investment cycle, while
lower inventory ratios have reduced the structural importance of inventory cycles. Combined with the positive impact of lower interest rates on demand for durable goods, thechanging technological characteristics made arecovery of manufacturing production in the
United States before the end of 2001 probable—and the first signs of a rebound were visible before September 11. However, the terrorist attacks have now rendered such a scenario
of quick recovery unlikely. Although the mechanisms behind the recovery remain unchanged,a delayed upturn is more plausible now.
As a recovery in the United States begins togather pace by mid-2002, increased investment
and Information and Communications Technol-

11

G L O B A L

E C O N O M I C

P R O S P E C T S

ogy (ICT) equipment spending should feedthrough to import demand, setting the stage fora pick-up in world export growth, mainly manifesting in robust 2003 annual growth rates(table 1.2). Expected growth of 4 percent in2002 is followed by growth over 10 percent in2003 in this projection. The rebound is likely to
be fastest for East Asia, with growth rates of
6.4 and 11.5 percent in the coming two years.
The dynamics in the region reflect countries’
specialization in high-tech products and the
pronounced boom-bust cycles rippling throughEast Asia since the 1997–98 crisis. For regions
depending more on commodity exports, export
growth will be lower under these circumstances. For example, Latin American exports
are expected to grow about 4 and 9.5 percent
in 2002 and 2003, while Sub-Saharan Africa
could see exports growing near 3 and 6.5 percent, lower than Africa’s record growth of
2000, but still high relative to past trends.

—but commodity exporters
remain vulnerable
After the sharp 9 percent fall in commodity
prices in 2001, almost no rebound is expected
for 2002, and only by 2003 are current losses
likely to be made up. Market conditions continue to put downward pressures on commodity prices in local currencies, and the modest
price rebound expected for 2002 is mainly
based on expected currency movements. With
manufactures export prices expected to increase by 4–4.5 percent per year, in light ofanticipated depreciation of the dollar, commodity exporters are likely to experience further terms-of-trade losses. The decrease in theimport-purchasing power of exports as a resultof relative price changes might constrain consumption and investment demand, for instancebecause of reduced availability of intermediate
manufactures or capital goods. Research on
North-South business cycles suggests that up
to 20 to 50 percent of output volatility for suchcountries may be explained by business fluctuations in developed countries (see, for example, Deaton and Miller 1996; Kouparitsas

12

Figure 1.8 Episodes of world growth
slowdown and agricultural and mineralexport prices(difference in growth from the previous two years—
percent)
10Agriculture

Minerals

0
–4.7

–6.3

–8.0

–10

–15.9
–20

–30

–17.5

–28.8
1980–82

1990–92

1998–99

Sample of 31 non-oil commodity dependent SSA
countries, classified as mineral or agricultural exporters(see GEP 2000, Chapter 4, fn. 28 on p. 129 for detailsof coverage).
Source: Economic Policy and Prospects Group staff
estimates.

1996; Kose and Riezman 2000). Figure 1.8 indicates that the negative impact during downswings on mineral exporters is generally larger
than on agriculture exporters, reflecting thegreater sensitivity of minerals demand to industrial production.
Oil prices are expected to gradually decline
to under $20 a barrel over the forecast period,
due to rising supply competition from both
non-OPEC producers and within OPEC itself.
Earlier episodes, notably the second oil crisis
during the early 1980s, show that, in the shortterm, it is possible to evoke large price swings
with small supply shocks, but that large supply adjustments are needed to keep the price athigh levels for a more extended period (figure1.9). The sharpening of the downturn after
September 11th and OPEC’s policy reactions
to avoid sharp price hikes in the wake of theterrorist attacks, have accentuated the expected downward trend.

P R O S P E C T S

F O R

D E V E L O P I N GC O U N T R I E S

Figure 1.9 OPEC output and crude oil pricedollars per barrel

Thousands of tons
1,400

40
Production(left scale)

35

1,200

30
25

1,000

20
15

Nominal crude price(right scale)

800

10
5

600

0
1971

1975

1979

1983

1987

1991

1995

1999

Source: World Bank; OPEC Bulletin.

Global environment:
financial markets
Increasing risk generally outweighsinterest rate reductions—
The weaknesses of demand in the industrial
countries had translated into lower interest rates
before September 11, as authorities provided amore accommodating monetary stance. Afterthe terrorist attacks, monetary authorities in theindustrial countries swiftly eased monetary conditions further. These policies can potentially
soften both the slowdown in the OECD region
itself and the transmission of the downturn todeveloping countries, enabling the latter to benefit from lower international interest rates and ashift of capital flows away from industrial countries. However, the financial channel of transmitting growth dynamics from the major markets to developing countries produced higher
spreads instead of larger capital flows in 2001,
and contained a strong bias in favor of wellperforming, creditworthy countries. This reflects the behavior of investors, who are now
more risk-sensitive and discerning than they
were in the years before the 1997–98 crises inemerging markets. Therefore, the benefits oflower OECD interest rates have been morethan-offset by higher risk premiums particularly
for poorer performing countries.
This is in sharp contrast to the 1991–93
slowdown in industrial countries, anotherepisode of slowing growth and interest rate
cuts. Then, when U.S. interest rates fell by 450
basis points cumulatively over three years,
global gross capital market flows increased by
22 percent a year, albeit from very low levels
born of the 1980s’ debt crisis. Developing
countries benefited from the increased liquidity
with a similar increase in inflows by 32 percent
a year.
In 2001, the opposite occurred when theFederal Reserve reduced policy rates by 400
basis points. After rising in 2000 for the firsttime since the 1997–98 crisis-ridden period,
net capital flows to developing countries are
expected to decline in 2001. Gross flows frominternational capital markets, which increasedby over 30 percent last year, are down by near
20 percent (year on year—y/y) in the first halfof this year (figure 1.10). Foreign direct investment (FDI) flows have continued to fall13

G L O B A L

E C O N O M I C

P R O S P E C T S

Figure 1.10 Gross capital market flows to developing countries
billions of dollars (monthly averages)
20

15

10

Equity
Loans
Bonds

5

0
1998

1999

2000

Q4 ’00

Q1 ’01Q2 ’01

July ’01

Aug. ’01

Source: Euromoney; Economic Policy and Prospects Group.

(by 4 percent [y/y] in the first quarter) fromtheir peak in 1999, and official flows are notexpected to post a significant rise in 2001.
The difference between the current downturn and the recession a decade ago is the risk
perception of private investors. Toward the endof the 1991–93 recession, investors were generally optimistic about new investment opportu-

nities in emerging markets after many developing countries eased capital market restrictions.
The spreads were relatively low and developing
countries’ share in global capital flows were increasing (figure 1.11). This year, the spreads
were high and even rising toward the middle ofthe year, reflecting the heightened risk perceptions of the markets. As a result, the alreadyFigure 1.11 Emerging market spreads and share of global capital flows
Percent

Basis points

15

1,500
EMBI spreads (LHS)
1,200

12

900

9

600

6
Emerging market
share (RHS)

300
1991 H1

1993 H1

1995 H1
LHS: Left scale

Source: Euromoney.

14

1997 H1
RHS: Right scale

1999 H1

3

2001 H1

P R O S P E C T S

small share of developing countries in global
capital flows has declined further.

—but mainly because of financial tensions
in some large emerging markets—
Although aggregate net capital flows are on the
decline this year, the reduction comes mainly
at the expense of a few large recipients, notably Brazil, Argentina, and Turkey. Investors
shunned the latter two countries on the worryof default on their public debt. Brazil, which
received FDI flows of over $30 billion a year in1999 and 2000—more than covering current
account deficits—has seen a marked fall-off in
FDI to $15–20 billion in 2001. A worsening of
the external environment for Brazil—weak export market growth, low commodity prices,and rising spreads due to contagion from Argentina—and a domestic energy crisis have
limited the country’s access to capital markets.
Market reactions in the first weeks after theterrorist attacks showed a similar pattern.
Spreads on Brazilian and Argentine bonds increased by more than 150 basis points, but the
average increase for all other emerging economies was just 60 basis points, only slightly morethan the decline in international interest rates(LIBOR).
Capital market financing to developing
countries other than Argentina, Brazil, andTurkey declined by 9 percent in the first halfof 2001, contrasted with a 20 percent decline
including these three countries. Bond issuance,that seems to have benefited from the lower
interest rate environment, grew by 75 percent
excluding the three countries, and by 35 percent for all emerging markets.
Countries that usually had difficulty in accessing the global bond market in the past few
years were successful during “windows of opportunity” that opened up periodically in thefirst half of 2001. These episodes usually occurred when interest rates fell sharply in the industrial countries—thereby increasing liquidity
in the market—and when difficult conditions in
key developing countries abated. June 2001 was
one such month, when gross capital flows
surged to over $21 billion, with countries thatF O R

D E V E L O P I N GC O U N T R I E S

had little success in accessing the market muchin the past year raising relatively large sums. For
example, a private Russian corporation successfully issued a bond—the first access in a year—
while large sums were raised by the Arab Republic of Egypt ($1.5 billion), Malaysia ($1billion), and Hungary ($0.9 billion). Moreover
many small issuers with less-than investment
grade credit ratings either tapped the bondmarket (Jamaica, Lebanon, Romania, and the
República Bolivariana de Venezuela) or obtained syndicated loans (Chad, El Salvador, Estonia, Gabon, Peru, and a Russian bank that received a loan for the first time since the 1998
crisis in that country).
These “windows of opportunity,” however,alternated with periods when they were closed
decisively. Investor sentiment deteriorated
sharply in July, with average spreads rising by
nearly 200 basis points in response to adverse
developments in Argentina and Turkey. Although spreads also increased for several Central European and other Latin American countries, the contagion was limited. The terrorist
attacks and threats of further violence will
likely yield a further decline in private flows to
emerging markets in 2001, both capital market flows and foreign direct investment. Capital market commitments could drop to some$160 billion—a third below 2000 levels. FDI
to major emerging markets had declined from$61 billion in the first half of 2000 to $56 billion in the first half of 2001, and the attacks
have raised the likelihood of a further downturn: they have greatly increased the uncertainty involved in traveling to supervise foreign subsidiaries; raised the cost of globally
integrated supply chains due to higher insurance rates and enhanced security measures atthe border; and demonstrated that these supply chains are vulnerable to interruption.

Capital flows are unlikely to recoverin 2002
Although near-term gross capital market flows
are notoriously difficult to forecast, the global
political and economic environment seems too
uncertain for a rapid upturn in capital flows to

15

G L O B A L

E C O N O M I C

P R O S P E C T S

developing countries. In the short run, emerging markets’ share of private flows—which increased rapidly during the last decade—is likely
to drop sharply as private investors seek safe
havens. By 2003, however, the right mix of continued low interest rates, a rebound in world
trade and reduced risk perceptions could generate a recovery of capital flows, and perhaps anincrease in developing countries’ share of global
flows. Yet private market flows will probably
be much more selective than in the past. Investors, with memories of financial crises in
East Asia and elsewhere firmly in mind, will remain more discriminating. Capital flows arethus likely to reward good policies in somecountries, but continue to constrain growth inothers. Moreover risks remain weighted to thedownside, as default by a major emerging market would escalate risk premiums for the majority of developing countries.

The outlook for developing
countriesA

lthough the slowdown in global economic
activity is being led by the industrial
countries, aggregate growth for developing
countries is being adversely affected and expected to weaken from 5.5 percent in 2000
to 2.9 percent in 2001. Delayed recovery in theOECD area is likely to keep developing country growth in 2002 restrained to 3.7 percent.
But stronger recovery in the advanced economies by 2003 should ignite a rebound to 5.2
percent growth in the developing world. However, there are considerable regional variations
underlying these summary figures.
The Europe and Central Asia (ECA), andLatin America and the Caribbean (LAC) regions have been hardest hit by the deteriorating global environment in 2001—althoughconditions in these regions have been clouded
by difficult financial and economic developments in Turkey, Argentina, and Brazil, respectively. Latin America in particular will begin
2002 within a challenging external environment, with the United States likely in recession,commodity prices falling sharply, international

16

tourism collapsing, and capital-market risk
aversion heightened. Only by mid-2002 will
recovery gain some underpinning, as theUnited States and the Euro Area emerge fromtheir slumps. Economic prospects for the Middle East and North Africa (MNA) region—
which, after Sub-Saharan Africa (SSA) suffers
the smallest reduction in near-term growth—
are expected to deteriorate further in 2002, as
oil prices continue to fall and other commodity
prices drop relative to the cost of manufactures
imports. The East Asia and Pacific (EAP) region is anticipated to be first among developing regions to show a recovery in exports inlate-2001 and early 2002, as the group was thefirst to suffer from the collapse in high-techtrade flows. South Asia (SAS) is expected toexperience a less pronounced cycle, as the region is relatively less integrated with the global
economy. But GDP growth at 4.5 percent in2001 corresponds with the 1997 low registered by the region. (See appendix 1 for moredetailed discussion of the regions).

Diverse impacts of industrial
countries’ slowdowns
Historically, the effects of downturns on developing countries have been quite diverse (figure1.12). Financial conditions are discriminating
factors that potentially even reverse the sign ofthe impact. In the early 1980s, the developing
countries followed the industrial countries into
recession; after the second oil crisis the industrial countries tightened monetary policy tobring inflation under control. Higher interest
rates generated severe debt-service problems
for oil-importing developing countries that had
accumulated foreign debts, and the downturnin the developing countries was almost as deepas in the industrial world. Moreover, growth
opportunities in highly indebted countries werelimited for a longer period.
In the beginning of the 1990s, growth in developing countries, excluding the transitiongroup, accelerated despite recessions in the
United States and Europe. It was again monetary transmission that played an importantrole. With inflation under control, the indus-

P R O S P E C T S

F O R

D E V E L O P I N GC O U N T R I E S

Figure 1.12 Industrial- and developing-country GDP growth, 1981–2003(percent change)

6
Developing
excluding transition

5
4
Industrial
3
2
1
0
1981

1984

1987

1990

1993

1996

1999

2002 2003

Source: World Bank data; Economic Policy and Prospects Group projections.

trial world pursued an accommodative andmore predictable monetary policy. Encouraged
by major reforms in developing countries—
including the opening up of capital markets—
international capital diversified away from industrial country markets and found its way
to those developing countries that undertook
major reforms. This enabled many low- andmiddle-income countries not only to escape thedownturn, but to grow at significantly fasterrates than the high-income countries—until theEast Asia crisis brought about a sudden reversal in capital flows.
Although the current downturn resembles
that of 1991–93 rather than the 1982 episode,developing countries today are more adversely
affected by falling import demand in the industrial countries. This is because trade linkages have become increasingly important. And
in the aftermath of the East Asia crisis, a sharp
rerouting of capital flows from industrial
countries to developing countries (as occurredin the early 1990s) is less likely. On the other
hand, developing countries are now better
equipped than 20 years ago to absorb negative
external shocks, benefiting from diversificationand domestic reforms associated with integration into the global economy. The structural

improvements in many developing countries
justify the expectation that they will return torelatively high growth rates, once the global
economy recovers from the current slowdown.

Current downturn follows region-specificchannels on developing country growth
A probable consequence of the simultaneous
downturn in the industrial world is that a
broad range of developing countries will face
an abrupt ending to the strong recovery that
followed the financial crises. GDP growth isexpected to drop by 2.6 percentage points in
2001, with serious downside risks, discussed
in the next section. Apart from an 11 percentage point drop in export market growth, andsharp fall in non-oil commodities—implying
substantial terms of trade losses—developing
countries face a decline in capital inflows ofalmost 20 percent and spreads are again on
the rise after a steady decline since the financial crises (table 1.3).
The regional impacts follow closely the export patterns that vary significantly acrossregions, both the commodity composition ofexports, and the orientation of exports acrossvarious markets in the industrial and developing worlds (figures 1.13 and 1.14). Countries

17

G L O B A L

E C O N O M I C

Table 1.3

P R O S P E C T S

All developing countries: key indicators(annual percent change unless indicated)
1990–99

2000

2001

2002

2003

Export market*
Merchandise export volume
Terms of trade (percent of GDP)

7.5
7.4
–0.2

13.4
19.2
0.5

2.3
2.1
–0.5

4.4
5.0
–0.5

9.4
9.7
–0.4

International market spreads (avg. bp)
Gross capital market flows

807.6
15.2

707.2
28.8

733.6
–18.5

...
...

...
...

3.2

5.5

2.9

3.7

5.2

Real GDP*merchandise import growth in destination countries, weighted by export shares of exporting countries.
. . . Not available
Source: Economic Policy and Prospects Group.

in East Asia—and to a lesser extent Latin
America—with large manufacturing exports,
were the first to feel the impact of the collapseof import demand in the United States andJapan. East Asia’s high-tech laden exports(about one-third of total shipments from theregion) were especially adversely affected as
demand for computers, telecommunications
equipment, and other semiconductor-based
capital goods dissipated. Now, increasing
weakness in Europe and declining commodity

prices put additional pressure on countries inCentral Europe, Sub-Saharan Africa, and Latin
America.
External debt-to-export ratios, and the composition of the debt (private or official) differ
widely across regions (figure 1.15), and canlargely influence the severity of the impact. The
more difficult external environment is especiallyworrisome for highly-indebted countries relying
on private capital flows, such as Argentina,
Brazil, Turkey, and Indonesia. At a regional

Figure 1.13 Composition of developing-country exports(average export shares, 1998–2000—percent)
Mfgrs

Oil

Non-oil commodities

Services

100

75

50

25

0
All
Developing

East
Asia

Source: U.N. COMTRADE database.

18

South
Asia

Middle EastandNorth Africa

Europe andCentral Asia

Latin America
and theCaribbean

Sub-SaharanAfricaP R O S P E C T S

F O R

D E V E L O P I N GC O U N T R I E S

Figure 1.14 Major destinations for developing-country exports(average export shares, 1998–2000—percent)
EuropeUnited States

Japan

Intra-Region

Middle EastandNorth Africa

Europe andCentral Asia

Other

100

75

50

25

0
All
Developing

East
Asia

South
Asia

Latin America
and theCaribbean

Sub-SaharanAfricaLatin America
and theCaribbean

Sub-SaharanAfricaSource: International Monetary Fund; Direction of Trade Statistics.

Figure 1.15 Total external debt in developing countries, 2000
(as a percent of exports**)
200
IMF
Short term
Official
150

Private100

50

0LMICs*

East Asia
and PacificMiddle EastandNorth Africa

Europe andCentral Asia

South
Asia

Note: *Low- and middle-income (developing) countries. **exports of goods and services plus workers’ remittances.
Source: Global Development Finance 2001, World Bank.

19

G L O B A L

E C O N O M I C

P R O S P E C T S

Figure 1.16 Emerging market stripped spreads, 1999–2001(basis points over US$ Treasury bonds)
2,500

2,000
Europe andCentral Asia
1,500
Latin America and the Caribbean
1,000

500
East Asia
0Jan. 1999

July 1999

Jan. 2000

July 2000

Jan. 2001

July 2001

Source: Euromoney; Economic Policy and Prospects Group calculations.

level, Latin America has one of the highest debtto-exports ratios, and at the same time thelargest share of private debt in total debt. As aresult, debt from private sources as a share ofexports in Latin America is more than twice aslarge as in any other region. This makes Latin
America particularly vulnerable. Potentially theregion can benefit from lower international interest rates, but is at the same time most susceptible to reduced availability of funds for refinancing. This vulnerability translates into alarger increase in Latin American spreads thanin other regions (figure 1.16). The heterogeneous debt picture across developing countries requires diverse policy responses. While forcountries with large reserves and low debt,
some macroeconomic easing may be warranted
to stimulate the domestic economy; others faceharsh, but ineluctable, fiscal adjustments.

Region-specific factors will complement
coming recovery
Developments in the world economy, if they
evolve as anticipated, will create a more favorable external environment for renewal ofgrowth in developing countries later in 2002.
Aggregate growth rates for the developing coun-

20

tries are likely to bounce back from their fall to
2.9 percent in 2001 to a projected 3.7 percent in2002 and 5.2 percent in 2003. The dynamics ofthis cycle are likely to be much different fromearlier downturns in the global economy—andto be heavily conditioned by structural changes
in trade and financial markets.
Although the initiating factor driving recovery among developing countries will be the resumption of growth in the industrial centers,
this should be augmented by conditions specificto developing regions and major countries. For
example, an important factor rekindling growthin East Asia should be a recovery of intra-region
trade, following the return of more buoyant demand conditions in the United States and Europe. In Central and Eastern Europe progress
toward accession to the EU, albeit more protracted, should serve to underpin policy reforms
and set the stage for more robust growth asWestern Europe emerges from its slowdown.
The degree of near-term success of reforms in
the larger developing and transition economies—Brazil, China, India, Indonesia, and theRussian Federation—will also prove critical elements in the outlook, as these countries address
issues ranging from fiscal and financial sector

P R O S P E C T S

reforms, privatization, or trade liberalization.
China’s imminent accession to the World Trade
Organization could spur its growth and contribute to further global integration.

East Asia and Pacific . . . trade slump
leads to sharp growth slowdown. . .
EAP experienced an unprecedented deceleration of exports in 2001, as noted in previous
sections. Export growth plummeted 25 percentage points, mainly following the collapse inglobal high-tech markets and the fall in Japanese and U.S. import demand. Worsening of financial conditions, reflected in higher spreads,
was limited to highly indebted countries such as
Indonesia and the Philippines. Relatively low
debt levels, current account surpluses, and large
foreign reserves tended to insulate other countries from contagion.
The sharp drop in manufacturing exports resulted in significant output declines—close torecession levels in some of the small, open economies. However, carryover effects from last year
resulted in positive annual growth rates formost countries, while continued strong, albeit
somewhat less dynamic growth in China keeps
regional growth near 4.5 percent in 2001.
The strength of next year’s rebound will
primarily depend on the vigor of the trade recovery and on policy responses to the deterioration of the financial environment. Signs thatthe high-tech markets have potentially passed
trough levels are becoming clearer, but it remains uncertain whether the upswing in thesemarkets will be as strong as they were during
the last decade. And slower U.S. growth in thewake of September 11 developments will dampennear-term export prospects.
Export growth during the coming two
years is expected to register 6.5 and 11.5 percent respectively. This is only 1 to 2 percentage points above export market growth, while
in previous years the difference between export performance and export market growth
was much larger, averaging 6 points over the
1990s, reflecting the high-tech specializationof East Asia. In that sense, the current forecast
is a cautious view on near-term developments.

F O R

D E V E L O P I N GC O U N T R I E S

Low inflation in most countries provides theopportunity for further monetary easing. However, strengthening of financial systems may
be equally as important as domestic stimulus
at the moment. Under cautious assumptions
about trade recovery and domestic policies,
and assuming no clear-cut financial crises, theforecast implies growth rates of 5 and 6.8 percent in 2002–03 respectively.

Latin America . . . global context andfinancial stress in Argentina exact a toll
on growth
Developments during 2001 proved much
more challenging than anticipated in thespring of the year, and have turned yet more
adverse following September 11. Slackening
world trade and weakening commodity prices
contributed to slower growth in many Latin
American countries. The region’s merchandise
export volume fell from a 12 percent advancein 2000 to about 2 percent, following a similar decline in export market growth. At thesame time the region endured terms-of-tradelosses, equivalent to 0.2 percent of GDP in
2001. For commodity-dependent Central
American countries, this measure dropped bya full percentage point in the year. Caribbean
countries were hit hard by a sharp reduction
in tourism earnings after the terrorist attacks
in the United States.
More important than the deterioration of
the trade environment were changing conditions in financial markets. Rapidly declining
U.S. interest rates provided a degree of relief
for some highly indebted countries by reducing
interest payments on debt. But international
capital markets were less forthcoming than anticipated, and a number of countries had difficulties in financing maturing debt. Argentina’s
fiscal strains and Brazil’s drought-induced
shortage of hydroelectric power were among
the domestic factors that created an inflammable mixture with the worsening of the external
environment. GDP growth in the region wasconstrained to 0.9 percent—a decline of 2.9
percentage points from the 3.8 percent performance of 2000.

21

G L O B A L

E C O N O M I C

P R O S P E C T S

GDP growth in 2002 accelerates to 2.5 percent in the current projections. However, thispoint estimate is surrounded by a high degreeof uncertainty, as it assumes that those countries under financial pressure in 2001 are able
to avert further adverse developments. Latin
America’s high debt and continued large financing requirements will keep risk perceptions elevated, due to the region’s strong reliance on volatile private capital markets.
Argentina’s struggle to establish sound footing
for its fiscal position and debt burden continues to depress its immediate prospects. Manylarge countries are facing elections in 2002
(Brazil and Colombia), with the potential fordomestic shocks remaining high. But macroeconomic management in many of the larger
countries has improved steadily over thecourse of the 1990s, laying the groundworkfor higher sustainable growth in the medium
term.
In 2003, rebounding world output and tradeactivity should be supportive of a substantial
recovery in Latin America, reflected in 4.5 percent GDP growth, powered in part by a revivalof export growth to over 9 percent.

Europe and Central Asia . . . prospects
worsened by EU downturn
The drop in export market growth from 12
percent in 2000 to 5 percent in 2001 was not
as sharp for the ECA region as for others. This
mainly reflects that the slowdown in Western
Europe, accounting for 50 percent of ECA’s
exports, started half-a-year later than in the
United States and Japan.
Despite the smaller than average drop inexports (about 13 percentage points), the deceleration of output growth was larger than in
any other region, from 6.3 percent in 2000 to
2.1 percent in 2001. This reflects the combined
outturns of a strong contraction in Turkey’s
GDP after recent financial upheaval; a return
to more moderate growth rates in Russia—and
other hydrocarbon exporters—after an unusually robust expansion of near 8 percent in
2000; and tight monetary policy in several
Central European countries, notably Poland

22and Hungary, leading to appreciation of currencies during the first half of the year. With financial stress in Turkey, Western Europe needing time to recover, oil prices expected to
decline, and a possible hiatus in progress toward EU accession,8 a sharp and quick recovery of economic activity in the region is unlikely. In the Commonwealth of Independent
States (CIS), GDP growth is expected to decelerate further to 3.2 percent in 2002, due inlarge part to the easing of oil prices. In theabsence of high oil prices, significant institutional and structural impediments remain a constraint to achieving higher sustained rates ofgrowth. GDP growth in the CIS is likely toachieve a 3.5 percent pace in 2003.
In Central and Eastern Europe, the potential for solid growth exists in the medium run.
Two key assumptions underlying this performance are that the EU accession process stays,
generally, on track—albeit with some transitory difficulties. And that Turkey is successful
in reestablishing macroeconomic stability,
paving the way for a recovery over the coming
period, driven in part by strong export
growth, due to some extent to the fall of theTurkish lire. A gradual recovery to stronger
performance in the region would yield growthof 3 percent in 2002, rising to near 4.5 by
2003. Contagion from the financial strains in
Turkey has been limited thus far, with average
spreads following a downward trend. This development has been supported as well by higher
oil prices serving to ease some of the financial
tensions that caused the Russian crisis. Nonetheless, financial risks remain substantial andcould drastically change the outlook.

South Asia . . . less affected by
global slowdown
SAS, less integrated into the global economy,
is generally less affected by the deteriorating
global environment, although uncertainty is
exceptionally high because the region could bedirectly affected by the ramifications of the terrorist attacks in the United States. GDP is projected to slow only moderately, from 4.9 percent in 2000 to 4.5 percent in 2001. Growth isP R O S P E C T S

then expected to remain near a rate of 5.4 percent over the short-term forecast period. This
reflects not only a relatively low level of global
integration across much of the region, but also
some positive domestic factors within many of
the countries. Agricultural sectors, at least outside Pakistan, are expected to perform better
than last year, when weather conditions werehighly unfavorable. However, the most significant contribution to growth will be the continued buoyancy of India’s large domestic service
sector, which is expected to grow at about
8 percent over the next few years. Of course,
the sharp deceleration in global trade has depressed growth in regional manufacturing production to only slightly above 1 percent, but
because this sector accounts for approximately
25 percent of regional economic activity, theaggregate impact has been somewhat muted.
Government subsidies have been used overthe last several years to cushion the impact ofhigh oil prices and poor crop production on
consumer prices—which in turn is being reflected in growing fiscal and current accountdeficits. For both India and Pakistan, central
government fiscal deficits—of 5.3 percent and5.8 percent respectively—have become major
impediments to an acceleration of growth.
India’s fiscal deficit is considerably higher on aconsolidated basis, including regional governments. Pakistan’s fiscal woes are being compounded by its deteriorating current accountposition, which reflects higher oil prices and interest payments, as well as drought-affected declines in export revenues. This has come at atime of high levels of public debt and low foreign reserves, and Pakistan was forced to turnto the IMF to help finance the current account.
Pressure on the current account may not ease in
the short run, because a severe water constraint
for irrigation is likely to significantly reduce cotton output, the main foreign exchange earnerfor Pakistan. Aside from economic developments, Pakistan’s position on the “front line” ofmilitary action against Afghanistan will carry
substantial near and medium term implications.
Risks are substantial for the region. Political uncertainty hangs over Afghanistan, andF O R

D E V E L O P I N GC O U N T R I E S

ineluctably implies future uncertainty for thesubcontinent. Structural problems also entail
risks. Financial strains in India and Pakistan,left unattended, would significantly reduce theopportunities for the region to benefit fully incoming years from a recovery in the global
economy, and jeopardize the promise of regional growth. The ending of a preferential
trade agreement with the United States—
which accounts for 30 percent of Bangladesh’s
exports—may damage the Bangladeshi clothing sector, but this will probably be more thanoffset in 2002, when Bangladesh will receive
duty-free access to European markets for its
garment exports.

Middle East and North Africa . . . high oil
prices and reprieve from drought boosts
near-term growth
Oil revenues—which account for almost twothirds of the region’s export revenues—provide the MNA region with a short-term outlook that is better than other regions. In 2001,
the oil-exporting countries benefited not only
from strong export revenues, but also improved fiscal positions and higher rates of investment. Among the diversified exporters,
agricultural production and rural incomes received a strong boost from a reprieve of longstanding drought conditions in some partsof northern Africa. Growth in Morocco, forexample, is anticipated to accelerate strongly
after consecutive years of stagnant or declining output.
While higher oil prices and recovery fromdroughts in 2001 have provided a fillip to
growth, the delayed recovery in industrial countries will significantly reduce the external impetus to growth at end-2001 and into 2002.
World demand has slowed, and oil prices are
expected to fall to $21 per barrel by 2002.
Growth in the oil-dominant economies willslow to 2.3 percent in 2002. The diversified exporters are similarly affected. Demand is now
slowing sharply in the EU—the dominant export market for the countries of the Maghreb—
and in the United States, of importance to several countries in the Mashreq. Lower income23

G L O B A L

E C O N O M I C

P R O S P E C T S

growth and the erosion of confidence after September 11th will also affect tourism and related
sectors in the region in a substantial fashion.
For some of the diversified exporters, increasinglevels of public debt make it relatively hard tocope with the current deterioration of the external environment. Increasing spreads threaten
to worsen debt dynamics for several countries.
Growth in the diversified exporters should
improve in 2003, as external conditions become more favorable to exports and tourism—
although the improvement in the international
context is expected to be gradual. And the
MNA region will face increasing competitive
pressures as the countries of Central Europe
enjoy greater access to the EU.

growth in 2002, with per capita incomes again
flat. However, the recovery in developed countries is expected to gather pace over the coming
year and set the stage for a strong rebound in
2003, with growth rising to 3.9 percent. Nonoil exporters should see a substantial improvement in performance, as commodity markets
firm and prices stabilize or even rise modestly
in real terms. By contrast, oil producers face
sharply weaker export prices and declining
terms of trade. Significant new capacity, especially in offshore development will help tooffset the negative impacts by allowing production and exports to increase. However, spillovers to non-energy sectors will be limited andoil exporters’ growth is expected to slow as theboom unwinds.

Sub-Saharan Africa . . . suffering fromlow commodity prices
In 2001, the world economic slowdown temporarily derailed SSA gradual recovery fromthe late 1990s slump. Average growth acrossthe region slowed to 2.7 percent from 3.0 percent in 2000, and with population growing at
2.5 percent, per capita GDP barely increased atall. Despite generally better supply conditions
in commodity producing sectors, weak demandin industrial countries held export volume
growth to 3.4 percent. Services, including
tourism also felt the impact, growing at 3.6 percent. A widespread deterioration in terms oftrade compounded the difficulties for many
countries. Agricultural and mineral commodity
export prices plummeted due to a combinationof weaker demand and a delayed supply response to the price surge of 1995–97. Oil prices
also weakened, although oil exporters continued to benefit from buoyant terms of trade andstrong foreign investment demand. Not surprisingly, oil exporters average growth of 3.6 percent significantly outperformed the rest of theregion, where growth registered 2.6 percent for
the year.
Given the steep decline in developed countries activity toward the end of 2001, and theprospect of a sluggish recovery in the first halfof 2002, the near term outlook for SSA is pessimistic. The forecast anticipates 2.7 percent

24

Risks to the outlook
The specter of a sharper slowdown inindustrial countries haunts the outlook—
Risks to this forecast are unusually high. The
terrorist violence in the United States in September will undoubtedly have negative shortrun consequences for the U.S. and global economy. But it is difficult to predict the severity of
the adverse effects because the response of consumers and businesses—and even future policies—are unknown. These uncertainties overlay
structural risks that in other contexts would be
more manageable. U.S. consumers may be lessresponsive to interest rates than on previous occasions as the stock market falls, high consumer
debt, and heightened insecurity may renderthem more cautious; or foreign investors might
become concerned about the persistently high
U.S. current-account deficit, and impose an
abrupt adjustment; these events in turn would
delay the recovery of investment and its implieddemand for high-tech imports. The European
downturn may become more severe once market sentiment deteriorates further, or monetary
policy does not ease sufficiently or have the expected effects. Japan’s structural reforms may
falter or exact a higher toll on economic performance, and cause the dip in 2001 to last into

P R O S P E C T S

F O R

D E V E L O P I N GC O U N T R I E STable 1.4 First year effects of a 2 percent of GDP decline in investment in the
United States, Europe, and Japan(percentage points impact on regional GDP)
East Asia
and Pacific

Latin America
and the Caribbean

Sub-SaharanAfricaEurope andCentral Asia

Middle East andNorth Africa

South Asia

–1.5

–0.5

–0.9

–0.4

–0.4

–0.3

Source: Economic Policy and Prospects Group.

the next year. Thus, with the global economy
in precarious balance, unforeseen shocks from
whatever source are magnified and could push
the global economy into recession.
What would be the consequences for the developing countries of a further slowdown in theindustrial regions? We model simulations ofsynchronous downturns in the United States,
Europe, and Japan. For each, the simulation
assumes a decline in domestic investment of
2 percent of GDP, spread over four quarters,
which is counterbalanced by monetary policy
reactions, which leads to a shift in the businesscycle. The monetary reactions follow historicalpatterns, with the United States quickly reacting to the fall in output with an accumulated
drop of 2.5 percentage points in interest rates.
European policy, much more focused on inflation, is less aggressive, and interest rates fall by
1 percentage point. In Japan, the scope for further lowering of interest rates is minimal as
rates are close to zero in the baseline. The resultof the differences in policy reactions is a weakening of the dollar both against the euro andthe yen. Table 1.4 shows the first year effects ofthese simulated downturns on developing regions. East Asia is hardest hit followed by SubSaharan Africa. Indeed, the negative effects ofa European recession on developing countries
is generally larger than the impact of a U.S. or
Japanese recession. A Japanese recession has
fewer repercussions, due in part to the smaller
size of Japan in world trade (see box 1.1).
The impact of a U.S. recession is mitigatedby a strong monetary policy response and,more importantly, by the strong and widespread effects of that reaction. Latin Americancountries in particular may benefit from a

sharp decline in dollar interest rates. The eurointerest rate is less important than the dollar
rate in the international financial system. Furthermore European trade linkages with Africa,
Central Europe, and some Latin Americancountries are relatively strong. These features
illustrate why the recent slowdown in Europe,
on top of low or negative growth in the UnitedStates and Japan is especially worrisome fordeveloping countries. The negligible shortterm impact of the U.S. shock on Latin America as a whole is the outcome of very diverse
country-specific effects, strongly negative for
Mexico and positive for Argentina. The latter
result is mainly driven by the weakening of thedollar in the simulations. However, this positive impact appears to be only temporary.
The medium-term dynamics of downturns
in the industrial countries differ markedly. Figure 1.17 shows the impact on global GDP in
the years after the shock. For example, the firstyear after the U.S. shock, global GDP is 0.6 percent lower than the baseline, and three years
after the shock it has returned to baseline levels.
So the impact is not a permanent change in thelevel of global GDP, but rather a shift in thetiming of the business cycle. While the reboundafter a U.S. downturn is likely to be quicker asa result of monetary easing, it may create tensions in the medium run because of the monetary impulses to the rest of the world. Lower interest rates potentially boost domestic demandin other countries to compensate for export
losses. In the medium run this may result in
inflationary tensions that give rise to a new
downturn. The dynamics after a Japanese crisis
show a different picture. Because of limited options for monetary easing, it takes several years

25

G L O B A L

E C O N O M I C

P R O S P E C T S

Table 1.5 Short-term claims ofinternational banks outstanding in selecteddeveloping regions

Figure 1.17 Global dynamics ofrecessions in industrial countries(as of end December 2000; percent of annual imports ofdebtor countries)(percentage points cumulated impact on global GDP)
0.20

Creditor

Japan

North
America

Europe

Total

2.7

4.6

33.6

40.9

3.8

1.5

11.9

17.2

0.9

2.0

26.4

29.3

1.8

10.8

36.9

49.5

0.00

Debtor region
AfricaEast Asia andPacific
Europe andCentral Asia
Latin America
and theCaribbean

UnitedStates–0.20
Europe
–0.40
Japan
–0.60

Source: BIS; Economic Policy and Prospects Group.
–0.80

1

3

5

7

9

year after shock
Source: Economic Policy and Prospects Group.

to rebound, with a more protracted, but lesspronounced, impact on the global cycle. The
analysis suggests that a European recession
gives rise to global dynamics somewhere in between the other two. Again we see that a European recession on top of a U.S. recession is potentially dangerous. It could lead to a more
protracted rebound, while at the same time aggravating medium-term tensions.

—while financial instability is
another risk
The previous analysis explored the effects ofslower growth through the main internationaltransmission mechanisms: trade and international interest rates. To illustrate the importance of financial flows (here, bank lending),
we simulated a temporary withdrawal of shortterm bank lending from the three industrial
regions, along with a general increase in emerging market spreads and a country-specific increase in spreads, depending on the reduced net
capital inflows in terms of import coverage. In
four quarterly steps the short-term debt owed
to industrial-country banks is halved, after
which the original debt is gradually restored.

26

Table 1.5 shows the short-term exposure of industrial countries’ banks in selected developing
regions as a percentage of the region’s annual
import bill. These economies account for twothirds of all short-term borrowing by developing countries from international banks.
The data show that the claims of European
banks are six to seven times larger than the exposure of U.S. and Japanese banks. Moreoverlending by European banks is much more diversified, while Japanese banks are focused on
East Asia, and U.S. banks on Latin America.
Consequently, banking problems in Europe arepotentially more disruptive for a broad range ofdeveloping countries than similar problems inJapan or the United States, albeit that the probability of European financial strain is much
lower than of escalating tensions in Japan. The
simulation results highlight the dominance ofEuropean banks and the large negative impactof a withdrawal of their lending on GDP in all
the debtor countries considered (table 1.6).
Apart from the magnitude of the shock, domestic conditions in the borrowing countries
determine the impact. The shock is more detrimental if reserves are low or foreign debt ishigh relative to exports. In general, the initial
reduction in foreign funds is absorbed in three
ways: by attracting alternative foreign capitalat the cost of higher interest rates; by improving the current account at the cost of domestic

P R O S P E C T S

Table 1.6 Withdrawal of short-term
lending by industrial-country banks to
selected developing regions: the first-year
impact on GDP

East Asia
Eastern Europe
Sub-Saharan Africa
Latin America

United Statesbanks

Europeanbanks

Japanese
banks

–0.1
0.0
–0.1
–0.4

–1.4
–1.3
–2.1
–4.4

–0.1
0.0
–0.1
–0.1

Source: Economic Policy and Prospects Group calculations.

recession and by reducing foreign reserves atthe cost of becoming more vulnerable to future shocks. For example, the Republic ofKorea would replace, in the simulation, aquarter of the lost short-term capital by othercapital inflows, reducing its capital needs byroughly 10 percent of the shock, and absorbing the remaining 65 percent of the shock byselling foreign reserves.
For countries with a low initial level of foreign reserves, such as Brazil, reducing reserves
much further would not be a viable option.
Therefore, the withdrawal of short-term lending would directly translate into a domestic
credit crunch. For countries with high external
debt, such as Indonesia, Argentina, or Brazil,
an improvement of the current account is difficult because higher spreads result in higher
debt service. This would put more weight on
the contraction of the domestic economy.

Long-term prospects:
growth and poverty reduction

D

espite the weakening of growth and uncertain present context, long-term prospects remain relatively promising for developing countries. Moreover, it should be noted that the rate of
GDP growth established by developing countries
even in the sluggish global year 2002 (3.7 percent), contrasts favorably with historic experience—some 0.2 percentage points above the average performance of the 1980s, and 0.5 points
above outturns for the 1990s. And longer termprospects hold the promise of continued better-

F O R

D E V E L O P I N GC O U N T R I E S

ing of historic performance, with advances in percapita GDP rising to 3.6 percent over the period
from 2005–2015, two full percentage points
higher than the experience of the 1990s.
While the near-term outlook for developing
countries is heavily influenced by the international business cycle and global environment,
long-term development trends are more directly the result of economic fundamentals—
savings, investment, population growth, tradeand productivity improvements as well as policy in the various regions. Analyzing these factors allows us to study possible paths of development and ways developing countries mightinteract with the global economy over a longer
period.9 To do so, we create a long-term growthscenario and analyze its consequences for development.10 This scenario allows us to test therealism of growth and poverty reduction objectives, given reasonable expectations about fundamentals and current policies. The scenario
also provides a baseline against which to simulate policy changes. In chapter 6 we return tolong-run analysis and use the baseline to analyze the effects of global reductions of barriers
to trade.

Long-term growth: A baseline scenario
Income growth in the developing countries
under the baseline scenario for 2005–15 would
be 3.6 percent in per capita terms, more than
1 percentage point above the per capita growthrate of the high-income countries and 2 percentage points higher than during the decade of
the 1990s (table 1.7). Developing countries are
expected to benefit from reforms carried out
over the past decade. The policy environment ismuch improved, especially in major countries
in virtually all of the regions. Tariffs have comedown sharply in the last decade, and as a result
economies are more open, with trade ratios
50 percent higher than a decade ago. Macroeconomic policies are improved; because government budget deficits are lower now than in
the late 1980s and median inflation rates havebeen halved. These efforts to improve policies constitute investment in better long-term
prospects, and will allow regions to take ad-

27

G L O B A L

E C O N O M I C

P R O S P E C T S

Table 1.7 Long-term prospects: forecast and scenario
growth of world GDP per capita(annual average percentage change)

World total
High-income countries
OECD
United States
Japan
Euro Area
Non-OECD countries
Developing countries
East Asia and Pacific
Europe and Central Asia
Latin America and the Caribbean
Middle East and North Africa
South Asia
Sub-Saharan Africa
Memorandum items
Transition countries of ECA
Developing countries,
excluding ECA
excluding China and India

Forecast

Scenario

Medium-termLong-term

1980s

1990s

2000–04

2005–15

1.4

1.2

1.4

2.1

2.4
2.5
2.2
3.4
2.2
3.7

1.8
1.8
2.2
1.1
1.8
3.8

1.8
1.8
1.7
1.1
2.2
2.3

2.5
2.4
2.2
2.6
2.7
4.2

1.5
6.1
2.7
–0.9
–0.6
3.5
–1.2

1.6
6.0
–2.5
1.6
1.0
3.3
–0.5

2.8
4.8
3.2
1.5
1.4
3.5
0.9

3.6
5.4
3.5
2.6
1.4
4.0
1.5

2.7

–3.2

3.7

3.5

1.4
0.8

3.0
0.4

2.8
1.8

3.7
2.7

Note: Aggregations are moving averages, reweighted annually after calculations of growth in constant prices.
Source: Economic Policy and Prospects Group.

vantage of underlying momentum on economic
fundamentals—savings rates, educational investments, population growth rates, and improvements in productivity. And the external
environment is poised to provide a more supportive long-term context that redounds to thebenefit of the developing countries.
The acceleration of growth in the developing countries seems, on first sight, somewhat
more spectacular than it actually is. First, excluding the transition countries, the next five
years feature a decrease of 0.2 percentage
points relative to the 1990s, before accelerating by 0.9 percentage points to a 3.7 percent
rate of per-capita growth. Second, about twothirds of the acceleration is the result of socalled composition effects. Fast growing countries such as China have now a larger weightin the total than they had ten years ago, increasing the growth rate of the developing
countries on aggregate, even without increasing its own rate of growth.

28Internal factors and policies drive differing
regional performance. East Asian countries
would not be able to maintain the exceptionallyhigh growth rates of the 1980s and early 1990s,
but, on the strength of high savings rates andproductivity, would continue its 30-year pattern
as the most rapidly growing region. China’s
growth will naturally slow as its economy becomes larger and more modern, but still has
scope to growth at 6 to 7 percent annually overthe period (see World Bank 1997: China 2020).
The countries in East Asia—should their savings rate persist at high levels—could well see
capital accumulation account for nearly twothirds of their overall growth rate, with about
30 percent generated by productivity increases.
South Asia would follow a fairly similar pattern, although with somewhat more contribution from labor supply growth and less fromtechnological improvement.
For Latin America, the scenario assumes
that the latent, but undeniable, growth poten-

P R O S P E C T S

tial in Mexico, Brazil, and Argentina, as wellas other economies, is progressively realized.
Better fiscal management and greater hemispheric and global integration are likely toprovide powerful forces that reduce debt burdens which in the past have shackled growthon the one hand, and, on the other, can unleash new productivity. The contribution ofcapital accumulation in Latin America will
be about twice the contribution of productivity, with the contribution from labor supply
growth less than 15 percent on average.11
The countries of Eastern Europe and Central Asia are expected to grow quite rapidly,
continuing a recovery from the transitiongenerated depression of the early part of the
1990s. Further openness among Central andEastern European countries to trade and financial integration with the EU, together
with the reestablishment of the conditions ofpeace in Southeastern Europe, should provide
a favorable context for these countries togrow. Both Eastern Europe and Central Asia
will rely extensively on productivity growth,with labor supply growth either stagnant or in
decline.
While the Middle East and North Africa
would improve rates of per capita growth relative to the historic period, growth under thisbaseline scenario is likely to make only modest
impact on achieving the International Development Goals (IDG). Consistent with relatively
high population growth rates, growth in the
Middle East and North Africa will be accounted for by labor supply growth—between
25 and 40 percent. Productivity growth will
have to be fairly sustained—between 35 and 60
percent of total growth—to achieve the IDG
GDP targets.
The external environment is likely to be supportive. Even though today’s environment is
exceptionally weak, new technologies and further economic integration could indeed produce
higher productivity-led per capita growth inhigh-income countries of 2.5 percent versus 1.8
percent during the 1990s. The U.S. economy isexpected to recover to a long-term trend that issomewhat higher than in the medium-term forecast because of the effects of technology-driven

F O R

D E V E L O P I N GC O U N T R I E S

Figure 1.18 Income and population
shares(income in billions of 1997 dollars using market
exchange rates, population in millions—percent)
100
90

880

910

5,170

6,200

80
70
60

24,20035,300

50
40
30
20
10

7,500

14,5002000 GDP

2015 GDP0

Low and middle

2000
2015
Population Population
High income

Source: Economic Policy and Prospects Group andWorld Bank Data and Projections (Population).

productivity growth. Europe, with a lower initial level of integration, has somewhat greater
scope for productivity improvements as it
adopts new technology and becomes more integrated. Japan is expected to emerge from its
current restructuring with a more efficient system of allocating capital, and this will allow it
to regain a degree of growth momentum, eventhough its aging population profile adds moredrag to its growth. If this scenario for the industrial countries is realized, capital flows to developing countries could well resume within thecontext of a high productivity, low inflation,
low interest rate environment.
Between 2000 and 2015 world income
would, according to the scenario, expand by
60 percent—some $18 trillion (in 1997 dollars) (figure 1.18). Income in the low- andmiddle-income countries would almost double, and account for over 37 percent of the increase in world output. Over 1 billion persons
will be added to world population, reachingsome 7.1 billion. Over 97 percent of the pop-

29

G L O B A L

E C O N O M I C

P R O S P E C T S

ulation increase will occur in low- and middleincome countries, with the high-income countries expected to add only around 30 million
persons in total.12

Poverty trends
Growth will substantially reduce the numberof people living in poverty. With base casegrowth, the total number of destitute poor, living on less than $1 per day, would decline toabout 750 million persons in 2015, downfrom 1.15 billion in 1999 (table 1.8). The
number of people living on $2 per day or lesswould decline by 600 million, from 2.8 billion
to 2.2 billion. While this rate of poverty reduction would be sufficiently robust to achieve
the target of reducing poverty by one-half in2015,13 not all regions would succeed. SubSaharan Africa would be far from reaching thegoal even under this favorable growth sce-

Table 1.8

nario. Moreover, should growth in developing
countries turn out to be less than the 3.6 percent per capita of the baseline scenario, theworld as a whole would not reach the target.
Nonetheless, these projections would continue the reduction of the number of people living in poverty that began roughly about 1980.
Up through the 1970’s, long-term increases in
population swamped the growth effects in the
global economy and the number of people living
below $1 day increased (figure 1.19).14 However, since 1980 faster growth, particularly in
China and South Asia, has contributed for the
first time in recent history to a steady decline in
the number living in destitute poverty. These
new projections confirm that trend.
The new projections represent slight reductions in out-year poverty relative to last year’s
forecast. The changes largely reflect updated
information on poverty and income distribu-

Regional breakdown of poverty in developing countries
Number of people living on
less than $1 per day (millions)

Number of people living on
less than $2 per day (millions)Region

1990

1999

2015

1990

1999

2015

East Asia and PacificExcluding China
Europe and Central Asia
Latin America and the Caribbean
Middle East and North Africa
South Asia
Sub-Saharan Africa

452
92
7
74
6
495
242

260
46
17
77
7
490
300

59
6
4
60
6
279
345

1,084
285
44
167
59
976
388

849
236
91
168
87
1,098
484

284
93
42
146
65
1,098
597

1,276
916

1,151
936

753
700

2,718
1,919

2,777
2,164

2,230
2,040

Total
Excluding China

Head count index (percent)Region

1990

1999

2015

1990

1999

2015

East Asia and PacificExcluding China
Europe and Central Asia
Latin America and the Caribbean
Middle East and North Africa
South Asia
Sub-Saharan Africa

27.6
18.5
1.6
16.8
2.4
44.0
47.7

14.2
7.9
3.6
15.1
2.3
36.9
46.7

2.8
0.9
0.8
9.7
1.5
16.7
39.3

66.1
57.3
9.6
38.1
24.8
86.8
76.4

46.2
40.4
19.3
33.1
29.9
82.6
75.3

13.5
13.3
8.7
23.4
16.7
65.5
68.0

Total
Excluding China

29.0
28.1

22.7
24.5

12.3
14.8

61.7
58.8

54.7
56.5

36.3
43.0

Source: World Bank staff estimates.

30

Head count index (percent)P R O S P E C T S

Figure 1.19 World poverty, 1820–1998(Number of people living on less than $1 day, millions)
1,400
Depression/
World War II

1,200
Historical trend

1,000

800
1820

1870

1910

1950

1970

1990

Source: Dollar (2001), Bourguignon and Morrisson (2001),
and Chen and Ravallion (2000).

tion in several countries. The downward revision in out-year poverty is despite the adverse
effect on poverty of somewhat lower longterm growth projections—the key economic
determinant of poverty reduction. As discussed
earlier in this chapter, the downgrading of theeconomic growth forecast reflects the effectsof lower growth in 2001 and 2002, as well as
minor revisions in long-term prospects forsome countries.15
There are three factors influencing thecurrent poverty forecast, reflecting updated
information:• The current forecast incorporates 31 newhousehold surveys leading to a reduction in
the assessment of the base-year level ofpoverty, with South Asia accounting forthe greatest reduction, somewhat offset byhigher poverty levels in Latin America andthe Caribbean.
• Overall projected population growth in developing countries is slower, in large partdue to the impacts of HIV/AIDS. This tragic
epidemic particularly affects population
growth in Sub Saharan Africa, which accounts for a significant part of the reductionin this year’s poverty forecast.

F O R

D E V E L O P I N GC O U N T R I E S• Revisions to the estimates of the relationship between economic growth and poverty
reduction based on the new surveys, suggesting a stronger positive effect of growthon poverty reduction in several countries.16
The long-term projection underscores theimportance of achieving fast growth and distributing the benefits of growth equitably.
Even under this scenario, the harsh reality isthat over 2.2 billion persons will be living
below the $2 per day income level in the year
2015—some 36 percent of developing country
population. Without macroeconomic stability,
improved governance and sustained structuralreforms, including for example, improvementsin the provision of public services and infrastructure, as well as enhancing the participation of the poor in growth, the pattern ofgrowth that underlies the baseline scenario
will not be realized, and millions more people
will remain in poverty.
A faster rate of growth is possible. This report explores the potential for more rapid
growth associated with an acceleration of
global integration. Reducing barriers to tradein merchandise and services can accelerate
growth if adequately supported by domestic
policies and development assistance. These
policies and their consequences, the focus of
this report, are analyzed further in Chapter 6.

Under-5 mortality
One of the most important international development goals for 2015 concerns infant andchild mortality. Are these goals likely to beachieved under the scenario of growth and rising incomes? To project under-5 mortality, welink long-term growth and urbanization,
shown to be effective predictors of child andmaternal health status and expected outcomesin under-5 mortality.17 Figure 1.20 presents thebaseline forecast and compares it with the official IDG target. The only region with a forecast achieving the goal is South Asia (SAS).
Three of the other regions are likely within
range of achieving the target: East Asia (EAP),
Middle East and North Africa (MNA), and31

G L O B A L

E C O N O M I C

P R O S P E C T S

Figure 1.20 Under-5 mortality—hopes and aspirations
Under-5 mortality rates—East Asia and PacificUnder-5 mortality rates—Sub-Saharan Africa
180

60

160
50

140
120

40

100
30

80
60

20

40
10

20
0

0
1990

1995

2000

2005

Hist + Forecast

2010

1990

2015

1995

Target2000

2005

Hist + Forecast

Under-5 mortality rates—South Asia

2010

2015

Target140

Under-5 mortality rates—Middle East and North Africa
80

120

70
60

100

50

80

40
60
30
40

20

20

10

0

0
1990

1995

2000

2005

Hist + Forecast

2010

1990

2015

1995

Target2000

2005

Hist + Forecast

Under-5 mortality rates—Europe and Central Asia
35
30

2010

2015

TargetUnder-5 mortality rates—Latin America and the Caribbean
60
50

25
40
20
30
15
20

10

10

5
0

0
1990

1995

2000
Hist + Forecast

2005

2010

2015

1990

1995

TargetSource: Economic Policy and Prospects Group; World Bank/Latin America Region staff.

32

2000
Hist + Forecast

2005

2010
Target2015

P R O S P E C T S

Latin America (LAC). Europe and Central Asia
(ECA) is not likely to achieve its target basedon this scenario. And Sub-Saharan Africa(SSA) is well off the target path. SSA has already deviated significantly over the last decade, and the current forecast foresees little
closing of the gap.

Conclusions

B

oth the short-term outlook and the longterm analysis underscore the importanceof realizing accelerating growth. One way tocreate incentives to grow is for developing
countries to deepen their participation in the
global economy. And that is the subject of theremainder of this report.

Notes
1. Japan Financial Services Agency, January 2001,
and Japanese Banks 2000, Japanese Bankers Association.
2. Source for data is U.S. Treasury. It should be
noted that the United Kingdom accounts for about 50
percent of portfolio investment flows, channeling European and well as developing country and offshore
funds into U.S. assets.
3. For example, major shipping lines increased
freight rates to South Asia by 10 to 15 percent.
4. Notably, the share of U.S. export value shippedby air has risen from 25 percent a decade ago to 40
percent in 2001, with 75 percent of total high-tech exports moving by air.
5. For example, around 65 percent of holidays
booked for the Caribbean had been canceled in the
weeks after the attack.
6. For example, the Brazilian real depreciated 27
percent relative to the dollar in the first half of 2001,
contributing to the 12.9 percent decline in soybean
prices and 11.6 percent drop in vegetable oil prices inthe same period. Indonesia’s currency depreciated 21
percent (from December to April), which pushed dollar
prices for palm oil and natural rubber down. Thailand,
the world’s largest rice exporter, had a year-to-date currency depreciation of 8 percent, contributing to a 9
percent decline in rice prices.
7. In the U.S. Pacific Northwest, 1.6 million tons ofaluminum capacity has been closed—equivalent to 7
percent of world capacity—because of the electricity
crisis in California.
8. Support for eastward expansion of the EU has
waned markedly in existing member countries, a trend

F O R

D E V E L O P I N GC O U N T R I E S

that was highlighted most recently by Ireland’s “no”
vote on the Treaty of Nice (which makes changes to thevoting structure of the EU to accommodate a larger
membership).
9. The main strategy in developing the baseline scenario is that GDP growth rates are given and the model
solves endogenously for a technology parameter consistent with the GDP target. The following assumptions
underlie the base-case scenario. The baseline assumes
that population and labor supply growth is exogenous.
The latter is proxied by the growth of the population
aged between 15 and 65 years, and implicitly assumes
that participation rates are constant. Agricultural productivity is fixed at 2.5 percent per year. Manufacturing
productivity is assumed to be 2 percentage points
greater than services productivity. International transportation margins decline by 1 percent per year in thebaseline. Income elasticities are fixed at base year levels.
This involves recalibrating the parameters of the consumer demand system between solution periods. Capital accumulation is modeled as the previous period’s
depreciated capital stock augmented by the previous
period’s level of investment (including net foreign investment). The model tracks capital vintages with substitution elasticities, typically lower for installed capitalthan for new capital. Countries with higher rates of investment will exhibit more flexibility over time. Foreign
capital flows are fixed at base year levels (ensuring atleast their sustainability). Fiscal policies are unchanged
at their base year levels, except for direct taxation that
adjusts to target a given fiscal deficit.
10. This is distinct from a forecast in the sense that
unforeseeable positive or negative shocks—from technology, politics, or other sources—are virtually certain
to occur, and will push up or down actual performance, especially at the regional level.
11. While one of the key outcomes of the baseline
scenario is the endogenously determined productivity,
many other variables of interest are generated endogenously in the baseline—relative factor prices, real exchange rates, terms of trade, bilateral trade flows, andthe composition of demand and output.
12. The above analysis provides a framework forassessing the world distribution of income and rates of
conversion, but says nothing about how this outcome
is achieved or what policies are needed to help bringabout these outcomes or even improve them. The
analysis relies to a large extent on an applied generalequilibrium model of the global economy. The model
reflects key facets of economic theory—the most important being that supply equals demand. This framework ensures that all economic flows are fully consistent—at the individual, national, and global level. The
model abstracts from some real world phenomenon,
notably international financial flows are not modeled33

G L O B A L

E C O N O M I C

P R O S P E C T S

explicitly, allowing differential rates of return acrossnations. Nor are there linkages between monetary phenomena and the real economy, for instance, when themodel exhibits super-neutrality.
13. Reducing poverty by one-half in 2015 (compared with the 1990 level) is one of the key development goals (see for example http://www.paris21.org/
betterworld).
14. Historical discussion based on David Dollar(2001), Bourguignon and Morrisson (2001) and Chen
and Ravallion (2000).
15. The long-term per-capita consumption growthforecast for developing countries has dropped from
3.5 percent to 3.4 percent (average per cent change perannum), though with variation across regions.
16. The household surveys and national income accounts on which forecasts are predicated are undergoing
continual review and methodological changes, especially for large countries, which can have important effects on overall poverty assessments. For example, thepoverty levels for India may well be revised downward
even further next year, once the new household survey
has been thoroughly evaluated in conjunction with national authorities.
17. This is based on the pioneering work initiated by Quentin Wodon of the World Bank’s Latin
American Region. We link long-term GDP forecasts toeconometrically estimated relations with selected International Development Goals (IDGs). The work undertaken in the Latin American Region has used panel estimation techniques to fit a relation between the IDGs
and GDP and the rate of urbanization, two important
determinants of health access. In order to allow forvarying elasticities (with respect to income and urbanization levels), the LAC estimation procedure usedspliced data. The forecast presented here uses a logistic
function that has continuously variable elasticities (although with constant signs). The estimation procedure
is based on pooled data on a regional level. It is assumed that the relation between per capita GDP growth
and the rate of urbanization is uniform across countries within a region, although the elasticities them-34

selves will be country-specific and related to the level of
economic development.

References
Bourguignon, François and Christian Morrisson.
2001. “Inequality among World Citizens:
1820–1992.” DELTA, Paris. Processed. (Available
at http://www.delta.ens.fr/XIX/paper WD19.pdf).
Chen, Shaohua and M. Ravallion. 2000. “How did theWorld’s Poorest Fare in the 1990s?” World Bank
Policy Department Working Paper No. 2409.
August. Washington, D.C.
Deaton, Angus, and R. Miller. 1996. “International
Commodity Prices, Macroeconomic Performanceand Politics in Sub-Saharan Africa.” Journal of
African Economies 5: 99–191.
Dollar, David. 2001. “Globalization, Inequality, andPoverty since 1980”. Processed. Development Research Group, The World Bank, Washington, DC.
Hoshi, Takeo. “What Happened to Japanese Banks?”
Monetary and Economic Studies, Institute for
Monetary and Economic Studies, The Bank ofJapan Discussion Paper Series No. 2000-E7:1–50,
March 2001. Tokyo.
Kose, M. Ayan, and R. Riezman. 2000. “Trade Shocks
and Macroeconomic Fluctuations in Africa.”
Journal of Development Economics 65: 55–80.
Kouparitsas, Michael A. 1996. “North South Business
Cycles.” Federal Reserve Bank of Chicago Working paper WP-96–9.
Mori, Naruki, S. Shiratsuka, and H. Taghuchi. 2001.
“Policy Responses to the Post-Bubble Adjustments in Japan: A Tentative Review.” Monetaryand Economic Studies (Special Edition), February
2001. Institute for Monetary and Economic Studies, the Bank of Japan, Tokyo.
World Bank. 1997. China Engaged: Integration with
the Global Economy. World Bank, Wash. DC.
———. 2001. Global Development Finance 2001.
World Bank WDC.

2
Market Access and theWorld’s PoorW

ith the conclusion of the Uruguay
Round and a wave of unilateral reforms, barriers to trade have fallen
substantially around the globe, spurring the
growth of world trade. Developing countries asa whole gained significant market share—about
7 percent—in world nonenergy merchandise
trade, thanks mainly to ambitious domestic policy reforms in the 1990s.

Global protection hits the poor hardest
However, progress in lowering barriers has
lagged in two of the sectors with both the highest protection and with the greatest impact onpoverty—agriculture and labor-intensive manufactures (such as textiles and clothing). Agriculture and other labor-intensive products matter to the world’s poor because they represent
more than half of low-income countries’ exports, and about 70 percent of least-developed
countries’ export revenues.
Developing countries themselves are part ofthe problem. Although South-South trade is amuch smaller share of total trade, average tariffs in manufactures are three times higher for
trade among developing countries than forexports to high-income countries. Taken together and because of high protection for laborintensive products around the globe, the world’s
poor face tariffs that are, on average, roughly
twice as high as those imposed on the nonpoor.
Protection that affects the poor takes several
forms, including tariff peaks, quotas for textiles
and clothing, tariff escalation, and agricultural
subsidies in high-income countries. In textiles

and clothing, the opening of markets has beenslow, because the implementation of the World
Trade Organization (WTO) agreement allows
importers the leeway to select the products
to be freed of quota restrictions. Thus despite
progress made by the agreement, foregone export earnings for developing countries are sizeable. And due to still-high tariffs, market accesswill remain restricted even after the quotas
have been abolished in 2005.

A “development round” would help—
These issues provide fertile areas where reciprocal negotiations in a “development round”
could provide substantial benefits for development. Open trade in agriculture and laborintensive manufactures would raise incomesamong the world’s poor.

—but effectiveness requires cooperative
policies to complement negotiations
Global cooperation beyond negotiations could
also expand trade. For example, most preferential access schemes to high-income countries’
markets only partly breach the walls of protection. Their limited coverage and various
other impediments to trade undermine theirotherwise positive effects. The recent European
Union’s “Everything But Arms” initiative mitigates these problems by removing barriers onexports from least-developed countries. Extension of this initiative to the United States,
Japan, Canada, and other higher-income countries would greatly stimulate the exports andgrowth of the least-developed countries.

37

G L O B A L

E C O N O M I C

P R O S P E C T S

Beyond these, “aid for trade” can help
countries take advantage of new market openings. Providing assistance for countries to implementing WTO-sponsored reforms, designing programs that protect the poor during
reform, and upgrading work skills will help
ensure that trade benefits the poor. Moreover,domestic reforms and assistance to improvebackbone services—such as transport, finance,and communications—can better link the poor
to the global marketplace.

A changing landscape ofmerchandise tradeThe 1990s witnessed a boom in world
trade, with an average annual increase of
6.3 percent in the volume of global merchandise trade (1990–99)—outpacing global grossdomestic product (GDP) growth by an average 4.2 percent per year over the same time
period. Exports grew faster than output inevery major region.

Developing countries gained market sharein world merchandise trade—
The share of developing countries in global
export markets rose by almost 7 percentage
points, to about 25 percent of world nonenergy merchandise trade, primarily on thestrength of superior performance in manufacturing (figure 2.1). However the details behindthese headlines reveal divergent trends—withsome sectors and some countries enjoying exceptional growth, while others remained almost stagnant.

—but poor countries remainedon the sidelines, dependent on slow
growing commodities and labor
intensive manufactures
Developing countries as a whole improved
their penetration of world markets, but the export share of the 49 least-developed countries(LDCs) shrank from 3 percent in the 1950s toaround 0.5 percent in the early 1980s, and has
hovered around this very low rate over the lasttwo decades (UNCTAD 2001). The least-

38

developed countries continue to be dependent
on agriculture and labor-intensive manufactures, which together account for about 70
percent of LDC exports.
The expansion of trade volumes in these
sectors did not keep pace with world trade
growth, which has undermined the growthprospects of the LDCs and hindered the battle
to reduce poverty. South-South trade represents about 30 percent of low-income countries’ nonenergy merchandise exports, and ismore important than for middle-income countries. Exports of low-income countries to otherdeveloping countries increased rapidly, especially in agriculture. In labor-intensive manufactures, South-South trade is far more
important in textiles than it is in clothing, footwear, and leather, both for low-income and for
middle-income countries.
Moreover across products, the increase indeveloping countries’ exports was uneven. In
labor-intensive manufactures, developing countries’ market share increased sharply and now
surpasses that of high-income countries. By contrast, in agriculture, another labor-intensive sector, developing countries’ market share rose
more modestly. This rise in market share wasdriven by South-South trade, with about onethird of all developing countries’ agricultural
exports now directed to other developing countries—up from just about 20 percent in the early
1990s. The slow increase of developing countries’ share in world agricultural exports partly
reflects developing countries’ export diversification out of agriculture, and partly reflects surplus production from high-income countries.
Exports of the poorest countries are evenmore concentrated in agriculture and laborintensive manufactures. Sub-Saharan African
agricultural products provide about 60 percent of export revenues, with little contribution from manufactures.1

Labor-intensive exports can spurpro-poor growthIn developing countries—in particular thepoorest where inexpensive labor is plentiful—M A R K E T

A C C E S S

A N D

T H E

W O R L D ’ S

P O O R

Figure 2.1 Changing global trade patterns
Export growth outpaced growth of output
everywhere——and developing countries increased theirshare in the global market

Average annual growth in volume terms, 1990–99, in percent

In percent of world exports for each product group (left axis)
In US$ billion (over bars)

7

60

6

Exports50

5Output40

4Exports to developing countries
Exports to high-income countries
129
1263
580

20

2

125

193

30

3

212

10

1

0

0
Manufactures

Mining products(including oil)

1991–92 1998–99

1991–92 1998–99

1991–92 1998–99

Total non-energy
merchandise

Agriculture

Labor-intensive
manufactures

Agricultural
products

Source: World Bank staff calculations, based on WTO data.

Manufactured exports have boomed—

Source: World Bank staff calculations, based on U.N. Comtrade.

—but poor countries did less well

Percent of developing countries’ exports

In percent of world exports for each product group

100

60
Exports from LDC

90

50

80
40

70
Oil and other

60

30

Exports from low-income countries
Exports from
Middle-income countries

50
20

40

Agriculture

30

10

20

0

Manufactures

10
0
1970

1975

1980

1985

1990

1995

Source: World Bank staff calculations.

1991–92 1998–99

1991–92 1998–99

1991–92 1998–99

Total non-energy
merchandise

Agriculture

Labor-intensive
manufactures

Source: World Bank staff calculations.

The shares of labor-intensive products in world
exports declined——and poor countries remain dependent onthese sectors

In percent of world nonenergy merchandise exports

In percent of total nonenergy merchandise exports for each country group80

14Agricultural products

7012

1991–9210

1998–99

Labor-intensive
manufactures

60
50

8

40

6

30

4

20

2

10

Source: World Bank staff calculations, based on U.N. Comtrade.

Sub-SaharanAfricaLDC

Low-income

9
98

19

91

–9

–9

2

9

Middle-income

19

98
19

19

91

–9

–9

2

9
98

19

19

91

–9

–9

2

9

2

–9

–9
91

98
19

19

Footwear &Leather98

Textile19

Clothing

19

Agriculture

91

–9

–9

2

9

0

0

High-income

Source: World Bank staff calculations, based on U.N. Comtrade.

39

G L O B A L

E C O N O M I C

P R O S P E C T S

export-led growth can accelerate the reductionof poverty. Faster export growth can boost
income growth of the poor, first, by stimulating
overall economic growth. On average, every
additional percentage point of growth in household consumption reduces the number of people living on less than $1 a day by an estimated
2 percent (World Bank 2000a). And among all
developing countries, successful integrating
countries—the top third of developing countries ranked by an increase in trade-GDP ratios—grew faster (Dollar forthcoming). During
each of the past two decades, the developing
countries that have had fast export growth—leading to an increase in the share of nonenergy
merchandise exports in GDP—have also had,on average, 1 percent higher real GDP growth(figure 2.2).
But if growth is necessary to reduce poverty,
the pattern of growth also matters. Export-led
growth can reduce poverty more directly when
it fosters employment in labor-intensive sectors

Figure 2.2 A rising share of exports in
GDP is associated with faster growth
Average real GDP growth per year, percent
3.5
1980–89

1990–99

3
2.5
2
1.5
1
0.5
0
Decreasing export
share in GDP

Increasing export
share in GDP

Note: Sample includes only developing countries. Exports
refer to nonenergy merchandise exports. Data fromnational accounts in constant 1995 dollars. Number ofcountries with increasing (decreasing) export share in
GDP: 1980–89: 23 (63), 1990–99: 57 (29).
Source: World Bank staff calculations.

40

where the poor have a stake. Capital-intensive
and import-substituting growth has generally
not been effective in alleviating poverty; agricultural growth, where there is a low concentration of land ownership and labor-intensive
technologies are used, has almost always helped
to alleviate poverty (Gaiha 1993; Datt andRavallion 1998). Exports of textiles and clothing have also spurred labor-intensive growth inmanufacturing, contributing to the reduction ofurban poverty, especially among women.

—Agricultural exports can reduce
rural poverty
Rural poverty accounts for nearly 63 percent
of poverty worldwide, reaching 90 percent in
China and Bangladesh, and between 65 and90 percent in Sub-Saharan Africa (Khan 2000).
Developing countries that have had more rapid
agricultural export growth have also tended tohave more rapid growth of agricultural GDP(figure 2.3). Thus increased agricultural exports contribute to increased agricultural income growth and reduced rural poverty.
The effects of trade growth on poverty
would be muted if exports expanded at theexpense of domestic food production. But inmost cases, increased exports of nonfood agricultural commodities (such as coffee, cocoa, or
cotton) provided hard currency to purchase inputs for food crop production, which boosts
overall agricultural growth. In Vietnam, for example, nonfood crop production and U.S. dollar exports (primarily coffee) rose by about 15
percent per year from 1990 to 1998, following
economic reforms. This boosted fertilizer use
and contributed to a nearly 50 percent rise infood crop production over the same period.
Agricultural GDP grew by 4.6 percent per year,
and rural poverty fell to 45 percent in 1998—
down from 66 percent in 1993 (World Bank
2000b).
In Uganda, nonfood crop production
surged following marketing liberalization in
the early 1990s. This surge was followed by atripling of fertilizer use and a rise in food crop
production. Thus, increased exports (primarily coffee) boosted agricultural GDP growthM A R K E T

A C C E S S

A N D

T H E

W O R L D ’ S

P O O R

Figure 2.3 Increases in exports and agricultural production go hand-in-handAgriculture GDP vs. export growth

Food production vs. agriculture export growth

Agricultural GDP growth (percent/year, 1980–98)
8

Food production growth (percent/year, 1980–99)
7
6

6
5
4

4
3

2

2
0
1
0

–2
–10

–5

0

5

10

–10

–5

0

5

10

15

Agricultural export growth (percent/year, dollars 1980–98)
Source: World Bank staff calculations, based on FAO data.

to about 4.4 percent per year, and eventuallycontributed to increased exports of other crops,
creating a virtuous circle in agriculture. Rural
poverty fell from 60 percent in 1992 to 39
percent in 2000, and among the poorest quintile of population primary school enrollment
rose from 51 percent to 69 percent in the same
period (World Bank 2001a).
Cross-country comparisons confirm that increases in agricultural exports rarely occur atthe expense of food crop production. Rather
than competing for scarce resources, the twoare positively correlated at the national level(figure 2.3). Thus increased agricultural exports and increased food production are a winwin combination for developing countries.

Exports of textiles and clothing tend to
reduce urban poverty—
Many developing countries have become major
exporters of textiles and clothing (T&C), butothers, especially in Sub-Saharan Africa, have
yet to take advantage of this card. Low-costlabor and a competitive exchange rate are two
important enablers of T&C exports. Institu-

tional arrangements that give duty-free and efficient access to inputs and foreign investors are
no less important. Most success stories amongdeveloping countries confirm that booming exports of textiles and clothing fostered broad
output growth (table 2.1).
Increased T&C exports are associated withgrowth of local manufacturing, through demand linkages and increased purchasing
power among workers. In all successful textile
exporters the share of private investment in
GDP considerably increased during export
booms. However, to benefit from backward
linkages, the domestic suppliers of the T&C
industry must be competitive and responsive.2
For example, Pakistan seems to be a case of
low industrial linkages and spillovers, as theincrease in the share of manufacturing value
added in GDP was just about the same as thatof the T&C industry. Pakistan remained focused on protective policies to boost the cotton-processing sector on the back of abundantdomestic cotton production (including, for example, export controls on cotton), rather thanrelying on globally integrated production

41

G L O B A L

E C O N O M I C

P R O S P E C T S

Table 2.1

Major export booms in textiles and clothing and effects on economic performance and poverty
Bangladesh1

PeriodShare of T&C in exports (%)
Real GDP growth per year (%)
Share of manufacturing value
added in GDP (%)
Poverty rate2 Total Head Count
Urban Head Count

Madagascar

Mauritius

Pakistan

Tunisia

1975–80

1980–95

1992–95

1996–99

1980–85

1986–92

1980–85

1986–90

1980–86

1987–93

0.2
3.3

39.3
4.7

7.7
1.2

19.1
3.6

27.7
2.2

47.8
7.4

36.5
7.4

53.7
6.0

19.3
3.9

34.7
4.3

16
58.5
50.2

16.4
53.1
35.0

14.3
60.2
—

15.0
—
—

16.9
19.5
—

23.9
10.6
—

15.6
49.6
38.2

16.9
33.9
28.0

13.5
19.9
12.0

16.6
14.1
8.9

Note: 1Exports of clothing. 2According to the national definition–end of period. For each country, the second column, indicates T&C export booms.
Source: World Bank staff calculations.

using best-available materials. By contrast, in
Mauritius and Tunisia, T&C export growth
was accompanied by broad manufacturing
growth.
Growth in textiles and clothing also bolsters employment and real wages. In Mauritius, growing T&C exports had a tremendous
impact on unemployment, which was at 14
percent before the export boom and was
virtually absorbed by 1992. Eventually theshortage of labor became a constraint on the
expansion of output, bringing about a nearly
50 percent wage increase. Part of Mauritius’
T&C production moved thus to Madagascar.
Because of faster employment and wage
growth for low-skilled workers in all countries
with T&C export booms, poverty declined significantly (table 2.1). As T&C manufacturing is typically concentrated in urban areas,urban poverty was more drastically reduced. In
Bangladesh, one of the poorest countries withoverwhelming rural population, total poverty
declined slowly; however during the export
boom in clothing, urban poverty dropped byalmost one-third (World Bank 1999b). Thus
to effectively contribute to the reduction ofpoverty, trade liberalization in agriculture andlabor-intensive manufactures must go hand in
hand.

—but trade liberalization affects the poor
in various ways
Domestic trade policy reform lays the groundwork for better use of productive resources to42

improve export performance. Poor workers
and farmers will benefit from domestic trade
policy reform, thanks to faster export growth,
increased demand for their labor, and higher
wages and producer prices. But trade liberalization can also affect the poor in the shortterm in complex ways that depend on country
circumstances (see Winters 2000). These effects
are difficult to track because trade policy reform is often undertaken in tandem with othermajor reforms that may also affect the poor—such as labor market reform, product market
deregulation, or public enterprise reform.
Trade policy does have important shortterm effects on the poor through three channels. Trade policy reform will, first, affect thepoor by changing the prices of their consumption basket. Trade liberalization will shift relative prices, eventually increasing the prices oftraded relative to nontraded goods and reducing the prices of imported relative to locally
produced goods.
The overall impact on the poor through theprice channel depends both on the compositionof their consumption and on other reforms that
may concurrently affect prices (such as thephasing out of subsidies and price controls). On
balance, in net food exporting countries, while
poor farmers may gain from higher producer
prices, poor urban dwellers may suffer fromhigher food prices. In Ghana for example,
while the rural sector gained from the reformand overall poverty was substantially reduced,
living standards in Accra deteriorated inM A R K E T

1988–92. By contrast, in net food importing
countries, poor consumers may benefit fromlower domestic prices of imported food. Experience from Haiti illustrates the complex impactof trade liberalization on the poor (box 2.1).
Second, wages and employment may notalways change as expected, depending on the
pre-reform structure of protection. If for example, the protected sectors employ many ofthe poor, they may suffer in the transition toan open trade regime. This is more likely in
middle-income countries, where sectors intensive in unskilled labor are often protected asthey face stiff competition from low-cost producers (Davis 1996; Wood 1997). For example, in Mexico, a country that implemented an
ambitious trade policy reform program from1985 to 1988, the nominal tariff and importlicense coverage in apparel and footwear wasamong the highest in manufacturing (Revenga

A C C E S S

A N D

T H E

W O R L D ’ S

P O O R

1995). A similar pre-reform pattern of protection was also found in Morocco (Currie andHarrison 1997). A more common pattern isthat the politically connected sectors that receive the most protection are the ones employing workers with higher wages.
A third channel is through the effects ofgovernment taxing and spending. Institutional
disruptions can mitigate the benefits of tradeliberalization for the poor. The abolition of themarketing boards for export crops sometimes
led to abandoning key services that they often
provided—such as research, quality monitoring, maintenance of rural roads, and credit tosmall farmers (Winters 2000; World Bank
2000a). In Zambia, for example, the abolitionof the marketing board led to abandoning thepurchase of maize in remote areas. There isalso concern that, in the absence of reforms tobroaden the tax base, reduced government rev-Box 2.1 The aftermath of trade liberalization inagriculture: lessons from HaitiT

he bold steps to liberalize trade in Haiti beginning in 1986 that continued throughout the
1990s have not produced rising incomes or reductions in poverty. Today with per capita income ofless than $500 and about two-thirds of the people
living in rural areas, and more than 80 percent of
the rural population living below the poverty line,
Haiti remains the poorest country in the Western
Hemisphere.
Prior to trade liberalization, the agricultural sector of Haiti was highly protected through tariffs (40to 50 percent) and subject to many nontariff barriers
and import prohibitions. Reforms brought down tariffs on rice, an important food staple, to 3 percent.
The real price of rice to consumers was reduced by
50 percent and imports of rice jumped from zero toabout half of domestic demand. Domestic rice production also fell—by more than 40 percent compared with the 1985–90 levels.
Does this mean that the poor suffered from thetrade reform as some have contended (Oxfam International 2001)? Not necessarily. To be sure, somepoor, small farmers were forced out of rice production. On the other hand, many urban and rural poor
were better off, because most of Haiti’s poor were
not producers of rice, but rather consumers who had
been paying a high tax on a very basic food staple,
curtailing their rice consumption. When rice became
more affordable, national consumption doubled, andmost of the poor were better off.
Yet this is only part of a story that does nothave a happy ending. Severe governance problems
eroded macroeconomic stability, discouraged investment, and undermined the capacity of the government to provide meaningful assistance for the poor,much less build infrastructure and institutions to
support and sustain trade capacity. The eventual virtual collapse of the state has left Haiti mired inpoverty. This underscores the lesson that trade policy
cannot substitute for good governance and a propoor development strategy.
Source: Oxfam International 2001; IMF Staff Reports for the1999 and 2000 Article IV Consultations; World Bank staff.

43

G L O B A L

E C O N O M I C

P R O S P E C T S

enues from trade-related taxes may trigger adecrease in social expenditures targeted for thepoor. For example, Tanzania trade policy reform in the mid-1980s shifted income toward
the largely untaxed small farmers, small enterprises, and the informal sector, thus reducing
the domestic tax ratio (Kanaan 2000).
In sum the evidence is clearer on the longterm consequences for the poor: on average,
in countries where outward orientation has increased, income growth of the poor has kept
pace with mean income growth (figure 2.4).3
And on average, globalizers have grown faster,thus witnessing accelerated reduction of poverty.
By contrast, countries where outward orientation has decreased have seen slower growth,and the poor in those countries have also
fallen behind. Nonetheless the transition tothese higher growth rates can take time andreform can impose short-term costs on thepoor in some countries. Hence, governments
have to design trade reforms carefully, provide

Figure 2.4 In globalizing economies thepoor participate in stronger growth
Percent of change per year
3.0

Average income growth

2.5
2.0

Income growth of the poorest
20 percent of the population

1.5
1.0
0.5
0.0
Increasing
outward orientation

Decreasing
outward orientation

Note: Sample includes 129 time periods, based on
developing countries’ household surveys. Outward
orientation is measured by the share of trade flows(the sum of exports and imports) in GDP. Periods ofincreasing outward orientation are those when theshare of trade flows in GDP increases by at least 0.5
percentage points per year.
Source: World Bank staff calculations.

44

adequate social protection, and ensure maximum access to retraining opportunities.

Market access barriers
limit export opportunities ofdeveloping countries

The Uruguay round of trade negotiations
made a significant contribution toward
lowering global barriers to merchandise tradeon two fronts: improving market access, thanks
to the reduction of tariffs and quantitative
restrictions on a number of products; and extending multilateral disciplines to previously excluded sectors—particularly agriculture, textiles,
and clothing. As a result of multilateral trade negotiations and unilateral reforms, average tariff
rates have been halved—although they still remain high in South Asia and in the Middle Eastand North Africa (figure 2.5).4 Progress in lowering tariff barriers has been particularly important for more skill-intensive manufactures,on which an increasing number of developing
countries in East Asia, Eastern Europe and Central Asia, and Latin America rely for exports.
For example, the largely duty-free trade in information technology products that came into
force with the “Information Technology Agreement” of the Uruguay Round strongly boosted
South-North trade in the information and communications technology sector.

Tariff walls are high, especially inlabor-intensive products
However despite progress, labor-intensive
products still remain extensively protected.
Tariff protection for agricultural commodities
is higher than for manufactures, both in industrial and in developing countries. But in highincome countries the average tariff rate on
agriculture is almost double the tariff for manufactures. Applied tariffs on labor-intensive
manufactures also largely surpass the averagefor industrial goods. Compared to industrial
products as a whole, labor-intensive manufactures are again more protected in high-income
than in developing countries, by an estimated
one-third.

M A R K E T

A C C E S S

A N D

T H E

W O R L D ’ S

P O O R

Figure 2.5 Tariffs still impede trade
In a decade, average tariffs have been almost
halved——but tariff protection in agriculture is higher than in
manufactures.

Average MFN tariffs (unweighted in percent)

Average MFN tariffs in 1997–99 (unweighted in percent)70

30South Asia

South Asia

60

Agriculture
1986–8825

1993–95

20

50

30

Latin America
and theAfrica Caribbean

1997–99

10

Highincome

E. EuropeandCentral Asia

Latin America
and theCaribbean

15

Middle East E. Europe
andE. Asia andNorth Africa Central Asia

Developing

20
10

AfricaDeveloping

40

Manufactures

Middle EastandNorth Africa

E. Asia

Highincome

5

0

0

Source: World Bank, based on WTO data.

Source: World Bank.

Labor-intensive manufacturers are also
sheltered——as widespread tariff peaks shelter agriculture andlabor-intensive manufactures in the Quad

Average MFN tariffs in 1997–99 (unweighted, in percent)

MFN tariff lines in tariff peak (in percent for each product group; 1999)

45
40
35
30
and
25 Textile
clothing
20
15
Industrial
10
5
0

80
70
60
50
40
30
20
10
0

South Asia
Industrial
products

Middle EastandNorth Africa

Footwear

Latin America
and theCaribbean
EasternEuropeDeveloping

East
Asia

Source: World Bank staff estimates, based on WTO data.

EU

Japan

USA

CanadaAgricultural products

All goods

Primary foodProcessed
food

Textile andclothing

Footwear

Note: Tariff peaks are defined as tariffs greater than 15 percent.
Source: World Bank, based on OECD tariff files.

Tariffs escalate steeply in the Quad—especially in agriculture——but tariff escalation is also common in developing
countries

Average unweighted tariffs in percent (1998–99)

Average unweighted tariffs in percent (1998–99)

16
14
12
10
8
6
4
2
0

30
Agricultural productsFirst stage
Semi-processed
Fully processed

25

Industrial products

15

First stage
Semi-processed
Fully processed

Agricultural products

20

Industrial products

10

Ja
pa
n
ro
p
Un ea
ion n
Un
St ite
at d
es
Ca
na
da
Eu

Eu

Ja
pa
n
ro
p
Un ea
ion n
Un
St ite
at d
es
Ca
na
da

5

Source: World Bank, based on WTO data.

0
Developing

High-income

Developing

High-income

Source: World Bank, based on WTO data.

