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Arvind Panagariya World
Bank Chief Economist Nicholas Stern is reported to have told a gathering
of economists in New Delhi this past month that poor countries should
unilaterally dismantle their barriers to trade in agriculture in spite of
European and American “hypocrisy” in raising farm subsidies. “There is no point in saying to the developed world: ‘You
are shooting yourself in the foot so we are going to shoot ourselves in
the foot as well,’” said Stern. “The best response is not to shoot
yourself in the foot at all.” Condemning
India’s tariffs as among the highest in the world and partially
responsible for the shortfall in trade by $150 billion relative to the
true potential, this time around Stern has delivered a message virtually
the opposite of the one he had conveyed on a visit to India less than two
years ago. Back then, on March 22, 2001, presenting the Annual
Commencement Day lecture of the EXIM Bank of India, Stern had taken the
view that trade liberalisation was no more an issue in India. He
introduced the topic of his lecture thus, “Now that macro and trade
reforms have been carried out (or are underway) and have borne fruit, the
main question I hope we can discuss today is…” The concern that
India’s high tariffs were hurting itself, central to his recent speech,
never figured in that lecture. Indeed,
in another speech delivered four days later in New Delhi, Stern went on to
essentially defend trade barriers in developing countries. “It is surely
hypocritical of rich countries to encourage poor nations to liberalise
trade and to tackle the associated problems of adjustment, whilst at the
same time succumbing to powerful groups in their own countries that seek
to perpetuate narrow self-interest,” he argued. By focusing on
adjustment costs without a simultaneous reminder that benefits of
liberalisation disproportionately outweigh these costs and that they call
for adjustment assistance, which the World Bank can readily provide,
rather than continued protection, Stern effectively strengthened the hand
of the protectionists who are omnipresent in India. Advocates
of free trade can only take delight in the transformation of Stern’s
views. His advice to developing countries not to shoot themselves in the
foot just because developed countries have done so is a direct paraphrase
of the more elegant phrase of pro-free-trade economist Joan Robinson who
famously said that if your trading partner throws rocks into his harbour
that is no reason to throw rocks into your own. Coincidentally, Jagdish
Bhagwati and I had cited precisely this latter phrase in an article
published in the Financial Times (March 29, 2001) to counter the argument
that it is wrong to ask poor countries to liberalise when the rich
countries maintain high trade barriers. But
there is no dearth of cynics in India. Given the keen US interest in
mobilising the support of large developing countries such as India and
China against the EU agricultural subsidies in the ongoing Doha
negotiations and the close US proximity to the World Bank, these cynics
are likely to see the hand of the United States Trade Representative
behind Stern’s advocacy of unilateral liberalisation. This would be
unfortunate, since India needs support for its liberalisation
program from all quarters. One thing Stern can do to counter such
perceptions in the future is to focus more centrally on the dismantling of
industrial protection, which is a far more serious problem in India
without, of course, sparing agriculture. The impression from the press
reports is that Stern’s speech in India focused more centrally on
agricultural than industrial protection. There is one additional important issue to which the World Bank needs to attend if it is to remain credible in its crusade against agricultural protection in the rich countries. For some years now, the senior Bank officials including President James Wolfensohn have frontally attacked agricultural subsidies in the rich countries, especially EU, arguing that they cost the poor countries more than the total amount of development assistance given them. Yet the truth is that the removal of the subsidies will largely benefit the relatively well-to-do developing countries, mainly the members of the Cairns Group, which include developing countries from Latin America and East Asia. In so far as the poor developing countries are concerned, the majority of them will be hurt. It is curious that this important distinction between the implications of the removal of agricultural subsidies for the poorest versus richer developing countries has entirely disappeared from the public debate in recent years. The
reason why the majority of the truly poor countries stand to lose from the
removal of the agricultural subsidies in the rich countries is that on a
net basis, 45 of the 49 United Nations designated Least Developed
Countries (LDCs) are importers of food products. The removal of subsides
will raise the prices of food imports and therefore hurt them. Even when
we take agriculture as a whole, 33 of the 49 LDCs are net importers and
will be paying higher prices for their imports post liberalisation. The
Cairns Groups of developing countries on the other hand are large
potential exporters of agricultural products and stand to benefit from
increases in prices and access to EU markets. December 18, 2002 |
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