Awakening the WTO

Hector Torres 21 September 2013

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Admitting that 'the present is just a snapshot in a journey' is disconcerting, so we feel better assuming that the current state of affairs will turn out to be permanent. Indulging in this mistake is common, and we also see it happening in multilateral institutions – particularly if they do not have a watchdog to keep them free from self-deception. The WTO does not have such a watchdog, and this may explain its resistance to acknowledging the obvious.

Developing-nation status: The issues

The WTO has 159 members, more than two thirds (124) of which are self-appointed as developing countries and therefore entitled to ‘lighter’ trade obligations (known as “special and differential treatment”).

Opening markets to competition can close uncompetitive industries faster than the economy can reabsorb the displaced labour and capital. Developing countries typically lacked the fiscal resources needed to facilitate the transition, so they got more time to adapt, as well as less ambitious targets. Without this deference, it would have been difficult to marshal support for trade liberalisation, particularly from democratic governments.

However, the process of developing is, by definition, dynamic and the world economy has changed dramatically. On average, developing countries (the big emerging markets included) now have approximately three times less debt and also three times less gross financing needs than their developed trade partners.1,2 This makes it increasingly difficult to argue that all developing countries need to enjoy a timeless right to opt out from WTO general obligations.3

A proposal: Establish a WTO ‘watchdog’

If the WTO had a watchdog like those that constantly bark at the IMF and the World Bank, governments would have been forced to acknowledge that some of the ‘developing’ countries will eventually develop, and that entitlements to special and differential treatment may need to be periodically revised.4 The aforesaid is easily seen, yet countries found it was comfortable to avoid the discussion.5

The IMF and the World Bank have Independent Evaluation Offices (IEO) – both are part of their institutional architecture, but both enjoy total independence.6 They “bark” several times a year, confronting executive directors with candid and unforgiving reports. By putting their fingers on the problems they do not necessarily facilitate agreeing on reforms, but they avoid indulging in costly intellectual 'siestas'.7

I am more familiar with the IMF’s watchdog. It is merciless in its accounting, but by bluntly unmasking mistakes it reduces the risk of overlooking failures and growing indulgent with poor performance. Beyond being critical, IEO reports also propose reforms. Not all proposals are welcomed and endorsed by the executive board, yet even if some are rejected they have helped in creating a learning culture.

An independent watchdog at the WTO would have much to do. Beyond calling for long-outstanding discussions and adjustments to its legal architecture (as the aforementioned extravagance of allowing countries to opt-out from the general rules at their will), it could scrutinise policy performance and propose improvements. How effectively are the WTO’s trade monitoring reports dealing with concealed trade (restrictive) measures, when they are 'discovered' but disavowed by the relevant country? How are those reports reflecting the potential trade effects of conventional and unconventional monetary policies? How effectively is the WTO complying with its mandate to promote greater coherence in global economic policymaking? How much is technical assistance helping countries understand the implications and opportunities of value-added chains? These are some of the questions that a WTO watchdog could address.

Concluding remarks

Having somebody paid to detect problems and criticise you publicly may sound like a foolish waste of budgetary resources, but reformers should consider the idea carefully.8 Asking somebody familiar with the institution (yet not part of the 'family') to blow the whistle reduces the political cost of waking up “intellectual nappers” to uncomfortable realities, paving the way for reform.

Finally, logistical problems should not be an impediment. Admittedly, the creation of an IEO would have some budgetary implications for the WTO, but this should not be an insurmountable challenge. Considering that the Doha “development round” is having a long “siesta”, a watchdog with a lean secretariat could be accommodated within the WTO’s structure without much external hiring.

Editor’s note: The views expressed are those of the author and do not represent those of the IMF or the WTO.

References

IMF (2013), “Fiscal Adjustment in an Uncertain World”, IMF Fiscal Monitor, 13 April.

Torres, Hector R (2012), “‘Developing’ Countries’ Arrested Development”, Project Syndicate, 23 July.


1 General government debt in advanced economies in 2013 is equivalent to 110.4% of their GDP, whereas in emerging market economies the general government debt is just 34% of their GDP. In LICs it is a bit higher (42.1%). (IMF 2013, Table 2, p. 5).

2 Gross financing needs in 2013 (debt coming to maturity, interest and projected primary fiscal deficits) for 26 advanced economies (average) is equivalent to 23% of their GDP. That of 27 emerging market economies (average) is 8.8% of GDP. (IMF 2013, Tables 6 and 7, pp. 15–16).

3 No middle-income country has ever felt the need to surrender its benefits – for further details, see Torres (2012).

4 Evaluation offices should not be confused with internal audit offices, whose mandate is to oversee financial and budgetary control systems and processes.

5 The failure of the multilateral negotiations launched in Doha in 2001 (the so-called “development round”) is part of the consequences. The insistence of the “developed” countries in “sectoral agreements” (i.e. full liberalisation in certain sectors encompassing the big developing economies) was a failed attempt to tacitly wean large emerging markets from special and differential treatment in those sectors.

6 The World Bank’s is called the Independent Evaluation Group.

7 Governance reform is advancing at a snail’s pace.

8 IEO reports are published.

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Topics:  Institutions and economics International trade

Tags:  WTO, Doha Round, developing countries, international trade

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