45

G L O B A L

E C O N O M I C

P R O S P E C T S

Trade barriers on labor-intensive products
are commonly raised through tariff peaks (tariffs exceeding 15 percent) on imports of “sensitive commodities.” Imports at tariff peaks represent about 5 percent of total Quad (Canada,
European Union (EU), Japan, and United States)
imports from developing countries, and morethan 11 percent of total Quad imports from
LDCs (Hoekman, Ng, and Olarreaga 2001).
Within the Quad, tariff peaks are widespread but their pattern differs (figure 2.5). In
North America, tariff peaks are commonly
found in industrial goods, particularly on imports of textiles and clothing. By contrast, tariff peaks in the EU and Japan are common inagriculture—especially on imports of processed
food, and tariff peaks on imports of footwear
are widespread across all Quad markets andsurpass those found in textile and clothing. In
developing countries, tariff peaks are prevalentalso, because applied tariffs are close to the tariff peak threshold.

Tariff escalation is a major concern fordeveloping countries
Tariffs often rise significantly with the level ofprocessing (tariff escalation) in many highincome and developing countries. Tariff escalation in high-income countries has the potential of reducing demand for processed imports
from developing countries, hampering diversification into higher–value added exports(Blackhurst, Enders, and Francois 1996).
In high-income countries, tariffs escalate
steeply, especially on agricultural products (figure 2.5). In the Quad, tariffs on more processed
agricultural commodities are comparatively
higher in the EU and Japan, while in the UnitedStates there is evidence of reverse escalation between unprocessed and semiprocessed commodities. Though less prevalent, tariff escalation
also affects imports of industrial products—especially at the semiprocessed stage. Examples ofsuch products, in which many developing countries have a comparative advantage, include textiles and clothing; leather and leather products;
wood, paper, and pulp; furniture; rubber products; and metals.

46

In developing countries, too, the average tariff for fully processed agricultural products andmanufactures is higher than on unprocessed
products. The reduction of tariff peaks in the
Quad and other countries would mitigate tariff
escalation. In the EU and Japan, for example,
tariff peaks are more widespread on imports ofprocessed food than on primary food imports(figure 2.5). Trade of products where more
processed exports from LDCs have a chance of
breaking through would thus receive a boost.

Despite progress, trade in agriculture
remains heavily distorted
The Uruguay Round Agreement on Agriculture(URAA), which came into force in 1995,
marked an important step in improving accessto sheltered agricultural markets in highincome countries. A wide range of nontariffbarriers was abolished, including quantitative
import restrictions, variable import levies, anddiscretionary import licensing. These barriers
were converted to ordinary tariffs (tariffication). Existing and new tariffs were bound, andthese bindings were subject to reduction. Developing countries were allowed more compliance flexibility through longer implementation
periods and lower reduction commitments.
Because international agricultural prices inthe base period for the URAA (1986–88) were
way below high domestic prices supported byquotas, the conversion of quotas into tariff
equivalents resulted in high rates of tariff protection (OECD 2001a; World Bank forthcoming). Moreover tariff reduction commitments
involved a simple average across products, creating much leeway to spread reductions unevenly, with lower cuts in more sensitive commodities. Hence scheduled tariff reductions over
the URAA implementation period may not have
reduced protection enough to significantly improve market access and boost agricultural
trade (Diakosavvas 2001).
Tariff peaks in agriculture occur frequently
on processed products and temperate commodities. They are less common on unprocessed fruits
and vegetables and tropical commodities, which
are not produced in high-income countries but

M A R K E T

are major export crops of least-developed countries. Thus tariff peaks could be seen as not targeting developing countries in particular, sincesuch tariff peaks can be found where market
shares of developing countries in Quad imports
are comparatively low. However, many developing countries in temperate zones have thepotential of competing as lower-cost producers
in temperate commodities. Hence besides providing sizeable market price support to highincome countries’ producers, developing countries’ exporters may be displaced by high tariffpeaks, especially in the EU where intra-EU tradeis duty-free. Indeed, intra-EU trade in productgroups with a high share of tariff-peak lines isprevalent, at about 70 percent of EU countries’
agricultural imports. By contrast, when tariffpeaks are less widespread, non-EU suppliers
seem to have more opportunities.
Concerns about market access also arise
from the poor performance of tariff quotas(TRQs) introduced by the URAA with the aimof securing a minimum level of market access.5
The average fill rates of TRQs have been low
and declining, from 67 percent in 1995 to 63
percent in 1998, while about a quarter of tariff quotas were filled to less than 20 percent.
Evidence as to whether the method of administration of tariff-quota allocations may have an
influence on the fill rates is still unclear (WTO
2001; OECD 2001a). But the low fill rate
could reflect high “in-quota” rates; in someQuad markets in-quota rates are above the average for agriculture (OECD 1999a). And, for
specific products, over-quota rates skyrocket—
such as the EU 130 percent tariff for abovequota bananas.

Support to agriculture is sizableand growing
At an estimated $245 billion in 2000—about
five times the level of international development
assistance—support to agricultural producers inhigh-income countries remains sizeable (OECD
2001b). Total support to agriculture (as definedby the OECD) is even higher, at about $327 billion in 2000—or 1.3 percent of OECD countries’ GDP.6

A C C E S S

A N D

T H E

W O R L D ’ S

P O O R

Support is often rationalized on the noneconomic benefits of agriculture, which are
not properly valued by the market—such asenvironmental protection, food security, andmaintenance of rural communities (Winters
1990; Maier and Shobavashi 2001). But extensive support may be counterproductive forthese goals because subsidies, in addition to accounting for the “multifunctionality” of agriculture, have a number of side effects. For example, production-linked subsidies encourage
environmentally unsustainable farming practices, boosting the use of chemicals, fertilizer,
and fuel in order to produce additional output
beyond what competitive conditions would
dictate. Agriculture now thus contributes about
one-fifth of global greenhouse gases—50 percent of methane and 70 percent of nitrous
oxide—while high-income countries accountfor the major share of global agricultural greenhouse gas emissions (OECD 1999b).7 Enhancing the environmental performance of agriculture remains a challenge, but efforts should rely
on appropriate incentive policies, tailored to
local environmental circumstances and demands (OECD 2001d).
Production-related support in high-income
countries also distorts agricultural commodity trade and affects developing countries. It
boosts production of agricultural commodities and reduces agricultural imports, thus displacing developing-country exports in highincome countries’ markets. The case of the
U.S. subsidies to sugar producers illustrates
both the pernicious impact of support on developing countries’ exporters, and the large
costs borne by high-income countries’ consumers and taxpayers (box 2.2).
The unwanted production surpluses are
dumped into world markets with the aid ofexport subsidies, depressing prices for many
temperate agricultural commodities (Burfisher
2001). The case of growing EU exportablesurpluses of wheat illustrates the potential distortions to trade (box 2.3). The incidence isgenerally negative for agricultural exporters—
especially developing countries that export
temperate commodities or have the capacity of47

G L O B A L

E C O N O M I C

Box 2.2

TP R O S P E C T S

U.S. sugar policy and its impact on imports

he United States began to directly intervene tosupport agricultural commodity prices in 1933
with the introduction of the Agricultural Adjustment
Act. The Act has been modified many times, but isstill the basis of most of the U.S. agricultural policy.
Sugar is one of the most protected commodities
under U.S. policy (see figure).
The United States is the world’s largest consumer of sweeteners, with the equivalent of 142
pounds of raw sugar consumed per person per year.
The U.S. sugar industry is heavily subsidized, with
about half of sugar producers’ revenues coming fromgovernment support. U.S. sugar producers have beenprotected from lower world market prices since theearly 1980s, by successive farm legislations that provided price supports through restrictive import controls. On average, U.S. sugar producers have received
2.6 times the world market price for sugar since themid-1980s (see figure).
Apart from protecting sugar production, domestic support to sugar also provides higher than world
market prices to corn syrup producers. This has encouraged the development of an important High
Fructose Corn Sweetener (HFCS) industry that now
supplies half of the country’s sweetener consumption,
especially in products such as soft drinks. HFCS production is now four times higher than in 1980, andsurpasses sugar production, which has increased byabout 50 percent (according to the U.S. Departmentof Agriculture). Sugar imports by the United States

Steady support to U.S. sugar producers
Producer support estimate(PSE), in percent of grossfarm receipts

4
80
3.5
70

U.S. sugar price
3

60

2.5

50

2

40
PSE refined sugar equivalent
30

1.5

20

1
PSE total agriculture

10

0.5
0

0
1986

1988 1990

1992

1994 1996

1998

2000

Source: OECD; World Bank.

fell by one-half over the period, from 4.3 million
tons in 1980 to slightly less than 2 million tons in
1998. The sugar policy costs foreign sugar producers
an estimated $1.5 billion in lost sales.

Source: World Bank staff, based on Sheales and others 1999.

becoming low-cost exporters. There are also,
however, benefits for net food-importing developing countries from lower import prices forfood (Freeman and others 2000).
The URAA also covered trade-distorting
measures of support and export subsidies (box2.4). The value of support subject to reduction
commitments in OECD countries declined significantly, to about 65 percent of its level inthe base period. However during the implementation period, this was largely offset by increased support under measures exempt fromreduction commitments, so that in 1997 overall support was practically unchanged from its

48

Ratio of U.S. sugar priceto free-market pricebase-period level.8 Subsidies that were exempt
from reduction commitments now account for
about 60 percent of total OECD-country agricultural support, even though some of thesesubsidies may affect production and trade(OECD 2001a).
The overall level of support to producers—asmeasured by the OECD’s producer support estimates (PSE)—has further increased since 1998,
in response to the decline in world commodity
prices, and now represents about 35 percent ofgross farm receipts (figure 2.6).9 And because
support is counter-cyclical, it insulates farmers
in high-income countries from changes in world

M A R K E T

Box 2.3

A C C E S S

A N D

T H E

W O R L D ’ S

P O O R

Wheat production with CAP support

A

griculture was given a central role when theoriginal European Economic Community (EEC)
established the Common Agricultural Policy (CAP)
in 1957. The basic market support set out in theTreaty of Rome remains much the same today, despite successive reforms to the CAP since the early
1990s. The CAP was very successful at achieving its
goals of food self-sufficiency and stable producer
prices. In fact, it was so successful that it encouraged
farmers to produce more than was needed, whichcaused intervention stocks to build and commodities
to be exported using export refunds. Wheat production is a case in point.
The first nine countries to join the EEC accountfor nearly 90 percent of EU wheat production. These
countries have adjusted to the high and stable wheat
prices established by the CAP, and they have responded by increasing yields by 2.5 percent per year
since 1970, compared to only 1 percent per year for
the United States, the world’s largest wheat exporter.
Domestic support for wheat (as measured by theOECD’s producer support estimates) remains sizeable in the EU despite several reforms to the CAP.
From 52 percent of gross farm receipts on average in
1986–88, it declined only marginally to an estimated48 percent in 1998–2000.
The impact of high wheat prices was not only toincrease production, but also to reduce demand andfurther contribute to the surpluses. Net exports ofwheat surged to 22.8 million tons in 1992, and thendeclined somewhat due to CAP reform measuresduring the 1990s (see figure). One of the consequences

prices and makes production less responsive toswings in demand. As a result, world commodity prices become more volatile, and during
downturns the burden of adjustment is shifted
disproportionately to producers in developing
countries who enjoy much lower levels of support (Tyers and Anderson 1992; Winters 1994).
Over the past 15 years support to agriculture
in high-income countries has declined only marginally as a share of gross farm receipts. The
outlook is unclear, because the reduction commitments are sectorwide, allowing governments
much leeway to target the reductions, while in-

EU wheat production and net imports
Million tons
100
80
60
Production

40
20
0
–20

Net imports
–40
1960

1970

1980

1990

2000

of the CAP was that lower cost producers were deprived of a market for their products. Argentina forexample, is a low cost producer that could supply
wheat to the EU. With more than 50 percent of its
exports concentrated on agricultural products andagro-processing manufactures, Argentina in particular may be suffering from trade distorting subsidies(see Nogues 2000).

Source: World Bank staff.

creasing support for specific “sensitive” commodities. Many commodities of export interestfor developing countries remain heavily subsidized—such as, for example, rice and sugar,
where support covers as much as 80 and 45 percent of gross farm receipts (OECD 2001b).

Export subsidies are particularly
damaging
The effectiveness of URAA in disciplining export subsidies is also questionable. Because export subsidies in the 1986–88 base period weresizeable, the limited reduction commitments49

G L O B A L

E C O N O M I C

P R O S P E C T S

Box 2.4 Bringing support to agriculture
and export subsidies under multilateral rules:
A long-awaited endeavorA

key objective of the URAA was to reduce
trade-distorting support to agriculture, while
creating room for government policies to design appropriate nondistorting support schemes, in response
to country-specific circumstances. Three maincategories of support were distinguished:

Billions of dollars
300
250
200

a) Trade-distorting support (often referred to as“amber box” measures), such as market price–support through administered prices supported
by restrictive trade measures and productionrelated subsidies (based on output or on the useof inputs).
b) Support with no, or minimal, distorting effect on
trade (often referred to as “green box” measures).
These may include a vast array of programs, suchas decoupled income support measures; payments
covering services for research and development;
pest and disease control; infrastructural services;
domestic food aid; structural adjustment and regional assistance; and environmental programs.
c) A category of direct payments under productionlimiting programs—the so-called blue box measures—was also distinguished.
Reduction commitments were scheduled on
trade-distorting support, expressed in terms of a “total
aggregate measurement of support” (AMS). Under the
URAA, developed countries are required to reduce
total base-period AMS by 20 percent over a period of
six years. Developing countries with AMS commitments are subject to a 13 percent reduction over 10
years. Measures in the “green box”—and also, undercertain conditions, in the “blue box”—have been
exempt from URAA reduction commitments.

150
100
50
0
1986–88

1996

1997

Export subsidies in agriculture allow countries toexport production surpluses to the world market at
prices below the high prices prevailing in their domestic markets. Export subsidies were about $7 billion on
average in 1995–98, of which 90 percent was grantedby the EU. In the URAA high-income countries agreed
to reduce base-period subsidized exports by 21 percent, in equal steps over six years—and to cut the corresponding budgetary outlays by 36 percent. Developing countries agreed to a 14 percent reduction in
subsidized export volumes over a 10-year period.

Source: OECD 2001a; WTO 2001; World Bank forthcoming.

taken in the URAA leave broad margins forcontinued subsidization. Thus for a number of
products, permitted subsidized exports during
URAA implementation were larger than actualsubsidized exports in the first half of the 1990s(OECD 2001a; World Bank forthcoming). And
the share of subsidized exports has even in-

50

1995

Aggregate measure of support
Blue box
Green box

creased for many products of export interest to
developing countries. For example, subsidized
exports of wheat represented 25 percent of total
wheat exports in 1998, up from 7 percent in
1995, while subsidized exports of sugar rose to
31 from 19 percent in the same period (Ingco
and Winters 2001).

M A R K E T

A C C E S S

A N D

T H E

Figure 2.6 Support to agriculture in the
Quad is growing . . .

. . . partly due to the fall in commodity
prices

Producer support estimate in percent
of gross farm receipts (left axis)

Total food prices inconstant dollars(weighted index; 1990=100)
115

In U.S. billions(over bars)

70
52

1986–90
1991–94
1995–97
1998–2000

56

60

110

W O R L D ’ S

P O O R

Producer support
estimate in percent
of gross farm receipts(total OECD countries)
45

Producer support
estimate (right)

40

105

50
98

105

40

100

PSE trend

35

6
95

30
4

20

39

30

51
90

Food prices (left)
25

85

10

80

0
Japan

EU

CanadaUnitedStates

Source: OECD.

In the EU, the Agenda 2000 Common Agricultural Policy (CAP) reform marked a step inthe right direction to reduce the need for export subsidies by cutting the support prices forcereals, beef, and dairy, but it is unlikely tobe sufficient to eliminate the EU exportablesurpluses in the years ahead. In addition to direct export subsidies, officially supported export credits have expanded during the 1998
Asian financial crisis, and are largely used in
the United States. By resulting in targeted costdiscounts for buyers, export credits might have
similar distorting effects on trade as direct export subsidies. The URAA called for negotiation of export credit disciplines, which has not
yet been achieved.

Due to remaining restrictions on textiles
and clothing, developing countries forego
sizeable export earnings
The Uruguay Round Agreement on Textiles
and Clothing (ATC) provides for the gradualphaseout of the multifiber arrangement (MFA)
country–specific quotas over a 10-year period,
ending in 2005 (box 2.5). The ATC was an im-

20
1986 1988 1990 1992 1994 1996 1998 2000
Source: World Bank; OECD.

portant step to improve developing countries’
access to high-income countries’ markets, because it became very difficult for the importers
to introduce new quotas. Moreover, the ATCabolished voluntary export restraints in response to pressure from developing countries.
These measures were identical in form with the
MFA quotas.
However the effectiveness of ATC in freeing
up markets has been limited by two main shortcomings. First, scheduled quota integration is“back-loaded,” with quota-free market accessfor nearly half of all imports due only at the endof the transition. Hence the transition is unlikely to be smooth for currently shielded producers. This could disrupt the post-ATC regime
by encouraging calls for higher tariff protection,or for more intensive use of contingent protection measures (box 2.6). And in textiles, after
the Uruguay Round, the use of contingent protection measures has increased faster than inother sectors. In 1998–99, initiations of antidumping investigations in textiles represented
11 percent of total, up from only about 5 percent, on average, in 1990–92 (WTO 2001).

51

G L O B A L

E C O N O M I C

P R O S P E C T S

Box 2.5 A primer on the agreement on textiles
and clothingT

he Multifiber Arrangement (MFA) that enteredinto force in 1974 (like its predecessors the
Short- and Long-term Cotton Arrangements between
1961 and 1973) established rules for the impositionof country-specific quotas, either through bilateralagreements or unilateral actions. This conflicted with
the General Agreement on Tariffs and Trade (GATT)
principle of nondiscrimination against trading partners. As of 1995, only the United States, EU,
Canada, and Norway continued to use quotas to restrict their imports of textiles.
The return to GATT rules has two components:(1) a schedule for freeing textiles and clothing fromimport quotas (the “integration” component of theATC); (2) additional provisions for accelerated
growth of remaining non-integrated quotas (the socalled liberalization component of the ATC). Products remaining under restriction will be allowed an
additional increase in quota growth rates—above thegeneral 6 percent annual growth agreed under the
MFA. Such products will have their quota increasedby an additional 16 percent in the first step, 25 percent in the second, and 27 percent in the third.
The ATC is being implemented in four steps. In
the first step, which took effect on January 1, 1995,
WTO members had to secure quota-free market access matching, at a minimum, 16 percent of the total
volume of their 1990 imports. In the second step,which started on January 1, 1998, an additional 17
percent of total 1990 imports had to be integrated,followed by an additional 18 percent in the third
step, which commences on January 1, 2002. Finally,on January 1, 2005, quota-free access corresponding
to the remaining 49 percent of total 1990 imports
must be secured.
The choice of products to be integrated is left tothe importing country, but they must cover at least
one item from each of four major product groups:
yarns and tops, fabrics, made-ups, and clothing.

Source: Based on ICTB 1999.

Second, the ATC rules for the removal of
quotas are framed in terms of overall importshares in textiles and clothing, rather than interms of the number of quotas. This allows
importing countries the leeway to select the
products to be freed of quota restrictions ineach step, which slows the pace of liberalization.10 Up to 2000, more than 33 percent
of trade was integrated, fulfilling the minimum ATC requirements. But products thathave been freed of quotas by the EU and theUnited States represent only small shares of
their total textile and clothing imports—about
6 percent of 1995–97 imports for the UnitedStates and less than 5 percent for the EU(ITCB 1999). Moreover, the products of interest to developing countries that were integrated tend to have low value added—such as
tops, yarns, and fabrics—with clothing representing only a small share of the total.

52

Due to the slow pace of the liberalization,
potential benefits for developing countries arebeing eroded, and foregone export earnings are
sizeable. For example, on current trends, theshare of intra-EU trade in textiles and clothing
could further decline from 49 to around 43 percent of total EU countries’ imports by the ATC
expiration in 2005. Assuming a twice-as-fast
decline under a more ambitious liberalization,
this share could drop by an additional 7 percent. Thus foregone export earnings for restrained developing countries in the EU could
be as high as $10 billion a year. In the UnitedStates, after the creation of the North American
Free Trade Agreement, restrained suppliers weredisplaced by booming textile and clothing exports from Mexico, which grew by about 35
percent per year. Despite these trade diversion
effects, the sharp increase in Mexican exports
illustrates the potential for other restrained low-

M A R K E T

Box 2.6

A C C E S S

A N D

T H E

W O R L D ’ S

P O O R

Anti-dumping—and better alternatives

Import-competing firms are often tempted to resort
to antidumping laws—which are permitted by
WTO rules—to allege unfair trade practices by foreign competitors. A firm is said to be dumping if its
export price is less than either the price in its homemarket or the average cost of production. Antidumping laws enable nations to impose offsetting duties
on imports found to be both dumping products on
the domestic market and causing “material injury”
to a domestic industry. The main users of these laws
were developed countries, but increasingly developing countries have taken recourse to these laws (seeFigure). Industrial and developing nations areequally targeted by antidumping actions.
In addition, some nations take action against
imports that they suspect may have been subsidized
by another government. These so-called countervailing duty cases are also allowed under WTO rules
and, if an investigation reveals that allegedly subsidized imports have injured a domestic industry, thena tariff can be placed on the products in question.
Both antidumping laws and countervailing duty laws
are referred to as “unfair trade laws,” reflecting theview that dumping and subsidization tilt the commercial playing field towards foreign firms. However,
the more widespread resort to “unfair trade laws” isdiluting the gains from trade liberalization.
Disrupting surges in imports can be far better
handled through the use of safeguard measures.
These afford domestic firms the chance to adjust to
greater competition from abroad, but do so only fora fixed period of time. WTO rules allow members to
impose temporary restrictions on imports that are

cost producers to expand their exports, shouldmarket-access obstacles be removed.
Evaluating the impact of MFA quota abolition requires a model comprehensive enoughto take into account the interplay between
suppliers, as well as the sectoral interactionsof each economy (see also chapter 6, andKathuria and others (2001) for South Asia).
Given the equally slow pace of liberalization in
North America, a rough estimate of foregone
export earnings for developing countries could

Developing countries are victims andplayers in the rising game of antidumping
Antidumping cases initiated by developed and developing
countries, 1986–1998
220
200

Developed

180
160
140
120
100
80
60
40

Developing

20
0
1986

1988

1990

1992

1994

1996

1998

causing serious injury to a domestic industry. Because the import protection is temporary, trading
partners know that their market access has not beenpermanently reduced. By contrast, the antidumping
and countervailing duty laws are often implemented
in such a way that the tariffs once imposed they arealmost never withdrawn. Worse still, if nations believe that the market access obtained during a tradenegotiation are going to be permanently eroded by
the use of the unfair trade laws, then they will be lessinclined to start trade negotiations in the first place.
Source: World Bank staff.

be twice the estimated amount in the EU—
equivalent to about 12 percent of total developing countries’ textile and clothing exports.
Market access in textiles and clothing willremain restricted even after the MFA-related
quotas have been abolished, because tariff barriers are high. While 90 percent of total highincome countries’ imports of manufactures facetariff rates below 10 percent, only about halfof textile and clothing imports face such low
tariffs. Moreover 28 percent of total OECD53

G L O B A L

E C O N O M I C

P R O S P E C T S

countries’ imports of textile and clothing still
face tariff peaks, down only marginally from35 percent in the pre–Uruguay Round regime(OECD 2001c).11

Preferential market access for developing
country exports
Preferential access schemes to high-income
countries’ markets, such as the generalized system of preference (GSP) and the LDC regimes,
aim to partly mitigate the effects of high mostfavored nation (MFN) tariffs on export products of developing countries. The United Nation’s 48 least-developed countries benefit from
LDC preferential access in all Quad countries,
where 75 percent of their exports are sold.12
Even though on average, these preferential
schemes look relatively generous (Hoekman
and others 2001), a number of factors erode
their effectiveness in reducing trade barriers
faced by poor countries. First, preferences
mainly apply to products that already face relatively low MFN tariffs (below 10 percent).
The margins of preference on tariff peaks are
significantly lower—with the exception of theEU, where the LDC preference margin for tariff peak products is about 70 percent. Thismargin is only 25 percent in Canada and 30
percent in Japan and the United States. Reflecting the selectivity of preferences and the structure of LDC exports, high tariffs are thus common in some Quad markets on products on
which LDC beneficiaries reveal some comparative advantage (figure 2.7).
Second, tariff preferences under GSP and
LDC regimes can also be easily eroded by nontariff measures, such as antidumping, safeguards, rules of origin, and graduation mechanisms. The case of the safeguard measuresapplied by Japan on imports of Shiitake mushrooms from China illustrates this point (box2.7). Finally, the GSP (and LDC regime implicitly) have graduation mechanisms that are related to income and market shares. They aretime-bound and subject to (uncertain) renewal.
Countries graduate if they pass a certain percapita income threshold and if they expand
their exports of products beyond a certain im-

54

Figure 2.7 Despite preferences, LDC
exports to the Quad often face high tariffs
In percent of LDC exports to each market (1996–99)

100

80

EU
Japan
United States
Canada

60

40

20

0
Low tariffs<5%

Medium tariffs
5–15%

Tariff peaks>15%

Source: World Bank staff calculations.

port share in the market of the GSP-granting
country.
There is evidence that tariff preferences help
the least-developed countries take advantage ofbetter export opportunities in Quad markets. In
the post–Uruguay Round period, LDC exports
to the EU that receive high preferences, havegrown by about 8 percent per year on average,
outpacing growth of LDC exports that receive
medium or low preferences (figure 2.8). A similar pattern is seen in Canada and Japan.13

On balance, global tariffs penalize
developing countries—
The post–Uruguay Round tariff structure penalizes developing countries as a whole because
their exports tend to be concentrated in products where market access is highly restricted.
Trade-weighted applied tariffs convey a sense oftariff incidence across countries and productgroups (figure 2.9).14 In manufactures, developing country exporters face, on average, higher
trade-weighted tariffs than other suppliers, bothin high-income and in developing countries’
markets. Tariff walls faced by developing-M A R K E T

Box 2.7

A C C E S S

A N D

T H E

W O R L D ’ S

P O O R

Mushroom wars

Shiitake mushroom are among the most popularmushrooms in Japan, where an estimated 30,000
farmers grow them. Japanese trading companies
began in the early 1990s to encourage Chinese farmers to use Japanese spores and modern cultivation
techniques to improve the quality of Chinese mushrooms to Japanese standards. The effort was a huge
success. In the humid mountainous climate of Fujian
province, as well as in Shandong, farmers quickly
adapted and China became a global mushroom
giant. The same techniques were applied to othermushrooms, and exports climbed to $120 million
per year. Farmers’ incomes in Fujian and Shandongrose, and consumers in Japan seemed happy to get
the shiitake mushrooms at one-third the price ofdomestically produced shiitakes.
But Japan’s shiitake farmers feared for their jobs
and sought protection from the government. The
government responded. Japan at first threatened tocountry exporters of manufactures in developing countries’ markets are about three times
higher than in high-income countries’ markets.
In agriculture, developing-country suppliers
face lower trade-weighted tariffs than do otherexporters, both in high-income and in developing countries’ markets. This is because tradepreferences to some extent mitigate the impactof tariff protection on developing countries,
while a large share of developing countries’
exports is in tropical commodities, for whichtariff protection is relatively low. By contrast,
high-income countries’ agricultural exports aremainly concentrated in temperate agriculturalcommodities and dairy products, which facewidespread tariff peaks.
Because average applied tariffs in agriculture are higher in developing countries, SouthSouth trade of agricultural commodities faces
higher trade-weighted tariffs than exports fromthe South to the North (South-North trade).
With an increasing share of developing countries’ manufactured and agricultural exports
being directed toward other developing coun-use inspection requirements as a veiled form of protection. But since April 17, 2001, imports over 8,000
tons face a tariff of 266 percent, while an amendment to the tariff code imposed temporary emergency import curbs. The import curbs will be implemented for up to 200 days through November 8. It
is the first time Japan has invoked import curb measures under the WTO’s ordinary safeguard mechanism designed to slow imports to allow a specificindustry to adjust to heightened competition fromforeign suppliers. The Chinese government urged
Japanese officials to reconsider the action, to noavail. China has retaliated by imposing punitive
duties on several Japanese exports. It is likely thatthe mushroom war is not over.
Source: The Economist, February 8, 2001; The Guardian, April
19, 2001; Peoples’ Daily, April 17, 2001; Financial Times, June20, 2001.

tries, high levels of tariff protection in the Southmay also impede prospects for export-led
growth. Trade in agriculture may suffer morefrom high levels of protection in middle-income
developing countries because markets in thesecountries are growing fast, reflecting fast population and income growth. High tariff protection in middle-income developing countries may
also damage the export opportunities of lowincome countries, especially in agriculture andin textiles where the export market shares of
low-income countries have increased rapidly.

—and denies the world’s poor access to
the global markets
Because developing countries are home to theworld’s poor—56 percent of the world’s population defined as those living on less than$2 per day (World Bank 2000c)—high tariffbarriers on developing countries’ exports act
as a roadblock to market access by the poor.
Compared with the nonpoor of the world,
poor people are more exposed to high penalties of the global system of protection.

55

G L O B A L

E C O N O M I C

P R O S P E C T S

Figure 2.8 LDC exports can grow fast
when tariff preferences are significant
LDC export growth(1996–99, average per year, in percent)Figure 2.9 Opposite patterns of tariff
incidence in manufactures andagriculture
Trade-weighted tariffs (average 1998–99), in percent

30

35Agricultural commodities

25
30

20

EU

15

25

Importer high-income
Importer developing

10
20

Canada5

150Manufactures–5
United States
–10

Japan

5
Low
preference0

Source: World Bank staff calculations, based on
U.N. Comtrade.

hiNote: Rankings of LDC preference margins on GSP tariffs:>10 percent = high preference; 3–10 percent = medium
preference; <3 percent = low preference.

gh Ex-in poco rte
m r
e
de Ex
ve po
lo rtepi rng

Mediumpreference

hi

High
preference

gh Ex-in poco rte
m r
e
de Ex
ve po
lo rte
pi r
ng

–15

10

Note: Trade-weighted tariffs, using 1997 applied tariffs
and trade weights: excluding intra-EU trade.
Source: Based on IMF-WB 2001.

The world’s poor generally earn their livingin the rural sector and other labor-intensive
activities—such as light manufacturing, informal services, and construction. When theseproducts find their way to the world markets,
they face high tariff barriers—such as those
faced by agricultural commodities and laborintensive manufactures. Labor services faceparticular restrictions—for example, restrictions on temporary cross-border movementsof workers for the provision of construction
services (see chapter 3).
One way to quantify the incidence of protection—albeit in rough fashion—is to look at
effective tariffs faced by the different income
groups in access to the world markets. Despite
the existing preferential access schemes for developing countries’ exports, the world’s poor
face tariffs that are more than twice as high as
the nonpoor face (box 2.8). This fact is independent of their position in the relative scaleof poverty. Making world merchandise trade
work for the world’s poor would require boldsteps to remove this disparity.

56

Liberalizing trade to promote
development

R

emoval of trade barriers on labor-intensive
products will generate shared benefits,
both for high-income and developing countries(these are quantified in chapter 6). Benefits fordeveloping countries would include greater access to high-income countries’ agricultural andapparel markets and more buoyant demand inindustrial countries as a result of lower prices
to consumers. Middle-income countries thathave access to international capital markets
but still depend greatly on exports of protected
products (for example, Argentina), could possibly see a decline in the risk premia they face,because more buoyant growth of export revenues could make their balance of payments
less vulnerable to economic swings. With better access to global markets, domestic policy
reforms become important to create export
opportunities and absorb the dynamic gains
from trade.

M A R K E T

Box 2.8

A C C E S S

A N D

T H E

W O R L D ’ S

P O O R

Calculating effective tariffs faced by the poorEffective tariffs faced by people in different income groups convey a sense of uneven access to
the world markets (see figure). For people in each
income group, effective tariffs are calculated on thebasis of the trade-weighted tariffs faced by exportsof their home countries. For simplicity, it is assumed
that all poor can be found in labor-intensive merchandise production, while the nonpoor earn theirliving across the whole array of economic activities.
Thus calculations of effective tariffs on those livingon less than $2 per day are based on trade-weighted
tariffs faced by countries for exports of agricultural
products and labor-intensive manufactures. Calculations of effective tariffs on the nonpoor are based on
trade-weighted tariffs faced by countries across exports of all goods. Trade-weighted tariffs are calculated from using 1998 applied tariffs and trade
weights.
Effective tariffs faced by each income group arecalculated as the sum of trade-weighted tariffs facedby the exports of different countries, using as
weights the share of each country’s population ineach income group (based on 1998 poverty data).
Since by global standards even the relatively poor in
all high-income countries have consumption greaterthan $2 per day, the whole population of these countries is in the nonpoor group.
Due to their size, China and India are the two
single countries that weigh more in these calculations. The trade-weighted tariff on exports of laborintensive products from China is 15.5 percent andfor India 15.1 percent. China accounts for 29 and21 percent respectively of the world’s poor anddeeply poor (those living on less than $1 a day).

Domestic policies to create
export opportunities
Developing countries have gone a long way toward removing many of the domestic obstacles
to export-led growth. Tariffs are lower everywhere, the anti-export bias embedded in thedomestic trade regimes and sectoral policies
has been reduced, while more sound macroeconomic policies have led to more competitive
exchange rates. However, while macroeconomic policy and trade policy reforms were

The poor face high tariffs
Effective tariff faced by income groups (in percent, 1997–98)
16
14
12
10
8
6
4
2
0
Deeply poor<$1/day

Poor $1–$2/day

Nonpoor>$2/day

India represents 27 and 40 percent of poor people ineach of the two groups. The trade-weighted tariffs
on labor-intensive exports from China and India are
multiplied by these population shares to determine
the contribution of the two countries in the effective
tariffs faced by each of the two groups of poor. But
China and India also account for 19 and 4 percent,respectively, of the world’s nonpoor. These population shares, along with the “all-inclusive” tradeweighted tariffs faced by China and India (estimatedat 8.3 and 8.5 percent) are used in the calculation ofeffective tariffs faced by the nonpoor.
Source: World Bank staff calculations.

ambitious, the pace of agricultural reforms
has been uneven both at the commodity andcountry levels (Townsend 1999; Shepherd andFarolfi 1999; Akiyama and others 2001).
Moreover a number of structural impediments
hamper export diversification into manufactures in the poorest countries—especially in
Sub-Saharan Africa (Fosu and others 2001).
Deepening the reform process in two directions is key to realizing the trade promise for
growth and poverty reduction: (a) reducing

57

G L O B A L

E C O N O M I C

P R O S P E C T S

further tariff and non-tariff barriers to trade ina context of supportive policies that link thepoor to expanded market opportunities andcushion transitional costs for any displacedgroup; and (b) building trade capacity by upgrading “behind-the-border” institutions, ranging from customs and ports to telecommunications and domestic transport.

Reducing tariffs and other barriers totrade can increase incomes, but
adjustment costs cannot be ignored
Reducing tariffs and other trade barriers will
not automatically lead to higher growth. Trade
policy cannot substitute for a development
program. However trade reform is an important component of a development strategy, anddeveloping countries, with average tariff levels
three times that of the high-income countries,
have ample scope for capturing further gains
from trade reform. Most analyses suggest thatunilateral reduction in barriers can produce
the greatest and quickest gains. Several countries have realized this and undertaken important domestic trade policy reforms—including
Chile, China, and Costa Rica.
Improving integration into the world trading system involves lowering trade barriers
and reforming domestic institutions in waysthat may initially hurt low-income consumers,
unskilled workers in sheltered industries, andpreviously shielded producers—especially subsistence farmers in remote areas with deficientrural infrastructure. Producers of import-competing commodities that receive disproportionate support may suffer from lower levelsof protection, at the same time that poor consumers benefit from lower prices.
Even though the benefits from trade integration would eventually outstrip the costs,
deployment of temporary safety nets—such assupport to displaced producers and retraining—would help cushion the costs of dislocation for specific groups, and would ensure that
trade-led growth is pro-poor (World Bank
1997, box 2.9). Efforts would also be needed
to cushion the consequences for affected countries of the reorientation of export flows,

58

should the preferential market access regimes
for specific commodities be discontinued. This
would require increased donor support. At thesame time, policy should remove distortions,with the aim of facilitating the redeploymentof labor and released resources from the industry that enjoyed support. Although labormarkets are inherently more flexible in developing countries, distortions—linked, for example, to state enterprise employment—often
obstruct labor markets and hold back the adjustment to reforms.

Building trade capacity by upgrading“behind-the-border” institutions
If a country’s investment climate is poor and its
institutions and infrastructure are weak, simply changing relative price incentives throughtrade policy may do little to promote sustained
growth. In several cases, as for example, in
Haiti (box 2.1), failure to respond to opportunities created by trade liberalization has been
related to poor macroeconomic policies thathave fed volatility and discouraged investment.
Weakness of “behind-the-border” institutions
can have a similar dampening effect, as occurs
in transport, utilities, and communications.
Improving regulation and competition in these
sectors would strengthen the export responseby reducing the cost of exporting. In agriculture, this is key to ensuring competitivenessin rapidly expanding markets for high-valued
commodities where competition is stiff—suchas, for example, fruits, vegetables, meats, andcut flowers.
Effective duty drawback and indirect tax
rebate mechanisms, are important to overcome the anti-export bias often embedded in
trade regimes. Export finance is often a major
constraint inhibiting exports in many low-income countries. Inadequacies may result fromthe overall weakness of the financial sector or
may reflect difficulties in assessing creditworthiness of traders. While ensuring availabilityof trade finance is a matter that needs to beleft to the private sector, any effort to expand
exports and to promote increased opportunities for the poor in the export sector needs

M A R K E T

A C C E S S

A N D

T H E

W O R L D ’ S

P O O RBox 2.9 Designing appropriate safety nets to ensure
trade reforms are pro-poor

S

ince segments of the poor may be hurt by tradeliberalization in the short run, determining the incidence of the tariff structure on the poor, and deploying appropriately tailored safety nets is important to ensure that subsequent growth is inclusive,and secure domestic support for reform. Deploymentof safety nets raises two broad policy options: Employ general social safety nets, or establish safety
nets targeted to those who are harmed by the tradereform (World Bank, 2001c).
Country-wide safety nets seem more appropriate
than special safety net programs for trade-related
problems. Fundamentally, it is difficult to justify
safety net programs to poor people who suffer fromtrade reform and deny assistance to other poor people who suffer from unemployment from other disruptions, such as technological change, or domestic
demand shifts. As the main need for the poor during
a difficult transition period is likely to be food, one
approach is a time limited food subsidy and distribution program. However, targeting a food subsidy isdifficult, and often subject to abuse, while the benefits may also spillover to middle and upper income
groups. An alternative is an untargeted subsidy on
inferior goods, as has been pursued in Egypt (Adams,
2000).

complementary policies to help overcome
credit bottlenecks. Appropriately managed
matching grants can be an effective instrument
to assist small firms to penetrate export markets. Product standards based on international norms facilitate market linkages, andact as safety, health, quality, or environmental
safeguards. Developing countries face a difficult challenge in this area, as they need to establish efficient testing, certification, and laboratory accreditation requirements to attainsanitary, phytosanitary, and product standards. Low-income developing countries needboth technical and financial assistance to meetthis goal. Marketing of exports is a challenging task for all low-income countries, because

Direct income support tends to be the most efficient type of social safety net. But proper management of means-tested programs of support requires
important administrative capabilities, which poor
countries often do not possess. One approach, which
was employed successfully in Jordan, is to initiallyprovide a money payment to a wide range of households, and subsequently narrow the program to only
low-income families. Because distinguishing the poor
from the non-poor may be difficult, workfare programs may be more generally applicable, and havebeen proven effective under certain circumstances(Ravallion, 1999), as individuals can self-identify forthese programs.
The World Bank’s Poverty Reduction Strategy
Sourcebook outlines best practices for deploying social safety nets in event of dislocation. In addition,
the Bank is working with other donors through theIntegrated Framework studies to ensure that bestpractices are tailored to local capabilities and institutions. But there are no easy answers as liberalization
affects the poor differently depending on country circumstances. The Bank intends to further deepen its
knowledge and provide policymakers with analytical
tools needed to answer some key questions.
Source: World Bank staff.

they have to improve information on market
opportunities; overcome problems of productand country brand; and meet concerns about
quality. Foreign partners and FDI can be helpful in providing needed contacts and expertise.
But local associations of exporters or producers can also help. Cooperatives and similar
ventures can help improve marketing while
ensuring that benefits from exports accrue tosmall poor farmers. However, transparency
and competition in these institutions is important, or poor farmers may receive lower prices
for their outputs.
In agriculture, in particular, where the stakes
for poverty reduction are high, additional companion policies and institutions would be

59

G L O B A L

E C O N O M I C

P R O S P E C T S

needed to improve the supply response to market incentives. Some of these policies demandconsiderable up-front mobilization of resources,
and should be backed by donor support. Examples include stepped up investment in rural infrastructure, which is a key enabler of agricultural exports in developing countries. Securing
sufficient supply of credit at competitive conditions is important to encourage private sector
investment into storage, transportation, andmarketing of agricultural products. Increased
investment in skills through education andtraining in rural areas is needed to bolster productivity in agriculture, and to enhance the ability of absorbing emerging technologies—especially those stemming from the biotechnology
revolution.
But other initiatives in agriculture would
need to improve the regulatory and policy environment. Continued trade policy reforms
should redress the still remaining anti-export
bias in developing countries’ agriculture. Reforms of pricing policies should be stepped up,
because in a number of LDC producer prices
are still compressed compared to border prices,thus limiting export incentives.
Efficient land policies and land tenure institutions are also key to improving the functioning of land markets, securing property rights
to farmland, and supporting the emergence ofmore efficient farm structures. Enhancing land
rights and transferability can increase a farmer’s ability to produce both for subsistence andfor income, improve their incentives to invest,
and enhance their ability to obtain credit (seealso Freeman and others 2000).

High-income countries can help
Domestic policies in developing countries havea greater chance of success if high-income
countries realize their interest in development
success. One policy high-income countries canadopt is following the lead of the European
Union. Its “Everything but Arms” proposal
grants duty-free and quota-free access in all
but 25 lines related to arms trade.15 Other
Quad countries have also announced initia-

60

tives that extend existing preferential access to
LDC or African countries, but they all fallshort of a full coverage.16
A number of studies have found that theexport growth gains for LDCs could be significant if all Quad markets granted duty-free access to LDC (Hoekman and others 2001; Ianchovichina and others 2001; UNCTAD 2001).
The projected trade diversion and decline inother developing countries’ exports are negligible, since LDCs represent only a small partof world merchandise trade, and other developing countries’ exports are more diversified.
According to a study (Hoekman and others
2001), even if all Quad members were to grant
LDCs duty-free access for only tariff-peakitems, non-oil LDC exports would increase byan estimated 11 percent, while other developing countries’ exports would decline only marginally—by an estimated 0.1 percent.
Extending duty-free market access to all
LDC exporters would also help mitigate thedrawbacks of current preferential access
schemes targeted on specific beneficiaries.
These schemes often distort trade, because they
displace low-cost producers elsewhere in thedeveloping world. The case of the EU preferential regime for bananas illustrates this point(box 2.10). Moreover, preferential access tohigh-income country agricultural markets withhighly subsidized domestic prices provides apremium over world prices to the countries
receiving the preferences. This form of “aidthrough-trade” is not an efficient way of providing aid because it creates dependence andis targeted to particular economic activities
rather than to identified areas of need.
High-income countries can also provide“aid for trade.” This could include increased
grant aid for trade policy analysis (such as in
the integrated framework program discussed
in chapter 6), technical assistance on implementation of standards, and aid for aspects ofdevelopment that affect the “soft infrastructure” of the investment climate, such as governance. No less important is disciplining theburgeoning recourse to contingent protection.

M A R K E T

A C C E S S

A N D

T H E

W O R L D ’ S

P O O RBox 2.10 The banana dispute: good intentions . . .
bad policies?

B

ananas are almost exclusively exported by developing countries to high-income countries, withthe four dominant exporters (Ecuador, Costa Rica,
Colombia, and the Philippines) accounting for threequarters of global exports. The two major importers,
the United States and the EU, cover approximately
60 percent of the world market, currently estimatedbetween $5 and $6 billion.
During the 1990s, bananas were a source oftrade dispute, often termed the “transatlantic banana
trade war.” The trade dispute reflects primarily EU
import policies. In 1997, 40 percent of the EU banana market was supplied by domestic production
and duty-free imports from African, Caribbean, andPacific (ACP) countries, with the rest being imported
from non-ACP banana producers (the so-called “dollar bananas,” primarily from Latin America), whowere subject to quotas and tariffs.
By restricting imports from non-ACP exporters,
the EU import regime causes its domestic banana
prices to be much higher than other markets—on
average, about two-thirds higher than in the UnitedStates. Furthermore, the regime de facto guarantees
high prices to EU and ACP producers, which has
been the political justification for such intervention.

Open regionalism could promotetrade creation—
Regional arrangements continue to proliferate,
and are likely to remain an enduring featureof the trade panorama. Smaller memberships
make it easier to negotiate the increasingly important issues inherent in trade and regulatory
regimes, while small countries often can exercise greater influence in regional arrangements.
“Open regionalism” holds the potential tostimulate global trade and improve the efficiency of regional producers. But regionalarrangements can also become a vehicle forprotection, trade diversion, and unintended inefficiency. Key conditions to benefit from expanded trade and investment include loweringcommon external trade barriers, stimulating

Apart from the income transfer from EU consumers to ACP and EU banana producers, a numberof other effects are in place. High prices lower EU
banana demand. If EU per capita banana consumption was the same as in the United States, total banana consumption in the EU would increase by morethan 10 percent. This additional demand would raiseworld prices, while lower-cost banana producers
would export more. The current quota/tariff combination is an inefficient and expensive way to provide aid.
Borell (1999), for example, reported that for every
dollar that ACP producers receive as aid throughhigher banana prices, EU consumers pay $5.30.
Ecuador, Guatemala, Mexico, and the UnitedStates brought a complaint before the WTO in 1997.
The panel ruled against the EU banana importregime. The EU has recently reached an agreementwith the United States and Ecuador that allows more
import licenses, based on historical allocation, until
2006 when ACP preferences will be retained only
through tariff protection.

Source: World Bank staff.

competition, reducing transaction costs, andreinforcing nondiscriminatory investment andservices policies (World Bank 2001b).17
North-South regional agreements are more
likely to improve welfare than South-Southarrangements, because they usually result in
lower trade barriers with less trade diversion,and because the greater structural differencesin North-South economies produce greater
gains from trade creation (World Bank 2000d).
Although South-South arrangements can bemade to work, a number of regional integration agreements have had negative or ambiguous effects on income. In particular, agreements between richer and poorer developing
countries are likely to generate losses for thepoorer ones when their imports are diverted

61

G L O B A L

E C O N O M I C

P R O S P E C T S

toward the richer members whose firms are
not internationally competitive.
Reflecting large differences in costs between
high-income and developing countries, NorthSouth arrangements hold also the greatest
promise for trade creation in agricultural products and labor-intensive manufactures. By contrast, a regional approach—even on a SouthSouth basis—seems promising in the regulationof services, when combined with a nondiscriminatory approach to liberalization (Subramanian and others 2000). Possible areas of cooperation—by pooling resources and expertise andby upgrading and harmonizing standards—
would include domestic regulation in sectors
such as financial services, telecommunications,power, and transport.

—but multilateral policies hold the
key to a sustained improvement inmarket access—
The next trade round has the potential to improve access for developing countries’ merchandise exports to high-income markets, particularly in agriculture and labor-intensive
manufactures, where the stakes for the reduction of poverty are high. The Quad countries—
the United States, EU, Japan, and Canada—
would serve their interest in expanding tradeand development well if they put serious concessions on the table in these areas.
Offering to link “aid for trade” to progressin reforms in developing countries would also
serve the interest of development well. The
trade round should also provide more international aid and technical assistance in key sectors, such as agriculture, where the poor countries need to build trade capacity.
Developing countries too (especially the
middle-income countries) should join multilateral efforts to further liberalize merchandise
trade if they want to maximize the benefits
from freer global markets. Because merchandise trade among developing countries is set toaccelerate further, outpacing the growth ofworld trade, reducing trade barriers in developing countries holds a key promise in increasing the development impact of trade.

62

An agenda of multilateral trade policy options to make merchandise trade work for thepoor would need to respond to three main
challenges.

—reducing distortions inagricultural trade—
Removal of distortions to agricultural trade requires coordinated efforts in different directions. As a first priority, MFN-applied tariffs
should be reduced, on average by half in highincome countries, and by one-third in developing countries. Agricultural tariff peaks in highincome countries should be phased out. Tariffs
should also become more transparent by limiting the use of specific and compound tariffs.
The EU and Japan should take the lead because
in these countries tariff peaks on agricultural
imports and specific tariffs are more prevalent.
The size of tariff quotas should be increased
and the “in-quota” tariff rates should be eliminated to improve the very low tariff quota fillrates, and the over-quota tariffs should be considerably cut to expand market access. Removal of tariff peaks in the Quad will help reduce the tariff escalation that hampers tradein more processed agricultural products andhigher value-added manufactures. But multilateral surveillance should also be enhanced, toprogressively eliminate tariff escalation in both
high-income and developing countries.
As a second step, agricultural tariffs should
be bound to levels close to MFN-applied rates,
particularly in developing countries wherebound rates are very high. Binding of tariff
rates will improve the predictability of the
global tariff system. High bound tariffs create
ample scope for tariff protection to rise without
infringing WTO commitments. Investors’ risks
could thus increase, limiting the benefits from
more open trade.
The third step would require a much bolder
overhaul of the system of support provided byhigh-income countries to agriculture. Morebinding disciplines should be introduced on
production-affecting support, also encompassing subsidies that are currently exempt fromURAA reduction commitments (“Blue Box,”M A R K E T“Green Box,” and “de minimis” measures).
As a benchmark, the producer support estimate in high-income (OECD-member) countries should be cut on average by half as ashare of gross farm receipts. This should becoupled with an accelerated phaseout of export subsidies—especially in the EU, where
their usage continues to be widespread. To
level the playing field, officially supported export credits—which are more prevalent in the
United States—should also be brought undermultilateral disciplines.

—expanding access in labor-intensive
manufactures—
The phaseout of the remaining quantitative
restrictions in textiles and clothing should be
stepped up, ahead of the ATC expiration in
2005, because the removal of quotas has been“back-loaded.” But this will not be enough to
improve market access for developing countries.
Applied tariffs in textiles and clothing remain
excessively high and should be cut on averageby half in high-income countries, and by onethird in developing countries. Tariff peaks
should be phased out—especially in the UnitedStates and Canada where they are prevalent.
Tariffs on footwear should be reduced across all
Quad countries.
To build confidence that trade in textiles
and clothing will be freed up in the post-ATC
regime, the increasing trend in the use of contingent protection (especially in textiles)
should be halted. Reducing the wide discrepancies between bound and applied tariffs
would help build trust, because these discrepancies provide the scope for using tariffs assafeguards or for balance-of-payments reasons(Laird forthcoming). And multilateral surveillance should be enhanced, to eliminate tariff
escalation on labor-intensive manufactures inboth high-income and developing countries.

—and eliminating tariff peaks andescalation on all products
Eliminating tariff peaks that now discriminate
against labor-intensive products would add considerably to the export potential of developing

A C C E S S

A N D

T H E

W O R L D ’ S

P O O R

countries. Similarly, reducing escalation in tariff codes in the developed and developing
countries alike will produce more efficient, usually pro-poor growth.

Notes
1. Moreover, in Sub-Saharan Africa agricultural
exports are concentrated in five major crops (cocoa,
coffee, cotton, sugar, and tobacco), which, in 1990–95,
accounted for an estimated 62 percent of total agricultural exports. Export concentration has hardly
changed over time, since these same five crops represented 63 percent of total agricultural exports in the
1970s (Ingco and others 2001).
2. Export processing zones (EPZs) were often used
extensively—for example, in Tunisia, Bangladesh, andMauritius—to overcome the anti-export bias of domestic trade policy regimes and support export-oriented T&C industries. But their effectiveness in promoting spillovers to the rest of the economy has beenquestioned. By creating economic enclaves, EPZs often
impair backward linkages with the rest of the economy, as the supply chain of exporting firms may rely
more on imported, duty-free, intermediate goods thanon local producers. Such impediments to local production linkages could be seen, for example, in the case of
Bangladesh (World Bank 1999a).
3. The data on income distribution for the countries
included in the sample are from household surveys reported in Deininger and Squire 1996, but in some countries household surveys measure expenditures, while inothers they measure income. When household surveys
report expenditure (47 out of 129 observations), consumption growth of the poorest 20 percent of the population is compared to growth in average per capita
consumption—otherwise it is compared to growth in percapita GDP. Time periods span irregular intervals foreach country—depending on the availability of household surveys of acceptable quality. To smooth out shortrun fluctuations in income or expenditure, time periods
span at least 3 years, with an average duration of 6.8
years. The geographical breakdown of the sample is: East
Asia—31; Latin America and the Caribbean—50; Middle East and North Africa and Europe and Central
Asia—15; South Asia—18; Sub-Saharan Africa—15.
4. In developing countries, applied tariffs are, on
average, about three times higher than in industrial
countries, partly because developing countries rely moreon trade-related taxes to raise revenue. In developing
countries, the coverage of nontariff barriers, including
state trading monopolies, has also been considerably
reduced (Martin forthcoming).
5. Tariff quotas allow a lower-tier, or “in-quota,”
rate to be set at low levels, with the second-tier, or

63

G L O B A L

E C O N O M I C

P R O S P E C T S“over-quota,” rate set at a higher level—close to thelevel of protection enjoyed before the URAA. The distribution of TRQs among countries and product groups
reflects the incidence of tariffication. More than onequarter of all tariff quotas apply to fruits and vegetables,with the next four more important groups being meat,cereals, dairy products, and oilseeds (WTO 2001).
6. Support to agricultural producers refers to the
producer support estimate (PSE) computed by theOECD. The PSE is an indicator of the annual monetary
value of gross transfers from consumers and taxpayers
to farmers, measured at the farmgate level, arising frompolicy measures that support agriculture. These transfers include both government subsidies to agriculture(taxpayer transfers) and effective market price support
through trade policies to restrict imports (transfers fromconsumers). A wider indicator of support, calculated by
the OECD, is the total support estimate (TSE). In addition to transfers included in the PSE, the TSE also includes an estimate of general services support provided
to agriculture—for example, public research and development, agricultural schools, inspection services, andinfrastructure.
7. To be sure, the global impact of subsidy reduction
in OECD countries on agricultural greenhouse gas emissions is uncertain, as production could increase in countries with higher emission intensity per unit of output.
8. In the EU and Japan, production-related total aggregate measurement of support (AMS) and “blue box”
measures still account for the majority of support (83percent in the EU and 53 percent in Japan), while in the
United States support is now provided mainly under“green box” measures (84 percent).
9. Domestic support to agriculture is also high outside the Quad. For example, in the Republic of Korea, at
an estimated $17.3 billion on average during 1998–
2000, the PSE covered 66 percent of gross farm receipts,
and was more than four times higher than in Canada(OECD 2001b).
10. For example, in 1990 only about 58 percent of
EU imports were under quota restrictions, which left
much room to defer the “integration” of restrained
products.
11. These high levels of protection also have a large
cost for high-income countries’ consumers. According
to a study, in 1997, quotas and tariffs on textiles andclothing cost to EU consumers about $10 billion, while
the loss of production efficiency due to the sheltering ofdomestic production will have cost another $10 billion(Francois, Glismann, and Spinanger 2000). Hence, eachjob saved through the delayed freeing up of the EU textiles and clothing market costs an estimated $24,000
per year in textiles and $35,000 per year in clothing.
12. Other preferential schemes offer better access tosome developing countries, such as those received by

64

African, Caribbean, and Pacific, southern Mediterranean and Eastern European countries in the European Union; and those received by Mexico, Israel, Andean countries, and the Caribbean Community in the
United States.
13. LDC exports to the United States show an opposite pattern. However, high-preference exports represent less than 1 percent of LDC exports to the UnitedStates, which suggests that the outcome could be sensitive also to other barriers—such as standards, rules oforigin, antidumping, safeguards, distribution, and soforth.
14. Trade-weighted applied tariffs may to some extent underestimate the degree of tariff protection, sincehighly restrictive tariffs, which are likely to reduce
trade flows, receive small weights in the constructionof the index.
15. However, for three sensitive agricultural products—bananas, rice, and sugar—the liberalization will
be phased in during a rather lengthy transition period,
to be completed by 2009 for rice and sugar, and 2006
for bananas.
16. Japan’s “99 percent Initiative on Industrial Tariffs” does not cover agricultural products where tariffbarriers are particularly high. The U.S. “African Growthand Opportunity Pact” that grants duty-free and quotafree access to the United States does not include sensitive
agricultural products (for which there are tariff quotas),
nor apparel and clothing, which have their own preferential regime—including quotas and relatively restrictive
rules of origin.
17. For example, Harrison, Rutherford, and Tarr
(1997) estimate that Chile was able to profit from its
free trade agreement with MERCOSUR due to the factthat it lowered its external uniform tariff from 11 to
6 percent.

References
Adams, R. 2000. “Self-targeted Subsidies: The Politicaland Distributional Impact of the Egyptian Food
Subsidy System.” Economic Development and Cultural Change, 49(1), 115–36.
Akiyama, T., J. Baffes, D. Larson, and P. Varangis. 2001.
Commodity Market Reforms: Lessons from Two
Decades. Washington, D.C.
Blackhurst, R., A. Enders, and J. Francois. 1996. “TheUruguay Round and Market Access: Opportunities and Challenges for Developing Countries.” In
The Uruguay Round and the Developing Countries W. Martin and L. A. Winters, editors. New
York: Cambridge University Press.
Borell, B. 1999. “Bananas: Straightening Out Bent Ideas
on Trade as Aid.” Presented in the WTO Conference on Agriculture and the New Trade Agenda in
the WTO 2000 Negotiations. October 1–2. Geneva.

M A R K E T

Burfisher, M. 2001. “The Road Ahead: Agricultural Policy Reform in the WTO: Summary Report.” Agriculture Economic Report No. 797, United States
Department of Agriculture. Washington, D.C.
Currie, J., and A. Harrison. 1997. “Trade Reform andLabor Market Adjustment in Morocco.” Journalof Labor Economics 15(3): S44–S72.
Datt, G., and M. Ravallion. 1998. “Farm Productivity
and Rural Poverty in India.” Journal of Development Studies (34): 62–58.
Davis, D.R. 1996. “Trade Liberalization and Income
Distribution.” NBER Working Paper 5693. August.
Deininger, K., and L. Squire 1996. “A New Data Set
Measuring Income Inequality.” The World Bank
Economic Review (10): 565–91.
Diakosavvas, D. 2001. “The Uruguay Round Agreement on Agriculture in Practice: How Open areOECD Markets?” Presented at the World Bank
Conference on Leveraging Trade, Global Market
Integration, and the New WTO Negotiations forDevelopment. July 23–24. Washington, D.C.
Dollar, David. Forthcoming. “Post-1980 Globalizers.”
In “Globalization” Policy Research Report. World
Bank, Washington, D.C.
Fosu, A. K., S. M. Nsouli, and A. Varoudakis. 2001.
Policies to Promote Competitiveness in Manufacturing in Sub-Saharan Africa. Development Centre
Seminars with the International Monetary Fund,and the African Economic Research Consortium.
OECD, Paris.
Francois, J., H. Glisman, and D. Spinanger. 2000. “The
Cost of EU Trade Protection in Textiles andClothing.” Working Paper No 997, Kiel Institutefor World Economics, Kiel, Germany. August.
Freeman, F., J. Melanie, I. Roberts, D. Vanzetti, A. Tielu
and B. Beutre, 2000. “The Impact of Agricultural
Trade Liberalization on Developing Countries.”
ABARE Research Report 2000.6. Canberra.
Gaiha, R. 1993. “Design of Poverty Alleviation in
Rural Areas.” United Nations Food and Agriculture Organization, Rome.
Harrison, G. W., T. F. Rutherford, and D. G. Tarr. 1997.
“Trade Policy Options for Chile: A Quantitative
Evaluation.” Policy and Research Working Paper
No 1783. World Bank, Washington D.C. June.
Hoekman, B., F. Ng, and M. Olarreaga. 2001. “Tariff
Peaks in the Quad and Least-Developed Country
Exports.” February. World Bank, Washington,
D.C. Processed.
IMF (International Monetary Fund)–World Bank.
2001. “Market Access for Developing Countries
Exports.” Joint Paper. April, Washington, D.C.
Ianchovichina, E., A. Mattoo, and M. Olarreaga. 2001.
“Unrestricted Market Access For Sub-SaharanAfrica: How much Is It worth and Who Pays?”
World Bank, Washington, D.C. February. Processed.

A C C E S S

A N D

T H E

W O R L D ’ S

P O O R

Ingco, M., and L.A. Winters, (eds). 2001. Agricultural
Trade Liberalisation in a New Trade Round. Discussion Paper No. 418. The World Bank, September, Washington, D.C.
Ingco, M., T. Kandiero, and J. A. Mistiaen. 2001. “SubSaharan Africa and the New WTO Trade Negotiations in Agriculture: Economic Analyses of Interests and Options.” Presented at the World Bank
Conference on “Leveraging Trade, Global Market
integration, and the New WTO Negotiations forDevelopment.” Washington, D. C. July 23–24.
ITCB (International Textiles and Clothing Bureau).
1999. “Agreement on Textiles and Clothing: Evaluation of Implementation.” August. Geneva.
Kanaan, O. 2000. “Tanzania’s Experience with Trade
Liberalization.” Finance & Development (37) June:
30–33.
Kathuria, S., W. Martin, and A. Bhardwaj. 2001. “Implications of MFA Abolition for South AsianCountries.” World Bank, Washington, D.C. April.
Processed.
Khan, M. H. 2000. “Rural Poverty in Developing
Countries.” Finance & Development December.
International Monetary Fund, Washington, D.C.
Laird, S. Forthcoming. “Market Access For Merchandise: How Large Are the Barriers?” In “Trade Policy for Developing Countries in a Global Economy:
A Handbook.” Washington, D.C.: World Bank.
Maier, Leo, and M. Shobayashi. 2001. “Multifunctionality: Towards an Analytical Framework.”
Summary and Conclusions. April, Paris.
Martin, W. Forthcoming. “Trade Policies, Developing
Countries, and Globalization.” In “Globalization” Policy Research Report. World Bank, Washington, D.C.
Nogues, J. J. 2000. “El Sistema Multilateral de Comercio y el Desbalance de la Rueda Uruguay.”
December. Buenos Aires.
OECD 1999a. “Post–Uruguay Round Tariff Regimes:
Achievements and Outlook.” Paris.
——— 1999b. “National Climate Policies and the
Kyoto Protocol.” Paris——— 2001a. “The Uruguay Round Agreement on
Agriculture: An Evaluation of Its Implementationin OECD Countries.” Paris.
——— 2001b. “Agricultural Policies in OECD Countries: Monitoring and Evaluation 2001.” Committee for Agriculture. May. Paris.
——— 2001c. “Trade and Development Issues in NonOECD Countries.” Trade Committee. April. Paris.
——— 2001d. “Improving the Environmental Performance of Agriculture: Policy Options and Market
Approaches.” Paris.
Oxfam International. 2001. “Rigged Trade and Not
Much Aid: How Rich Countries Help to Keep the
Least-Developed Countries Poor.” May. London.

65

G L O B A L

E C O N O M I C

P R O S P E C T S

Ravallion, M. 1999. “Protecting the Poor in Crisis.”
PREM Note no. 12, The World Bank. Washington, D.C.
Revenga, A. 1995. “Employment and Wage Effectsof Trade Liberalization: The Case of Mexican
Manufacturing.” Policy Research Working Paper
1524. World Bank, Washington, D.C.
Sheales, T., S. Gordon, A. Hafi, and C. Toyne. 1999.
“Sugar: International Policies Affecting Market
Expansion.” ABARE Research Report 99.14.
Canberra.
Sheperd, A. W., and S. Farolfi. 1999. “Export Crop Liberalization in Africa: A Review.” Food and Agriculture Organization Agricultural Services Bulletin
No. 135. Rome.
Subramanian, A., E. Gelbard, and others. 2000.
“Trade and Trade Policies in Eastern and Southern Africa.” IMF Occasional Paper No. 196. August. Washington, D.C.
Townsend, R. 1999. “Agricultural Incentives in SubSaharan Africa.” World Bank Technical Paper
No. 444. August. Washington, D.C.
Tyers, R., and Anderson, K. 1992. Disarray in World
Food Markets: A Quantitative Assessment. Cambridge University Press, Cambridge.
UNCTAD (United Nations Conference on Trade andDevelopment). 2001. “Duty and Quota Free Market Access for LDCs: An Analysis of Quad Initiatives.” London and Geneva.
Winters, L. A. 1990. “The So-Called Non-Economic
Objectives of Agricultural Support.” OECD Economic Studies No. 13: 238–66.
Winters, L. A. 1994. “The LDC Perspective,” in K. A.
Ingersent, A. J. Rayner, and R. C. Hine (eds.). Agriculture in the Uruguay Round, St. Martin’s Press,
New York, 157–181.

66———. 2000. “Trade and Poverty: Is there a Connection?” In “Trade, Income Disparity and Poverty,”
Geneva: World Trade Organization.
Wood, A. 1997. “Openness and Wage Inequality in
Developing Countries: The Latin American Challenge to East Asian Conventional Wisdom.” The
World Bank Economic Review (11): 33–57.
World Bank. 1997. Global Economic Prospects and theDeveloping Countries 1997. Washington, D.C.
———. 1999a. “Bangladesh Trade Liberalization: Its
Pace and Impacts.” South Asia Region. November. Washington, D.C.
———. 1999b. “Bangladesh. From Counting the Poor
to Making the Poor Count.” Washington, D.C.
———. 2000a. World Development Report 2000/2001.
Washington, D.C.
———. 2000b. “Vietnam Development Report 2000:
Attacking Poverty.” Washington, D.C.
———. 2000c. Global Economic Prospects and theDeveloping Countries 2001. Washington, D.C.
———. 2000d. Trade Blocs. Washington, D.C.
———. 2001a. “Uganda Poverty Status Report 2001.”
February. Washington, D.C. Draft.
———. 2001b. “Leveraging Trade for Development.”
Development Committee. April. Washington, D.C.
World Bank. 2001c. “Trade Policy and Poverty,” inPoverty Reduction Strategy Sourcebook. Washington, D.C.
World Bank. forthcoming. Agriculture and the Global
Trading Systems, (draft) M. Ingco (ed), May 2001,
Washington, D.C.
WTO (World Trade Organization). 2001. “Market Access: Unfinished Business.” Special Studies. May.
Geneva.

3
Trade in Services:
Using Openness to Grow

Services are vital for economic
development—
Services are the fastest growing sector of the
global economy, and trade and foreign direct
investment in services have grown faster thanin goods over the past decade. Developing
countries have witnessed even faster growth
rates, and their share in world services exports
increased from 14 percent in 1985–89 to 18
percent in 1995–98. Technological progresshas greatly enhanced the scope for trade inconventional services, such as education and finance, and also created a host of new tradable
services, such as software development and Internet access. Moreover, liberalization in many
countries is leading for the first time to the private and foreign provision of services such as
telecommunications, transport, and finance.
In virtually every country, the performanceof the services sectors can make the difference
between rapid and sluggish growth (box 3.1).
Developing countries, in particular, are likely
to benefit significantly from further domestic
liberalization and the elimination of barriers
to their exports. The income gains from a reduction in protection to services are estimatedto be multiples of those from trade liberalization in goods.

—but the benefits from liberalization are
not automatic
Flawed reform programs can substantially reduce gains. The largest gains come from eliminating barriers to entry, but many developing

countries have given priority to a change inownership through privatization, while retaining limitations on new entry. Effective regulation ranging from prudential regulation of financial services to procompetitive regulationof telecommunications is critical to the successof liberalization, but regulatory weaknesses
are too prevalent in developing economies.
Liberalization also frequently requires complementary policies to help improve access toessential services for the poor. The experienceof several countries has demonstrated that
universal service goals can be achieved in competitive markets.

Multilateral engagement can be an
important catalyst for liberalization
Even though governments can initiate reforms
of services individually, multilateral engagement can help in two ways. First, negotiations
under the General Agreement on Trade in Services (GATS) could help accelerate domestic
reform and improve access to foreign markets
for developing countries. However, for thesenegotiations to be fruitful, both developed anddeveloping countries must recognize mutualinterests in reciprocal liberalization. In particular, developed countries must see the advantages of allowing the temporary movement of
individual service providers. Developing countries must see the advantages of multilateralagreements to increase competition, enhancecredibility of potential domestic reform, andstrengthen domestic regulation. Recognizing69

G L O B A L

E C O N O M I C

Box 3.1

P R O S P E C T S

Why do services matter for development?

In developing countries, the average share of services in GDP increased from around 40 percent in1965 to around 50 percent in 1999, while in theOECD countries the average share increased over thesame period from 54 percent to over 60 percent.
Among the fastest growing sectors in many countries
are services such as telecommunications, software,and finance.
Efficient services not only provide a direct benefit to consumers, but also help shape overall economic performance. An efficient and well-regulated
financial sector leads to the efficient transformationof savings to investment, ensuring that resources are
deployed wherever they have the highest returns; andfacilitates better risk-sharing in the economy. Improved efficiency in telecommunications generates
economywide benefits, because this service is a vitalintermediate input and also crucial to the dissemination and diffusion of knowledge. The spread of theInternet and the dynamism that it has lent toeconomies around the world is telling testimony tothe importance of telecommunications services. Simi-

larly, transport services contribute to the efficient distribution of goods within a country, and are particularly important in influencing a country’s ability toparticipate in global trade. Although these are themore prominent services, others are also crucial.
Business services such as accounting and legal services are important in reducing transaction costs—
the high level of which is considered one of the mostsignificant impediments to economic growth inAfrica. Education and health services are necessary
in building up the stock of human capital. Retail andwholesale services are a vital link between producers
and consumers, and influence the efficiency withwhich resources are allocated to meet consumer
needs. Software development is the foundation of themodern knowledge-based economy. Environmental
services contribute to sustainable development byhelping alleviate the negative impact of economic activity on the environment.

Source: World Bank staff.

these potential mutual gains will allow reciprocal “concessions” that benefit both.
In parallel, global cooperation is needed toprovide support for developing countries atfour levels: in devising sound policies, strengthening the domestic regulatory environment,enhancing their participation in the development of international standards, and in ensuring access to essential services in the poorest
areas.

Surging trade and investment
in services
Trade in services: four modes of supply
Services include activities as disparate as transport of goods and people, financial intermediation, communications, distribution, hotels
and restaurants, education, health care, construction, and accounting. In contrast to mer-70

chandise trade, services are often intangible,
invisible, and perishable, and usually require
simultaneous production and consumption.1
The need in many cases for proximity between
the consumer and the producer implies that
one of them must move to make an international transaction possible. Since the conventional definition of trade—where a productcrosses the frontier—would miss out on a whole
range of international transactions, it is now
customary to define “trade in services” to include four modes of supply:• Mode one: cross-border supply, which isanalogous to trade in goods; arises whena service crosses a national frontier, forexample, the purchase of software or insurance by a consumer from a supplierlocated abroad.
• Mode two: consumption abroad; occurs
when the consumer travels to the terri-T R A D E

tory of service supplier, for example, topurchase tourism, education, or healthservices.
• Mode three: commercial presence; involves foreign direct investment, for example, when a foreign bank or telecommunications firm establishes a branch or
subsidiary in the territory of a country.
• Mode four: movement of individuals; occurs when independent service providers
or employees of a multinational firm temporarily move to another country.2
Services have been among the fastest growing components of world trade over the last
15 years. Over the period 1985–99, the compound annual growth rate for services exports
on a balance-of-payments basis—which covers
primarily cross-border supply and consumption abroad—was over 9 percent per annum,
compared to 8.2 percent per annum for merchandise (figure 3.1 left). As a result, services
trade more than trebled its size in fifteen years

I N

S E R V I C E S :U S I N GO P E N N E S S

T O

G R O W

to $1.2 trillion in the year 1999, and now accounts for a quarter of all cross-border trade.3
Developing countries as a group have witnessed an even more rapid (nearly four-fold)increase in their services exports, and a consequent increase in their share in world service
trade from 14 percent in 1985–89 to 18 percent in 1995–98 (figure 3.1 right). From a regional perspective, Europe and Central Asia
(ECA) and East Asia and Pacific (EAP) increased their services exports by a factor of six;South Asia (SAR) and Latin America and the
Caribbean (LAC) kept up with world growth;and Sub-Saharan Africa (SSA) and the Middle
East and North Africa (MNA) lagged behind.
Even so, most trade in services still takes place
between rich countries.
Over the last two decades, there has been asignificant decline in the relative importance oftransport services in total services exports—from around one-third to around one-fifth of
total exports—which may in part reflect a decline in the relative price of transport services

Figure 3.1 Trade in services has grown
faster than trade in goods——and developing countries share inworld exports have increased, 1986–98(compound growth, 1985=1)

Percent
25.0

3.5
Services

22.5

3.0

Goods
Services

22.0
20.6

20.0
2.5

18.0

18.3
17.5

17.5

18.0

2.0
15.0

Goods
1.5

13.7

12.5

1.0
1985

14.0

10.0
1987

1989

1981

1993

1995

1997

1999

Note: Population estimate from a sample of 100 countries forperiod 1985–98. Figure for 1999 is estimate from 69 countries.
World trade defined as (X+|M|)/2
Source: IMF BoP Rev. 5, through SIMA; EPPG staff
calculations.

1986

1990

1995

1998

Note: Population estimate from a sample of 100 countries.
Source: IMF BoP Rev. 5, through SIMA; EPPG staff
calculations.

71

G L O B A L

E C O N O M I C

P R O S P E C T S

Figure 3.2 Transport has declined, while“other” services have increased“Other” services

Percent of world total services exports
50
1980
1990
1998

40

Communications
5% Construction
7%30

Financial
10%

Other
businesses
53%

20

Personal, cultural,and recreational
3%

10
Royalties andlicense fees
12%

0Transport

TravelComputer andinformation
5%

Other

Note: Population estimate from a sample of 89 countries.
Source: IMF BoP Rev. 5, through SIMA; EPPG staff
calculations.

(figure 3.2). While the 1980s witnessed a
growth in the relative importance of travel, the1990s witnessed a significant increase in theshare of other commercial services. Detailed information on this last category is not available
for most countries. Estimates suggest that financial services are probably the most important, followed by construction, communications,and computer and information services.

Most FDI in services goesto OECD economies—
A large amount of “trade” in services takes
place through an established presence, for example through foreign direct investment (FDI).
The available evidence suggests that commercial presence has been the most dynamic modeof services supply in recent years.4 This may reflect the fact that there has been far greater liberalization of foreign investment than of crossborder supply of services, which was either
already open or did not witness significant new
opening. At the level of individual sectors, despite the growing use of information and communications technology, commercial presence

72

Insurance
5%

Source: Trade Handbook, based on IMF BoP rev. 5.

is the dominant mode of supply in all sectors
except transport, and to a more limited extent
telecommunications.5—but the growth rates of FDI flows todeveloping countries are higher
The limited evidence available suggests that thebulk of FDI stocks are in the Organisation for
Economic Co-operation Development (OECD)
countries (figure 3.3). However, over the period 1988–97, stocks in developing countries
have witnessed much faster rates of growth,
increasing ten-fold in EAP, seven-fold in SSA,
and five-fold in LAC, compared to a three-foldincrease in the OECD.6 The only exceptions
are the three countries in SSA for which data
are available, where the stock declined by ahalf. In all regions except SSA, the services sector now accounts for nearly half of the entire
FDI stock—from 1988 levels of less than onefifth in LAC and less than one-third in SAS.
The limited information on sectoral composition of FDI stocks suggests that nearly half thestock in SAS is in financial services, whereas
the stocks in EAP and LAC are more uniformly

T R A D E

I N

S E R V I C E S :U S I N GO P E N N E S S

Figure 3.3 FDI in services is concentrated
in the OECD countries——but the growth rates are higher for
many developing countries

Billions of dollars

Simple average compound annual growth rates

1,000

50
Services
All industry

40

800

31.7

700

30

38.1

28.3
25.7

600
500

20

15.3
10.3

400
304.5

300
200
1.2 0.6

0.8 7.2

Sub-SaharanAfrica

South
Asia

9.4

46.6

–4.2

8.9

East Asia
Latin
andAmerica
Pacific
and theCaribbean

9.5

10
0

101

100
0

G R O W

46.4

911.4

1988
1997

900

T O

–2.2

–10
OECD

Sub-SaharanAfrica

South
Asia

Latin
East Asia
Americaandand thePacific
Caribbean

OECD

Source: UNCTAD, FDI/TNC database.

distributed across finance, transport, storage
and communications, hotels and restaurants,
real estate, and other business services.

Developing countries are becoming players
in exporting services
While some developing countries are increasingly investing in other countries to export
services—for example, Malaysia in environmental services, and South Africa in telecommunications—most supply services via cross bordersales (for example, data processing), to visiting
foreign consumers (for example, tourism), andthrough the movement abroad of individual
services providers (for example, professional
services). Developments in information andcommunication technology have dramaticallyincreased the scope for cross-border exports ofservices, ranging from software development in
the Philippines to data processing in Barbados.
Rough estimates suggest that the size of the potential market for developing-country exports oflong-distance services could be in the range of 1
to 5 percent of the total employment in services
in the seven richest economies—implying ex-

ports valued at between $40 billion and $120
billion (World Bank 1995). This mode of delivery is still free of explicit barriers, though regulatory barriers may impede trade (see box 3.2).
One of the most striking recent examples
of a developing-country service export successstory is the Indian software industry. Indian
software exports grew from $225 million in
1992–93 to $1.75 billion in 1997–98 (at anannual growth rate of approximately 50 percent).7 A recent report projects annual revenues of $87 billion, 2.2 million jobs, and amarket capitalization of $225 billion for the
Indian information technology (IT) sector by
the year 2008.8 By the same year, the IT sector
could account for 35 percent of India’s exports and attract $5 billion of FDI per year.
These figures are not implausible because
India still accounts for only half a percent of
the world software market, and there are stillwide differences across countries in the costof software development and support. The average cost per line of code in Germany (themost expensive country) exceeds by more thanfour times that of India (the cheapest country)73

G L O B A L

E C O N O M I C

P R O S P E C T S

Box 3.2 Whose regulations and for what purpose?
Challenges in electronic commerceDomestic regulations that affect trade pose themain challenge to ensuring open conditions forelectronic delivery of services. Two examples illustrate how difficult it is to distinguish between regulations that incidentally impede trade in the pursuit oflegitimate objectives and regulations that deliberately
discriminate against foreign provision for the sake ofprotection.
Privacy
An issue that could have a profound effect on electronic commerce is privacy. In late 1998, the European Union issued a wide-ranging directive that aims
to safeguard the privacy of personal data of EU citizens and prevent its misuse worldwide. It is backed
by the power to cut off data flows to countries that
the EU judges not to have adequate data protection
rules and enforcement. The directive caused frictions
with the US, which accused the EU of trying to impose laws beyond its own frontiers. A compromise
was reached under which the US agreed to set up arrangements for the processing by companies of
personal data from the EU, but the issue has notbeen fully resolved.
The issue could have an impact on developing
countries exports of data processing services, andposes a difficult choice for these countries. If theychoose not to enact laws deemed adequate, they
could be shut off from participation in this growing
market. In the absence of such laws and given the
weakness of local legal systems, it might be difficultfor private firms in developing countries to emulate
United States firms like Microsoft and credibly commit to meet the required high standards.
If they do enact stringent laws, it is unlikely thatthey could be made specific to trade with particularjurisdictions, and so the result could be an economywide increase in the costs of doing business. For instance, if private sector estimates generated in the
United States are to be believed, information sharing
saves the customers of 90 financial institutions(accounting for 30 percent of industry revenues),$17 billion a year ($195 per average customer
household) and 320 million hours annually (4 hours
per average customer household) (Glassman, 2000).

74

It is of course true that reporting of personal credit
histories is critical to consumer credit, and, even intheory, excessively, strict privacy laws could create
significant asymmetries of information and affect theefficiency of markets (Kitchenman, 1999). This is
not to suggest that there might not be good reasons
to protect privacy. However, achieving diverse national objectives without creating unnecessary impediments to trade is ideally accomplished through amultilateral process in which developing countries
participate.
Offshore financial services
Several Caribbean countries have become off-shore
financial services centers. However, in recent years,
their tax and regulatory regimes have drawn fire andelicited increased scrutiny. For example, the Financial
Stability Forum (FSF), which assesses conformity withinternational regulatory standards (including crossborder cooperation) placed many of the Caribbean
offshore centers in the lowest category; the Financial
Action Task Force (FATF), which is concerned withprotecting financial systems from money launderingand criminal use, placed a number of Caribbean centers in its list of “non-cooperative jurisdictions,” fromthe standpoint of willingness to cooperate with the
FATF on the basis of a list of its own criteria; and thecountries also attracted the attention of the OECDfor tax practices deemed harmful.
While the regulatory objectives are legitimate,several concerns have been raised about these initiatives. First, most developing countries have not participated in the development of the standards thatare being applied. Second, the standards are not always applied uniformly. For example, the FATF applies the FATF 40 Criteria when conducting mutual
evaluations of its members, but uses a different standard, the FATF 25 Criteria, to assess jurisdictions
that are not FATF members. Third, in some cases theassessment processes are not transparent. For example, the FSF does not specify how a country classified
in a low category can improve standards and graduate to a higher category. And FATF deliberations determining “non-cooperative jurisdictions” are held in
closed sessions. Finally, the evaluation processes areT R A D E

Box 3.2I N

S E R V I C E S :U S I N GO P E N N E S S

T O

G R O W

(continued)

in some instances not voluntary and involve a “nameand shame” approach to induce compliance.
These issues have provoked continuing discussions in the international financial institutions andother fora, but much work needs to be done before
international consensus can be established. The Bankand the Fund are assisting many jurisdictions to assess their compliance with international standards(figure 3.4). Against the background of a total
market for software services worth about $58
billion in the United States, $42 billion in Europe, and $10 billion in Japan, cost savings
could well be substantial.9 Other gains fromtrade liberalization include a more competitivemarket structure for software services, increased
choice (because countries may develop a special
expertise for certain development or support
services), and greater diffusion of knowledge.
The movement of service-supplying personnel remains a crucial means of delivery. Even
though the share of on-shore services in total
Indian software exports has been in continuous decline (in 1988, the percentage of on-site
development was almost as high as 90 percent), about 60 percent of Indian exports arestill supplied through the temporary movementof programmers to the client’s site overseas.10

with the aim to help them address any underlying
weaknesses. Key in this is the Bank-Fund Comprehensive Financial Sector Assessment Programs andthe recent IMF-led program of voluntary off-shore financial center assessments. Several Caribbean offshore financial centers have endorsed these initiatives.
Source: Bank staff.

Figure 3.4 Software is cheaper todevelop in India
Cost per line of code (dollars)$25
Development
Support

$22

$20
$18

$15

$10

$10

$5

$10

$5

$.30

$.60

$.60

$1.10

$1.30

$0
India

Italy

IrelandUnitedStatesGermany

Source: Adapted from Rubin (1999).

Barriers to mode four deprive both homeand host country of benefits
Many more developing countries could “export” at least the significant labor componentof services such as construction, distribution,
environmental, and transport with greater liberalization in the movement of individuals(mode four). If the movement is temporary,then we can be fairly confident that both thehost and home country will gain. For exporting countries, it is clear that both the financial
and knowledge benefits would be greatest if
service suppliers return home after a certain
period abroad.11 For importing countries, such

temporary movement should create fewer social and political problems than immigration.
Today, many different barriers constrain the
movement of individuals. The most obvious
barriers are explicit quotas or economic needs
tests—for example, requirements that employers take timely and significant steps to recruitand retain sufficient national workers in thespecialty occupation and that no worker has
been laid off for a certain period preceding andfollowing the filing of any work permit or visa
application.12 Then the many formalities (for75

G L O B A L

E C O N O M I C

P R O S P E C T S

example, to obtain a visa) make red tape related to FDI seem trivial by comparison. The
entry of foreigners can be impeded by nonrecognition of their professional qualifications,burdensome licensing requirements, or by theimposition of discriminatory standards on them.
The requirement of registration with, or membership of, professional organizations can also
constitute an obstacle for a person wishing toprovide the service on a temporary basis.

Health services could be an area ofcomparative advantage—
Health services are another area in which developing countries could become major exporters, either by attracting foreign patients todomestic hospitals and doctors, or by temporarily sending their health personnel abroad.
In Cuba, the government’s strategy is to convert
Cuba into a world medical power. SERVIMED,a trading company created by the government,
prepares health and tourism packages. During
1995–96 25,000 patients and 1,500 students
went to Cuba for treatment and training respectively, and income earned from sales ofhealth services to foreigners was $25 million.
Cost savings for patients and health insurers
can be significant. For example, the cost ofcoronary bypass surgery could be as low as
70,000 to 100,000 Indian rupees in India, about
5 percent of the cost in developed countries.
Similarly, the cost of a liver transplant in India is
one-tenth of that in the United States (UNCTAD
and WHO 1998).

—but will require greater portability of
insurance
A major barrier to consumption abroad (modetwo) of medical services is the lack of portabilityof health insurance. For example, U.S. federal orstate government reimbursement of medical expenses is limited to licensed, certified facilities in
the United States or in a specific U.S. state. The
lack of long-term portability of health coveragefor retirees from OECD countries is also one of
the major constraints to trade. In the UnitedStates for instance, Medicare covers virtually noservices delivered abroad. Other nations may

76

extend coverage abroad, but only for limited periods (two or three months). This constraint issignificant because it tends to deter some elderly
persons from traveling or retiring abroad. Those
who do retire abroad are often forced to returnhome to obtain affordable medical care. If individual concerns about the quality of care received abroad are addressed, then the potential
impact of permitting portability could be substantial. If only 3 percent of the 100 million elderly persons living in OECD countries retired
to developing countries, they could bring withthem possibly $30 to $50 billion annually inpersonal consumption and $10 to $15 billion
in medical expenditures (UNCTAD and WHO1998).

Service reforms can promote
efficiency and growthLiberalization of trade in services, accompanied by the reform of complementarypolicies, can lead to sectoral and economywide improvements in performance.

At the sectoral level—
Removing barriers to trade in services in a particular sector is likely to lead to lower prices,
improved quality, and greater variety. As in thecase of trade in goods, restrictions on trade
reduce welfare because they create a wedge
between domestic and foreign prices, leading toa loss to consumers that is greater than theincrease in producers’ surplus and government
revenue.13 Several empirical sectoral studies
support this contention.14 Because many services are inputs into production, the inefficient
supply of such services acts as a tax on production and prevents the realization of significant
gains in productivity. As countries reduce tariffs
and other barriers to trade, effective rates ofprotection for manufacturing industries may become negative if they continue to be confronted
with input prices that are higher than theywould be if services markets were competitive.15
A major benefit of liberalization is likely tobe access to a wider variety of services whose
production is subject to economies of scale.

