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World Bank and IMF show welcome revisions to stance on developing countries and trade

Jagdish Bhagwati and Arvind Panagariya

FT: Letter, December 24, 2003

Sir, The article by Horst Kohler of the International Monetary Fund and James Wolfensohn of the World Bank in support of the multilateral trading system and the Doha round is welcome, especially as it belatedly repairs important sins of commission and of omission by these Bretton Woods institutions ("We can trade up to a better world", December 12).

The sins of commission were different for the two institutions. The IMF's was indirect. Having encouraged the hasty adoption of capital account convertibility in the developing countries, the IMF played a role in the creation of the Asian financial crisis, while compounding it through mistaken conditionality in the year thereafter. The enthusiasm for trade liberalisation was crippled in the region, and elsewhere, because few bothered to distinguish between dangers posed by freed capital flows and the more certain gains from freer trade.

But the World Bank's sin of commission has been disconcertingly direct. Under its present leadership, the Bank has encouraged, in several statements that we have quoted in our writings (eg, OECD Observer, May 2002), the developing countries to think that their trade barriers are less than those of the developed countries and that it is therefore hypocritical and a manifestation of "double standards" to ask them to reduce these barriers.

We have repeatedly attacked this "fallacy of description" and the resulting "fallacy of prescription" that has reinforced the determination of the developing countries to hold on to their trade barriers.

It is good to see therefore that the World Bank's leadership, and not just its excellent technical staff, now recognises that the developing countries should continue to reduce their own trade barriers.

But the sin of omission has been equally crippling. One of us (Bhagwati) has written over the years that, while the developed countries that have liberalised trade over five decades have evolved schemes of adjustment assistance to cope with the possible disruptions from trade liberalisation, the developing countries, whose trade liberalisation is much more recent, have not.

But where would they get the funds to finance such adjustment assistance? Evidently, they must come from institutions such as the World Bank. It is good to see that, after years of silence and neglect, the Bank is responding to these proposals.

The IMF's idea of assisting countries that run into balance of payments difficulties from trade liberalisation is good. But the lobbying opposition to trade liberalisation, as in the developed countries, is likely to come from the import-competing sectors. Adjustment assistance for them, something the World Bank can provide, is also necessary.