Welcome Aboard Mr. Stern

Abandoning the exclusive focus on the rich country protectionism and complacency towards the poor country protectionism, the World Bank Chief Economist has now forcefully condemned the latter. This is good news.  But the World Bank also needs to pay attention to the nuances while propagating the view that agricultural subsidies and protection in the rich countries inflict huge injuries on the poor countries. The removal of these intervention will no doubt benefit the developing countries as a whole but it will also hurt the majority of the poorest countries.

December 18, 2002

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.

Recognition of this asymmetry is crucial to devising a balanced bargain under the Doha Round, especially from the viewpoint of the poorest developing countries. By taking the black and white view that rich country protectionism hurts the poor countries, as the World Bank officials have done to-date, we run the grave risk of ignoring the interests of the poorest developing countries. Of all the institutions, the World Bank, which claims to be the champion of the poor, should appreciate this fact and not confuse the public discourse by blanket statements.