T R A D EConsumers derive not only a direct benefit fromdiversity in services such as restaurants and entertainment, but also an indirect benefit because
a wider variety of more specialized producer
services, such as telecommunications and finance, can lower the costs of both goods andservices production (Ethier 1982; Copeland2001). In such circumstances, smaller markets
can be shown to have a strong interest in liberalizing trade in producer services, since this canoffset some of the incentives that firms have tolocate in larger markets (Markusen 1989).16—and economywide—
Estimates of benefits vary for individual countries—from under 1 percent to over 50 percent
of gross domestic product (GDP)—dependingon the initial levels of protection and the assumed reduction in barriers.17 In simulations ofglobal service trade liberalization, developed
countries gain more in absolute terms—which
is not surprising given the relative size of theireconomies—but developing countries also see
significant increases in their GDP. One model
predicts gains of between 1.6 percent of GDP(for India) to 4.2 percent of GDP (for Thailand)
if tariff-equivalents of protection were cut by
one-third in all countries (Chadha and others
2000). The gains from liberalizing services may
be substantially greater than those from liberalizing trade in goods (box 3.3), because current
levels of protection are higher and because liberalization would also create spillover benefits
from the required movement of capital andlabor. For instance, one model finds that thewelfare gains from a 50 percent cut in services
sector protection would be five times larger
than those from nonservices sector trade liberalization (Robinson and others 1999). These
results are particularly striking because they arederived from models that do not fully allow for
the temporary movement of individual service
suppliers—potentially a major source of gain.

—with accelerator effects on growth
Certain services industries clearly possess
growth-generating characteristics (see box 3.1).
Furthermore, barriers to entry in a number of

I N

S E R V I C E S :U S I N GO P E N N E S S

T O

G R O W

services sectors, ranging from telecommunications to professional services, are maintained
not only against foreign suppliers but also
against new domestic suppliers. Full liberalization can, therefore, lead to enhanced competition from both domestic and foreign suppliers. Greater foreign factor participation andincreased competition together imply a larger
scale of activity, and hence greater scope forgenerating the special growth-enhancing effects.18 Even without scale effects, the importof foreign factors that characterizes services
sector liberalization could still have positiveeffects because they are likely to bring technology with them.19 If greater technology
transfer accompanies services liberalization—either embodied in foreign direct investment
or disembodied—the growth effect will bestronger.20
Econometric evidence—relatively strong forthe financial sector and less strong but nevertheless statistically significant for the telecommunications sector—suggests that openness
in services influences long-run growth performance (figures 3.5 and 3.6). After controllingfor other determinants of growth, countries thatfully liberalized the financial services sector
grew, on average, about 1 percentage point
faster than other countries. An even greater impetus on growth was found to come from fully
liberalizing both the telecommunications andthe financial services sectors. Estimates suggestthat countries that fully liberalized both sectors
grew, on average, about 1.5 percentage points
faster than other countries. While these estimates indicate that there are substantial gains
from liberalizing key services sectors, it would
be wrong to infer that these gains can be realized by a mechanical opening up of services
markets.

A flawed reform program can undermine
the benefits of liberalization
If privatization of state monopolies to private
owners (sometimes foreigners) is conductedwithout concern for creating conditions ofcompetition, the result may be merely transfersof monopoly rents to private owners. Similarly,77

G L O B A L

E C O N O M I C

P R O S P E C T S

Box 3.3 Welfare gains from service liberalization:
The case of Tunisia
Percentage change in GDP resulting fromliberalization of selected service sectors
3.0
2.5
2.0
1.5
1.0
0.5

e

n
na
Fi

tri
D

is

nc

tio
bu

ne
Bu

Tr

an

sp

si

ta
or

ru
st
on
C

ss

n
tio

n
ct

io
at
ic
un
m

Source: Konan and Maskus 2000.

than the 6.6 percent adjustment the model predicts
as a consequence of the Tunisia-EU free trade agreement on goods trade. The gentler impact on thelabor market is a consequence of the fact that services liberalization induces foreign investment, sothat workers simply change employers within thesame sector. Finally, if Tunisia were to obtain a
20 percent increase in overseas permits for its guest
workers in foreign markets, then there would be an
additional gain in welfare equivalent to 0.4 percent
of GDP.
Source: Konan and Maskus 2000.

if increased entry into financial sectors is notaccompanied by adequate prudential supervision and full competition, insider-lending andpoor investment decisions may result. Also, if
policies to ensure universal service are not put

78

io

ns

0.0

om

he implications of services liberalization for the
Tunisian economy have been analyzed by Konanand Maskus (2000) using a computable general equilibrium model. Using actual data as the foundation,
they analyze the effect of liberalizing six service sectors: communications, construction, transportation,business and insurance, distribution, and finance.
The Tunisian economy is relatively closed, and also
faces constraints on its exports through the movement of individuals. The model is developed so as toconsider three different modes of liberalization: “import” liberalization of cross-border trade and theright of establishment by foreign investors, as well as
increased “exports” through cross-border movementof natural persons.
The main finding is that services liberalization
could provide significant gains to Tunisia, with welfare gains equivalent to 7 percent of GDP. These aretwice as large as the gains the model predicts for
Tunisia from its preferential agreement with the EU.
The largest benefits come from the liberalization offoreign investment in financial services, communications, and transportation. Liberalization vitalizes the
economy by eliminating inefficiency through increased international competition. Services are available not only at lower prices but also in greater varieties through an increase in the number of firms thatwould operate in Tunisia. More efficient financial,communications, and transportation sectors are also
likely to attract foreign firms to other industries in
Tunisia. As more and more foreign firms start to operate in Tunisia, the number of varieties of goods
and services made available to consumers and producers also increases, which further improves welfare. The possible cost in terms of restructuring the
economy turns out to be small. For example, it ispredicted that a mere 3 percent of the workforce
would have to change sectors—a much lower figureCT

in place, liberalization need not improve accessto essential services for the poor. Managing reforms of services markets therefore requires integrating trade opening with a careful combination of competition and regulation.

T R A D E

I N

S E R V I C E S :U S I N GO P E N N E S S

T O

G R O W

Figure 3.5 Services liberalization indices: telecoms & financial services
South Asia (3)East Asia and Pacific (5)Sub-Saharan Africa/
Middle East and North Africa (17)Eastern Europe and Central Asia (3)Financial
Services

Latin America and Caribbean (18)High Income (26)Sub-Saharan Africa/
Middle East and North Africa (42)
Eastern Europe and Central Asia (3)South Asia (5)Telecoms

East Asia and Pacific (8)Latin America and Caribbean (21)High Income (21)
0.0

2.0

4.0

6.0

8.0

10.0
Less restrictiveNote: The openness index for telecommunications captures the degree of competition, restrictions on ownership and theexistence of an independent regulator (needed to enable competitive entry), and draws on an ITU-World Bank database for 1998.
The index for financial services captures the restrictions on new entry, foreign ownership and capital mobility, and draws primarily
upon commitments made by countries under the GATS, which are known to reflect closely actual policy, and data in the IMF’s
Annual Report on Exchange Arrangements and Exchange Restrictions.
Source: Mattoo, Rathindran, and Subramanian 2001.

Figure 3.6 Greater liberalizationin services is associated with more
rapid growth
Growth rate (adjusted for other factors)
.059

GUY
DNK

Linear prediction
ISL
NIC
BRA

DOM SGP
IND
CHL
ARG
PAN

CRI

MLT
MOZ
COL

THA
URY
TUN

PER

LKA
MAR
TUR CYP
KEN

MWI
HND
VEN

EGY
BOL
KOR
PRT

ZAF GRCJAM
PHLMYS NLD

SWE
SLV
GBR
NOR
USA
CAN
BEL
FRA
AUT
FIN
ESP
AUS
ITA

MEX NZLCHEECUIDN

AGO

–.024
1

Composite services liberalization

Source: Mattoo, Rathindran, and Subramanian 2001.

8.5

South Africa’s experience with liberalizing
telecommunications services is instructive. The
government recognized the need for a more
efficient supply of services. It decided to sell a
30 percent equity stake of the public incumbent, Telkom, to a strategic investor and to
grant the newly privatized entity a five-year
monopoly period for fixed-line telephone services. It was hoped that market exclusivity
would facilitate rapid infrastructure rollout topreviously underserviced areas, but the program has had mixed results. Even though network growth picked up, Telkom did not meet
its rollout obligations and sought to renegotiate the targets specified in its monopoly license. The cost of the fixed-line monopoly
was also reflected in Telkom’s rising price-cost
margin, with gains in productivity leading tohigher margins rather than lower prices (Hodge
1999). Finally, despite some improvement, la-79

G L O B A L

E C O N O M I C

P R O S P E C T S

bor productivity was only a quarter that of leading international operators, with the lack ofcompetition in the domestic market identified
as a major contributing factor. Continued restrictions on domestic and foreign entry appear to have prevented the realization of thefull benefits of competitive markets.
In addition to competition, the institutionaland regulatory framework plays a critical role.
For example, in the 1990s financial reforms
were introduced in many African countries,
but have been less successful than expected(World Bank 2001a). Some of the reasons forthe disappointing results are directly related
to the financial system, while others pertain
to the general economic environment. The restructuring of state-owned banks was not sufficient to change the behavior of the financial
institutions. Public authorities still pressured
these institutions to lend money to loss-making public enterprises. Liberalization failed totrigger competition in the banking sector andgovernments were generally reluctant to close
down distressed state banks. Furthermore, liberalization of interest rates in a setting characterized by uncontrolled fiscal deficits had a pernicious effect on domestic public debt, which inturn led to larger deficits. Finally, and crucially,
there was a lack of adequate regulation and supervision mechanisms to monitor the functioning of the financial system.
The collapse of the Republic of Korea’s economy in 1997 also reveals the precariousness offinancial liberalization in an imperfect policy
environment. Korea did liberalize its financial
markets substantially, but it encouraged thedevelopment of a highly fragile financial structure.21 By liberalizing short-term foreign borrowing, the Korean authorities made it possible for the larger and better-known banks andconglomerates (chaebols) to assume heavy indebtedness in short-term foreign currency debt.
Meanwhile, the second tier of large chaebols
greatly increased their short-term indebtedness
in the domestic financial markets (funded indirectly through foreign borrowing of the banks).
The funds borrowed were being invested in theover-expansion of productive capacity. At the

80same time, financial regulation and supervisionwere fragmented with responsibilities spread
unclearly between the Bank of Korea and several parts of the Ministry of Finance. In addition, Korea had a restrictive regime in terms offoreign bank entry. Until the 1997 crisis, theKorean banking system was virtually closed toforeign banks, in contrast to some other East
Asian economies, such as Hong Kong (China),
which was almost completely open for all financial services. This restrictive regime impeded
the development of the local institutions, andmay have contributed to the large capital outflows as foreign creditors refused to rollover
their loans.

Liberalization could increase prices ofsome services for the poor—
Opening up essential services to foreign or domestic competition could have an adverse effect on the poor—which is often cited as a reason for the persistence of public monopolies.
However, a more efficient solution is to haveregulations with a social purpose.
If a country is a relatively inefficient producer of a service, liberalization and the resultant foreign competition are likely to lead to a
decline in domestic prices and improvement inquality. But there is a twist. Frequently, theprices before liberalization are not determinedby the market but set administratively, and are
kept artificially low for certain categories of
end-users or types of services products. Thus
rural borrowers may pay lower interest rates
than urban borrowers, and prices of local telephone calls and public transport may be kept
lower than the cost of provision.22 This structure of prices is often sustained through crosssubsidization within public monopolies, or
through government financial support.
Liberalization threatens these arrangements.
Elimination of restrictions on entry imply an
end to cross-subsidization, because it is nolonger possible for firms to make extranormal
profits in certain market segments. New entrants may focus on the most profitable market segments (“cream-skimming”), such asurban areas, where network costs are lower

T R A D E

and incomes higher. And privatization could
mean the end of government support. The result is that even though the sector becomes
more efficient and average prices decline, theprices for certain end-users may actually increase or availability decline, or both.
The evidence on the relationship between
competitive market structures and wider access to services is mixed. In some cases, a positive relationship has been observed in services
such as basic telecommunications, especiallyin countries where initial conditions are feeble, as exemplified by a low teledensity or service rationing (long waiting lists for obtaining
connections). However, there is also evidence
that financial services liberalization in somecountries has had an adverse affect on accessto credit for rural areas and the poor.23 These
point to the need to create mechanisms to ensure that the poor have adequate access to services in liberalized markets.

—and entail adjustment costs
Different modes of supply have different effects on factor markets. Cross-border tradeand consumption abroad resemble goods tradein their implications. The impact of the movement of factors depends critically on whether
the factors are substitutes or complements fordomestic factor services. Given the structure offactor prices in poor countries, we would typically expect liberalization to lead to an inflow
of capital and skilled workers. Such inflows
would tend to be to the advantage of the unskilled poor, increasing their employment opportunities and wages.24 Interestingly, it has
been shown that even when foreigners compete with local skilled workers in a services sector, the productivity boost to the sector fromallowing foreigners access could lead to an increase in the demand for domestic skilledworkers—the scale effect could outweigh thesubstitution effect (Markusen, Rutherford, andTarr 2000). Given these predictions, why are
workers in developing countries sometimes
skeptical about the benefits of liberalization?
One concern is the possible reduction in employment in formerly public monopolies thatI N

S E R V I C E S :U S I N GO P E N N E S S

T O

G R O W

have frequently employed surplus labor. For
example, Alexander and Estache (1999) findthat the privatization of electricity distribution
in Argentina led to a 40 percent reduction in
the workforce after privatization.
But there is also evidence that pessimism
may not always be justified. For example, anumber of developing countries have managed
to maintain or even increase employment intheir liberalized telecommunications sectors.
Since many developing countries have low teledensities (in the vicinity of five lines per 100
people), roughly 70 percent of telecom investment in developing countries is directed toward building wire line and mobile networks,
which are labor intensive and hence help maintain or raise employment levels. Petrazzini andLovelock (1996) find in a study of 26 Latin
American and Asian economies that telecom
markets with competition were the only ones
that consistently increased employment levels,
while two-thirds of the countries with monopolies saw considerable declines in their telecom
workforce.25 Nonetheless, reform programs will
generally require complementary policies to mitigate any social and economic costs of adjustment in factor markets.

Domestic policy: emphasizing
competition and regulation
Increasing competition is the first orderof business
Many developing countries have moved awayfrom public monopolies in sectors such as communications, financial, and transport services,
but are still reluctant to allow unrestricted newentry. Privatization does not axiomatically mean
greater competition. Restrictions on foreign
presence assume particular significance in thecase of services where cross-border delivery is
not possible, because consumer prices then depend completely on the domestic market structure. Several studies have concluded that larger
welfare gains arise from an increase in competition than from a simple change in ownershipfrom public to private hands (Armstrong and81

G L O B A L

E C O N O M I C

P R O S P E C T S

others 1994). Foreign investment clearly brings
benefits even in situations where it does not leadto enhanced competition. Foreign equity may
relax a capital constraint, can help ensure thatweak domestic firms are bolstered (for example,
via recapitalizing financial institutions), andserve as a vehicle for transferring technology
and know-how, including improved management. However, if restrictions on competition
artificially inflate the returns on investment, thenet returns to the host country may be negative.
Are there good reasons to limit entry? Insome cases, technical limitations may prevent
competition—such as those imposed by the
scarcity of radio spectrum needed for the provision of mobile telecommunications services,and scarcity of space for department stores or
airports in a city. More generally, entry restrictions might be justified by the existence of significant economies of scale. For example, if
there are substantial fixed costs of networks,competitive entry could lead to inefficient network duplication.26 However, entry restrictions
are increasingly hard to defend in principle, inthe face of technological change and in the faceof mounting evidence that competition works.
First of all, entry restrictions change the nature of interaction between incumbents andmay well make collusion more likely. Second,such restrictions dampen the impact of competition on productive efficiency. Third, the regulator is usually not better placed than thecompetitive process to determine the optimal
number of firms in the market, especially given
the difficulty of obtaining information about
the cost structure of firms and other sources ofregulatory failure. Furthermore, technologicaladvances have significantly lowered network
costs in a unisector such as telecommunications, and vertical separation (for example,
through network unbundling) has widened thescope for competitive entry (Smith 1995).
Therefore inefficiencies introduced by duplication of networks may be small compared tooperational inefficiencies that can result froma lack of competitive pressure.27 For example,
even in telecommunications, a sector where82

fixed costs are significant, countries in Latin
America that granted monopoly privileges totelecom operators of six to ten years to the privatized state enterprises saw connections growat one and a half times the rate achieved understate monopolies, but only half the rate inChile, where the government retained the rightto issue competing licenses at any time (Wellenius 1997). A recent study of countries in Asia
found that the largest increases in mainline
penetration and productivity were witnessedin countries where a change of ownership was
accompanied by the introduction of competition and the strengthening of regulation (Fink
and others 2001).

Efficient regulation: Making
competition work
Regulation in services, as in goods, arises essentially from market failure, which is attributable to the problems of natural monopoly
and inadequate consumer information, andfrom considerations of equity and protecting
the poor.
The existence of natural monopoly or oligopoly is a feature of the so-called locational
services. Such services require specialized distribution networks: roads and rails for landtransport, cables and satellites for communications, and pipes for sewerage and energy distribution (UNCTAD; and World Bank 1994).
Many countries have instituted independent regulators for basic telecommunications
services to ensure that monopolistic suppliers
do not undermine market access by charging
prohibitive rates for interconnection to theirestablished networks (see box 3.4).28 A similar approach is being taken in a variety ofother network services, including transport(terminals and infrastructure), and energy services (distribution networks).
Regulation of the interconnection price may
not, however, be sufficient. Small markets may
not be able to create conditions for effective
competition in the supplies of certain telecommunications, transport, and financial services,even if they eliminate all barriers to entry—for

T R A D E

I N

S E R V I C E S :U S I N GO P E N N E S S

T O

G R O WBox 3.4 Challenges in implementing
procompetitive regulationIt is now widely recognized that in basic telecommunications procompetitive regulation is needed todeliver effective competition and gains from liberalization. But the experience of different countries reveals a range of political and economic difficulties
that are only gradually being overcome.
In India a conflict between the departmentof telecommunications (DOT) and the regulatory
agency, Telecommunications Regulatory Authority ofIndia (TRAI), as it was initially constituted, hampered
progress toward an efficient telecom infrastructure.
Underlying a number of these problems was the
DOT’s joint role in awarding licenses for both basic
and cellular services while remaining as the main
telecommunications service provider. Absent an independent regulator, empowered to rebalance tariffs,
enforce fair interconnection agreements, and ensure
rapid, equitable issuance of radio spectrum, the benefits of a sector opened to allow private participationand foreign investment were significantly limited.
The government announced a new telecommunications policy on March 26, 1999 that addressed several of these key outstanding issues. The
DOT’s policymaking and service provision functions
were separated, and the operations arm was corporatized. TRAI was reconstituted in 2000, and its dispute resolution powers are now vested in a newquasi-judicial agency. The authority announced a new
telephone tariffs decision that will substantially restructure telephone service prices over a three-year
period, significantly improving incentives for local
network investment. The regulator has also programmed an agenda of activity to address several
other important regulatory matters, such as interconnection arrangements; a numbering plan; quality ofservice; rules of business; and customer satisfaction.
For smaller countries, a different problem arises:
the creation and operation of an efficient regulatory
agency involves substantial fixed costs that could

two related reasons. First, with services, unlikein the case of goods, national markets are often
segmented from the international market due
to the infeasibility of cross-border delivery. Sec-

place a significant resource burden. Apart from spectrum monitoring equipment, computers, and programs, there is the cost of professional assistance foractivities such as interconnection, cost estimation, andspectrum management. For example, the total costof government in Dominica is $41 million a year,
whereas the budget of the U.S. telecom regulator (theFederal Communications Commission) runs to $210 ayear. It is estimated that even a bare-bones regulatory
authority is likely to cost in the region $2 million eachyear, or 5 percent of Dominica’s government budget.
In response to these problems, in May 2000,
St Lucia, Dominica, Grenada, St Vincent and the
Grenadines, and St Kitts and Nevis set up, withWorld Bank support, the Eastern Caribbean Telecommunications Authority (ECTEL), the first regional telecommunications authority in the world.
ECTEL is in the process of developing from a legal
entity into a functioning institution. Although themember countries will retain their sovereign powerover licensing and regulation, ECTEL will provide
technical expertise, advice, and support for national
regulations. Apart from the economies of scale in establishing a common regulator, there are at least
three other advantages. It will promote the development of harmonized and transparent regulation in
the region, allow for a greater degree of independence (and hence credibility) in regulatory advice,
and enhance bargaining power in negotiations withincumbents and potential entrants. In fact, there isevidence that the creation of ECTEL, along withother reforms, has already prompted a decline in theprices of telecommunication services in the region.
One example is that the per-minute cost of a daytime
call to the United States has fallen between 24 and42 percent in these countries.
Source: DeFreitas, Kenny, and Schware 2001; and World Bank
staff.

ond, changing technologies may have reduced
the optimal scale of operation as well as sunkcosts in these sectors, but not enough for small
markets to sustain competitive market struc-83

G L O B A L

E C O N O M I C

P R O S P E C T S

tures. Some form of final price regulation may,therefore, be unavoidable. In some cases, such
regulation can be implemented at the national
level although, in practice, many developing
countries today lack the means to do so. In
other cases, the limited enforcement capacity ofsmall states strengthens the case for multilateral initiatives.29

Regulation to remedy inadequate
consumer information
In many intermediation and knowledge-based
services, consumers have difficulty securing full
information about the quality of service they arebuying (UNCTAD and World Bank 1994). Consumers cannot easily assess the competence ofprofessionals such as doctors and lawyers, thesafety of transport services, or the soundness ofbanks and insurance companies. When such information is costly to obtain and disseminate,
and consumers have similar preferences about therelevant attributes of the service supplier, the regulation of entry and operations in a sector could
increase social welfare. However, the establishment of institutions competent to regulate well isa serious challenge, as is revealed by the difficulties in the financial sector—not only in a numberof developing countries but also in the UnitedStates, Sweden, and Finland in the 1980s and1990s. The fact that regulatory inadequacies cannot be quickly remedied raises the issue of how
different elements of reform—particularly prudential strengthening and trade and investment
liberalization—are best sequenced (see box 3.5).
A separate problem is that domestic regulations to deal with the market failure may themselves become impediments to competition andtrade, as a result of differences across jurisdictions in technical standards, prudential regulations, and qualification requirements in professional, financial, and numerous other services(see box 3.2). In many cases, the impact on
trade is an incidental consequence of the pursuit of a legitimate objective, but in some cases
regulation can be a particularly attractivemeans of protecting domestic suppliers fromforeign competition.30 The issue of how multilateral trade rules might sift the legitimate from84

the protectionist is an issue to which we returnin the final section of this chapter.

Regulation to ensure universal service
Reform programs can accommodate universal
service obligations by imposing this requirement on new entrants in a nondiscriminatory
way. Thus such obligations were part of thelicense conditions for new entrants into the
fixed network telephony and transport in several countries. However, subsidies have often
proved more successful than direct regulationin ensuring universal access (Estache and others 2001).31 In 1999, Peru adopted a universal
service levy of 1 percent to finance a fund dedicated to providing universal access in remoteareas. Funds were allocated through a competitive bidding process that encouraged operators to adopt the best technology and othercost-saving practices at minimum subsidy. The
Chilean government adopted a similar schemethat permitted it to leverage over $2 million in
public funds into $40 million in private investment; this resulted in installation of telephones in 1,000 localities at about 10 percentof the costs of direct public provision. Household ownership of a telephone in Chile increased from 16 to 74 percent from 1988 to
2000, and all but 1 percent of the remaining
households were provided with public accessto telephones.
Public subsidies may also be directed to theconsumer rather than the provider (Cowhey
and Klimenko 1999). Governments have experimented with various forms of vouchers,
from education to energy services. This last instrument has at least three advantages: first, it
can be targeted more directly to those who need
the service and cannot afford it; second, it
avoids the distortions that arise from artificially
low pricing of services to ensure access; and finally, it is an instrument that does not discriminate in any way between providers. Of course,
no single approach will fit all sectors and countries, and the appropriate model to ensure service delivery to low-income groups will depend
on local circumstances, particularly regulatory
capacity.

T R A D E

I N

S E R V I C E S :U S I N GO P E N N E S S

T O

G R O WBox 3.5 Financial sector liberalization:
the need for policy coherenceFinancial reform is especially complicated. It isuseful to distinguish three types of financial liberalization and the scope of each.
• Domestic financial liberalization allows market
forces to work by eliminating controls on lending
and deposit rates and on credit allocation and,more generally, by reducing the role of the state in
the domestic financial system.
• Capital account liberalization removes controlson the movement of capital in and out of acountry and restrictions on the convertibility ofcurrency.
• Internationalization of financial services eliminates
discrimination in treatment between foreign anddomestic financial services providers, and removes
barriers to the cross-border provision of financial
services.
Internationalization has raised several fears: thethreat to the survival of local banks and financial
companies; the loss of monetary autonomy; and theincreased volatility of capital flows. Many of theseconcerns do not relate just to internationalization offinancial services, but also to the processes of financial deregulation and capital account liberalization.
But the extent of benefits and costs of internationalization depends, to a great extent, on how it isphased in with these other two types of financial reform, and, in particular, the strengthening of prudential regulation and supervision.
Many countries that have successful experiences
opening up to foreign financial firms (Brazil, Chile,
Hungary, Ireland, Poland, Portugal, Spain, and others)
also engaged in a process of domestic deregulation
and, consequently, reaped substantial gains (WorldBank 2001b). The experience of the countries acceding to the EU suggests that internationalization anddomestic deregulation can be mutually reinforcing.
Increased foreign entry bolstered the financial sector
framework by creating a constituency for improved
regulation and supervision, better disclosure rules, andimprovements in the legal and regulatory framework
for the provision of financial services. It also added tothe credibility of rules. These benefits of opening up toforeign entry followed from both top-down actions on
the part of government, as well as from bottom-up

pressures from the market as best international practices and experiences were introduced.
While the two reform processes (internationalization and domestic financial deregulation) are mutually reinforcing, they are not sufficient in themselves. More than in other sectors, the gains andcosts of financial reform depend on the regulatory
and supervisory framework, (Barth and others
2001). Experience shows that it is vital to strengthen
the supporting institutional framework in parallelwith domestic deregulation and internationalization.
In the absence of such strengthening, foreign entry
may entail risks. Foreign bank entry can destabilize
local banks by taking away the lowest risk business—including large, exporting firms—leaving local
banks to venture further out on the risk frontier.
Also several countries, especially in Africa, discovered with the failure of banks—such as BCCI and
Meridien—that a foreign name did not guarantee
safety and soundness even when these foreign banks
were operating in industrial economies or had someownership links with reputable foreign sources.
Having a supportive institutional framework iseven more obvious when it comes to capital accountliberalization. Experiences in the past, most recently
in Asia, have shown that achieving the potential
gains, and avoiding the risks, of capital account liberalization depend to a great extent on whether domestic institutions and prudential authorities have developed sufficiently to ensure that foreign finance will bechanneled in productive directions (Eichengreen forthcoming). Recent experiences also shows the potential
benefits of foreign financial institutions in stabilizing
capital flows. Several countries with significant foreign presence, such as Argentina and Mexico, benefited from the access of these institutions to foreign
capital during periods of economic presence (Dages,
Goldberg, and Kinney 2000). More generally, studies
show that diversity in ownership contributes togreater stability of credit in times of crises (Barth andothers 2000a; b); and La Porta and others 2000). In
so far as foreign presence leads to a stronger regulatory and supervisory framework, it contributes tomaking capital account liberalization and internationalization mutually reinforcing.
Source: World Bank staff.

85

G L O B A L

E C O N O M I C

P R O S P E C T S

Multilateral engagement:
Buttressing domestic reformsIn principle, a country can liberalize its markets and strengthen its regulatory institutions unilaterally, but four types of issues create benefits from multilateral engagement.
First, liberalization may be constrained by domestic opposition from those who benefit fromprotection. Second, a country cannot on its
own improve access for its exports to foreign
markets. Third, a small country may not beable to deal adequately with anticompetitive
practices by foreign suppliers. Finally, a country may lack the expertise and resources to devise and implement optimal policy, especiallyin the area of domestic regulation.
The WTO is the natural forum to pit thefirst two elements—opposition to reform athome and barriers to access abroad—against
each other constructively through the process
of mercantilist negotiations. But there is alsoa need for complementary multilateral efforts

to ensure that the gains from liberalization
are not undermined by inadequacies in policy
choice and regulation.

Using the current round of GATS
negotiations to deliver liberalization athome and access to markets abroad
The General Agreement on Trade in Services(GATS) had a deliberately symmetric structure, encompassing the movement of both
capital and labor for services provision. In theory, developed and developing countries could
indeed bargain to exploit their modal comparative advantage: improved access for capitalfrom developed countries being exchanged for
improved temporary access for individual service providers from developing countries. In
practice, all countries have been unwilling to
grant greater access for foreign individuals(except for the limited class of skilled intracorporate transferees), and a tradeoff between
modes of delivery simply has not occurred

Figure 3.7 WTO members have been reluctant to make market access commitments on the
movement of natural persons (Mode 4)
100
90
80
70
60
50
40
30
20
10
0
DC LDC AC
Mode 1DC LDC AC
Mode 2DC LDC AC
Mode 3

DC LDC AC
Mode 4

Note: Calculated on the basis of a sample of 37 sectors deemed representative for various services sectors.
Source: See WTO Document S/C/W/99, March 2, 1999.
LegendThe upper part of each bar represents partial commitments, the lower part full commitments.
DC = Developed countries
LDC = Developing and transition economies
AC = Acceding countries

86T R A D E(figure 3.7). Moreover, even the negotiating
links across services sectors and between services and goods sectors do not seem to havebeen particularly fruitful. And so, since governments could not demonstrate improved access to foreign markets as a payoff for domestic reform, GATS commitments reflect for themost part the existing levels of unilaterally determined policy—rather than liberalizationachieved through a reciprocal exchange of“concessions.”32This may change with time. With severe
shortages of skilled labor in the United Statesand Europe and the powerful constituency ofhigh-technology companies lobbying for relaxation of visa limits, the prospects for serious intermodal tradeoffs—such as obtaining
temporary labor movement in return for allowing greater commercial presence for foreign service providers—are now greater. The
challenge is, first, to devise mechanisms thatprovide credible assurance that movement is
temporary rather than a stepping-stone to migration; and second, to devise negotiating formulae that credibly link Mode 4 liberalization
to reductions in restrictions in other areas.

Strengthening GATS rules
and commitments
In line with the WTO’s central concern withsecuring market access, it would also be natural to use the GATS to enhance the credibility of policy at home and security of access tomarkets abroad through legally binding commitments; to ensure that domestic regulations
support trade liberalization; and to prevent discrimination between trading partners by ensuring effective application of the most-favorednation (MFN) principle.33
First, the GATS could help secure access tomarkets that are already open. Trade in electronically delivered products, in which more
and more developing countries are beginningto participate, must continue to remain freeof explicit barriers—should such barriers ever
become feasible. It would be far more effective
to widen and deepen commitments under the
GATS on cross-border trade (see box 3.6).

I N

S E R V I C E S :U S I N GO P E N N E S S

T O

G R O WAt home, policies that are believed in are
most likely to succeed. Developing countries
themselves could take greater advantage of theopportunity offered by the GATS to lend credibility to reform by committing to maintain current levels of openness or to greater levels of future openness. In basic telecommunications, theone sector where countries have been willing to
make such commitments, there is evidence thatthe commitments have facilitated reform.
Developing countries have much to gainfrom stronger multilateral rules on domestic regulations. Such rules can play a role in promoting
and consolidating domestic regulatory reform,
as happened to some degree in the telecommunications negotiations. The rules are also needed
to equip developing-country exporters to address regulatory barriers in foreign markets inthe form of burdensome licensing and qualification requirements for professionals, or restrictive standards in electronic commerce.
It is desirable also to remedy the current
weaknesses in the application of the MFN
principle in the GATS. One obvious problem
is the explicit departure from the MFN obligation through numerous MFN exemptions
listed by countries. Less visible, but potentiallymore serious, is the possibility of implicit discrimination through preferential recognition
agreements and allocation of quotas. Rules inthese areas need to be clarified and strengthened to protect developing countries bothfrom discrimination in their export markets
and from pressure to grant particular foreign
suppliers privileged access to their markets—as, for instance, is reported to be happening in
the Chinese insurance market.

Dealing with anticompetitive practices
Anticompetitive practices that fall outside thejurisdiction of national competition laws may
be important in sectors such as maritime, airtransport, and communication services. The
current GATS provision in this area provides
only for information exchange and consultation. Strengthened multilateral rules are needed
to reassure small countries with weak enforcement capacity that the gains from liberaliza-

87

G L O B A L

E C O N O M I C

P R O S P E C T S

Box 3.6 Ensuring barrier-free trade in electronicallydelivered productsTrade in electronically delivered products, in which more and more developCommitments on cross-border supply in selected
ing countries are beginning to participate,services sectors
and which offers an increasingly viable
*
DC
26
Data
alternative to the movement of individuals,
processing services LDC 40
is today largely free of explicit barriers. The
DC
25
Voice
main concern should be preventing the intelephone services LDC 51
troduction of new barriers if they becomeDC
26
Online info andtechnically feasible. What is the best route
database retrieval LDC 39
to preventing the imposition of explicit reDC
4
Audiovisualstrictions, such as tariffs and quotas? (The
services
LDC 40issue of regulatory barriers is discussed inDC25
Retailing
servicesbox 3.2.)
LDC 19WTO Members have so far focused on
DC
18
Adult
educationprohibiting the imposition of customs duLDC 13
DC26
Non-life
ties on electronically delivered products. It
insurance
LDC 48is ironic that considerable negotiation enDC
25
Acceptanceergy has been invested in prohibiting theof deposits
LDC 55
economically superior (and probably notDC25
Lending of
feasible) instrument of protection whereas
all types
LDC 54little attention has been devoted to inferior
26
DC
Trading in(and possibly more feasible) instruments
securities
LDC 45DC
17such as quotas and discriminatory internalEntertainment
services
LDC 22
taxation. In any case, since the bulk of such
22
DC
News agency
commerce concerns services, open trading
services
LDC 3
conditions are more effectively secured
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
through deeper and wider commitments
Full
Partialunder the GATS on cross-border trade re*Number of countries with commitments.
garding market access (which would preSource: World Trade Organization.
clude quantitative restrictions) and national
treatment (which would preclude all formsof discriminatory taxation).
There is considerable scope for an immitments would be for all Members to agree that no
provement in such commitments. For instance in
restrictions would be imposed on cross-border delivdata processing, of the total WTO Membership ofery, either of all services or of a bundle whose comover 130, only 66 Members have made commitposition could be negotiated.
ments; and only around two-thirds of these commitThese commitments have additional value bements guarantee unrestricted market access. Many
cause other GATS disciplines, for example, on dodeveloping countries have not made sectoral commitmestic regulations, would only meaningfully kick inments, but the commitments of the few which have,once these commitments are in place. For instance, if
are frequently superior to those of developed counthere were excessively restrictive regulatory barriers
tries. It is particularly striking that in some of theto cross-border trade in the core banking services incore financial services, about a third of the developdeveloped countries, it would be difficult today to
ing countries which have made commitments guaranchallenge them, since these countries have not eventee unrestricted cross-border supply, whereas none ofcommitted to provide market access and national
the 26 developed countries does so. Developing
treatment.
countries have also been more forthcoming than developed countries in audiovisual and entertainment
services. One possible approach to improving comSource: Mattoo and Schuknecht 2000.

88

T R A D Etion will not be appropriated by international
cartels. For instance, the United States and the
EU could begin by ending the exemption ofcooperative price-setting and related practices
in maritime transport from the scope of theircompetition law. Ending the exemption would
enable a careful assessment by competition authorities of the social costs and benefits of thesecollusive arrangements. Competitive discipline
could also be strengthened by creating a rightfor foreign consumers to challenge anticompetitive practices by services firms in the national
courts of countries whose citizens own or control these firms—a variant of the precedent in
the WTO rules on intellectual property and government procurement.

Global cooperation to support
liberalization
Beyond WTO negotiations multilateral support is needed at four levels: in devising soundpolicy, strengthening the regulatory environment, enhancing developing country participation in the development of international
standards, and ensuring access to essential services in the poorest areas.
While there is growing consensus on thebenefits of liberalization, there is less agreement on the precise route to liberalization.
Certain issues have prompted differing strategies. Should all barriers to entry be eliminatedin sectors with significant economies of scale?
How far should trade and investment liberalization be conditioned on strengthened prudential regulation? Developing countries in particular could benefit from the experience of othercountries on these issues—but the experienceswith electricity in California and rail transport
in Britain suggest that there is scope for learning in all countries. More work is needed at thenational and international levels to take stockof individual and cross-country experience toidentify the areas where there are clear prescriptions for policy and those where there is aneed for further research, and therefore for humility in policy advice and formulation.
Sound domestic regulation—ranging fromprudential regulation in financial and profes-I N

S E R V I C E S :U S I N GO P E N N E S S

T O

G R O W

sional services to procompetitive regulation ina variety of network-based services—is criticalto realizing the benefits of services liberalization. We have also seen that devising and implementing such regulation is not easy, andthat there are acute regulatory problems inmany developing countries. Regulatory institutions can be costly and may require sophisticated skills. To some extent such costs can berecovered through fees or regional cooperation—but external assistance could help ensure that adequate regulation is in place. Sometechnical assistance is already being provided,
but often on an ad hoc basis either bilaterallyor through international organizations. Moresystematic efforts—along the lines of the Integrated Framework for least-developed countries—are needed to assess the needs of individual developing countries and to ensure thatthe most appropriate assistance is provided in
key sectors.
Improvements in domestic standards andqualifications are also needed in order to export services. For example, in the case of professional services, low standards and disparities in domestic training and examinations canbecome a major impediment to obtaining foreign recognition. Thus inadequacies in domestic regulation can legitimize external barriers
to trade. At the same time, developing countries need to participate more actively in thedevelopment of international regulations andstandards, especially in new areas such as electronic commerce. Otherwise, standards could
evolve to reflect the concerns only of developed countries and impede the participationof developing countries in services trade.
There will remain certain poor countries, or
certain regions within poor countries, where
improvements in services policy and regulation
will not be sufficient to ensure access to essential services. The criterion for determining
whether assistance is needed could be the absence of private sector provision despite comprehensive policy reform. International assistance effectiveness could be maximized byallocating it in a manner similar to that used
domestically by countries such as Chile and89

G L O B A L

E C O N O M I C

P R O S P E C T S

Peru to achieve universal service. For instance,
once a country (or a region within a country)
has been selected for assistance, funds—such as
those provided by certain countries to bridge
the digital divide—could be pooled and allocated through international competitive tenders
to the firm that offers to provide the necessary
infrastructure at least cost. Providing international assistance in meeting the costs of therequired subsidy programs could increase thebenefits of, and facilitate, liberalization by ensuring that the needs of the poor would be met.

Notes
1. There are, however, exceptions to each of thesecharacteristics of services: a software program on adiskette or an architect’s design on paper are both tangible and storable, many artistic performances are visible, and automated cash-dispensing machines makeface-to-face contact between producers and consumers
unnecessary. These exceptions do not, however, detractfrom the usefulness of the general definition of services
presented above.
2. This view of trade originated in Bhagwati 1984
and Sampson and Snape 1985, and has been formalized in the General Agreement on Trade in Services(GATS).
3. The invisibility and intangibility of most services
imply that when they are delivered across borders,
their passage is not recorded by a customs official. Dataon services are therefore unreliable and volatile. Furthermore, statisticians in most countries do not keep
track of the sales of services by foreign investors or foreign individuals who stay for longer than a year. Despite
these difficulties, it is possible to put together a roughpicture of trade in services by drawing on three complementary sources. The International Monetary Fund(IMF) balance of payments statistics are the only services trade statistics available on a global basis, andcapture cross-border supply, consumption abroad (aspart of the category “travel”), and some temporary
movement of service suppliers. The more limited United
Nations Conference on Trade and Development (UNCTAD) data on FDI in services capture the flows throughwhich commercial presence is established. Finally, theUnited States is the only country that has regularly collected data on the sales of services by foreign affiliates.
4. The United States is the only country that has
regularly compiled data on sales of services to foreign
persons by majority-owned foreign affiliates of U.S.
companies, and on sales of services to U.S. persons by

90

majority-owned U.S. affiliates of foreign companies. A
comparison of the balance of payments and foreign affiliates transactions reveals in broad terms the relative
importance of sales through cross-border delivery andcommercial presence.
5. It must be borne in mind, though, that the relative importance of trade by different modes in a particular sector reflects the choices of economic agents
given the constraints of both technological feasibility
and policy restrictions.
6. The FDI data are extremely thin, with data missing for many countries and only available for three SSA
countries.
7. See the National Association of Software andService Companies (NASSCOM) Web site <http://www.
nasscom.org>. These exports consist mainly of standardized coding and testing services.
8. This report was prepared by McKinsey andCompany for NASSCOM.
9. These figures were computed from WTO 1998,
table 3. Data refer to 1997.
10. See http://www.nasscom.org. The dominance ofon-shore delivery is due, among other things, to a reduction in information asymmetries with regard to theperformance of programmers, the need for continuous
client-developer interaction, and demands by Indian
programmers to be sent abroad, in part to improvetheir skills and expose themselves to international markets (see Heeks 1998).
11. With permanent movement, the gains to thehost country must be weighed against the possible costto the home country in terms of “brain drain.” Over50 percent of all migrating physicians come from developing countries. In Ethiopia, for example, during
1984–94, 55.6 percent of the pathology graduates fromthe Addis Ababa Faculty of Medicine left the country.
In Ghana, of the 65 who graduated from the Medical
School in 1985, only 22 had remained in the country by
1997. If these countries had adequate medical staff athome, these figures would be less cause for concern.
12. Other barriers to movement of natural persons
include double taxation, wage-matching requirements(wages paid to foreign workers should be the similar to
those paid to nationals in that profession, eliminating
the cost advantage for foreigners), and local training
requirements (to replace foreign with national laborwithin a certain time frame).
13. This is strictly true in static models withoutmarket imperfections—such as monopolistic market
structures, internal and external economies of scale, orother distortions. The presence of imperfections opens
up a plethora of possibilities in which the effects oftrade policies are typically indeterminate, dependingon the prior distortion.
14. See Hoekman and Braga (1997) for a review.

T R A D E

15. Consider, for instance, the case of the Arab Republic of Egypt, where the import-weighted tariff was
31 percent in 1997, and the average manufacturingwide effective rate of protection (ERP) was much higher
at 70 percent (Hoekman and Djankov 1997). However,services inputs used by Egyptian industry, including construction, communications, financial, business, distribution, transport, and storage, were more expensive thanthey might have been if competition had been allowed.
If it were assumed that prices were higher by, say, 15
percent, then the average ERP for manufacturing would
not only be lower, but negative for several industries(chemicals, crude petroleum, and other extractive industries), implying that the tariff on intermediate goods,
together with the implicit tariffs on services inputs, outweighed the tariff protection on the final goods.
16. If no trade in either goods or services is possible, the production of final goods is cheaper in larger
markets, because a larger market can support a greater
variety of services. If trade in only goods is possible(for instance if services must be supplied through a
local establishment), then goods production tends toagglomerate in the larger country. The large country
gains from this as productivity increases since a larger
final goods sector can support a wider variety of intermediate goods production. For the same reason, thesmaller country can lose from goods trade as final goods
production shrinks. However, if there is free crossborder trade in services, then all countries have accessto the full range of producer services. As a result, productivity in final goods production increases in all
countries, and so all countries gain from trade.
17. The last few years have seen a profusion ofnational and global computable general equilibrium
models seeking to estimate the economywide effects ofservices liberalization. The models suffer from weaknesses, particularly the inadequate treatment of different modes of supply, the poor data on the levels of protection in different services sectors, and an inability tocapture the regulatory institutional detail that is a key
determinant of the consequences of services liberalization. The models are, nevertheless, useful in providing
a rough idea of the costs of maintaining services barriers and the corresponding welfare gains from theirremoval.
18. As pointed out by Rodriguez and Rodrik (1999),
there are two contradictory impulses on growth emanating from the scale effect described above. Protecting
a sector increases its size, leading to higher growth, but
it also creates a wedge between domestic and foreign
prices imposing a production inefficiency that rises overtime exerting a negative impact on growth. The larger
the size of the protected sector the larger this impact. By
contrast, liberalization of the services sector, in which
the country is assumed to have a comparative disadvan-

I N

S E R V I C E S :U S I N GO P E N N E S S

T O

G R O Wtage, will also lead to increased static efficiency. This
will strengthen the growth impact of liberalization.
19. For example, there is evidence to suggest that
foreign bank entry qualitatively changed Turkish banking by introducing financial and operations planningand improving the credit evaluation and marketing system (Denizer). Foreign banks also took the lead inspreading electronic banking and introduced new technologies. They raised the human capital level of Turkish workers through domestic training programs, andby sending local recruits to training centers abroad.
20. Coe, Helpman, and Hoffmaister (1999) and
Lumenga-Neso and others (2001) are among those
who present empirical evidence demonstrating the impact of technology diffusion—in their case throughtrade in goods—on total factor productivity growth. In
principle, the same should hold true for technologythat is diffused through factor flows
21. In terms of the financial instruments employed(too much reliance on short-term bills), in terms of thefinancial intermediaries that were unwittingly encouraged (lightly regulated trust subsidiaries of the banks,and other newly established near-bank financial intermediaries), and in terms of market infrastructure development (failure to develop the institutions of thelong-term capital market). See, for instance, Claessens
and Glaessner (1999)
22. Sometimes the object is to ensure access to all
consumers at the same price, irrespective of the cost ofprovision (for example, in transport and postal services). At other times, the object is ensure cheaper access for certain categories of users (for example, in financial services).
23. Mosely (1999) estimates the impact of financial
liberalization on access to rural credit in four Africancountries Uganda, Kenya, Malawi, and Lesotho. Using
sample survey data, Mosely reports that between 1992
and 1997, the percentage of sampled households withaccess to rural credit rose in Kenya and Uganda from
13.1 percent and 9.2 percent to 25 percent and 21 percent respectively. However, in Malawi, there was in a
decline in the corresponding number from 12 to 8 percent. Access to credit of the poorest 10 percent (by income) remained unchanged in Uganda and Kenya, but
in the case of Malawi and Lesotho declined from
1.9 and 2 percent to .9 and 1.9 percent respectively.
Mosely’s study also shows that financial reform by way
of financial innovation in rural areas and developmentof financial institutions catering to the poor has strong
and significant effects on improving access to rural
credit and lowering poverty. But simply privatizing
state micro-finance agencies has proven to be unsuccessful, as illustrated by the experience of Malawi.
24. The poor are likely to be unskilled, so the question arises as to the services sectors in which they are91

G L O B A L

E C O N O M I C

P R O S P E C T S

likely to be employed. Unfortunately, data on the skill
composition of the workforce in services sectors are
only available for some OECD countries and that at arather aggregate level. Still a certain pattern can be inferred. Construction, distribution and personal services
tend to be unskilled–labor intensive, whereas communications, financial and business services tend to beskilled–labor intensive.
25. In India, the incumbent operator—the department of telecom expanded its workforce over the
1996–2000 period. In the face of competition, it wasforced to improve its marketing strategy, expand its
network and opened up thousands of public call offices
all over India.
26. One such possibility is the case of “nonsustainability” of natural monopoly. This could arise, for instance, under some natural monopoly cost conditions,when there exist no prices that will not attract entry,
even though single firm supply is efficient. Armstrong
and others (1994, p. 106) conclude that, “Notwithstanding the logical possibility of this happening,
we are doubtful whether it provides a good case forentry restrictions in the utility industries, which are
not for the most part remotely contestable and where
there is little evidence that cost conditions give rise tononsustainability.”
27. Interesting evidence in this context is available
from the Indian telecommunications sector. Das (2000)
estimates a frontier multi-product cost function of theincumbent fixed-line operator, covering 25 years from1969 to 1994. The study finds the existence of very
high economies of both scale and scope in the technology used—the parameter estimates even suggest thattelecommunications in India is a natural monopoly.
However, the incumbent operator displays great inefficiency, leading to a 26 percent increase of the operator’s cost of production. Based on these findings, Das
concludes that India’s market liberalization program,started in the mid-1990s, is justified, but he argues that
there may be a need to regulate entry in order to reduce
unnecessary duplication of common costs. Moreover,with continued improvements in technology, the fixed
costs of entrants are likely to fall, reducing losses ofscale economies and thus increasing the costs of entry
restrictions.
28. Several countries have found it difficult to create
an open, competitive telecommunications sector because of a weak regulatory environment. Poland opened
up its telecommunications sector to private competition
as early as 1990. There was a rush to invest, and about
200 licenses were awarded in the first six years of the
newly liberalized regime. The dominant state operator,
operating in a weak regulatory system, limited access to
its network and benefited from unequal terms for revenue sharing, however. By 1996, only 12 of the 200 li-

92

censes were still being used by the few competitive operators who had managed to survive.
29. Studies of Argentina show that all income
classes gain from services reforms but that the rich (andthe foreign investors) gain relatively more if the regulator is weak and that the poor win relatively more if theregulator is effective in ensuring that the rents of thesector are shared with the rest of the economy (Chisari
and Romero 1999; and FIEL 2000). The additional
gains from good regulation are estimated to be about
0.35 percent of GDP on an annual basis.
30. As UNCTAD and World Bank (1994) argue,“Service providers are likely to prefer the higher incomes that result from control of entry into their occupation, or form restrictions on competition between
those who are admitted to it . . . whenever regulation is
judged necessary, a major concern must be to ensurethat regulatory powers are not captured by the existing providers of a service and used to further theirinterests.”
31. In some cases, though, where the cost of raising
revenue is very high, the direct regulation route may be
preferable.
32. Hoekman 1996.
33. For a detailed treatment see Mattoo 2000 andforthcoming.

References
Alexander, I., and A. Estache. 1999. “The Role of Regulatory Reform and Growth: Lessons from Latin
America.” Paper presented at TIPS Annual
Forum. Johannesburg. September.
Armstrong, M., S. Cowan, and J. Vickers. 1994. Regulatory Reform: Economic Analysis and British
Experience. Cambridge, Mass.: MIT Press.
Barth, J. R., G. Caprio Jr. and R. Levine. 2000a. “TheRegulation and Supervision of Banks Around theWorld: A New Database,” Policy Research Working Paper #2588, Development Research Group.
Washington, D.C.: The World Bank.
———. 2000b. “Banking Systems Around the Globe:
Do Regulation and Ownership Affect Performance and Stability?” Policy Research Working
Paper #2325, Development Research Group. :The World Bank, Washington, D.C..
———. 2001. “Bank Regulations and Supervision:
What Works Best?” Paper presented at the “13thAnnual World Bank Conference on Development
Economics.” April.
Bhagwati, J. N. 1984. “Splintering and Disembodiement of Services and Developing Nations.” The
World Economy 7: 133–44.
Chadha, R., D. Brown, A. Deardorff, and R. Stern.
2000. “Computational Analysis of the Impact on

T R A D E

India of the Uruguay Round and the Forthcoming
WTO Trade Negotiations.” Discussion Paper No.
459, School of Public Policy. The University ofMichigan, Ann Arbor.
Chisari, O., and C. Romero. 1999. “Winners andLosers from the Privatization and Regulation of
Utilities: Lessons from a General Equilibrium
Model of Argentina.” The World Bank Economic
Review 13 (2).
Claessens, S., and T. Glaessner. 1999. “Internationalization of Financial Services in Asia.” Paper presented at the conference “Investment Liberalization and Financial Reform in the Asia-PacificRegion,” Sydney, Australia. August.
Coe, D. T., E. Helpman, and A. W. Hoffmaister. 1997.
“North-South R&D Spillovers.” The Economic
Journal 107 (440): 134–49.
Copeland, B. R. 2001. “Benefits and Costs of Tradeand Investment Liberalization in Services: Implications from Trade Theory.” Paper prepared forthe Department of Foreign Affairs and International Trade, Government of Canada.
Cowhey, P., and M. M. Klimenko. 1999. “The WTO
Agreement and Telecommunication Policy Reforms.” Draft report for the World Bank. Graduate School of International Relations and PacificStudies, University of California at San Diego.
March.
Dages, G. B., L. Goldberg, and D. Kinney. 2000. “Foreign and Domestic Bank Participation in Emerging Markets: Lessons from Mexico and Argentina.” Economic Policy Review 6(3):17–36.
Federal Reserve Bank of New York. September.
Das, N. 2000. “Technology, Efficiency and Sustainability of Competition in the Indian Telecommunications Sector.” Information Economics andPolicy 12: 133–54.
DeFreitas, D., C. Kenny, and R. Schware. 2001.
“Caribbean Cooperation: Rise of the Regional
Regulator.” Journal of Policy, Regulation andStrategy for Telecommunications Information andMedia 3: 195–201.
Denizer, Cevdet. 2000. “Foreign Entry in Turkey’s
Banking Sector, 1980–1997.” Chapter 14 in S.
Claessens and M. Jansen, editors, Internationalization of Financial Services: Issues and Lessons
for Developing Countries. Boston: Kluwer.
Eichengreen, B. Forthcoming. “Capital Account Liberalization: What do the Cross-Country Studies Tell
Us?” World Bank Economic Review.
Estache, A., Q. Wodon, and V. Foster. 2001. “Accounting for Poverty in Infrastructure Reform:
Learning from Latin America’s Experience.”
World Bank, Washington, D.C.

I N

S E R V I C E S :U S I N GO P E N N E S S

T O

G R O W

Ethier, W. 1982. “National and International Returns
To Scale in the Modern Theory of International
Trade.” American Economic Review June 72:
492–506.
Fink, C., A. Mattoo, and R. Rathindran. 2001. “Liberalizing Basic Telecommunications: The AsianExperience.” Paper presented at a workshop on“Trade, Investment and Competition Policies in
the Global Economy.” Hamburg Institute of International Economics. January.
FIEL (Fundacion de Investigaciones Economicas Latinoamericanas). 2000. “La Regulacion de la Competencia y de los Servicios Publicos: Teoria y experiencia Argentina Reciente.” Buenos Aires.
Glassman, C. A. 2000. “Customer Benefits from Current Information Sharing by Financial Services
Companies.” A study for the Financial Services
Roundtable. December.
Heeks, R. 1998. “The Uneven Profile of Indian Software Exports.” Working Paper No 3, Institute forDevelopment Policy and Management. Universityof Manchester, U.K.
Hodge, J. 1999. “Liberalizing Communications Services in South Africa.” Trade and Industrial Policy Secretariat, Johannesburg.
Hoekman, B. 1996. “Assessing the General Agreement
on Trade in Services.” In The Uruguay Roundand the Developing Countries, W. Martin, and
L. A. Winters, editors. Cambridge, U.K.: Cambridge University Press.
Hoekman, B., and S. Djankov. 1997. “Effective Protection and Investment Incentives in Egypt andJordan: Implications of Free Trade with Europe.”
World Development 25: 281–91.
Hoekman, B., and C. Primo Braga. 1997. “Protection
and Trade in Services: A Survey.” Open Economics Review 8: 285–308.
Kitchenman, W. F. 1999. “U.S. Credit Reporting: Perceived Benefits Outweigh Privacy Concerns.” The
Tower Group.
Konan, D., and K. E. Maskus. 2000. “Service Liberalization in WTO 2000: A Computable General Equilibrium Model of Tunisia.” February. Processed.
La Porta, R., F. Lopez de Silanes, and A. Shleifer. 2000.
“Government Ownership of Banks.” Harvard Institute of Economic Research Discussion Paper
Series (U.S.). 1890:1–55. March.
Lumenga-Neso, O., M. Olarreaga, and M. Schiff.
2001. “On Indirect Trade-Related Research andDevelopment Spillovers.” Policy Research Working Paper No. 2580. World Bank, Washington,
D.C.
Markusen, J. R. 1989. “Trade in Producers Services
and in Other Specialized Intermediate Inputs.”
American Economic Review 79: 85–95.

93

G L O B A L

E C O N O M I C

P R O S P E C T S

Markusen, J., T. F. Rutherford, and D. Tarr. 2000.
“Foreign Direct Investment in Services and theDomestic Market for Expertise.” Policy ResearchWorking Paper No. 2413, World Bank, Washington, D.C.
Mattoo, A. 2000. “Developing Countries in the New
Round of GATS Negotiations: Towards a ProActive Role.” World Economy 23 (4): 471–489.
———. Forthcoming. “Shaping Future Rules for Tradein Services: Lessons from the GATS.” In T. Ito,and A. O. Krueger, Trade in Services. Cambridge,
Mass.: NBER.
Mattoo, A., and L. Schuknecht. 2000. “Trade Policies
for Electronic Commerce.” World Bank Policy
Research Working Paper No. 2380. World Bank,
Washington, D.C.
Mattoo, A., R. Rathindran, and A. Subramanian.
2001. “Measuring Services Trade Liberalizationand its Impact on Economic Growth: An Illustration.” World Bank Policy Research Working
Paper No. 2655. World Bank, Washington, D.C.
Mosely, P. 1999. “Micro-Macro Linkages in Financial
Markets: The Impact of Financial Liberalizationon Access to Rural Credit in Four African Countries.” Journal of International Development 11:
367–384.
Petrazzini, B. A., and P. Lovelock. 1996. “Telecommunications in the Region: Comparative Case Studies.”
Paper presented at the “International Institute forCommunication Telecommunications Forum.”
Sydney, Australia. April 22–23.
Robinson, S., Z. Wang and W. Martin. 1999. “Capturing
the Implications of Services Trade Liberalization.”
Paper presented at the Second Annual Conference
on Global Economic Analysis, GL Avernaes Conference Center, Ebberup, Denmark. June 20–22.
Rodríguez, F., and D. Rodrik. 1999. “Trade Policy andEconomic Growth: A Sceptic’s Guide to the94

Cross-National Evidence.” Discussion Paper No.
2143, Center for Economic Policy Research. May.
Rubin, Howard A. 1999. Global Software Economics.
Hunter College, Department of Computer Science, and Rubin Systems Inc. New York.
Sampson, G., and R. Snape. 1985. “Identifying the Issues in Trade in Services.” World Economy 8(June): 175–82.
Smith, P. 1995. “End of the Line for the Local Loop
Monopoly.” Public Policy for the Private Sector,
Note No. 63. December. World Bank, Washington, D.C.
UNCTAD (United Nations Conference on Trade andDevelopment) and World Bank. 1994. “Liberalizing International Transactions in Services, A
Handbook.” New York and Geneva.
UNCTAD (United Nations Conference on Trade andDevelopment) and WHO (World Health Organization). 1998. International Trade in Health Service—A Development Perspective. Simonetta
Zarilli and Colette Kinnon, editors. Geneva:
World Health Organization.
Wellenius, B. 1997. “Telecommunications Reform—
How to Succeed.” Public Policy for the Private
Sector, Note No. 130. October. World Bank,
Washington, D.C.
World Bank. 1995. Global Economic Prospects. Washington, D.C.
———. 2001a. Can Africa Claim the 21st Century?
Washington, D.C.
———2001b. Finance for Growth: Policy Choices in a
Volatile World. New York: Oxford University
Press.
WTO (World Trade Organization). 1998. “General
Agreement on Trade in Services: Results of the
Negotiations on Financial Services.” March.

4Transport Services:
Reducing Barriers to Trade

High transport costs are a barrier
to trade—
The costs of international transport services
are a crucial determinant of a developing country’s export competitiveness. Shipping costs
often represent a more binding constraint togreater participation in international trade thantariffs and other trade barriers. Across economies, a doubling of shipping costs is associated with slower annual growth of more than
one-half of a percentage point. Transport costs
determine the potential access to foreign markets, which, in turn, explains up to 70 percent
of variations in countries’ gross domestic product (GDP) per capita.

—reflecting geography and income—Transport costs depend on a mixture of geographic and economic circumstances. Adverse
geographic locations and low-income levels—the latter being associated with poor infrastructure and low traffic volumes—pose an inherent challenge for many countries’ trade anddevelopment prospects—at least in the short
to medium term.

—but also competitive forces inservice markets
Public trade barriers and private commercial
practices hamper the provision of international
maritime and air transport services. Policies toward maritime transport, such as cargo reservation and limitations on the provision of port
services, often protect inefficient service providers and unduly restrain competition. At thesame time, competition restraining practices
among shipping lines and port terminal operators around the world pose the risk that thebenefits of government reforms will be captured by private firms. International air transport is one of the services sectors most protected from international competition. The
current regime of bilateral air service agreements largely denies access to efficient outside
carriers. International airline alliances, while
enhancing network efficiency, can also be detrimental if they impede effective competition.

Policy reform can lower costs—
In most countries, policy can make better useof existing transport resources and significantly improve the efficiency of services. At thedomestic level, targeted infrastructure investments, regional cooperation on transportation,and trade facilitation initiatives can play animportant role in improving the transportcompetitiveness of exporters. As discussed inchapter 3, liberalizing services policy can produce substantial cost reductions and widen theavailability and choice of services. The preponderance of anticompetitive practices by transport service providers also demands the development of efficiency-oriented competition
policies.

—and multilateral policies can besupportive of domestic reforms
Multilateral negotiations on transport services
under the General Agreement on Trade in Services (GATS) Agreement have, so far, not un-

97

G L O B A L

E C O N O M I C

P R O S P E C T S

leashed substantial liberalization, nor havecountries bound existing policies to gain credibility in their domestic reforms. Indeed, thenegotiations on maritime transport were theonly post–Uruguay Round services negotiations that completely failed. International airtransport services are largely outside the scopeof the GATS. The new round of services negotiations offers the possibility of creating arules-based services regime for maritime transport, as well as an opportunity to develop aframework under which a multilateral regime
for air transport services could be phased in.
Moreover, the multilateral trading system canplay a useful role in developing procompetitive regulatory principles for the transport sector, and in fostering international cooperationon competition policy matters more generally.

High transport costs
penalize exports
High transport costs push down profits
and wages
The efficiency of transport services greatly determines the ability of firms to compete in foreign markets. For a small economy—for whichworld prices of traded goods are largely
given—higher costs of transportation feed into
import and export prices. To remain competitive, exporting firms that face higher shipping
costs must pay lower wages to workers, accept
lower returns on capital, or be more productive. The pressure on factor prices and productivity is even higher for industries with a highshare of imported inputs. In these cases, small
differences in transport costs can easily determine whether or not export ventures are at all
profitable. In developing countries, for laborintensive manufacturing industries such as textiles, high transport costs most likely translate
into lower wages, directly affecting the standard of living of workers and their dependents.
The cost structures of firms are equally affected by the quality of transport services. If services are unreliable and infrequent, or if a country lacks third party logistics providers who

98

efficiently handle small shipments, firms arelikely to maintain higher inventory holdings at
every stage of the production chain. The costsof financing large inventories can be significant,especially in countries with high real interest
rates. Gausch and Kogan (2001) find that inventory holdings in the manufacturing sector
in developing countries are two to five times
higher than in the United States, and estimatethat cutting inventory levels in half could reduce
unit costs of production by over 20 percent. At
the wholesale and retail levels, firms depend
greatly on high quality transport services in distributing products to geographically dispersed
markets. For example, seamless transport services were critical to Kodak’s decision to integrate once-separate national warehousing operations in the Mercosur countries into one tradebloc–wide operation located in Brazil, thus reaping economies of scale in distribution.1
Long journeys have a similar effect. They
delay payments if goods are exported on acost, insurance, and freight (c.i.f.) basis or importers may demand a time discount if goods
are delivered free on board (f.o.b.). If products
are perishable (such as food) or subject to frequent changes in consumer preferences (suchas high-fashion textiles), longer journeys leadto additional losses in terms of a product’s
shortened lifetime in the export market. Box
4.1 illustrates the complex logistical arrangements that ensure the timely delivery of
Kenyan cut flowers to European consumers.
One recent estimate, based on comparisons between air and ocean freight rates for U.S. imports, puts the per day cost for shipping delays at 0.8 percent of the value of trade for
manufactured products. Only a small fractionof these costs can be attributed to the capitalcosts for the goods during the time they are on
board the ship.2 Delivery time is found to havea more pronounced effect for imports of intermediate products (Hummels 2000), suggestingthat the fast delivery of goods is crucial for the
maintenance of multinational vertical productchains. Quality aspects of transportation arethus likely to be an important factor in the location decisions of multinational companies.

T R A N S P O R T

S E R V I C E S :R E D U C I N G

B A R R I E R S

T O

T R A D E

Box 4.1 The Kenyan-European cut-flower supply chainK

enyan exports of cut flowers to Europe havegrown remarkably in recent years, increasing by
217 percent in value from 1992–98. The competitiveness of Kenyan cut flower exports stems fromfavorable climatic conditions, the use of modern
farming technology and skilled manpower, and theircounter-seasonality to the patterns of production inWestern Europe. Although a wide range of flower
varieties are cultivated in Kenya, the industry’s
growth in the 1990s was primarily due to expandedrose production—sparked by strong consumer demand and relatively high prices in Europe.
Cut flowers are highly perishable commodities,
having a vase and marketable life ranging from a few
days to not more than two weeks. International
flower trade demands cold storage and transportation facilities, efficient inland and air-freight shipping
arrangements, and mechanisms for rapid distribution
in the export markets. Prior to packing, harvested
flowers are placed in solutions to maintain post harvest quality, then graded, bunched and placed in cold
storage. Refrigerated or insulated trucks carry theflowers to specialized freight handlers, which consolidate consignments from various growers, palletize
them, record temperatures, and load them directly
onto commercial or charter airlines. They also facilitate customs, inspections, and proper documentation,
which serves as the basis for claims should flowers
arrive in Europe at exceedingly higher temperatures.
Import functions at the European end (cutting,rehydrating, and repacking) are typically handled byindependent agents, who also provide a wider arrayof services including consultancy and product andmarketing information. Several large Kenyan produces have established forward linkages with freight

Shipping costs often represent a greater
burden than tariffs—
Transport costs are important relative to othertrade barriers. Figure 4.1 compares countries’
transport cost incidence for exports to theUnited States (the share of international shipping costs in the value of trade) and their tariff
incidence (the trade-weighted ad valorem duty
actually paid). For 168 out of 216 U.S. trading
partners, transport cost barriers outweigh tar-firms and clearance and import agents, in order toensure supply continuity and gain greater control
over production, distribution, and sales.
About 40 percent of Kenyan flowers enter European wholesale markets through one of the sevenflower auctions in the Netherlands. Dutch auctions
trade, on average, 15 million flowers and potted
plants daily, with total sales amounting to $1.9 billion in 1998. After the flowers are collected andchecked for quality, ripeness, grading, and packing,selling takes place with the help of computerized“auction clocks,” which provide information on thegrower, product, quality, unit of currency, and minimum purchase required. The financial transactions
are settled immediately following the auction process,and flowers are then distributed to the buyers, who
repackage and box the flowers for further air or landtransport.
Aside from the Dutch auction system, importers
are directly sourcing cut flowers from Kenyan growers for European supermarkets and traditional retailers. In the United Kingdom, for example, supermarkets have contractual arrangements with Kenyan
exporters (via import agents) and send daily orders
to growers, which form the basis for harvesting, processing and shipping schedules. Through fully integrated supply chains, products can be harvested andon U.K. supermarket shelves within 24 hours fromharvest. The final retail price in the United Kingdom
is more than four times the farm gate price in Kenya,with the difference between the two prices accounted
for by freight charges, fees and commissions, retailmargin, and value-added tax.
Source: Thoen and others 2000.

iff barriers. Only a few developing countries—
including, among others, Bangladesh, the Arab
Republic of Egypt, Lesotho, Mauritius, Mongolia, Nepal, Pakistan, and Sri Lanka—are
more constrained by trade taxes than by shipping costs. For the majority of Sub-SaharanAfrican countries, the tariff incidence typicallyamounts to less than 2 percent, while the transport cost incidence often exceeds 10 percent.
Most striking is the example of Benin, where99

G L O B A L

E C O N O M I C

P R O S P E C T S

Figure 4.1 Transport costs are often
higher than tariffs
Nominal tariff
20

45°

18
16
14
12
10
8
6
4
2
0
0

2

4

6

8

10

12

14

16

19

20

Transport cost
Note: Data refer to 1998. Five countries (Benin, Guinea,
Solomon Island, Togo, and Western Samoa) exhibit atransport cost incidence greater than 20 percent and are
not shown.
Source: U.S. Bureau of Census.

exports faced duties equivalent to 0.6 percent
of total exports, but shipping costs represented
22.7 percent of trade. Amjadi and Yeats (1995)
confirm that freight rates for African exports
to the United States are considerably higher
than on similar goods originating in othercountries—contributing to the region’s lackluster trade performance over the last two or
three decades.3
In interpreting the relative importance oftransport costs and tariffs, several points
should be kept in mind. First, the freight rate
calculations, based on c.i.f/f.o.b. comparisons,understates the true door-to-door shipping
cost, because only the international leg of thetransport journey is considered. The importance of port and inland transportation costs
vary substantially by country and exporter location, but can take up as much as two-thirdsof the total door-to-door costs (see below). Second, the U.S. tariff schedule is lower comparedto other countries, and exporters face otherpolicy-induced barriers to trade besides tariffs.4

100

Indeed, for some product groups, restrictions
implied by standards or domestic regulations
represent a bigger obstacle to trade than importtaxes. Third, it is somewhat arbitrary to lookonly at transport services and ignore the costsof other producer services critical to the supplyof foreign markets. High costs of communications, legal assistance, or export finance, forexample, represent other sources of inefficiencies that may erode exporters’ competitiveness.5 Finally, transport costs—as distinct fromtariffs—cannot be brought down to zero.
One recent estimate finds that a doublingof the ad valorem freight rate leads, on average, to a fall in aggregate import values between five- and six-fold.6 These are rough calculations, however, and the effect is likely tovary substantially across countries and industries. Much depends on the degree to whichhigher shipping costs are directly passed on to
consumer prices. Another factor is the pricesensitivity of final demand and the degree towhich imports from one location can be substituted with imports from another location,or from domestic sources. If final demand ishighly price sensitive, and goods from different locations are good substitutes, small changes
in shipping costs can have a substantial effecton bilateral imports.7—and restrain trade in services—
Transport costs also represent a barrier totrade in services. Though difficult to quantify,
this is important for developing countries that
rely heavily on tourism services as a source of
foreign exchange (figure 4.2). Tourists are sensitive to travel costs, especially where close
substitute destinations exist. Estimates vary
substantially across locations, but a doublingin travel costs may reduce tourism demand asmuch as eight-fold.8 More than 90 percent of
tourists arrive in developing countries by air,underscoring the importance of efficient airtransport services for this export industry.
For example, air transport costs in East andSouthern Africa are reported to be up to tentimes higher than for Florida, in the UnitedStates, limiting the pool of lower- and middle-

T R A N S P O R T

S E R V I C E S :R E D U C I N G

B A R R I E R S

T O

T R A D E

Figure 4.2 Tourism earnings in developing countries, 1998

Tanzania
JordanCroatia
Dominican Republic
BelizeDominica
Fiji
Jamaica
Malta
Barbados
Seychelles
Aruba
Maldives
East Asia and Pacific
Europe and Central Asia
Travel services as a percent of GDP

Latin America and the Caribbean

Travel services as a percent of total exportsof goods and services

Middle East and North Africa
Sub-Saharan Africa
South Asia
0

10

20

30

40

50

60

70

80

90

Source: World Bank Development Indicators.

income tourists able to afford a holiday inthese regions.9 The price of international passenger transport also dictates the extent towhich firms can afford business trips necessary to maintain ties with foreign companies
and to gather information about market demand in other countries. In addition, the mobility of businesspeople is key to the formationof multinational production networks, whichhave emerged as a dynamic driver of world
trade over the past decades.

Transport costs affect growth rates—
Shipping costs can affect economic growth inseveral ways. First, higher transport costs re-duce rents earned from the exports of primary
products, lowering an economy’s savings available for investments. They push up importprices of capital goods, directly reducing real investments. Second, all things being equal, countries with higher transport costs are likely to devote a smaller share of their output to trade.
Those countries are also less likely to attract
export-oriented foreign direct investment (FDI).
Since trade and FDI are key channels of international knowledge diffusion, higher transport
costs may lead an economy to be farther removed from the world technology frontier andslow its rate of productivity growth.10 Third,transport costs determine a country’s selection

101

G L O B A L

E C O N O M I C

P R O S P E C T S

of trading partners. If export markets largely
consist of poor, slow-growing markets andthere are significant costs (including transportation) of switching to new, richer, and fastergrowing markets, countries may be constrainedin their growth potential. This dilemma may beespecially severe for small landlocked countries
far away from major economic centers.11
Controlling for a large number of socioeconomic, geographic, and institutional factors,
Radelet and Sachs (1998) find that developing
countries with lower shipping costs experienced more rapid growth of manufacturingexports relative to GDP in the period from1965 to 1990. In addition, when exploring therelationship between shipping costs and overall economic growth across economies, thestudy concludes that a doubling of the cost oftransportation is associated with slower annual growth of slightly more than one-half ofa percentage point.

—and help to explain regional variationsin incomeTransport costs—as opposed to tariffs facedby exporters—vary widely across trading nations. The availability, price, and quality oftransportation services therefore have strong
implications for what countries produce andwith whom they trade.
In a theoretical analysis, Venables andLimão (1999) find that transport costs may
cause the world to be divided into “zones of
specialization.” The more transport-intensive agood is, the more likely it is that it is exported
by countries that exhibit lower shipping costs
to the economic center. By contrast, exceedingly
high shipping costs to a major economic center
can lead a country to be self-sufficient in a particular good—despite the fact that it may nothold a comparative advantage in its production
solely based on its factor endowments. Countries with higher transport costs but identicalfactor endowments also exhibit lower real incomes, as more resources are devoted to transportation and the gains from trade are smaller.
Redding and Venables (2001) estimate thepotential access of a country’s manufacturing

102

goods to the domestic and foreign markets, as
determined by shipping costs.12 This measureof market access explains up to 70 percent ofvariations in countries’ GDP per capita in
1996 (figure 4.3). Admittedly, the study lends
strong causative weight to transport costs, asother factors explaining income variation—
notably capital accumulation—are taken,
themselves, to be determined by market access.
At the same time, the inclusion of characteristics of physical geography and social, political,
and institutional variables does not fundamentally alter the study’s result. While more research is necessary to verify and refine thesefindings, they support the view that a country’s
development prospects are greatly affected bytheir economic geography, of which shipping
costs are an important determinant.
As much as transport costs explain the location of production across countries, they are

Figure 4.3 Potential market accessexplains variations in income
Income per capita (log)

10

9

8

7

6
13

15

17

19

21

23

Potential market access (log)Note: Countries’ potential access to the domestic andforeign markets are estimated by a gravity equation,
whereby bilateral trade flows are explained bycharacteristics of the importing and exporting countries,
as well as bilateral transport costs.
Source: Redding and Venables 2001.

T R A N S P O R T

equally important in affecting the location ofexporting firms within countries. As foreign
trade barriers are removed, firms have an incentive to move to regions with good access toforeign markets, such as border areas or port
cities—especially if exports account for a large
fraction of total sales. For example, closer ties
between the United States and Mexico caused
a rapid expansion of manufacturing employment in northern Mexico at the expense of the
Mexico City manufacturing belt.13 Agglomeration forces may create a self-reinforcing process, whereby entire industries move toward
exporting centers, causing sharp regional inequalities in production and income. The severity of this process depends on the efficiency ofinternal transport systems—as illustrated in box
4.2 on China.14
Transport services thus matter for tradecompetitiveness. Even if tariff and nontariffbarriers to trade were removed, cross-country
evidence suggests that the penalty of high shipping costs will continue to hold down growth
rates and income of countries with poor international transport links. Furthermore, inefficient internal transport systems can sharpen
economic inequalities within countries, withhinterland regions being disconnected from international commerce. Two questions that immediately arise in this context are why somecountries pay more for transport services thanothers, and what governments can do to improve the transport competitiveness of trading
firms.

Why some countries pay more
for transport services:
geography and income
International transport costs
vary dramaticallyTransport costs vary widely across countries.
According to the price quotes of one U.S. freight
forwarder, it costs $1,000 to ship a 40-footcontainer from Baltimore to Dar es Salaam, thelargest port city in Tanzania (figure 4.4). Yet theprice of shipping the same container to Durban

S E R V I C E S :R E D U C I N G

B A R R I E R S

T O

T R A D E

(South Africa) is $2,500 and goes up to $4,000
for Vienna (Austria), $6,500 for Asunción(Paraguay), $7,800 for Yerevan (Armenia),$10,000 for Bujumbura (Burundi), and $13,000
for Kathmandu (Nepal). The geographic distance from Baltimore alone cannot explain thesedramatic price differences. Transport costs are
determined by factors that can be changed in the
short run by policy, and those that cannot. Thissection concentrates on the second set of determinants. Despite advances in transport technology, a large number of developing countries continue to be challenged by geography interms of being landlocked or far away fromthe world’s economic centers. In addition, poor
physical infrastructure and thin traffic densities,
typically associated with low-income economies, represent additional impediments totransport competitiveness (although policy canalter these constraints in the longer term). Thus,
high shipping costs undeniably represent a constraining factor in the trade and development
prospects of many developing countries.

Advances in transport technology—
Innovations in transportation have been an important factor in the globalization of goods
markets observed in the late twentieth century.
An examination of ad valorem freight rates for
U.S. imports, for which detailed data are available, suggests that the share of shipping costsin the value of trade in 1998 was smaller for all
major commodity groups compared to 1938,
and for all but two goods classes compared to1974 (see table 4.1).15 However, declining advalorem freight rates may also be due to changes
in the composition of trade or in unit values oftraded commodities, due, for example, to improvements in the quality of goods.
Ocean, air, road, and railway shipping haveeach seen a different mix of technological andinstitutional innovations, with profound implications on how traded goods are shipped fromone location to another.16 Ocean shipping is arelatively mature industry, yet there have been
important advances in maritime transport technology over the past decades. Specialized ships
have emerged for dry bulk commodities, oil,103

G L O B A L

E C O N O M I C

P R O S P E C T S

Box 4.2 Inefficient internal transport systems
contribute to the concentration of China’s exportindustries in coastal regionsA

remarkable feature of China’s dramatic expansion in international trade over the past two
decades has been the concentration of export-oriented
industries in coastal regions. The four main coastal
provinces (Guangdong, Jiangsu, Fujian, and Shangkai)
have been the main recipients of outward-oriented foreign investment, with the remaining portion going toeither other coastal provinces or regions adjoining
coastal areas. The provinces in the central core—usually referred to as lagging provinces—barely benefited
from the incoming investment. While dispersion ofexport-oriented units have narrowed coastal income
disparities—with the south coast regions catching up
with the hitherto affluent east coast—the export boom
has exacerbated the coastal-inland gap. Thus, while
China’s economic reforms have been successful in raising living standards for a considerable share of the
population, a large number of Chinese people ininland provinces still live below the poverty line.
Another contributing factor to coastal agglomeration has been various inefficiencies in China’s internaltransport systems. Transport infrastructure disparities
between the coastal and inland provinces narrowed
considerably following policies aimed at promoting
more regionally balanced economic development
since 1990. However, indications of increasing interprovincial trade between inland regions, and between
inland and coastal regions, suggests that it is not theavailability of transport infrastructure per se that haveprecluded inland provinces from actively participating
in foreign trade. Rather the inadequacies associatedwith transport services are the more binding constraint
to better integrating China’s hinterland economy.
The compositional shift of exports from lowvalue raw materials to high-value manufactured goods
has made transport increasingly suitable for containerization. Though there has been significant increase in
the volume of container traffic in China since 1990,
the increase is largely confined to coastal regions, andassociated with the oceangoing leg of travel. Container
traffic in inland areas is much less, with no significant
change in the percentage of sea-borne containers traveling beyond port cities and coastal provinces. Truckrates for moving a container 500 kilometers inland are
estimated to be about three times more, and the trip

104

time five times longer, than they would be in Europe
or the United States. China’s railways still charge
what is, in effect, a penalty rate for moving containers.
Priority on the congested rail network is still given to
low-value bulk freight (mostly coal), rather than tohigh-value freight, such as containers.
Surveys based on major foreign shippers, shippinglines, and freight forwarders based in the United States,
Japan, and Hong Kong (China) indicate that China’stransport systems, particularly inland transport, arewell below international standards. First, respondents
pointed to the lack of container freight stations, yards,
and trucks in inland regions. Second, border procedures were perceived to be cumbersome and timeconsuming, due to the many certification requirements
and duplication of documents—in part, a consequenceof the lack of coordination between the different government agencies involved in the various modes oftransport. Third, container-tracking capability wasparticularly poor, with shippers often unaware of theircontainers’ whereabouts. Shippers attributed this topoorly trained staff, the lack of a reliable recovery system, and the poor accountability system in government
agencies. Fourth, the intermodal transport system wasfound to be poorly integrated, with no streamlined
procedures to support the continuous movement ofcontainers between the coast and inland.
Another source of inefficiencies is the dominanceof state-owned enterprises and the lack of competitionin transport service markets. Since pricing in many of
the intermediate transport service activities is controlled, the companies have little incentive for aggressively pursuing cost-cutting methods. Due to a lack ofcompetition, intermediate service providers represent
the interests of transport operators. Hence value-added
service and reliability, hallmarks of winning business
confidence in a modern economy, are not practiced bymost participants. Investment by foreign enterprises orjoint ventures between foreign and domestic enterprises
in intermediate transport services is limited in inland regions. Though foreign investment is not prohibited,
there are restrictions on investors’ activities.
Source: Atinc 1997; Graham and Wada 2001; Naughton 2001;
and World Bank 1996.

T R A N S P O R T

S E R V I C E S :R E D U C I N G

B A R R I E R S

T O

T R A D E

Figure 4.4 Shipping a container from Baltimore, Maryland, around the world: Distance isonly half the costs story
Brasilia (Brazil)$4,000Ashkhbad(Turkmenistan)$13,000

Asunción(Paraguay)$6,500Lima (Peru)$4,000

Bujumbura(Burundi)$10,000

Ankara (Turkey)$4,000

Mbabane (Swaziland)$12,000

Durban(South Africa)$2,500kilometers
Baltimore
4,500

5,500

6,500

7,500

La Paz (Bolivia)$6,500

8,500

9,500

10,500Dar es Salaam (Tanzania)$1,000Niamey (Niger)$7,000Beijing (China)$13,000
Yerevan(Armenia)$7,800Vienna (Austria)$4,00012,500 13,500 14,500

11,500Kathmandu(Nepal)$13,000

Note: Shipments refer to loosely packed freight and do not include insurance costs.
Source: Limão and Venables 1999.

chemicals, automobiles, forest products, andother goods. Probably the most far-reaching development in maritime transport has been thegrowth of containerized cargo shipping, which
has allowed investments in larger and fasterships. Today, more than 60 percent of global
general cargo trade moved by sea is carried incontainers. On trades between industrializedcountries the percentage is just over 80 per-Table 4.1

cent.17 However, evidence from major developedcountry shipping routes suggests that the real
price of ocean liner shipping has not declined
over the past decades, while tanker and tramp
shipping has arguably become cheaper (Figure4.5). Unfortunately, no information is available
to assess the development of real ocean freightrates for developing country routes in past
decades.

Ad valorem freight rates for U.S. imports: 1938, 1974, and 1998

(As percent of total import values)
All countries

Foods
Agricultural raw material
Crude materials and ores
Fuels
Chemicals
MetalsOther manufactures

Developing countries

1938

1974

1998

1938

1974

1998

9.3
7.5
65.2
14.3
10.4
10.0
10.1

9.4
11.4
44.5
7.7
14.3
7.7
10.6

7.0
6.5
12.0
7.8
3.3
5.2
4.6

12.5
10.3
57.3
21.5
6.7
10.2
5.2

8.3
14.3
30.4
13.0
16.0
6.8
7.5

8.4
10.2
13.9
9.3
6.4
5.5
4.5

Note: Ad valorem freight rates are based on comparisons between f.o.b export and c.i.f. import values, as reported by U.S.
customs. They therefore do not include inland transportation costs and charges incurred at the port of exportation.
Source: Yeats 1981 for 1938 and 1974; and U.S. Bureau of Census for 1998.

105

G L O B A L

E C O N O M I C

P R O S P E C T S

Figure 4.5 Ocean freight rates, 1970–99
200
Liner trade180

Tramp tanker

160

Tramp dry cargo

140
120
100
80
60
40
20
0
1970

1973

1976

1979

1982

1985

1988

1991

1994

1997

1999

Note: The liner trade series is based on freight rates observed in Germany seaborne trade and deflated by the German
consumer price index (CPI). Freight rates are typically quoted in U.S. dollars, but shippers often apply currency adjustments tocompensate for fluctuating exchange rates. using the U.S. CPI, the overall trend in prices is very similar, although freight rates
would decrease over the 1970–99 period due to higher U.S. inflation. The tramp tanker and tramp dry cargo (trip charter) series
are deflated by the U.S. CPI, since charter prices are typically quoted in U.S. dollars and set in highly competitive markets.
Source: UNCTAD Review of Maritime Transport (various issues), based on data from the German Federal Statistical Office(for liner trade) and Lloyd’s ship manager (for tanker and dry cargo).

—have boosted air transport—
Air transport is still a relatively young industry
that has gained in significance only after the
emergence of long-distance jet airliners in thelate 1950s and the introduction of the widebody jet in 1967. The liberalization of air transport services, starting domestically with theUnited States in 1978, provided an additional
impetus to the industry’s growth, as airlines
were granted greater freedom in determining
their routes and schedules, and service competition intensified. Since 1980 airlines’ freight operating revenues per ton-kilometer have fallen
by 55 percent in real terms. As air shipping
prices have fallen relative to prices for oceantransport, the share of world trade shipped byair has continuously grown over the past
decades—from 7 percent in 1965 to 30 percent
in 1998 in terms of value for U.S. imports.18 In
terms of ton-miles shipped worldwide, air cargoshipping has grown by almost 10 percent annually from 1970–96, compared to only 2.6 percent growth for ocean shipping.19

106

Air passenger transport has also experienced
a dramatic real price decline, which has led to a
sharp increase in international air travel, growing at an average annual rate of 5.8 percent interms of passenger-kilometers since 1980.

—and have improved the qualityof services
Due to the introduction of faster ships and thegrowth of air transport services, the averagetime of cargo delivery has fallen sharply in thepast decades—from an estimated 40 days in1950 to 14.3 days in 1998 in the case of U.S.
imports.20
Managerial innovations and closer integration of transport services into production, inventory, and distribution systems have been
additional drivers of change in the international transport industry. Just-in-time deliveryof intermediate inputs, for example, has allowed firms to outsource certain stages of production, cut inventories, and geographicallydisperse production. Better management of the

T R A N S P O R T

supply chain has enabled producers of perishable commodities to compete in distant consumer markets. These managerial changes
have, in turn, led many transport operators to
become multidimensional providers of logistics services—including packing and labeling,freight forwarding, insurance and banking, theprocessing of border formalities, tracking of
shipments, and other services. The growth ofthese services has, in part, been propelled by
the falling cost and increasing power of communications and computing, as logistics primarily involves the processing of information.

Geography continues to exert its
own tyranny—
Despite technological advances, however, geography continues to be an important determinant of international variations in transport
costs. The distance between the origin anddestination points of a transport journey directly affects the variable cost of shipping in
the form of fuel, wear and tear of vehicles, andthe amount of time that goods are traveling.
Due to the existence of fixed costs of transportation, however, the effect of distance ontransport costs is less than proportionate, suggesting that distance matters more where thecosts of packaging, documentation, port services, and other distant-invariant activities are
small.21 Typically, a 1 percent increase in distance causes trade volumes to fall by slightly
more than 1 percent—although this large effect is also due to factors other than transport
costs.22 Countries that share a common border are found, on average, to trade significantly more than countries without a common
border, which can in many instances be attributed to more integrated transport networks
and the existence of bilateral customs agreements that reduce transit times.

—especially for landlocked countries
The effect of distance depends greatly, however, on the mode of transport. By one estimate, an additional kilometer of overlandtransport adds seven times more to transport
costs than an additional kilometer by sea.23 It

S E R V I C E S :R E D U C I N G

B A R R I E R S

T O

T R A D E

is thus not surprising that landlocked countries
pay, on average, more for shipping exports andimports than coastal economies. Multiple studies have documented the “penalty” of being
landlocked, and estimates usually put the additional cost of transportation at more than 50
percent of that paid by countries with maritime
ports.24 For many shipments to landlocked
countries this “penalty” is likely to be higher.
For example, the price quotes for container
shipments from Baltimore reveal that the costof shipment to Durban (South Africa) is$2,500, whereas the cost to Mbabane (Swaziland) via Durban comes to $12,000—a landlocked “penalty” of 380 percent (figure 4.4).
Aside from longer overland distances, traffic toand from landlocked economies often suffersfrom higher transaction costs due to the complexities of coordinating multimodal transport
journeys and the crossing of multiple borders.
It is thus not surprising to find that landlocked countries have only 30 percent of the
trade volume of average coastal economies;
that none of the 15 developing countries withthe fastest export growth is landlocked; andthat all 15 of those economies are located either directly on major shipping routes or close
to a major developed-country market.25 The
study by Redding and Venables (2001) provides additional proof of the burden of geography: access to the coast raises per capita income by 64 percent, while halving the distanceto all trading partners increases per capita
income by 74 percent. While these figures provide a pessimistic view on the trade and development prospects of geographically disadvantaged countries, in the long run new economic
centers emerge. High-income landlocked economies such as Switzerland, or the state of Colorado in the United States demonstrate thatsuch disadvantages need not be permanent.

Infrastructure links the hinterland to
the world—
Transport infrastructure, encompassing road,railway, and internal waterway networks, seaports and airports, warehousing facilities, andsupporting communications systems, is a key

107

G L O B A L

E C O N O M I C

P R O S P E C T S

prerequisite to efficient transport services. When
goods originate or terminate in remote regions,inland shipping accounts for a substantial shareof the total door-to-door transport charge (figure 4.6). If internal transportation networks
are dense, remote regions are in a better position to supply foreign markets. In countries
with well-developed infrastructures, exporters
can typically choose among alternative modesof transport (truck, railroad, or internal waterway) and alternative seaports and airports toship their goods abroad. Aside from greater
flexibility, increased modal and port choicedirectly promotes competition and limits thepotential abuse of market power by transport
operators serving chokepoints. Based on anindex that captures the densities of countries’ road, railway, and telecommunications
networks, Limão and Venables (1999) confirm
that better infrastructure translates into significantly lower transport costs.26 Moreover, ahigher infrastructure density in transit countries reduces transport costs to landlocked economies. Both own and transit country infra-

Figure 4.6 Decomposing the costs ofdoor-to-door shipments
U.S. dollars
3,000

2,500

Ocean freight
Customs inspection
Cargo handling and transfer
Documentation & forwarding
Inland transport

2,000—and poor countries are at a
disadvantage
Poor infrastructure conditions are often the direct result of low income levels, as the resources
available for infrastructure investments are limited. Nonetheless, governments play an important role in expanding the reach and improving
the quality of existing infrastructure. Investments in transport infrastructure often take asignificant share of developing countries’ GDP.28
Governments in many countries—in part driven by the need to cut public expenditures—
have increasingly turned to the private sector
for financing such large investments. Successful
involvement of private investors necessitates anattractive investment climate, transparent andcarefully designed concession contracts, anda credible overall policy regime.29 Yet wherecommercial risks are too high, public sector investments are still required—especially in thepoorest countries that are typically not able toattract private investment. Governments also
play a crucial role in infrastructure planning.
Road, railway, and port capacities need to accommodate projected growth in trade. The design and construction of transport networks
need to be coordinated with neighboring countries, which is especially important for small
and landlocked economies.

Economies of scale and scope

1,500

1,000

500

0
Containerized carpet
shipment from
Kathmandu (Nepal)
to Munich (Germany)

Tea shipment(8.4 tons) from
Karimganj (India)
to Liverpool (UK)

Note: Costs refer to the cheapest route of shipment.
Insurance and bank processing charges are excluded.
Source: Subramanian and Arnold 2001.

108

structures are found to be important determinants of bilateral trade flows.27

There are large economies of scale in the provision of shipping services. Greater transportation flows allow service providers to operatelarger vehicles and to spread fixed route costs
over a larger number of shipments. The capacity of containerships operating on the major
East-West trading routes is several times that ofthose operating on North-South routes, wheretraffic density is substantially smaller. Controlling for other determinants of liner freight
prices, shipments from the port of Lagos, Nigeria, to southern California would be 24 percent
cheaper, if traffic on this route would be thesame as from the port of Hong Kong (China)

T R A N S P O R T

to the same region.30 Furthermore, due to relatively low trading volumes, developing countries often face longer travel times and less frequent services, as ocean carriers require a larger
number of stops to fill vessels.31
At sufficiently large traffic volumes, transport operators can reap economies of scope byoffering services on connected routes. Throughhub-and-spokes systems, maritime and oceantransport operators have been able to cut costs,
while at the same time offering transport links
between a larger number of locations at higher
frequencies. The overwhelming share of intercontinental ocean trade is today delivered by
hub-and-spoke systems, through major ports
such as Hong Kong (China), Los Angeles, Rotterdam, or Singapore. By contrast, most ocean
carriers serving the routes to and from West
Africa still operate under so-called multiple
ports of call systems. However, given current
traffic levels, commodity mix, port infrastructures, and inland transportation systems, Pálsson (1997) finds that the adoption of a huband-spoke system would not systematicallyyield substantial cost savings. Future growth intrade as well as infrastructure improvements
may change this calculus. Yet the implementation of a hub-and-spoke system would still require the willingness of the spoke countries to
accept lower traffic volumes to the benefit of
the hub port.

S E R V I C E S :R E D U C I N GGovernment policy can inadvertently inflate transport costs. Most developing
countries enact rules that detract from using
existing transport resources efficiently. These
rules drive up transport-related transaction
costs and often preserve monopolies in service
markets.

Reducing high transaction
costs in-country—
High costs of transport-related transactions—such as frequent reloading of goods, customs
clearance, fulfillment of documentation require-T O

T R A D E

ments, and others—add to the overall logisticalcosts of international shipments. Uncertainty
about the enforceability of legal documents(such as bills of lading or letters of credit) increases the risks faced by importers and exporters as well as transport operators. One
study on Brazilian ports reports the averagecosts per container related to administrationand customs clearance at $1,727, which could
be reduced to $320 according to international
best-practice estimates (figure 4.7).32 In manycases, transport-related transaction costs do
not even show up in the final freight bill, buttake up a firm’s resources that could be used
more productively.
Multiple changes of transport modes during the transport journey create costs in theform of frequent reloading of goods, coordination problems that result in shipment delays, and the need to contract several transport operators instead of a single door-to-door
service provider—often exacerbated by legal
provisions preventing foreign multimodal oper-

Figure 4.7 Potential door-to-door costsavings on containerized imports in
BrazilU.S. dollars
5,000
Administration/customs
Bonded warehouse
Inland transport
Port charges
Ocean freight rate

4,500
4,000

Why some countries pay more:policy-driven factors

B A R R I E R S

3,500
3,000
2,500
2,000
1,500
1,000
500
0
Actual costs

Potential costs

Note: Figures are based on the port of Santos. Insurance
charges are excluded. Potential costs are estimated basedon international best practice.
Source: World Bank 1997.

109

G L O B A L

E C O N O M I C

P R O S P E C T S

ators from undertaking door-to-door contracts.
Containerization has substantially reduced thereloading costs of multimodal journeys, as goods
are packed once at the factory’s door and unpacked at the importer’s site. Indeed, containerization has fostered the integration oftransport service providers toward multimodal operations, which internalizes transaction costs resulting from modal switches. Even
though containerization of general cargo hastaken hold in many developing country–ports,
containers are less frequently used for inlandtransport (especially in Africa)—obviating oneof the main cost-saving characteristics of container shipping.33 The main reasons for thisare long inland turnaround times for containers, risks of loss or damage to containers, andinadequate road infrastructure unsuited to container loads. Limitations on the cross-borderprovision of trucking services create bottlenecks at the border, because goods have to bereloaded onto different carriers. Different national standards regarding safety requirements,
vehicle sizes, railway gauges, or coupling andbraking systems similarly constrain the smoothcross-border movements of goods.
Although official customs fees are typically
only a small portion of overall transportation
costs, inefficiency in customs procedures can result in congestion and long queues at the border. For example, at the key border crossingpoint between India and Bangladesh as many as
1,500 trucks queue up on both sides of the border, and waiting times vary between one andfive days.34 Inefficiencies often are the resultof understaffing, burdensome documentation
requirements, poorly defined procedures, andthe need to obtain approval from many officials. High trade protection typically results inmore complex customs requirements—for example, through the need to obtain import licenses before goods are shipped. Corruption isendemic in many developing country ports
and is more widespread the more opaque are
the customs procedures, and the greater thediscretion of customs officials.
Advances in information technologies havecreated a large scope for reducing transport-

110

related transaction costs. The development of
the electronic data interchange (EDI) system,
for example, has substituted the traditional
paper documentation routines for customs
clearance. Through the global positioning system, firms can monitor the location of vehicles
and better time loading and reloading. The
Internet has opened new ways of organizing
transport movements, creating more flexible
and efficient transport markets with reduced
uncertainty regarding the quality of shipments.
Yet use of these technologies is still primarily
confined to developed countries and large
ports. Lack of communications infrastructure
and the necessary skills, as well as an inadequate legal framework for electronic signatures,
often present obstacles to the dissemination oftransport-related information technology in thedeveloping world.

—requires coordinated government action
There is much that governments can do to reduce transport-related transaction costs, usually under the umbrella of so-called trade facilitation initiatives. Such programs can result insignificant reductions in direct and indirect
shipping costs in relatively short time periods.
They are most effective if implemented in partnership with the private sector (box 4.3). Another role for governments is to create an appropriate legal and regulatory framework for
multimodal transport, which often represents
one of the most pressing constraints to the provision of efficient door-to-door services. Cooperation on standard-setting and the conclusionof mutual-recognition agreements with neighboring countries can facilitate the cross-border
movement of goods by trucks. While countries
should remain free to adopt their preferred regulatory standards, it is important to ensurethat such standards do not unnecessarily discriminate against foreign–service providers (seechapter 3).

From public monopoly toprivate competition
For a long time the provision of many transport services was the domain of public monop-

T R A N S P O R T

Box 4.3

S E R V I C E S :R E D U C I N G

B A R R I E R S

T O

T R A D E

Lessons from customs reforms in MexicoJ

ust years before joining the North American Free
Trade Agreement, Mexico introduced a series ofcustoms reforms as part of its ongoing trade reformin 1989. An important part of the modernization initiative was reducing customs clearance time, throughrisk management and selective testing of cargo, inline with similar initiatives in North America andAustralia.
Prior to 1989, customs procedures were highly
centralized, a reflection of the then inward-oriented
bias of the economy. The directorate general of customs (DGC)—part of the ministry of finance—hadunlimited authority over customs, with little accountability enforced on customs officials. The importexport guidelines were either not published ahead oftime, or subject to frequent and arbitrary revisions.
Adjudications of customs-related disputes were timeconsuming. The approval of customs brokers’ licenses
was strictly regulated, thereby providing incentives
for collusion between customs officials and customs
brokers.
As part of the reform program, DGC was divested of all ancillary functions and the customs administration was decentralized. To ensure transparency, the rights and obligations of the traders
were widely published. Traders under the new guide-olies, and indeed state-owned enterprises
continue to be a dominant force in many countries’ transport sectors. Public monopolies were
often justified by natural monopoly arguments, such as in the case of port operations,which require large infrastructure investments.
Prestige arguments (for example, the desire tooperate a national flag airline) and security
concerns (self-sufficiency in times of war) afforded a justification for limiting the participation of foreign service providers in domestictransport operations. Such arguments are becoming increasingly harder to defend. Private
entry and competitive market structures have
proved to be feasible for virtually all transport
services and, to a large extent, have led to efficiency gains and lower prices for consumers.
Moreover, the principle of comparative advan-lines were required to pay tariffs through commercial
banks that opened branches in customs facilities. An
important component of the modernization program
was targeting enforcement efforts on mainly “highrisk” consignments, while allowing the cargo of usually compliant importers with minimum or no inspection. Customs uses a random system that determines
whether or not goods will be inspected. This systemrelies on data—including the country of origin, importer or exporter, type of merchandise, tariff item
number, and other variables—to determine whether aparticular passenger or consignment is to be inspected. The system is not entirely random, because
it uses information in its database to determine thelevel of risk. Upon completion of customs formalities
in respect of a passenger or a consignment, the system is interrogated by pressing the appropriate button. In 90 percent of the cases the green light flashes
indicating that no further formalities are required.
The benefits of the reforms, reduction in customs transit time and attendant reductions in thecosts of interest, storage, and transport, as well as
lower broker fees, were estimated to be about 5 percent of the total value of the merchandise.
Source: World Bank 1997.

tage fully applies to the provision of transport
services, as it does to other traded commodities. By opening up domestic markets to foreign competition, shippers can choose among a
broader spectrum of services and opt for service operators with superior technologies orlower operating costs.

Maritime transport—
Due to differences in commodity type as wellas to technological improvements in the shipping industry—most importantly, containerization—international maritime freight transport has developed specialized branches. Linershipping, meaning maritime transport of commodities by regular lines, which publish in advance their calls in different harbors, is distinct from tramp shipping, which refers to111

G L O B A L

E C O N O M I C

P R O S P E C T S

transport performed irregularly, depending on
momentary demand. Typically, liner carriers
transport commodities with a higher degree ofindustrial processing using containers, whilenoncontainerized raw materials (such as crude
and refined oil, iron ore, grain, coal, or bauxite) tend to be carried in tramp carriers.

—is affected by government policies—
Tramp shipping is generally believed to be ahighly competitive market that is, as a rule,
free from restrictions.35 Prices are set in spot
markets based on either time charter or voyage
charter contracts. In contrast, liner shipping
has traditionally been subject both to trade restrictions and private cooperation. The mostimportant policy-imposed barriers applied tointernational maritime transport have beenvarious cargo reservation schemes. These require that part of the cargo carried in tradewith other states must be transported only byflagships (ships carrying a national flag) or
ships interpreted as national by other criteria.
Cargo reservation takes various forms. It
can be imposed unilaterally if ships flying national flags are given the exclusive right totransport a specified share of the cargo passing
through the country’s ports. An alternative
form involves cargo sharing with trading partners on the basis of bilateral or international
agreements. A specific form of multilateralcargo reservation scheme is the United Nations
Conference on Trade and Development (UNCTAD) Liner Code of Conduct, which was conceived to encourage the development of theshipping industry of developing countries by
guaranteeing domestic lines a minimum (40percent) share of traffic, and ensuring their participation in international liner conferences.36
Cargo reservation schemes have probably
declined in significance, as more and morecountries have phased them out. In addition,
the increased transfer of ships to open registries to enable the ship owners to benefit
from more efficient cost conditions has further
diluted the importance of cargo sharing. The
UNCTAD Liner Code, which was never applied on a large scale, is even less visible today,

112

being applied mostly to routes between West
Africa and Europe (box 4.4). Nevertheless,countries ranging from Benin to India still
have in place reservation policies that at least
nominally restrict the scope for trade.

—and the practices of ocean carriersCompetition-restraining practices in linertransport take the form of cooperative agreements among maritime carriers on technicalor commercial matters. Carriers’ cooperative
habits are deeply rooted in the history of maritime transportation. The first shipping cartels,
covering the routes between the United Kingdom and Calcutta, India, date back to 1875.
By joining carrier agreements, shipping companies retain their juridical independence, butconsent to common practices with the othermembers regarding pricing, traffic distribution,or vessel capacity utilization. One of the mostcommon types of agreement are liner conference agreements, which typically provide forthe fixing of and adherence to uniform freighttariff rates and conditions of service. Liner conferences also employ exclusive contracts andother loyalty-inducing instruments to deter
entry of outside shipping lines.37 Another typeof carrier agreement includes cooperative working and discussion agreements, which establish
exclusive or preferential working relationships
between shipping lines, and provide a forum
for information sharing but do not necessarily
engage in unique price setting. A more recent
form of private cooperation is strategic alliances,which aim at closely integrating vessel operation activities and service networks.
It has been frequently pointed out that inrecent years the power of liner conferences
and other cooperative arrangements has beeneroded. In the 1990s efficient outside shippinglines were able to gain a significant share of themarket on many routes. Moreover, more liberal
regulations affecting international shipping
have weakened the command of rate-fixing
agreements. For example, the Ocean Shipping
Reform Act of 1998 in the United States introduced the confidentiality of key service contract
terms, allowing greater scope for price com-

T R A N S P O R T

Box 4.4W

S E R V I C E S :R E D U C I N G

B A R R I E R S

T O

T R A D E

Maritime shipping in West Africa

est Africa has lagged behind the rest of Africa
and the world in terms of growth of sea-borne
trade over the last two decades. Sea-borne transport
increased by an average annual growth rate of 1.2
percent since 1990. This compares to 1.6 percent for
all developing countries in Africa and just over 3
percent for total world sea-borne trade. Between
1980 and 2000, West Africa averaged about 4 percent of total goods loaded in the world’s seaports.
For goods unloaded, the region averaged about 2
percent of world sea-borne trade.
West African nations adopted the UNCTAD
Liner Code in the 1980s and rapidly expanded theirfleets, hoping to be in a position to take full advantage of the code’s cargo sharing formula. However,most of the shipping lines based in West Africa either
collapsed or went bankrupt. Today the market shareof West African lines is very slim in the containerized
trade to and from Europe, with five national lines
mustering up about 6–7 percent of total capacity offered. They run a fleet of small and generally old vessels and offer exclusive service between their homecountries and Europe, consequently limiting themselves to a small cargo base. Low traffic levels inWest Africa restrict the number of regional carriers
that can be sustained and limit market entry by commercially oriented carriers.
Due to low volumes, there is also concern about
abusive practices by private operators. Interesting
evidence on such practices was revealed in the Associated Central West Africa Lines (CEWAL) liner conference court case, which was initiated by the European
Commission (EC) against three liner shipping conferences operating on routes between continental North
Seaports and West Africa. Although European Union(EU) regulations provide for a block exemption for
liner conferences, the abuse of a conference’s dominant position still falls under the realm of the competition rules provided in the EC’s treaty of Rome.
The members of the CEWAL conference were
found to have abused their collective dominant position in several ways. First, the conference establisheda system of loyalty agreements, whereby loyal shippers received rebates on routes between Northern
Europe and Zaire, while disloyal shippers were
“blacklisted” and could no longer count on “nor-mal” services from CEWAL members. Second, aspecial agreement with the Zairian Maritime Freight
Administration granted the conference the power toprevent any intrusion of competition on its market
and allowed it to monitor sea-borne trade. Third,
the conference employed “fighting ships” to eliminate competition from its most direct competitor
and potential market entrants. “Fighting ships”
were identified as those vessels that sailed at dates
close to the sailings of its principal competitor.
Special freight tariffs—identical or less than thoseoffered by the competing line—were established
for those ships.
These agreements and practices enabled the conference to maintain a high market share, which contrasts with other Euro-African trades for which themarket share of the conferences is sometimes lessthan 60 percent. After the court hearing, members of
the CEWAL conference had to amend the terms of
their loyalty contracts to prevent infringement of EC
competition rules. Moreover fines were imposed on
several members of the conference. The CEWAL casedemonstrates the positive spillover of competition
law enforcement by a large trading bloc, such as the
EU. Since the final decision by the European Courtof Justice in March 2000, liner transport prices onroutes between northern Europe and West Africa
have reportedly fallen.
Notwithstanding the dominance of certain liner
conferences, there is growing competition from independent service providers in specific port to port
markets, including niche operators (operating in special, well defined market segments, sometimes withspecial equipment) and operators without vessels
who rely on chartering space from liner companies—
so-called non-vessel-owning common carriers. These
corporations frequently keep at arm’s length fromthe large operators and can be quite successful
within their particular markets. In view of West
Africa’s stagnant trade volumes, however, there iscontinued need to closely monitor competitive conditions in this critical trade-supporting industry.

Sources: Audige 1995; European Union 1999 and 2000; Pálsson
1997; and WTO 2000.

113

G L O B A L

E C O N O M I C

P R O S P E C T S

petition. It is also important to recognize thatprivate cooperation can bring benefits to consumers of shipping services—notably due toimproved network coordination, which cangenerate economies of scope and a wider choiceof services available to shippers.
Yet one recent study, which examines theimpact of price-fixing and cooperative working agreements on liner freight rates for U.S.
imports, concludes that private practices continue to exercise a significant influence onliner freight rates, and that the hypotheticalbreakup of carrier agreements could lead tocost savings of as much as 20 percent (see box4.5). In practice, the extent to which liner
freight rates are pushed up by private anticompetitive practices is likely to differ acrossroutes. Developing country routes are arguably
more prone to such practices, since low overall
traffic volumes limit the number of competitors that can be commercially sustained (seebox 4.4).

Seaport services are increasingly driven by
private capital and competition—
In performing their function as the interface
between various modes of transport, seaports
provide multiple services. The management ofships in ports requires a mixture of services related to berthing, including pilotage, towing,
and tug assistance. Cargo handling is the mostimportant service in moving goods throughseaports, accounting for 70 to 90 percent of
total port charges. Other services related tocargo manipulation include customs clearance,storage, and warehousing. Specialized agentsor consignees take on the paperwork and all
matters related to the use of port facilities bya ship. Finally, there is a series of ancillary services to crew members and ships, including
provisioning, fueling and watering, garbage
collecting, and repair facilities.38
The last decades have seen profoundchanges in the organization of seaports—thegeneral trend being toward increased private
sector participation and greater competition
within and between ports. A variety of ownership and operational structures have emerged114

with regard to port management and coordination, the provision of infrastructure, andthe supply of services. For example, under theLandlord Port concept—which is becoming
widespread worldwide—the public Port Authority owns the basic infrastructure—land,
access, and protection assets—and leases it
out to private operators on a long-term concession basis. Under the Tool Port concept thePort Authority owns the infrastructure, the superstructure, and heavy equipment, and rents
it to private operators, which carry out commercial operations under licenses. The Port
Authority usually retains all regulatory functions in the case of landlord and tool ports. In
only a few ports in the world has port land
been sold to private operators, and all publicmanagement and regulatory functions beentransferred to the private sector.39—but smaller ports are ata disadvantage—
The feasibility of competitive provision of port
services, especially cargo handling, depends on
several factors. The availability of port spaceposes a constraint to the number and the degree of specialization of port terminals. Second, traffic levels have to be sufficiently large,such that it is feasible to operate several terminals at full capacity. Experience has shown thatthe operation of more than one container terminal only becomes viable if port traffic exceeds 150,000 twenty-foot equivalent units(TEUs) per year. Third, competition between
ports depends on geographic factors, the density and quality of inland transport networks,
and overall traffic volumes in the greater port
region. In practice, competitive forces arelikely to lead to a cost-efficient provision ofservices only in large seaports and regional
hubs. For smaller ports, ex ante competition,in the form of auctions where private firms bid
for the right to operate a terminal, can extract
potential monopoly or oligopoly rents that
service providers expect to generate. Furthermore, it is necessary to accompany private port
participation with appropriate regulation overtariffs charged by service providers. Indeed, theT R A N S P O R T

S E R V I C E S :R E D U C I N G

B A R R I E R S

T O

T R A D E

Box 4.5 How important are public and private
barriers to trade in maritime services?

A

recent study by Fink and others (2001) has
attempted to quantify the absolute and relative
importance of public and private barriers to trade inmaritime services. Using data on liner transportcharges for U.S. imports, broken down to the sixdigit Harmonized System commodity level, the study
estimates a model that explains port-to-port liner
prices with their standard determinants, ranging
from distance to containerization, as well as various
proxies for public and private restrictions that exist
across countries and on different routes. Public
policy restrictions include cargo reservation and theextent to which certain port services, such as pilotage
and towing, are mandatory for incoming ships.
Private restrictions considered are price-fixing andcooperative working agreements on routes between
U.S. trading partners and selected U.S. coastal
districts.

The econometric results show that both public
policy and private practices exercise a significant influence on liner transport prices. Of public restrictions, the cargo reservation policies that proliferated
in the 1970s and 1980s seem to be largely ineffectual, but restrictiveness in the form of mandatory
port services significantly raises prices. Most striking
is the even more powerful effect that private carrier
agreements have in keeping prices high. The tablebelow presents the estimated reductions in transport
prices due to policy liberalization and the hypothetical breakup of private carrier agreements. While port
liberalization would lead to an average reduction intransport prices by 8 percent and cost savings of up
to $850 million, the breakup of private carrier agreements would cause prices to decline further by 20
percent and there would be additional cost savingsof up to $2 billion on U.S. routes.

Estimated reductions in liner transport prices

Liberalizationof port services

Breakup ofcooperative
workingagreements

Breakup of
price-fixing
agreements

Cumulative effectof the breakup of
private carrier
agreements

Cumulative
total effect

1. Average percentage price reduction

8.27

5.29

15.73

20.05

26.37

2. Projected total savings for all U.S. imports(in millions of dollars)

850.4

544.1

1618.42063.02712.5

Note: The average percentage price reductions are computed from the sample of 59 countries included in the study, while the projected totalsavings apply to all U.S. trading partners. Given the functional form of the underlying regression equation, the individual effects do not sum
to the cumulative effects. See Fink and others 2001 for additional explanatory notes.

While the study provides important evidence
on the forces constraining competition in maritime
transport, several important questions fall outside
the scope of the empirical analysis. First, the overall
restrictiveness of the port services regime is only imperfectly captured by the extent to which certain
port services are mandatory for incoming ships. The
efficiency of cargo handling—the most important
service in bringing moving goods through ports—is
not considered in the analysis. Moreover, the data
employed only capture inefficiencies in the provisionof port services to the extent that they push up liner
freight rates. More research is needed to evaluate

how public and private restrictions directly affectcharges for port and auxiliary services. Second, due
to data availability, the study only considers liner
traffic to the United States, where recent reforms
have increased the scope for price competition,
potentially reducing the role of private carrier
agreements. Evidence for other routes involving
developing countries is needed to evaluate how
public and private barriers to competition affectmaritime shipping.

Source: Fink and others 2001.

115

G L O B A L

E C O N O M I C

P R O S P E C T S

creation of regulatory capacity is an importantelement in every port reform package—not
only to monitor and set tariffs, but also to ensure the safety and quality of services supplied.
With few exceptions, such as Singapore,public port monopolies are typically associatedwith inefficient and expensive services; experience has shown that liberalization programs
can, in principle, greatly improve performance(see box 4.6). Yet achieving successful liberalization is a complex task—even in developed
countries. To attract long-term private investors, the overall policy regime has to be credible and consistent over time. At the same time,governments need to ensure that efficiency
gains are passed on to port users, which requires carefully designed concession contracts
ex ante and appropriate regulatory mechanisms
ex post. Thus a country with weak institutions,high overall economic uncertainty, a reputation
for policy reversal, and limited regulatory capacity arguably faces a significantly more difficult task in managing the liberalization process.
Another frequently encountered obstacle in reforms is the adjustment to the labor force in
port. Due to technological progress, port operations have, over the past decades, become
more capital-intensive, such that modernization typically requires the reduction of excess
labor. Forming consensus with workers on thedesign of reforms, retraining programs, andmeasures to soften the social impact of labor reductions can overcome some of the resistanceof often-powerful port unions.40—and powerful operators are emerging at
the global level
Opening port services to the participation offoreign operators can bring special benefits, as
multinational companies often bring technology, experience, and managerial know-how.
Large global port operators can also offer aloyal customer base, networking possibilities,
and access to finance. Yet a number of observers have voiced concerns about the rising
global concentration of the industry. A relatively small group of port operators has established a regional or worldwide presence; by one

116

estimate this small group now accounts forabout 40 percent of the world’s annual container liftings.41 While consolidation may bring
benefits to port users, there is the danger that
dominant operators may abuse their market
power—for example, by offering exclusive contracts to shipping lines if they use their worldwide facilities. Such practices may pose the riskthat the benefits from port liberalization are tosome extent captured by foreign firms.

International air transport services areheavily restricted—
International air transport is divided into scheduled passenger, freight, and mail services, andchartered services that depend on momentarydemand. In 1998, scheduled services represented 87 percent of revenues, of which theoverwhelming share (88 percent) came fromthe movement of passengers.42 International
airfreight transport can be further divided into
passenger belly-hold freight and dedicatedfreight services. Passenger belly-hold freight istypically cheaper, because freight rates are set
at marginal cost, whereas dedicated freight
services need to recover the full costs of operating the aircraft.
Trade in international air transport services
is heavily restricted by governments aroundthe world—more so than international maritime transport. Market access of foreign passenger and cargo carriers is largely determinedthrough a complex system of bilateral air service agreement (ASAs), which typically designate the airlines allowed to operate on bilateralroutes, the number and frequency of flights
they operate, what types of aircraft they use,and how much they charge.43 ASAs also determine the traffic rights of airlines operating on
bilateral routes, which are defined by so-called
freedoms of the air. Under third and fourth
freedom rights, airlines are allowed to carrytraffic between their home countries and foreign countries. Fifth freedom rights permit anairline of one country to carry traffic between
two other countries, provided the flight originates or terminates in its own country. The
most liberal—yet rarely granted—traffic rights

T R A N S P O R T

Box 4.6AS E R V I C E S :R E D U C I N G

B A R R I E R S

T O

T R A D E

Lessons from reforming Argentina’s portss part of its overall program of macroeconomic
stabilization, liberalization, and public sector
reform, in the 1990s the government of Argentina
initiated a comprehensive reform of the port sector.
The reform was a major success, in that it greatly
improved the performance of Argentina’s largest seaports, sustaining a rapid expansion in the volume ofsea-borne trade, growing more than four times from
249,000 in 1990 to 1,070 million twenty-foot equivalent units (TEUs) in 2000.
Before 1990, Argentinean ports were characterized by institutional inadequacies, including a major
corruption problem, inefficient cross-subsidization,and insufficient investment in the modernization of
the sector. Tariffs charged by the publicly operated
ports were reportedly among the highest in theworld. Total cargo moved in the ports fell by
10 percent between 1970 and 1989, with the portof Buenos Aires alone experiencing a 52 percent
reduction in traffic.
The overall reform program consisted of a combination of devolution of most port responsibilities
to the provinces, private sector participation, andpromotion of service competition. Provinces were
given the freedom to operate, concession, or close
ports, with the exception of large ports, for which
the creation of independent autonomous companies
was foreseen. In the case of the port of Puerto Nuevo(Buenos Aires), six terminals were competitively concessioned to the private sector, with a payment of aleasing fee to the government for use of infrastructure assets—following the landlord port model. To
improve the contestability of port operations, thegovernment also established free entry into the sector
by allowing any operator to build, manage, and operate a port for public or private use. A new regulatory agency (Autoridad Portuaria Nacional) was created under the ministry of the economy. Finally, therestructuring process included a major labor reformthat eliminated restrictive work regulations and softened the social impact of labor reductions.
The main economic effect of the overall reforms
was to transform Argentinean ports from the mostexpensive ones in Latin America into the cheapest
ones—as illustrated in the table below for the port of

Buenos Aires. Private investment picked up significantly in the second half of the 1990s, leading to a
substantial expansion in capacity. Productivity has
picked up sharply, significantly reducing operationalcosts and duration of stay in ports. Combined withmore intense competition between port service
providers, this has resulted in a reduction in overall
container terminal handling prices.
Improved performance in the port of Buenos Aires
Indicator

1991

1997

Cargo (thousand tons)
Containers (thousand TEUs)
Capacity (thousand TEUs)
Cranes
Productivity (tons per employee)
Average container time at port (days)
Charges per container ($/TEU)

4,000
300
400
3
800
2.5
450

8,500
1,023
1,300
13
3,100
1.3
120

Despite these impressive achievements, unresolved issues from the first wave of port reforms aswell as changes in the competitive environment in
the sector, although not pressing, demand solutionsin the long run. While intraport competition is
working effectively, the likelihood of future mergers
between terminal operators at the port of Buenos
Aires raises the risk of collusion. Improved monitoring and benchmarking mechanisms, as well as thefine-tuning of price regulations, may be necessary toensure that services continue to be provided on a
cost-efficient basis. Inefficient customs operations
pose a key constraint toward further productivity
gains in the sector and represent a priority for futurereform. Finally, some aspects of Argentina’s port
policy, such as restrictions on the circulation of containers, are reported to restrain intermodal integration. Addressing this issue in the context of the wider
policy framework on multimodal transport would
contribute to a better performance of the transportsystem nationwide.

Source: Trujillo and Nombela 1999; and Trujillo and Estache
2001.

117

G L O B A L

E C O N O M I C

P R O S P E C T S

are seventh freedom rights, which allow an airline of one country to operate flights between
two other countries without the flight originating or terminating in its own country.44—but bilateral arrangements are
becoming more liberal—
Over time, ASAs have become increasingly
more liberal. For example, so-called Bermudatype agreements do not regulate capacity oneach route, but leave it to the designated airlines to negotiate the number and frequencyof flights. “Open skies” agreements are aneven less restrictive type of ASA, which originally emerged on selected routes to and fromthe United States. Under a multiple open skies
agreement, airlines can typically fly on allroutes between two countries without any exante controls on capacity or fares, and are
granted unrestricted fifth freedom rights. Domestic reforms, especially the entry of second
and third carriers to compete with the former
national flag carriers have also led to more intense competition on a considerable numberof international routes. In addition, unilateraland bilateral policies toward air cargo services
are, in most countries, more liberal than passenger services. Governments have often been
willing to authorize dedicated freight services
when demand for services exceed what national flag carriers could provide.45
Another noteworthy development is theconclusion of liberal regional air service agreements that, at least partially, attempt to overcome the distortions introduced by bilateralpreferences. These are often linked to regional
trade agreements, such as in the case of thecommon aviation market in the EU or the Andean Pact open skies agreement. The “Yamoussoukro Declaration” adopted by Africancountries provides for liberalization of airtransport on the continent by 2002. The foreseen regime would replace bilateral air services arrangements and eliminate all restrictions in traffic rights up to the fifth freedom.
Privatization of state-owned airlines has
also progressed in the 1990s. More than 70
percent of airline companies now have a ma-

118jority of private capital. In addition, governments have become less willing to come to therescue of distressed national flag carriers. Indeed, selected countries—notably in the developing world—have allowed the bankruptcy
and closure of national carriers. While privatization is frequently driven by short-term fiscal
needs, there is growing recognition that direct
or indirect subsidies to national flag carriers
distort the allocation of resources. The tightening of competition policies in relation tostate aids has also contributed to a more commercially oriented climate in which airlines
operate today.
Besides restrictive bilateral agreements,
market access of foreign airlines is sometimes
limited due to regulatory standards and requirements. While it is legitimate for more developed countries to seek higher safety andenvironmental standards, they can potentiallyhave adverse effects on air services with developing countries, which should be taken into
account when adopting new standards (box4.7). International cooperation on technicalstandards, for example under the umbrella of
the International Civil Aviation Organization(ICAO), can play a useful role in forming consensus about what are legitimate safety or environmental concerns and what can be considered unnecessarily discriminatory.

—fostering consolidation—
A large number of studies have documented
the benefits of liberal international air service
markets in developed economies. In principle,competition between airlines has been shown
to result in overall lower prices, and an increased range and quality of services.46 Little
formal research has been conducted to evaluate the effects of air service liberalization indeveloping countries, but anecdotal evidence
points to significant inefficiencies as a resultof restrictive air service policies. At the sametime, the experience of developed countries
has shown that liberalization may foster consolidation in the industry, as airlines seek toexpand the reach of their networks to generate
hub-and-spoke economies.

T R A N S P O R T

S E R V I C E S :R E D U C I N G

B A R R I E R S

T O

T R A D E

Box 4.7 EU noise regulations and their potential
effect on air service to Central Asian countries

The EU has been continuously framing regulations to curb noise pollution within the Community caused by older types of civil jet aircrafts. A
trade dispute between the United States and the EU
has thus been brewing over the issue of hushkits—
retro-fitted noise muffling systems used extensively
in U.S. carriers to bring older aircraft in conformity
with ICAO standards. The hushkits law, effectivefrom April 2002, would ban all non-EU aircraftwith built-in hushkits that are not already flying in
the EU.
The IL76, an aircraft with high cross-country
carrying capacity will be prevented from operating
as a result of these regulations. According to one airtransport operator, almost 90 percent of all humanitarian and disaster relief operations around theworld are performed by the IL76. Such aircrafts playa role in the advancement of emerging industries bycarrying maintenance equipment and spare parts
worldwide. They have also been used widely in servicing regions such as Kazakhstan, which lack sufficient infrastructure to support Western aircrafts.

A regional market with limited traffic may
only sustain a number of airlines that is smaller
than the number of states in the region. Someobservers have, for example, pointed out that
consolidation would be a likely consequence if
air services were further liberalized in Africa.
Consolidation may be in the consumer’s bestinterest, if economies of scale and scope resultin lower airfares and freight rates, yet it also
raises the danger that “spoke” routes with thintraffic densities will become monopolized andairfares increase once price and capacity controls are removed.47 Achieving successful liberalization may require the regulation of prices
and the imposition of service requirements on
thin routes—at least temporarily until competition has sufficiently intensified.

The noise level near airports is determined not
only by the fleet mix serving the airport, but also by
the quantity of aircraft movements. A regulation thatbans such aircrafts in populated areas but not inareas with low population density is an alternativethat can be applied for a limited period until the aircrafts are re-engineered in accordance with the environmental standards. That could also imply channeling some of the air cargo through specialized remotecargo airports.
The negative implications for developing nations
are evident. Delays in urgent relief could have catastrophic results. Cargo traffic between developing
countries and the EU would also be adversely affected, as the costs of maintaining a fleet that is inline with stricter noise regulations would increase.
Taking into account the implications for developing
countries when setting environmental laws and regulations would make better development policy.
Source: Council of the European Union 1999; and www.
coyneair.com.

—and increasing the relevance ofprivate practices.
A related concern stems from the emergenceof a large number of airline alliances and codesharing agreements between airlines of different countries. One of the main rationales ofthese arrangements has been to expand thereach of existing networks in an environment
where cross-border trade and direct investments are restricted by bilateral ASAs.48 In
addition, regulation and market structure inindustries upstream or downstream from airservices can strongly affect competitive conditions for both passenger- and cargo-transport.
Chiefly, the allocation of landing and takeoff
slots at airports can be used to favor domestic
incumbents and lead to a high concentration

119

G L O B A L

E C O N O M I C

P R O S P E C T S

of services in city-specific markets. Similarly,
passenger carriers need access to computer
reservation systems, which are provided globally by only a small number of operators.

Unleashing competition ininternational transport:
policy implications
Domestic policy action is needed—
Government policies can play an importantrole in improving the efficiency of international transport services. Creating a favorable
climate for private investments, targeted public infrastructure investments, and regional
cooperation on transport matters can serve
to lessen constraints imposed by adverse geographic or economic circumstances. As pointed
out in chapter 3, the liberalization of service
markets should focus on the removal of entry
barriers in the form of public monopolies or
specifically government policies that directly
limit competition. Such policy-imposed restrictions are present in a large number ofcountries and can apply to virtually all transport services, ranging from public shippinglines, port monopolies, and national flag air
carriers, to controlled freight forwarding, andagency and third party logistics markets.49
Cargo reservation in maritime transport,
while still applied in a number of developing
countries, has arguably become less relevant.
Liberalization of port services is a much newer
phenomenon, but has proved to be a successful strategy in improving the performance ofport operations in both developed and developing economies.
Notwithstanding the recent progress toward more commercially oriented and liberal
air service markets, the current system governing international air transport remains one
that essentially grants preferential access toairlines that reside at one end of an international route. Even the most liberal bilateral
open skies agreements and regional accords do
not grant seventh freedom rights. Preferential

120

liberalization entails costs, in that market access may be denied to the world’s most efficient airlines, unless those airlines fall under
the ambit of a bilateral agreement. Despite thespread of airline alliances, which has led to
improved international network coordination,
limitations on foreign ownership of airlines
similarly prevent foreign airlines from fully
integrating service networks and achieving
economies of scale and scope. In the long term,
the goal should be to move toward a nondiscriminatory trade and investment regime in airtransport. Further liberalization at the domestic level would contribute to an environment inwhich such a regime would become feasible in
the future.

—as well as a strong regulatory andcompetition policy framework
Liberalization needs to be accompanied by thedevelopment of appropriate regulatory mechanisms. Regulatory intervention is necessary to
remedy market failures, to protect consumer
interest and the environment, and to ensure thesafety of services supplied. Good regulation isoften the key to successful liberalization. Although there is no unique model of a good regulator, experience has shown that clearly defined responsibilities, institutional and somedegree of financial independence, well-trained
staff, and credibility in the market are important ingredients to the regulator’s effectiveness.
Assistance from bilateral or multilateral donors
can be supportive, especially for newly createdagencies with limited resources.
An adequate competition policy framework
is needed to address potentially anticompetitive business practices by operators, and to ensure that the gains from policy liberalization
are passed on to consumers of services. In principle, greater scrutiny of private carrier agreements by competition policy would not automatically imply the breakup of all forms ofprivate cooperation, but would require a staticand dynamic efficiency test as to whether carrier agreements, alliances, and other private
practices—whether in maritime or air trans-

T R A N S P O R T

port—seek to lower operational costs or work
to the detriment of consumers.

Yet effective application of competition
policy may be difficult—Many developing countries lack an adequate
national competition policy framework to deal
with private practices by transport operators.
Although a large number of countries haverecently adopted antitrust laws, examinationand enforcement capabilities often remain
weak and take time to develop. There are alsosignificant extraterritoriality problems related
to the application of national laws to transport
services that are inherently international. Large
states can probably tackle such practices unilaterally, but small states with limited enforcement capacity are at a disadvantage. Cooperation on antitrust matters (such as the collectionof evidence) can help in pursuing multijurisdictional practices, but, again, such cooperation
currently is most pronounced only among developed countries.

—in part due to developed country
antitrust exemptions
Undoubtedly antitrust scrutiny of internationaltransport operators in big trading nations, suchas the United States and the EU, is likely to generate positive spillovers for developing countries; yet such positive spillovers are likely to belimited, for several reasons. First, the UnitedStates, the EU, and other countries have historically exempted—at least partially—shipping
conferences from the realm of antitrust law, on
the grounds that they provide price stability
and limit uncertainty regarding available tonnage.50 In some countries, governments evenfacilitate price-fixing by requiring ocean carriers to officially file their rate and schedule information. Similarly, the United States has exempted selected airline alliances from the realmof its antitrust law—justified by airlines’ needto share scheduling and pricing information,
which could be challenged under existing competition regulations. Second, developed country competition laws typically do not take into

S E R V I C E S :R E D U C I N G

B A R R I E R S

T O

T R A D E

account the interests of foreigner consumers,
and foreign persons usually do not have standing in developed country courts.
A case can therefore be made to review
competition regulations—including sectoral
exemptions—in the major industrial countries
in terms of their potential development implications. This would not only make for betteroverall development implications, but in manycases it could lead to better outcomes in developed countries.

Multilateral negotiations can besupportive of domestic reforms—
Reform programs aimed at improving the performance of transport services are primarilya challenge for domestic policy. Nonetheless,multilateral agreements can help in several
ways to achieve good policy—as chapter 3 hasdiscussed in greater detail. Transport services
fall under the scope of the General Agreement
on Trade in Services (GATS), which was oneof the outcomes of the Uruguay Round of
trade negotiations. Measures listed in member
countries’ specific commitments include, forexample, quotas such as cargo reservation policies, foreign ownership limitations of service
providers, requirements regarding the legal formof commercial presence, discriminatory taxes
and subsidies, restrictions on the hiring of foreign crew members, and the terms of access toport services and other essential facilities such as
computer reservation systems.

—but little has been achieved so far—Notwithstanding the broad coverage of the
GATS, relatively little has been achieved to dateon disciplining transport services by multilateral trade rules. Take the case of maritime
transport services, where negotiations stretchedover a period of nearly ten years.51 Liberalization was a central concern in the Uruguay
Round, but at the end of the process only 39
WTO–Member countries were willing to offer
commitments, most with significant limitations.
As in other sectors, such as telecommunications
and financial services, it was decided to extend

121

G L O B A L

E C O N O M I C

P R O S P E C T S

negotiations in this sector until the end of June
1996. However, no agreement could be reachedand negotiations were suspended. Thus eventhough the maritime transport sector is an integral part of the GATS, it is not subject to themost favored nation (MFN) rule, and existingcommitments are limited to those that certain
Members have been willing to make unilaterally. The suspension of the MFN obligation
was prompted by the difficulty in eliminating
MFN-inconsistent measures in the maritime
sector. Examples of such measures are thebilateral cargo-sharing arrangements under
the UNCTAD Liner Code of Conduct, and certain unilateral retaliatory actions—such as thosemaintained by the United States—against trading partners who are perceived to resort to restrictive foreign trade practices.
Liberalization of air transport services
under the GATS has also been very limited.
Current commitments only apply to three ancillary services—aircraft repair and maintenance services, selling and marketing services,and computer reservation services. The GATS
expressly excludes the core issue of air trafficrights. Because the bilateral structure of theinternational air service regime is fundamentally at odds with the MFN principle of theWorld Trade Organization (WTO), exclusion
was preferred to the possibility of scheduling alarge number of MFN exemptions. Several developed countries—in part supported by theirairlines—also preferred to pursue the liberalization of air services in a bilateral context.
The fact that these countries can obtain a rapid
and timely resolution of disputes under the existing bilateral system contributed to the lackof enthusiasm for a strong GATS framework.

—leaving the door open for mutually
beneficial negotiations in the new roundIn 2000, new negotiations on services were
initiated, as called for in the GATS. If a broader
new round were to be launched at the Ministerial Meeting in Doha, Qatar, in November
2001, the scope for intersectoral bargaining
would substantially widen and encourage a122

broader and deeper exchange of commitments
by Members. Although specific negotiating interests on transport services are likely to varyfrom country to country, there are general
guiding principles that would arguably contribute to beneficial outcomes. First, developing countries are likely to gain credibility intheir domestic reforms by binding existingtransport policies in a multilateral commitment. Holding on to commitments that are“below” actual policy—for example, motivated by the desire to preserve future negotiating leverage—entails significant costs, inthat investors may be deterred by the riskof policy reversal. In maritime transport, theprospects for locking in existing policies havearguably improved since the last round of negotiations, as unilateral liberalization in this
sector has gathered steam, and a larger number of countries appreciate that restrictions
on maritime trade impose a significant cost on
the whole economy.52
Second, developing countries should use
the negotiating process to advance liberalization of transport services—especially in sectors where there are powerful interest groups,
such as in port services, which resist reforms.
At the same time, market access demands bytrading partners need to be reconciled withdomestic reform priorities and overall development objectives. This “balancing act” requires careful analysis prior to negotiations,which should be supported by bilateral andmultilateral development agencies.
Third, and specifically regarding the coverage of air transport services under the GATS, astronger multilateral framework for aviation
would, in principle, be desirable and could
contribute to a more level playing field forsmaller countries. Realistically, application of
the MFN principle to air transport—for example, by substituting bilateral quotas with nondiscriminatory taxes—would require majorchanges in the way the industry is currently
governed, which seems unlikely in the short
to medium term. One way forward would beto negotiate the inclusion of air cargo and so-T R A N S P O R T

called express integrated cargo services, which
are already relatively more liberal than air passenger services. In the long term, multilateralrules for these subsectors can create the momentum for a more comprehensive treatmentof air transport under the GATS.
Finally, it may be beneficial to create multilateral disciplines on transport regulation andmeasures that address anticompetitive businesspractices. Such disciplines could unleash a
deeper exchange of liberalization commitments,
as countries would be more confident that market access concessions are not reversed by regulatory barriers and that the gains from more liberal policies are not captured by private parties.
The Reference Paper on Regulatory Principles,
which is part of the 1997 GATS Agreement on
Basic Telecommunications, has demonstrated
that multilateral disciplines can play a positiverole in this regard, without aiming at harmonizing regulatory standards or practices. The experience with these behind-the-border issues in the
WTO is still young; further work is necessary toevaluate possible options in the transport sector.
For example, extending nondiscrimination principles under the GATS to essential facilities intransportation, such as seaports and airports, orcomputer reservation systems, could make apositive contribution toward a secure trading
regime for transport services. Competition disciplines could call for an end to exemptions ofparticular sectors—such as air and maritime
transport—from domestic antitrust law. Another useful role the WTO might play in this regard is to uncover anticompetitive practices, forexample in the context of the already existing
trade policy reviews mechanism, or in the formof dedicated competition assessments. Developing countries that have limited resources available for this kind of analysis would likely be themain beneficiaries.

Notes
1. See Lakshmanan 2001.
2. If one assumed a 6.26 interest rate (the average
U.S. Treasury Bill rate in the year of estimation), theS E R V I C E S :R E D U C I N G

B A R R I E R S

T O

T R A D E

daily capital would be 0.017 percentage ad valorem,
roughly 47 times smaller than the measured cost.
3. Amjadi and Yeats (1995) also show that Africancountries use a larger share of their foreign exchangeearnings on net payments for transport services compared to other developing country regions.
4. Hummels (1999a) makes similar comparisons
between freight rates and import tariffs for several
Latin American countries and, in many cases, findsthat tariffs do exceed transport costs, especially among
manufactured goods.
5. Note that insurance services are included in thedefinition of freight rates shown in figure 4.3.
6. See Limão and Venables 1999. Geraci and Prewo(1977) estimate a similar elasticity of trade with respect
to shipping costs.
7. Hummels (1999a) directly estimates the degreeof goods’ substitutabilities, controlling for the transport and tariff incidence on import prices. The study
suggests an even larger trade-inhibiting effect of transport costs for individual product categories than theaggregate estimate by Limão and Venables 1999.
8. For an overview of travel cost elasticity estimatesof tourism demand, see Witt and Witt 1995.
9. See Christie and Crompton 2001.
10. A recent study on productivity spillovers in Organisation for Economic Co-operation and Development countries finds that foreign research and development (R&D) stocks in distant economies have a much
weaker effect on domestic total factor productivity thando R&D stocks in closer economies (Keller 2001).
11. Indirect evidence for the role of export market
choice on growth is provided by Vamvakidis 1998.
This study finds that the size of open neighbors’ market
and their level of economic development has a positiveeffect on home country economic growth, although afaster growth rate of the neighboring economy was
found to not provide any positive spillovers.
12. Since direct data on transport costs are unavailable, Redding and Venables (2001) use geographic distance and the existence of a common border to approximate the effect of shipping costs. Estimations are
performed for a group of 101 developed and developing economies, using 1994 bilateral trade data.
13. See Hanson 1998.
14. Interesting new work even suggests that transport costs—as an element of trade costs—help explaina variety of puzzles in the field of international macroeconomics. Their role in explaining countries’ homebias in consumption may be the most straightforward,
but Obstfeld and Rogoff (2000) also demonstrate that
trade costs can be an explanatory factor of why savingsin most countries are typically invested domestically, oreven why exchange rates are excessively volatile.

123

G L O B A L

E C O N O M I C

P R O S P E C T S

15. It should be pointed out that 1974 is an unfortunate year for comparisons, however, because freightrates were pushed up by the oil price shock in the preceding years. Based on similar data from New Zealand,
Hummels (1999b) finds that freight costs increased byat least 30 percent between 1973 and 1974, such thatthe decline in ad valorem freight rates between 1974–98
would be nearly eliminated.
16. Most of the discussion on ocean and air transport is based on Hummels 1999b. This study provides
an excellent treatment of available evidence on the evolution of international shipping costs.
17. See World Bank 2000.
18. See Hummels 2000.
19. These estimated growth rates are based on
Hummels 1999b.
20. See Hummels 2000. Based on an estimateddaily ad valorem cost of 0.8 percent of the importvalue, this study concludes that, “. . . the advent of relatively fast shipping is equivalent to reducing tariffs
from 32 to 11.4 percent.”
21. In the case of maritime transport, Fink and others (2001) estimate that a 1 percent increase in distancepushes up liner transport prices by 0.2 to 0.3 percent.
Besides fixed transport costs, it is also possible that differences in the variable costs of shipping across ships
and routes cause freight rates to increase less than proportionately with distance.
22. See, for example, Rose 2000 or Limão and Venables 1999.
23. See Limão and Venables 1999.
24. See, for example, Radelet and Sachs 1998, andLimão and Venables 1999.
25. See Radelet and Sachs 1998, and Limão and
Venables 1999.
26. Improving the infrastructure density index in
the export destination country by one standard deviation reduces transport costs by the equivalent of 6,500
kilometers by sea or 1,000 kilometers by land.
27. Raising infrastructure density of the medianlandlocked economy to the 25th percentile reduces the
disadvantage of being landlocked by 12 percentage
points; improving the infrastructure of the transit economy reduces the disadvantage by a further 7 percentage points.
28. For example, one study for Latin America estimates investment needs of $18 billion annually in Latin
America for 2000 to 2005, in order to bring road infrastructure to the upper-middle-income country average of 2.32 kilometers per capita. See Fay 2000.
29. For a more detailed discussion of the role of theprivate sector in transport infrastructure investments,
see Estache 1999.
30. This estimate is based on the empirical model ofocean liner shipping by Fink and others 2001.

124

31. See Hummels 2000.
32. Admittedly, such best-practice estimates areoften crude and sometimes do not fully take into account that practices or technologies employed abroad
may not be applicable at home. Moreover, the study isbased on the performance of Brazilian ports in 1997.
Since then, port charges have been significantly reduced
through the concessioning of private container terminals to private operators.
33. See Pálsson 1997.
34. See Subramanian 2001.
35. See World Trade Organization 1998a.
36. The UNCTAD Liner Code was adopted in 1974
and entered into force in 1983 through its ratification
by more than 70 countries. Signatories are required todivide the cargo transported according to the following
rule: 40 percent for ships belonging to the exporting
country, 40 percent for ships belonging to the importing country, and 20 percent for ships belonging toother countries.
37. Marín and Sicotte (2001) provide historical evidence of how the stock returns of ocean lines respondto anticipated changes in the legal treatment of exclusive contracts.
38. See Trujillo and Nombela 1999.
39. For a more detailed description of port ownership and management structures, see World Bank 2001a.
40. See World Bank 2001b.
41. See World Bank 2000.
42. These shares were computed from operating
revenue data published in the Statistical Yearbook of
the International Civil Aviation Organization. They
refer to the revenue of scheduled airlines, which in1996 accounted for more than 97 percent of all carrier
revenue.
43. With some exceptions, chartered air services
remain outside the scope of the bilateral ASAs. Theirauthorization remains largely at the discretion of individual countries; airlines must satisfy the charter requirements of both the origin and destination countries
before commencing services.
44. First and second air freedoms grant the right tofly over another country’s territory or to land in another country for nontraffic purposes such as refuelingor maintenance. Sixth freedom rights are a combination of two sets of third and fourth freedom rights—
they allow an airline of one country to carry traffic between two other countries via its own country.
45. See WTO 1998b.
46. See, for example, Dresner and Tretheway 1992,
Gillen and others 1999, Gonenc and Nicoletti 2000,
and Productivity Commission 1998.
47. For example, Brueckner and Spiller (1994) simulate the effect of industry consolidation based on
structural estimates of cost and demand parameters inT R A N S P O R T

the U.S. domestic market. They find that a merger of
two carriers who share the same hub results in a fareincrease for passengers traveling on routes where previously only the merging carriers operated. Fares onroutes that remain competitive after the merger, however, fall, indicating that density gains compensate forthe loss of competition. Because the merger leads to a
substantial increase in total airline profit, its net welfare effect is positive.
48. A recent study on global airline alliances concludes that, while the existing alliances are not stableenough to threaten competition of global airline markets, individual alliances may be able to dominate certain hubs or even city pairs (Laaser and others 2000).
49. For example, one study on container transport in
China identified ineffective competition for freight forwarding services—with 80 percent of the market being
controlled by two state-owned enterprises—as a reason
for limited inland container use (World Bank 1996).
Similarly, entry restrictions in the provision of third
party logistics providers in Brazil are found to adversely
affect Brazil’s distribution economy (World Bank 1997).
50. The exemptions from competition law in the
United States and the European Union are arguably
accompanied by a strong regulatory framework andmechanisms that monitor competitive conditions in theaffected transport markets. At the same time, the interests of foreign consumers are either not or only marginally taken into account by authorities in these countries.
51. See Mattoo 2001.
52. See WTO 1998b.

References
Amjadi, Azita, and A. J. Yeats. 1995. “Have Transport
Costs Contributed to the Relative Decline of SubSaharan Exports?” Policy Research Working Paper No. 1559. World Bank, Washington, D.C.
Atinc, Tamar Manuelyan. 1997. Sharing Rising Incomes: Disparities in China. Washington, D.C.:
World Bank.
Audige, Michel. 1995. “Maritime Transport Serving
West and Central African Countries: Trends andIssues.” Sub-Saharan Africa Transport Policy Program (SSATP), Working Paper No. 16. World
Bank, and Economic Commission for Africa, Washington, D.C.
Brueckner, Jan K., and P. T. Spiller. 1994. “Economies
of Traffic Density in the Deregulated Airline Industry.” The Journal of Law and Economics 37(2): 379–415.
Christie, Iain T., and D. E. Crompton. 2001. “Tourism
in Africa.” Africa Region Working Paper Series

S E R V I C E S :R E D U C I N G

B A R R I E R S

T O

T R A D E

No. 12. World Bank. [available at http://www.
worldbank.org/afr/wps/wp12.htm]
Council of the European Union. 1999. Official Journal
L 115, 04/05/1999: 1–4.
Dresner, Martin E., and M. W. Tretheway. 1992.
“Modelling and Testing the Effect of Market
Structure on Price: The Case of International Air
Transport.” Journal of Transport Economics andPolicy 26 (2): 171–84.
European Union. 1999. “Community Legislation in
Force.” Document No. 393D0082. [available at
http://europa.eu.int/eur-lex/en/lif/dat/1993/en_
393D0082.html]———. 2000. “Proceedings of the Court of Justice andthe Court of First Instance of the European Communities.” [available at http://curia.eu.int/en/act/
act00/0009en.htm]
Estache, Antonio. 1999. “Privatization and Regulationof Transport Infrastructure in the 1990s: Successes and Bugs to Fix for the Next Millennium.”
World Bank, Washington, D.C. [available at
http://www.worldbank.org/wbi/regulation/pdfs/
2248bugstofix.pdf] Processed.
Fay, Marianne. 2000. “Financing the Future: Infrastructure Needs in Latin America, 2000–05.”
World Bank, Washington, D.C. Processed.
Fink, Carsten, A. Mattoo, and I. C. Neagu. 2001.
“Trade in International Maritime Services: How
Much Does Policy Matter?” Policy Research Working Paper No. 2522. World Bank, Washington,
D.C.
Gausch, Luis J., and J. Kogan. 2001. “Inventories in
Developing Countries: Levels and Determinants,
a Red Flag on Competitiveness and Growth.”
World Bank, Washington, D.C. Processed.
Geraci, Vincent J., and W. Prewo. 1977. “Bilateral
Trade Flows and Transport Costs.” Review of
Economics and Statistics 59(1): 67–74.
Gillen, David, R. Harris, and T. H. Oum. 1999. “A
Model for Measuring Economic Effects of Bilateral Air Transport Liberalization.” Working Paper No. 99-08. Wilfrid Laurier University, Waterloo, Ontario, Canada. Processed.
Gonenc, Rauf, and G. Nicoletti. 2000. “Regulation,
Market Structure and Performance in Air Passenger Transportation.” Economics Department Working Paper No. 254. Organisation for Economic
Co-operation and Development, Paris.
Graham, Edward, and E. Wada. Forthcoming. “Foreign Direct Investment in China: Effects on
Growth and Economic Performance.” In Peter
Drysdale, editor. Achieving High Growth: Experience of Transitional Economies in East Asia.
Oxford: Oxford University Press.

125

G L O B A L

E C O N O M I C

P R O S P E C T S

Hanson, Gordon H. 1998. “North American Economic Integration and Industry Location.” Oxford Review of Economic Policy 14 (2): 30–44.
Hummels, David. 1999a. “Toward a Geography ofTrade Costs.” University of Chicago. Processed.
———. 1999b. “Have International Transportation
Costs Declined?” University of Chicago. Processed.
———. 2000. “Time as a Trade Barrier.” Purdue University, W. Lafayette, Ind.
International Civil Aviation Organization. Various issues. Statistical Yearbook. Montreal, Canada.
Keller, Wolfgang. 2001. “The Geography and Channels of Diffusion at the World’s Technology Frontier.” University of Texas. Processed.
Laaser, Claus-Friedrich, H. Sichelschmidt, R. Soltwedel, and H. Wolf. 2000. “Global Strategic Alliances in Scheduled Air Transport—Implications
for Competition Policy.” Kiel Discussion Paper
No. 370. Kiel Institute of World Economics,
Germany.
Lakshmanan, T.R. 2001. “Transport and Trade in
Mercosur.” In T. R. Lakshmanan, U. Subramanian, William P. Anderson, and F. A. Léautier, editors, Integration of Transport and Trade Facilitation. Washington, D.C.: World Bank.
Limão, Nuno, and A. J. Venables. 1999. “Infrastructure, Geographical Disadvantage, and Transport
Costs.” Policy Research Working Paper No. 2257.
World Bank.
Marín, Pedro L., and R. Sicotte. (2001). “Exclusive
Contracts and Market Power: Evidence from
Ocean Shipping.” CEPR Discussion Paper No.
2828. London, United Kingdom.
Mattoo, Aaditya. Forthcoming. “The Maritime Negotiations in the WTO.” In Trade Policy for Developing Countries in a Global Economy. Washington, D.C. World Bank.
Naughton, Barry. 2001. “Problems of Lagging Regionsin China.” Background Paper submitted to theWorld Bank Beijing Resident Mission.
Obstfeld, M., and K. Rogoff. 2000. “The Six Major
Puzzles in International Macroeconomics: Is
There a Common Cause?” NBER Working Paper
No. 7777. Cambridge, Mass.
Pálsson, Gylfi. 1997. “Containerized Maritime Trade
Between West Africa and Europe: Multiple Portsof Call versus Hub-and-Spoke.” World Bank,
Washington, D.C. Processed.
Productivity Commission. 1998. “International Air
Services.” Inquiry Report No. 2. Australian Productivity Commission, Canberra, Australia.
Radelet, Steven, and J. Sachs. 1998. “Shipping Costs,
Manufactured Exports, and Economic Growth.”126

Harvard Institute for International Development.
Processed.
Redding, Stephen, and A. J. Venables. 2001. “Economic Geography and International Inequality.”
Centre for Economic Performance Discussion Paper No. 495. London School of Economics.
Rose, Andrew K. 2000. “One Money, One Market:
The Effect of Common Currencies on Trade.”
Economic Policy 15 (30): 7–46.
Subramanian, Uma. 2001. “Transport, Logistics, andTrade Facilitation in the South Asia Subregion.”
In T. R. Lakshmanan, Uma Subramanian, William P. Anderson, and Frannie A. Léautier, editors. Integration of Transport and Trade Facilitation Washington, D.C.: World Bank.
Thoen, Ronaldt, Steven Jaffee, Catherine Dolan, andLucy Waithaka. 2000. “Equatorial Rose: The
Kenyan-European Cut Flower Supply Chain.”[Available at http://www1.worldbank.org/wbiep/
trade/c_papers/Roses2KenyaSupplychain.pdf].
Processed.
Trujillo, Lourdes, and Antonio Estache. 2001. “Surfing
a Wave of Fine Tuning Reforms in Argentina’s
Ports.” World Bank, Washington, D.C.
Trujillo, Lourdes, and Gustavo Nombela. 1999. “Privatization and Regulation of the Seaport Industry.” Policy Research Working Paper No. 2181,
World Bank, Washington, D.C.
UNCTAD Review of Maritime Transport. Geneva.
U.S. Bureau of Census. Washington, D.C.
Vamvakidis, Athanasios. 1998. “Regional Integrationand Economic Growth.” The World Bank Economic Review 12(2): 251–70.
Venables, Anothony J., and Nuno Limão. 1999. “Geographical Disadvantage: a Heckscher-Ohlin-vonThunen Model of International Specialization.”
Policy Research Working Paper No. 2256. World
Bank, Washington, D.C.
Witt, Stephen F., and Christine A. Witt. 1995. “Forecasting Tourism Demand: A Review of Empirical
Research.” International Journal of Forecasting
11: 447–75.
World Bank. 1996. “Container Transport Services andTrade: Framework for an Efficient Container
Transport System.” Report No. 15303-CHA.
———. 1997. “Multimodal Freight Transport: Selected Regulatory Issues.” Report No. 16361-BR.
———. 2000. “The Evolution of Ports in a Competitive
World.” Port Reform Toolkit, Module 2. [available at http://www.worldbank.org/transport/ports/
toolkit.htm].
———. 2001a. “Alternative Port Management Structures and Ownership Models.” Port Reform Tool-T R A N S P O R T

kit, Module 3. [available at http://www. worldbank.
org/transport/ports/toolkit.htm].
———. 2001b. “Labor Reform.” Port Reform Toolkit,
Module 7. [available at http://www.worldbank.
org/transport/ports/toolkit.htm].
World Trade Organization. 1998a. “Maritime Transport Services.” Background Note by the Secretariat. (S/C/W/62).

S E R V I C E S :R E D U C I N G

B A R R I E R S

T O

T R A D E———. 1998b. “Air Transport Services.” Background
Note by the Secretariat. (S/C/W/59).
———. 2000. “Communication from the European
Community and its Member States.” (WT/WGTCP/W/140).
Yeats, Alexander. 1981. Shipping and Development
Policy: An Integrated Assessment. New York:
Praeger Scientific Publishers.

1275Intellectual Property: Balancing
Incentives with Competitive AccessIntellectual property rights can promote
development—
One of the most fundamental changes in global
commercial policy set out by the Uruguay
Round of trade negotiations was the commitment by all World Trade Organization (WTO)
Members to adhere to the requirements of theAgreement on Trade-Related Intellectual Property Rights (TRIPS). TRIPS defines minimum
standards of protection for intellectual property
rights (IPRs) and their enforcement. IPRs seek
to balance the incentives necessary to encourage future innovations (such as the ability to recoup the costs and risks of development, andstill earn a profit) against the desire to provide
wide access to those products in a competitivemarket. Because the overwhelming majority
of intellectual property—new inventions, proprietary commercial information, digital entertainment products, software, trade names, andthe like—is created in the industrialized countries, TRIPS decidedly shifted the global rulesof the game in favor of those countries. Nonetheless, TRIPS may lead to several long-run
benefits for countries that take advantage of its
standards in an appropriate and flexible manner, while complementing those standards withbroader development and competition regimes.

—but should be appropriate to local
capacities and benefits—
Developing countries went along with the TRIPS
agreement for a variety of reasons, ranging fromthe hope of additional access to agriculturaland apparel markets in rich nations, to an ex-

pectation that stronger IPRs would encourage
additional technology transfer and innovation. However, the promise of long-term benefits seems uncertain and costly to achieve inmany nations, especially the poorest countries. In addition, the administrative costs andproblems with higher prices for medicines andkey technological inputs loom large in theminds of policy makers in developing countries. Many are pushing for significant revision of the agreement.
There are reasons to believe that the enforcement of IPRs has a positive net impact
on growth prospects. On the domestic level,
growth is spurred by higher rates of innovation—although this tends to be fairly insignificant until countries move into the middleincome bracket. Nonetheless, across the range
of income levels, IPRs are associated withgreater trade and foreign direct investment(FDI) flows, which in turn translate into fasterrates of economic growth.

—so the poorest countries may requireassistance and time—
The most appropriate level of IPRs enforcement therefore varies by income level. In particular, poorer countries—which are less able
to absorb the associated costs, and least likely
to benefit from domestic innovation—mayfind it advantageous to stage implementationof some aspects of IPRs. Since industrial countries are the main beneficiaries of IPRs, andgiven the challenges facing developing countries, the former may find it in their interest to129G L O B A L

E C O N O M I C

P R O S P E C T S

provide assistance to the poorest countries forthe implementation of TRIPS.

—and they also may require
special consideration in the caseof essential medicines
The least-developed countries face critical needs
for access to new drugs and vaccines that may
be developed for treating human immunodeficiency virus/acquired immune deficiency syndrome (HIV/AIDS), malaria, tuberculosis, andother diseases. Patent protection will raise incentives marginally for drug firms to invent suchtreatments but could also support considerably
higher prices. A mechanism needs to be found
to reward innovation in this area while providing new medicines to poor countries at low cost.

Intellectual property rights
and development
Rationale
At their most basic level, intellectual property
rights exist to strike a balance between theneeds of society to encourage innovation andcommercialization of new technologies, products, and artistic and literary works, on the one
hand, and to promote use of those items, on
the other. Intellectual property takes several
forms (box 5.1). The need for intellectual property protection arises from the fundamental
characteristics of information. It is often costly
to develop new technologies and products,
requiring considerable investment in researchand development (R&D) with uncertain payoffs. The investment extends further to thecosts of bringing new ideas to the marketplace.
These costs must be recovered through atemporary ability to set prices above marginal
costs of production. If an intellectual creation ispotentially valuable but easily copied and usedby others, there will be free riding by competitive rivals. Such behavior would quickly drive
the price to marginal production cost and prevent the inventor from recouping investment
costs, thereby discouraging innovation. Society
has a dynamic interest in limiting free riding to130

benefit from the introduction of new products
and technologies. This goal is achieved by theexclusive market positions afforded by IPRs.
At the same time, society has an interest inpromoting widespread access to new products
and information. Countries therefore limit thescope and duration of protected exclusivity inorder to place goods into the public domain
after an adequate expected return has been
earned. There is an obvious tension between
invention and dissemination.
Despite the inherent difficulty of measurement,1 a growing body of empirical work suggests that IPRs, as represented by legislated
patent rights, influence international economic activity and growth performance.2
Like other economic policies, IPRs are chosen by governments in response to competinginterests. Thus the strength of intellectual
property protection depends on economic andsocial circumstances, which in turn affect perceptions of the appropriate tradeoff between
invention and dissemination. Historically,
countries have adopted stronger IPRs only
when domestic interests in their favor became
sufficiently strong to decide policy. This is further supported by the wide variation in standards across countries. The stronger the capabilities of a nation’s enterprises to develop
distinctive products and new technologies, thegreater the preferences of consumers for quality guarantees among similar products; thewider the markets in which artists wish to sell
their music and literature, and the easier it is tomisappropriate the returns to invention throughimitation, the more pronounced will be interests in protection.

Enforcement of rights increases
with income—Several stylized facts emerge from the literature about the level of development and IPRs.
First, countries with a high ratio of R&D ingross domestic product (GDP) or a high proportion of scientists and engineers in the labor
force have markedly stronger patent rights
than others. Clearly such countries desire toprotect returns to inventive activity.

I N T E L L E C T U A L

Box 5.1

AP R O P E R T Y

An overview of intellectual property rightst the broadest level, intellectual property has traditionally been divided into industrial property,
or inventions and identifying marks that are usefulfor industry and commerce, and artistic and literaryproperty, or works of culture. This distinction reflected a perception that cultural creations differedfundamentally from functional commercial inventions. However, this distinction has blurred considerably in the age of information technology and digitalproducts.
There are four primary forms of industrial property rights. First, a patent awards an inventor theright to prevent others from making, selling, or using
the protected product or process without authorization for a fixed period of time within a country. In
return, society requires that the application be published in sufficient detail to reveal how the technology
works, thereby increasing the stock of public knowledge. The minimum period of protection required
under TRIPS is 20 years from the date an application
is filed. Many countries recognize utility models or
petty patents, which award rights of shorter duration
to small, incremental innovations requiring someinvestment in design and development.
A second form is industrial designs which
protect the aesthetic aspects of a useful commercial
article. TRIPS requires that designs be protected fora minimum of 10 years.
A third mechanism includes trademarks andservice marks, which protect rights to use a distinctive mark or name to identify a product, service, orfirm. The fundamental objective of these marks is to
reduce consumer search costs and remove consumer
confusion over product quality and origin.
A related device is geographical indications,which certify that such products as wines, spirits,
and foodstuffs were made in a particular place andembody quality characteristics of that location.
Artistic, musical, and literary works are protected by copyrights, which grant exclusive rights tothe particular expression of the work for a periodof time, typically the life of the creator plus 50 years(70 years in the United States and the European
Union). Copyrights cover only expressions rather
than ideas, and therefore provide thinner protection
than patents. Rights extend to the duplication, display, performance, translation, and adaptation of theworks. The primary limitation on copyright protection stems from the fair-use doctrine, which defines
conditions under which copying for noncommercial
purposes is permitted.
TRIPS requires that computer programs beprotected, at least by copyrights, under the principlethat software code is a literary expression. However,countries may vary in the degree to which reverse
engineering of computer programs is permitted under
the fair-use doctrine.
Because computer programs may constitute acommercially useful process, a number of developed
countries permit firms to patent them. This policy ispushing patent protection more deeply into newareas, including methods of doing business on theInternet. A similar evolution explains the tendency
toward awarding patents for biotechnologicalresearch tools.
For some technologies sui generis, or special,protection regimes exist. One is the design of integrated computer circuits. These are more than literary
expressions, but the inventive step is often minimal,suggesting a compromise between patent and copyright. Indeed, a 10-year protection term is provided
and requires only novelty in expression. Another isplant breeders’ rights (PBRs), which permit developers of new, distinctive, and genetically stable seed varieties to control their marketing and use for a fixed
term. Many countries limit these rights by permitting
an exception for farmers to use seeds for subsequent
replanting, and for researchers to study the seeds.
Although not literally IPRs, a related area of
business regulation lies in defining the boundaries ofprotection for proprietary trade secrets of rival firms.
A production process or formula may be kept secretwithin the firm, but if a competitor learns the confidential information through legitimate reverse engineering, the originator has no rights to exclude its
use. Unfair competition includes such activities as
industrial espionage, inducing employees to reveal
trade secrets, and encouraging defection of technicalemployees to produce their own versions of a product based on proprietary information. However,there is considerable variability in such definitions
across countries.
Source: World Bank staff.

131

G L O B A L

E C O N O M I C

P R O S P E C T S

Second, the evidence suggests that interests
in encouraging low-cost imitation dominate
policy until countries move into a middleincome range with domestic inventive and absorptive capabilities.3 Only at high income
levels do patent rights become strongly protective. These findings may be explained by
the nature of technological development.
Least-developed countries devote virtually noresources to innovation and have little intellectual property to protect. As incomes andtechnical capabilities grow to intermediatelevels, some adaptive innovation emerges but
competition flows primarily from imitation.
Thus, the majority of economic interests prefer weak protection. As economies mature tohigher levels of technological capacity and demands shift toward higher-quality products,
domestic firms come to favor protective IPRs.
Finally, the strength of IPRs shifts upward at
the highest income levels (Evenson and Westphal 1997). Not only do legislated IPRs become stronger, but enforcement and compliance also rise with income levels.

—and with greater openness of trade
Third, countries that are more open to trade
tend to have stronger patent rights. This result
suggests that trade interacts positively withthe demand for intellectual property protection and, possibly, domestic innovative efforts.
Finally, the size of an economy, as measured
by absolute GDP, has no detectable correlation with patent rights. Thus, even in large developing countries such as India and China it
may be some time before patent rights are effectively enforced.

IPRs and international economic activity
In strengthening their IPRs regimes—either
unilaterally or through adherence to TRIPS—
developing countries may be able to attract
greater inflows of technology. The three channels through which technology is transferred
across borders include international trade ingoods and services, foreign direct investment,
and contractual licensing of technologies.

132

IPRs can boost trade volumes—
Imports of goods and services can transfer anddiffuse technology. For example, imports ofcapital goods and technical inputs could reduce
production costs and raise productivity. An important question is whether IPRs affect suchtrade flows. Maskus and Penubarti (1995,
1997) estimated changes in imports of manufacturing goods and high-technology manufactures that could be induced by stronger patentrights. A patent index from Rapp and Rozek(1990) was increased by various amounts fordifferent countries to reflect roughly the commitments required by TRIPS. The anticipatedimpacts on trade volumes depended on the extent of patent revisions, market size, and reductions in the imitation threats from complying
with TRIPS. Estimated effects on trade ranged
from small impacts in the United States andSwitzerland, which were not required to undertake much legal revision, to substantial increases in imports in China, Thailand, Indonesia, and Mexico, which must adopt stronger
rights.4 Mexico updated its IPRs regime earlybecause of commitments made under NAFTA.
The study found significant impacts of
IPRs change on import volumes of developing
countries. For example, there was an anticipated increase in manufactured imports into
Mexico of $6.3 billion, amounting to 9.4 percent of its real manufactured imports in 1995.
Thus, evidence suggests that the long-run impacts could be substantial. The estimated increase in China’s high-technology imports was$2.8 billion, or just under 2 percent of its total
imports in 1995. Note that Coe, Helpman,and Hoffmaister (1997) found that total factor productivity (TFP) is enhanced in developing nations through such imports. In principle
there could be a notable bonus to productivity
performance.
However, most of the largest predicted impacts were in nations with strong imitation
capacities, such as Argentina and Brazil. In
contrast, India and Bangladesh would experience relatively weak, though positive, trade
impacts.5

I N T E L L E C T U A L—and attract FDI inflows and licenses

Table 5.1

A primary channel of technology transfer is
FDI. IPRs should have varying importanceacross sectors with respect to encouraging
FDI. Investment in low-technology goods andservices should depend less on the strength of
IPRs and more on input costs and market opportunities. Investors with technologies thatare costly to imitate also would pay little attention to local IPRs. However, firms with easily copied products and technologies, such as
pharmaceuticals and software, would be quite
concerned about the ability of the local IPRs
system to deter imitation. Firms considering
investing in a local R&D facility would pay
particular attention to protection of patents andtrade secrets (Mansfield 1994, 1995).
Thus, the strength of IPRs and the ability to
enforce contracts could have important effects
on decisions by multinational firms in certain
sectors on where to invest and whether totransfer advanced technologies. Table 5.1 reports results from the econometric estimationof a model of FDI and patent rights (Maskus
1998).6 Using the Ginarte-Park index, there
was a negative elasticity of FDI assets with respect to patents in high-income economies, but
a strongly positive elasticity among developing
economies. Applying these impacts to anticipated changes in patent laws from TRIPS generates the estimated impacts on asset stocks incolumn 2. Reductions in asset stocks in Japanand Canada would amount to over $2 billion,
for example.7 However, FDI assets would risesignificantly in Brazil, Mexico, Chile, and Indonesia as a result of stronger patents. Indeed,
the increase in the Mexican FDI assets would
be 2.6 percent of the 1994 stock of U.S.-owned
assets in that country, and in Brazil that would
be 7.4 percent. Note that these figures related
solely to U.S.-owned assets. If multinationalfirms headquartered in other developed nations
were to react similarly, there would be evenlarger increases in overall inward FDI stocks.
Other studies of FDI and intellectual property protection bear mixed messages. Lee andMansfield (1996) statistically related the in-

Estimated changes in Payments for Technology and in FDI
Flows for selected countries for full application of TRIPS(millions of 2000 dollars)

P R O P E R T Y

TRIPS: who gains?

Country

United States
Germany
Switzerland
FranceAustralia
Ireland
New ZealandPortugal
GreeceNetherlands
Spain
Japan
United Kingdom
CanadaPanamaIsraelColombia
South Africa
Rep. of Korea
MexicoIndia
BrazilArgentina
Chile
China
IndonesiaNet
patentrents

U.S.-owned
FDI Assets

U.S. receipts from
UnaffiliatedRoyalties andLicense Fees

19,083
6,768
2,000
3,326
1,097
18
–2,204–282–7,746241–4,716
5,673
2,968
–574
n/a
–3,879n/a–11–15,333–2,550
–903
–530
n/a
n/a
–5,121n/an/a–1,180
–102
n/a
–279
–267
–83
97
51
–1,503–341–2,533–1,369–2,396
309
6
1,190
25
270
3,465
139
3,505
721
1,062
687
1,966

n/a
100
0
n/a
2
14
4
n/a
n/a
32
47
783
29
69
n/a
0.6
n/a
11
388
148
63
124
64
n/a
n/a
181

Source: World Bank staff and Maskus (2000a). Figures for net
patent rents update McCalman’s (2001) coefficients applied to1995 data. Calculations for the stock of FDI assets use coefficients from an econometric analysis of the impacts of patentrights on patent applications, affiliate sales, exports, and affiliate assets, using data over 1986–94 for the foreign operationsof U.S. majority-owned manufacturing affiliates in several developed and developing countries. These coefficients were applied to 1994 asset stocks and updated to year 2000 dollars.
Computations for royalties and license fees use coefficientsfrom an econometric analysis of the effects of patent rights
on U.S. licensing volumes in manufacturing for 26 countries
in 1985, 1990, and 1995. These coefficients were applied to1995 royalty fees and updated to year 2000 dollars.

vestment decisions of U.S. multinational enterprises to their perceptions of the weaknesses of IPRs in a sample of developing countries. They found that FDI is negatively
affected by weak protection. Using firm-level
data, Smarzynska (2001) discovered that foreign investors considering operations in the
countries of Eastern Europe and the Former

133

G L O B A L

E C O N O M I C

P R O S P E C T S

Soviet Union pay attention to patent rights. In
particular, investment in technology-intensive
sectors is deterred by weak protection; in all
sectors weak protection discourages investment in production facilities but does notdeter investment in distribution. Smith (2001)
also found that international FDI flows are
positively related to IP protection. Using a different econometric approach, however, Fink
(1997) could not detect a significant impactof patent rights on various measures of FDI
activity by U.S. or German multinational enterprises. Thus, there remains statistical ambiguity about the nature of the relationships
between IPRs and FDI, though most studies
suggest it is positive.
Yang and Maskus (2001) studied technology licensing. The figures in the last column oftable 5.1 update their results of estimating theimpacts of international variations in patentrights on the volume of unaffiliated royalties
and licensing fees (a measure of arm’s length
technology transfer) paid to U.S. firms. Japan
had a large absolute response, reflecting theimportance of licensing in the Japanese economy. However, large impacts were also discovered in the Republic of Korea, Mexico,
Brazil, and Indonesia. Indeed the analysis suggested that licensing volumes would double in
Mexico and India, and would go up by a factor of nearly five in Indonesia.
The findings discussed here are econometric predictions of long-run impacts of patent
reforms on imports, FDI, and market-based
technology transfer. The figures are not definitive but do support the view that stronger
IPRs could have potentially significant andpositive impacts on the transfer of technology
to developing countries. This conclusion isstrongest for middle-income developing countries. The results are less positive for the leastdeveloped economies, where the potential formarket-power effects looms larger.

IPRs and innovation indeveloping countries
Developing nations also hope that stronger
intellectual property protection could encour-134

age domestic innovation, product development,
and technical change. It is possible to structure
IPR systems in ways that promote dynamic
competition through technology adaptation,
learning, and follow-on innovation. However,many developing countries have regimes thatfavor imitation of foreign products and technologies and discourage domestic technicalchange. Indeed, inadequate IPRs can limit innovation even at low levels of economic development. This is because much invention andproduct development are aimed at local markets and could benefit from domestic protection of patents, utility models, and trade secrets(see box 5.1). In the vast majority of cases, invention involves minor adaptations of existing
technologies and products. The cumulative impacts of these small inventions can be critical for
growth in knowledge and productive activity.
An example is that protection for utility
models (or “petty patents”)—minor adaptations to existing technologies—improved
productivity in some countries (Evenson andWestphal 1997). In Brazil, utility models
helped domestic producers gain a significant
share of the farm machinery market by encouraging adaptation of foreign technologies
to local conditions. Utility models in thePhilippines encouraged successful adaptive invention of rice threshers.
In another example, the Japanese patent system (JPS) affected postwar Japanese technicalprogress (Maskus and McDaniel 1999). The
JPS in place over the period 1960–93 was designed to encourage incremental and adaptive
innovation and diffusion of technical knowledge into the economy. It stimulated large numbers of utility model applications, which werebased in part on published prior applications
for invention patents. In that study utility models had a strongly positive impact on real TFP
growth over the period, because they were an
important source of technical change and information diffusion. It is interesting to note that asJapan has become a global leader in technology
creation, its patent system has shifted awayfrom encouraging diffusion and more toward
protecting fundamental technologies.

I N T E L L E C T U A L

If constructed well, IPRs also stimulate acquisition and dissemination of new information. Patent claims are published, allowing
rival firms to use the information in them todevelop further inventions. A recent study on
trademark use in Lebanon suggests that innovation through product development andthe entry of new firms is motivated in part bytrademark protection, even in poor nations(Maskus 2000b). Firms in the Lebanese apparel industry are capable of designing clothing of high quality and style aimed at Middle
Eastern markets. Their efforts have been frustrated by trademark infringement in Lebanon
and in neighboring countries. Firms in thefood products sector suffered from rivals passing off goods under their trademarks. The
problem has restrained attempts to build markets for Lebanese foods in the Middle East andelsewhere. Related difficulties plagued innovative producers in the cosmetics, pharmaceuticals, and other sectors. Thus, product development and enterprise growth have been stifled bytrademark infringement targeted largely at domestic enterprises.8
Copyright protection can induce investments
in creative activities and also stimulate innovation. Where protection is weak, such copyrightindustries as publishing, entertainment, andsoftware are dominated by counterfeiting rather
than domestic creation. Thus, lower-quality
copies are widely available, but the economy’s
cultural and technological development may behampered. For example, Lebanon has a small
but vibrant film and television industry that
could successfully export to neighboring economies if those countries adopted stronger copyright protection (Maskus 2000b). In the face ofdifficulties in expanding their markets, Chinese
software enterprises are now playing a role inpromoting enforcement (Maskus, Dougherty,
and Mertha 1998). Finally, work in such countries as Jamaica and Senegal shows that weak
copyrights and the absence of supporting institutions, such as professional collection societies,
significantly reduce incentives for local musicians to record and market their compositions(World Bank 2000).

P R O P E R T Y

At the same time, in many poor countries,
the effectiveness of all types of intellectual
property instruments is held back by inadequate administration and enforcement procedures. These inadequacies may be due to corrupt and inflated bureaucracies or weaknesses
in the legal system at large—frequently affecting also the security of real and physical property rights. Hence, a weak overall governancestructure typically poses one of the biggest
challenges to harnessing the positive contribution IPRs can make to the development
process.

IPRs can boost growth prospects
The analysis reviewed here suggests that selecting appropriate IPRs systems could boost
economic growth. History does not provide
strong guidance on this hypothesis. At different times and in different regions of the world,countries have realized high rates of growthunder varying degrees of IPRs protection.
Two recent empirical studies have considered this question in a cross-country econometric framework. Gould and Gruben (1996)
related economic growth rates across many
countries to a simple index of patent strengthand other variables. They found no strong direct effects of patent rights on growth, but there
was a significantly positive impact when thoserights were interacted with a measure of openness to trade. The impact of stronger patentlaws in open economies was to raise growth
rates by 0.66 percent, on average. This suggeststhat market liberalization and IPRs jointly increase growth.
Park and Ginarte (1997) studied how IPRs
affect growth and investment. They found no
direct relation between patent strength andgrowth, but there was a strong and positive
impact of patent rights on physical investment
and R&D spending, which in turn raised growth
rates.
While these results are encouraging, the link
between IPRs and long-term economic growth
remains poorly understood, and is likely to remain controversial. More research is necessary
to provide better guidance to policymakers.

135

G L O B A L

E C O N O M I C

P R O S P E C T S

Costs of enforcing IPRs

W

hile developing countries may enjoy
long-run gains from strengthening theirsystems, the transition to stronger protection
involves short-run costs that are not trivial.

Administrative costs
It is costly to develop the administrative and enforcement mechanisms necessary to support amodern system of intellectual property protection. Costs include upgrading offices for registering and examining patents and trademarks,
and for accepting deposits of plant materials;
training examiners, judges, and lawyers; improving courts to manage intellectual property
litigation; and training customs officers and undertaking border and domestic enforcement actions. The United Nations Conference on Tradeand Development (UNCTAD 1996) provided
some estimates of the administrative costs ofcomplying with TRIPS in various developing
countries. In Chile, additional fixed costs fromthis upgrade were estimated at $718,000 andannual recurrent costs at $837,000. Egyptian
fixed costs would be perhaps $800,000, withadditional annual training costs of around $1
million. Bangladesh anticipated one-time costsof administrative TRIPS compliance (drafting
legislation) amounting to $250,000, and over$1.1 million in annual costs for judicial work,
equipment, and enforcement efforts. If training
costs were included it is likely that a comprehensive upgrade of the IPRs regime in the poorest countries could require an up-front expenditure of $1.5 to $2 million, plus recurrent costs.
Finger and Schuler (1999) report World Bank
surveys finding that these costs could be far
higher.
Given other pressing needs in education,
health, and policy reform it is questionable
whether the least-developed countries would be
willing to absorb these costs, or indeed whether
they would achieve much social payoff frominvesting in them. Moreover, note that poor
countries are extremely scarce in trained administrators and judges, suggesting that one of thelargest costs would be to divert scarce professional and technical resources out of potentially136

more productive activities. Indeed, in manypoor countries, devoting more resources to theprotection of tangible property rights, such as
land, could benefit poor people more directly
than the protection of intellectual property.
Three factors could help offset these costs.
First, intellectual property offices may charge
fees to defray their costs. Fees should be set
to meet the innovation and commercializationneeds of each country. Second, poor countries
may petition for technical and financial assistance from industrial countries and fromthe World Intellectual Property Organization(WIPO) and the WTO. Unfortunately, the resources available are small in relation to theunderlying needs. Third, authorities may takeadvantage of cooperative international agreements to reduce administrative costs. Membership in the Patent Cooperation Treaty, forexample, provides significant economies because examiners may read the opinions madeby major patent offices about novelty and industrial applicability, rather than undertake suchtechnical examinations themselves.

Rent transfers
Patents are overwhelmingly owned by inventors in the industrialized countries. For example
in Mexico in 1996, only 389 patent applications came from domestic residents, while over
30,000 came from foreign residents, mostly in
the United States and the EU. Brazil’s domestic
applications were just 8 percent of total applications in that same year. In the poorest countries virtually no patents are granted to domestic residents. As patent rights are strengthened,
this relative imbalance could be reversed tosome degree, particularly in countries that develop innovation systems and inventive enterprises. However, inventors from developed countries are expected to apply for most patents forthe foreseeable future.
As patents and trade secrets are better protected, imitation costs rise and the ability ofpatent holders to set higher prices and license
and royalty fees is enhanced. Thus, one impactof TRIPS will be to transfer economic rents fromtechnology importers to technology developers.

I N T E L L E C T U A L

Suggestive evidence is provided in table 5.1.
Firms own patents in various countries, thevalues of which depend on local protection
and market size. In an interesting study, McCalman (2001) used an econometric model tocompute the value of these patents in 1988.
World Bank staff used his methods and regression coefficients to compute the values of international patents among 28 nations in 1995,
using the Ginarte-Park patent index, patentapplications, and GNP levels. Note that bothpatent applications and GNP had reached far
higher levels in the later year, thereby raising
the value of patent portfolios. To assess thechange in patent rents associated with stronger
IP protection, the index for each country wasincreased to reflect obligations accepted in the
TRIPS Agreement.
The figures in the first column of table 5.1
show that overwhelmingly the United States
would gain the most income in terms of static
rent transfers, with a net inflow of some $19.1
billion per year. U.S.-headquartered firms
owned numerous patents in many countries
that were required by TRIPS to strengthen
their intellectual property protection, while
U.S. law was subject to little change. Germany
would earn an additional net income of $6.7
billion on its patent portfolio. Many countries
would experience a rising net outflow of patent rents because they tend to be net technology importers. Korea would register the largest net outward transfer of some $15.3 billion
because of the large rise in volume of patents
registered there. Developing countries also
would pay more on their patent stocks, with
China experiencing a net outward transfer ofaround $5.1 billion per year. These calculations are static and ask only what the additional income on existing patents would havebeen under TRIPS. They suggest that TRIPS
could have a significant impact on net incomes
earned from foreign patents.

Prices of patented drugs
By January 1, 2005, developing countries must
provide patents for new pharmaceutical products and most have already implemented pa-

P R O P E R T Y

tents or exclusive marketing rights. Nothingis more controversial in TRIPS. It is conceivable that patent protection will increase incentives for R&D into treatments for diseases ofparticular concern to poor countries. However
because purchasing power is so limited in thepoorest countries, there is little reason to expect a significant boost in such R&D. Accordingly, many developing countries see little potential benefit from introducing patents.
In contrast, potential costs could be significant. Pharmaceutical supplies in many developing countries often come from domestic or
imported generic competition. Such competition for drugs on patents in the industrializedcountries helps sharply lower drug costs in developing nations with active pharmaceuticalindustries. In the future, enterprises in thesecountries must wait until patent expiration before they can compete with generic versions,or else must produce under license to patent
holders. It should be noted that if firms choose
not to register patents in certain countries, thisissue will not arise.
There is some scope for stronger patents toencourage local firms to develop patentabledrugs themselves. Several Indian enterprises
claim to be developing treatments that may
be patentable abroad, although they currently
refuse to place them on the Indian market forfear of imitation.9 In most cases, however,
local enterprises will come under pressure toclose down or form alliances with larger firms,
resulting in a concentration of the industry.
There is evidence that patents generate considerably higher prices for protected drugs thanfor copied and generic drugs (Lanjouw 1998;
Fink 2001). Watal (1999) computed that static price impacts of patent coverage in India
could raise average patented drug prices by atleast 26 percent from a 1994 base.
In light of this possibility, developing countries need to gird themselves with policies that,while consistent with TRIPS, bear potential tomoderate the price impacts of new patents. Recent attempts by South Africa and Brazil to push
the boundaries of TRIPS in this regard have
proven contentious, as discussed in box 5.2.

137

G L O B A L

E C O N O M I C

P R O S P E C T S

Box 5.2 Pharmaceutical policies and the limitsof TRIPSI

n response to TRIPS, South Africa and Brazil recently introduced new laws bearing directly on theability of those countries to react to price increases
that may emerge from patents. The greatest spur tothese attempts to limit patent rights came from a desire to procure AIDS drugs at affordable prices inorder to manage that enormous health-care crisis.
Both laws are controversial.
South African Medicines Law
In November 1997 South Africa enacted significant
amendments to the Medicine and Related Substances
Control Act. The amendments permit the healthminister to revoke pharmaceutical patent rights inSouth Africa if he deems the associated medicines to
be too expensive. They further empower the ministerto order compulsory licensing if the patentee engages
in abusive practices, defined basically as a failure tosell a drug in adequate amounts to meet demand, ora refusal to license the product on reasonable terms
so that domestic firms may meet demand. They also
permit parallel importation (imports of original or
generic versions without the authorization of theSouth African patent holder) of drugs, and allow thehealth minister to override regulatory decisions concerning the safety and registration of medicines. The
law requires pharmacists to employ generic substitution (prescribe generic versions of patented drugs)
unless the doctor or patient forbids it, sets limits on
pharmacy markup rates, and bans in-kind inducements from drug manufacturers to physicians.
While it may be a heavy dose of regulation,
South Africa’s law is probably consistent with TRIPS(Abbott 2000). While some legal scholars claim thatpatent rights necessarily extend to an ability to preclude parallel imports, the bulk of opinion is that
Article Six of TRIPS provides full latitude for eachcountry to choose its own policy on exhaustion. Beyond this issue, Article 31 of TRIPS provides ample
grounds under which compulsory licenses may be issued, subject to certain conditions (Watal 2001). In
particular, licensing may be compelled where aprospective user has failed to achieve a license fromthe patent holder on reasonable commercial terms
within a reasonable period of time, so long as
market-based compensation is paid. Compulsory

138

licenses may be issued without observing even these
constraints in cases of national emergency. Finally,
the price-control provisions of the South African
amendments do not seem to be restrained by TRIPS,
which does not address domestic health regulation.
Brazilian Industrial Property Law
Brazil passed an industrial property law (Law No.
9,279) that came into effect in 1997. The law updated most aspects of Brazil’s industrial property
regime to comply with TRIPS. It provides patents forpharmaceutical products as required. However, it
permits the issuance of compulsory licenses in cases
where patent holders choose to supply the market
through imports rather than local production. Thatis, Brazil’s law does not recognize imports as amethod for meeting its “working requirements” on
the Brazilian market. The legislation explicitly defines “failure to be worked” as “failure to manufacture or incomplete manufacture the product” or“failure to make full use of the patented process.”
While the Brazilian industrial property law refers to
all patents, its most aggressive use is aimed at transferring production of AIDS drugs to domestic firms
and government agencies in order to reduce theirprices below those on the U.S. and European markets. Media reports indicate that this active intervention has dramatically reduced treatment costs in
Brazil.10 In combination with prevention programsand effective methods for distribution and clinicalstays, the country has limited AIDS mortality to far
lower levels than those in Sub-Saharan Africa.
It remains to be seen whether Brazil’s insistence
on local production as a working requirement may
be sustained within TRIPS. Because it applies to all
patented items and not solely to medicines, the law
may generate less sympathy among the WTO membership than the South African law, despite its evident value as a threat to bring down prices. In negotiating TRIPS, patent advocates strongly favored an
end to domestic production requirements, lending
support to the American view on their inconsistency.

Source: World Bank staff.

I N T E L L E C T U A L

Agricultural inputs
Under TRIPS, patents must be awarded toagricultural chemicals and biotechnological inventions, and effective protection must be provided for plant breeders’ rights (PBRs). Because
farming is the mainstay of economic activity
in many developing countries, policies that increase costs of key agricultural inputs could bedamaging. Plant strains bioengineered for pestand drought-resistance are of particular interest to many developing countries. Note thatplant patents preclude the breeder’s research
exemption and, unless explicitly allowed for in
the rules, also the farmer’s privilege to retain
seeds for replanting. Experience from Latin
America suggests that providing PBRs while
retaining this privilege does not much disadvantage farmers (Maskus 2000a).

Genetic materials and indigenous
knowledge
Because firms can attain patents in some industrialized countries on products developed
from plant and animal resources they findanywhere, incentives exist to extract such materials as sources for new drugs, food products, and cosmetics. New patents in developing countries will increase such incentives.
This “bioprospecting” raises several concerns.
First, foreign patents have been awarded to
products and formulas that were alreadyknown in the source countries, or were simple
improvements, preventing those with the original know-how from marketing abroad (Duranand Michalopoulos 1999). Second, genetic materials often do not bear adequate property
rights. Plants may be extracted from public
lands or from farms and villages that cannot
assert ownership or represent collective interests. The resources may be acquired withoutcompensation or attention to socially optimal
extraction rates.
There is much know-how in developing
countries among tribes, villagers, and other collective units about how to produce foodstuffs,
apparel designs, and artistic works. Because theknowledge is a collective good, and therefore of
uncertain ownership, it has proven difficult to

P R O P E R T Y

apply standard intellectual property tools to its
protection. Many such products and designs
have found their way into international commerce under protection in foreign countries,
however, as firms abroad copy and register them.
These problems point to a shortcoming in
TRIPS. That agreement makes it clear that inventions from genetic resources are patentable
except in unusual circumstances. However, it
is silent on the issue of how nations may regulate their extraction, an issue in which IPRs
are only one consideration. Similarly, it contains no provisions for defining and protecting
rights in collective knowledge. It is important
for the global community to work out appropriate mechanisms for ensuring the appropriate valuation of resources and knowledge andfor effecting payments that both conserve thematerials and provide incentives for efficientinnovation.

IPRs policies for promoting
development

Despite the significant costs, stronger intellectual property protection could produce
gains in the long run through greater domestic
innovative activity and cultural creation, profitable international exploitation of that activity,
enhanced structural transformation, and increased technology transfer. These gains are
more likely to materialize if countries adopt
standards and supporting policy regimes that
promote competitive processes on their markets.

IPRs standards at varying levelsof development—
TRIPS prevents countries from discriminating
between domestic and foreign firms in thetreatment of IPRs. Beyond this basic stipulation, however, TRIPS contains considerable
flexibility in implementing and enforcing standards that are conducive to development. One
important principle of a pro-competitive development of IPRs policy is that the standards
adopted tilt the balance in favor of secondcoming rival firms. A second principle is thatgovernments should not discourage inward

139

G L O B A L

E C O N O M I C

P R O S P E C T S

transfer of technology and should not suffocate innovative efforts of domestic firms. The
essential goal is to move local entrepreneurs
from “free-riders” to “fair-followers” in Reichman’s apt phrase.11
Table 5.2 divides developing countries into
three types and lists IPRs standards that arelikely to be most appropriate for each group.12
The first country type is low-income nations,or the least-developed countries and some countries in transition, which have weak environments for advanced invention but some capability at small-scale innovation and cultural
creation. The second is middle-income nations,which have a strong imitative capacity and areasonable degree of human capital. Suchcountries need to encourage technology adoption and incremental innovation. The third ishigh-income nations, which have a strong human capital stock and a growing capacity forinnovation. It is evident that as countries become more developed they may choose tostrengthen their IPRs. Table 5.2 is only a guideline; individual countries may choose to pursue their own standards as interests require.
This section analyzes possibilities for the lowincome and middle-income nations.

—allowing poor countries the possibilityof exemptions
While countries must meet the general obligations of TRIPS, there are some areas in whichpoor nations are afforded special status.
Under Article 66, those least-developed countries experiencing difficulties in implementing
legislation may petition the TRIPS Council fortime extensions, and there is no specified limiton the number of such petitions. While it isimportant to consider carefully the signals adelay would send to the global community,
some countries may wish to take advantage ofit, particularly as regards the complex and controversial subject of patents.
Both low-income and middle-income countries would benefit from greater flows of technical and financial assistance to develop, implement, and enforce IPRs. Poor developing
countries also should push the developed coun-

140

tries to do more to encourage private technology transfer. The weakness of such action todate remains a sore point leading some observers to question the balance of interests in
TRIPS.

Administration
Administration and enforcement are costly.
Authorities in low-income nations could
achieve some gains by publicized raids andconsumer awareness programs. While such actions would face opposition among infringing
enterprises, they would signal some commitment to IPRs and also encourage domestic
creative interests to become more active. The
awareness itself may be the most valuable, andauthorities could limit economic damages by
imposing moderate penalties for first offenses,
with the severity of the fines rising with the extent of the piracy and the number of violations.
Low-income countries cannot readily afford
patent examination offices and should rely on
patent registration instead. However, authorities need to consult international patent offices
and databases to see if applications were denied elsewhere. Thus, developing countries
would benefit from the cost savings of using
foreign sources of information, such as the
Patent Cooperation Treaty. Countries could
also gain from adherence to regional examination systems. Electronic access to international
patent and trademark registries also cuts costsof performing prior art examinations. As countries grow richer and technologically more sophisticated, the patent system could move toward domestic examinations.
Application and renewal fees for patents
and trademarks may be set to cover the costsof administering those regimes. It is sensible toselect fees in ways that promote desirable innovation and use of IPRs. It is possible, for example, to set lower patent application fees forsmall and medium enterprises than for large
firms. Patent renewal fees may rise over timein order to encourage firms to let protection
lapse on less-valuable inventions. This can be
an important means of pushing technologies
into the public domain.

I N T E L L E C T U A L

Table 5.2

P R O P E R T Y

TRIPS-consistent IPRs standards: options for developing countries

Area of TRIPS

Low-Income

Middle-Income

High-Income

General transition
periods

Consider Article 66 extensions inpatents, trade secrets

Assistance

Push for technical and financial
assistance, including aninternational fundTechnology transfer

Push for fulfillment of technology
transfer commitments

Administration
Enforcement andcustoms

Reduce piracy and counterfeiting
through raids and awarenessModerate fines and civil penalties
Train customs officers for periodic
inspections
Upgrade professionalism

Reduce piracy and counterfeiting
through raids and awareness
Stronger fines and civil penalties
Train customs officers for inspections
on demand

Full enforcement

Judiciary

No special IP court
Training for judges and attorneys

No special IP court
Training for judges and attorneys

Consider special IP court

Patents
Administration

Registration system

Examination system

Rely on international grants data
Rapid and full disclosure
Post-grant opposition
Differential fees by applicant size

Registration or limited examination
systemRely on international grants data
Rapid and full disclosure
Pre-grant opposition
Differential fees by applicant size

Rising renewal fees

Rising renewal fees

Fullest exemptions from patenteligibility
High inventive step using rigorous
international examinations
Oral prior art considered
Narrow claims
Narrow or no doctrine of equivalents
Permit experimental use

Broad exemptions from patenteligibility
High inventive step

Consider appropriate exemptions

Oral prior art considered
Narrow claims
Narrow doctrine of equivalents
Permit experimental use

Oral prior art considered
Broader claims
Broader doctrine of equivalents
Permit experimental use

National emergency use
Public non-commercial use
Antimonopoly tool

National emergency use
Public non-commercial use
Antimonopoly tool

National emergency use

Working requirements

Permit imports to satisfy
Liberal definition of demand

Permit imports to satisfy

Limited working requirements

Utility models

Recognize utility models

Recognize utility models

Industrial designs

Recognize design rights
Originality requirement
Supplement with copyrights
Nonvoluntary licenses of right

Recognize design rights
Originality requirement
Supplement with copyrights
Non-voluntary licenses of right

Recognize design rights
Originality and novelty
Supplement with copyrights
Nonvoluntary licenses of right

Plant breeders’ rights

Provide PBRs
Recognize farmers’ privilege
Permit breeders’ exemption
UPOV 1978 model with national
treatment
Public research and extension

Provide PBRs
Recognize farmers’ privilege
Permit breeders’ exemption
UPOV 1991 model

Consider patents
Limited exemptions for farmers
Permit breeders’ exemption
UPOV 1991 model or patents

Public research and extension

Extension services

Standards and scopeCompulsory licenses

Push for technical and financial
assistanceConsider providing technology
transfer

Deterrent penalties

Consult international grants data
Full disclosure
Pre-grant opposition
More uniform fee
Structure
Rising renewal fees

Moderate inventive step

Antimonopoly tool(continued)141

G L O B A L

E C O N O M I C

P R O S P E C T S

Table 5.2

TRIPS-consistent IPRs standards: options for developing countries (continued)

Area of TRIPS

Low-Income

Middle-Income

Biotechnology

Maintain exemptions frompatentability
Strict standards for patent eligibility
Narrow claims
Contracts for efficient and equitable
extraction

Maintain exemptions frompatentability
Weaker standards for patent eligibility
Broader claims
Contracts for efficient and equitable
extraction

Limited exemptions from patentability

Integrated circuits

TRIPS minimum standards

TRIPS minimum standards

TRIPS standards plus possible patents

Trademarks

Indefinite registration with rising
renewal fees
Registration contingent on use after
3 years
Fair use of descriptive terms
Register service marks
Define sector broadly for which
trademark is “well-known”
Limits on protecting marks against
dissimilar goods
Protect domain names

Indefinite registration with rising
renewal fees
Registration contingent on use after
3–5 years
Fair use of descriptive terms
Register service marks
Narrower definition

Indefinite registration

Protect domain names

Protect domain names

Geographical
Indications (GI)

List generic and semi-generic names
Registration system for indications tobe protected
Oppose or cancel registration of own
GI abroadPush for common WTO list for wines
and spirits
Expand TRIPS protection for relevant
products

List generic and semi-generic names
Registration system for indications tobe protected
Oppose or cancel registration of own
GI abroadPush for common WTO list for wines
and spirits
Expand TRIPS protection for relevant
products

List generic and semi- generic names
Registration system for indications tobe protected
Oppose or cancel registration of own
GI abroadPush for common WTO list for wines
and spirits
Expand TRIPS protection for relevant
products

Copyrights

Reduce piracy and raise awareness
TRIPS minimum period
Liberal fair use and compulsory
licenses for education, research
Reverse engineering in software
Non-voluntary licenses of right insoftwareEstablish collection societies,
contracts, infrastructure
Identify copyrightable works
Compliance with minimum standards
in WIPO treaties
Require creativity for datacompilations

Reduce piracy
TRIPS minimum period
Liberal fair use and compulsory
licenses for education, research
Reverse engineering in software
Non-voluntary licenses of right insoftware
Improve infrastructure

Compliance with minimum standards
in WIPO treaties
Require creativity for datacompilations

Adopt WIPO treaties

Minimum definition of unlawful
disclosure methods
Limit employment restraints in hiring

Moderate definition of unlawful
disclosure methods
Limit employment restraints in hiring

Moderate definition of unlawful
disclosure
More permissive toward employment
restraints

High standard for defining” newchemical entity”
No period for excluding priorapplicant’s test data

High standard for defining” newchemical entity”
Short period for excluding priorapplicant’s test data

Trade secrets andtest data

Source: World Bank staff.

142

High-Income

Weaker standards for patent eligibility
Broader claims

Registration contingent on use after
5 years
Register service marks
Narrower definition

Liberal fair use
Permit patents undertight criteria

Require creativity for datacompilations

Longer period for excluding priorapplicant’s test data

I N T E L L E C T U A L

Encouraging innovation
For reasons of promoting dynamic competition, developing countries should require
rapid publication of patent applications (mostof which will have been published elsewherein any case), with full disclosure of the technical processes involved in producing the inventions, and how to reduce them to commercial
practice. This should encourage local firms toinvent around patents and use the disclosed
knowledge to improve their manufacturingmethods. Countries with a registration systemshould permit active opposition after grants
are made, in order to invalidate inappropriately awarded patents. Those countries that
undertake examination could permit pre-grant
opposition.
Developing countries could permit oral
prior art to defeat claims of novelty. They could
also provide a limited grace period in order tomaximize the inventions available in the publicdomain to domestic firms. Authorities could
also preserve the rights of prior users of newly
patented inventions to continue to use themwith appropriate license fees.
For patents, countries could set high standards for the inventive step, thereby preventing routine discoveries from being patented.
Regarding patent scope, it is sensible to exercise strict claims and discourage multiple claims
in patent applications.
Under limited circumstances governments
may resort to compulsory licensing to promote
the public interest in health, welfare, security,competition, and other grounds. Low-income
countries may wish to ensure that their patentlegislation and health regulations permit theissuance of compulsory licenses in patented
medicines under sharply defined conditions. In
addition to being consistent with the requirements of TRIPS, compulsory licensing shouldbe transparent and not arbitrary in order toavoid discouraging entry of foreign firms anddevelopment of new technologies by domestic
firms. Compulsory licenses are available also
as a primary restraint on monopolistic behavior. Indeed, the United States has an extensive
record of compelling licensing from technology

P R O P E R T Y

owners to rival firms as a remedy for anticompetitive activity.
Protection for industrial designs can also
promote innovation in developing countries.
Providing rights to registered designs with asmall novelty requirement, for a limited time
period, can promote product innovation. Suchrights may be supplemented in two ways. First,
designs may be protected under copyright law,even without registration. Second, countries
could experiment with systems in which, after
a shorter defined period of protection, rivals
are able to acquire licenses to use the designs intheir own work.
Protection of plant varieties remains controversial. When establishing PBRs, poor countries would be advised to follow the UPOV
1978 model,13 providing the farmers’ privilege
and a wide exemption for rival breeders to use
protected seeds to develop their own strains.
There is a role for public agencies to undertake
research and disseminate new seed varieties.
Middle-income economies are seeing development of plant breeders, and there are potential
gains from protection.
In biotechnology, lower-income economies
may prefer to recognize narrow patent claims
and retain exemptions from patentability where
allowed by TRIPS. Countries with stronger industries, such as China and Brazil, might award
stronger protection in order to promote technology transfer and domestic invention.
Recognition of trademarks can promote domestic enterprise development. In developing
countries it is often domestic entrepreneurs
who are frustrated in building their enterprises
because their marks are infringed by inferior
products. This problem raises confusion on thepart of consumers about the inherent qualityof commodities they wish to purchase. Thus,
recognition of trademarks can be an importantdevelopment spur, even for poor countries.
Geographical indications may be of particular interest to numerous developing countries.
Again, such indications reflect the quality characteristics of products coming from a particular location. Because many developing nations
have a comparative advantage in agricultural143

G L O B A L

E C O N O M I C

P R O S P E C T S

products and processed foods and beverages,
significant gains could be realized from registration of such place names. This is one area inwhich developing countries might be advised
to push for extended global standards.
Cultural resources—including folkloric arts,
designs, and traditional remedies—could beprotected by a combination of copyright andtrademark principles. The difficulty here is thatsuch resources are often collective knowledge
and effectively in the public domain. Efforts areneeded to work out appropriate standards forprotecting such knowledge and the economic
advantages that can be earned from it.
A distinction should be made between
straightforward duplication of published andrecorded goods—also called piracy—and access to new information. While the former activities only yield short-run benefits, they dolittle to enhance the technological capabilities
of copying nations.
Countries are free to determine the fair-use
exceptions they will permit in the copyrightarea. Copyrighted materials may be madeavailable on a limited and noncommercial basis
for use in teaching, research, libraries, museums, and charitable organizations. Indeed, thepreamble to the 1996 WIPO Copyright Treaty
contains language promoting this balance ofinterests and encouraging nations to carry forward such limitations into the digital network
environment.
TRIPS requires copyright protection fordata compilations. The EU has gone well beyond TRIPS’ standards in specifying strong
protection for databases even when their
compilation involves no creative step. Developing countries should insist upon a demonstration of creativity before recognizing suchprotection.
Recognition of the need to protect confidential business information can also be procompetitive. A natural lead-time is provided tothe owners of trade secrets because rivals must
invest in learning the technical information
they embody. This effort can contribute to thetechnical knowledge capital of an economy
and encourage follow-on innovation. Follow-

144

ers may prefer to acquire trade secrets by purchasing licenses from the originator, thereby
paying some share of the invention rents andraising incentives for future inventive activity.
Trade secrets are also instrumental in encouraging technology transfer from abroad.
Poor nations would be advised to adopt theleast stringent regulations set out in the Paris
Convention and perhaps also actively encourage technology transfer. Middle-income countries could establish more protective regimes,
for example by imposing more stringent requirements on technical employees who are
induced to change employment.
Governments have some obligation to prevent the public disclosure of confidential test
data submitted for approval of medicines andagricultural chemicals for some period. Developing countries could establish a high standard
for what constitutes a new chemical entity anddeny such protection to simple reformulations
or repackaging. For those submissions meetingthe originality test, data need to be protected,
even though denying such information to rivals
would extend the time before generic competition ensues.

Other policies can support
technological progressWhile the standards sketched above areimportant in promoting competition
and innovation, simply adopting a stronger setof IPRs cannot be sufficient to ensure a positive outcome. Intellectual property protection
is but a component of broader business regulation, innovation promotion, and consumer
protection that must be conjoined in an effective overall system.14
Perhaps the most important complementary factor is a commitment to education,
training, and skill development. The positiverole of educational attainment in economic
growth is well established empirically. It is
plausible that a positive relationship exists between the strength of IPRs and the level (orgrowth) of human capital, given the results reviewed earlier.

I N T E L L E C T U A L

Economies that are more open to tradeand FDI experience a growth premium fromstrengthening their IPRs relative to closed
economies. Competitive markets help limit thescope of intellectual property rights to their intended function, which is to encourage investments in new products but not to prevent fairentry. In addition, a liberal stance on inward
trade and FDI improves a country’s access toavailable international technologies, intermediate inputs, and producer services. As discussed
earlier, IPRs are a factor that encourages inward FDI under appropriate conditions.
Making IPRs stronger invites considerationof competition rules to discipline anticompetitive practices. To abuse an intellectual property
right is to try to extend its exclusive use beyond
permissible limits. Claims that a rights holder
has engaged in anticompetitive behavior arecomplex, and resolving them requires significant judicial and legal expertise. Administrative
costs may limit a country’s ability to undertakecompetition enforcement but the issue is sufficiently important to merit a high priority.15
IPRs need to be supplemented by programs
to promote national technical change. However, there are opportunity costs to the allocation of scarce budgetary resources to R&D
programs. To the extent that investment inproduct development is underprovided by theprivate market, there is a rationale for public
assistance. The limited R&D could be causedby such factors as an inadequate environment
for risk-taking, taxation systems that fail torecognize R&D as a business cost, and missing information about technological opportunities. Policies could aim to relax such restraints. This could be particularly importantfor small- and medium-size enterprises, which
remain the source of much innovation in developing countries.

Multilateral actions and IPRs in adevelopment roundT

he TRIPS Agreement ushered in a new
global regime for protecting intellectual
property. There are numerous means by which

P R O P E R T Y

developing countries may benefit from thischange, at least in the long run, although there
are bound to be significant short-run costs.
However in the short run, the developed countries are likely to be the primary beneficiaries.
Moreover the introduction of global IPRs intosuch areas as pharmaceutical products, agricultural inputs, biotechnology, environmental
technologies, and electronic databases has serious development consequences that merit careful consideration. This situation suggests policies in three general areas:
1. Collective international actions that can be
combined with the new protection regime
to help achieve important public goods
2. Ways developed countries can ease the transition burden for poor countries
3. Approaches to IPRs that developing countries could take in the “Development Round”

International collective goods
The new global IPRs system could affect thewillingness and ability of the international
community to find effective solutions to anumber of critical public-goods problems.
Consider three of the most important issues.
First, the health status of impoverishedpeople in the least-developed countries continues to deteriorate. Beyond the debilitating
costs diseases impose on patients, medical systems, and government budgets, it has spillover effects on other countries through exposure to infection and reduced productivity. A
role for public intervention exists in resolving
the crisis.
By requiring countries to provide patents
for new pharmaceutical products, TRIPS sets
up incentives that may work at cross-purposes. By slowing down generic competition,patents could raise prices of new drugs in developing countries and reduce the ability ofpatients to acquire drugs at reasonable cost.
At the same time, the promise of wider andstronger patent protection could raise incentives for private pharmaceutical firms to engage in more R&D into the diseases of poverty.
There is little private research undertaken in145

G L O B A L

E C O N O M I C

P R O S P E C T S

such diseases (Sachs and others 1999). This situation stems from both the absence of patent
protection and the extremely low purchasing
power of patients in poor countries. TRIPS
affords a solution to the former problem but
not to the latter. Consequently, TRIPS could
raise costs without providing much incentive
for innovation.
Effectively addressing the diseases endemic
to poor countries requires separation of the
dynamic incentives for R&D from the need
for widespread distribution at low cost.
Any comprehensive solution to the problem requires significant increases in foreignassistance from industrialized countries andfinancial support from multilateral organizations and private donors. These resources
would be used for two purposes. One is toprovide an incentive to firms to engage in
R&D into new and effective vaccines andmedicines. This incentive could involve purchasing targeted drugs at negotiated prices orpaying royalties for licenses that permit designated countries to produce and distribute them.
By their recent actions in the area of HIV/AIDS drugs, pharmaceutical firms have indicated a willingness to sell medicines cheaply,
provided that exports back to developed
countries, where prices would be higher, areprevented. The other task is to fund the development of effective health-care delivery systems in poor countries.
A second issue relates to incentives set up by
TRIPS to extract biogenetic resources from developing countries. In principle contracts could
be devised to manage extraction of genetic materials. However it is not easy to determine appropriate royalties when the resources are developed in areas without clear rights in naturalproperty. Ownership may be collective within avillage or even undefined.
Thus contracts need to be developed that
pay attention to both private incentives andpublic objectives. A role for governments arises
here to ensure equitable and efficient sharingof the economic rents to IPRs earned on products from extraction of domestic resources.
For example, some countries now require firms

146

to demonstrate that they have attained theapproval of local villages before going bioprospecting or removing resources.
A third issue is how TRIPS affects incentives
to develop new transgenic crops throughbiotechnological research. Widespread introduction of new crops raises concerns aboutbiodiversity. The rapid increase in output of genetically modified plants attests to their advantages in terms of enhanced disease resistance,
reduced use of chemical inputs, and higher
yields. It also suggests that traditional varieties
could be pushed out of the market. IPRs provide incentives for producing better crops but
ultimately might limit consumer choice.
It makes little economic sense to retard incentives for developing new plants and foodproducts by restricting exploitation of IPRs
beyond their usual limitations. A more promising and direct approach would be labelingprograms that permit consumers to express
preferences for traditional crops and provide
market incentives to sustain their production.
Further if the disappearance of plant varieties
were seen as potentially damaging in environmental terms, an argument would exist fordomestic and international public agencies tostockpile such strains for purposes of keeping
them alive as a form of social insurance.
To some extent the global IPRs system isinconsistent with public interests in resource
conservation and biodiversity. For example,
the United Nations Convention on Biological
Diversity stipulates that countries have sovereign rights over biological resources, while
TRIPS recognizes private rights to own microorganisms and microbiological processes.
Developing countries that are the sources ofgenetic resources and natural plant strainsneed to assess their interests in revising TRIPS
to deal with this inconsistency. If Article 27 of
TRIPS (dealing with patents in life forms andprotection for plant varieties) is revised, many
developing countries should push for a resolution of the concept of resource rights and collective ownership, along with the obligationsof firms that extract resources. Thus for example, countries could push to forbid patents

I N T E L L E C T U A L

on plant-based products obtained from materials in international germplasm banks andother deposit institutions.
In many of these new areas, the legal andtechnical expertise needed to design carefullybalanced intellectual property and related regulations is likely to exceed the capacities ofleast-developed countries and even middleincome countries. Multilateral assistance canplay an important role in ensuring that policies promote development and in complementing direct funding for research on technologies
addressing poor country needs.

Policy options for developed countries
on TRIPS
Technology-exporting countries have a strong
interest in sustaining TRIPS. Because of systemic
difficulties among developing countries in adjusting to the new obligations and concerns
about its implications, industrialized nations
could consider several options to make the agreement more directly supportive of development.
First, in recognition of extreme budgetary
and institutional difficulties, least-developed
countries should be afforded latitude in exercising delays in implementation of TRIPS, especially in the technically complex and controversial areas of pharmaceutical patents and plant
protection. Similarly, noncompliance problems
should not be the subject of dispute resolution
unless they constitute willful departures frombasic TRIPS obligations.
Second, it should be recognized that developing countries need to have lower and more
flexible IPRs standards than do their developed counterparts. TRIPS provides such flexibility in many areas and the developing countries should be afforded the opportunity tooperate at the lower limits if it is in their development interests to do so.
Third, developed countries could go a long
way toward raising enthusiasm for TRIPS if
they would actively implement their “best efforts” commitments to encourage technology
transfer to the least-developed countries and toprovide technical and financial assistance fordeveloping countries. While some assistance is

P R O P E R T Y

on offer now, it is insufficient for the major jobof reforming IPRs administration. The current
approach, whereby grants are made to suchorganizations as WIPO and UNCTAD for undertaking specific projects, is inadequate given
various bureaucratic constraints.
A valid justification for expanding assistance is found in the asymmetric costs andbenefits from TRIPS. Intellectual property developers in rich countries stand to be the primary gainers from the new systems, while
there is little promise of gains for poor countries, at least for a considerable period of time.
It could also be a wise investment in promoting compliance with TRIPS and enforcementof IPRs, which might otherwise emerge only
slowly. Thus, developed countries could convert their “best efforts” promises to binding
commitments, with benefits on both sides.
Finally, the most important action developed countries could take to affirm confidencein TRIPS is to meet and expand their obligations to provide greater market access for theexports of developing countries. Especially important would be new attempts to reduce barriers to agricultural trade, which would greatly
benefit many developing nations. Moreover,agricultural liberalization would raise the incentives of firms in developing countries to invest in new agricultural technologies protectedby IPRs, thereby cementing faith in TRIPS.

Developing countries and TRIPS reform
The interests of developing countries in altering or extending TRIPS vary greatly because,in part, they have different levels of income
and technological sophistication. To rebalance
the agreement in some measure toward the interests of the poorest countries, while allowing
for the quite diverse circumstances of countries, would help promote development.
First, extending the transition periods beyond
2005 for the least-developed countries wouldease their administrative burdens. Although they
have a limited opt-out procedure as discussed
earlier, a general recognition by the WTO membership of needs for extensions could be beneficial in avoiding disputes. Such extensions should147

G L O B A L

E C O N O M I C

P R O S P E C T S

be accompanied by serious commitments towork toward ultimate implementation.
Second, the low-income and middle-income
countries should weigh carefully the introduction into TRIPS of significant new protection
for IPRs that would reduce their access to information and technology. Extending patents inbiotechnology to additional life forms and toplant variety protection could impose significant costs on developing countries, as would
any attempt to globalize the highly protective
database systems in place in the European
Union or under contemplation in the UnitedStates. Another form of protection to weighcarefully is patents for software and methods
for doing business. Similarly, erecting global restraints on parallel trade might have adverse
potential competitive effects on future prices.
On the other hand, many developing countries
have economic interests in extending protection
for geographical indications to their food products and handicrafts. This may help to ensurethat valuable geographic indications do not become generic terms. Further, there are soundreasons for introducing the WIPO Copyrightand Phonograms Treaties into TRIPS obligations, so long as they retain flexibility for establishing liberal fair use of Internet transmissions.
Third, despite proposals to remove from patent eligibility those drugs that are on, or will
be on, the WHO “Essential Drugs” list, it isunlikely that such discrimination by productwould be acceptable and, moreover, it could
significantly reduce incentives to develop critical new drugs. A better alternative, discussed
above, is to use public funds to purchase drugs
or licenses. So long as the financial offers
cover anticipated R&D costs the incentives todevelop new drugs would improve.
Fourth, current TRIPS rules may not allow
governments to grant a compulsory license toforeign firms, and may not permit firms producing under compulsory licenses to export
much of their production.16 This situation
threatens to raise the costs of drugs in countries
where domestic production capacities cannot
ensure adequate supply of essential medicines.
A revision of the Agreement in this regard may

148

be necessary to permit small, poor, countries
the right to import from foreign producers offering low-cost or generic products prior topatent expiration. Such a provision would provide greater flexibility in addressing publichealth crises. Even if such licenses may not actually be granted, the option itself would likely
increase the bargaining power of governmentswith regard to pharmaceutical multinationals.
Fifth, many developing countries are interested in establishing new forms of IPRs overcollective and traditional knowledge. Suchknowledge covers literary creations, such asoral histories, artistic works, music, designs,
pharmaceutical preparations, and methods ofproduction. It is difficult to protect these itemswith traditional IPRs precisely because they are
traditional (and therefore not novel) and collectively known, without easily assigned property rights. Thus, development of new rights,
combining elements of trademarks, copyrights,
and trade secrets along with sui generis recognition of traditional practices, could be beneficial. A global principle that patents are notavailable for items that had been known to the
public by means of oral tradition or written
description also would be beneficial for poor
countries. Coordinated public efforts may berequired to catalogue these pieces of traditional information.
As these final comments suggest, IPRs
evolve dynamically over time to meet the needsof inventors and creators in market economies.
The TRIPS Agreement significantly increased
the requirements for protecting intellectual
property incumbent upon nations that wish to
be part of the global trading system. While
promising some eventual benefits, the new
regime is asymmetric in its likely effects acrosscountries. Low-income economies may expect
to incur net costs for some time, suggestingthat patience and assistance are needed, alongwith programs to limit potentially negative effects in such areas as new medicines. The picture in middle-income economies is more complex as they feature a mix of interests between
intellectual property developers, users, and imitators. Experience with the negotiation andI N T E L L E C T U A L

implementation of TRIPS should improve theability of developing countries to participate
effectively in the further evolution of international norms.

Notes
1. It is difficult to quantify the strength of IPRs because they are rules concerning conditions of dynamic
competition rather than taxes or subsidies applied toparticular sectors. Moreover, those rules have different
impacts under different economic circumstances.
2. This material is summarized from Maskus 2000a.
3. Controlling for other influences, there is a quadratic (U-shaped) statistical relationship between thestrength of patent rights and real per capita GDP.
Specifically, patent rights become weaker as incomesgrow to a level of approximately $2,000 per capita in
1985 international dollars ($3,000 today assuming an
average growth rate of 2.5 percent), then become increasingly stronger as countries get richer.
4. China has largely met TRIPS requirements in its
legislation in anticipation of joining the WTO.
5. Smith (1999) found a similar outcome.
6. The figures in column 2 of table 5.1 use coefficients developed in a four-equation simultaneous decision framework, which incorporated the impacts ofpatent rights on patent applications, affiliate sales, exports, and affiliate assets. The model was estimatedwith data from 1986 to 1994 for the foreign operationsof U.S. majority-owned manufacturing affiliates in several developed and developing countries. The assets
equation had a negative coefficient on patent rights,
suggesting that, on average, across countries stronger
patents would diminish the local asset stock. However,there was a large positive coefficient on patents interacted with an indicator variable for developing countries, resulting in a positive and significant net impact
in those nations. This result likely means that at low
protection levels internalization decisions encourage
FDI as patents get stronger. However, as protection exceeds some level there emerges a substitution effect favoring licensing over investment.
7. One possible explanation for this negative impact
is that firms may exploit their IPRs in richer countries
relatively more through arm’s length licensing relationships. Indeed, economic theory suggests that as IPRs arestrengthened, firms would choose to substitute licensing
contracts for FDI (Horstmann and Markusen 1987).
8. Similar problems exist in China (Maskus,
Dougherty, and Mertha 1998). Interviews suggested
that trademark infringement negatively affected innovative Chinese enterprises. Numerous cases were citedof difficulties facing Chinese producers of consumer
goods. Establishing brand recognition in China requires

P R O P E R T Y

costly investments in marketing and distribution channels; enterprises that achieved it found their trademarks
applied to counterfeit products. Such products were oflower quality and damaged the reputation of the legitimate enterprise. This problem deterred enterprise development and prevented interregional marketing.
9. The Economist, June 22, 2001.
10. New York Times, “Look at Brazil,” January 28,
2001.
11. See Reichman 1996/1997, which provides thebasis for some of the analysis in this section. See also
Watal 2001.
12. Evenson and Westphal (1997) provide a morenuanced categorization of countries but provide little
concrete guidance regarding IPRs.
13. UPOV refers to a series of revisions of a treaty
for the protection of plant varieties, which is known by
its French acronym. The 1978 revision serves as a modelfor developing countries, but is not now available for accession. The 1991 version provides stronger protection
for breeders and is available for membership.
14. Maskus 2000a provides extensive discussion.
15. The papers in Anderson and Gallini 1998 provide an excellent and comprehensive overview.
16. The European Union submitted a paper to the
WTO TRIPS Council arguing that such licenses are acceptable under the Agreement (“Paper Submitted by
the EU to the TRIPS Council for the Special Discussion
on Intellectual Property and Access to Medicines,” 20
June 2001, IP/C/W/280), but legal opinion is divided.

References
Abbott, Frederick M. 2000. “The TRIPS-Legality of
Measures Taken to Address Public Health Crises:
Responding to USTR-State-Industry Positions
that Undermine the WTO.” Manuscript. Florida
State University, Talahassee, Fla.
Anderson, Robert, and N. T. Gallini. 1998. Competition Policy and Intellectual Property Rights in the
Knowledge-Based Economy. Calgary: Universityof Calgary Press.
Coe, David T., E. Helpman, and A. W. Hoffmaister.
1997. “North-South R&D Spillovers.” The Economic Journal 107: 134–49.
Duran, Esperanza, and C. Michalopoulos. 1999. “Intellectual Property Rights and Developing Countries in the WTO ‘Millenium Round’.” Journal ofWorld Intellectual Property. November.
Evenson, Robert E., and L. E. Westphal. 1997. “Technological Change and Technology Strategy.” In
Jere Behrman and T. N. Srinivasan, editors,
Handbook of Development Economics: Volume
3A. Amsterdam: Elsevier North-Holland.
Finger, J. Michael, and P. Schuler. 1999. “Implementation of Uruguay Round Commitments: The De-

149

G L O B A L

E C O N O M I C

P R O S P E C T S

velopment Challenge.” Manuscript. World Bank,
Washington, D.C.
Fink, Carsten. 1997. “Intellectual Property Rights andU.S. and German International Transactions in
Manufacturing Industries.” Manuscript. World
Bank, Washington, D.C.
———. 2001. “Patent Protection, Transnational Corporations, and Market Structure: A Simulation
Study of the Indian Pharmaceutical Industry.”
Journal of Industry, Competition, and Trade 1:
101–21.
Ginarte, Juan Carlos, and W. G. Park. 1997. “Determinants of Patent Rights: a Cross-National Study.”
Research Policy 26: 283–301.
Gould, David M., and W. C. Gruben. 1996. “The Roleof Intellectual Property Rights in Economic
Growth.” Journal of Development Economics
48: 323–50.
Horstmann, Ignatius, and J. R. Markusen. 1987. “Licensing Versus Direct Investment: A Model of Internalization by the Multinational Enterprise.”
Canadian Journal of Economics 20: 464–81.
Lanjouw, Jean O. 1998. “The Introduction of Pharmaceutical Product Patents in India: Heartless
Exploitation of the Poor and Suffering?” NBER
working paper 6366, Cambridge, Mass.
Lee, J.-Y., and E. Mansfield. 1996. “Intellectual Property Protection and U.S. Foreign Direct Investment.” Review of Economics and Statistics 78:
181–86.
Mansfield, Edwin. 1994. “Intellectual Property Protection, Foreign Direct Investment, and Technology
Transfer” International Finance Corporation Discussion Paper 19. Washington, D.C.
———. 1995. “Intellectual Property Protection, Direct
Investment and Technology Transfer: Germany,
Japan, and the United States.” International Finance Corporation Discussion Paper 27. Washington, D.C.
Maskus, Keith E. 1998. “The International Regulationof Intellectual Property.” Weltwirtschaftliches Archiv 134: 186–208.
———. 2000a. Intellectual Property Rights in the
Global Economy. Washington DC: Institute forInternational Economics.
———. 2000b. “Strengthening Intellectual Property
Rights in Lebanon.” In B. Hoekman, and J. E.
Zarrouk, editors, Catching Up with the Competition. Ann Arbor: University of Michigan Press.
Maskus, Keith E., S. M. Dougherty, and A. Mertha.
1998. “Intellectual Property Rights and Economic
Development in China.” Manuscript prepared for
the Southwest China Regional Conference on Intellectual Property Rights and Economic Development. Chongqing. September.

150

Maskus, Keith E., and C. McDaniel. 1999. “Impacts of
the Japanese Patent System on Productivity
Growth.” Japan and the World Economy 11:
557–74.
Maskus, Keith E., and M. Penubarti. 1995. “How
Trade-Related Are Intellectual Property Rights?”
Journal of International Economics 39: 227–48.
———. 1997. “Patents and International Trade: An
Empirical Study.” In K. E. Maskus, P. Hooper,
E. E. Leamer, and J. D. Richardson, editors, Quiet
Pioneering: The International Economic Legacyof Robert M. Stern. Ann Arbor: University ofMichigan Press. 95–118.
McCalman, Philip. 2001. “Reaping What You Sow:
An Empirical Analysis of International Patent
Harmonization.” Journal of International Economics 55: 161–86.
Park, Walter G., and J. C. Ginarte. 1997. “Intellectual
Property Rights and Economic Growth.” Contemporary Economic Policy 15: 51–61.
Rapp, Richard T., and R. P. Rozek. 1990. “Benefits
and Costs of Intellectual Property Protection in
Developing Countries.” Journal of World Trade
24: 75–102.
Reichman, J. H. 1996/1997. “From Free-riders to Fairfollowers: Global Competition Under the TRIPS
Agreement.” New York University Journal of International Law and Politics 29: 11–93.
Sachs, Jeffrey, M. Kremer, and A. Hamondi. 1999.
“The Case for Vaccine Purchase Fund.” Harvard
University, Cambridge, Mass. Manuscript.
Smarzynska, Beata. 2001. “Composition of Foreign Direct Investment and Protection of Intellectual Property Rights: Evidence from Transition Economies.”
Manuscript. World Bank, Washington, D.C.
Smith, Pamela J. 1999. “Are Weak Patent Rights a Barrier to U.S. Exports?” Journal of International
Economics 48: 151–77.
———. 2001. “How Do Foreign Patent Rights Affect
U.S. Exports, Affiliate Sales and Licenses?” Journal of International Economics 55: 411–39.
UNCTAD (United Nations Conference on Trade andDevelopment). 1996. The TRIPS Agreement andDeveloping Countries. Geneva.
Watal, Jayashree. 1999. “Introducing Product Patents
in the Indian Pharmaceutical Sector: Implications
for Prices and Welfare.” World Competition 20:
5–21.
———. 2001. Intellectual Property Rights in the WTO
and Developing Countries. London: Kluwer Law
International.
World Bank. 2000. Workshop on “Developing theMusic Industry in Africa.” June. Washington, D.C.
Yang, Guifang, and K. E. Maskus. 2001. “Intellectual
Property Rights and Licensing: an Empirical Investigation.” Weltwirtschaftliches Archiv 137: 58–79.

6Envisioning Alternative Futures:
Reshaping Global Trade
Architecture for Development

Deepening global trade and investment
integration holds the promise of more
rapid increases in standards of living
around the world, particularly in developing
countries. Greater openness and expanded
trade, partly attributable to the Uruguay
Round, contributed to new opportunities for
growth. Trade and incomes of developing countries grew during the 1990s at twice the rateof the previous decade, and those developing
countries that deepened their integration withthe global economy have seen their incomes rise
at more than three times the pace of those that
did not (Collier and Dollar forthcoming).
The challenge ahead is to expand those opportunities and ensure that the poorest countries and poorest people benefit. Today developing countries’ exports confront higher levelsof border protection than those of developed
countries. The average poor person selling into
globalized markets confronts barriers that are
twice as high as the typical worker in developed
countries (chapter 2). Said differently, productsthat the world’s poor produce are more likely
to be subject to high tariffs, quotas, disadvantageous subsidies, and antidumping claims
than are those produced by the better-off. Although only partly because of disadvantageous
external circumstances, the 49 least-developed
countries have fared particularly badly during
the last decade. Thirty percent of exports fromleast-developed countries face tariff peaks in atleast one of the Quad countries (United States,
EU, Japan, and Canada). Besides merchandise
trade barriers, restrictions on global trade inservices also have impeded development. On
the one hand, the lack of progress in the highincome countries to grant access on temporary
movement of workers (mode 4 under General
Agreement on Trade in Services—GATS) has
foreclosed a potential source of earnings for developing countries. On the other, restrictions
that developing countries place on foreign direct investment (FDI) in services industries haveleft unrealized their own full productivity potential. Moreover, costs of transporting developing-country exports are higher because ofquasi-cartel restrictions, which, when added to
the “behind the border” under-investments in
ports, customs efficiency, and domestic infrastructure, drive up the landed price of exports
and reduce volume.
Trade can only realize its potential if developed and developing countries alike take action to reshape the global trade architecture topromote development. This chapter discusses
in summary form the key policy foundationsof a new trade global architecture for development, and then shows how a phased program
putting in place those policies might affectthe long-term growth prospects of developing
countries. Our conclusion: a reshaped global
architecture can have dramatically positive effects on the lives of the world’s poor.

153

G L O B A L

E C O N O M I C

P R O S P E C T S

Reshaping global tradearchitecture for development

W

hile the global trade architecture is
likely to evolve only slowly, the discussion among world leaders on a future traderound can forge the first underpinnings. This
report has focused on four policy domains:• Policies to ignite a successful development
round in the World Trade Organization(WTO) that would produce tangible anddurable benefits for developing countries• Policies for global cooperation outside the
WTO necessary to expand trade on a sustainable basis, and to promote development• Policies of high-income countries to ensure
continued global growth and to facilitate
trade expansion through provision of accessand aid• Domestic policies that developing countries
might undertake to promote trade-led development—with or without the help of theinternational community
This report has not addressed other aspectsof global trade architecture that have beentaken up in previous Bank reports and numerous other studies. These include issues suchas standards and environment1 as well as theworkings of trade-related global institutions(such as the World Intellectual Property Organization, World Customs Organization, andInternational Air-Transport Association). Similarly, we have not dealt with another elementof trade architecture—regional trading arrangements—which are particularly germane to theobjectives of this report, hence the digression
below.

A digression: regional arrangements
Regional arrangements to expand trade continue to proliferate. Governments, now more
receptive to openness than in previous periods,
have sought to expand existing trade by locking in increased market access with trading
partners—most often neighbors. Moreover, regional arrangements are attractive because they
can increase the credibility of reforms and may

154

be less cumbersome to negotiate than multilateral reforms. Smaller memberships may also
make it easier to negotiate the increasingly important issues inherent in regulatory regimes, asharp contrast with complicated multilateralnegotiations involving more than 100 countries. Also, small countries can exercise greater
influence in regional arrangements.
Regional arrangements, properly designed,have the potential to stimulate global tradethrough improving the efficiency, and hence thecompetitiveness, of regional producers and expanding demand for inputs from nonregionalsources. But regional agreements behind tradebarriers may artificially shift import supply
from external countries to countries within the
trade area, and this may lead to reduced efficiency for participants if displaced external
suppliers would provide goods at lower cost.
This trade diversion may disadvantage global
export competitiveness in much the same waythat national barriers do. “Rules of origin”
arrangements in some regional agreements canraise costs and stifle local industry. This is also
true of mutual recognition agreements that
may shield regional partners behind discriminatory testing and certification protocols or regional standards. Smaller countries with lesstechnical capacity to evaluate these schemes
may find themselves at a net disadvantage, andbe better off with first-best unilateral tradereform.
Whether a particular agreement improves
national incomes depends on its design, andon the trading partners involved. Key design
tests include whether regional arrangements
involve lowering common external trade barriers, whether they stimulate increased competition, and whether they reduce transaction
costs and extend to nondiscriminatory investment and services policies—all elements central to “open regionalism.” The World Bank
Policy Research Report Trade Blocs (WorldBank 2000a) concludes that North-South regional agreements are more likely to improvewelfare than South-South agreements, simply
because experience shows they usually resultin lower trade barriers with less trade diver-R E S H A P I N G

G L O B A L

T R A D E

A R C H I T E C T U R E

F O R

1985

1997

D E V E L O P M E N T

Figure 6.1 Regional integration agreements are proliferating
Number of WTO notifications of regional integration agreements
18

15

12

9

6

3

0
1957

1961

1965

1969

1973

1977

EEA
EU
Iceland
Liechtenstein
NorwayEU
Austria
Belgium
Denmark
FinlandFranceGermany
GreeceIreland

1981

1989

1993

Source: World Trade Organization.

—and now span the globe.
Selected regional integration agreements

NAFTA
CanadaMexicoUnited States

GCC
Bahrain
KuwaitOman
Qatar
Saudi Arabia
United Arab Emirates

CEMAC
Cameroon
Central Africa Rep.
Chad
WAEMU
Congo
Andean Pact
Equatorial Guinea Benin
Burkina Faso
Bolivia
Gabon
Côte d’Ivoire
Colombia
Guinea-Bissau
MERCOSUR
Ecuador
Mail
Argentina
Peru
Niger
BrazilVenezuela,
SenegalParaguay
R.B. deTogo
Uruguay
CARICOM
CaribbeanGroup of 3
Colombia
MexicoVenezuela,
R.B. deEuro-Maghreb
EU
MoroccoTunisia

Italy
Luxembourg
Netherlands
Portugal
Spain
SwedenUnited Kingdom

LAIA
Argentina
Bolivia
BrazilChile
Colombia
EcuadorMexicoParaguay
Peru
Uruguay
Venezuela, R.B. de

ASEANBrunei
Cambodia
Indonesia
Lao PDR
MyanmarPhilippines
Singapore
Thailand
Vietnam
APEC
Australia
Chile
Brunei
CanadaChile
China
Indonesia
Japan
Korea,
Rep. of
Malaysia
MexicoNew Zealand
Papua New Guinea
Peru
Philippines
Russian Federation
Singapore
Thailand
United States
Venezuela, R.B. de
Vietnam

Source: World Bank staff.

155

G L O B A L

E C O N O M I C

P R O S P E C T S

sion, and because the greater structural differences in North-South economies usually produce greater potential gains from trade creation.2 The EU arrangements under the 1992
Single Market Program are a clear case inwhich the analysis shows income-increasing
effects. The North American Free Trade Agreement (NAFTA) also appears to have had apositive impact on its Members, particularly
Mexico.
Regional arrangements are likely to remain
an enduring feature of the trade panorama. To
realize possible benefits of trade and investment expansion, arrangements have to be designed in a way that they become steppingstones to greater openness and development,
rather than a vehicle for protection and unintended inefficiency. An important componentof making them steppingstones rather thanstumbling blocs to greater openness is forthe countries involved to have low protection
against non-Member countries. For example,
Harrison, Rutherford, and Tarr (1997) estimate that Chile was able to gain from its free
trade agreement with Mercosur due to the factthat it lowered its external uniform tariff from11 to 6 percent. Regional agreements can facilitate the deep integration—reduction of border barriers, promotion of cross-investments,
adoption of common regulations, and evencultural and political exchange—in ways thatreinforce and enhance multilateral efforts.
Nonetheless, the world market is bigger
than the market next door, so for all their coordination difficulties, multilateral efforts to
expand market access can have greater impact
on development. For these reasons this report
has focused on a four-part agenda: a development round, global cooperation to expand
trade, policies of high-income countries, andpolicies of developing countries (box 6.1).

A development round: policies in the
WTO to expand trade opportunities forthe world’s poor
Market access. For the world’s 2.8 billion
poor, reducing barriers to agricultural products,
textiles, clothing, apparel, and other labor-

156

intensive manufactures are critical. Both thehigh-income countries, and even the middleincome countries, will have to reduce theirlevels of protection in agriculture. In manufactures, political commitment is necessary tophase out the quotas of the Agreement on Textiles and Clothing (ATC) in 2004 and reduce
the high levels of tariff protection that would
otherwise impede access once the quotas areended. These efforts should be accelerated. It
also means a commitment from the highincome countries (HIC) to reduce tariff escalation and tariff peaks that now discourage thecreation of new industrial activities in developing countries. Trade in services can be expanded—opening new vistas of productivity
gains for developing and developed countries
alike—if countries permitted more movementof temporary workers and reduced anticompetitive and discriminatory restrictions on foreign
investment. Electronic commerce (e-commerce)
deserves greater attention under GATS to provide maximum competition. Using GATS toeliminate anticompetitive aspects of the private
carrier agreements in maritime transport and toengender new competition in air transport
could lower the costs of delivering developingcountry exports to foreign shores.
Antidumping, recourse to other forms of
unilateral contingent protection, and overly
stringent produce standards have dampened
the access that developing countries have to theworld’s major markets. Whether it is shiitake
mushrooms entering Japan, steel entering theUnited States, or products entering the EU,
raising barriers to trade to protect domestic
markets has too often hurt development. Applications of contingent protection are not limited to developed countries. Middle-income
countries have increasingly sought refuge fromthe competitive pressures of their neighbors.
One immediate measure would build confidence and show convincing movement on the
ATC: an agreement to limit the use of antidumping on trade in textiles and clothing thatwill be liberalized as negotiated in the Uruguay
Round. Over the longer term, the use of antidumping ought to be phased out (Finger

R E S H A P I N G

G L O B A L

1998). Other “safeguard” instruments might
be disciplined by giving standing to users of thegoods concerned in the decision process.
Implementation issues. No less important
than market access is tailoring implementationof existing and new agreements to the local
capabilities of developing countries. Developing countries, given power asymmetries, havean interest in avoiding a two-track multilateralsystem that relegates them to a particular position; however, implementing global agreements
can be better calibrated to domestic capacities.
For example, the administrative costs of implementing Uruguay Round agreements on The
Agreement on Trade-Related Intellectual Property Rights (TRIPS) and customs procedures
can run into the tens of millions of dollars, andcould easily swamp the investment budgets ofmany poor countries (see Finger and Schuler2000). As developing countries have emphasized in several recent meetings (e.g., LDC3,
Abuja and Zanzibar Trade Ministers’ conferences), these implementation concerns areparamount if a negotiation round is to promote
development.
Moreover the benefits they would receive interms of greater access to low-cost technology
are, relative to the implementation costs, questionable. New trade rules recognizing these
constraints would allow flexibility and provide
for transition periods linked to development
capacities. To be effective, implementation
would have to be linked to a long promised financing facility that would provide technical assistance to implementation, and the highincome countries could convey their seriousness
by agreeing to bind this commitment. Note that
all of these issues could be decided during negotiations, and none need hold a new roundhostage to prior action.

WTO transparency and participation. Beyond these elements, the convening of a roundof talks is likely to promote development only
if agreements enjoy full ownership among
WTO Members. For agreements to realize
their potential mutual benefits, major constituencies in both developing and developed

T R A D E

A R C H I T E C T U R E

F O R

D E V E L O P M E N T

countries must understand them, participate
fully in their formulation, and buy into them.
Two elements would serve that end. First,
transparency is vital for ownership and implementation. Enhancing the transparency of
WTO operations and improving access to anddissemination of WTO databases, reports, andinformation (for example, data underlying national trade policy reviews) would broaden
the basis for participation of developing countries to engage in the policy formation process(Francois 2001).3
Second, a determinant of ownership ofagreements is the ability of countries to participate in the WTO process. Many countries
have inadequate representation in Geneva,
impeding active engagement in negotiations.
Although options have been identified to expand representation in Geneva at relatively low
cost, expertise is still in short supply.4 Funding
could be made available to allow low-income
countries to finance the cost of hiring expertsthat can undertake the required analyses(Winters 2001). The annual cost of such an assistance program to least-developed countries
could be in the $10 million range.5

Global actions outside the WTO
to expand trade: beyond negotiation
to cooperation
Expanding trading opportunities for theworld’s poor requires going beyond negotiations in the WTO to cooperation in other policy domains. Two sets of complementary policies are particularly important.
Increasing multilateral development assistance to expand trade can help countries takeadvantage of existing global markets, respondto global and domestic trade policy reforms,
and link the poor to new opportunities. Multilateral cooperation among bilateral donors canprovide “aid for trade.” One important example: The EU has taken the lead in providing generous assistance to the Integrated Framework(IF), a program designed to analyze obstacles totrade for least-developed countries and provide
assistance in overcoming them (see box 6.2). A
similar approach could usefully be applied to157

G L O B A L

E C O N O M I C

P R O S P E C T S

Box 6.1 Reshaping global trade architecture fordevelopment: The four-part policy agenda
1. Convening a development round in the WTO
Market access
Agriculture• Reduce applied tariffs, phase out tariff rate quotas, and bind tariffs at applied rates in both developed anddeveloping countries• Phase out export subsidies in high-income countries and commit to eliminate domestic support linked to
production levels• Reduce tariff escalation and cut off tariff peaks
Manufactures• Reduce applied rates further, and bind tariffs to levels that equal or are close to applied rates• Reduce tariff escalation and cut off tariff peaks• Accelerate implementation of ATC quota eliminations and reduce tariffs in lines now covered by quotas• Negotiate tighter disciplines on antidumping and other forms of contingent protection
Services• Liberalize entry of foreign services suppliers through elimination of restrictions on entry and promoting increased
competition, with wider use of GATS to bind nondiscriminatory access and lend credibility to domestic programs• Enhance scope of services provision through the temporary movement of service providers (both skilled andunskilled)• Secure openness of e-commerce in services, through wider and deeper GATS commitments on cross-border supply• Strengthen multilateral rules to deal with anticompetitive practices in services• Adopt a nondiscriminatory trading regime for air transport, including traffic rights, under GATS
Implementation procedures and phasing• Adopt a phased implementation of TRIPS and other administrative-intensive agreements for low-income countries,
based upon development capacity.
• Establish a consensus that the TRIPS Agreement allows developing countries with no domestic production
capacity to grant compulsory licenses to foreign firms• Convert “best endeavor” promises to binding commitments to provide low-income countries with financial andtechnical assistance to implement WTO accords
Improving WTO transparency and participation• Require WTO disclosure of databases; reports and their full associated information; and analyses for particulardecisions• Provide assistance to strengthen capacity of all members to participate effectively in negotiations

2. Global cooperation to support trade outside the WTO
Provide “aid for trade” through stepped up development assistance• Expand “Integrated Framework” assistance to all low-income countries• Provide assistance to enhance the efficiency of the customs clearance process in developing countries, notably thegood customs practices that are laid out in the revised Kyoto Convention (World Customs Organization)• Expand multilateral assistance to overcome country-specific bottlenecks to improving competitiveness and trading
potential (for example, in finance, transportation infrastructure, education for low income workers, and public
sector trade-related institutions) and to promote trade158

R E S H A P I N G

Box 6.1

G L O B A L

T R A D E

A R C H I T E C T U R E

F O R

D E V E L O P M E N T(continued)• Fund mechanisms to help developing countries use intellectual property protection to their benefit by protecting
intangible assets such as traditional knowledge, designs, music, and ethnobotanicals, and patent protection forindustrial goods as well as improve enforcement of IPRs
• Establish a global health fund to purchase licenses from developers of new medicines essential to treating
debilitating diseases in poor countries
Expand global efforts beyond trade to improve the environment, raise labor standards, and adopt adequate
product standards outside the WTO• Expand global environmental cooperation with financing to improve environmental protection
in developing countries, and create multilateral forum of environmental exchange• Strengthen international actions on labor standards through the International Labour Organisation (ILO), withproject collaboration from multilateral development banks• Create a Standards Development Facility to introduce science and other professional evidence into standard
setting for products, with adequate representation from developing countries; and provide assistance todeveloping countries’ standard setting bodies

3. Policies for high-income countries
Market access• Grant to all low-income countries duty-free and quota-free access to markets of all countries of OECD
• Reduce uncertainty of market access by harmonizing rules of origin, and by reducing threats of antidumping
Expand bilateral “aid for trade”• Provide financial and technical assistance to developing countries for “behind the border” trade-related investments necessary to take advantage of market access• Improve policy coherence by establishing coordinating mechanisms between development policies and trade
policies to ensure effective development outcomes• Assist developing countries to strengthen competition agencies and improve legislation, and require antitrust
agencies to provide to developing countries information on third market effects of domestic mergers as well as
pending cases of price-fixing and restrictive business practices; and review the anticompetitive consequences ofantitrust exemptions in transport and other sectors that adversely affect development
Domestic policies that facilitate adjustment of labor to economic change• Review domestic policies to ensure displaced workers have adequate social support to deal with rapid changes inlabor market conditions, including unemployment insurance, social safety nets (particularly health and pensions),
and access to training and education

4. Policies for developing countries• Adopt program of trade reform, including phased lowering of border protection for goods and services as part ofa poverty reduction strategy• As part of the trade reform program, adopt companion policies to cushion any impact on the poor of adjustment
to new trade incentives, and ensure investment responses; solicit foreign assistance when necessary to implementadministrative requirements of programs• Spur development of industries essential to trade, such as transport, telecommunications, financial sector, andbusiness services, particularly through introduction of regulatory policies that, where feasible, harness competition• Invest in upgrading public sector institutions related to trade, including customs, administration of drawback
programs, and financial supervision agencies• Encourage domestic intellectual property development through TRIPS-consistent standards appropriate to country
needs, and pursue protection of domestic intellectual property abroad• Ensure adequate macroeconomic policy framework to provide sound investment climate

159

G L O B A L

E C O N O M I C

P R O S P E C T S

Box 6.2. The recently renovatedintegrated frameworkThe Integrated Framework (IF) is a program set upby bilateral donors to increase the effectiveness of
trade-related technical assistance to the least-developed
countries. The IF was established in 1996; participating agencies include the WTO, the International
Monetary Fund, the International Trade Center,
United Nations Development Programme, United Nations Conference on Trade and Development, and theWorld Bank. Its purpose is to analyze options for
trade-led integration, determine the relative payoff totrade-related reform, and work with local counterparts to design appropriate policy reform packages
that both promote growth and protect the poor dur-ing the reform transition as options the government
might consider in preparing its poverty reduction
strategy papers (PRSP). The process starts with analysis: how trade might fit into national development
strategies, followed by assistance in the design and financing of projects (drawing on cross-country experience). An interagency task force was formed during
2000, and a trust fund has recently been establishedto fund the “integration studies” and technical assistance that can be built into the country assistancestrategies as appropriate.
Source: World Bank staff.

other low-income countries, and this too will require resources. “Aid for trade” could also help
speed adoption of best practices in customs administration as contained in the revised Kyoto
Convention and administered by the World
Customs Organization. It could help with financing of infrastructure related to trade (ports,
transport, and related services), logistics, tradefacilitation, and trade promotion; in many cases
bottlenecks in one or another area impedes export expansion from a particular country. Overthe medium term, development assistance devoted to education can help upgrade schools toincrease the productivity of poor workers. Finally, if specific assistance were available it
might be possible to help stakeholders in developing countries use intellectual property protection to their benefit by protecting intangible
assets such as traditional knowledge, designs,
music, and ethnobotanicals as well as patent
protection for industrial goods.
A second set of policies outside the WTO is
to expand global efforts to improve the environment, raise labor standards, and adopt adequate product standards. Environmental protection agencies from all over the world are
already engaged in a broad range of bilateralcollaborations—joint studies, exchanges, semi-

160

nars, and conferences—often in collaboration
with global nongovernmental organizations(NGOs). However, the potential for collective
action in the environment has barely beenscratched. The phenomenal success of the Montreal Protocol in reducing ozone-depleting substances (ODS), with the felicitous reversal oftrends toward an ever larger ozone hole over
the Antarctic, is worthy of study and emulation.
The Global Environmental Facility to reducegreenhouse gases has also had some success, if
somewhat more limited. Besides administeringbilateral trust funds to reduce ODS and greenhouse gases, the World Bank now finances environmental projects worth several billion dollars in developing countries, as do the regional
multilateral development banks. Much more
could be done. These positive efforts should replace efforts to use negative instruments such as
trade sanctions and recourse under the WTO,
which are likely to be ineffectual and even counterproductive (see box 6.3).
Finally, more has to be done to make patented drugs available in times of health crises,
such as acquired immune deficiency syndrome(AIDS), in a way consistent with incentives toinvest in research and development. One option: developed country governments, interna-

R E S H A P I N G

Box 6.3.

G L O B A L

T R A D E

A R C H I T E C T U R E

F O R

D E V E L O P M E N T

Environmental standards and tradeEnvironmental standards are at the forefront of
the public debate on trade. The WTO’s Technical
Barriers to Trade Agreement and the Agreement on
Sanitary and Phytosanitary Standards both include
some references to environmental protection andtrade, although to date there have been few formal
disputes brought before the WTO.
The links between trade and the environment
are complex.6 One effect is that trade can raise scalesof production. These effects will be positive because
the amount of resources that used to produce thesame level of output will decline. However, if trade
induces a change in output composition, it is possible that dirty industries (even at larger scales) may
increase, and clean industries contract, counteracting
the effects of scale. Trade may also permit greater access to more advanced and cleaner technology. The
net effect depends on the change in output mix andtechnology that occurs with trade-induced growth.
What are the trade consequences of environmental regulation? One hypothesis is that pollutionintensive industries take flight to countries with lax
environmental standards. However, there is limited
evidence to date to support this hypothesis. For example, Pearson (1987) and Leonard (1988).7
A second analytical approach considers the environment as a factor of production, such as capitaland labor. The idea is that countries with lax environmental regulations (for example, environmental
abundance) tend to specialize in pollution-intensive
goods. Here, too, the evidence is ambiguous. For
example, Tobey (1990), looking at five pollutionintensive industries in 23 countries, found that environmental regulations have caused trade patterns todeviate from the predictions of the model. Wilson,
Sewadeh, and Otsuki (2001), in a study of 24 countries with five different pollution-intensive industries,
found that stringency of environmental regulation reduces net exports of the five pollution-intensive industries. On the other hand, Grossman and Krueger(1993) investigate the environmental impact oftional organizations, and foundations could establish a global health fund that could be usedin part to purchase licenses from developers of
new drugs and vaccines that are essential forthe treatment of debilitating diseases in poor

NAFTA, and conclude that lax environmental regulations do not create a comparative advantage in
Mexico. Xu (1999), using a gravity model to investigate whether differences in environmental regulations have affected bilateral trade between a sample
of developed and developing countries in pollutionintensive goods, found no evidence that countries
with stricter environmental standards lower their
total exports of pollution-intensive goods. In sum,
the evidence on the specific linkages between environmental regulation and trade is mixed.
So what policy tools and institutions are best
suited to promoting higher levels of environmental
protection? Trade sanctions to support environmental
protection can restrict developing-country market access. Indeed they may be counterproductive: since environmental regulations tend to improve as incomesrise, policies that restrict trade and restrict growth
also undermine a driver of environmental improvement (see World Bank 2001). Second, sanctions penalize whole industries, the clean firms, as well as thepolluters in an industry. Third, many polluters produce for the local market and are unaffected by sanctions. Finally, domestic pollution and environmental
protection can be controlled most effectively they are
targeted at the source—through taxes and other domestic policy instruments. A more productive approach is to establish policy coordination among
countries. This would allow for joint regulation ofcommon watershed and air basin controls in areas oftransborder pollution, and for development assistance to transfer clean technology and environmental
aid to strengthen environmental protection over time.
Global environmental agreements (such as the Montreal Protocol that bans certain ozone-depletingchemicals) and others, if based on sound cost benefit
analysis, can raise environmental quality over time.
Voluntary ecolabeling programs also can provide incentives for environmental protection.
Source: Wilson 2001.

countries. These licenses would contribute toan adequate return on research and development costs in order to promote new drug development and also permit distribution ofdrugs to patients at low cost.

161

G L O B A L

E C O N O M I C

P R O S P E C T S

Similarly, collective action to improve labor
standards could also contribute to poverty reduction. Some actions are primarily developmental in scope, such as providing educational
subsidies to ensure that children can attend
school and do not have to enter the workplace(see Indonesia’s highly successful “Stay in
School Program”). Other actions have to dowith the propagation of core labor standards.
Leadership of these activities are—and should
continue to be vested—in the ILO, with project collaboration from multilateral development banks (see box 6.4).
Product standards are becoming increasingly important in international trade to protect consumers. However, standard setting canquickly become a ruse for protecting domestic
producers. One solution is to create a Standards Development Facility to introduce science and other professional evidence into standard setting for products, with adequate
representation from developing countries. This
Facility could also collaborate with governments to provide unbiased assistance to developing countries’ standard setting–bodies (seebox 6.5).
Countries could also undertake a programof collective action on government procurement. The World Bank’s Development Gateway
may be a vehicle to help countries implementtransparent and competitive processes in government procurement of goods and services, anarea where the multilateral development banks
have accumulated vast experience. Agreeing on
key principles, procedures, and policies, supplemented with provision of technical and financial assistance to implement them could go far
toward encouraging trade, engendering competition, and augmenting efficiency.

Policies of high-income countries
A major objective of a new round of tradetalks whose rationale is to promote development must be to lower the barriers to trade ingoods that the world’s poor produce and to theservices they can provide. An important firststep would be to reduce barriers to trade withthe low-income countries as an effort to pro-162

mote their development. This could be done
if all high-income countries were to emulate
the EU’s “Everything but Arms” preferential
scheme. This would provide an impetus to
LDC exports that could increase their revenues
by more than 10 percent and the trade from
Sub-Saharan Africa by some 14 percent.
Broadening this access for the 49 least-developed countries to the 70 low-income countries
would provide an important impetus to tradeled development in those countries that need it
the most. The effects in trade diversion would
be minimal, and the benefits important to the
low-income countries. If high-income countries
were to reduce antidumping threats, the effects
would be even greater.
Resources are essential to creating a supply
response to incentives created through market
access. Much can be accomplished from debtbased multilateral flows, but some portion ultimately falls on bilateral developmental assistance, often as grants, that can fill in the gaps.
If the high-income countries really wish to see
developing countries become more vigorous
participants in global trade, they must makeadditional efforts to augment extant programswith trade-related assistance. Bilateral grant
aid can help with many aspects of trade facilitation—customs reform, disseminating technical standards, and trade law reform, to name a
few areas.
Technical assistance can be as important
as financial assistance. One area where highincome countries could help immeasurably iscompetition policy. Simply requiring antitrust
authorities to present the structural effects ofmergers and acquisitions in home markets on
third country markets to be publicly available
would aid authorities in developing countries
to enforce competition policy in their own
jurisdictions. Moreover as analyzed in chapter
4, conducting a regular review of antitrust exemptions and their adverse consequences fordeveloping countries could be helpful, particularly in international transport.
It would be a mistake to infer that policies indeveloped countries should be designed solely topromote trade in developing countries. No less

R E S H A P I N G

G L O B A L

T R A D E

A R C H I T E C T U R E

F O R

D E V E L O P M E N T

Box 6.4 Improving labor standards in a waythat works

I

mproving labor standards is a fundamental aspectof development. However many developing nations have resisted efforts to include labor standards
in world trade agreements. Proponents argue that
trade sanctions should be used to enforce labor standards and to raise wages, while developing countries
fear that international labor standards could becomemasks for protection. Their inclusion in the WTO
threatens a main comparative advantage of developing countries.
Numerous studies have shown that low labor
standards that affect working conditions do notgrant a competitive edge to developing countries.
According to a 1996 OECD study, countries withlower core labor standards (that is, the eliminationof exploitative child labor, abolition of forced labor,
nondiscrimination in employment, freedom of association, and the right to collective bargaining) do nothave an improved export performance. The study
finds no correlation between real wage growth andthe degree of respect for freedom of association.
On the contrary, it supports the view that higher
national income levels and open-market reforms areboth associated with improved labor standards.

Percent growth of wages between 1980s and 1990s
30

20

10

0
MarginalizedRich countries

Post-1980
Globalizers

Source: Collier and Dollar 2001.

At the same time, trade sanctions to improvelabor conditions are likely to be counterproductive.
By limiting trade between nations, sanctions shackle

the growth in wages that expanded trade would otherwise bring. Historically, the growth rate of wages
has been twice as rapid in the developing countries
that increased their trade participation in the world
economy as compared with those that did not (Collier and Dollar forthcoming). Moreover, their wage
growth has been even faster than in the rich countries. Depriving poor nations of export opportunities
in the name of raising wages is fatuous.
There are other problems with trade sanctions.
Trade sanctions penalize whole countries and industries when violators are firms—and often they arefirms that do not export. Firms serving the domestic
market usually have worse labor standards thanexport industries (Aggarwal 1995). Wages and working conditions in export processing zones, for example, tend to be higher than the average for the domestic economy. Trade sanctions would in effecttarget the better performing export firms. Second,
trade sanctions are an inherently unequal instrument:
they are likely to be imposed only by developed
countries against developing countries. Finally, trade
sanctions can hurt the very people they are intended
to help. For example, in Bangladesh, children displaced from garment factories due to the fear of
sanctions found alternative employment in activities
with even lower standards, such as street vending
and prostitution (Panangariya 1999).
Fortunately, the international community has
more effective instruments to promote better labor
standards. A main purpose of the ILO is to promulgate good labor practices and legislations, and it,
rather than the WTO, is far better positioned to leadinternational efforts. Governments should be encouraged to monitor and enforce their own legislation by,
if necessary, imposing fines on enterprises that violate
core labor standards (Elliot 2001). Revenues fromthese fines could be channeled back into enforcement
programs and investments to upgrade labor conditions. This has several advantages over trade sanctions: violators are punished rather than all firms; revenues stay in the country and are used to improvestandards rather than imposing income losses on
countries; and improvements occur in a manner consistent with indigenous social values and mores rather

163

G L O B A L

E C O N O M I C

Box 6.4

P R O S P E C T S(continued)

than according to the dictates of people in rich countries. If violations are pervasive and egregious and international sanctions are needed, withholding development assistance is potentially more effective (Torres
1996). The role of NGOs is important, too. The aggressive campaigns of NGOs have called attention tofirm violations around the world, and these can help
promulgate stricter codes of conduct, encourage en-forcement, and call public and international attention
to the most egregious violations (Gereffi and others
2001). The international community can help developing countries improve wages and working conditions,but can do so better through the ILO than throughthe WTO.
Source: World Bank staff.

important are policies at home to help domestic
workers adjust to sudden changes in labor market conditions. Since it is impossible to separate
out trade-related dislocation from technologyrelated or “other”-related dislocations, thesepolicies should focus on providing support andflexibility to workers as they adjust to whateverforms of shocks to the labor market.

Domestic policies of developing countries
Governments in developing countries do nothave to wait for international negotiations,other international collective actions, or policies in high-income countries to revamp trade
policies in a way that promotes development.
Country policies still hold the potential for thegreatest gains from trade for most countries.
For this reason, countries and economies asdiverse as Chile, China, Hong Kong (China),
and Singapore, as well as Costa Rica andUganda have chosen to reduce tariffs unilaterally and to use multilateral agreement to legitimate and lock in the resulting more-efficient
price incentives for investors.
Many developing countries still have highlevels of protection that implicitly tax theirexport and growth potential. Border trade barriers continue to be high in three regions—
Africa, the Middle East, and South Asia. Average (unweighted) tariffs in these regions are
20 percent or higher, nearly double the 10 percent average now found in East Asia, Latin
America, and Europe and Central Asia. Moreover in many countries, tariff dispersion re-164

mains large, and so nominal tariff averages may
understate the resulting economic distortion. In
the small number of countries where nontariffbarriers continue to be used, elimination ofsuch instruments should be a priority. Theirconversion into tariffs will generally generate
revenues. As South-South trade is becoming increasingly important, developing countries canhelp themselves through lowering barriers that
impede access to their own markets.
However, to be effective, reduction in border barriers must be accompanied by otherpolicies and institutional improvements in theinvestment climate, so that the potentiallypowerful instrument of trade reform results inimproved productivity and growth. Weaving
reforms that lower border protection together
with reforms to elicit a supply response andpromote propoor growth is more complicatedthan first-generation reforms. Openness, in
combination with sound macroeconomic, financial, and governance policies, is one determinant of sustained rapid growth, which has adirect and positive relation to increases in theincomes of the poor (see World Bank 2000b;and Dollar and Kraay 2001).
Trade liberalization affects the poor differently depending on the country (see WorldBank 2000b: 49 ff). The immediate effects oftrade reform on the poor depend (among otherthings) on the initial nature of protection, thestructure of production, the effects of reforms
on relative prices, and whether reforms increase
the demand for labor (the basic asset of theR E S H A P I N G

G L O B A L

T R A D E

A R C H I T E C T U R E

F O R

D E V E L O P M E N T

Box 6.5 Standards development facility:
coordinated action to bridge the standards gap

Product standards are a critical part of trade in the
21st century. These include product standards
and sanitary and phytosanitary standards necessary
for market access in agriculture. Standards are directly linked to poverty reduction and human welfare through health, safety, and other channels. The
development challenge posed by standards and border barriers are particularly important to future
trade prospects of the least developed nations (WorldBank 2001).
The costs of barriers in standards are likely
much higher than tariffs to global trade (Maskus andWilson 2001). Moreover, testing, and certification
requirements in global market remain a serious obstacle for developing countries seeking to expand exports. The OECD estimates that standards alone represent between 2 and 10% of final product costs(OECD 1999). Changes in product standards canhave serious repercussions for developing country exporters. World Bank research and operational experience indicates that standards are today one of thefundamental “behind the border” barriers to poverty
alleviation through trade (Wilson 2000).
Most developing countries do not have the resources to apply standards. In Guatemala, for example, the total budget for standards in 2000 totals$119,000 (Hufbauer, Kotschwar, Wilson 2001). This
represents a small fraction of the total government
budget. The World Bank’s experience with standards
in the 1990s shows that investments of $ 3.5m (Vietnam) $155 million (Turkey), and $5 million in Morocco, for example, had to be undertaken to simply
begin the process of modernization. The Bank alongwith other multilateral institutions and bilateral
donors support standards-related projects in Africa
and elsewhere. The international community needs,
however, a coordinated and sustained effort to leverage work now done in an ad hoc fashion. A newcommitment to action is needed that compliments
the WTO agenda and trade negotiations. In order tosecure the benefits that market-driven standards offer

poor). For example in cases where the poor primarily produce for export or rely on imports
for consumption, lowering tariff barriers canimprove their situation through changes in rel-and integration of developing nations into the world
trading system, a new commitment is needed. Action
to bridge the rapidly widening divide between developed and developing countries. A two-part strategy
to meet this challenge over a 10 year period.
First, the G-8 leaders in Genoa in July 2001
committed to better coordinate trade-related assistance to “provide bilateral assistance on technicalstandards” and stressed the “paramount importanceof food safety.” A new Standards Development Facility (SDF) could be created to move these commitments forward. The program, to be coordinated incooperation with the WTO, the Bank, and othermultilateral institutions and bilateral donors, would
develop the framework for a long-term assistanceplan to (1) expand access to standards for developing
countries, and (2) facilitate modernization of standards infrastructures. This work could start with the
PRSP countries and build upon pilot programs incoordination with the G-8.
The second goal of the SDF would center on
promoting trade expansion through regulatory reform and removal of technical barriers in discriminatory standards, testing, and certification regimes.
This work is in the long-term economic benefit ofboth the developed and developing countries. A
framework to promote the wider use of “supplier’s
declaration of conformity” to regulatory requirements should be developed. A systematic review of
products subject to mandatory government testing
and certification that can be moved to declaration ofconformity status should be undertaken. A multilateral “Global Conformity Agreement” (GCA) could
then be developed based on this list for international
negotiation and agreement (Wilson 2001). Funding
to support standards modernization and capacity
building in the least developed countries, as outlined
above, must be part of this goal.

Source: World Bank staff.

ative prices, but when the poor work mainly
in import-competing sectors, trade liberalization can cause dislocation that adversely affects
them. That trade reforms can produce increases

165

G L O B A L

E C O N O M I C

P R O S P E C T S

in income and, in the long term, offset negative
effects offers little solace to those poor sufferingtransitional costs. For these reasons, trade reform programs have to identify the effects of reforms on the poor, design targeted compensation where possible, and build propoor social
protection into Poverty Reduction Strategies of
low-income countries and development programs of middle-income countries. For leastdeveloped countries, because much analyticaland capacity-building work remains to be undertaken, donors have agreed to adopt an Integrated Framework for the Least-Developed
Countries (see box 6.2).

Envisioning alternative futures

Making these changes in global tradearchitecture requires political leadershiparound the globe and within countries. Policymakers will ask: Are the benefits worth thepolitical effort? How will it affect poverty andincome distribution?
Answering these questions in a quantitative
sense poses challenges. Trade is only one ofmany factors affecting the long-term prospects
of developing countries. Chapter 1 presented a
discussion of the long-term growth dynamics
of developing countries in the world economy.
This constitutes a baseline view about the likely
evolution of developing countries, based upon
best guesses about generally stable parameters—savings, investment, population growth,trade, and productivity growth. To distinguishthe effects of changes in trade policies, we thensimulate the removal of trade restrictions discussed in the foregoing chapters, and analyze
their development consequences as measured
against the baseline scenario. Although economists’ ability to measure these changes is limited (for reasons discussed below), the effort isintended to give us some idea of relative magnitudes of effects.

Assessing the effects of trade openness:a fast-integration scenario
In chapter 1 recall that we had indicated that
income growth in low- and middle-income
countries under the baseline scenario will reach

166

around 3.6 percent on per capita terms, about
1.1 percentage points above the per capita
growth rate of the high-income countries, withthe highest growth rates anticipated in Asia.
The countries of Eastern Europe and Central
Asia were expected to grow quite rapidly in thenext decade, while Africa and the Middle East
would revert to modest growth rates. This performance over the 2000–15 period expands income by nearly 60 percent—some $18 trillion(in 1997 dollars).
The baseline scenario establishes a path ofgrowth against which to assess the effects ofeliminating trade barriers. It is important tobear in mind that the baseline incorporates
only those changes to the global trading regime
up through 1997 carried forward to 2015. The
key policy change to be simulated is the phased
elimination of all import tariffs, export subsidies, and domestic production subsidies. These
are modeled to begin in 2005 and last through2010. Said differently, in each year between
2005 and 2010, restrictions are reduced by
one-sixth from their initial levels. The structural transformation therefore starts in 2005,
and it has five years to complete (2011–15)
after full removal. In reality, of course, this typeof policy change would not come about only
through multilateral negotiations; but a development round, together with regional agreements8 and unilateral domestic policy reforms,
could well advance policy toward this framework by 2010.
Two versions of the trade reform scenario arepresented. In the first version it is assumed that
trade reform has no impact on productivity.
These are the static gains.9 For the most part,the source of these gains comes from reducing
the economic inefficiencies linked to trade policy distortions. These may have some dynamic
impacts as they change savings and investment
outcomes. The gains are sometimes counteracted, partially or even completely, by changes
in a nation’s terms of trade.10 (Annex 1 below
provides summary information on the design ofthe simulations and the underlying model.)The second version entails dynamic gains.
It assumes that productivity is a function of
the degree of openness of the economy. WhileR E S H A P I N G

G L O B A L

much more work needs to be done in this area,
the evidence available to date suggests a clear
link between openness and productivity. Thishas been implemented in the model assuming a
direct relation between productivity growth
and a measure of openness. Productivity
growth is linked to the export-output ratiousing a constant elasticity function.11 There areseveral potential channels through which thismechanism operates. As firms’ exports growand they increase their penetration of world
markets, they learn new technologies (throughcomparison with their competitors’ products);
they improve production processes to matchinternational standards (such as safety, health,packaging, style, and others); and they canbenefit from scale economies as they produce
for a larger market.12 There are other channels
through which openness could impact on productivity that are not incorporated here. The
key channels are imports of technology-ladenintermediate imports or capital goods, or both.
Impacts on real incomes. Measured in static
terms, world income in 2015 would be $355
billion more with trade liberalization than in
the baseline (figure 6.2).13,14 Measured in dynamic terms, this would translate into cumulative additional income of $1.5 trillion to developing countries over the 2005–15 period(valued at net present value in 2005).
About 48 percent of total gains accrue to thehigh-income countries, with Western Europe
garnering the highest static gains at $83 billion.
This largely reflects its highly distorted agricultural policies, which not only are costly for
European consumers and taxpayers, but also
place a burden on more competitive farmers
outside the EU, who face lower world prices
due to these distortions. Developing countries
as a whole would benefit from a rise in real incomes of 1.6 percent in the final year 2015,
compared to baseline income (figure 6.2).
There are wide variations in the income gains
across developing regions reflecting two opposing forces. On the one hand, removal of tariffs
leads to greater economic efficiency and higher
growth. By contrast, terms-of-trade losses canpartially counteract the gains from efficiency
improvements.

T R A D E

A R C H I T E C T U R E

F O R

D E V E L O P M E N T

The introduction of a link between openness and productivity increases the static gains
described above by a factor of over two, withthe global gains jumping to over $830 billion
using our base-case parameters. As a percentage of the global gains in 2015, developing
countries do much better, improving theirshare from 52 percent to 65 percent. The gains
as a percent of initial income rises to almost 5
percent for developing countries, and represents significantly higher gains than observedin the static version. The relative gains will behighest in countries observing the greatest risein their export-to-output levels. Typically, thesewill be countries with either high initial tariffs,
inducing a large shift in both imports andexports; or countries facing large tariffs andable to increase market penetration; or both.15
These results are broadly comparable in similar studies (see box 6.6)

Agriculture provides the greatest
opportunity
The gains from further opening of the global
economy can be decomposed in a number of directions. Table 6.1 illustrates the sources of theincome gains from two angles—regional andsectoral. Along the regional angle it shows thatthe greater source of income gain among developing countries is from their own reforms.
Thus full trade reform by developing countries
generates an income gain of $121 billion (inthe static) simulation, some two-thirds of theirgains from global trade reform. Needless to say,full market access by the high-income countries
leads to gains for developing countries of nearly$125 billion if productivity gains are taken into
account.
The sectoral decomposition is similarly illuminating. Reflecting the high distortions inagriculture, the largest gains from merchandise
trade liberalization are to be realized from
eliminating all forms of agricultural protection.
In both the static and dynamic simulations,agricultural reform in itself accounts for 70
percent of the global gains. Free market accessin the high-income countries could result ingains to developing countries of as much as$100 billion. On a lesser scale, but nonetheless167

G L O B A L

E C O N O M I C

P R O S P E C T S

Figure 6.2 Developing countries could
reap income gains of over $500 billion
from full trade liberalization—which implies up to a 5 percent boost
in incomes(billions of 1997 dollars, additional income in 2015
compared with baseline)(percent of baseline income in 2015)

900

5
StaticDynamic

Static800

Dynamic

4

700
600

3

500
400

2
300
200

1

100
0

0
Low- and middleincome countries

High-income
countries

World total

Low- and middleincome countries

High-income
countries

World total

Note: Static gains refer to the results holding productivity constant. Dynamic gains allow productivity to respond to
sector-specific export-to-output ratios.
Source: World Bank model simulations.

far from trivial, elimination of existing protection on textiles, clothing, and footwear would
generate global income gains ranging from $40
billion, in the case of fixed productivity, to almost $190 billion with endogenous productivity. Both of these sectors, as reflected in chapter
2, harbor the larger share of the working poor
in developing countries.

Results are sensitive to assumptions
While there is little doubt regarding the productivity-enhancing impacts of greater openness, there has been relatively little econometric analysis at either the macro or micro level
to determine more precisely the magnitude of
the relation. In light of this uncertainty, table
6.2 illustrates some potential range of the
global impacts of full trade liberalization withvarying assumptions regarding the key parameters in the relation between openness andproductivity.
Two parameters determine the relation. The
first is the responsiveness of sectoral productivity to sectoral openness (as measured by the168

export-to-output ratio). The second is the shareof total sectoral productivity affected by openness in the baseline simulation.21 The estimateof the gains in the baseline simulation corresponds to a productivity elasticity of one and ashare of 40 percent, that is, $832 billion. The
first column represents the static gains—anelasticity of 0. As one would anticipate, thegains increase as both parameters rise. Since
trade reform typically increases the export-tooutput ratio, an increase in the responsivenessof productivity to this ratio will increase theopenness-related productivity results. Similarly,
the larger the share of productivity accounted
for by the openness factor, the greater will be
the impact on growth.22

Service sector liberalization
The liberalization scenario described so far
has concerned only the goods sectors. However, chapter 3 of this volume clearly illustrates the importance of liberalizing the service sectors. With details to follow below, we
conservatively demonstrate that, for develop-

R E S H A P I N G

G L O B A L

T R A D E

A R C H I T E C T U R E

F O R

D E V E L O P M E N T

Box 6.6 The complexities of measuring openness
and growthtrade openness can affect growth. While the earlymodels essentially estimated the static inefficiency
losses from imposing tariffs and other trade barriers,
more recent models have extended the analysis alongfour main research paths—dynamic accumulation of
static gains, allowing for imperfect competition andscale economies, endogenous growth in which productivity is responsive to trade openness, and endogenous capital flows models in which capital is responsive to trade opening.17 All of these magnify themeasured static efficiency gains by a factor of two tofour, depending on the methodology.

S

tudies of the relation between openness andgrowth have followed two main lines. One line ofresearch has been to estimate econometrically the relation between openness and growth using crosscountry time series data and panel estimation techniques (see, for example, Sachs and Warner 1995,
and Dollar and Kraay 2001). These studies conclude
that there is indeed a strong link between openness
and growth.16 A second line of research has been thedevelopment of increasingly sophisticated generalequilibrium models. Model and data development
have focused on the various channels through which

Comparisons of the gains from full trade liberalization(all gains are in billions of dollars)
Type ofsimulation

Base year

Full pre-UR tradeliberalization

Dynamic

AFHHMbFull pre-UR tradeliberalization

GEPc

Full tradeliberalization(from 1997 base)

Study

Nature of reform

GKVa

Gain forindustrial countries

Gain fordeveloping countries

World total

1992

290

160

450

Steady-state

1995

146

108

254

Dynamic

1997

171

184

355

Dynamic
w/productivity

1997

293

539

832

450

760

1210

DFSd

Full tradeliberalization(from 1995 base)

Dynamic
w/productivity

1995

DFATe

Full tradeliberalization(from 1995 base)including services

Static1995

BDSf

Full post-UR tradeliberalization
including services

Static1995

Notes: a. Goldin, Knudsen and van der Mensbrugghe (1993).
b. Anderson, Francois, Hertel, Hoekman and Martin (2000).
c. Global Economic Prospects (2002).
d. Dessus, Fukasaku, and Safadi (1999).
e. Department of Foreign Affairs and Trade, Australia (1999).
f. Brown, Deardorff and Stern (2001).

750

1490

370

1860

(continued)169

G L O B A L

E C O N O M I C

Box 6.6

P R O S P E C T S(continued)

The box table summarizes several studies using
applied general equilibrium models.18 The differences in results can be essentially explained by threefactors: (a) the base from which the reform is simulated, together with its assumptions about initial levels of trade barriers (for example, pre- or postUruguay Round); (b) whether productivity is fixed or
responsive to trade opening; and (c) whether service
trade liberalization is included.
The first three studies—Goldin and others (GKV1993), Anderson and others (AFHHM 2000), andGlobal Economic Prospects 2002 (GEP) (that is, thestudy you are reading), use similar model specifications and estimate the long-term efficiency gains
from full merchandise trade liberalization. The aggregate gains from reform are roughly similar acrossthese three studies, and the differences can largely be
explained by the nature of the reform scenario. The
first estimates the pre-Uruguay Round (UR) impactsof full trade reform, the second the post-UR impacts,
and the third the impacts of trade reform before
complete implementation of the UR.

Only two of the studies cited here have someform of endogenous growth—the GEP and Dessus
and others (DFS 1999) studies. The DFS model assumes a relation between aggregate openness (asmeasured by the ratio of exports plus imports togross domestic product—GDP). The GEP model assumes that the economic response to opening issector-specific. As a result, in the GEP study, productivity increases are limited to the agriculture andmanufacturing sectors, thereby capping to some extent the additional gains from introducing the openness productivity link.19
Finally, the table in this box shows the impacts
of including service trade liberalization in the complete package.20 The Department of Foreign Affairs
and Trade (DFAT 1999) study shows a gain of $750
billion, and a tripling of the gains of merchandise
trade reform (compared with AFHHM); and theBrown and others (BDS—2001) study shows a massive gain of nearly $1.9 trillion. The study incorporates scale economies and imperfect competition that
could readily explain the differences in results.

ing countries, the income gain from service
liberalization amounts to multiples of the gains
from merchandise trade reform. There are several reasons for this. First, services play a
growing role in all economies as they develop,
both from the point of view of the consumer,
as well as their importance as inputs into an
efficient modern economy. Second, liberalization of services has lagged far behind liberalization of goods, where average tariffs aretoday generally low.
However quantification of services sectors’
trade barriers and other forms of protection isstill more art than science. Even the morestraightforward accounting of bilateral flows
and the value of sales of foreign affiliates inthe services sectors is sketchy, at best. Several
efforts have been undertaken to measure thebarriers and assess the impacts of their removal. Two global studies are cited in box
6.6, and the Tunisian case is developed morethoroughly in box 3.3 in chapter 3. These

170

studies, not surprisingly, show the tremendous
potential gains from liberalizing the services
sectors, gains that are multiples of merchandise trade liberalization.
Rather than relying on imprecise estimatesof the barriers to services delivery, results presented below provide a very conservative estimate of the potential gains using the samemodel used to assess merchandise trade liberalization, though in a simpler context. The framework is completely static using the 1997 base.23
The services sectors were disaggregated into six
categories:24 (1) trade and transportation; (2)communications; (3) financial services (including banking and insurance); (4) other private
services, including legal, accounting, accommodation, and restaurants; (5) public services; and(6) housing. The scenario assumes that reforms
are undertaken in four of these sectors—excluding public services and housing.
The barriers in the services sectors, as implemented in this framework, take three

R E S H A P I N G

G L O B A L

T R A D E

A R C H I T E C T U R E

F O R

D E V E L O P M E N T

Table 6.1 Agriculture accounts for the bulk of the gains from merchandise tradeliberalization(billions of 1997 dollars, additional income in 2015 as compared with baseline income)
Simulations with fixed productivity

Liberalizing region:
Benefiting region:
High-income
High-income
Low- and middle-income
Total
Low- and middle-income
High-income
Low- and middle-income
Total
All regions
High-income
Low- and middle-income
Total

Agriculture
and food

Textileand clothing

All other sectors

Total

73
31
104

–3
19
16

–25
26
1

49
75
124

23
114
136

20
7
27

78
–5
73

118
121
239

106
142
248

17
24
41

50
20
70

171
184
355

Simulations with endogenous productivity

High-income
High-income
Low- and middle-income
Total
Low- and middle-income
High-income
Low- and middle-income
Total
All regions
High-income
Low- and middle-income
Total

144
99
243

–10
20
10

12
7
20

149
124
273

53
294
346

78
104
182

22
21
43

151
424
575

196
390
587

66
123
189

35
27
62

293
539
832

Source: World Bank model simulations.

Table 6.2 Global gains are sensitive to
productivity—openness linkages(billions of 1997 dollars)
Elasticity(Share percent)

0.0

0.5

1.0

1.5

20
40
60
80

355
355
355
355

435
515
596
677

578
832
933
1,031

674
1,026
1,174
1,340

Note: Sectoral productivity is decomposed into two factors.
The first is sensitive to an openness indicator represented by
the sectoral ratio of exports to output. The second is a residual determined by other factors. In the baseline simulation,
the trade-sensitive factor is calibrated so that its share in determining total sectoral productivity is fixed. The sensitivity
analysis shows how the gains vary with respect to this share,respectively 20, 40, 60, and 80 percent. The table also shows
the sensitivity of the aggregate gains with respect to the elasticity linking trade openness with productivity.
Source: World Bank model simulations.

forms.25 The first is a cost penalty measuring
the relative inefficiency of firms operating as
monopolies or otherwise protected from competition. The second is a price markup overaverage cost, representing the ability of firms
to price to market in the absence of competition (be it domestic or foreign). The third captures barriers to cross-border trade.26 The barriers were set at conservative levels. Both thecost and trade penalties were set at 10 percent,and the markup was also fixed at 10 percent.
(By comparison, in the Tunisian study cited inchapter 3 [Konan and Maskus 2000], barriersin these same sectors varied from 3 to 200 percent, with most ranging from 30 to 50 percent.) The results presented below are limited
to services liberalization in developing coun-

171

G L O B A L

E C O N O M I C

P R O S P E C T S

tries only; that is, there is no assessment of the
impact of high-income country reform on developing countries.
The results are telling. So-called joint reform, where all three instruments are relaxedsimultaneously, yields an incremental income
gain for developing countries of nearly $900
billion, some 4.5 times greater than their gainfrom global merchandise trade liberalization
alone, or $190 billion (table 6.3).27 In total,
this represents a 9.4 percent income gain compared to base levels.28
Table 6.3 also reveals the decomposition of
the “joint reform” into its three components. It
is clear that reducing the cost penalty has thegreatest impact. It is equivalent to shifting the
production possibilities frontier outwards (inthe four service sectors). Though the markup
allows for some decline in the producer price,
it will be attenuated to some extent by higher

wages and returns to capital. In many ways themarkup is similar to a producer tax.29 In thatsense, one would not anticipate that a reduction in the markup would lead to the same
boost as an improvement in efficiency.30 Moreover, similar to a tax, elimination of a markup
can also produce perverse results if it leads toincreasing losses due to other inefficiencies (socalled second-best effects). Finally, the impactsof the trade barrier instrument are also significantly smaller than the efficiency gains. In part
this reflects the low level of penetration of crossborder trade in services. The long-run potential
would be much larger.
Table 6.3 also reports the decomposition of
the gains by category of service. The source ofthe largest impact is the trade and transportation sector, which accounts for roughly doubleof the aggregate gains. This largely corresponds
to this sector’s share in demand (compared toTable 6.3 Services liberalization generates substantial windfall gains for developing
countries
Goods trade
alone

Cost
penaltyMarkupremovalTradepenalty

Joint
reformTotal

Static income gain for developing countries ($1997 billion)

Reforming sector
Merchandise trade
All four service sectors
Trade and transportation
Communications
Financial services
Other private services

190.0
800.4
443.0
39.0
96.1
209.0

27.5
7.9
1.1
8.1
6.4

54.4
26.0
1.3
4.0
23.1

883.5
477.7
41.4
108.5
235.6

1073.4
667.6
231.3
298.4
425.5

Static income gain for developing countries (percent of base income)Merchandise trade
All four service sectors
Trade and transportation
Communications
Financial services
Other private services

1.7
7.0
3.9
0.3
0.8
1.8

0.2
0.1
0.0
0.1
0.1

0.5
0.2
0.0
0.0
0.2

7.7
4.2
0.4
0.9
2.1

9.4
5.8
2.0
2.6
3.7

Note: Though the results come from a comparative static simulation with a 1997 base, in order to make them comparable with previous results, they have been scaled by the projected income of 2015. For example, the merchandise trade gain of $190 billion isequivalent to $84.2 billion when scaled to 1997 income. The results as a percent of base income are invariant to the choice of reporting year. The first column represents the gains from merchandise trade liberalization only (in the comparative static framework).
The next four columns represent the incremental gains from services liberalization, that is, those gains on top of the gains from merchandise trade liberalization. The “Cost penalty” column reports the impacts of a 10 percent increase in efficiency in the four private
services sectors. The “Markup removal” column reports the impacts of the removal of a 10 percent markup in the same four sectors.
The “Trade penalty” column reports the impacts of reducing the trade penalty parameter by 10 percent. And the fifth column,“Joint reform,” represents the incremental impact of implementing all three reforms simultaneously. The final column represents thetotal gains: “Joint reform” added to merchandise trade liberalization. The instruments are only applied in developing countries.
Source: World Bank model simulations.

172

R E S H A P I N G

G L O B A L

the other three service sectors). For example,
on average in developing countries, input oftrade and transport services accounts for 6.6
and 7.4 percent of output in the manufacturing
and services sectors, respectively. And trade andtransport accounts for nearly 22 percent of private consumption. Other private services, thenext largest sector, has only 3.2 percent costshare in manufacturing and a 7 percent share inprivate consumption.31
Despite the somewhat tentative nature ofthese results, they clearly illustrate the importance of services liberalization for developing
economies. They also illustrate the need forsignificantly more research in the area of services—both in fundamental data gathering, as
well as in improving our knowledge of theeconomic mechanisms through which protection in the services sectors operate.

A R C H I T E C T U R E

F O R

D E V E L O P M E N T

the big number, policy makers, businesses andthe general public are often concerned about
the more direct impacts to specific segments ofsociety—who is likely to benefit and who may
be hurt. The next sections shed some light on
the more detailed economic impacts of merchandise trade reform—leaving the effects ofany service sector liberalization in abeyance.
Four headlines are noteworthy. First, tradereform tends to improve income distribution
toward greater equality. Second, it leads to
sharp reductions in poverty. Third, the majority of economic sectors tend to expand in thewake of reform. Finally, there is a significant
expansion in trade, particularly in agriculture
and textiles, two of the most protected sectors
in the global economy.
Income distribution. The current framework, although aggregate in nature, can elucidate some of the underlying factors determining income distribution, notably factor returns
and structural changes.32 Table 6.4 presents
the final year–impacts on real factor returns

Consequences for inequality and poverty
While all too frequently the focus of trade reforms is on the aggregate economic impact, i.e.
Table 6.4

T R A D E

Labor’s share of national income rises substantially(percent change in real factor returns in 2015 as compared with baseline)
With exogenous productivity

With endogenous productivity

Capitalreturns

Unskilled
wages

Skilledwages

Capitalreturns

Unskilled
wages

Skilledwages

High-income countries
United States
Western Europe
Japan
Other high-income OECD countries
Newly industrialized economies

0.1
0.1
1.2
0.8
0.5

0.5
0.7
1.5
3.1
4.1

0.4
2.6
2.7
0.6
2.9

0.4
0.7
2.2
0.7
–0.4

0.5
0.7
1.9
2.3
4.1

1.0
3.1
3.4
1.3
3.8

Low- and middle-income countries
Sub-Saharan Africa
East Asia and PacificSouth Asia
Eastern Europe and Central Asia
Middle East and North Africa
Latin America and the Caribbean
Rest of the world

0.8
4.6
1.7
1.4
8.0
0.7
0.8

6.9
6.2
6.0
5.4
4.1
5.3
3.3

4.5
7.8
3.4
4.3
12.5
2.5
2.2

3.4
9.3
3.7
3.3
10.9
1.4
3.2

5.4
11.2
5.7
5.3
6.1
4.8
2.7

6.8
15.0
5.8
6.7
17.0
4.3
4.2

Memorandum items
High-income countries
Low- and middle-income countries
World total

0.2
2.7
1.0

1.0
5.7
2.3

1.6
5.6
2.5

0.7
5.1
2.1

1.1
7.4
2.8

2.2
9.6
3.8

Note: Nominal factor prices deflated by economywide CPI.
Source: World Bank model simulations.

173

G L O B A L

E C O N O M I C

P R O S P E C T S(as percentage changes from the baseline). Unskilled wages improve more than skilled wages,
and capital returns in all of the developing regions, except for East Asia and the Middle Eastand North Africa, and in some cases quite substantially, for example in South Asia and Latin
America. This suggests quite strongly that protection has largely been detrimental to unskilledworkers, including, of course, those working
in agriculture.33 With endogenous productivity
the relative gains of unskilled workers is somewhat dampened. Since the additional productivity is only labor-augmenting, capital becomes
relatively scarcer with endogenous productivity,
thereby raising its relative return, and could
potentially reverse the trend toward improved
income distribution, although this will in part
depend on the share of capital income in aggregate income.
Poverty. Rising unskilled wages, as presented above, are likely to lead to a decrease inpoverty. When coupled with changes in theprice of the poor people’s consumption basket, the reduction in poverty could be quite
substantial. Figure 6.3 presents the “food andclothing” wage for unskilled workers in developing countries.34 The largest increase in real
unskilled wages occurs in the Middle East andNorth Africa region, but all developing regions benefit from a substantial rise. The changes
in the real wages of unskilled workers (deflated by the food and clothing index) can beapplied to the forecasts of poverty headcounts
for the year 2015. Assuming an elasticity of
two, a standard assumption for these types ofanalyses, figure 6.3 shows the implication on
poverty of the rise in unskilled real wages.
Overall dire poverty (those living on less than
$1 per day) would fall by over [110] million under these assumptions, some [15] percent below
the baseline forecast for 2015. Sub-SaharanAfrica would account for over one-half of the
improvement. Poverty would decline by over
320 million persons based on the $2 per day
criteria, with the largest absolute improvements in Sub-Saharan Africa and South Asia.
This represents a 15 percent decline in poverty
globally.

174

Structural transformation. Removal of
trade barriers has multiple structural implications—changes in the composition of production, changes in trade-to-output ratios, and soon. While in aggregate these changes are highly
positive, they could cause significant displacement, and potentially some losers. One of thereasons trade reforms are difficult to implement is that the potential losers are easy toidentify (and quick to alert and influence policymakers) whereas the gains are more diffused,and devoid of organized partisanship. Even if
the losses are small compared to the gains, thepolitical weight of protected sectors can, inmany cases, impede improvements in policies.
Figure 6.4 reflects the aggregate losses in value
added compared with the net aggregate gains.
For most regions, the negative displacement issmall relative to the aggregate gains. One of
the exceptions is Western Europe, where thevalue added losses, particularly in agriculture
and food processing, are much larger than theoverall gains. Sub-Saharan Africa, South Asia,and the Middle East and North Africa regions
also face relatively high negative displacementcompared with the aggregate gains. These are
the regions with the highest distortions, andtherefore are subject to the greatest structuraltransformation. However, on average for developing countries, the displacement represents
only 23 percent of the total gains.
Trade. In the baseline scenario and in the absence of any trade policy change, aggregate
world trade of goods and services would rise
above $11.2 trillion (table 6.5). Market penetration of developing economies in high-income
countries would rise to 32 percent, a rise of 5
percentage points from its level in 1997. Under
the openness scenario, world trade would increase by an additional $1.9 trillion in 2015, anincrease of 17 percent from baseline levels.
Developing-country market penetration would
rise to 37 percent in the high-income countries,
reflecting an increase of 26 percent in the valueof exports from developing countries to thehigh-income countries. More impressively,South-South trade would jump 59 percent, an
increase in value by over $700 billion.

R E S H A P I N G

G L O B A L

T R A D E

A R C H I T E C T U R E

F O R

D E V E L O P M E N T

Figure 6.3 Unskilled wages rise substantially relative to cost of living—
Percent change from baseline in 2015
18
16
14
12
10
8
6
4
2
0
Sub-SaharanAfricaEast Asia
and PacificSouth Asia

EasternEurope andCentral Asia

Middle EastandNorth Africa

Latin America
and theCaribbeanNote: Figure represents changes in unskilled wages deflated by the food and clothing CPI.
Source: World Bank model simulations.

—implying a substantial reduction in poverty
Number of persons (in millions) compared to baseline in 2015
120
$1 per day$2 per day

100
80
60
40
20
0
Sub-SaharanAfricaEast Asia
and PacificSouth Asia

EasternEurope andCentral Asia

Middle EastandNorth Africa

Latin America
and theCaribbeanNote: Figure represents potential reductions in number of persons living in poverty. A poverty elasticity of 2 with respect to theimprovement in unskilled real wages is applied to the baseline poverty scenario for 2015.
Source: World Bank model simulations.

The sectoral composition of the change intrade is equally revealing (figure 6.5). Except
for energy and the nontradable sectors (construction and services), developing-country
exports in all sectors increase sharply, particularly in percentage terms from baseline levels.
Agricultural exports expand by $200 billion,
and textile, clothing, and footwear exports bynearly $180 billion. Reflecting tariff escalation in the food-processing sector, developingcountry exports jump 139 percent. Note thathigh-income exports of food processing also
expand considerably.
This outcome reflects several factors. First,
tariffs in this sector are high around the world,
so industrial-country exporters are able to take175

G L O B A L

E C O N O M I C

P R O S P E C T S

Figure 6.4 Reform has costs, but they are largely outweighed by the gains
Change in billions of 1997 dollars compared to baseline
600
Displacement

Value added

Middle EastandNorth Africa

Latin America
and theCaribbean

500

400

300

200

100

0
Sub-SaharanAfricaEast Asia
and PacificSouth Asia

EasternEurope andCentral Asia

High-income
countries

Note: The displacement bars represent the sum of the difference in value-added in sectors with declining value added. The valueadded bars represent the aggregate change in value added. The figures are from the endogenous productivity scenario.
Source: World Bank model simulations.

Table 6.5 Developing countries increase
their market share(trillions of 1997 dollars in 2015)
Importing region

High-income

Low- andmiddle-income

World

Trade flows in baseline scenario

Exporting region
High-income
Low- andmiddle-income
World total

5.1

2.4

7.6

2.4
7.6

1.2
3.6

3.6
11.2

Trade flows with endogenous productivity

High-income
Low-andmiddle-income
World total

5.1

3.0

8.1

3.0
8.2

1.9
4.9

5.0
13.1

Source: World Bank model simulations.

advantage of new opportunities. Second, withdecline in protection in their own markets,
producers shift toward producing for export
markets. And third, the decline in agriculturalprotection in high-income countries reduces176

the costs of inputs for food processors, making
them more competitive internationally.
Exports of other manufactured products bydeveloping countries represent the largest absolute increase. A significant portion of the increase represents an increase in South-South
trade where barriers to manufactured imports
are high in the baseline, compared with barriers to trade in the industrial countries for thesesame products.

Conclusions
Launching a development round, moving forward on the global cooperation agenda to expand trade, enacting policies in high-income
countries to promote trade-led development,
and enacting trade reforms within developing
countries are all momentous tasks. But thelong-term promise is tangible: $2.8 trillion in
additional global income, $1.5 trillion of additional income for developing countries, reductions in global poverty by an additional
320 million people, and fewer infants dying
before their fifth birthday. This, in turn, would

R E S H A P I N G

G L O B A L

T R A D E

A R C H I T E C T U R E

F O R

D E V E L O P M E N T

Figure 6.5 World trade booms, particularly in food and agriculture(billions of 1997 dollars in 2015)
700
High-income countries

37

Low- and middle-income countries

600
500
400

7

300
139

87

200

48

52
100
0

6
Agriculture

911Energy4

10Processed
foods

0

Textiles, clothing,
and footwear

Other
manufacturing

Non-tradables

Note: Number above columns represents percent increase in exports from baseline level. These represent the results of openness
with endogenous productivity.
Source: World Bank model simulations.

Box 6.7 World Bank programs: activities to support
trade-led pro-poor growthT

he Bank, usually in partnership with other entities, is working to help developing countries
create—and take advantage of—new trade opportunities. It is doing so in three policy domains: global,
regional, and national.
At the global level, developing countries, more
important in size and sophistication than ever before,
are now pivotal to the success of the world trading
system. Their interests have to be taken into account
if any new multilateral trade negotiations are to be
successful and if the multilateral system is to bestrengthened. The Bank’s objective is to help developing countries use the system of multilateral rules
to expand their trade and development. In particular,
the Bank is focusing intensively on the barriers facing
least developed countries (LDCs) in using trade topromote development.
Regional arrangements are becoming increasingly important for trade policymakers in the developing world. The Bank is focusing on analyzing
their effects, on helping governments to shapearrangements so that they expand trade and become steppingstones to more effective multilateralparticipation, and on advising prospective members about costs and benefits. Understanding theeffects of the largest arrangements, such as the
proposed Free Trade Arrangement of the Americas

and the European Union agreements, is especially
important.
Finally, and most important, at the country
level, work on traditional border barriers remains apriority, particularly for countries in South Asia, theMiddle East, and Africa. At the same time, virtually
all countries are paying increased attention to “behind the border” issues—for example, investment
regulations, transportation infrastructure, trade facilitation, telecommunications, and business services—to ensure that producers can take full advantage ofthe opportunities globalization presents. This part of
the new trade agenda may partially overlap with extant sectoral reform initiatives, and in these cases, achallenger is to ensure consistency between traderelated objectives and the other objectives of sectoral
reforms. In all cases, the Bank’s goal is to help governments design and implement pro-poor reform
programs that can leverage trade into faster growthand poverty reduction. Of particular importance is
the Integrated Framework effort, a multilateral initiative designed to help least developed countries respond to market opportunities and accelerate theirintegration into the multilateral system.
In 2000, the Bank presented 46 projects to its
Board with trade components, and was undertaking 35
studies in addition to the IF work—to advise clients.

177

G L O B A L

E C O N O M I C

P R O S P E C T S

contribute to a more sustainable standard ofliving around the globe—and a more stableworld community.

Annex 1A

pplied general equilibrium (AGE) modeling, in some form, has been the tool ofchoice for trade economists to analyze the impacts of multilateral trade reforms for over two
decades, starting with analyses of the Tokyo
Round in the late 1970s and early 1980s (Clineand others 1978; Deardorff and Stern 1981;
and Whalley 1985). Their development took
off with the rising accessibility of computing
power and improved software, and have become increasingly more sophisticated, integrating aspects such as dynamics, market structure(for example monopolistic competition), and financial flows. AGE models proved to be influential in the last round of multilateral negotiations, which culminated in the Uruguay Round
Agreement signed in Marrakech in 1994 (seeMartin and Winters 1996, for example).
AGE models capture the detailed interactions across the many agents of an economy—
producers, consumers, public entities, investors,
importers, and exporters. Despite their level ofdetail, they nonetheless represent a stylized representation of a true economy. For example,
the version of the model used for this volume
represents economic activity by only 20 goods
and services. A detailed domestic model may
have 100 to 200 sectors.
The results of the model depend on two key
sets of parameters and the so-called closurerules. The first set is the dynamic parameters—
population and labor force growth rates, education, savings behavior, and technologicalprogress (or productivity). The second set of
key parameters includes the behavioral andtechnological parameters of the economic
agents. How do consumers respond to pricechanges? How do household budgets change asincomes rise? How flexible is production? Can
labor substitute for capital, or vice versa? While
many of these parameters are econometricallyestimated, there is still a great deal of uncer-

178

tainty regarding their levels. Systematic sensitivity analysis is desirable to determine the extent to which the impact analysis is robust tochanges in these parameters. This in itself is far
from a trivial task, given the thousands of parameters these models typically employ.
The closure rules pertain to the actions ofcertain agents that are not modeled explicitly,or are exogenous to the model. There are three
key closure rules in the simulations undertaken
for this study.35 First it is assumed that government expenditures are fixed in real terms.
In the baseline scenario, they grow at the samerate as real GDP; in policy simulations they areunchanged from their baseline levels. Government revenues are raised to achieve a targeted
level for the fiscal deficit. The latter is held
fixed at its base level in order to avoid sustainability concerns.36 The direct tax schedule adjusts to insure fiscal balance equilibrium. In thecase of trade reform, this implies that the reduction in import tax revenues is replaced bydirect taxes (to the extent that revenues fromother sources of taxation are not significantly
altered).
The second closure rule concerns investment. Investment is assumed to be savingsdriven, for instance, there is no interest ratemechanism that equilibrates the savings supply
and investment demand schedules. Foreignsaving can add to or subtract from domestic
saving. Trade reform may have little impact onoverall domestic savings to the extent that it
would do little to modify consumers’ choice
between current and future consumption. However to the extent that the price of investment
goods decline (due to the removal of tariffs oncapital goods), investment could rise substantially with positive long-term payoffs. In otherwords, the amount of investment per dollar
saved has very positive dynamic impacts if tariffs impose a high cost on capital goods.
The final closure rule concerns foreign capital flows. In the absence of endogenous determination of foreign capital flows across countries, these are assumed to be exogenous in any
given time period.37 Thus policy shocks aretransmitted to a fixed trade balance, the re-R E S H A P I N G

G L O B A L

verse side of a fixed capital account balance.
The typical impact of this closure rule in a
trade reform scenario is a real depreciation.
The removal of tariffs generates an increase inimport demand. Given the fixed trade balance,
this must be met by a rise in exports, achieved
through a real depreciation. The extent of thedepreciation will depend on the levels of the
trade elasticities (import and export). This simplification of foreign capital flows implies foreclosing an important channel for growth, forinstance, the increase in foreign direct investment (FDI) in the aftermath of trade reform.
Empirically, this channel has proven to bequite important as witnessed by Portugal andSpain with their entry into the EU, or by Mexico when it joined the North American Free
Trade Agreement. China has also witnessed aboom in direct foreign investment in anticipation of its accession to the WTO. Some of thepotential benefits of increased FDI are captured by the scenarios with endogenous productivity growth.
The version of the model used for thisanalysis decomposes the world economy into
15 regions and 20 economic activities. The
model is calibrated to the latest release of the
Global Trade Analysis Program (GTAP) dataset with a 1997 base year.38 The model issolved forward as a series of linked sequential
equilibria, where population and labor force
growth rates are given, capital accumulation isbased on the previous period’s level of investment, and productivity is calibrated to a target
GDP growth rate.
After a plausible baseline simulation is developed, policy shock scenarios are undertaken
where parameters calibrated in the baseline
simulation are taken as given (for example,
productivity parameters) and GDP growth is an
outcome. Thus, in the absence of any change inthe exogenous environment, the policy shock
scenario should reproduce the baseline.

Notes
1. See World Bank 2001, chapter 3.
2. This is not to say that South-South arrangements
cannot be made to work. However, many South-SouthT R A D E

A R C H I T E C T U R E

F O R

D E V E L O P M E N T

regional integration agreements have been formed thathave had negative or ambiguous effects on income. The
Trade Blocs report (World Bank 2000a) found that
South-South agreements between richer and poorer developing countries are likely to generate losses for thepoorer ones when the poorer members import products
from the richer members, whose firms are not internationally competitive. For example, in the 1960s, Kenya
had a more developed manufacturing sector than
Uganda and Tanzania, and when the three formed theEast African Community (EAC), the latter two lost tariff
revenue by importing from Kenya at the high protected
price rather than at the lower world price, with transfers
going from them to Kenya. This asymmetry proved unsustainable and resulted in the demise of the EAC.
3. Of particular importance is that the results of negotiations are made publicly available in user-friendly
form. For example, data on tariff bindings are not madeavailable in a database format, preventing analysts fromundertaking cross-country research. This is importantbecause it impedes efforts to estimate the magnitude
and incidence of costs of protection. It is a truism thatto reduce protection and resist protectionist pressures,
those that lose (pay) need to be aware of the costs ofsuch policies. The suppliers of, and the clients for, suchanalysis and information are not only governments, butalso civil society (think tanks) and the constituencies inindividual countries that are affected by policy. To dothis, they need easy access to the relevant data.
4. For example, Blackhurst, Lyakurwa, and Oyejide(2000) propose that governments transfer national representatives from United Nations agencies in New
York to the WTO to intensify cooperation by membersof regional integration arrangements.
5. However, synergies could be realized throughnetworking and collaboration between advisers. For
example, the new Global Development Gateway that isbeing established by the World Bank in cooperation
with numerous public and private sector partners
could provide a powerful vehicle for building a tradecommunity and sharing expertise. Such a portal could
also be used to assist governments (and NGOs) seeking
to identify experts and determine what has alreadybeen done in specific countries or on specific issues.
6. For example, Esty (1994) argues that if taxes orother measures compensate for environmental consequences, trade will result in more efficient use of resources, spur innovation, and lower costs of environmental protection everywhere. Ekins and others (1994)
add that if commodities for export are produced withserious damage to the environment, then trade may aggravate environmental problems. DeBellevue (1994)
and Røpke (1994) share the same view. Another channel of interaction between trade and the environment
concerns transboundary problems where pollution

179

G L O B A L

E C O N O M I C

P R O S P E C T S

spills over from one country to another. Esty (1994) argues that when a country suffers transboundary harm
due to exports of pollution-intensive product, the imposition of trade restrictions on the import of the culpable product can be justified.
7. Pearson (1987) asserts that there is no evidence
to establish that lax environmental regulations would
be captured by foreign investors as opposed to local
firms. Leonard (1988) argues that environmental regulations do not alter plants’ location decisions. He presents case studies of foreign direct investment in Ireland, Mexico, and Romania to examine trade data andinvestment statistics, and concludes that the data do
not support an industry flight hypothesis. Smarzynska
and Wei (2001) consider the corruption level of thehost country and use firm level datasets for 25 transition economies to examine support for the industry
flight hypothesis. They find limited evidence to support
the assertion that firms move to countries with lessstrict environmental regulations.
Levinson (1996) uses industry abatement costs,
business taxes, wages, energy costs, and roads to measure environmental performance and studies the effectsof these factors on the probability that a new industry
plant would open in a certain state. The results reveal
little evidence that environmental regulations hinder establishment of new plants. In contrast, Lucas, Wheeler,and Hettige (1990); Mani, Pargal, and Huq (1997);
and List and Co (1999) find some evidence to support
the industry flight hypothesis. Lucas, Wheeler, and Hettige (1990) find that toxic intensity has increased more
rapidly in developing countries than in industrial countries. They conclude that stringent environmental regulations in the OECD countries have caused relocationof pollution-intensive industries. According to Mani,
Pargal, and Huq (1997), environmental spending inIndia has a positive impact on plant location. However,they conclude that environmental regulations are not asignificant factor in determining plant location, because
costs involved with environmental regulations are notlarge enough to exceed other costs of doing business.
List and Co (1999) study the relationship between location decisions and environmental regulations. Theyuse state-level data from 1986–93; their results showthat a 10 percent increase in the median state’s (WestVirginia) regulatory expenditures per manufacturer decreases the probability of attracting a new firm by 3.9
percent for the median state. They conclude that environmental stringency and the location decision of a
new firm are inversely related.
8. The proposed Free Trade Agreement for theAmericas has a quick timeline for the elimination ofmost trade barriers in the Western Hemisphere. AsiaPacific Economic Cooperation (APEC) has proposed a2010 deadline for eliminating trade barriers among its

180

high-income members, and 2020 for developing-country members. Expansion of the European Union toward
the east and south would also eliminate barriers acrossa broad number of partners. There are also numerous
other proposed agreements, many of them bilateral.
9. There are some dynamic gains coming fromchanges in investment and structure.
10. Depending on the market power of a country’s
trading partners, and its own market power and thesize of the shock, the terms-of-trade impact could besignificant. A potentially critical situation is a country
that only imports highly differentiated goods from asmall set of importers and exports an homogeneous
good on world markets. Other factors also influencechanges in the terms of trade. For example, the removal of agricultural subsidies by high-income countries is likely to be beneficial for exporters of thesecommodities from developing countries, because theywould profit from a rise in the world price of thesecommodities.
11. The following functional form is used:
h

i
ÊE ˆ
g ie = c i0 Á i ˜
Ë Xi ¯where  ei is the growth in sectoral productivity due tothe change in openness (added to an exogenous growth
factor),  0i is a calibrated parameter, E and X represent
respectively sectoral export and output, and  is theelasticity. The parameter  0i has been calibrated so that(on average) openness determines roughly 40 percent
of productivity growth in the baseline simulation, andthe elasticity has been set to 1.
12. Scale economies could, of course, be modeled
explicitly.
13. Aggregate income gains or losses summarize theextent to which trade distortions are hindering growthprospects and the ability of economies to use the gains
to help those whose income could decline. Figure 6.2
summarizes these impacts for the modeled economies.
The figure presents the aggregate impacts in terms of
the outcome in the final year of the simulation (2015).
The results are presented in nominal value terms (expressed in 1997 prices), as well as relative to baseline income. Finally, it shows the results of both scenarios—with and without trade-sensitive productivity.
Real income is summarized by Hicksian equivalentvariation (EV). This represents the income that consumers would be willing to forgo to achieve post-reform
well-being (up) compared to baseline well-being (ub) at
baseline prices (pb):
EV = E(pb, u p ) - E(pb, u b )where E represents the expenditure function to achieve
utility level u given a vector of prices p (the b super-R E S H A P I N G

G L O B A L

script represents baseline levels, and p the post-reform
levels). The model uses the extended linear expendituresystem (ELES), which incorporates savings in the consumer’s utility function. See Lluch (1973) and Howe
(1975). The ELES expenditure function is easy to evaluate at each point in time. (Unlike the OECD treatmentof EV, we use baseline prices in each year rather thanbase year prices. See Burniaux and others 1993). The
discounted real income uses the following formula:

CEV =

2015

/

2015

S b (t -2004)EVta t =Sb (t -2004)Ytdt = 2005
2005

where CEV is the cumulative measure of real income(as a percent of baseline income),  is the discount factor (equal to 1/(1+r) where r is the subjective discountrate), Yd is real disposable income, and EV a is adjusted
equivalent variation. The adjustment to EV extracts
the component measuring the contribution of household saving, since this represents future consumption.
Without the adjustment, the EV measure would be
double counting. The saving component is included in
the EV evaluation for the terminal year. Similar to theOECD, a subjective discount rate of 1.5 percent is assumed in the cumulative expressions.
14. All nominal dollar figures are in 1997 prices;
the model does not incorporate nominal inflation. The
price anchor of the model is an export price index of
manufactures from the OECD high-income countries,
similar in concept to the World Bank’s Manufactured
Export Unit Value index. It is set to one in the base andall subsequent years.
15. Most of the action occurs in the agricultural andmanufacturing sectors because this version of the model
does not incorporate significant barriers in services.
16. Rodriguez and Rodrik (1999), among others,
have criticized these studies on methodological grounds;
they have also criticized those who use them to advocate simplistic policy conclusions. Nonetheless, the preponderance of evidence points rather consistently
to the fact that countries with more open trade andfinancial regimes, complemented with other appropriate macroeconomic and social policies, have improved
growth performance.
17. These four ideas are described summarily:
Dynamics. The main channels are two-fold. First,
higher incomes lead to higher savings and thus greater
capital accumulation. The second channel is that tariffs
are often imposed on investment goods. Their removal
leads to a rise in real investment, because per dollar ofsaving a buyer can purchase more investment goods.
Baldwin (1992) estimates that these dynamic gains
could triple the static efficiency gains. See, for example
Burniaux and van der Mensbrugghe 1994; Harrison,
Rutherford, and Tarr 1996; Francois, McDonald, andT R A D E

A R C H I T E C T U R E

F O R

D E V E L O P M E N T

Nordström 1996; and Ianchovichina and McDougall
2000.
Imperfect competition and scale economies. Relaxing the assumption of constant returns to scale technology and allowing for imperfect competition canlead to additional sources of gain from trade openness.
The ability to increase market size allows firms tospread fixed costs over greater output, thereby reducing average costs—and greater competition from otherfirms can reduce price markups. Both effects cansignificantly enhance the gains from openness. See forexample Harris 1984, Delorme and van der Mensbrugghe 1990; Harrison, Rutherford, and Tarr 1996;
Francois, McDonald, and Nordström 1996; andBrown, Deardorff, and Stern 1992.
Endogenous growth (or productivity). Openness
does not occur in a vacuum. As countries open theirborders to new products and capital goods, local firms
can take advantage of new technologies, foreign research and development, and other innovations to significantly enhance their productivity. Greater market
access of local exporters also can generate productivity
externalities by gaining more knowledge of foreign
markets and processes and improving production tomatch international norms and standards. See, for example, de Melo and Robinson 1990; Rutherford andTarr 2001; Diao, Roe, and Yeldan 1999; and Dessus,
Fukasaku, and Safadi 1999.
Endogenous capital flows. While many trade models typically abstract from incorporating endogenously
determined capital flows, there is significant empiricalevidence that the gains from international capital mobility are quantitatively important. There are twochannels through which capital flows influence
growth. The first is the direct channel leading to capital deepening (although this requires care in evaluating
the long-term gains, since eventually this generates a
stream of income repatriated back to the foreign owners). The second channel is through productivity since
it is often the case that the incoming capital embodies
new and improved technologies. See, for example,
McKibbin and Sachs 1991; Collado, Roland-Holst,
and van der Mensbrugghe 1995; McKibbin andWilcoxen 1999; Hertel 1997; and Ianchovichina andMcDougall 2000.
18. Comparisons of model results are notoriously
difficult to make. Models can differ in numerous ways,
dimensionality (for instance, regions, sectors), databases (notably policy instruments, such as tariff levels),
closure rules, time horizon, functional specification,and elasticities (such as supply, income, trade, and soon), and market structure (both goods and primaryfactors). Moreover, studies do not necessarily report
the same indicator as a measure of the gains fromtrade. The choices are various: real GDP, real income,181

G L O B A L

E C O N O M I C

P R O S P E C T S

some measure of welfare such as equivalent variation,
real absorption, and so on. And the units of measurement are not always identical. The indicators could bereported in different base year dollars, or as some cumulated discounted value, or as a percentage of somebase year indicator. Some noteworthy attempts to compare model results include the Martin and Winters
1996 volume on the Uruguay Round simulations, andthe OECD 1993 and 1998 and IPPC 2001 studies comparing model results of the potential economic consequences of mitigating climate change.
19. The sensitivity of these results to the openness
or productivity relationship is discussed below.
20. Modeling of services trade liberalization is stillin its infancy. First, simply assessing the trade (and investment) barriers quantitatively is a much more difficult task than developing tariff data on goods trade.
Second, the nature of the barriers is harder to specify
and implement in a model. It is currently a very active
area of research.
21. For example, assume total sectoral productivity
in the baseline is 2.5 percent. If the share affected by
openness is 40 percent, total productivity is the sum of
two components—1 percent determined by the openness factor (for instance, 40 percent of 2.5) and theresidual 1.5 percent determined by other factors. In
policy simulations, the trade openness indicator only
affects the 1 percent in this example. Thus if openness
increases by 10 percent, and the elasticity is 1, productivity will increase to 2.6 percent (=1.5 + 1.1).
22. These results are within the range found in the
few comparable studies available. For example Dessus
and others (1999) estimate a macro relationship between openness—as measured by the export plus import to GDP ratio—and per capita GDP growth using apanel dataset. Their preferred elasticity is 0.09—that is,
an increase in the trade-to-GDP ratio of 10 percent
leads to a rise in per capita GDP of 0.9 percent. As arough approximation, the elasticity of 1 used above inthe base simulation implies an elasticity of 0.4 for total
sectoral productivity with respect to openness—somefour times higher than the 0.09 used in the Dessus andothers (1999) study. However, their endogenous productivity applies economywide, that is, including services. If the 0.4 elasticity is multiplied by the agriculture
and manufacturing share of the economy, somewhere
between 30 and 60 percent, the economywide impact
falls to somewhere between 0.12 and 0.24. A second
factor to consider is that productivity is only labor-augmenting. Correcting for the labor share in the economy,
say, around 50 percent, the final impact on aggregate
productivity falls between 0.06 and 0.12. This isroughly in the range of the elasticity of Dessus and others (1999) and explains in part the differences in the estimates of the two studies.

182

23. Thus, the results represent two different economic equilibria abstracting from any dynamic effects
of changes in investment or saving, or both, and otherstructural transformation.
24. In the merchandise trade liberalization scenarios, the service sectors were aggregated into a single
account.
25. See van der Mensbrugghe 2001 for further
details.
26. The latter is implemented as a trade penalty,
similar to an import tariff, but with no direct revenue
implications. Formally, the model implements a versionof the so-called iceberg model. For example, if thepenalty parameter is set to 0.9, this implies that, of 100
units that are exported, only 90 units actually arrive at
destination.
27. For the purposes of comparison, the income
gains—as measured in dollar terms—were scaled toprojected 2015 income levels. This has no impact on
the relative gains.
28. The spillover effects of this scenario for highincome countries are marginal.
29. The difference being that the revenues generated by the markup typically accrue to firms and not
the government.
30. In results not reported, the impact of themarkup is highly nonlinear. Elimination of a 20 percent
markup—i.e., a doubling of the initial markup—generated an incremental income gain of $106 billion, somefour times the impact of eliminating a 10 percent
markup. The model results were generally linear withrespect to the other two instruments.
31. The shares are based on GTAP data.
32. The World Bank has an active research program
to improve analysis of the openness distribution linkages.
It involves developing both data and methodologies toincorporate multiple representative households directly
into AGE models (see, for example, Hertel, Preckel, andCranfield 2000) as well as to inject the results of the AGE
simulations into much more detailed microsimulation
models based on country-specific household surveys,
typically with thousands of households. More on thisresearch program is available at: http://www1.worldbank.org/wbiep/trade/povertyconf.html.
33. Skilled and unskilled workers are assumed to be
imperfect substitutes for one another. An alternative
specification would be to have skilled workers as complements to capital and the two together an imperfect
substitute for unskilled labor. The distributional outcomes would change, but presumably would favoreven more unskilled labor in most developing regions.
There is an active debate about the role of trade openness on relative wages. The standard theoretical argument suggests that returns to the relatively abundantfactor, unskilled labor in the case of developing coun-

R E S H A P I N G

G L O B A L

tries, should rise with trade openness. However, the reverse has been observed in some developing countries.
Part of the explanation comes from an increase in FDI,
which is assumed to require skilled labor. Another partial explanation is that openness frequently was undertaken simultaneously with other reforms, such as privatizations. The latter has often led to shedding oflabor to rationalize operations.
34. The figure reflects the results of the scenario
with endogenous productivity. It differs only slightly
from the results of the scenario with exogenous productivity.
35. See van der Mensbrugghe 2001 for complete
model specification.
36. The GTAP dataset merges public savings withthe household sector, and thus the public balance is zeroin all countries in the base year. The balancing items are
net transfers between the government and households.
37. Although exogenous in any given time period,
the capital account could vary over time (subject to theconstraint that it must sum to zero globally). To avoid
sustainability issues, the capital account is assumed tobe fixed at its base year level. Alternatively, it could
converge toward zero over the time period.
38. GTAP, based at Purdue University, has developed
the most widely used dataset for global trade analysis(See Hertel 1997 or GTAP’s Web site: www.gtap.org).
The latest release (version 5) incorporates data for 66
countries or regions, and 57 sectors.

References
Aggarwal, Mita. 1995. “International Trade, Labor
Standards, and Labor Market Conditions: An
Evaluation of the Linkages.” Office of Economics
Working Paper 95-06-C. U.S. International Trade
Commission, Washington, D.C.
Anderson, Kym, J. Francois, T. Hertel, B. Hoekman,
and W. Martin. 2000. “Potential gains from tradereform in the new millennium.” Paper presented
at the Third Annual Conference on Global Economic Analysis, held at Monash University, June
27–30. (Available at http://www.monash.edu.au/policy/conf/65Anderson.pdf.)
Baldwin, Richard E.. 1992. “Measurable Dynamic
Gains from Trade.” Journal of Political Economy, 100 (1), pp. 162–74, February.
Blackhurst, Richard, Bill Lyakurwa, and Ademola Oyejide. 2000. “Options for Improving Africa’s Participation in the WTO”. World Economy. 23(4),pp. 491–510. April.
Brown, Drusilla K., A. V. Deardorff, and R. M. Stern.
1992. “A North American Free Trade Agreement:
Analytical Issues and a Computational Assessment.” The World Economy 15: 15–29. (See also

T R A D E

A R C H I T E C T U R E

F O R

D E V E L O P M E N T

http://www.spp.umich.edu/rsie/model/analytics.ht
ml for model specification.)———. 2001. “CGE Modeling and Analysis of Multilateral and Regional Negotiating Options.” Research Seminar in International Economics Discussion Paper No. 468. School of Public Policy,
The University of Michigan, Ann Arbor. (Available at http://www.spp.umich.edu/rsie/workingpapers/papers451-475/r468.pdf.)
Burniaux, Jean-Marc, and D. van der Mensbrugghe.
1994. “The RUNS Global Trade Model.” Economic & Financial Modelling Autumn/Winter:
161–282.
Burniaux, Jean-Marc, G. Nicoletti, and J. OliveiraMartins. 1993. “GREEN: A Global Model for
Quantifying the Costs of Policies to Curb CO2
Emissions.” OECD Economic Studies: Special
Issue on the Economic Costs of Reducing CO2
Emissions 19 Winter: 49–92. Paris.
Cline, William R., N. Kawanabe, T. O. M. Kronsjö,
and T. Williams. 1978. Trade Negotiations in theTokyo Round: A Quantitative Assessment. Washington, D.C.: The Brookings Institution.
Collado, Juan Carlos, D. Roland-Holst, and D. van der
Mensbrugghe. 1995. “Latin America Employment
Prospects in a More Liberal Trading Environment.” In Social Tensions, Job Creation and Economic Policy in Latin America, D. Turnham, C.
Foy, and G. Larrain, editors. Paris: Organisation
for Economic Co-operation and Development.
Collier, Paul, and D. Dollar. Forthcoming. Globalization: Facts, Fears, and an Agenda for Action.
World Bank Policy Research Report, Washington,
D.C.
de Melo, Jaime, and S. Robinson. 1990. “Productivity
and Externalities: Models of Export-Led Growth.”
PRE Working Papers WPS 387. World Bank, Washington, D.C.
Deardorff, Alan V., and R. M. Stern. 1981. “A Disaggregated Model of World Production and Trade:
An Estimate of the Impact of the Tokyo Round.”
Journal of Policy Modeling 3: 127–152.
DeBellevue, E. B., E. Hitzel, K. Cline, J. A. Benitez, J.
Ramos-Miranda, and O. Segura.. 1994. “TheNorth American Free Trade Agreement: An Ecological Economic Synthesis for the United Statesand Mexico.” Ecological Economics 9: 53–71.
Delorme, François, and D. van der Mensbrugghe. 1990.
“Assessing the Role of Scale Economies and Imperfect Competition in the Context of Agricultural
Trade Liberalization: A Canadian Case Study.”OECD Economic Studies No. 13 (Winter 1989–
90): 205–36.
DFAT (Department of Foreign Affairs and Trade). 1999.
Global Trade Reform: Maintaining Momentum.

183

G L O B A L

E C O N O M I C

P R O S P E C T S

Canberra, Australia. (Available at http://www.
dfat.gov.au/trade/negotiations/gtr_2000.pdf.)
Dessus, Sébastien, K. Fukasaku, and R. Safadi. 1999.
“Multilateral Tariff Liberalisation and the Developing Countries.” OECD Development Centre
Policy Brief No. 18, Paris. (Available at http://www.
oecd.org/dev/ENGLISH/publication/Policy-B/
pb18a.pdf.)
Diao, Xinshen, T. Roe, and E. Yeldan. 1999. “Strategic
policies and growth: an applied model of R&Ddriven endogenous growth.” Journal of Development Economics 60: 343–80.
Dollar, David, and A. Kraay. 2001. “Growth is Good for
the Poor.” World Bank Policy Department Working Paper No. 2587. April. Washington, D.C.
Ekins, P., C. Folke, and R. Costanza. 1994. “Trade,
Environment and Development: The Issues in Perspective.” Ecological Economics 9: 1–12.
Elliot, Kimberly Ann. 2001. “Finding Our Way on
Trade and Labor Standards.” International Economics Policy Briefs. Institute of International
Economics, Washington D.C.
Esty, D. C.. 1994.. “Greening the GATT: Trade, Environment and the Future.” Institute for International Economics, Washington, D.C.
Finger, J. Michael. 1998. “GATT Experience with Safeguards: Making Economic and Political Sense of
the Possibilities that the GATT Allows to Restrict
Imports.” World Bank Policy Research Working
Paper, No. 2000, Washington, DC.
Finger, J. Michael, and Philip Schuler. 2000. “Implementation of Uruguay Round commitments: thedevelopment challenge”. World Economy, 23(4),pp. 511–25. April.
Francois, Joseph F., B. McDonald, and H. Nordström.
1996. “The Uruguay Round: A Numerically
Based Qualitative Assessment.” In W. Martin and
L. A. Winters, editors, The Uruguay Round andthe Developing Countries. Cambridge, U.K.:
Cambridge University Press.
Gereffi, Garri, R. Garcia-Johnson, E. Sasser. 2001.
“The NGO-Industrial Complex.” Foreign Policy
July–August.
Goldin, Ian, O. Knudsen, and D. van der Mensbrugghe.
1993. Trade Liberalization: Global Economic Implications. Paris: OECD/The World Bank.
Grossman, Gene M., Krueger, A. B. 1993. “Environmental Impacts of a North American Free Trade
Agreement.” In The Mexico-U.S. Free Trade Agreement, Peter M. Garber, editor. Cambridge andLondon: MIT Press. P.13–56.
Harris, Richard. 1984. “Applied General Equilibrium
Analysis of Small Open Economies with Scale
Economies and Imperfect Competition.” The American Economic Review 74 (5–December): 1016–32.

184

Harrison, Glenn W., T. F. Rutherford, and D. Tarr.
1996. “Quantifying the Uruguay Round.” In W.
Martin and L. A. Winters, editors, The Uruguay
Round and the Developing Countries. Cambridge, U.K.: Cambridge University Press.
Harrison, Glenn W., Thomas F. Rutherford and David
G. Tarr. 1997. “Trade policy options for Chile: aquantitative evaluation”. World Bank Policy Research Working Paper, No. 1783, Washington, DC.
Hertel, Thomas W., editor. 1997. Global Trade Analysis: Modeling and Applications. New York: Cambridge University Press.
Hertel, Thomas W., P. V. Preckel, and J. A. L. Cranfield. 2000. “Multilateral Trade Liberalization
and Poverty Reduction.” Paper presented at theConference on Poverty and the International
Economy, jointly sponsored by World Bank and
the Parliamentary Commission on Swedish Policy
for Global Development (Globkom), October
20–21, 2000, Stockholm, Sweden. (Available at
http://www1.worldbank.org/wbiep/trade/papers/
cranfield.pdf.)
Howe, Howard. 1975. “Development of the Extended
Linear Expenditure System from Simple Savings Assumptions.” European Economic Review 6:
305–10.
Ianchovichina, Elena, and R. McDougall. 2000. “Theoretical Structure of Dynamic GTAP.” GTAP
Technical Paper No. 17. Center for Global Trade
Analysis, Department of Agricultural Economics,
Purdue University, West Lafayette, Ind. (Available
at http://www.agecon.purdue.edu/gtap/resources/
download/160.pdf.)
IPCC (Intergovernmental Panel on Climate Change).
2001. “Climate Change 2001: Mitigation.” Contribution of Working Group III to the Third Assessment Report of the Intergovernmental Panelon Climate Change (IPCC). Edited by B. Metz,
O. Davidson, R. Swart, and J. Pan. Cambridge
University Press, Cambridge, U.K. (A technicalsummary is available at http://www.ipcc.ch/pub/wg3TARtechsum.pdf.)
Leonard, H. J. 1988. Pollution and the Struggle forWorld Product. Cambridge, UK.: Cambridge University Press.
Levinson, Arik. 1996. “Environmental Regulations
and Manufacturers Location Choices, Evidence
from the Census of Manufacturers.” Journal of
Public Economics 62: 5–29.
List, John A., and C. Y. Co. 1999. “The Effects of Environmental Regulations on Foreign Direct Investment.” Journal of Environmental Economics
and Management 40: 1–20.
Lluch, Constantino. 1973. “The Extended Linear Expenditure System.” European Economic Review
4: 21–32.

R E S H A P I N G

G L O B A L

Lucas, Robert E. B., D. Wheeler, and H. Hettige. 1990.
“Economic Development, Environmental Regulation and the International Migration of Toxic Industrial Pollution.” Paper presented at the symposium on International Trade and the Environment,
Washington D.C.
Mani, Muthukumara, S. Pargal, and M. Huq. 1997.
“Does Environmental Regulation Matter? Determinants of the Location of New Manufacturing
Plants in India.” Policy Research Working Paper
No. 1718. World Bank, Washington, D.C.
Martin, Will, and L. A. Winters, editors. 1996. The
Uruguay Round and the Developing Countries.
Cambridge, U.K.: Cambridge University Press.
McKibbin, Warrick J., and J. D. Sachs. 1991. Global
Linkages: Macroeconomic Interdependence andCooperation in the World Economy. Washington,
D.C.: The Brookings Institution.
McKibbin, Warrick J., and P. J. Wilcoxen. 1999. “The
Theoretical and Empirical Structure of the G-Cubed
Model.” Economic Modeling 16 (1):123–48.
OECD (Organisation for Economic Co-operation andDevelopment). 1993. “OECD Economic Studies:
Special Issue on the Economic Costs of Reducing
CO2 Emissions No. 19.” Winter 1992. Paris.
———. 1996. “Trade, Employment and Labor Standards: A Study of Core Workers’ Rights and International Trade.” Paris.
———. 1998. “Economic Modeling of Climate
Change.” OECD Workshop Report. September
17–18, 1998. Paris. (Summary available at http://
www.oecd.org/dev/news/Environment/summary.
pdf.)
Pananagariya, Arvind. 1999. “Labor Standards in the
WTO and Developing Countries: Trading Rights
at Risk.” University of Maryland, College Park.
Pearson, C. 1987. Multinational Corporation, the Environment and Development. Washington, D.C.:
World Resources Institute.
Rodriguez, Francisco, and D. Rodrik. 1999. “Trade
Policy and Economic Growth: A Skeptic’s Guide
to Cross-National Evidence.” NBER Working
Paper W7081. NBER, Cambridge, Mass. (Available at http://papers.nber.org/papaers/w7081.)

T R A D E

A R C H I T E C T U R E

F O R

D E V E L O P M E N T

Røpke, I. 1994. “Trade, Development and Sustainability:
A Critical Assessment of the ‘Free Trade Dogma’”
Ecological Economics 9: 13–22.
Rutherford, Thomas F., and D. G. Tarr. 1998.
———. Forthcoming. “Trade Liberalization, Product
Variety and Growth in a Small Open Economy:
A Quantitative Assessment.” Journal of International Economics.
Sachs, Jeffrey D., and A. M. Warner. 1995. “Economic
Reform and the Process of Global Integration.”
Brookings Papers on Economic Activity (1):
1–118.
Smarzynska, Beata, and S.-J. Wei. 2001. “Pollution
Havens and the Location of Foreign Direct investment: Dirty Secret or Popular Myth?” World
Bank, Washington, D.C. Processed.
Tobey, James A. 1990. “The Effects of Domestic Environmental Policies.” Kyklos 43 (2): 191–209.
Torres, Raymond. 1996. “Labor Standards and International Trade” The OECD Observer No. 202.
van der Mensbrugghe, Dominique. 2001. “LINKAGE
Technical Reference Document.” World Bank,
Washington, D.C. Processed. (Available at http://
www.worldbank.org/prospects/pubs/TechRef.pdf)
Wells, P., and M. Jetter. 1992. The Global Consumer.
London: Victor Golancz.
Whalley, John. 1985. Trade Liberalization among
Major World Trading Areas. Cambridge, Mass.:
MIT Press.
Wilson, John S. 2001. “Environmental Standards andTrade: A Primer.” World Bank, Washington, D.C.
Processed.
Wilson, John S., M. Sewadeh, and T. Otsuki. 2001.
“Dirty Exports and Environmental Regulation:
Do Standards Matter?” World Bank, Washington, D.C. Processed.
World Bank. 2000. Trade Blocs. World Bank Policy
Research Report. World Bank/Oxford University
Press. Oxford, UK.
Xu, Xinpeng. 1999. International Trade and Environmental Regulation: A Dynamic Perspective. Commack, NY. Nova Science Publishers, Inc.

185

Appendix 1
Regional Economic Prospects

East Asia and Pacific Region
Recent developmentsT

HE YEAR 2001 WAS SHAPING UP AS A DIFficult year for East Asia and Pacific(EAP) even before the September 11 terrorist attacks on the United States. The unexpectedly sharp cyclical downturn in the world
economy during the year had centered on arecession in the global high-technology (hightech) sector, resulting in a plunge in the exportsof the many East Asian economies that have become important suppliers of components andfinished products for world high-tech markets.
East Asian exports were also especially hurt by
the fact that the slowdown in global demandhas been steepest in the region’s largest externalmarkets, the United States and Japan, which together buy almost 40 percent of regional exports. By July or August economies with a highreliance on high-tech, such as the Republic ofKorea, Malaysia, the Philippines, Singapore,
and Taiwan (China), were seeing U.S. dollar export declines of around 20–25 percent on year
earlier levels. There was, nevertheless, some
comfort in the fact that, apart from the Philippines, the main impact of the high-tech recession was falling on high income or uppermiddle-income countries with low poverty.
In the wake of the terrorist attacks, the region’s export downturn is likely to become
broader based, as falling consumer confidence
in the United States and around the world
dampens demand for the region’s consumer

and services exports. Overall, the global economic impacts of the terrorist attacks arelikely to have pushed back the prospects for arecovery in world trade and in East Asian exports by six to nine months.

Near-term outlook
Growth in the developing East Asia region is
expected to fall to 4.6 percent in 2001 from
7.5 percent in 2000, and to recover only
mildly to around 5 percent in 2002. These
would be the region’s second weakest years
for growth since 1990, bar only the near-zerogrowth year of financial crisis, 1998. Most of
the slowdown in growth is concentrated in the“Crisis 5” countries (that is, the five countries
that were most affected by the financial crisisof 1997–98—Indonesia, Korea, Malaysia, thePhilippines, and Thailand). Aggregate growthin this group is expected to slow to only 2–3
percent in 2001 from around 7 percent in2000. Growth in 2001 will still reach around
7 percent in China, which contains two-thirdsof the region’s poor (at the $2 a day povertyline). With a more diversified export basket
than some other countries in the region,
China’s export growth, while slowing sharply
to an average 2 percent pace in June–August
2001, has at least avoided the huge 20–35 percent declines seen elsewhere. Growth has also
been bolstered by a robust fiscal stimulus package to offset the export slowdown.
Other transition countries, such as Cambodia and Vietnam, which rely on low- or

187

G L O B A L

E C O N O M I C

P R O S P E C T S

Figure A1.1 Industrial production in East Asia and world semiconductor sales volumes
3-month moving average, percent y/y
25

40

20

30

15

20
East Asia

10
East Asia
excluding China

5

0
–10

0
–5

World semiconductor
sales volume [right scale]

–20
–30

–10
Jan. 1999

10

July 1999

Jan. 2000

July 2000

Jan. 2001

July 2001

Source: Semiconductor Industry Association through Bloomberg and World Bank.

medium-tech exports, have also been less affected by the high-tech recession, and showed
continued buoyancy in domestic investment in
the first part of the year. Growth prospects forthe region in 2002 will depend significantly on
the timing and scope of world recovery. It is
probable that the steep cuts in interest rates,
income tax cuts, and post-attack emergency
spending in the United States, as well as policy
measures in other industrial countries, willlead to a rebound in the second half of 2002,
strengthening to a more full-blown global recovery in 2003.
Prospects for the region will also be affectedby specific sectoral trends in the wake of theterrorist attacks. Oil prices have been volatile
after the attacks and may have an upward bias
for the rest of the year because of the risk ofmilitary action in the Middle East, with amixed impact on the region. If major disruptions are avoided, weak world growth will tend
to push oil prices lower in 2002. However,countries that rely on worker remittances could
be hurt by political turmoil in the Middle East,as well as from weaker growth in Asia. Remittances to the Philippines are already down.
Non-oil commodity prices have weakened in
2001, and are likely to weaken further with188

lower world growth after the attacks. Some ofthe smaller economies of the region that rely oncommodity exports, such as Mongolia, Papua
New Guinea, Fiji, and the island economies
will be hurt by lower non-oil primary commodity prices. As regards other sectoral effectsof the attacks, airline travel, tourism, and insurance are likely to be the worst affected,
while inputs for military materials, information
technology (IT) infrastructure, and telecommunications may benefit. As a result, East Asia,with its reliance on high-tech exports, may beless badly affected than other regions. However, selected Pacific islands and countries suchas Thailand will feel a more significant effect ofthe pullback in world tourism.
Among other factors affecting near-term
prospects, it is notable that, despite serious
emerging capital market crises in Turkey andArgentina, there were few signs of a generalized contagion effect or pullback of private
flows to the region in the first part of the year.
Gross capital market flows to the region of
about $31.5 billion in January–July 2001 were
only slightly lower than during the same period in 2000. This overall stability reflected
improvements in crisis countries’ external balance sheets in the last several years, including a

R E G I O N A L

buildup of foreign reserves and reductions inshort-term debt. Exchange rates, while volatile,
were not much different in early September
from the start of the year, while the majority ofequity markets had actually risen modestly
over this period. Capital market stresses wereconcentrated on the Philippines and Indonesia,
reflecting political uncertainties earlier in theyear, as well as concerns about high public
debt. After the Sept. 11 attacks, secondary market spreads for Indonesia and the Philippines
widened. Equity prices fell sharply in mostcountries in the region. To some extent, the region will share in a more widespread investor
pullback from emerging markets. Corporate restructuring and privatization efforts may behampered by reduced foreign investor interest.
Among near-term policy responses to theslowdown, a number of countries have increased fiscal expenditures somewhat to help
smooth the impact of the export shock, including China, Korea, Malaysia, and Thailand.
Such expenditures can be especially helpfulwhen carefully targeted to address social protection, infrastructure, or other particular sectoral needs that may be warranted in a sharply
slowing economy. However, concerns about
relatively high or growing public debt—especially when measured inclusive of contingent
Table A1.1

E C O N O M I C

P R O S P E C T S

liabilities—mean that in most countries higher
spending can only be sustainable for a limited
time. Indeed, very high public debt levels will
essentially preclude greater fiscal stimulus inIndonesia and the Philippines. Given these constraints, a temporary increase in spending—where possible—is best seen as a means of addressing specific social or sectoral objectives,and as a complementary policy that allows
countries to continue to make progress on difficult structural policies such as corporate restructuring, even in the current weak economic
climate.
The impact of this year’s slowdown on
poverty will be mitigated by the fact that thesteepest declines in growth are in the highincome, newly industrialized economies (NIEs—
including Hong Kong (China), Singapore, andTaiwan (China) and in the richer Crisis-5 countries, which have relatively low poverty rates.
Still, with less growth, this year’s downturn inEast Asia will stall the pace at which income
poverty in the region falls, while the risk of a risein poverty has also increased. According to calculations by the Bank’s East Asia and Pacific Region, the proportion of people living below the$2-a-day line may edge down from an estimated47 percent in 2000 to a forecast 46 percent in2001. Given continued robust growth in China

East Asia and Pacific forecast summary(percent per year)
Baseline forecast
Growth rates/ratios

1991–2000

1999

2000

2001

2002

2003

2004–2010

7.2
5.4
6.0
1.2
5.4
34.1
–1.0
13.0
0.5

7.0
6.0
5.9
1.1
0.0
29.0
–2.5
7.7
4.3

7.5
6.8
6.4
1.0
3.4
30.0
–2.2
23.7
3.3

4.6
5.5
3.6
0.9
7.1
30.4
–2.0
0.4
1.4

4.9
5.7
4.0
0.9
6.7
30.7
–2.4
6.2
0.0

6.8
5.9
5.9
0.9
5.3
30.7
–2.3
11.3
0.5

6.2
6.0
5.4
0.8
3.7
33.7
–3.1
7.3
–0.8

5.3

6.9

7.1

2.3

3.4

5.4

5.0

Real GDP growth
Consumption per capita
GDP per capita
Population
Inflationa
Gross Domestic Investment/GDPb
Central Gvt Budget Balance/GDP
Export Volume cCurrent Account/GDP
Memorandum Items
GDP growth: EAP excl. China
a. Local currency GDP deflator; median.
b. Investment ratio measure in real terms.
c. Goods and non-factor services.

Source: World Bank baseline forecast, October, 2001.

189

G L O B A L

E C O N O M I C

P R O S P E C T S

and other transition countries, which containthe large majority of the region’s poor, the main
source of slower region-wide poverty reduction
in 2001 is likely to be the sharp slowdown ingrowth in Indonesia, the Philippines, and Thailand, which contain most of the rest of the region’s poor.
In a longer-term perspective, it is notablethat the pace of poverty reduction in the region has slowed dramatically, something that,persisting over time, cannot help but have deepsocial, political, and policy implications. Between 1990 and 1996 the regional poverty
rate at $2-a-day fell from 67 to 49 percent, butfrom 1996 to 2000 it fell only 2 percentage
points more. The less numerically significant
reason is the financial crisis and slow recovery
in Indonesia, the Philippines, and Thailand.
The other is slower income growth in China’s
rural areas—where most of China’s poor
live—even as urban income growth has gonefrom strength to strength. Thus the drama of
East Asian poverty reduction will largely depend on how countries address disparities inrural-urban and intra-regional growth, as wellas the structural and institutional improvements needed to bolster growth overall.

Long-term prospects
Despite these near-term weaknesses, the longterm prospects for East Asia remain broadly
positive. Average annual growth rates could
exceed 6 percent in the 2004–10 period. Mostof the countries in the region are committed tostrengthening the underlying determinants ofstrong and sustained growth—improvements
in education, enhancing the rule of law, promoting high domestic savings (including prudential fiscal policies), and openness to tradeand investment. As demonstrated over the last
three decades, the region’s economies havebeen able to scale the technology ladder andsignificantly close the production and income
gap compared to the most industrialized nations. China’s entry into the World Trade Organization (WTO) is a particularly notable
event that has positive trade and productivity
implications for the whole region.

190

The region is not without its vulnerabilities, as evidenced by the financial crisis of thelate 1990s and the economic slowdown thatstarted at the end of 2000. The financial crisis
revealed in stark terms the deficiencies of theregion’s banking and financial institutions,and the lack of sufficient regulatory oversight
to compensate for those deficiencies. In the aftermath of the crisis, many of the countries in
the region have undertaken a significant overhaul of both the financial and the regulatory
institutions, but the legacy of the crisis persists
in many of the countries. Economic recovery
and current account surpluses have provided
some breathing room, but as the current slowdown indicates, the region’s authorities needto pursue financial reform, in particular toboost financial intermediation to ensure thatthe most productive investments get funded.

Risks
A key issue for policymakers in the region is toposition their countries in order to be able totake full advantage of the global recovery
when it arrives. Medium-term structural reforms that strengthen the fundamental underpinnings of development are likely to have amore significant impact on growth andpoverty reduction than possible short-term
gains from fiscal stimulus. At the same time,
this year’s largely unexpected global downturn
has shown the weakness in the strategy of simply trying to “grow out” of the problems left
over from the financial crisis of 1997–98. Indeed, in the wake of the September 11 attacks,
higher uncertainty and risk may become amore prevalent feature of international affairs
for some time. Structural reforms should thenalso help make the region’s economies morerobust in riding through a more uncertain andvolatile external environment. Among structural issues facing the region, the importanceof renewed attention to corporate and financial restructuring; trade reform; and institutional and governance reforms are worth particular note. If the region is able to implement
contemplated reforms in these areas, it will improve the climate favoring new investment

R E G I O N A L(foreign and domestic) and technological progress, opening the way to realizing its long-term
potential.

South Asia
Recent developmentsSouth Asia, one of the world’s poorest regions, remains a relatively closed economy, despite progress toward trade liberalization in the 1990s. Imports and exports
are a much smaller share of GDP than in Latin
America or East Asia, and tariffs are among
the highest in the world. The region is also relatively closed to private capital flows. However, dependence on official flows is large forsome countries.
Notwithstanding chronically high fiscal
deficits, the region was able to grow at respectable rates over the 1990s. However, in2001 the global slowdown adversely affected
growth across the region and GDP growth fell
from 4.9 percent in 2000 to 4.5 percent in2001. Because of the region’s narrow tax baseand reliance on custom imports, slower
growth had an immediate adverse fiscal impact resulting in additional pressure on already overstretched fiscal positions.
The tragic events of September 11 focused
attention on South Asia because the militaryresponse created special risks to the countriesof the region, especially in Pakistan. For example, freight rates to and from Pakistan havebeen increased 10 to 15 percent by major shipping lines.1 Importers in other countries, fearing supply disruptions, have canceled orders
for goods from Pakistan.2 These developments
have put additional pressure on Pakistan’s
already vulnerable external position—with aheavy external debt of $38 billion that absorbs
more than 40 percent of Pakistan’s exports
earnings and external financing needs that haverisen to $3.4 billion.
Large fiscal deficits have been a persistent
challenge in most of the region. India’s fiscal deficit is 10.5 percent on a consolidated
basis, including central and state governments.

E C O N O M I C

P R O S P E C T S

Even so, its external financial position remains
strong, with a small current account deficit,
very low external debt, and $45 billion in foreign exchange reserves. Public finances have
weakened in Bangladesh over recent years,
with the public sector deficit reaching about
8–9 percent of GDP in 2001. In this context
this country’s external position has become
increasingly vulnerable. In contrast, Pakistan
and Sri Lanka have been successful in reducing
their fiscal imbalances. In the context of an
IMF program, Pakistan’s fiscal deficit has declined to 5.2 percent of GDP but financial
stress remains, with a large public debt, low reserves, and a large financing gap. Sri Lanka
also reached an agreement with the IMF in
2001 and is undertaking macroeconomic andstructural reforms.

Near term outlook
With the deterioration in the external environment, GDP growth in 2001 and 2002 in South
Asia is projected to be 4.5 percent and 5.3 percent, respectively. Agricultural production is
expected to increase in the second half of 2001
as a result of favorable weather conditions.
Normal—and in some cases excessive—monsoon rain has filled water reservoirs and watertables throughout the region.
However, private investment will be influenced negatively by the heightened degree of
uncertainty in the wake of the events of September 11. The external environment will provide little or negative stimulus, and the needfor fiscal consolidation will further dampen
aggregate demand.
The global downturn in growth in 2001–02
will have some deleterious effects on the region, perhaps more limited than in other regions. The downturn in export market growth,from 13 percent in 2000 to an average of 3.3
percent in 2001–02, will be mirrored by falling import demand stemming from slower
growth domestically. Some countries in the region are depreciating their currencies to promote exports and increase competitiveness,
which should have a positive effect on the tradebalance. Given improved weather conditions,

191

G L O B A L

E C O N O M I C

P R O S P E C T S

Figure A1.2 Industrial production in South Asia
(percentage)
35

25
Bangladesh

15

5

–5
India

Pakistan

–15

Ja
n.
19
97
Ap
ril
19
97
Ju
ly
19
97
O
ct
.1
99
7
Ja
n.
19
98
Ap
ril
19
98
Ju
ly
19
98
O
ct
.1
99
8
Ja
n.
19
99
Ap
ril
19
99
Ju
ly
19
99
O
ct
.1
99
9
Ja
n.
20
00
Ap
ril
20
00
Ju
ly
20
00
O
ct
.2
00
0
Ja
n.
20
01
Ap
ril
20
01
Ju
ly
20
01

–25

Source: IMF, International Financial Statistics.

and as oil prices fall, trade balances will benefit as well.
The region may struggle in its clothing sector in the near term. The Trade Development
Act–2000 (TDA-2000) passed in January
2000 by the U.S. Congress poses a challenge
Table A1.2

to garment exports of the region. TDA-2000
provides duty-and-quota free access, under certain conditions, to the U.S. market for textile
and apparel products to 72 countries in SubSaharan Africa and the Caribbean. Bangladesh
and India both have reported sharply lower

South Asia forecast summary(percent per year)
Baseline forecast
Growth rates/ratios

1991–2000

1999

2000

2001

2002

2003

2004–2010

5.2
2.6
3.3
1.9
8.1
22.8
–8.6
9.3
–1.4

5.8
6.1
3.9
1.9
4.6
22.6
–4.0
1.8
–0.8

4.9
1.6
3.0
1.9
5.8
24.3
–5.7
7.5
–0.3

4.5
3.6
2.8
1.7
6.1
24.8
–4.8
6.0
–0.1

5.3
3.0
3.6
1.7
7.3
25.4
–4.7
8.8
–0.5

5.5
3.0
3.8
1.6
7.3
25.6
–4.5
9.2
–0.6

5.4
3.0
4.0
1.4
6.5
28.9
–4.1
7.9
–0.8

4.2

3.6

3.9

4.7

4.9

5.2

5.2

Real GDP growth
Consumption per capita
GDP per capita
Population
Inflationa
Gross Domestic Investment/GDPb
Central Gvt Budget Balance/GDP
Export Volume cCurrent Account/GDP
Memorandum Items
GDP growth: SAS excl. India
a. Local currency GDP deflator; median.
b. Investment ratio measure in real terms.
c. Goods and non-factor services.

Source: World Bank baseline forecast, October, 2001.

192

R E G I O N A L

monthly garment exports this year compared
to last year. For example, Bangladesh reported
153 percent lower garment exports in February 2001 compared to a year ago. An expansion of TDA-2000 to include the South Asia
region, which is just as poor as those currently
included in TDA-2000, would redress the imbalance and improve growth prospects of theregion.

Long term prospects
Long term growth in South Asia should average about 5.4 percent, similar to the projections of GEP 2001, and near the average
growth rates of the 1990s. This reflects expectation of reforms continuing to be implemented at a gradual pace. Lower population
growth and structural reform in the next
decade will possibly lead to per capita growthclose to 4 percent per year.
Potential output growth in the region has increased, given the improvement in human capital indicators in recent years, with higher literacy rates and school enrollments and lower
infant mortality rates. Additionally, the highskill levels of Indian workers with training intechnology sectors, a boom area of growth,will ensure that the highly productive investment in these sectors will continue in the longterm. As scheduled privatization and reform ofstate-owned enterprises occur, private investment will account for a greater share of domestic investment, with the concomitant benefits flowing from higher productivity of private
investment compared to that of public investment. Additionally, privatization will encourage foreign investment and the associatedspillovers to the domestic economies. Trade liberalization is also expected to continue with the

E C O N O M I C

P R O S P E C T S

easing of tariff and non-tariff barriers and import substitution policies, providing greater opportunities for trade integration with the global
economy, particularly for the smaller countries
within the region.

Risks
Besides political risks in the short run, otherrisks to the forecast stem from the major challenges that countries in the region face in the
consolidation of their fiscal positions and debt
levels. In India, sharp reductions in the fiscal
deficit may prove difficult in the short run. As
a result, the recent fall in the rate of inflation
is not expected to last beyond 2001.
Design and implementation of tax reform
measures will be difficult. A gradual increase intax revenue collection in all countries in the region is required. Changes in the incidence oftaxation will be necessary to decrease the reliance on trade taxes and broaden the tax baseto stabilize revenue collections over time. Morediscipline will be required in fiscal expenditures to ensure fiscal sustainability, while being
careful to maintain expenditures that are essential for development programs. For example, reducing subsidies has been singled out
as a target in expenditure reform programs.
Broadening the tax base away from trade isalso a part of the trade liberalization strategy
that will ensure that exporters have access tocheaper inputs and consequently become morecompetitive in global markets. Sustainable fiscal revenues and a responsible expenditure
program will be required in several countries
to counter financial vulnerability. Countries
with healthy debt levels should also act to ensure sustainable fiscal positions to prevent a
decline into unsustainable debt levels.

193

G L O B A L

E C O N O M I C

P R O S P E C T S

Latin America and the Caribbean
Recent developmentsGrowth out-turns for most countries in
the region in 2001 were much worse
than anticipated in the spring of theyear. Adverse developments in the external environment and in domestic conditions in somecountries were the primary reasons behind the
sharp reduction in the region’s GDP growth,from 3.8 percent in 2000 to an estimated 0.9
percent in 2001, about 2.8 percentage points
lower than anticipated in the spring. The
growth slowdown was most acute in the “BigThree” (Argentina, Brazil, and Mexico), reflecting the increasing impact of the global, and particularly the U.S. slowdown; economic difficulties in Argentina; and the energy crisis in Brazil.
Uncertainties linked to the electoral process inArgentina this year and in Bolivia, Brazil,
Colombia, Costa Rica, and Ecuador next year
contributed to falling investment rates in a
number of countries. Weaker growth in Argentina and Brazil, along with a worsening of
the external environment, contributed to a deceleration of growth in other South Americancountries, while a collapse of commodity prices(especially for coffee and semiconductor prices)
and a severe drought lowered growth rates inCentral America. In contrast, Ecuador and República Bolivariana de Venezuela did better thanin 2000 due to relatively high oil prices.
Rapid deterioration in global activity contributed to a sharp decline in export revenues.
Excluding Mexico, dollar exports from the region grew by an average of about 8 percent(year over year or y/y) in the first half of theyear—down from over 15 percent in 2000.
With the exception of Brazil (where dollar exports grew by 11.5 percent y/y), most countries
had exports growing below 4 percent. In Mexico, the decline was even more dramatic, froman average of 22.6 percent growth in 2000 tozero (0 percent) by June 2001. Moreover, capital market commitments to the region weakened markedly (that is, they fell by 21 percent(y/y) in the first half of the year)—reflecting
the deteriorating conditions in Argentina and194

slower economic activity in the region as awhole—exerting downward pressure on mostregional currencies.
Large external financing requirements as ashare of GDP coupled with fiscal deficits andhigh public debt reduced the ability for countercyclical fiscal and monetary policies in somecountries. Despite falling U.S. interest rates,
which reduce dollar debt-service payments—
the depreciating exchange rates, slowing economic activity, and rising domestic interest
rates (needed to maintain investor confidence)placed additional pressure on fiscal balances,
limiting the scope for automatic stabilizers
to function properly. Indeed, some countries,
such as Brazil, had to tighten both fiscal andmonetary policies in an effort to offset the
combined negative effects of an energy crisis, alarge reduction in FDI inflows, and contagion
from the Argentine crisis, which resulted in a
sharp reduction in capital market flows as secondary market spreads rose and remained highin the wake of the September 11 terrorist attacks (figure A1.3). Although these policies
tended to keep inflation under control, they resulted in a sharp growth deceleration and exacerbated the already high level of unemployment throughout the region (16 percent inArgentina, for example).
In Argentina, recovery from the deep recession in 1999 has proven elusive, with each upturn in economic activity usurped by politicalstalemate on reforms, a weakening of fiscal accounts during the first half of the year, andvolatile capital flows—reflecting investor uncertainty about solvency of public debt. GDP
growth has remained in negative territory since
the third quarter of last year. The authorities
undertook a number of initiatives to bolster
investor confidence—including a $29.5 billion
debt swap, a severe fiscal adjustment aimed
at zero deficit, and a package of tax reforms
aimed at improving competitiveness of Argentine firms.
Negative fallout from Argentina was mostacute in Brazil, and other Mercosur partners—
slowing capital flows, especially FDI inflows;increasing yield spreads; and contributing to a

R E G I O N A L

E C O N O M I C

P R O S P E C T S

Figure A1.3 Secondary market spreads for selected LAC countries, 2000–2001(basis points above U.S. Treasuries)
1,600

1,600

Argentina
1,200

1,200

Brazil800

800
Colombia

400

400
Mexico0Jan. 2000

0
July 2000

Jan. 2001

July 2001

Source: JP Morgan’s EMBI Global indices through Bloomberg.

weakening of the real. Brazil’s drought-induced
energy crisis and falloff in FDI, in conjunction
with a depreciating currency, put upward pressure on inflation and set in motion tighter fiscal and monetary policies. Targets for the primary (before interest payments) fiscal surplus
were raised, and policy interest rates rose by
325 basis points in the four months to August,contributing to a slowdown in growth. In contrast, Mexico suffered little contagion from thecrisis in Argentina, with both the currency andequity markets rising strongly—reflecting thecontinuing positive impact of North America
Free Trade Agreement (NAFTA) membershipon FDI. Nonetheless, output growth contracted rapidly—in line with the sharp slowdown in U.S. activity, reaching zero (y/y) by thesecond quarter of 2001 after averaging nearly
7 percent in 2000.
Slowing economic activity in Argentina andBrazil along with falling copper prices affected
growth negatively in Chile, but with lesser external financing concerns than in other countries, the authorities were able to reduce interest rates. GDP growth slowed in 2001 but by
much less than in many other countries. In
Peru, political uncertainties in the run-up to

mid-year elections kept investment rates low
and restrained consumer spending, resulting in
growth slowing to below 1 percent from over
3 percent last year. Growth in Colombia also
weakened compared with 2000, due to lower
coffee prices and lower-than-expected investment caused by rising uncertainty (including
the electoral cycle, legal infrastructure, and theguerrilla war). In contrast, growth in the oil
exporters in the Andean region held up well
due to high, although declining, oil revenues.
Growth in Venezuela was sustained by largescale public expenditure, while growth inEcuador accelerated from the low or negative
growth in 1998–2000 with the construction ofa new oil pipeline.
In Central America, growth in 2001 waslower by about 1.7 percentage points comparedwith 2000, due primarily to a weakening of
economic activity in Mexico and in the UnitedStates, a collapse of coffee prices, and a major
drought, which severely affected Honduras andNicaragua. The sharp fall in semiconductor
prices hurt Costa Rica particularly hard as
semiconductors account for nearly two-fifths of
their exports, resulting in merchandise exports
declining by 21 percent (y/y) in the first half of195

G L O B A L

E C O N O M I C

P R O S P E C T S

Table A1.3

Latin America and the Caribbean forecast summary(percent per year)
Baseline forecast
Growth rates/ratios

1991–2000

1999

2000

2001

2002

2003

2004–2010

3.3
1.5
1.6
1.7
12.6
21.8
–3.5
8.4
–2.8

0.1
–1.7
–1.5
1.6
5.8
19.4
–4.4
5.7
–3.1

3.8
2.2
2.2
1.6
6.9
19.7
–2.9
9.7
–2.4

0.9
1.0
–0.7
1.6
7.9
19.4
–3.2
2.6
–2.8

2.5
1.6
1.0
1.5
6.3
20.1
–3.0
4.2
–3.3

4.5
2.0
3.0
1.4
6.0
20.7
–2.5
9.5
–3.2

3.9
2.5
2.6
1.3
5.0
23.5
–1.7
6.7
–2.2

3.8
4.4
3.4

–0.4
4.3
5.7

3.4
2.7
5.5

0.5
1.0
1.4

2.3
2.2
3.0

4.7
4.0
4.2

3.7
3.8
4.0

Real GDP growth
Consumption per capita
GDP per capita
Population
Inflationa
Gross Domestic Investment/GDPb
Central Gvt Budget Balance/GDP
Export Volumec
Current Account/GDP
Memorandum Items
GDP growth: LAC excl. Brazil
Central America
Caribbeana. Local currency GDP deflator; median.
b. Investment ratio measure in real terms.
c. Goods and non-factor services.

Source: World Bank baseline forecast, October, 2001.

the year. Caribbean countries also saw a reduction in growth rates due to declining tourism
revenues, especially in the latter part of the year.

Near-term outlook
The region’s growth prospects for 2002 havedimmed in light of a significant worsening of
the external environment over the past six
months, and especially since the September 11
terrorist attacks in the United States. The region’s GDP is now expected to grow by 2.5
percent in 2002—1.9 percentage points lower
than the spring forecast—provided that thosecountries currently under financial stress areable to avoid debt-service defaults. The delay in
the U.S. recovery, weak global output and trade
growth, a continuation of soft non-oil commodity prices and falling oil prices, and thelikelihood of reduced capital flows to developing countries underpin the moderate growth recovery for next year. (As a consequence, there
is great uncertainty surrounding the forecastwith more negative or positive responses ofconsumers and investors possible.) In 2003,
GDP is expected to grow by 4.5 percent, reflecting the expected rapid growth momentum196

in the United States, and world output in thelatter part of 2002 and into 2003.
Revisions to external conditions, as wellas domestic considerations, will impact thegrowth prospects for countries differently. The
expected delay in the U.S. recovery will havethe most significant trade impacts in Mexicoand the Central American and Caribbean
countries. For many of these countries, exportprocessing zone (maquilas) exports destined
mainly for the North American market are asignificant proportion of total exports (30 percent of net exports in Costa Rica and El Salvador, for example). Moreover, remittances arealso likely to decline at a time when many Central American countries are facing weak coffee
prices (after a four-year decline) and the effects
of a severe drought in 2001. Weakness in laborand equity markets in the United States and increased risk aversion to air travel will adversely
impact tourism receipts—which are extremely
important for Caribbean countries. Preliminary estimates indicate that loss of tourism revenues could reduce these countries’ GDP by
1.5 to 5 percent with potentially damaging social impact in light of high unemployment in

R E G I O N A L

the region. Argentina and Brazil are likely to
be more hurt from disturbances in capital markets (if they were to be prolonged) than fromdirect trade impacts, due to weaker global activity. This reflects their high public and private
debt and large current account deficits (nearly
3 percent of GDP for Argentina, about 5 percent for Brazil). Although lower U.S. interest
rates will help to alleviate debt-service payments, risk perceptions have remained elevated—partly due to the market view that debt
restructuring for Argentina may be necessary,as occurred in Ecuador in 1999—and have
kept capital market flows subdued, reducing
the ability of these countries to roll over debt.
In Argentina, these factors are likely to keep
the recovery modest. In Brazil, contagion fromevents in Argentina (despite a $15.58 billion
IMF–led package) is reducing the room forcountercyclical policies. In addition, presidential elections due next year could be anotherfactor restraining a return of investor confidence and the acceleration of growth.
As oil prices soften in 2002–03, the adjustment that oil exporters will have to undergo
will be difficult and growth-restraining. Venezuela, for example, used buoyant oil revenues
to finance growth in 2001, resulting in the nonfinancial–public sector’s fiscal balance shiftingfrom a surplus of 2.9 percent in 2000 to a
deficit of about 3.1 percent of GDP. In contrast, Ecuador may avoid a contraction in
growth in 2002, because oil revenues may remain high with expanded output partially offsetting the expected decline in oil prices.
Colombia’s prospects hinge increasingly on fiscal deficit reduction and on progress in thepeace process, but growth prospects will remain subdued with the expected weak oil andcoffee prices. In Peru, the new administration
will face tension between containing the fiscal
deficit and reactivating growth quickly to reduce the danger of popular discontent, which
could lead to political and social instability.
However, the combination of weak metals
prices, delayed FDI flows, and limited access tocapital markets could delay the economic rebound. Bolivia, Paraguay, and Uruguay all have

E C O N O M I C

P R O S P E C T S

strong trade ties to Argentina and Brazil, limiting their growth prospects to the fortunes of
those countries.

Long-term prospects
Per capita GDP growth over the long term
(2004–10) is projected to average 2.6 percent a
year, a full percentage point higher than what
the region achieved in the 1990s. Key factors
supporting the cautious optimism for growth in
the 2000s compared with the 1990s include improvements in: (a) human capital (health, education, and literacy indicators have all improved over the course of the 1990s, althoughmuch remains to be done in this area); (b)macroeconomic management leading to greater
domestic macroeconomic stability (inflation
rates have fallen over the 1990s, for example,
although they are still more volatile than inother regions); (c) investment climate attracting
FDI; and (d) progress on deepening trade integration with the regional and global economies.
FDI as a share of region-wide GDP rosefrom less than 1 percent at the beginning of the
1990s to nearly 4 percent in 2000, with a significant share going into telecommunications;this represents benefits to the economy that arelikely to accrue in the next decade. Regulationand supervision of financial sectors have beenstrengthened, and trade regimes have been liberalized, with trade doubling as a proportion of
GDP over the last 10 years. These developments have contributed to a large rise in totalfactor productivity, from negative growth in the
1980s to nearly 1 percent a year in the 1990s.
In the 2004–10 period, TFP growth is expected
to remain in the 1 to 2 percent range, while improvements in the investment climate—including strengthening the financial sectors throughbetter supervision and regulation—could contribute another 1 percentage point to regional
growth.

Risks
The region remains vulnerable in a number ofareas however. First, national saving rates remain low in many countries, resulting in a persistent dependence on foreign savings (of about

197

G L O B A L

E C O N O M I C

P R O S P E C T S

3 percent of GDP)—typically from volatile private capital markets. These markets havedemonstrated their power in delivering severe
external shocks to developing countries, andthe region has had to endure at least two such
episodes in the 1990s (Mexico in 1995, andBrazil in 1999). The case of Argentina is stilldeveloping, and will obviously impact risk perceptions in the region for some time.
Second, the prevalence of large debt overhangs (both in the public and the private sectors) in countries throughout the region requires rollover on a continuing basis. Although
the region’s debt-to-GNP ratio is in line withthe average of developing countries, the debtto-exports ratio is very high. This exposes somecountries to exogenous shocks emanating fromglobal capital markets, which are at times independent of domestic considerations.
Third, trade integration is incomplete withratios of trade-to-GDP remaining low by international standards (Chile, Mexico, and small
economies are exceptions), and diversificationof exports is still limited—many countries arestill commodity dependent.
Finally, the region still lags behind its potential in financial deepening (which could
help raise national saving rates), infrastructure, and quality of institutions—areas which,if improved, can propel high and sustainablegrowth rates. Many countries in the region
have made strides in addressing some of theseareas and, should investor sentiment toward
emerging markets improve significantly, theregion could grow at a faster pace than in thecurrent forecast.

Europe and Central Asia
Recent developmentsR

eal gross domestic product (GDP)growth for the Europe and Central Asia
(ECA) region is projected to deceleratemarkedly in 2001 to about 2.1 percent, downfrom 6.3 percent in 2000. This rapid slowdown
is dominated by three main factors. First, in
Turkey domestic demand collapsed due to high198

interest rates and severe economic disruption in
the wake of the financial crisis, which erupted
in late 2000 and early 2001. Second, there has
been a pronounced moderation of growth in the
Russian Federation, Poland, and the former Yugoslav Republic of Macedonia (FYR Macedonia). In the Russian Federation, the impetus
behind exceptionally strong growth of over 8
percent in 2000 (generated from a combinationof high oil prices and import substitution, driven
by devaluation) is receding. In Poland high interest rates, aimed at containing inflation, havestymied demand. In FYR Macedonia, the military conflict with the Albanian rebels, whichbegan in March 2001, has clearly begun to takeits toll on the budget and on economic activity.
Third, the slowdown in global demand in 2001,
particularly in the European Union (EU), has
had a negative impact on growth in the ECA region, in contrast to 2000 when external demand
acted as a strong engine for growth.
Countervailing some of these negative pressures on regionwide growth, domestic demandhas strengthened in a number of countries (suchas the Czech Republic, Hungary, Romania, andthe Slovak Republic). Similarly, strong growthin domestic demand, particularly in private consumption, stimulated by an increased money
supply through large hard currency inflows,
among other factors, is providing a buffer tothe slowdown in the Russian Federation. Within
the Commonwealth of Independent States (CIS)
subregion, strengthened domestic demand in
the Russian Federation in 2001 has translated
into a significant firming of import demand andhas provided a boost to growth in a number ofcountries that export to the Russian Federation(for instance, Ukraine). In contrast, export sectors in a few countries with significant revenues
from Turkey, (for instance, Bulgaria and Georgia) are expected to be impacted by the plunge
in Turkish import demand.
For most countries in ECA, current accountdeficits are forecast to stay at 2000 levels or todeteriorate in 2001, although they should remain manageable. In the few cases where there
are current account surpluses, they are expected to narrow. In some countries the cur-

R E G I O N A L

E C O N O M I C

P R O S P E C T S

Figure A1.4 Russian imports and partner exports in 1998–2001(3-month moving average, y/y percent change (of US$ merchandise trade)
125
75
25
–25
–75
–125
–175
1 1 1 10 0 0 0 0 0 0 0 0 0 1 1
9 9 9 9 9 9 9 9 9 0 0
98 98 98 98 98 98 98 98 98 98 98 98 99 99 99 99 99 99 99 99 99 99 99 99 00 00 00 00 00 00 00 00 00 00 00 00 00 00 00 00 00 00
2 .2 2 2
2 .2 2 2 2 .2 .2 .2 .2 .2 .2 .2
19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 . 1 1 1 1 . 1 . 1 . 1 . 1 . 1 . 2 . 2yn. eb. rch pr. ay ne uly ug. pt. ct. ov. ec. an. eb. rch pr ay une uly ug ept ct ov ec an eb rch pr ay une July ug ept ct ov ec an eb rch Apr a une
a
M J
O
J
A
e
a
J
u
M
O
F
J
a
N D
F
A S
a A M J
N D
A S
J F
J
a A M J J A S O N D J F
M
MM
MRussia – Imports

CEECs (excl. Turkey) – Exports

Other CIS – Exports

Turkey – Exports

Source: IMF.

rent account deficits are already quite large orare growing rapidly relative to GDP (such as in
Poland and Romania). For countries such as
Poland, with an already high current accountdeficit, the EU slowdown will be felt more directly, although the sharp deceleration in domestic demand there will reduce imports.
While the Russian Federation is expected topost a large surplus again for 2001, it will besignificantly below the record $46 billion surplus in 2000. In Turkey the current account is
expected to post a sizeable surplus due to a
sharp contraction in imports and strengthening
exports stimulated by the massive devaluationof the Turkish lire subsequent to the abandonment of the crawling-peg regime in February
2001.
Real foreign exchange rates throughout theregion remained on a broadly stable path overthe first half of 2001. The most notable exception is the sharp devaluation of the Turkish lireof about 60 percent in nominal terms, or about
30 percent in real terms, as of August 2001,
year over year (y/y). The currencies of someother countries (for instance, Hungary and
Poland) subsequently came under considerable
downward pressure during July 2001, wheninternational investors became more bearish
on emerging market instruments. In contrast,
the Russian ruble has remained relatively firm
and generally appreciated in real terms over
the year, bolstered, in particular, by a large current account surplus. Elsewhere in ECA, due inpart to fixed currency regimes and inflationdifferentials, the Bulgarian (currency board)and Baltic (pegged) currencies have continued
to appreciate.
Inflationary pressures in the ECA region on
the whole were relatively contained in 2001,
with the general rate of increase either declining somewhat or remaining flat. Turkey, withthe consumer price index running at about 55
percent in 2001, is an important exception.
Until domestic markets stabilize there, heightened uncertainty will contribute to higher inflationary pressures, as will the hefty increasein the cost of imports that will likely generatesignificant pass-through effects. Driven in most199

G L O B A L

E C O N O M I C

P R O S P E C T S

Table A1.4

Europe and Central Asia forecast summary(percent per year)
Baseline forecast
Growth rates/ratios

1991–2000

1999

2000

2001

2002

2003

2004–2010

–2.3
–3.5
–2.5
0.2
347.1
23.6
–19.0
0.5
–0.6

1.8
–2.9
1.7
0.2
7.3
18.0
–10.5
–1.4
0.0

6.3
4.2
6.1
0.1
7.5
19.0
–7.4
11.1
1.9

2.1
3.8
1.9
0.1
7.5
19.4
–7.5
8.5
1.2

3.0
3.0
2.9
0.1
5.9
19.5
–7.2
2.8
–0.4

4.2
2.9
4.1
0.1
5.4
19.7
–6.4
8.3
0.0

3.6
3.9
3.5
0.1
4.3
24.3
–4.8
5.9
–1.4

–3.1
0.8
–5.2

3.3
2.3
4.1

6.1
3.9
7.8

4.0
2.8
4.9

3.1
2.9
3.2

3.8
4.3
3.5

3.4
4.3
2.6

Real GDP growth
Consumption per capita
GDP per capita
Population
Inflationa
Gross Domestic Investment/GDPb
Central Gvt Budget Balance/GDP
Export Volumec
Current Account/GDP
Memorandum Items
GDP growth: Transition countries
Central and Eastern Europe
CIS countries
a. Local currency GDP deflator; median.
b. Investment ratio measure in real terms.
c. Goods and non-factor services.

Source: World Bank baseline forecast, October, 2001.

cases by an accommodating fiscal stance, inflation remains at double-digit levels in a handful of other ECA countries, for example in Belarus, Romania, Tajikistan, and Uzbekistan. For
the region’s oil-importing countries, the recent
pass-through impact of higher energy prices has
begun to diminish. In contrast, strengthening
domestic demand in a number of ECA countries
could lead to higher inflationary pressures.

Near-term outlook
The severity and duration of the current slowdown in the EU, along with policy responses
in the transition countries, will be importantfactors for near-term prospects. In the EU, arecovery is not expected until the second halfof 2002, and much stronger external demand
from the EU is not anticipated until 2003. Thisis especially significant for the Central andEastern European countries (CEECs), because
their economies have become well integrated
with the EU. Another important near-term assumption is that the combination of slowing
world energy demand and an accommodating
stance by the Organization for Petroleum Exporting Countries (OPEC) will likely translate
into lower nominal and real oil prices. For the200

hydrocarbon exporters of the CIS, this scenario
implies a further slowdown in growth in 2002.
For the ECA region oil-importers, the decline
in the energy bill is expected to partially offset
the negative impacts of a less favorable external
environment. If indeed Turkey stabilizes andbegins to recover in 2002, which is an assumption underlying our forecast, it will lift aggregate growth for the region.
Throughout the region, access to foreign private capital (including foreign direct investment, FDI) is expected to remain more difficult
over the near-term, due to increased aversion
to emerging markets by international investors. Correspondingly, domestic and foreign investment in the ECA economies is expected todecelerate through 2002, in part reflecting anticipated delays in privatization programs.
Tourism, an important source of foreign currency in a number of ECA countries (such as
Croatia and Turkey), is also projected to slow
markedly.
In sum, over the near term (2002–03),
growth is expected to stabilize at close to 3.5
percent for the region as a whole. At the subregion level, we are forecasting a pattern of
diverging growth becoming manifest in 2003.

R E G I O N A L

For the CEECs, aside from anticipated stronger
external demand in 2003, the EU accession
process is expected to stimulate a continuationof reforms and to further boost growth. In contrast, CIS growth is expected to slow in 2002
and to remain generally flat in 2003 as energy
prices stabilize at lower levels, and the boost
from high oil rents winds down in a policy environment of gradual reforms. As a consequence, import demand from the Russia Federation is expected to decline, which is in turn
expected to result in lower export volumes forthe smaller CIS countries.

Long-term prospects
Over the coming decade through 2010, GDP
growth for the ECA region is forecast to average close to 4 percent, in contrast with the 2.3
percent region-wide average rate of contraction
witnessed during 1991–2000, the first decadeof transition. From a region-wide perspective,
the main drivers of higher growth are an improved policy environment and a greater degree of macroeconomic stability leading tohigher investment and savings rates as a shareof GDP. Growth for the CEEC subregion is expected to average above 4 percent during theperiod 2001–10, up significantly from close to
1 percent posted during 1991–2000. Growth in
the CIS subregion is expected to average somewhat below 3 percent, also a marked increase
compared to the sharp contraction of about 5
percent annually registered during 1991–2000.
In the CEECs, during the second decade oftransition, a number of factors are contributing
to the anticipation of stronger growth performance, including rising investment as a share of
GDP and continued restructuring of the capitalbase. Broad-based reforms and a well-educatedlabor force have been—and are expected to remain—important factors contributing to fruitful returns on rising investment.
Almost all of the CEECs are EU accession
candidates, and have significantly benefited
from the EU accession process, which has provided an incentive to address underlying structural and institutional impediments to growth.
The EU accession process is expected to con-

E C O N O M I C

P R O S P E C T S

tinue to boost FDI into the subregion, although
as privatization programs wind down, this is
expected to diminish somewhat. These flows
have largely financed the subregion’s shortfall
in domestic savings. Domestic savings rates are
forecast to increase over the forecast horizon as
FDI inflows moderate, but they are not expected to increase sufficiently to close the gap
over the forecast horizon. This potential imbalance between savings and investment exposes
the CEECs to the risk that investment demand
will be bridled by inadequate domestic savings
or by a sudden drop in foreign inflows. Nevertheless, prospects are broadly positive as mostof the countries of the subregion have achieved
a significant degree of stability and realignmentof institutions and markets over the last decadeand are on a path to continue the process. The
CEEC subregion growth forecast of just over 4
percent over the long term, albeit not insignificant, suggests only slow convergence with EU
per capita income levels.
As with the CEECs, high educational attainment provides a strong positive contribution to
growth potential in the CIS. However, investment in human capital in the region has declined substantially following the breakupof the Soviet Union and in the wake of the
1997–98 crisis. Should a turnaround in the investment in human capital not materialize, an
important positive dynamic of the subregion’s
growth picture will deteriorate further. The recent surge in growth in the CIS subregion of hydrocarbon exporters has created an important
opportunity to introduce reforms more actively.
The Russian Federation is an example of where
this process has begun, especially during 2001.
However, there the implementation process isjust being initiated, and much remains uncertain. Significant institutional and structural impediments remain constraints to growth. Consequently for the CIS countries as a group—andin contrast to the CEECs—investment as ashare of GDP is expected to remain at relatively
low ratios, after having declined during the
1990s. Also, considerable excess capacity remains, though much of it could be obsolete, soinvestment demand could kick in sooner if the201

G L O B A L

E C O N O M I C

P R O S P E C T S

economy picks up. If good policy reforms are
introduced more aggressively, then the CIS economies could shift to a higher growth path.

Risks
Over the near- to medium-term, risks to theforecast are predominantly on the downside.
Within the region the main risks include thepossibilities of a deepening of the crisis in
Turkey or a sharper economic slowdown in the
Russian Federation, or both. In either case,growth prospects in smaller economies of theregion would also decline. Another internal risk
factor is an escalation of political tensions andinstability in the Balkans. The September 11
terrorist attacks have increased both external
and internal risks. With regard to the former,
there is the possibility of greater risk aversion
to emerging markets and capital flight. Regarding the latter, a risk of increased political uncertainty is an important factor, especially in the
countries of Central Asia, due to the heightened
conflict and instability in Afghanistan. There
could also be an influx of refugees to the ECA
countries bordering Afghanistan, namely Tajikistan, Turkmenistan, and Uzbekistan.
Other external risks are mainly associatedwith the EU, both in terms of its growthprospects and with public support for the accession process. A stronger and more protracted decline in external demand from the EU
would add pressure to external balances andlikely reduce growth outcomes, particularly in
the CEECs. An important aspect of an extended slowdown in the EU is the timing—that
is, coinciding with important EU accession negotiations—because it will likely reduce maneuverability for both candidate countries andexisting members. Correspondingly, support
for the EU accession process (both within theexisting EU countries3 and within prospective
member countries) has been diminishing. This
could become a higher risk over the near term
because more difficult issues—such as the freemovement of labor and capital, agriculture,and the distribution of structural funds—are
now shifting to the front burner in enlargement
negotiations. Extensive delays in the EU acces-

202

sion process could slow the reform process andundermine long-term growth prospects within
the CEECs.
Potential output could be increased if reform programs in the CIS were to move forward more aggressively than anticipated. In
the case of the Russian Federation, this would
generate positive demand dynamics throughout the CIS and in Turkey. Depending on dynamics both internal and external to the region, there is the upside risk that the EU
accession process will regain stronger positive
momentum and proceed more smoothly andmore rapidly than currently envisioned. Notably, the recent terrorist crisis could act as acatalyst to strengthen political resolve in boththe EU and applicant countries to move forward with the accession process. Turkey, theRussian Federation, and Central Asian countries might also benefit from strengthened political backing from the west and a possible
increase in official assistance as a reward forsupporting U.S.–led strikes into Afghanistan.

Sub-Saharan Africa
Recent developmentsGrowth in Sub-Saharan Africa (SSA)
slowed to 2.7 percent in 2001 from 3
percent in 2000, interrupting a progressive recovery from the slowdown of thelate 1990s. With population growing at 2.4
percent, the rise in per capita GDP was minimal. The slowdown was widespread throughout the region, in East, West, and Southern
Africa, and in both oil and non-oil commodity
exporters.
The primary cause was the slowdown indeveloped countries. In the face of weaker
demand from the United States and the EuroArea, merchandise exports managed just 3.4
percent growth in volume terms compared to
8.8 percent in 2000. Services exports, including
tourism, were also affected, growing by 3.6
percent. Commodity prices remained well
below levels of the late 1990s, including thosethat rebounded from recent lows. Beverage

R E G I O N A L

E C O N O M I C

P R O S P E C T S

Figure A1.5 Real GDP growth of SSA oil and non-oil exporters(percent)
4.5
Oil

Non-oil

4
3.5
3
2.5
2
1.5
1
0.5
0
2000

2001

2002

2003

Source: Economic Policy and Prospects Group.

producers were particularly hard hit, with coffee prices down over 25 percent from 2000 andcocoa prices—although they were up around
10 percent in 2001—only 75 percent of the average for 1995–2000. While oil prices easedback from their peak of nearly $30 a barrel in
mid-2000 they remained strong, and oil exporters outperformed the region as a whole,growing at an average of 3.6 percent for theyear, compared to 2.6 percent for non-oil exporters. Oil constitutes less than a third of SSA
exports, however, and net energy exports are
only 5 percent of GDP. Thus on balance, recent
world commodity market trends represented amajor drag on growth and incomes.
Apart from the external environment, developments within the region painted a mixed
picture. Better weather boosted agricultural production and household incomes in a numberof countries in East and Southern Africa, including Ethiopia, Kenya, Mozambique, andTanzania. However, localized drought conditions persisted in these and many other countries. In Southern Africa, food production fellby as much as 25 percent, due to both adverse
weather conditions and civil disturbance.
Overall, the Food and Agriculture Organization of the United Nations (FAO) estimatesthat the need for food aid will be unchanged
from last year at around 2.7 million tonnes(FAO 2001). Weather also contributed to a 12
percent reduction in the cocoa crop in West
Africa after the bumper harvest of 1999–2000,
according to the International Cocoa Organization (African Business, July/August 2001).
In the political sphere, some progress toward stability was achieved in the Democratic
Republic of Congo, Guinea, and Sierra Leone,
but peace seemed as elusive as ever in Angola,
Liberia, and the Sudan, and Zimbabwe’s crisis
intensified with the approach of elections inspring 2002. Countries in conflict or experiencing severe governance problems4 recorded
the worst performances, growing at –0.4 percent in 2001. On the plus side, robust growthcontinued in a number of countries, including
Ethiopia, Madagascar, Mozambique, andUganda, reflecting better policy and economic
management. Finally, 19 countries reached decision points under the enhanced Heavily Indebted Poor Countries Initiative, cutting debt
servicing costs by a third, and relaxing balanceof payments and budgetary pressures.
In South Africa, the region’s largest economy, a robust recovery in the second half of2000 dissipated in the first half of 2001 as in-203

G L O B A L

E C O N O M I C

P R O S P E C T S

adequate rains led to a disappointing maize harvest. The impact spilled over from agriculture
into manufacturing and, on the demand side,
into consumer spending, and growth slowed to
2.4 percent. Both public and private investment
remained strong, as did productivity growth,
although the investment rate at only 16 percent
of GDP remains well below the level needed
to support adequate employment growth. The
rand came under strong selling pressure in thesecond half of the year as a result of ongoing
uncertainty about emerging markets generally
and the situation in Zimbabwe specifically.
In Nigeria, the energy sector registeredstrong gains, thanks to both oil and natural gas
revenues and to keen investor interest, particularly in the offshore sector. However, it is increasingly evident that progress on reforms todate has had little impact on the non-oil economy. A one-year, $1 billion standby credit fromthe IMF was extended from August to Octoberdespite the government’s failure to meet important conditionalities, but especially with the approach of elections in late 2002, the future of
the reform process is uncertain.

Near-term outlook
While many idiosyncratic factors will bear onnear-term performance, the slowdown in industrial countries during 2001 and sluggish recovery in the first half of 2002 virtually guarantee
a poor out-turn for the coming year. Weak demand will continue to depress export prices
and volumes. However, as recovery consolidates in OECD trade partners, demand for theregion’s exports will strengthen setting the stage
for stronger gains in 2003. For the region as awhole, merchandise exports are expected to
grow by only 2.9 percent in 2002, while termsof trade fall by 6.2 percent, equivalent to 1.8
percent of GDP. The subdued external performance will hold GDP growth to 2.7 percent fora second year, again leaving per capita incomes
flat. Oil prices are expected to fall to $21 a barrel in 2002, implying steep terms-of-trade losses
for oil exporters of 4.1 percent of GDP; theirreal growth will average 3.1 percent, down from
3.6 percent in 2001. However, other commod-204

ity prices should firm on average, even though
non-oil exporters’ terms of trade deteriorateslightly because of higher import prices. The
modest improvement in the external environment will raise non-oil exporters’ growth to 2.7
percent from 2.6 percent 2001. For the SSA region as a whole in 2003, the forecast anticipates a strong acceleration in export volume
growth to 6.4 percent, pushing GDP growth
to 3.9 percent. With decent rains, the actual
outcome might be even better. Nevertheless,terms-of-trade weakness is expected to persist
through the forecast period, especially for oil
exporters, as oil prices fall further to below $20
a barrel.
Despite weak energy prices, substantial investment in oil exporters promises to sustain
real growth in oil sectors in the medium term.
Nigeria has struggled recently to meet OPEC
quotas, but plans to increase capacity significantly over the next few years and a second liquid natural gas train at Bonny Island will boost
production by 50 percent beginning in 2002.
Meanwhile, recent offshore discoveries could
substantially raise medium-term productionand exports for non-OPEC Angola and Equatorial Guinea. Even in the near term, exploration and development activity—including
the Chad-Cameroon pipeline project—is helping to offset terms-of-trade losses, keeping real
growth higher than otherwise would have been
the case. For non-oil exporters, faster world
growth will tighten the supply demand balance
in primary commodity markets allowing export
prices and terms of trade to strengthen. In addition to the rebound in the world economy
generally, export prospects will also benefit
from a number of specific trade initiatives, including the United States’ Africa Growth andOpportunities Act (AGOA), the EU’s “Anything but Arms” initiative, and the EU–South
Africa Free Trade Agreement. Early evidence
from the first half of 2001 shows that 13 SSA
countries benefited from $3 billion of exports
under AGOA preferences (USTR 2001). Nonetheless, SSA’s medium term performance willremain subdued as a result of inelastic export
demands and a lack of diversification.

R E G I O N A L

Table A1.5

E C O N O M I C

P R O S P E C T S

Sub-Saharan Africa forecast summary(percent per year)
Baseline forecast
Growth rates/ratios

1991–2000

1999

2000

2001

2002

2003

2004–2010

2.2
–0.6
–0.4
2.6
9.7
17.4
–7.4
4.3
–2.1

2.5
0.0
0.0
2.4
5.3
17.1
–8.1
3.0
–2.2

3.0
0.4
0.5
2.5
6.3
17.2
–2.2
7.0
–1.5

2.7
0.2
0.3
2.4
6.0
17.5
–3.4
3.4
–1.0

2.7
0.5
0.3
2.4
5.0
17.6
–3.3
2.4
–2.4

3.9
0.9
1.6
2.3
4.5
17.8
–3.2
7.6
–2.0

3.7
1.1
1.5
2.2
4.1
18.4
–2.8
6.3
–1.8

2.6
2.7
2.6

3.0
2.6
2.4

2.9
3.8
2.7

3.0
3.6
2.4

2.8
3.1
2.9

4.0
3.4
3.6

4.2
3.6
3.8

Real GDP growth
Consumption per capita
GDP per capita
Population
Inflationa
Gross Domestic Investment/GDPb
Central Gvt Budget Balance/GDP
Export Volumec
Current Account/GDP
Memorandum Items
GDP growth: SSA excl. South Africa
Oil exporters
CFA countries
a. Local currency GDP deflator; median.
b. Investment ratio measure in real terms.
c. Goods and non-factor services.

Source: World Bank baseline forecast, October, 2001.

Long-term prospects
Over the long term, the expectation is for acontinuation of the trend toward better economic policies and management and a broadly
favorable external environment. Internal market reforms, deregulation, and privatization
have raised productivity and improved incentives, and encouraged nontraditional exports
such as fish and horticulture at a time whenprospects for many traditional crops are poor.
Notably a number of well-managed reformers
have sustained high growth even through difficult external conditions. In the baseline scenario, which assumes a continuation of current
productivity trends, output growth averages
3.7 percent from 2004–10. With population
growth falling to 2.2 percent, real per capita
income growth will average 1.5 percent, reaching $640 in real (1995 dollars) terms by 2010.
For many countries, export diversification andfavorable price trends will sustain performancewell above the regional average.
This performance will fall short of what isneeded to achieve the international development goals, and SSA will continue to lag behind
other regions in the developing world. Low domestic savings combined with only modest pri-vate foreign capital inflows will limit investment
rates to an average of below 19 percent of GDP.
Although up from barely 17 percent currently,
this is far from what is needed. As a result, capital accumulation will contribute less than 1
percent annually to growth—not even a quarterof the rate anticipated for East Asia. Low rates
of human capital investment and slow progress
on rebuilding infrastructure will hold productivity growth to around the same rate.
Despite the somewhat pessimistic outlook, if
the forecast is accurate the coming decade will
see the region’s best sustained performancesince the 1960s. There are manifold reasons for
SSA’s historically poor performance—disease,civil strife, poor governance, inauspicious climate, low savings and investment, and fallingterms of trade. Some of these conditions areunlikely to change any time soon, but for others there are signs of real improvement. Political and economic reforms have gained pacesince the mid-1980s, and are contributing tohigher standards of governance and economic
management. Private sector growth and increasing regional integration are helping toboost efficiency and rationalize production.
Greater openness and debt relief are relaxing

205G L O B A L

E C O N O M I C

P R O S P E C T S

balance of payments constraints, easing import
restrictions, and over time encouraging more
foreign investment interest. But even as somecountries notch up high growth rates, overall
performance will continue to be constrained by
the devastating effects of HIV/AIDS, slow progress on governance in some countries, and thelimited availability of resources to rehabilitate
productive capacity and infrastructure.

Middle East and North Africa
Recent Developments

Developments in the Middle East andNorth Africa were strongly positive in
2000, with a rare convergence of simultaneous increases in oil prices and export
volumes contributing to stronger-than-anticipated growth of 3.9 percent. Growth in 2001
will be lower at 3.4 percent, as declines in
OPEC export quotas affect oil production andincreasingly weak growth in industrial countries affects demand for goods and services
from the region. Short-term prospects have
weakened considerably since September 11 in
the face of a slowdown in external demand,with economic recovery in Europe and theUnited States delayed into 2002.
The oil exporters have reaped the benefits ofhigher demand and disciplined adherence to
OPEC quotas, boosting both export volume
and revenue growth in 2000, with GDP growthof over 4 percent in several countries. Export
volume growth is weaker in 2001 because
OPEC quotas were reduced throughout theyear in an effort to target supply around a priceof $25 a barrel, with growth falling to 3.1 percent. The boost in revenue has fostered income
gains and led to strong growth in domestic demand through stronger consumption and import growth. Current account surpluses rose to
14.9 percent of GDP in 2000 and 8.4 percent in2001. Domestic interest rates fell, and there
was an increase in investment in the oil andnon-oil sectors, with several countries also benefiting from higher foreign investment. Oil exporters have had few problems refinancing lia-

206

bilities. Government revenues have also benefited from high oil prices. Many oil exporters
achieved balanced budgets or surpluses in
2000, and some of that momentum has continued in 2001. Governments did spend morethan previously budgeted from their revenue
windfall but most were relatively restrained,
given the expenditure profiles of earlier windfall
gains. For example, the Saudi government received 58 percent more revenue than budgetedin 2000 but only spent approximately 10 percent more than planned, with much of the extra
spending being used to pay domestic arrears.
The diversified economies grew 3.4 percent
in 2000, lower than their historical average.
Drought conditions in Morocco, Tunisia, andthe Levant contributed to lower production andagricultural exports, despite high export market
growth in 2000. Additionally, domestic condition in the Arab Republic of Egypt deteriorated
significantly as the budget and current accountdeficit increased, placing pressures on interest
rates, exchange rates, and domestic investment.
GDP growth in the diversified exporters willrise to 4.4 percent in 2001. Morocco, which
had a partial recovery from drought this year,
accounts for the increase in GDP growth. Additionally, stronger oil prices and a relief fromdrought are behind increased growth in Syria. A
weaker external environment, particularly inEurope, has affected trade prospects with falling growth expected in most countries as export
market growth fell from 13 percent in 2000
to 1.9 percent in 2001. Workers’ remittances,
tourism, and services receipts will be similarly
affected.

Near-term outlook
Looking forward, GDP growth in the region is
expected to fall to 2.9 percent in 2002 and to
recover to 3.6 in 2003. The sharper downturnin industrial countries and the delayed recovery
into mid-2002 will reduce the external impetus
to growth. Slower world demand growth willkeep oil prices at the lower end of the OPEC
price band (around $21 a barrel) and production and income growth will be adversely affected. The diversified exporters face lower

R E G I O N A L

E C O N O M I C

P R O S P E C T S

Figure A1.6 Tourism and workers remittances as a share of GDP in 2000
(percent)
25
Workers Remittances

20.6

Tourism

20

15

13.5
11.6

10
7.0

6.9
5.5

5

3.6

2.9
0
Egypt, Arab
Rep.

JordanMoroccoTunisia

Source: IMF Balance of Payments.

trading partner–import growth, and adverse
impacts on tourism from lower external income
growth. Growth will probably fall in 2002 to
4.2 percent, but will recover along with the oil
exporters in 2003, if, as anticipated, Europe
and other trading partners gather momentum.
The momentum of growth in the oil exporters will slow in 2001–02, as weaker global
growth affects energy demand and OPEC keeps
a tight rein on oil production quotas. Production and export volumes in 2002 are expected
to be lower than 2001 levels, thus ensuring thatexport volumes and GDP growth will decline
from 2000 and 2001 rates. As the oil price falls
to $21 a barrel in 2002, the terms-of-tradegains made over the last several years will decline, and current account surpluses, whichreached 14.9 percent of GDP in 2000, will fallto 1.7 percent of GDP in 2002. Similarly, government balances will show some deterioration,
both as oil revenues fall and governments implement new expenditures. The Islamic Republic of Iran is locked into a balanced budget rule,and, with the conservative oil price assumptions
used for budget purposes, should retain fiscal
balances. Algeria is expected to increase fiscal
expenditures greatly in 2001–02, but the oil sta-bilization fund will be used to finance deficits
and retire debt. However, if fiscal policy becomes too expansionary, it will be difficult tomaintain the lower interest rates and inflationthat have been apparent recently.
The windfall gains have provided opportunities for several oil exporters, particularly theIslamic Republic of Iran and Algeria, to amortize external debt and retire domestic debt. Oil
exporters in the Gulf have built up foreign
reserves and had few problems maintaining
their fixed exchange rates. The Islamic Republic of Iran appears on-track to unify its exchange rate regime in the 2002/03 fiscal year;
as a result, it may face a dose of imported inflationary pressures in the forecast period. For
most countries, however, inflationary pressures should remain low. Interest rates in oil
exporters have been falling, along with rapid
growth in liquidity; therefore, there will be
continued support to growth from domestic
demand as demand for oil softens.
Short-term prospects in diversified exporters are mixed. Growth is expected to averagearound 4.3 percent in 2002–03. Morocco and
the Syrian Arab Republic are expected to recover from the debilitating droughts of recent

207

G L O B A L

E C O N O M I C

P R O S P E C T S

Table A1.6

Middle East and North Africa forecast summary(percent per year)
Baseline forecast
Growth rates/ratios

1991–2000

1999

2000

2001

2002

2003

2004–2010

3.2
0.4
1.0
2.2
5.2
22.7
–1.6
5.8
–1.9

2.2
0.3
0.3
1.9
3.5
22.4
–2.7
13.1
–1.0

3.9
3.1
1.9
2.0
3.4
23.4
–2.5
6.2
8.1

3.4
1.7
1.5
1.9
4.5
23.9
–3.0
3.0
4.7

2.9
0.7
1.0
1.9
4.5
24.2
–2.9
4.0
0.8

3.6
0.8
1.6
1.9
4.0
24.3
–2.6
5.7
–0.9

3.3
0.9
1.4
1.9
4.0
25.4
–2.2
4.6
–2.3

2.6
4.0

1.8
3.3

3.3
3.4

2.6
4.4

2.3
4.2

3.3
4.3

2.7
4.3

Real GDP growth
Consumption per capita
GDP per capita
Population
Inflationa
Gross Domestic Investment/GDPb
Central Gvt Budget Balance/GDP
Export Volumec
Current Account/GDP
Memorandum Items
GDP growth: Oil exporters
Diversified exporters
a. Local currency GDP deflator; median.
b. Investment ratio measure in real terms.
c. Goods and non-factor services.

Source: World Bank baseline forecast, October, 2001.

years, and agricultural production and exports
will provide support for growth in the nearterm. This will offset, to some extent, the expected external slowdown in demand in 2001–
02. The slower activity in the European economy in 2001–02 will adversely affect all the diversified exporters, with merchandise export
growth falling from 7 percent in 2000 to 1.9
percent in 2001, before recovering to 4.9 percent in 2002. Jordan is enjoying a broad-based
increase in activity, but deterioration in the external environment (tourism, remittances, andcapital flows) could dampen growth next year.
Current account deficits, which widened in recent years in drought-stricken countries, willremain higher than previously anticipated due
to lower export volume growth. Fiscal policy inthe drought-stricken countries has by necessity
been somewhat expansionary to counter declines in agricultural incomes. Several countries
that have signed EU Association Agreements(such as Morocco and Tunisia) have loweredor eliminated customs duties that were a sourceof revenue, placing upward pressures on fiscal
deficits. Consequently, the public sector willcontinue to play a large role in growth.
Tourism and workers’ remittances, two of
the mainstays for diversified exporters, will208

not fare well in the near term. The majority
of tourists come from Europe and, with
low-income growth in Europe into 2002, andconfidence eroded because of the events of
September 11, tourism will suffer. Politicaluncertainty may also contribute to a decline intourism, particularly in the Levant and in Egypt.
This can already be seen in Egypt, where afteran almost 15 percent rise in tourist arrivals in
2000, arrivals fell by 8.1 percent in April 2001
and 8.5 percent in May over the same period in
the previous year. Jordan’s tourism receipts fell
by 3.6 percent in the first half of 2001 compared to a year ago. Tunisia and Morocco will
suffer less from the effects of the political instability in the Levant. Indeed, Tunisia should
continue to experience some growth, and Morocco is investing heavily in tourist infrastructure. Remittances will remain stagnant or growvery slowly as growth slows in the near term inoil exporters, and as income growth is dampened in Western Europe, the main source of remittances for the region.

Long-term prospects
Long-term prospects in the Middle East andNorth Africa are less positive than in most otherdeveloping regions. Growth for the oil ex-

R E G I O N A L

porters in the long term is expected to average
2.7 percent; in the diversified exporters growthis expected to average 4.3 percent. In each case,growth is only slightly higher than the averagefor the 1990s. Growth in 2004–10 for the region is expected to average 3.3 percent, similar
to the average of the 1990s and lower than the
average of 3.5 percent for 2000–03. The reasons for the lack of acceleration of growth in
the forecast period include the real long-term
decline in oil and other commodity prices expected in the next 10 years; the high level ofvulnerability of countries in the region to commodity price and other external shocks; and thelow level of attractiveness of the region to foreign investment outside commodity sectors.
The main external sources of growth and income in the region come from commodity exports, tourism, and workers’ remittances. Eachof these sectors is highly vulnerable. In the longterm, energy prices are not expected to increase—in fact, the real crude oil price in 2010is projected to be approximately half its 2000
level. On the supply side, it is expected that nonOPEC supply will grow in the next several
years, indicating that OPEC production and exports must decline in order to maintain prices
above $20 a barrel, given expected demand conditions. Without further diversification in oilexporting countries, many of which receive up
to 95 percent of export revenues from hydrocarbons, the external impetus for growth seen
since 2000 will diminish. The agricultural andmineral exports of the diversified exporters
should fare better as prices increase in the next
decade, but the recovery will be slight, and will
come from the extremely low levels seen in recent years. In terms of agricultural exports, thescope for increasing penetration of markets islimited by the restrictions remaining on agriculture in the initial Association Agreements signedwith the EU by the Mediterranean countries.
Tourism receipts are an important source ofrevenue for many of the Mediterranean countries but, as can be seen in the current context,
they are highly vulnerable to issues concerning

E C O N O M I C

P R O S P E C T S

political stability. Current events in Israel andthe West Bank and Gaza have affected tourism,
not just in these areas but in the entire Levant
and in Egypt. While countries such as Tunisia
and Morocco are making concerted efforts toimprove accommodations and service, they still
face fierce competition from other destinations
that have lower levels of political conflict andbetter facilities and services. Remittances by
nationals working in the Gulf countries and inEurope are also an important source of income,but remittances from the Gulf are not expected
to continue growing rapidly. The Gulf countries have begun programs to increase the numbers of their own nationals in their domestic
workforce, and this will certainly be at the expense of non-nationals. With slower growth
expected in the oil exporters in the long term,
remittances are also expected to decline or togrow very slowly.

Notes
1. Dawn Internet Edition, Pakistan, September 20,
2001, http://www.dawn.com.
2. The News International, Pakistan, September 20,
2001, http://www.jang.com.pk
3. Support for eastward expansion of the EU has
waned markedly in existing member countries, which
was highlighted most recently by Ireland’s June 2001
“No” vote on the Treaty of Nice (which makes changes
to the voting structure of the EU to accommodate
expansion).
4. Angola, Burundi, Côte d’Ivoire, Democratic Republic of Congo, Guinea-Bissau, Kenya, Sierra Leone,
and Zimbabwe. No reliable data are available for
Liberia or Somalia.

References
FAO (Food and Agriculture Organization of the United
Nations). 2001. “Food Supply Situation and Crop
Prospects in Sub-Saharan Africa.” No. 2 (August).
USITC (United States International Trade Commission). 2001. “Sub-Saharan Africa: Major U.S. Import Suppliers Under the Generalized System ofPreferences, and the African Growth and Opportunity Act, Year-to-Date.” (http://reportweb.usitc.
gov/africa/trade_data.html)

209

Appendix 2
Global Commodity Price Prospects

C

ommodity prices declined in 2001,
however oil prices remain high relative
to non-oil prices (figure A2.1). Agricultural prices have yet to begin a sustained recovery from the declines that began just before
the Asia crisis in mid-1997, due to continued
large supply increases, weak demand, and currency devaluations of major commodity exporters relative to the dollar. Metals and minerals prices made a modest recovery from thelows reached in 1999, but have since returned
to near those lows, due mostly to weak demand. Oil prices rose sharply from their 1998
lows due to cuts by OPEC producers, but have
weakened in the past year due to weakness in
the global economy and, most recently, the terrorist attacks in the United States.
One of the main reasons for the divergenceof oil and non-oil commodities is that commodity producers have responded very differently to the price declines following the Asia crisis. Cuts in crude oil production and exports by
OPEC producers starting in 1999 sent oil prices
higher, while metals and minerals prices got aboost from cuts in mine and smelter output.
However producers of agricultural commodities were slow to adjust to low prices; this has
contributed to continuing price weakness. Some
agricultural commodities are still facing large
year-to-year production increases despite thenearly 32 percent decline in agricultural commodity prices from 1997 to 2001. Global coffee
production, for example, increased 21 percent

from 1997 to 2000 despite a decline of 53 percent in nominal prices over the same period.
Currency devaluations, relative to the U.S.
dollar, have also depressed prices of some commodities—especially in countries with weakcurrencies that are also major commodity exporters, such as Brazil, Indonesia, and Thailand. For example, Brazil’s currency has devalued about 50 percent relative to the dollar
since 1997, and this has led to lower dollar
prices for its major agricultural exports—coffee, soybeans, and sugar. Indonesia, a major
exporter of natural rubber and vegetable oils,
has seen its currency devalue 70 percent relative to the dollar since 1997. Thailand, thelargest rice exporter, has seen its currency devalue 30 percent relative to the dollar since1997, which has sent rice prices lower.
The current decline in non-oil commodity
prices has been more severe than the two declines of the 1980s. There are strong similarities in all three periods, however (figure A2.2).
The current decline began in May 1996, andprices fell by 30 percent in 38 months, compared to a decline of 27 percent in 32 months
from the February 1980 peak, and a 23 percent decline in 37 months from the June 1988
peak. In all three cases, commodity prices
reached their initial lows after about three
years and then rallied before returning to theirprevious lows. Then the patterns diverge, withprices declining for another year in one caseand rising in the other.

211

G L O B A L

E C O N O M I C

P R O S P E C T S

Figure A2.1 Commodity price trends
January 1997=100
160

120

80

40
Jan. 1997

Jan. 1998

Jan. 1999
AgricultureJan. 2000
Crude oilJan. 2001

Sept. 2001

Metals and minerals

Source: World Bank.

Figure A2.2 Non-energy commodity
pricesFeb. 1980
June 1988
May 1996

Index (price peak = 100)
110

100

90

80

70
Forecast
60
12

24

36

48

60

72

84

96

Months
Source: World Bank.

The recent terrorist attacks and resulting
economic slowdown is expected to delay therecovery in non-oil commodity prices until thelatter half of 2002 and result in a modest 1.6

212

percent increase in 2002. Thereafter prices are
expected to rebound rapidly as extreme low
prices curtail supplies and prices rise 8.1 percent in 2003. The increases are expected to be
below the recoveries of the 1980s (figure A2.2)
because of large surplus production capacity
relative to demand that exists in many commodities; improvements in technology thathave lowered production costs; and policies inmany OECD countries that have insulated producers from declines in global prices. Agricultural prices are projected to rise 1 percent in2002 and 8.8 percent in 2003, while metals
and minerals prices are projected to rise 3.2
and 7.2 percent, respectively, during 2002 and2003. Beyond 2003, we expect nominal nonoil prices to continue to increase about 5 percent per year through 2005. Specific commodity price projections are contained in tables
A2.12 and A2.13 for selected years to 2005,
2010, and 2015. Projected nominal and realcommodity indices are given in table A2.14.
Oil prices are expected to fall to $21 a barrel in 2002 compared to $25 a barrel in 2001.
However, the recent terrorist attacks in theG L O B A L

United States have added substantial risk to
the outlook, and prices will likely be morevolatile than previously expected. Prices are
expected to settle in the $18–20 range over thebalance of the decade as recent high prices
stimulate new production capacity.
Over the forecast period to 2015, real non-oil
commodity prices are projected to remain about
constant relative to 2001 levels as nominal
prices recover from current severely depressed
levels. In contrast, real oil prices are expected tofall 40 percent over the same period as prices retreat from current high levels. This divergent
forecast for non-oil and oil prices reflects the extreme divergence in current prices rather than afundamental difference in the long-term outlook. The trend of real commodity prices of thelast century are expected to continue, with both
oil and non-oil prices declining relative to manufactures prices. During the twentieth century,
non-oil commodity prices fell about 1 percent
per year relative to the prices of manufactures;
oil prices fell even more rapidly until the early
1970s when OPEC’s market power emerged
and supplies were curtailed. Since the peak of

Box A2.1

P R I C E

P R O S P E C T S

real non-oil prices in the early 1970s and thepeak of oil prices in 1980, real prices of bothhave declined by about two-thirds.
The structural decline in agricultural commodity prices relative to manufactures appears
to be the direct consequence of more rapid
productivity gains (see box A2.1) Such gains
have been fueled by rising yields, improved
policies in developing countries, and investments in infrastructure and irrigation. Metals
and minerals costs have also declined due toimprovements in technology, better management, and better policies. Demand growth forcommodities has slowed in response to slower
population growth and declining income elasticities. These trends are expected to continue
and lead to continued declines in real commodity prices over the longer term.

AgricultureA

gricultural commodity prices have been
the weakest component of commodity
prices, down 33 percent in 2000 compared totheir 1995 highs.

Total factor productivity growthartin and Mitra (2001),1 in a cross-country
study of nearly 50 countries for the period
1967–92, estimated total factor productivity (TFP)
growth for agriculture at between 2.3 percent and 2.9
percent per year (depending on the econometric specification used) compared to 1.1 percent to 1.9 percent
for manufactures. The TFP growth was found to befaster in developed countries than in developing countries, for both agriculture and manufacturing, andgrowth was faster in middle-income than low-income
developing countries. The difference in TFP growth
between agriculture and manufactures was most striking for low-income developing countries, where therange of TFP estimates was 1.4 to 2.0 for agriculturecompared to 0.2 to 0.9 for manufactures (table A2.1).
Thus the greater gain in total factor productivity ofagriculture relative to manufactures has played a largeM

C O M M O D I T Y

Total factor productivity growth in agriculture
and manufacturing(percent)

Overall TFPDeveloped countries
Developing countries
Low income countries
Middle income countries

Agriculture

Manufacturing

2.3 to 2.9
3.4 to 3.5
1.8 to 2.6
1.4 to 2.0
1.8 to 2.9

1.1 to 1.9
1.9 to 3.3
0.6 to 0.9
0.2 to 0.9
0.8 to 1.0

role in accounting for the decline of agricultural prices
relative to manufactures.
1 Martin, W. and D. Mitra (2001). “Productivity Growth in Agriculture versus Manufacturing.” Economic Development and Cultural
Change, vol. 49, no. 2, January, pp. 403–422.

213

G L O B A L

E C O N O M I C

P R O S P E C T S

Beverages
The World Bank’s monthly index of nominal
beverage prices (comprised of the export value
weighted average of coffee, cocoa, and tea
prices) has declined 71 percent since the 1997
highs, due mostly to steep declines in coffee
prices.
Prior to 1998–99, coffee production andconsumption were relatively equal, with little
overall increase in either since the late 1980s.
Since 1998–99, production has increased about
20 percent, and arabica and robusta coffee
prices have declined 66 and 63 percent, respectively, from 1997 to the first nine months of2001. Despite these dramatic price declines,
production is expected to increase for the
fourth consecutive year (see table A2.1). Prices
are not expected to recover until this imbalanceis resolved. It is possible that coffee prices havepermanently shifted lower to accommodate increased production by efficient producers.
Cocoa and tea prices have not seen the sharp
declines observed in coffee because supplies
have not increased as significantly. Cocoa consumption has grown at a fairly steady 3 percent
per year over the past two decades, while global
tea consumption has grown at a more modest 1
percent per year (see table A2.2).

CoffeeBrazil, the largest coffee producer with about
30 percent of the world’s total, is expected tohave a near-record crop, while Vietnam, thesecond largest producer, is expected to have arecord crop. Other major producers such as

Colombia, Côte d’Ivoire, Indonesia, and Mexico are all expected to have large crops.
Low prices have been met with several recent attempts to curtail exports by the Association of Coffee Producing Countries (ACPC).
So far these attempts have been ineffective andall efforts have ended in failure. Current efforts
appear to lack an effective mechanism to control coffee exports and have not yet inspired
much market response. In addition, withholding stocks without reducing supplies encourages sales outside of the agreement and undermines the agreement.
The recent decline in coffee prices has been
due primarily to a surge in supplies, but theequally important longer-term problem forcoffee producers is weak demand. Per capita
consumption in Europe and the United States,
which accounts for nearly 90 percent of international demand, has been declining. In the
United States, for example, per capita coffee
consumption has been declining since 1970,
while per capita consumption of soft drinks
has more than doubled. Unless tastes change,
coffee producers will probably need to adjust
to slow—perhaps stagnant—demand growth.
A significant recovery of coffee prices is notexpected soon unless there are major supply
disruptions due to droughts or frosts, which occurred in 1994 and 1997. We project a modest
recovery in robusta prices beginning in 2002
and arabica prices in 2003 (table A2.12–13 forspecific price forecasts), but we also recognize
the risk that prices could drift lower until supplies are sharply reduced. Over the longer-term,

Table A2.1 Coffee production(million bags)

BrazilVietnam
Colombia
Indonesia
MexicoCôte d’IvoireWorld

1997–98

1998–99

1999–2000

2000–01

2001–02

22.8
6.9
12.2
7.8
5.1
3.7
96.4

35.6
7.5
10.9
7.0
5.0
2.2
108.4

30.8
11.0
9.5
6.5
6.2
5.7
113.7

34.1
11.3
11.5
7.3
5.5
4.3
117.0

33.7
12.5
11.4
6.3
5.5
4.7
117.7

Source: USDA; and International Coffee Organization (ICO).

214

G L O B A L

C O M M O D I T Y

P R I C E

P R O S P E C T S

Table A2.2 Beverages’ global balance
Annual growth rates (percent)
1970

1980

1990

1999

2000

2001

1970–80

1980–90

1990–2000

64,161
71,53654,186

86,174
79,10060,996

88,84996,30076,163

113,723
98,00092,338117,001
103,290
87,502

117,739
105,340
96,095

2.11
1.01
0.78

1.36
1.97
2.41

1.20
0.22
1.06

1970

1980

1990

1998

1999

2000

1970–80

1980–90

1990–2000

Cocoa (Thousand tons)
Production
Grindings
Stocks

1,554
1,418
497

1,695
1,556
675

2,506
2,335
1,791

2,884
2,785
1,231

3,032
2,911
1,321

2,809
2,977
1,125

0.46
0.16
2.38

4.62
4.48
13.89

1.82
2.38
3.95

Tea (Thousand tons)
Production
Exports

1,286
752

1,848
859

2,526
1,099

2,963
1,296

2,847
1,272

2,895
1,309

4.09
2.35

2.87
2.39

1.24
1.62

Coffee (Thousand bags)
Production
Consumption
Exports

Notes: The 2001 figures for coffee are preliminary forecasts. Time reference for coffee and cocoa are based on crop year shown
under the year that production begins: October to September for cocoa, and April to March for coffee. For tea, time is calendar
year.
Source: International Cocoa Organization; International Tea Committee; FAO; USDA; and World Bank.

real coffee prices are expected to recover, but
remain well below historical highs of the 1970s
or recent highs of the 1990s. By 2015, real arabica and robusta prices are projected to increase 54 and 74 percent, respectively, from2001 levels, but they would still be only half of
their 1990s peaks.

countries have seen slower demand growth,
partly due to the recent economic slowdown.
Prices are projected to average a little over
$1.00/kg in 2001 and about $1.10/kg in 2002.
By 2015, real prices are projected to increase
21 percent from 2001 but still be 20 percent below their 1998 highs.

Cocoa

Tea

Following the three-decade low in February
2000, cocoa prices recovered somewhat during the first nine months of 2001 to average$1.01/kg compared to $0.91/kg in 2000. The
partial price recovery was largely due to production cutbacks and export disruptions inCôte d’Ivoire (due to political instability), andGhana. The 2000–01 cocoa crop is expected
to be down 7.3 percent from the 1999–2000
record crop, and more in line with the average
production levels of the early 1990s.
Demand for cocoa is expected to grow by
2.3 percent this season, just a little slower than
the 1990–2000 average of 2.4 percent, but far
below the 1980–90 average of 4.6 percent (tableA2.2). Demand from Eastern Europe and theformer Soviet Union (FSU) has grown by morethan 10 percent per year, while East Asian

The three-auction average tea price fell 17 percent in the first nine months of 2001, compared to 2000, due mostly to increased production by the major exporters (India, Kenya,
and Sri Lanka). In addition, currency devaluations in Sri Lanka relative to the U.S. dollar
contributed to the dollar price declines. Since
the high in 1997, nominal tea prices are down
about 21 percent.
Tea prices have been held up by several
years of poor harvests in some exporting
countries, combined with strong demand in
the Middle East and the Russian Federation,
following high export earnings from crude oil.
However, prices are expected to decline as
supplies increase and demand weakens alongwith the expected decline in crude oil prices.
We project tea prices to decline about 1 per-215

G L O B A L

E C O N O M I C

P R O S P E C T S

cent in 2002, but there is potential for larger
declines because of a possible disruption intrade to the Middle East and Central Asia following recent events.
The growth of global tea exports has
slowed significantly during the 1990s compared to previous decades (table A2.2), andthis has not been offset by more rapid growthin domestic demand in major producing countries, such as India. Thus, we project real prices
to decline 14 percent by 2015 relative to 2001
as exporters intensify their push to increase
output and demand growth remains weak.

Food
Despite considerable volatility in the components of the food price index, the overall index
of nominal food prices has remained relatively
constant since 1999, but is down nearly 32 percent since peaking in 1996. Prices are expected
to increase about 1 percent in 2002 and thenbegin to recover more rapidly as the global
economy rebounds from the current slowdown,
and agricultural commodity prices recover fromcurrent lows. By 2015, real food prices are expected to return to long-run trends, down 13
percent relative to 2001 levels.

Fats and oils
Fats and oils prices have taken a beating,down 8.1 percent in the first nine months of2001 compared to 2000, and down 40 percent
since 1997. The declines are due generally toincreased supplies and currency devaluationsof major producers versus the dollar. Global
fats and oils production in 2001–02 (October
to September) is expected to increase about 2
percent from the 2000–01 level, which is well
below the trend growth of about 3.5 percent
per year, but follows large increases in recent
years that have left the market oversupplied.
The increase has been greatest in the twolargest vegetable oils—soybean and palm—
which account for 23 and 19 percent of totalfats and oils, respectively.
World soybean production has grown by
5.1 percent per year over the past decade, withgrowth centered in the three major producers

216

Table A2.3 Soybean production(millions of tons)
Year

Argentina

BrazilUnitedStates

World

1990
1995
2000
2001

11.5
12.4
26.0
25.5

15.8
24.2
37.5
38.0

52.4
59.2
75.4
79.9

104.1
124.9
172.1
177.2

Source: USDA.

and exporters (Argentina, Brazil, and theUnited States), which together account for 80
percent of global production (table A2.3).
Since 1990, palm oil production has more thandoubled (table A2.4), with the large increases
coming from Indonesia and Malaysia.
Table A2.4 Palm oil production(millions of tons)
Year

Indonesia

Malaysia

World

1990
1995
2000
2001

2.41
4.22
6.95
7.35

6.10
7.81
10.84
11.55

11.03
15.22
21.77
23.01

Source: Oil World.

Prices of most fats and oils are expected toincrease in 2002 and 2003, but remain well
below 1999 highs. Once the current imbalanceis resolved, price prospects improve due to thestrong demand growth expected in China andIndia. Real fats and oil prices are projected toincrease 12 percent from 2001 to 2015 as
prices recover from current lows.

GrainsThe USDA’s projection for the new season(2001–02) is for significant declines in endingstocks of grain (table A2.5), and this shouldcause most grain prices to increase in 2001 and2002 after reaching lows in 1999 or 2000.
Maize prices appear to have bottomed out in2000 and are expected to increase about 2
percent in 2001 and 7 percent in 2002. Wheat
prices, which hit bottom in 1999, are projected
to increase 10 percent in 2001 and 4 percent in

G L O B A L

Table A2.5 Global grain stocks to use(percentages)

1997–98
1998–99
1999–2000
2000–01
2001–02(estimated)
1990s low

Maize

Rice

Wheat

Total Grains

25.5
29.3
28.4
25.9

33.3
34.3
35.8
34.2

29.3
29.8
28.3
26.8

26.9
28.5
27.8
26.1

23.0
22.6

31.4
31.4

22.4
25.2

23.1
23.2

Source: USDA. Data for 2001–02 are the USDA’s August
2001 estimate.

2002. Rice prices, which are still falling, are expected to decline 16 percent in 2001, and thenincrease 9 percent in 2002. In real terms, maize,
rice, and wheat prices are projected to increase
14, 17, and 13 percent by 2015 relative to theirlows during 1999–2001.
Substantial surplus production capacity exists because yields have continued to growalong historical trends, while the area devoted
to grain production has fallen (figure A2.3).
Despite these reductions in land use, real prices
have declined by half since 1980. The growthof global grain consumption has slowed from

Figure A2.3 World grain area and yields
Million hectares and tons per hectare
750

3.50
3.00

Area

2.50

700

2.00

Yields

1.50
650
1.00
0.50
600
1960

0.00
1970

1980

1990

2000

Note: Area is in million hectares (left side) and yields are
in tons per hectare (right side).
Source: World Bank based on USDA data.

C O M M O D I T Y

P R I C E

P R O S P E C T S

2.6 percent per year during the 1970s to 1.8
percent during the 1980s, and to 1 percent
during the 1990s (table A2.6).

Sugar
World sugar production has exceeded consumption in 8 of the past 10 seasons, causing
the ending stocks-to-use ratio to reach 0.27 in
the 2000–01 marketing season—the highest
since 1985. World sugar consumption has
grown by 3 percent per year during the last
decade (table A2.6). Sugar prices had recovered from the sharp drop following the Asia
crisis, but have since declined due to large supplies (figure A2.4).
Brazil, which is the largest sugar exporter
with about one-quarter of world exports in
2000–01, more than doubled production from1990–91 to 2000–01 and increased exports
from 1.5 to 11.3 million tons. Australia andThailand increased production by 50 and 70
percent, respectively, from 1990–91 to 1997–
98 when prices were attractive, but have cut
production as prices have declined.
Sugar prices are expected to fall about 11
percent in 2002 in response to large supplies
and weak demand, and then increase 12 percent in 2003. However, prices are expected toremain relatively weak for the next several
years, with fluctuations depending on the yearto-year balance of production and consumption. Over the longer term, real prices are expected to trend lower as production continues
to outpace consumption and stocks periodicallybuild. Relative to the 1999 lows, real prices areprojected to increase 49 percent by 2015.

Raw materials
The index of agricultural raw materials prices(comprised of tropical hardwoods, cotton,
and natural rubber) declined sharply during
the Asia crisis and then stabilized. Recently
prices have again declined, and are now about
40 percent below their 1997 nominal levels(figure A2.5). Prices are expected to reach a
low in 2001 and then increase modestly during the next several years. By 2005, nominal
prices are projected to rise 28 percent relative217

G L O B A L

E C O N O M I C

P R O S P E C T S

Table A2.6 Foods’ global balance
Annual growth rates (percent)
1970

1980

1990

1998

1999

2000

1970–80

1980–90

1990–2000

1,079
1,114
109
193

1,430
1,450
215
309

1,769
1,717
203
490

1,888
1,857
225
528

1,887
1,890
241
525

1,840
1,876
227
489

2.88
2.58
6.35
7.24

1.55
1.78
0.13
3.83

1.04
1.02
0.94
0.56

Soybeans (Thousand tons)
Production
44,269Consumption
47,988
Exports
12,572
Stocks3,599

80,87384,017
24,514
11,538104,093
103,643
24,48812,992

159,819
159,567
38,945
14,297

159,659
159,839
47,231
14,338172,107
171,486
52,686
14,209

6.84
6.53
5.24
13.83

1.87
2.04
0.80
0.66

5.08
4.99
2.88
0.20

Sugar [Thousand tons (raw equivalent)]
Production
70,91984,742
Consumption
65,39591,062
Exports
21,931
27,571
Stocks
19,614
19,494

109,393
106,802
34,07819,309143,388138,168
41,93328,178

133,634
127,499
36,742
31,639136,882
129,449
39,91135,225

2.80
3.30
3.26
3.96

1.59
1.40
0.83
0.77

3.26
3.00
3.12
4.52

Grains (Million tons)
Production
Consumption
Exports
StocksFats and oils (Million tons)
Production
Consumption
Exports
Stocks

1970

1980

1990

1999

2000

2001

1970–80

1980–90

1990–2000

39.78
39.82
8.83
5.18

58.09
56.80
17.763
9.25

80.84
80.87
26.89
12 .15113.50112.2035.13
14.04

117.48117.5437.82
14.00

119.84121.29
39.37
12.80

3.68
3.55
7.05
7.09

3.54
3.69
4.19
2.44

3.70
3.64
3.39
0.69

Note: Time reference for grains, soybeans, and sugar are based on marketing years, shown under the year in which production
begins, and varies by country and commodity; for fats and oils time is crop year beginning September.
Source: USDA; and Oil World.

Figure A2.4 Nominal sugar price
U.S. cents per kilogram
35
30
25
20
15
10
5
0
1990

1991

Source: World Bank.

218

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

G L O B A L

Figure A2.5 Agricultural raw materials
price index
Index, 1990 = 100

C O M M O D I T Y

P R I C E

P R O S P E C T S

term, real prices are expected to rise only
modestly from current low levels. By 2015,
real prices are projected to increase 14 percent
relative to 2001.

130

Natural rubber
110

90

70
Jan.
1997

Jan.
1998

Jan.
1999

Jan.
2000

Jan.
2001

Source: World Bank.

to 2001, and real prices are projected to rise
17 percent by 2015.

CottonCotton prices declined almost 14 percent in thefirst three quarters of 2001 compared to
2000—in response to a 6 percent increase inglobal production in the 2001–02 season. The
surge in production (compared to recent historical growth of about 0.8 percent a year) was
largely due to a 7 percent increase in global
area planted in cotton, which was in responseto the relative attractiveness of cotton prices
compared to other annual crops. China, India,
and the United States accounted for threequarters of the total production increase.
Cotton demand has been stagnant for mostof the past decade and is unlikely to quickly
absorb recent production increases. Cotton’sshare of total fiber consumption exceeded 80
percent in 1950, but fell to 50 percent by
1980, and reached a low of 40 percent in recent years. Consumption is only expected toincrease 1 percent in 2001–02; consequently
stocks are expected to rise significantly. Therefore, the widely used Cotlook A Index is projected to average $1.06/kg in 2001 and thendecrease to $1.02/kg in 2002. Over the longer

Natural rubber prices have contributed to therecent weakness in raw materials prices by declining 11 percent during the first three quarters of 2001 compared to 2000. This priceweakness occurred despite a nearly 9 percent
increase in global demand (partly in responseto the second Firestone tire recall).
The three top producers and exporters ofnatural rubber—Indonesia, Malaysia, and Thailand—have, in principle, agreed to establish abuffer stock with the objective of cutting production by 4 percent annually starting in 2002
until a full price recovery is realized. While thedetails of the buffer stock scheme have not yet
been outlined, the trilateral organization, Tripartite Rubber Corporation (TRC), is expectedto act soon. The historical record of managedsupply cut mechanisms is poor, but because
TRC consists of the three members who together account for about two-thirds of global
output, the outcome may be different.
Natural rubber prices are expected to decline 11 percent in 2001 and then begin to
recover in 2002—rising 25 percent by 2005.
Real prices are expected to increase 16 percent
by 2015 relative to 2001.

Tropical timber
Asian meranti log prices fell 14 percent during
the first three quarters of 2001 compared to2000, due to weak demand in Japan and thestrong dollar relative to the Japanese yen.
African sapelli log prices fell 5 percent over thesame period due to reduced supplies because ofrestrictions and bans on log exports from
Cameroon and other African countries. The
weakness of the euro against the dollar and theinstability of meranti prices encouraged European buying in the African market.
As growth in the global economy slows, demand in the tropical timber industry continues
to weaken, and prices are expected to follow

219

G L O B A L

E C O N O M I C

P R O S P E C T S

Table A2.7 Raw materials’ global balance
Annual growth rates (percent)

Cotton (thousand tons)
Production
Consumption
Exports
Stocks

1970

1980

1990

1999

2000

2001

1970–80

1980–90

1990–2000

11,74012,173
3,875
4,605

13,832
14,215
4,414
4,895

18,97018,576
5,081
6,645

18,841
19,7846,102
8,802

19,36019,7005,770
8,580

20,80019,930
5,900
9,460

1.22
1.11
0.93
1.71

3.09
3.10
2.79
2.83

0.84
0.21
0.49
1.38

1970

1980

1990

1998

1999

2000

1970–80

1980–90

1990–2000

3,820
3,770
3,280
1,480

5,080
5,190
3,950
1,500

6,820
6,540
4,690
2,300

6,800
6,660
4,660
2,530

6,880
7,260
5,000
2,150

1.78
1.58
1.26
0.60

3.17
3.16
2.07
0.23

3.08
3.25
1.84
3.71

1980

1990

1997

1998

1999

1970–80

1980–90

1990–1999

300
25.1
131.8
16.1
48.2
14.9

311
17.9
115.0
21.2
56.1
19.5

289
14.6
108.3
19.5
47.6
18.3

299
18.9
108.2
21.6
52.0
18.3

1.47
0.18
1.17
4.95
1.17
0.69

1.71
5.10
1.74
2.57
2.02
9.10

0.45
5.36
1.99
3.33
0.46
3.60

Natural rubber (thousand tons)
Production
3,140
Consumption
3,090
Net Exports
2,820
Stocks1,440
1970

Tropical lumber (thousand cubic meters)
Logs, production
210
262
Logs, imports
36.1
42.2
Sawnwood, production
98.5
115.8
Sawnwood, imports
7.1
13.2
Plywood, production
33.4
39.4
Plywood, imports
4.9
6.0

Note: The 2001 figures for cotton are preliminary forecasts. Time reference for cotton is based on crop year shown under the
production year beginning August; for rubber and tropical timber, time refers to calendar year.
Source: International Cotton Advisory Committee; International Rubber Study Group; FAO; and World Bank.

demand. Log imports to Japan are expected tofall about 6 percent in 2001 compared to theprevious year, according to industry estimates.
China, which is the largest global log importer,
has continued rapid import growth and thishas partially offset weak Japanese imports.
However, the combination of the strong dollar,
slower economic growth, and the abundanceof softwoods that can substitute for hardwood
in some uses, should lead to lower prices in2001. The recovery of timber prices beyond
2001 will be closely linked to the global economic recovery expected in 2003 and to a
weakening of the dollar. We project timber
prices to remain unchanged in 2002 and to recover in 2003. By 2005, nominal prices of meranti logs are projected to increase 43 percent
relative to 2001; sapelli logs are projected toincrease 13 percent; and meranti sawnwood is
projected to increase 34 percent.
Over the longer-term, real timber prices areprojected to recover from current levels, as

220

timber prices remain one of the few commodities with trend real price increase due to supply
constraints. Real meranti logs and sawnwood
prices are projected to increase 37 and 27 percent, respectively, from 2001 to 2015 whilesapelli log prices are projected to increase 9
percent by 2015 compared to 2001. The
slower projected growth of sapelli log prices
reflects the smaller price decline compared tomeranti log prices during the Asia crisis.

Fertilizers

T

he fertilizer industry is burdened by surplus capacity and weak demand, but prices
appear to be near their lows. The situation
varies by fertilizer type, with nitrogen (urea)
fertilizer prices recovering in 2000 after fallingfor four years; phosphate (TSP) fertilizer prices
still declining but near expected lows; andpotash (MOP) prices holding steady due to aggressive production cutbacks (figure A2.6).

G L O B A L

C O M M O D I T Y

P R I C E

P R O S P E C T S

Figure A2.6 Fertilizer prices
Dollars per ton

250
Urea
200
TSP
150

100
MOP
50

0
Jan. 1990

Jan. 1992

Jan. 1994

Jan. 1996

Jan. 1998

Jan. 2000

Source: World Bank.

The industry is still adjusting to the sharp
declines in consumption in former Soviet andEastern European countries following the collapse of the Soviet Union. Prices had beenheavily subsidized under state control and fertilizer use was high, but subsidies were cut andconsumption fell sharply after the collapse of
the Soviet Union. This left many countries(such as the Russian Federation and Ukraine)with large production capacity and reduced

domestic demand—which led to export
growth from Eastern Europe of 4 percent per
year since 1993. These exports displaced traditional exporters, and depressed prices of nitrogen and phosphate fertilizers. Global consumption fell about 17 percent from the high in 1988
to the low in 1993 and has only recently recovered to near the 1988 peak (figure A2.7).
The fertilizer industry has had to contend
with several other changes in recent years, in-Figure A2.7 World fertilizer consumption and exports
Millions of tons
160
Consumption
120

80

40
Exports
0
1970

1975

1980

1985

1990

1995

Source: FAO.

221

G L O B A L

E C O N O M I C

P R O S P E C T S

Table A2.8 Fertilizer global balance(million tons)
Annual growth rates (percent)
1970

1980

1990

1997

1998

1999

1970–80

1980–90

1990–99

Nitrogen
Production
Consumption
Exports

33.30
31.76
6.77

62.78
60.78
13.15

82.26
77.14
19.48

87.60
80.12
23.24

88.48
82.62
23.95

90.85
85.53
24.58

6.53
6.86
7.23

3.12
2.60
5.10

1.11
1.15
2.62

Phosphate
Production
Consumption
Exports

22.04
21.12
2.92

34.51
31.70
7.51

39.35
35.90
10.50

32.81
33.34
12.24

32.99
33.17
12.54

32.65
33.15
12.90

3.72
3.85
8.37

1.70
1.39
5.01

2.05
.88
2.31

Potash
Production
Consumption
Exports

17.59
16.43
9.45

27.46
24.24
16.72

26.82
24.68
19.82

26.16
22.63
22.52

24.98
22.36
22.13

25.42
22.68
22.63

3.97
3.93
4.89

0.03
0.05
0.73

0.59
0.94
1.48

Note: All data are in marketing years.
Source: FAO.

cluding weak grain prices since 1996; highnatural gas prices in the United States andEurope in the past two years; reduced fertilizer
use in the EU because of environmental concerns and lower commodity intervention prices;
and increased domestic fertilizer production in
major importing countries such as China.
The slow recovery of agricultural commodity prices and weakness in the global economy
suggest that prices may remain near current levels for several years or begin a modest recovery.
Over the longer term, nitrogen prices are projected to rise as production capacity is rationalized and demand increases; phosphate prices
are expected to remain about constant following recent declines; and potash prices are expected to decline as surplus capacity continues.

Metals and Minerals

T

he index of metals and minerals prices fell
15 percent during the first nine months of2001, with copper prices down 23 percent (seefigure A2.8). Production cutbacks have helped
slow the price decline, most notably in aluminum where significant capacity has been
shut in the United States’ Pacific Northwest—
and to a lesser extent in Brazil—because ofelectric power problems. Mergers and acquisi-

222

tions have also helped to rationalize surplus
capacity within the industry. However global
output continues to exceed demand and inventories have risen. Stocks of most metals
have risen by more than 60 percent this year,with aluminum and copper stocks more thandoubling (see figure A2.9).
The negative impact on the global economy
from the terrorist attacks of September 11 will
result in lower demand for most metals andminerals, higher inventories, and lower prices.
Further closure of high-cost production is likely,
and this may help underpin prices somewhat.
However the recovery in prices will likely be delayed well into 2002, and will largely be determined by the timing and the strength of the rebound in global economic activity.
Higher prices will also bring forth new capacity and the restart of idle facilities, and prices
will eventually recede. Real prices are expected
to decline in the longer term, as production costs
continue to fall due to new technologies and improved managerial practices (see figure A2.10).

Aluminum
Aluminum prices have fallen 14 percent thisyear, while London Metal Exchange (LME) inventories have risen 124 percent. Prices havebeen partly supported by large reductions in

G L O B A L

C O M M O D I T Y

P R I C E

P R O S P E C T S

Figure A2.8 Aluminum and copper prices
Dollars per ton
2,700

2,300

Copper1,900

1,500
Aluminum
1,100
Jan. 1996

Jan. 1997

Jan. 1998

Jan. 1999

Jan. 2000

Jan. 2001

Source: London Metal Exchange.

Figure A2.9 Aluminum and copper stocks
Thousands of metric tons
1,000

800
Aluminum
600

400
Copper200

0Jan. 1996

Jan. 1997

Jan. 1998

Jan. 1999

Jan. 2000

Jan. 2001

Source: London Metal Exchange.

production in the United States because of theelectricity crisis on the West Coast and production curtailments in Brazil and Canada due tohydropower shortages.
About 1.6 million tons of capacity in the U.S.
Pacific Northwest has been idled because ofelectric power shortages in the region. The Bonneville Power Authority (BPA) asked aluminumproducers to stay off-line for up to two years orface high power prices when new contracts
went into effect on October 1, 2001. The BPA
announced that load reductions by utilities andindustries helped reduce the rate increase to 46
percent (approximately $34/MWh) comparedto possible rate increases of 250 percent, andspot power rates that were several times that223

G L O B A L

E C O N O M I C

P R O S P E C T S

Figure A2.10 Metals and minerals prices
Price index (1990 = 100)160
Forecast

140
Real
120
100
80
60
Nominal

40
20
1960

1965

1970

1975

1980

1985

1990

1995

2000

2005

2010

2015

Source: Platts and World Bank.

224

amount. As compensation for not taking powerand curtailing production, aluminum smelters
will receive an average rate of $20/MWh.
Despite production cutbacks, the global
market is expected to retain a small surplus
this year, before moving into a deficit in 2002,
but this will partly depend on any structural
impact to demand following the September
terrorist attacks. Prices are expected to recover during the next economic cycle, but reallong-term prices are expected to decline. New
low-cost capacity is coming on-stream, but
profitable new investments will continue to require low-cost power supplies.

9 percent. Demand has been weak elsewhere,with the notable exception of China, partly
due to its infrastructure programs. Meanwhile, world production rose 4 percent in thefirst half of the year.
With recovery of demand in 2002, the market balance is expected to slip into deficit,
since only moderate growth in production is
expected. Prices could rebound sharply as thenext cycle commences, which could also provide upward momentum to other metals prices.
In the longer term, increases in new low-cost
capacity are expected, and real prices are expected to decline.

CopperNickelCopper prices declined 23 percent in the firstnine months of 2001, due to weak demand
and rising stocks.
LME inventories have more than doubled
this year, and are only 13 percent below thehighs in early 2000. World consumption fell
2 percent during the first six months, due tothe slump in economic activity. In the UnitedStates, the construction sector has been buoyant, but weakness in the auto and technology
sectors has resulted in total demand falling

Nickel prices have fallen 31 percent this year
because supply has significantly exceeded demand. LME inventories have risen by 73 percent, but are still quite low compared with levels in recent years (see table A2.9). Productionin the first seven months increased by 2.7 percent, with Canada, Colombia, and New Caledonia recording large gains. However first-halfworld consumption dropped 10 percent, withdemand in Japan and the United States down
sharply, while China provided the one brightG L O B A L

C O M M O D I T Y

P R I C E

P R O S P E C T S

Table A2.9 Metals and minerals global balance(thousand tons)
Annual growth rates (percent)
1970

1980

1990

1998

1999

2000

1970–80

1980–90

1990–2000

Aluminum
Production
Consumption
LME ending stocks

10,257
9,996
n.a.

16,027
14,771
68

19,362
19,244311

22,64821,842636

23,70523,505775

24,49524,905
322

3.2
3.2
n.a.

1.9
1.8
0.3

2.2
2.2
0.4

CopperProduction
Consumption
LME ending stocks

7,583
7,294
72

9,242
9,400
123

10,80910,780179

14,145
13,364592

14,455
14,094790

14,78815,099
357

1.9
2.5
7.4

1.1
1.0
5.6

3.5
3.3
15.7

Nickel
Production
Consumption
LME ending stocks (tons)

0
0
2,130

717
742
4,554

842
858
4,344

999
1,042
65,964

1,073
1,028
46,962

1,140
1,107
9,678

n.a.
n.a.
n.a.

1.6
1.5
0.5

3.1
2.6
8.3

n.a. = not available.
Source: World Bureau of Metal Statistics; London Metal Exchange and World Bank.

spot of growth. Stainless steel production has
declined owing to the slowdown in economic
activity, which lowered demand and prices fornickel (and zinc). The market is tilting into surplus, and a small surplus is expected to endure
in 2002 and 2003 as production increases.

GoldGold was the one major metal to rise sharply
immediately following the September terrorist
attacks. After averaging $267/toz this year,

prices surged toward $300/toz as some investors turned to gold as a safe haven. Oncecalm returns to world markets, gold prices
should revert toward previous levels, as gold
demand will be adversely affected by higher
prices and the slowing global economy. Golddemand has been sluggish this year, falling 3
percent in the second quarter, in part becauseof the higher U.S. dollar gold price. Central
Bank sales continue (see table A2.10), with
the U.K. government about to complete its

Table A2.10 Gold global balance(tons)
Tons

Jewelry
Other fabrication
Bar hoarding
Other
Total demand
Mine production
Net official sales
Old gold scrap
Net hedging
Other
Total supply(percent p.a.)

1991

1994

1995

1996

1997

1998

1999

2000

1991–2000

2,358
518
252
n.a.
3,128
2,159
111
482
66
310
3,128

2,618
457
231
n.a.
3,305
2,279
81
617
163
173
3,305

2,791
503
306
6
3,606
2,274
173
625
535

2,851
484
182
n.a.
3,518
2,361
279
640
142
95
3,518

3,349
560
325
n.a.
4,234
2,479
626
628
504
297
4,234

3,156
569
173
208
4,106
2,538
374
1,097
97

3,149
595
240
170
4,154
2,568
464
616
506

3,185
564
211

4,106

4,154

3.4
0.9
2.0
n.a.
4.0
2.0
17.4
2.6
n.a.
0.7
2.4

3,606

3,971
2,576
471
607
316
3,971

n.a. = not available
Source: Gold Field Minerals Service; and World Bank.

225

G L O B A L

E C O N O M I C

P R O S P E C T S

planned series of auctions of 395 tons in early
2002. Gold prices are expected to remain
under $300/toz over the forecast period, generally trading in a relatively narrow range. As
has been the case for some time, higher prices
will stimulate new supplies, encourage producer sales, and lessen demand, while low
prices will reduce investment and encourage
consumption. Mine production is expected tocontinue to increase moderately, as new lowcost operations come on-stream. An important
determinant of prices will be the decision by
Central Banks whether to further stem official
gold sales when the Washington Agreement expires in 2004.

PetroleumS

ince the rebound in oil prices that began inearly 1999—propelled by a large cutbackin OPEC production and sharp decline in inventories (see figure A2.11)—prices have held
firm primarily because of OPEC production restraint. Ten OPEC countries (excluding Iraq,
which remains outside the quota system while
under U.N. sanctions) are taking pre-emptive
production decisions to keep prices within theirrecently chosen band of $22–28 a barrel for its
basket of crudes. Due to the seasonality of oil
demand, OPEC must both raise and lower production during the year to stabilize prices (seefigure A2.12). With non-OPEC supply increasing, it will be more and more difficult to counterbalance the downward pressure on prices.
The terrorist attacks on the United States
on September 11, 2001, have accentuated thispicture, while at the same time uncertainty is
exceptionally large. Following the attacks, oilprices slumped below $23 a barrel due to expectations of weak oil demand, little immediate
threat to oil supplies, and no action by OPEC to
reduce production and prop up sagging prices.
However should there be a significant supply
disruption—either from military attacks, sanctions, or reactions from oil producers (for instance, from Iraq)—oil prices could rise sharply.
OPEC announced immediately after the attacks that it would raise production if necessary
to help prevent oil prices from spiking higher.
Given surplus capacity of around four million
barrels a day, the organization could easily
make up for a loss of, say, Iraq’s exports ofaround two million barrels a day. At its meetingat end-September 2001, the organization de-Figure A2.11 Oil price and OECD stocks
Dollars a barrel

Millions of barrels
2,850

35

2,800
30

2,750
2,700

25

2,650

Price

2,600
20
2,550
2,500

15
Stocks

2,450
2,400

10
Jan. 1996

Jan. 1997

Jan. 1998

Source: World Bank and International Energy Agency.

226

Jan. 1999

Jan. 2000

Jan. 2001

G L O B A L

C O M M O D I T Y

P R I C E

P R O S P E C T S

Figure A2.12 OPEC production and quotas
Millions of barrels a day
30
OPEC-10 quota

OPEC-10 production

OPEC production

28

26

24

22
Jan. 1996

Jan. 1997

Jan. 1998

Jan. 1999

Jan. 2000

Jan. 2001

Note: OPEC-10 excludes Iraq.
Source: International Energy Agency.

cided not to cut production, despite the fact thatoil prices were starting to fall below the lower
end of its range. The organization felt compelled not to raise prices at this time because of
the impact on the weakening global economy,
and to show support for the allied coalition.
In 2002, the requirements for OPEC oil are
projected to be lower than in 2001, due to minimal growth in global oil demand and continued rise in non-OPEC supplies. Consequently,
OPEC will need to lower production to keep
prices within its band. OPEC is expected to
strive to maintain prices within the lower endof its range. However, in the present politicaland economic environment, it is expected tofall short because of weak oil demand, higher
inventories, and overproduction by some member countries.
Once some form of normalcy returns to thepolitical and economic climate, and a global recovery commences, OPEC is expected to continue its policy of adjusting output to keep inventories lean and to maintain prices within its
band. However, this requires OPEC to micromanage the market and to anticipate seasonalchanges in demand for its crude. Given the
many uncertainties affecting underlying levelsof oil demand and supply, its production deci-

sions may result in both the over- and undershooting of prices.
In the longer term, if OPEC is successful in
keeping prices above $25 a barrel, the impact on
demand, and particularly on competing supplies,
will increasingly exert downward pressure on
prices. While higher prices in 1999–2000 wereachieved relatively easily with little apparent impact on demand, supply, and economic activity,
long-term responses are likely to be much higher
and could thwart part—and possibly much—of
the growth in demand for OPEC crude.
To the degree that higher oil prices are
deemed to be temporary, there will be little
structural change to oil demand. But if highprices are perceived to be “permanent,” it will
accelerate advances in conservation and substitution away from oil. High prices have already generated policy responses, such as the
new U.S. energy policy, and increasing environmental pressures will also tend to restrain
oil consumption over time. High prices will
also stimulate development of conventional
and unconventional oil supplies, and make alternative energy supplies more competitive.
There are no apparent resource constraints far
into the future, and oil consumption has only
risen moderately over the past 20 years (see227

G L O B A L

E C O N O M I C

P R O S P E C T S

Table A2.11 Petroleum global balance(million barrels per day)Million barrels per day

OECD
FSU
Other nonOECD
Total consumption
OPEC
FSU
Other nonOPEC
Total production
Stock change, misc.

Annual growth rates (percent)

1970

1980

1990

2000

2001

2002

1970–80

1980–90

1990–2000

34.0
5.0
6.8
45.7
23.5
7.1
17.4
48.0
2.3

41.5
8.9
12.3
62.6
27.2
12.1
24.6
63.9
1.3

41.5
8.4
16.1
66.0
24.5
11.5
30.9
66.9
0.9

47.8
3.6
24.4
75.9
30.8
7.9
38.0
76.7
0.8

47.8
3.7
24.6
76.1
30.3
8.5
38.0
76.8
0.7

47.8
3.7
24.9
76.4
29.3
8.8
38.7
76.8
0.4

2.0
5.9
6.1
3.2
1.5
5.4
3.5
2.9

0.0
0.6
2.7
0.5
1.0
0.5
2.3
0.5

1.4
8.1
4.3
1.4
2.3
3.6
2.1
1.4

Source: British Petroleum; International Energy Agency; and World Bank.

table A2.11). In addition, new areas continue
to be developed (e.g., deep water offshore andthe Caspian Sea), development costs continue
to fall (shifting supply curves outward), andthe large profits being generated will lead tohigher investment. In addition, OPEC countries are increasing capacity, and will add tothe supply competition in the coming years.
Due to rising supply competition andbelow-trend oil demand growth, oil prices are

expected to decline from $25 a barrel in 2001
to $21 a barrel in 2002, and fall below $20 abarrel by mid-decade (see figure A2.13). A risk
to the forecast is if OPEC takes strong, concerted action on production levels over the
next few years to keep prices at or above $25
a barrel. If successful, it will add to the growing pressures on world demand and competing
supplies, and prices would still be expected tofall below $20 a barrel by mid-decade.

Figure A2.13 Crude oil prices
Dollars a barrel
50
Forecast
40
1990 dollars
30

20

10

0
1960

1965

Source: World Bank.

228

1970

1975

1980

1985

1990

1995

2000

2005

2010

2015

G L O B A L

C O M M O D I T Y

P R I C E

P R O S P E C T S

Table A2.12 Commodity prices and price projections in current dollars
ActualCommodity

Projections

Unit

1970

1980

1990

2000

2001

2002

2003

2005

2010

2015

EnergyCoal, U.S.
Crude oil, average
Natural gas, Europe
Natural gas, U.S.

$/mt
$/bbl
$/mmbtu$/mmbtu

n.a.
1.21
n.a.
0.17

43.10
36.87
3.40
1.55

41.67
22.88
2.55
1.70

33.06
28.23
3.86
4.31

44.00
25.00
4.00
3.95

38.00
21.00
3.30
2.50

36.00
20.00
3.10
2.60

34.00
18.00
2.75
2.75

35.00
19.00
2.75
3.00

36.00
21.00
3.00
3.25

Nonenergy Commodities
Agriculture
Beverages
Cocoa
Coffee, other milds
Coffee, robusta
Tea, auctions (3) averagecents/kg
cents/kg
cents/kg
cents/kg

67.5
114.7
91.4
83.5

260.4
346.6
324.3
165.9

126.7
197.2
118.2
205.8

90.6
192.0
91.3
187.6

105.0
136.7
61.7
162.0

110.0
138.9
63.9
160.0

120.0
154.3
70.6
168.0

140.0
209.4
88.2
180.0

157.0
265.0
132.0
182.0

168.0
280.0
142.6
184.0

$/mt
$/mt
$/mt
$/mt
$/mt
$/mt
$/mt

397.2
224.8
378.6
260.1
102.6
286.3
116.9

673.8
452.7
858.8
583.7
262.4
597.6
296.2

336.5
230.7
963.7
289.8
200.2
447.3
246.8

450.3
304.8
713.7
310.3
189.2
338.1
211.8

315.0
200.0
675.0
290.0
180.0
357.0
200.0

365.0
350.0
725.0
330.0
183.0
385.0
205.0

430.0
400.0
775.0
360.0
190.0
395.0
210.0

600.0
450.0
820.0
400.0
215.0
425.0
235.0

645.0
480.0
850.0
450.0
235.0
460.0
260.0

670.0
500.0
875.0
475.0
245.0
505.0
270.0

Grains
Maize
Rice, Thai, 5 percent
Sorghum
Wheat, U.S., HRW

$/mt
$/mt
$/mt
$/mt

58.4
126.3
51.8
54.9

125.3
410.7
128.9
172.7

109.3
270.9
103.9
135.5

88.5
202.4
88.0
114.1

90.0
170.0
95.0
125.0

96.0
185.0
91.8
130.0

108.0
205.0
103.3
138.0

122.0
235.0
116.6
150.0

125.0
260.0
119.5
155.0

130.0
270.0
123.5
160.0

Other foodBananas, U.S.
Beef, U.S.
Oranges
Shrimp, Mexican
Sugar, world$/mt
cents/kg$/mt
cents/kg
cents/kg

166.1
130.4
168.0
n.a.
8.2

377.3
276.0
400.2
1,152
63.16

540.9
256.3
531.1
1,069
27.67

424.0
193.2
363.2
1,513
18.04

610.0
207.0
630.0
1,575
18.80

523.6
202.8
625.0
1,550
16.75

523.6
202.8
550.0
1,600
18.70

529.1
213.9
450.0
1,660
22.00

568.0
220.0
475.0
1,690
24.00

590.0
230.0
500.0
1,720
26.00

Agricultural raw materials
TimberLogs, Cameroon
Logs, Malaysia
Sawnwood, Malaysia

$/cum
$/cum
$/cum

43.0
43.1
175.0

251.7
195.5
396.0

343.5
177.2
533.0

275.4
190.0
594.7

265.0
162.0
485.0

265.0
162.0
485.0

275.0
190.0
570.0

300.0
232.0
650.0

338.0
260.0
720.0

385.0
295.0
820.0

Other raw materials
CottonRubber, RSS1, Malaysia
Tobaccocents/kg
cents/kg
$/mt

67.6
40.7
1,076

206.2
142.5
2,276

181.9
86.5
3,392

130.2
69.1
2,976

105.8
61.7
3,011

102.1
63.9
3,080

114.6
72.8
3,150

132.3
77.2
3,250

149.9
88.0
3,300

159.6
95.1
3,450

Fertilizers
DAP
Phosphate rock
Potassium chloride
TSP
Urea, E. Europe, bagged

$/mt
$/mt
$/mt
$/mt
$/mt

54.0
11.00
32.0
43.0
48.0

222.2
46.71
115.7
180.3
222.1

171.4
40.50
98.1
131.8
130.7

154.2
43.75
122.5
137.7
112.1

147.0
41.75
119.0
125.0
105.3

155.0
41.00
120.0
126.0
110.0

165.0
42.00
121.5
127.0
120.0

180.0
43.00
125.0
138.0
140.0

190.0
46.00
127.0
145.0
145.0

200.0
48.00
130.0
165.0
150.0

Metals and minerals
Aluminum
CopperGold
Iron ore, Carajas
Lead
NickelSilver
Tin
Zinc

$/mt
$/mt
$/toz
cents/dmtu
cents/kg$/mt
cents/tozcents/kg
cents/kg

556
1,416
36.0
9.84
30.3
2,846
177.0
367.3
29.6

1,456
2,182
607.9
28.09
90.6
6,519
2,064
1,677
76.1

1,639
2,661
383.5
32.50
81.1
8,864
482.0
608.5
151.4

1,549
1,813
279.0
28.79
45.4
8,638
499.9
543.6
112.8

1,440
1,575
275.0
30.03
47.0
5,900
450.0
440.0
89.0

1,500
1,625
280.0
30.50
50.0
6,100
475.0
465.0
90.0

1,650
1,800
275.0
31.00
55.0
6,200
500.0
485.0
95.0

1,800
2,000
275.0
32.00
60.0
6,400
520.0
525.0
100.0

1,850
2,100
300.0
33.00
64.0
6,500
550.0
540.0
110.0

1,900
2,200
300.0
33.00
64.5
6,600
550.0
550.0
120.0

Food
Fats and oils
Coconut oil
Copra
Groundnut oil
Palm oilSoybean meal
Soybean oil
Soybeans

n.a. = Not available.
Note: Projections as of October 12, 2001.
Source: World Bank, Economic Policy and Prospects Group.

229

G L O B A L

E C O N O M I C

P R O S P E C T S

Table A2.13 Commodity prices and price projections in constant 1990 dollars
ActualCommodity

Projections

Unit

1970

1980

1990

2000

2001

2002

2003

2005

2010

2015

EnergyCoal, U.S.
Crude oil, average
Natural gas, Europe
Natural gas, U.S.

$/mt
$/bbl
$/mmbtu$/mmbtu

n.a.
4.31
n.a.
0.61

54.71
46.80
4.32
1.97

41.67
22.88
2.55
1.70

33.94
28.98
3.96
4.42

47.33
26.89
4.30
4.25

39.31
21.73
3.41
2.59

35.68
19.82
3.07
2.58

31.97
16.92
2.59
2.59

30.48
16.54
2.39
2.61

29.17
17.02
2.43
2.63

Nonenergy Commodities
Agriculture
Beverages
Cocoa
Coffee, other milds
Coffee, robusta
Tea, auctions (3) averagecents/kg
cents/kg
cents/kg
cents/kg

240.6
408.8
325.7
297.7

330.5
440.0
411.7
210.6

126.7
197.2
118.2
205.8

93.0
197.1
93.7
192.6

113.0
147.0
66.4
174.3

113.8
143.7
66.1
165.5

118.9
153.0
69.9
166.5

131.6
196.9
82.9
169.2

136.7
230.8
114.9
158.5

136.1
226.9
115.6
149.1

$/mt
$/mt
$/mt
$/mt
$/mt
$/mt
$/mt

1416.0801.61349.5927.1
365.7
1020.8
416.8

855.3
574.7
1090.1
740.9
333.1
758.6
376.0

336.5
230.7
963.7
289.8
200.2
447.3
246.8

462.3
312.9
732.6
318.5
194.2
347.1
217.5

338.9
215.2
726.1
312.0
193.6
384.0
215.2

377.6
362.1
750.1
341.4
189.3
398.3
212.1

426.2
396.4
768.1
356.8
188.3
391.5
208.1

564.1
423.1
771.0
376.1
202.1
399.6
221.0

561.7
418.0
740.2
391.9
204.6
400.6
226.4

542.9
405.1
709.0
384.9
198.5
409.2
218.8

Grains
Maize
Rice, Thai, 5 percent
Sorghum
Wheat, U.S., HRW

$/mt
$/mt
$/mt
$/mt

208.2
450.3
184.7
195.7

159.0
521.4
163.6
219.3

109.3
270.9
103.9
135.5

90.9
207.8
90.3
117.1

96.8
182.9
102.2
134.5

99.3
191.4
95.0
134.5

107.0
203.2
102.3
136.8

114.7
221.0
109.7
141.0

108.9
226.4
104.1
135.0

105.3
218.8
100.1
129.6

Other foodBananas, U.S.
Beef, U.S.
Oranges
Shrimp, Mexican
Sugar, world$/mt
cents/kg$/mt
cents/kg
cents/kg

592.1
465.0
599.1
n.a.
29.32

478.9
350.3
508.0
1,462
80.17

540.9
256.3
531.1
1,069
27.67

435.3
198.4
372.9
1,553
18.5

656.2
222.7
677.7
1,694
20.2

541.7
209.8
646.6
1,604
17.3

518.9
201.0
545.1
1,586
18.5

497.5
201.1
423.1
1,561
20.7

494.6
191.6
413.6
1,472
20.9

478.0
186.4
405.1
1,394
21.1

Agricultural raw materials
TimberLogs, Cameroon
Logs, Malaysia
Sawnwood, Malaysia

$/cum
$/cum
$/cum

153.3
153.8
623.9

319.5
248.2
502.7

343.5
177.2
533.0

282.8
195.0
610.5

285.1
174.3
521.7

274.2
167.6
501.8

272.6
188.3
564.9

282.1
218.1
611.1

294.3
226.4
627.0

311.9
239.0
664.4

Other raw materials
CottonRubber, RSS1, Malaysia
Tobaccocents/kg
cents/kg
$/mt

241.1
145.2
3,836

261.7
180.8
2,889

181.9
86.5
3,392

133.7
71.0
3,055

113.8
66.4
3,239

105.6
66.1
3,186

113.6
72.1
3,122

124.4
72.6
3,056

130.5
76.6
2,874

129.3
77.0
2,795

Fertilizers
DAP
Phosphate rock
Potassium chloride
TSP
Urea, E. Europe, bagged

$/mt
$/mt
$/mt
$/mt
$/mt

192.5
39.2
114.1
153.3
171.1

282.1
59.3
146.9
228.8
282.0

171.4
40.5
98.1
131.8
130.7

158.3
44.9
125.8
141.4
115.1

158.1
44.9
128.0
134.5
113.3

160.4
42.4
124.2
130.4
113.8

163.5
41.6
120.4
125.9
118.9

169.2
40.4
117.5
129.8
131.6

165.5
40.1
110.6
126.3
126.3

162.1
38.9
105.3
133.7
121.5

Metals and minerals
Aluminum
CopperGold
Iron ore
Lead
NickelSilver
Tin
Zinc

$/mt
$/mt
$/toz
cents/dmtu
cents/kg$/mt
cents/tozcents/kg
cents/kg

1,982
5,047
128.1
35.1
108.0
10,147631.0
1309.6
105.5

1,848
2,770
771.6
35.7
115.0
8,275
2619.42129.3
96.6

1,639
2,661
383.5
32.5
81.1
8,864
482.0
608.5
151.4

1,590
1,862
286.5
29.6
46.6
8,867
513.2
558.0
115.8

1,549
1,694
295.8
32.3
50.6
6,347
484.1
473.3
95.7

1,552
1,681
284.5
31.6
51.7
6,311
491.4
481.1
93.1

1,635
1,784
272.6
30.7
54.5
6,145
495.5
480.7
94.2

1,692
1,880
258.6
30.1
56.4
6,017
488.9
493.6
94.0

1,611
1,829
261.2
28.7
55.7
5,660
478.9
470.2
95.8

1,539
1,783
243.1
26.7
52.3
5,348
445.6
445.6
97.2

Food
Fats and oils
Coconut oil
Copra
Groundnut oil
Palm oilSoybean meal
Soybean oil
Soybeans

n.a. = Not available.
Note: Projections as of October 12, 2001.
Source: World Bank, Economic Policy and Prospects Group.

230

G L O B A L

C O M M O D I T Y

P R I C E

P R O S P E C T S

Table A2.14 Weighted indices of commodity prices and inflation
Projectionsa

Actual
Index

1970

1980

1990

2000

2001

2002

2003

2005

2010

2015

Current dollars
Petroleum
Nonenergy commoditiesb
Agriculture
Beverages
Food
Fats and oils
GrainsOther food
Raw materials
TimberOther raw materials
Fertilizers
Metals and minerals

5.3
43.8
45.8
56.9
46.7
64.4
46.7
32.2
36.4
31.8
39.6
30.4
40.4

161.2
125.5
138.1
181.4
139.3
148.7
134.3
134.3
104.6
79.0
122.0
128.9
94.2

100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0

123.4
86.9
87.7
88.4
84.5
96.2
79.5
77.7
91.4
111.0
78.0
105.8
83.0

109.3
79.1
80.1
71.8
86.5
89.5
77.4
89.1
78.1
91.0
69.3
97.9
74.9

91.8
80.4
80.9
73.4
87.2
95.2
82.0
83.7
78.4
91.0
69.8
97.7
77.3

87.4
86.9
88.0
80.5
91.6
100.9
90.0
84.8
89.1
107.0
76.8
99.0
82.9

78.7
97.4
100.3
101.4
100.4
115.1
101.0
88.0
99.6
123.1
83.5
105.2
89.3

83.0
106.8
112.3
123.6
107.4
126.6
106.7
92.0
110.4
136.6
92.5
111.3
92.6

91.8
109.5
114.8
130.8
100.4
132.8
110.6
68.1
121.7
155.5
98.6
122.7
95.2

Constant 1990 dollarsc
Petroleum
Nonenergy commodities
Agriculture
Beverages
Food
Fats and oils
GrainsOther food
Raw materials
TimberOther raw materials
Fertilizers
Metals and minerals

18.9
156.3
163.3
202.8
166.5
229.5
166.6
114.9
129.8
113.3
141.1
108.3
143.9

204.6
159.3
175.3
230.3
176.8
188.7
170.5
170.5
132.7
100.3
154.9
163.6
119.6

100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0

126.7
89.2
90.0
90.7
86.7
98.8
81.6
79.8
93.8
113.9
80.0
108.6
85.2

117.5
85.1
86.2
77.2
93.0
96.2
83.3
95.9
84.1
97.9
74.6
105.3
80.5

95.0
83.1
83.7
75.9
90.2
98.5
84.8
86.5
81.1
94.2
72.2
101.0
80.0

86.6
86.1
87.3
79.8
90.8
100.0
89.2
84.0
88.3
106.0
76.2
98.2
82.1

74.0
91.5
94.3
95.3
94.4
108.2
94.9
82.7
93.6
115.7
78.5
98.9
84.0

72.3
93.0
97.8
107.7
93.5
110.3
92.9
80.1
96.1
118.9
80.5
96.9
80.7

74.4
88.7
93.1
106.0
81.3
107.6
89.6
55.2
98.6
126.0
79.9
99.4
77.1

28.05

78.78
10.88

100.00
2.41

97.41
–0.26

92.96
–4.56

96.66
3.98

100.904.38

106.362.67

114.84
1.55

123.42
1.45

33.59

65.93
6.98

100.004.25

123.732.15

126.582.30

128.861.80

131.432.00

137.282.20

153.062.20

170.65
2.20

Inflation indices, 1990=100d
MUV indexe
Percent change per annum
U.S. GDP deflator
Percent change per annum

a. Commodity price projections as of October 12, 2001.
b. The World Bank primary commodity price indices are computed based on 1987–89 export values in U.S. dollars for low and middle-income
economies, rebased to 1990. Weights for the subgroup indices expressed as ratios to the nonenergy index are as follows in percent: agriculture 69.1, fertilizers 2.7, metals and minerals 28.2; beverages 16.9, food 29.4, raw materials 22.8; fats and oils 10.1, grains 6.9, other food 12.4; timber 9.3, andother raw materials 13.6.
c. Computed from unrounded data and deflated by the MUV index.
d. Inflation indices for 2001–10 are projections as of October 3, 2001. MUV for 2000 is an estimate. Growth rates for years 1980, 1990, 2000, 2005,
2010, and 2015 refer to compound annual rate of change between adjacent end-point years; all others are annual growth rates from the previous year.
e. Unit value index in U.S. dollar terms of manufactures exported from the G-5 countries (France, Germany, Japan, the United Kingdom, and the UnitedStates) weighted proportionally to the countries’ exports to the developing countries.
Source: World Bank, Economic Policy and Prospects Group; Historical U.S. GDP deflator; U.S. Department of Commerce.

231

Appendix 3
Global Economic Indicators

G L O B A L

E C O N O M I C

P R O S P E C T S

Table A3.1 Growth of real GDP, 1971–2010(GDP in 1995 prices and exchange rates—average annual percentage growth)
2000 GDP(current
billions of
U.S. dollars)

1971–80

1981–90

1991–00

2000

Estimate
2001

Forecast
2001–2010

World

31,981

3.8

3.2

2.6

3.8

1.3

2.9

High-income economies
Industrial
G-7
United StatesJapan
G-4 Europe
GermanyaEuro Area
Non-G7 Industrial
Other high-income
Asian NIEs

25,59924,811
21,028
9,873
4,752
5,693
1,872
6,077
3,783
788
571

3.4
3.4
3.4
3.1
4.5
2.9
2.7
3.3
3.2
7.7
9.5

3.1
3.0
3.1
3.2
4.0
2.4
2.2
2.5
2.7
5.2
7.4

2.4
2.4
2.3
3.2
1.4
1.8
1.8
2.1
2.8
5.2
6.1

3.4
3.3
3.2
4.1
1.5
3.1
3.1
3.5
3.9
6.3
7.8

0.9
0.9
0.7
1.1
–0.8
1.4
0.6
1.5
1.9
0.6
0.4

2.5
2.4
2.4
2.7
2.0
2.3
1.9
2.4
2.8
3.9
4.2

Low- and middle-income economies
Excluding ECA
Asia
East Asia and Pacific
China
Korea, Rep. ofIndonesia
South Asia
India
Latin America and the Caribbean
BrazilMexicoArgentina
Europe and Central Asia
Russian Federationb
TurkeyPolandMiddle East and North Africa
Saudi Arabia
Iran, Islamic Rep.
Egypt, Arab Rep.
Sub-Saharan Africa
Republic of South Africa
Nigeria

6,401
5,365
2,595
1,982
1,080
457
153
612
479
1,949
588
584
285
993
247
200
158
549
149
134
96
315
126
41

5.4
5.5
5.4
6.6
5.3
7.6
7.9
3.1
3.0
5.9
8.5
6.7
3.0
5.2
5.2
4.2
5.0
6.6
10.3
1.8
6.6
3.3
3.5
4.7

3.5
3.5
7.2
7.8
9.2
9.1
6.4
5.8
5.9
1.1
1.5
1.8
–1.5
3.5
4.7
5.2
–0.1
2.4
0.4
2.7
5.5
1.7
1.3
1.1

3.2
4.8
6.8
7.2
10.1
6.1
4.2
5.2
5.6
3.3
2.7
3.5
4.6
–2.3
–5.2
3.6
3.7
3.2
2.3
4.1
4.4
2.2
1.7
2.5

5.5
5.3
6.9
7.5
8.0
8.8
5.2
4.9
5.2
3.8
4.4
6.9
–0.5
6.3
8.3
7.1
4.2
3.9
4.0
5.2
5.1
3.0
3.1
2.8

2.9
3.1
4.6
4.6
7.2
2.5
3.6
4.5
4.5
0.9
1.4
0.6
–1.9
2.1
4.7
–7.4
1.4
3.4
1.5
4.1
4.3
2.7
2.4
3.1

4.5
4.7
5.8
6.0
...
...
...
5.3
...
3.5
...
...
...
3.4
...
...
...
3.3
...
...
...
3.6
...
...

a. Data prior to 1991 covers West Germany.
b. Data prior to 1992 covers the former Soviet Union.
Note: This table comprises a sample of 145 countries representing 99 percent of world GDP.
Source: World Bank data and staff estimates.

Figure A3.1 Real GDP growth, 1991–2010
Percent
8.0
1991–2000
6.0

2001–2010

4.0

2.0

0.0

–2.0

–4.0
High-income
economies

234

East Asia
and PacificSouth Asia

Latin America
and theCaribbean

Europe andCentral Asia

Middle Eastand North
AfricaSub-SaharanAfricaG L O B A L

E C O N O M I C

I N D I C A T O R S

Table A3.2 Growth of real per capita GDP, 1971–2010(GDP in 1995 prices and exchange rates—average annual percentage growth)
2000 GDPper capita(current
U.S. dollars)

1971–80

1981–90

1991–00

2000

Estimate
2001

Forecast
2001–2010

World

5,530

1.9

1.4

1.2

2.4

0.0

1.8

High-income economies
Industrial
G-7
United StatesJapan
G-4 Europe
GermanyaEuro Area
Non-G7 Industrial
Other high-income
Asian NIEs

28,751
29,39530,42135,84037,52022,04822,821
20,08424,75417,01017,595

2.6
2.6
2.6
2.1
3.3
2.6
2.6
2.8
2.4
5.2
7.2

2.4
2.5
2.5
2.2
3.4
2.1
2.1
2.2
2.1
3.4
5.9

1.8
1.8
1.7
2.2
1.1
1.5
1.5
1.8
2.3
3.7
4.7

2.8
2.8
2.7
3.2
1.5
3.0
3.1
3.3
3.5
4.7
6.4

0.5
0.5
0.3
0.3
–0.9
1.3
0.7
1.4
1.6
–0.7
–0.7

2.2
2.2
2.1
2.0
2.0
2.3
2.1
2.5
2.7
2.8
3.4

Low- and middle-income economies
Excluding ECA
Asia
East Asia and Pacific
China
Korea, Rep. ofIndonesia
South Asia
India
Latin America and the Caribbean
BrazilMexicoArgentina
Europe and Central Asia
Russian Federationb
TurkeyPolandMiddle East and North Africa
Saudi Arabia
Iran, Islamic Rep.
Egypt, Arab Rep.
Sub-Saharan Africa
Republic of South Africa
Nigeria

1,301
1,211
861
1,175
857
9,684
729
461
472
3,889
3,450
5,900
7,703
2,174
1,693
3,062
4,071
1,948
6,714
1,415
1,508
484
2,942
325

3.2
3.2
3.2
4.5
3.4
5.7
5.4
0.6
0.7
3.4
5.9
3.6
1.3
4.1
4.2
1.8
4.1
3.6
5.1
–1.4
4.4
0.5
1.2
1.7

1.5
1.4
5.3
6.1
7.6
7.8
4.4
3.5
3.6
–0.9
–0.4
–0.3
–2.9
2.6
3.8
2.8
–0.8
–0.6
–4.8
–0.7
2.9
–1.2
–1.2
–1.9

1.6
3.1
5.2
6.0
9.0
5.1
2.5
3.3
3.7
1.6
1.3
1.7
3.2
–2.5
–5.2
2.0
3.5
1.0
–1.1
2.4
2.4
–0.4
–0.3
–0.3

4.0
3.6
5.4
6.4
7.0
7.9
3.5
3.0
3.3
2.2
3.0
5.2
–1.7
6.1
8.6
5.5
4.1
1.9
0.7
3.5
3.5
0.5
1.4
0.4

1.5
1.5
3.2
3.6
6.4
1.7
2.1
2.8
2.8
–0.7
0.2
–1.3
–3.2
1.9
5.0
–8.7
1.4
1.5
–1.5
2.5
2.7
0.3
1.0
0.3

3.2
3.3
4.7
5.1
...
...
...
3.8
...
2.1
...
...
...
3.3
...
...
...
1.4
...
...
...
1.3
...
...

a. Data prior to 1991 covers West Germany.
b. Data prior to 1992 covers the former Soviet Union.
Note: This table comprises a sample of 145 countries representing 99 percent of world GDP.
Source: World Bank data and staff estimates.

Figure A3.2 Real per-capita GDP growth, 1991–2010
Percent
6.0
1991–2000
2001–2010
4.0

2.0

0.0

–2.0

–4.0
High-income
economies

East Asia
and PacificSouth Asia

Latin America
and theCaribbean

Europe andCentral Asia

Middle Eastand North
AfricaSub-SaharanAfrica235

G L O B A L

E C O N O M I C

P R O S P E C T S

Table A3.3 Inflation: GDP deflators, 1971–2010(percentage change a)
1971–80

1981–90

1991–00

2000

Estimate
2001

Forecast
2001–2010

World

9.0

5.8

4.1

2.2

2.8

1.9

High-income economies
Industrial
G-7
United StatesJapan
G-4 Europe
Germanyb
Euro Area
Non-G7 Industrial
Other high-income
Asian NIEs

8.8
8.6
8.3
7.1
7.8
9.7
5.3
9.4
10.4
19.3
9.5

5.2
4.6
4.2
4.2
1.9
5.7
2.8
6.0
6.9
32.1
4.7

2.3
1.9
1.8
2.2
0.1
2.7
2.9
2.9
2.8
15.7
2.4

1.2
1.2
0.8
2.3
–1.7
0.7
–0.4
1.2
3.1
–0.2
–2.0

1.7
1.8
1.5
2.7
–0.6
1.5
1.0
1.8
2.9
1.3
1.2

1.2
1.1
1.1
1.8
–0.4
1.4
2.4
1.2
0.8
3.1
3.0

Low- and middle-income economies
Excluding ECA
Asia
East Asia and Pacific
China
Korea, Rep. ofIndonesia
South Asia
India
Latin America and the Caribbean
BrazilMexicoArgentina
Europe and Central Asia
Russian Federationc
TurkeyPolandMiddle East and North Africa
Saudi Arabia
Iran, Islamic Rep.
Egypt, Arab Rep.
Sub-Saharan Africa
Republic of South Africa
Nigeria

9.8
11.5
11.0
11.0
1.8
20.8
20.6
11.9
8.9
14.6
39.7
18.1
117.7
0.3
0.3
32.6
4.5
11.8
23.8
20.2
11.0
10.3
13.3
13.4

8.3
9.8
7.0
5.6
5.5
7.1
8.8
8.9
8.3
19.3
330.8
63.7
439.5
2.4
2.3
46.3
72.5
7.7
–3.1
15.6
13.1
9.4
15.1
16.6

11.8
8.9
7.0
5.4
6.3
4.8
15.0
8.1
8.4
12.6
205.6
18.1
10.2
347.1
179.1
72.1
23.5
5.2
1.2
25.6
8.4
9.7
9.9
28.8

6.4
5.8
4.8
3.4
1.0
–1.5
9.4
5.8
6.9
6.9
7.2
11.8
1.1
7.5
41.1
53.3
7.6
3.4
2.5
22.5
4.0
6.3
6.9
26.1

6.7
6.4
7.0
7.1
5.1
11.7
10.5
6.1
3.3
7.9
11.1
10.9
–0.5
7.5
18.1
53.2
7.7
4.5
4.5
20.7
5.0
6.0
6.9
18.5

4.6
4.5
5.0
4.5
...
...
...
6.6
...
6.4
...
...
...
4.9
...
...
...
4.1
...
...
...
4.4
...
...

Note: Deflators are in local currency units: 1995=100.
a. High-income group inlation rates are GDP-weighted averages of local currency inflation. Low- and middle-income groups are
medians. World is GDP-weighted average of the two groups.
b. Data prior to 1991 covers West Germany.
c. Data prior to 1992 covers the former Soviet Union.
Note: This table comprises a sample of 145 countries representing 99 percent of world GDP.
Source: World Bank data and staff estimates.
Figure A3.3 GDP inflation, 1991–2010
Percent
25.0

1991–2000

20.0

2001–2010

15.0

10.0

5.0

0.0
High-income
economies

236

East Asia
and PacificSouth Asia

Latin America
and theCaribbean

Europe andCentral Asia

Middle Eastand North
AfricaSub-SaharanAfricaG L O B A L

E C O N O M I C

I N D I C A T O R S

Table A3.4 Current account balances, 1971–2010(percentage of GDP)
2000 current
account(billions of
U.S. dollars)

1971–80

1981–90

1991–00

2000

Estimate
Forecast
2001
2001–2010

World

–197

–0.2

–0.6

–0.3

–0.6

–0.7

–0.8

High-income economies
Industrial
G-7
United StatesJapan
G-4 Europe
GermanyaEuro Area
Non-G7 Industrial
Other high-income
Asian NIEs

–276
–328
–335
–445
117
–25
–21
–10
7
52
35

0.0
–0.2
–0.1
0.0
0.2
0.1
0.5
–0.1
–1.1
5.9
1.2

–0.3
–0.5
–0.4
–1.9
2.3
0.3
2.6
0.3
–0.8
3.9
0.4

–0.1
–0.2
–0.3
–1.9
2.4
0.0
–0.7
0.3
0.3
3.2
4.2

–1.1
–1.3
–1.6
–4.5
2.5
–0.4
–1.1
–0.2
0.2
6.6
6.1

–0.9
–1.0
–1.3
–3.9
2.2
0.1
0.1
0.3
0.7
4.1
4.8

–0.6
–0.6
–0.9
–2.3
2.1
–0.7
–1.0
–0.1
0.7
1.2
3.9

Low- and middle-income economies
Excluding ECA
Asia
East Asia and Pacific
China
Korea, Rep. ofIndonesia
South Asia
India
Latin America and the Caribbean
BrazilMexicoArgentina
Europe and Central Asia
Russian Federationb
TurkeyPolandMiddle East and North Africa
Saudi Arabia
Iran, Islamic Rep.
Egypt, Arab Rep.
Sub-Saharan Africa
Republic of South Africa
Nigeria

79
60
64
73
21
11
8
–2
–1
–47
–25
–17
–10
19
46
–10
–10
41
25
9
–1
–5
–1
2

–0.5
–0.5
–1.1
–1.4
0.1
–6.9
–2.3
–0.5
0.2
–2.8
–4.3
–4.0
–0.4
–0.6
2.1
–2.1
–3.0
7.4
21.7
6.7
–5.2
–1.7
–1.1
1.6

–1.2
–1.7
–1.3
–1.0
0.2
0.7
–3.1
–2.0
–1.7
–1.7
–1.6
–0.6
–2.1
–0.2
3.5
–1.4
–6.5
–1.6
–7.2
–0.4
–3.4
–2.6
0.6
–0.7

–1.2
–1.4
0.0
0.5
1.5
0.9
–0.4
–1.4
–1.1
–2.8
–2.2
–3.7
–3.2
–0.5
4.7
–1.1
–2.8
–1.9
–5.8
0.8
1.5
–2.1
–0.2
1.0

1.2
1.1
2.5
3.3
1.3
2.4
5.5
–0.3
–0.2
–2.4
–4.2
–3.0
–3.5
1.9
18.7
–4.9
–6.3
8.1
16.6
10.1
–1.2
–1.5
–0.4
4.6

0.1
–0.1
0.9
1.4
0.2
1.2
1.0
–0.5
–0.6
–2.8
–4.8
–2.8
–2.9
1.2
10.5
3.0
–5.1
4.7
9.2
7.6
–0.2
–1.0
0.4
5.2

–1.3
–1.4
–0.5
–0.4
...
...
...
–0.7
...
–2.9
...
...
...
–1.2
...
...
...
–1.1
...
...
...
–1.8
...
...

a. Data prior to 1991 covers West Germany.
b. Data prior to 1992 covers the former Soviet Union.
Note: This table comprises a sample of 145 countries representing 99 percent of world GDP.
Source: World Bank data and staff estimates.

Figure A3.4 Ratio of current account balance to GDP, 1991–2010
Percent
2.0
1991–2000
1.0

2001–2010

0.0

–1.0

–2.0

–3.0

–4.0
High-income
economies

East Asia
and PacificSouth Asia

Latin America
and theCaribbean

Europe andCentral Asia

Middle Eastand North
AfricaSub-SaharanAfrica237

G L O B A L

E C O N O M I C

P R O S P E C T S

Table A3.5 Exports of goods, 1999
(percent)
Merchandise
exports(US$
millions)

Averageannualgrowth
1990–99

Effective
marketgrowth
1990–99a

World

5,587,318

5.9

7.0

All developing
ctrys.

1,374,752

7.1

7.0

621,080

12.0

7.5

Asia
East Asia andPacific
China
Fiji
Indonesia
Korea, Rep.
Malaysia
Myanmar
Papua New
GuineaPhilippines
Thailand
VietnamSouth Asia
Bangladesh
India
Nepal
Pakistan
Sri Lanka

564,636
194,931538
48,666
143,537
84,052
1,125

12.3
16.0
4.0
8.4
12.3
10.8
15.5

7.6
7.4
6.2
7.1
8.5
7.3
8.0

1,927
34,21056,775
8,779

4.2
12.4
9.1
23.4

6.4
7.3
7.3
7.0

56,444
5,458
37,528
709
8,164
4,586

9.2
14.6
9.8
13.7
4.8
9.0

6.7
6.6
6.7
7.1
6.9
6.6

Latin America andthe Caribbean
302,952
Argentina
23,333
Bolivia
1,051
Brazil
48,011
Chile
15,555
Colombia
12,030
Costa Rica
6,668
Dominican Rep.
5,137
Ecuador
4,451
El Salvador
2,500
Guatemala2,781
Jamaica
1,490
Mexico136,392
Panama5,300
Paraguay
2,707
Peru
6,112
Trinidad andTobago
2,402

238

5.5
5.8
4.4
0.1
3.8
4.4
12.9
14.6
5.6
11.3
6.2
1.5
12.0
6.1
4.4
0.7

8.1
8.1
9.3
8.5
7.8
7.8
7.6
7.9
8.0
8.9
8.8
6.8
7.9
8.1
10.3
7.4

4.8

8.1

Merchandise
exports(US$
millions)

Middle East andNorth Africa
Algeria
BahrainEgypt, Arab
Rep.
Iran, Islamic
Rep.
Iraq
JordanMoroccoOman
Saudi Arabia
Syrian Arab Rep.

Effective
marketgrowth
1990–99a

Merchandise
exports(US$
millions)

Averageannualgrowth
1990–99

Effective
marketgrowth
1990–99a

2.4
–3.5

5.5
8.1

–0.9
4.6

10.5
8.5

Middle East andNorth Africa (continued)
Tunisia
5,873
Yemen, Rep.
2,478

253,930
247
1,025
5,646
4,006
26,2422,453
330
21,846
5,989
463
1,889
3,147
469
26,347
8,503

2.6
–1.5
5.6
3.1
–10.0
8.6
11.3
9.0
4.0
1.9
9.0
6.8
3.1
–4.9
7.5
–1.9

4.9
1.8
2.1
0.2
5.3
6.8
2.5
2.6
5.4
1.3
–0.1
2.2
2.7
–0.5
5.5
6.2

Sub-SaharanAfricaAngolaBotswana
Cameroon
Cote d’Ivoire
Ethiopia
Gabon
Ghana
Kenya
Madagascar
Nigeria
SenegalSouth Africa
Sudan
ZambiaZimbabwe

81,154
5,009
2,671
1,675
4,104
467
3,459
2,117
1,740
507
12,876
1,027
28,624
780
864
1,879

2.7
5.2
2.2
–1.0
5.5
3.6
6.3
11.2
6.9
4.6
5.0
2.2
1.0
5.9
–2.2
4.4

6.6
7.7
0.0
6.8
6.5
6.7
7.4
6.5
5.3
5.7
7.2
5.9
6.4
6.1
5.4
5.6

75,900
10,201
689

–1.5
5.4
–1.4

5.2
6.5
3.8

High-income
economies

4,221,189

5.6

7.0

Industrial

3,735,447

5.5

6.9

1,192
1,223
29,326
13,189
1,976

–2.0
–5.1
9.1
4.2
0.9

5.5
4.1
5.3
2.0
2.1

2,726,116
245,832
334,103544,281
232,082402,647

5.5
7.6
6.0
5.7
3.5
2.7

7.2
7.7
6.4
6.2
6.7
8.4

115,635
11,514
4,140

3.9
1.3
2.7

6.7
6.5
6.5

G-7
CanadaFranceGermany
Italy
Japan
UnitedKingdom
United States

268,921698,250

5.3
7.4

6.6
7.6

5,236

4.9

6.3

15,271
10,838
1,832
7,509
7,218
50,757
3,806

2.0

6.3
5.5
6.2
5.9
7.6
7.0
5.1

1,009,331
56,04864,424
154,069
49,823
41,983
5,249
2,009

5.7
6.3
6.7
5.1
2.7
5.0
–2.8
0.9

6.2
6.8
6.3
6.3
6.5
5.7
5.7
5.9

Latin America andthe Caribbean (continued)
Uruguay
2,304
Venezuela
20,819Europe andCentral Asia
Armenia
Azerbaijan
Belarus
Bulgaria
Czech Rep.
Estonia
Georgia
Hungary
Kazakhstan
Kyrgyz Rep.
Lativia
Lithuania
Moldova
PolandRomania
RussianFederation
Slovak Rep.
Tajikistan
TFYR
Macedonia
Turkmenistan
TurkeyUkraineUzbekistan

Averageannualgrowth
1990–99

8.4
5.2
5.8
5.6
2.9

Other
industrial
Australia
Austria
Belgiumb
Denmark
Finland
GreeceIcelandG L O B A L

E C O N O M I C

I N D I C A T O R S

Table A3.5 Exports of goods, 1999 (continued)(percent)
Merchandise
exports(US$
millions)

Averageannualgrowth
1990–99

Effective
marketgrowth
1990–99a

11.4
6.5
2.7
4.2
8.7
6.0
2.3

5.9
6.0
6.6
6.0
6.3
5.9
6.6

Other industrial (continued)
Ireland71,375
Netherlands
199,026
New Zealand
12,594
Norway45,651
Spain
113,490
Sweden84,849Switzerland
83,320

Merchandise
exports(US$
millions)

Averageannualgrowth
1990–99

Effective
marketgrowth
1990–99a

485,742
2,552

6.2
1.6

8.1
6.3

173,865
25,564

8.3
6.8

8.6
6.8

Other highincome
BruneiHong Kong,
China
IsraelMerchandise
exports(US$
millions)

Other high-income (continued)
Kuwait12,276Singapore
115,639
Taiwan, China
121,129
United ArabEmirates
27,645

Averageannualgrowth
1990–99

Effective
marketgrowth
1990–99a

0.5
5.7
5.3

7.1
8.4
7.8

4.7

5.7

.. Not available
a. Effective market growth is a weighted average of import volume growth in the country’s export markets.
b. Includes Luxembourg
Source: See technical notes.

Figure A3.5a Merchandise exports as a share of GDP, 1999
Percent
40.0

30.0

World
20.0

10.0

0.0
Industrial
economies

Sub-SaharanAfricaEast Asia
and PacificSouth Asia

Latin America
and theCaribbean

Europe andCentral Asia

Middle Eastand North
AfricaFigure A3.5b Average annual growth rate of export volumes, 1990–99
Percent
14.0
12.0
10.0
World
8.0
6.0
4.0
2.0
0.0
Industrial
economies

Sub-SaharanAfricaEast Asia
and PacificSouth Asia

Latin America
and theCaribbean

Europe andCentral Asia

Middle Eastand North
Africa239

G L O B A L

E C O N O M I C

P R O S P E C T S

Table A3.6 Imports of goods, 1999
(percent)
Merchandise
imports(US$
millions)

Average Merchanannual
disegrowthImports/
1990–99GDPWorld

5,604,722

6.2

18.1

All developing
ctrys.

1,270,637

6.2

19.7

521,113

8.2

19.0

Asia
East Asia andPacific
China
Fiji
Indonesia
Korea, Rep.
Malaysia
Myanmar
Papua New
GuineaPhilippines
Thailand
VietnamSouth Asia
Bangladesh
India
Nepal
Pakistan
Sri Lanka

451,721
165,699653
24,003
119,631
61,404
2,160

8.6
10.5
2.1
5.0
8.1
9.7
19.6

20.8
16.7
37.9
16.8
29.5
77.7
6.2

1,071
29,252
47,847
12,383

–3.1
9.4
4.8
16.0

29.9
38.4
39.2
42.0

69,392
7,420
45,556
1,590
9,533
5,293

5.5
7.2
6.0
8.9
1.2
8.6

12.1
16.1
10.2
34.6
16.4
33.7

Latin America andthe Caribbean
310,945
Argentina
24,103
Bolivia
1,539
Brazil49,272
Chile
13,951
Colombia
10,254
Costa Rica
6,008
Dominican Rep.
8,041
Ecuador
2,786
El Salvador
3,859
Guatemala4,226
Jamaica
2,628
Mexico141,973
Panama6,715
Paraguay
3,041
Peru
6,729
Trinidad andTobago
2,558

240

10.8
18.1
5.6
9.3
6.4
7.4
13.3
14.6
3.6
11.2
9.9
4.4
14.5
7.8
9.8
9.9

14.8
8.5
18.5
9.3
20.6
11.8
38.6
46.2
14.7
31.0
23.2
39.3
18.9
70.3
39.3
13.0

9.5

32.7

Merchandise
imports(US$
millions)

Middle East andNorth Africa
Algeria
BahrainEgypt, Arab
Rep.
Iran, Islamic
Rep.
Iraq
JordanMoroccoOman
Saudi Arabia
Syrian Arab Rep.

Merchandise
imports(US$
millions)

Average Merchanannual
disegrowthImports/
1990–99
GDP

8.8
4.7

15.3
12.8

Middle East andNorth Africa (continued)
Tunisia
8,014
Yemen, Rep.
2,120

265,272
721
1,433
6,216
5,087
28,073
3,331
863
24,037
5,645
547
2,916
4,551
597
40,727
9,595

2.5
0.1
3.9
–0.6
–7.3
7.3
2.4
10.2
7.8
–3.1
–1.6
3.0
1.6
–3.7
11.9
0.3

30.6
39.1
31.8
22.6
42.0
52.9
64.9
31.7
49.8
33.5
43.8
43.8
42.7
50.9
26.2
27.3

Sub-SaharanAfricaAngolaBotswana
Cameroon
Côte d’Ivoire
Ethiopia
Gabon
Ghana
Kenya
Madagascar
Nigeria
SenegalSouth Africa
Sudan
ZambiaZimbabwe

76,453
2,167
1,996
1,218
2,513
1,387
1,514
3,228
2,570
518
8,588
1,373
24,474
1,256
756
1,712

3.5
3.3
2.9
–0.1
2.1
4.5
5.9
10.9
1.5
4.0
7.2
1.9
2.5
1.8
–1.4
1.3

24.3
35.0
39.5
13.3
22.4
21.5
34.8
41.5
24.1
13.9
24.5
28.9
18.8
12.9
24.4
30.5

39,60011,310
663

–5.0
8.9
–2.5

21.0
57.6
61.2

High-income
economies

4,334,085

6.2

17.7

Industrial

3,856,210

6.0

16.3

1,602
1,210
39,773
12,945
2,621

3.0
0.3
9.9
–4.3
–3.8

46.4
36.6
22.6
42.1
14.2

96,853
8,746
3,468

1.8
–1.0
1.4

19.4
18.3
51.0

G-7
2,866,532
Canada219,994
France304,819
Germany
485,257
Italy
218,111
Japan
280,190
United Kingdom
311,261
United States
1,046,900

6.2
6.4
4.7
6.9
4.0
4.9
4.8
7.8

13.9
33.5
21.2
23.0
18.2
6.2
21.6
11.3

15,1654.0

17.0

12,483
5,516
3,292
9,957
4,300
25,717
3,590

–2.4
21.7
4.6
5.6
5.2
1.8
5.6

11.3
19.9
40.8
28.4
22.0
18.5
22.5

Other
industrial
Australia
Austria
Belgiuma
Denmark
Finland
GreeceIceland
Ireland

5.4
5.5
6.8
4.5
3.7
1.0
3.4
4.7
9.0

29.2
16.6
32.3
66.2
24.5
23.1
17.3
26.3
50.6

Latin America andthe Caribbean (continued)
Uruguay
3,173
Venezuela
13,213
Europe andCentral Asia
Armenia
Azerbaijan
Belarus
Bulgaria
Czech Rep.
Estonia
Georgia
Hungary
Kazakhstan
Kyrgyz Rep.
Lativia
Lithuania
Moldova
PolandRomania
RussianFederation
Slovak Rep.
Tajikistan
TFYR
Macedonia
Turkmenistan
TurkeyUkraineUzbekistan

Average Merchanannual
disegrowthImports/
1990–99GDP

989,677
65,82867,749146,814
43,13529,81521,7002,317
47,252

5.2
–4.9

38.3
31.3

G L O B A L

E C O N O M I C

I N D I C A T O R S

Table A3.6 Imports of goods, 1999 (continued)(percent)

Other industrial(continued)
Netherlands
New Zealand
NorwaySpain
SwedenSwitzerland

Merchandise
imports(US$
millions)

Averageannualgrowth
1990–99

Merchandise
Imports/
GDP

989,677
181,152
13,02935,532
144,882
67,65883,602

5.4
7.0
4.4
2.6
7.7
4.0
3.8

29.2
45.5
23.8
23.3
23.7
28.1
32.3

Merchandise
imports(US$
millions)

Other highincome
BruneiHong Kong,
China
Israel
KuwaitAverage Merchanannual
disegrowthImports/
1990–99GDP

477,875
1,328

8.2
2.2

64.7
48.4

179,861
29,972
6,705

9.2
7.1
–0.7

113.7
29.7
22.6

Merchandise
imports(US$
millions)

Other highincome (continued)
Singapore
104,337
Taiwan,China
110,585
United ArabEmirates
33,239Average Merchanannual
disegrowthImports/
1990–99
GDP

7.3

122.8

8.6

38.5

12.0

68.7

.. Not available
a. Includes Luxembourg
Source: See technical notes.

Figure A3.6a Merchandise imports as a share of GDP, 1999
Percent
40.0

30.0
World

20.0

10.0

0.0
Industrial
economies

Sub-SaharanAfricaEast Asia
and PacificSouth Asia

Latin America
and theCaribbean

Europe andCentral Asia

Middle Eastand North
AfricaFigure A3.6b Average annual growth rate of import volumes, 1990–99
Percent
12.0

10.0
World
8.0

6.0

4.0

2.0

0.0
Industrial
economies

Sub-SaharanAfricaEast Asia
and PacificSouth Asia

Latin America
and theCaribbean

Europe andCentral Asia

Middle Eastand North
Africa241

G L O B A L

E C O N O M I C

P R O S P E C T S

Table A3.7 Direction of merchandise trade, 1999a(percentage of world trade)High-income importers

SubSaharanAfrica

East
Asia
and
Pacific

EuropeandSouth Central
Asia
Asia

Source of exports

UnitedStates

EU-15

Japan

High-income econ.
Industrial
United States
EU-15
Japan
Other industrial
Other high-incomeb

12.6
10.6
...
3.6
2.5
4.4
2.1

29.7
28.2
2.7
22.3
1.3
1.9
1.5

3.0
2.2
1.1
0.7
...
0.4
0.8

7.0
6.7
3.6
2.4
0.4
0.3
0.3

52.4
47.7
7.4
29.0
4.3
7.0
4.7

5.5
4.3
1.2
1.4
1.4
0.3
1.2

57.9
52.0
8.6
30.4
5.7
7.4
5.9

0.9
0.8
0.1
0.5
0.1
0.0
0.1

6.5
4.1
1.1
0.9
1.6
0.4
2.4

0.7
0.4
0.1
0.2
0.1
0.1
0.2

3.2
3.0
0.2
2.7
0.1
0.1
0.1

1.5
1.4
0.3
0.9
0.1
0.1
0.1

4.3
4.1
2.7
0.9
0.3
0.1
0.2

16.9
13.8
4.5
6.2
2.3
0.8
3.1

74.8
65.8
13.1
36.5
8.0
8.2
9.0

6.7
0.2
2.4
0.3

6.0
0.4
1.6
0.3

2.1
0.0
1.6
0.1

0.9
0.0
0.4
0.0

15.7
0.7
6.0
0.6

3.0
0.1
2.3
0.1

18.7
0.8
8.4
0.8

0.5
0.2
0.1
0.0

2.1
0.1
1.4
0.1

0.5
0.0
0.2
0.0

1.6
0.0
0.2
0.0

0.5
0.0
0.2
0.0

1.3
0.0
0.3
0.0

6.5
0.4
2.4
0.3

25.2
1.2
10.8
1.0

0.3

2.3

0.1

0.1

2.7

0.1

2.9

0.0

0.2

0.0

1.2

0.1

0.0

1.6

4.5

0.2

0.7

0.3

0.0

1.2

0.2

1.5

0.0

0.3

0.1

0.1

0.1

0.0

0.7

2.1

3.4

0.7

0.1

0.2

4.4

0.1

4.4

0.0

0.1

0.0

0.1

0.1

0.8

1.1

5.6

19.4

35.7

5.2

7.9

68.1

8.5

76.6

1.3

8.6

1.2

4.8

2.0

5.6

23.4

100.0

World

Other
All
high- highincome income

Latin
Middle America All
East
andlowandtheandNorth Carib- middleAfrica
bean income

Otherindustrial

Low- and middleincome economies
Sub-Saharan Africa
East Asia and PacificSouth Asia
Europe andCentral Asia
Middle East andNorth Africa
Latin America
and CaribbeanAllindustrial

Low- and middle-income importers

a. Expressed as a share (percent) of total world exports. World merchandise exports in 1999 amounted to some $5,135 billion.
b. Other high-income group includes the Asian newly industrializing economies, several oil exporters of the Gulf region, and Israel.
Source: IMF, Direction of Trade Statistics.

242

World

G L O B A L

E C O N O M I C

I N D I C A T O R S

Table A3.8 Growth of current dollar merchandise trade, by direction 1990–99a(average annual percentage growth)High-income importers

Source of exports

High-income
econ.
Industrial
United States
EU-15
Japan
Other industrial
Other high-incomebAll
industrial

Low- and middle-income importers

Other
All
high- highincome income

SubSaharanAfrica

East
Asia
and
Pacific

EuropeandSouth Central
Asia
Asia

Latin
Middle America All
East
andlowandtheandNorth Carib- middleAfrica
bean income

UnitedStates

EU-15

Japan

Other
industrial

6.6
6.7
...
7.1
3.3
9.0
6.2

3.8
3.6
4.2
3.6
2.8
3.1
7.6

3.0
2.4
2.6
3.5
...
0.3
4.9

5.0
5.1
7.1
3.5
0.7
4.3
4.4

4.5
4.3
5.2
4.0
2.9
6.2
6.2

7.7
7.0
7.1
7.9
6.5
5.0
10.7

4.8
4.5
5.4
4.1
3.6
6.1
7.0

2.0
1.6
4.1
1.4
–0.7
3.1
6.3

8.5
7.2
7.6
7.6
7.1
5.8
11.3

2.8
0.8
1.3
–0.1
0.2
5.6
8.1

9.3
9.1
2.1
11.0
–3.2
0.7
16.6

3.5
3.5
4.7
3.3
2.6
3.6
4.2

10.6
10.6
11.6
9.8
7.9
5.4
10.5

9.0
8.6
9.4
9.5
6.3
5.9
10.7

5.4
5.0
6.5
4.6
4.2
5.9
8.1

12.3
3.7
11.7
9.2

10.3
3.9
12.6
7.0

6.5
6.7
7.4
–0.7

10.3
14.0
11.8
8.4

10.4
4.3
10.6
7.0

10.3
23.6
10.6
11.7

10.4
5.0
10.6
7.6

13.5
14.2
13.7
21.4

18.2
24.2
19.9
10.5

13.3
23.7
13.5
11.4

11.9
3.1
8.7
9.7

7.5
10.3
10.9
7.3

13.2
18.5
20.9
27.9

16.2
17.3
18.0
12.8

11.1
7.5
11.7
8.5

13.5

9.4

–3.1

10.5

9.3

15.2

9.5

6.1

7.9

2.3

4.9

2.3

7.9

12.3

7.6

World

Low- and middleincome economies
Sub-Saharan Africa
East Asia and PacificSouth Asia
Europe andCentral Asia
Middle East andNorth Africa
Latin America
and Caribbean

1.2

4.5

6.0

–3.4

3.8

5.4

4.0

11.8

20.5

10.4

–0.3

3.5

6.3

11.6

5.5

15.3

2.9

1.0

7.8

11.1

4.1

10.9

4.7

5.9

12.7

–1.0

6.5

11.4

10.1

10.5

World

8.2

4.3

4.1

5.4

5.4

8.5

5.7

4.6

10.0

5.6

7.5

4.2

11.1

10.1

6.3

Note: Growth rates are compound averages.
Source: IMF, Direction of Trade Statistics.

243

G L O B A L

E C O N O M I C

P R O S P E C T S

Table A3.9 Structure of long-term debt, 1999
Share of long-term debt (%): concessional debt; nonconcessional debt at variable interest rates; nonconcessional debt at fixed interest
rates
Non-concessional

Non-concessional

Concessional

Variable

Fixed

Concessional

VariableFixed

All developing countries

19.0

43.4

37.6

Asia
East Asia and Pacific
China
Indonesia
Korea, Rep.
Malaysia
Myanmar
Papua New Guinea
Philippines
Thailand
Vietnam

28.1
19.3
21.7
26.1
0.8
6.5
88.2
38.2
30.0
14.0
27.4

39.0
43.9
26.7
62.8
55.4
61.9
0.0
11.3
31.6
45.0
12.3

33.0
36.7
51.6
11.1
43.8
31.6
11.8
50.5
38.4
41.0
60.3

South Asia
Bangladesh
India
Nepal
Pakistan
Sri Lanka

58.5
99.0
49.5
99.3
60.5
90.0

21.7
0.1
23.9
0.0
28.0
5.3

19.9
1.0
26.6
0.7
11.5
4.6

Europe and Central Asia (continued)
Bulgaria
2.6
Czech Republic
1.2
Estonia
1.7
Georgia
61.8
Hungary
1.9
Kazakhstan
8.1
Kyrgyz Republic
55.1
Latvia4.7
Lithuania
4.3
Moldova
31.7
Poland
15.1
Romania
4.6
Russian Federation
0.3
Slovak Republic
5.1
Tajikistan
74.0
Turkmenistan
13.3
Turkey7.2
Ukraine30.5
Uzbekistan
19.4

78.6
38.6
16.6
9.0
14.4
40.7
16.3
36.4
29.6
49.7
45.7
38.5
42.3
24.3
8.7
70.0
47.2
31.4
44.2

18.8
60.2
81.7
29.2
83.7
51.2
28.6
58.9
66.1
18.6
39.2
56.9
57.4
70.6
17.3
16.7
45.7
38.1
36.4

Latin America andthe Caribbean
Argentina
Bolivia
BrazilChile
Colombia
Costa Rica
Dominican Republic
EcuadorEl Salvador
GuatemalaJamaica
MexicoPanamaParaguay
Peru
Trinidad and Tobago
Uruguay
Venezuela

4.6
1.8
62.9
0.8
1.2
3.2
19.4
41.6
15.4
39.5
40.9
32.5
1.0
6.4
53.5
15.4
0.7
4.5
0.2

59.2
48.8
22.3
77.7
52.3
61.6
27.2
30.9
56.0
36.9
29.4
27.4
49.1
47.5
20.8
51.3
44.1
50.3
72.3

36.2
49.3
14.8
21.5
46.5
35.2
53.4
27.5
28.6
23.6
29.7
40.1
50.0
46.1
25.7
33.4
55.3
45.2
27.5

Middle East andNorth Africa
AlgeriaEgypt, Arab Rep.
JordanMoroccoOman
Syrian Arab Republic
Tunisia
Yemen, Rep.

37.9
12.7
86.3
53.7
32.0
33.5
92.8
25.1
91.6

30.5
51.0
4.2
24.3
34.3
31.8
0.0
22.0
2.1

31.6
36.3
9.5
22.0
33.6
34.8
7.2
52.9
6.2

Europe andCentral Asia
Armenia
Azerbaijan
Belarus

6.5
69.0
50.4
9.8

42.2
18.2
29.7
47.4

51.4
12.8
19.9
42.8

Sub-Saharan Africa
AngolaBotswana
Côte d’Ivoire
Cameroon
Ethiopia (excludes Eritrea)
Gabon
Ghana
Kenya
Madagascar
Nigeria
SenegalSudan
ZambiaZimbabwe

51.5
29.8
60.6
39.1
53.6
89.5
24.9
81.6
73.9
72.6
7.6
80.7
49.8
77.3
45.1

14.1
10.4
9.5
46.6
11.8
0.3
11.5
4.6
7.7
5.2
20.2
10.2
17.8
8.7
21.7

34.5
59.9
29.9
14.2
34.6
10.3
63.5
13.7
18.4
22.2
72.2
9.1
32.5
14.0
33.2

Note: Nonconcessional debt data are available only for countries which report to the World Bank’s Debtor Reporting System.
Non-concessional debt contains estimates of private non-guaranteed in addition to public and publicly guaranteed debt.
For aggregate figures, missing values are assumed to have the same average value as the available data.

244

G L O B A L

E C O N O M I C

I N D I C A T O R S

Figure A3.9a Structure of long-term debt, by group, 1999
Percent
100

80

60

40
Fixed rate
Variable rate

20

Concessional0
Severelyindebted
low-income

Moderately
indebted
low-income

Severelyindebted
middle-income

Moderately
indebted
middle-income

Other

Figure A3.9b Structure of long-term debt, by region, 1999
Percent
100

80

60

40
Fixed rate
Variable rate

20

Concessional
0Sub-SaharanAfricaEast Asia
and PacificSouth Asia

Latin America
and theCaribbean

Europe andCentral Asia

Middle Eastand North
Africa245

G L O B A L

E C O N O M I C

P R O S P E C T S

Table A3.10 Long-term net resource flows to developing countries, 1999
(millions of U. S. dollars)
Private

246

Total

Percentage
of GDP

All developing ctrys

264,900

Asia
East Asia and Pacific
China
Indonesia
Korea, Rep.
Malaysia
Myanmar
Papua New Guinea
Philippines
Thailand
VietnamSouth Asia
Bangladesh
India
Nepal
Pakistan
Sri Lanka

Official

Total

Officialdevelopment
assistance

Other

34,45645,686

40,725

4,960

59,111
56,04138,753–2,745
9,333
1,553
216
297
573
6,213
1,609

22,445
21,133
3,732
1,273
12,426
522
0
232
422
2,527
0

19,241
14,257
2,038
3,487
3,349
369
42
69
40
2,229
1,096

13,796
9,533
1,798
1,757
1,514
–111
43
101
887
893
1,086

5,444
4,724
240
1,731
1,835
480
–1
–32
–847
1,336
11

–2,20915–1,658
–13
–478
–74

3,070
179
2,169
4
530
177

1,312
4
1,302
0
0
6

4,984
1,049
1,538
235
1,092
258

4,264
1,041
1,367
237
541
259

720
8
171
–2
551
–1

111,30232,296
1,017
22,793
11,851
3,635
924
1,404
944
360
98
425
26,781
382
620
109
3,140
713
66
3,130

17,0587,963
0–11,828
2,612
2,502
255
66
254
129
–57
–99
13,865
82
597
38
883
80
–163
–124

90,352
23,9291,016
32,659
9,221
1,109
669
1,338
690
231
155
524
11,786
300
22
72
1,969
633
229
3,187

3,893
404
0
1,961
18
25
0
0
0
0
0
0
1,129
0
0
0
289
0
0
67

5,224
744
338
722
–69
1,073
–102
138
223
148
357
–80
–1,674
549
15
97
718
–61
260
–67

3,335
–230
353
–18
7
152
–26
61
135
77
199
–49
–53
579
–6
25
184
5
–1
3

1,889
974
–15
741
–75
920
–76
77
89
71
157
–31
–1,621
–30
22
72
534
–66
261
–70

43,164
122
596
394
1,112
4,837
569
86
4,961
1,477
–16
303

13,080
0
86
169
204
–756
72
4
2,418
–110
–52
–45

26,534
122
510
225
806
5,093
305
82
1,950
1,587
36
348

3,550
0
0
0
102
500
191
0
592
0
0
0

9,319
115
187
–27
346
99
62
112
208
252
227
347

8,311
119
184
4
187
119
46
148
86
112
194
65

1,008
–4
3
–31
159
–20
16
–36
122
140
33
282

Total

Debt flows
net

FDI

Portfolio

4.37

219,214–649

185,408

72,47565,31842,670–4,928
9,758
3,616
245
568
4,955
4,700
1,924

2.93
3.45
4.31
–3.49
2.40
4.58
..
15.85
6.46
3.85
6.71

53,23551,062
40,632–8,416
6,409
3,247
203
499
4,915
2,471
828

–28,322–26,112–1,854–6,944–15,350
1,173
–14
–30
3,920
–6,269
–781

7,157
1,247
3,351
227
1,145
366

1.23
2.71
0.75
4.54
1.97
2.33

2,173
198
1,813
–8
53
109

Latin America andthe Caribbean
Argentina
Bolivia
BrazilChile
Colombia
Costa Rica
Dominican Rep.
EcuadorEl Salvador
GuatemalaJamaica
MexicoNicaragua
PanamaParaguay
Peru
Trinidad and Tobago
Uruguay
Venezuela

116,526
33,041
1,354
23,515
11,782
4,708
822
1,542
1,167
508
455
345
25,106
931
635
206
3,858
652
326
3,063

6.41
11.65
16.27
4.44
17.41
5.43
5.28
8.86
6.15
4.07
2.50
5.17
5.23
42.08
6.64
2.67
7.43
9.49
1.56
2.96

Europe andCentral Asia
Armenia
Azerbaijan
Belarus
Bulgaria
Czech Republic
Estonia
Georgia
Hungary
Kazakhstan
Kyrgyz Republic
Latvia52,483
237
783
367
1,457
4,936
631
198
5,169
1,729
211
650

5.97
12.87
17.36
1.37
11.75
9.31
12.31
7.28
10.67
10.25
16.90
9.75

G L O B A L

E C O N O M I C

I N D I C A T O R S

Table A3.10 Long-term net resource flows to developing countries, 1999 (continued)(millions of U. S. dollars)
PrivatePercentage
of GDP

Europe and Central Asia (continued)
Lithuania
1,320
Moldova
114
Poland10,499
Romania
920
Russian Federation
5,058
Slovak Rep.
575
Tajikistan
84
Turkmenistan
50
Turkey8,127
Ukraine701
Uzbekistan
1,052
Middle East andNorth Africa
AlgeriaEgypt, Arab Rep.
Iran, Islamic Rep.
JordanMoroccoOman
Syrian Arab Rep.
Tunisia
Yemen, Rep.
Sub-Saharan Africa
AngolaBotswana
Cameroon
Côte d’Ivoire
Ethiopia
Gabon
Ghana
Kenya
Madagascar
Nigeria
SenegalSouth Africa
Sudan
ZambiaZimbabwe

Official

Total

Officialdevelopment
assistance

Other

0
0
721
0
644
0
0
0
800
0
0

172
103
47
206
1,278
294
74
104
–540
330
395

70
55
294
64
1,040
71
74
94
–131
47
294

102
48
–246
142
238
223
0
10
–409
283
101

1,461
7
1,065
85
158
3
60
91
350
–150

669
3
550
0
11
91
11
0
0
0

1,392
–311
255
–1,220
389
91
23
–32
228
305

3,418
71
460
24
366
302
31
7
165
323

–2,026–382–205–1,244
23
–211
–9
–39
63
–17

7,949
2,471
37
40
350
90
200
17
14
58
1,005
60
1,376
371
163
59

3,899
0
0
0
8
0
0
19
5
0
2
0
3,855
0
0
4

10,511
317
–22
218
73
501
–167
432
64
247
–227
325
245
211
315
217

11,865
323
9
313
291
505
14
473
227
267
126
353
244
216
400
274

–1,354
–6
–31
–95
–219
–4
–181
–41
–163
–19
–353
–29
1
–6
–85
–57

Total

Debt flows
net

FDI

12.38
9.73
6.77
2.61
2.62
2.92
7.77
1.51
4.40
2.28
6.16

1,148
11
10,452
714
3,780
281
10
–54
8,667
371
658

661
–22
2,461
–327
–173
–73
–14
–134
7,084
–125
545

487
34
7,270
1,041
3,309
354
24
80
783
496
113

2,456
–1,7971,814–2,605
501
–26
–390
55
968
155

0.42
–3.77
2.03
–2.62
6.21
–0.08
–2.61
2.12
4.62
2.28

1,064
–1,486
1,558–1,385
112
–118
–413
87
739
–150

–1,066–1,496–57–1,470
–57
–212
–484
–4
389
0

20,960
2,690
14
206
147
579
41
416
13
299
633
379
4,778
581
466
287

6.55
43.43
0.28
2.24
1.31
8.97
0.95
5.36
0.12
8.04
1.81
7.97
3.67
5.98
15.01
5.12

10,449
2,373
36
–13
74
78
209
–16
–51
52
860
54
4,533
371
151
70

–1,399
–98
–1
–53
–283
–12
9
–52
–70
–6
–146
–6
–698
0
–12
7

Total

Portfolio

Source: World Bank data.

Figure A3.10 Distribution of long-term net resource flows, 1999
Percent
100
80
PrivateOfficial

60
40
20
0
Sub-SaharanAfricaEast Asia
and PacificSouth Asia

Latin America
and theCaribbean

Europe andCentral Asia

Middle Eastand North
Africa247

Technical Notes

The principal sources for the data in this appendix are the World Bank’s central databases.
The cut-off date for data updates was August
31, 2001; revisions/releases since that time havenot been incorporated.
Regional aggregates are based on the classification of economies by income group andregion, following the Bank’s standard definitions (see country classification tables that follow). Debt and finance data refer to the 137
countries that report to the Bank’s Debtor Reporting System (see the World Bank’s Global
Development Finance 2001). Small economies
have generally been omitted from the tables
but are included in the regional totals.
Current price data are reported in U.S.
dollars. The cut-off date for data updates was
August 31, 2001; revisions/releases since thattime have not been incorporated.

Notes on tables
Tables A3.1 through A3.4. Projections are
consistent with those highlighted in Chapter 1
and Appendix 1.
Tables A3.5 and A3.6. Merchandise exports and imports exclude trade in services. Imports are reported on a c.i.f. basis. Growth
rates are based on constant price data, which
are derived from current values deflated by relevant price indexes. Effective market growth isthe export-weighted import growth rate of thecountry’s trading partners. The IMF’s Balance248

of Payments database is the principal sourcefor data through 1999; in some cases these data
have been supplemented by UNCTAD and UN
Comtrade databases or by World Bank staff estimates. Trade figures for countries of the former Soviet Union reflect the total of non-CIS
and intra-CIS exports and imports.
Tables A3.7 and A3.8. Growth rates arecompound averages and are computed for current dollar measures of trade.
Table A3.9. Long-term debt covers public
and publicly guaranteed external debt but excludes IMF credits. Concessional debt is debt
with an original grant element of 25 percent
or more. Nonconcessional variable interest
rate debt includes all public and publicly guaranteed long-term debt with an original grantelement of less than 25 percent whose terms
depend on movements of a key market rate.
This item conveys information about the borrower’s exposure to changes in international
interest rates. For complete definitions, see
Global Development Finance 2001.
Table A3.10. Long-term net resource flows
are the sum of net resource flows on long-term
debt (excluding IMF) plus non-debt-creatingflows. Foreign direct investment refers to the net
inflows of investment from abroad. Portfolio
equity flows are the sum of country funds, depository receipts, and direct purchases of sharesby foreign investors. For complete definition,
see Global Development Finance 2001.

Classificationof Economies

G L O B A L

E C O N O M I C

P R O S P E C T S

Table 1 Classification of economies by income and region, July 2001
Sub-Saharan Africa

Incomegroup

Subgroup

Subtotal

250

West
AfricaEast Asia
and Pacific

South
Asia

EasternEurope andCentral Asia

Middle Eastand North Africa

Rest ofEuropeMiddleEast

AngolaBurundiComoros
Congo, Dem.
Rep.
Eritrea
Ethiopia
Kenya
LesothoMadagascar
MalawiMozambique
RwandaSomalia
Sudan
Tanzania
UgandaZambiaZimbabwe

Benin
Cambodia
Burkina Faso Indonesia
Cameroon
Korea, Dem.
Central African Rep.
Republic
Lao PDR
Chad
Mongolia
Congo, Rep. Myanmar
Côte d’Ivoire Solomon
Gambia, The
Islands
Ghana
VietnamGuineaGuineaBissau
Liberia
Mali
Mauritania
Niger
Nigeria
São Toméand Principe
SenegalSierra Leone
Togo

Afghanistan
Bangladesh
BhutanIndia
Nepal
Pakistan

Armenia
Azerbaijan
Georgia
KyrgyzRepublic
Moldova
Tajikistan
UkraineUzbekistan

Yemen, Rep

Lower

Namibia
Swaziland

Cape VerdeEquatorial
GuineaChina
FijiKiribati
MarshallIslands
Micronesia,
Fed. Sts.
Papua New
GuineaPhilippines
Samoa
Thailand
Tonga
Vanuatu

Maldives
Sri Lanka

Albania
BelarusBosnia andHerzegovina
Bulgaria
Kazakhstan
LatviaLithuania
Macedonia,
FYRa
Romania
RussianFederation
Turkmenistan
Yugoslavia,
Fed. Rep.

Iran, Islamic
Rep.
Iraq
JordanSyrian Arab
Republic
West Bankand Gaza

Upper

Botswana
Mauritius
MayotteSeychelles
South Africa

Gabon

AmericanSamoa
Korea, Rep.
Malaysia
Palau

LowincomeMiddleincome

East andSouthern
AfricaEurope andCentral Asia

Asia

155

25

23

23

8

Croatia
Czech
Republic
Estonia
Hungary
PolandSlovakRepublic

Isle of Man
Turkey

26

2

North
AfricaHaiti
Nicaragua

Algeria
Djibouti
Egypt, Arab
Rep.
MoroccoTunisia

Bahrain
Libya
LebanonOman
Saudi Arabia

10

Americas

BelizeBolivia
Colombia
Cuba
Dominican
Republic
EcuadorEl Salvador
Guatemala
GuyanaHonduras
JamaicaParaguay
Peru
St. Vincent
and theGrenadines
Suriname
Antigua andBarbudaArgentina
BrazilChile
Costa Rica
Dominica
GrenadaMexicoPanamaPuerto Rico
St. Kitts andNevis
St. Lucia
Trinidad andTobagoUruguay
Venezuela,
RB

6

32

R E G I O N A L

E C O N O M I C

P R O S P E C T S

Table 1 Classification of economies by income and region, July 2001 (continued)
Sub-Saharan Africa

Incomegroup

Highincome

Total

Subgroup

East andSouthern
AfricaWest
AfricaEast Asia
and Pacific

South
Asia

OECD

AustraliaJapan
New Zealand

Non-OECD

BruneiFrenchPolynesia
GuamHong Kong,
ChinacMacao,
ChinadNew
Caledonia
N. Mariana
Islands
Singapore
Taiwan,
China

208

25

Europe andCentral Asia

Asia

23

35

EasternEurope andCentral Asia

Middle Eastand North Africa

Rest ofEuropeMiddleEast

North
AfricaAustria
Belgium
Denmark
FinlandFranceb
Germany
GreeceIceland
Ireland
Italy
Luxembourg
Netherlands
NorwayPortugal
Spain
SwedenSwitzerland
UnitedKingdom
Slovenia

8

27

Americas

CanadaUnitedStatesAndorraChannelIslands
CyprusFaeroeIslands
Greenland
Liechtenstein
MonacoSan Marino

Israel
Kuwait
Qatar
United ArabEmirates

28

14

Malta

Aruba
Bahamas,The
Barbados
BermudaCaymanIslands
Netherlands
AntillesVirginIslands(U.S.)

741

a. Former Yugoslav Republic of Macedonia.
b. The French overseas departments French Guiana, Guadeloupe, Martinique, and Réunion are included in France.
c. On 1 July 1997 China resumed its exercise of sovereignty over Hong Kong.
d. On 20 December 1999 China resumed its exercise of sovereignty over Macao.
Source: World Bank data.

Definitions of groups
For operational and analytical purposes, the World Bank’s
main criterion for classifying economies is gross national
income (GNI) per capita. Every economy is classified as low
income, middle income (subdivided into lower middle andupper middle), or high income. Other analytical groups,
based on geographic regions and levels of external debt, arealso used.
Low-income and middle-income economies are sometimes
referred to as developing economies. The use of the term isconvenient; it is not intended to imply that all economies in

the group are experiencing similar development or that othereconomies have reached a preferred or final stage of development. Classification by income does not necessarily reflect development status.
This table classifies all World Bank member economies,
and all other economies with populations of more than
30,000. Economies are divided among income groups according to 2000 GNI per capita, calculated using the World Bank
Atlas method. The groups are: low income, $755 or less;lower middle income, $756–2,995; upper middle income,$2,996–9,265; and high income, $9,266 or more.

251

G L O B A L

E C O N O M I C

P R O S P E C T S

Table 2 Classification of economies by income and indebtedness, July 2001
Incomegroup

Subgroup

Severely indebted

Moderately indebted

Less indebted

Not classified
by indebtedness

LowincomeAfghanistan
Mali
Angola
Mauritania
Benin
MyanmarBurundiNicaragua
Cameroon
Niger
CentralNigeria
AfricanPakistan
Republic
RwandaComorosSão ToméCongo, Dem.
and Principe
Rep.
Sierra Leone
Congo, Rep.
Somalia
Côte d’Ivoire
Sudan
Ethiopia
Tanzania
GuineaUgandaGuinea-Bissau Zambia
Indonesia
Kyrgyz Republic
Lao PDR
Liberia
Madagascar
MalawiArmenia
Bangladesh
Burkina Faso
Cambodia
ChadGambia, The
Georgia
Ghana
Haiti
Kenya
Moldova
Mongolia
Mozambique
SenegalTogo
Turkmenistan
Vietnam
Yemen, Rep.
Zimbabwe

Azerbaijan
BhutanEritrea
India
Korea, Dem. Rep.
Lesotho
Nepal
Solomon Islands
Tajikistan
UkraineUzbekistan

Middle- Lower
incomeBolivia
Bosnia andHerzegovina
Bulgaria
Cuba
GuyanaIraq
JordanPeru
Syrian Arab
Republic

Algeria
BelizeColombia
EcuadorHonduras
Jamaica
MoroccoPapua New
GuineaPhilippines
RussianFederation
Samoa
St. Vincent and
the Grenadines
ThailandTunisia
TurkeyAlbania
BelarusCape Verde
China
Costa Rica
Djibouti
Dominican
Republic
Egypt, ArabRep.
El Salvador
Equatorial
GuineaFiji
GuatemalaIran, Islamic
Rep.
Kazakhstan
Kiribati
LatviaLithuania
Macedonia,
FYRa
Maldives
NamibiaParaguay
Romania
Sri Lanka
Suriname
Swaziland
Tonga
Vanuatu
Yugoslavia,
Fed. Rep.

Marshall Islands
Micronesia, Fed. Sts. ofWest Bank and Gaza

Argentina
BrazilGabon

Chile
Estonia
Hungary
Lebanon
Malaysia
Mauritius
PanamaUruguay
Venezuela, RB

Antigua andBarbudaBahrain
Botswana
Croatia
Czech
Republic
Dominica
GrenadaKorea, Rep.
Libya
MexicoOman
PolandSaudi Arabia
Seychelles
SlovakRepublic
South Africa
St. Kitts andNevis
St. Lucia
Trinidad andTobagoAmerican Samoa
Isle of Man
MayottePalau
Puerto Rico

Upper

252

R E G I O N A L

E C O N O M I C

P R O S P E C T S

Table 2 Classification of economies by income and indebtedness, July 2001 (continued)
Incomegroup

Subgroup

Severely indebted

Moderately indebted

Less indebted

High- OECD
incomeNonOECD

Total

208

46

43

Not classified
by indebtedness

Australia
Austria
Belgium
CanadaDenmark
FinlandFranceb
Germany
GreeceIceland
Ireland
Italy

Japan
Luxembourg
Netherlands
New Zealand
NorwayPortugal
Spain
SwedenSwitzerland
UnitedKingdom
United States

AndorraAruba
Bahamas,The
Barbados
BermudaBruneiCaymanIslands
ChannelIslands
CyprusFaeroeIslands
FrenchPolynesia
Greenland
Guam
Hong Kong,
ChinadIsrael

KuwaitLiechtenstein
Macao,
ChinacMalta
MonacoNetherlands
Antilles
New Caledonia
N. Mariana
Islands
Qatar
San Marino
Singapore
Slovenia
Taiwan, China
United ArabEmirates
VirginIslands (U.S.)

57

62

a. Former Yugoslav Republic of Macedonia.
b. The French overseas departments French Guiana, Guadeloupe, Martinique, and Réunion are included in France.
c. On 20 December 1999 China resumed its exercise of sovereignty over Macao.
d. On 1 July 1997 China resumed its exercise of sovereignty over Hong Kong.
Source: World Bank data.

Definitions of groups
This table classifies all World Bank member economies, andall other economies with populations of more than 30,000.
Economies are divided among income groups according to2000 GNI per capita, calculated using the World Bank Atlas
method. The groups are: low income, $755 or less; lower
middle income, $756–2,995; upper middle income,$2,996–9,265; and high income, $9,266 or more.
Standard World Bank definitions of severe and moderateindebtedness are used to classify economies in this table. Severely indebted means either: present value of debt service to
GNI exceeds 80 percent or present value of debt service toexports exceeds 220 percent. Moderately indebted means ei-

ther of the two key ratios exceeds 60 percent of, but does notreach, the critical levels. For economies that do not report detailed debt statistics to the World Bank Debtor Reporting System (DRS), present-value calculation is not possible. Instead,the following methodology is used to classify the non-DRS
economies. Severely indebted means three of four key ratios(averaged over 1997–99) are above critical levels: debt to
GNI (50 percent); debt to exports (275 percent); debt service
to exports (30 percent); and interest to exports (20 percent).
Moderately indebted means three of the four key ratios exceed 60 percent of, but do not reach, the critical levels. Allother classified low- and middle-income economies are listed
as less indebted.

253