The impact of the crisis on small developing countries has been severe. As external financing dried up in the second semester of 2008, their exports fell by 33% -- vastly surpassing the widely advertised losses by major developing countries like China and India. Some smaller countries have experienced even larger drops as a result of stiff reductions in export prices. The situation is dramatic. Faced with the worst economic setback since the Great Depression, most small African, Asian, and Latin American developing countries lack resources for fiscal and monetary interventions. Many among them have turned to the multilateral development banks for financial assistance, but these solutions take time. What else can these countries do instead?
Trade policy options for developing countries
In CEPR Policy Insight No. 33, we discuss trade policy alternatives for small developing countries in this crisis. One bad alternative is to follow the example of developed governments and enact financial, investment, and labour protection measures. Indeed, many G7 governments have requested financial firms to focus on domestic borrowers, instructed non-financial firms to reduce their investments abroad, and some have even passed legislation favouring native-born workers.
Another bad alternative -- one which is popular these days among governments lacking deep pockets -- is to enact overtly protectionist actions. Evidently the leaders of impoverished nations are under tremendous pressure to deliver immediate actions, and unsophisticated trade policy stands out as a cheap-to-implement lever at their disposal "to relieve some of the pain." Helpful and well-crafted alternatives however would build on three pillars, namely the adoption of policies with minimal trade distortions, preference for export incentives rather than import restrictions, and last but not least assistance from advanced countries. Based on those guidelines, developing country leaders, G20 governments, and presidents of multilateral banks should lead a concerted effort to oversee the implementation of the following measures:
- Small developing countries should depreciate their currencies to boost both exports and import-competing sectors.
- Afflicted developing countries should provide across-the-board rebates to their exports during a two-year period. At the same time, WTO members should not enforce rules forbidding export subsidisation against these countries.
- Developing countries should also defer payment of corporate income taxes and customs duties on capital-goods imports by export-oriented firms.
- Multilateral development banks, the IFC, and G20 export credit agencies should ramp up export credits for products sold by small developing countries.
- Multilateral development bank should extend further funding for trade facilitation programs in developing countries.
- All G20 members should implement the duty-free quota-free provisions for developing countries outlined in the Doha negotiations.
- G20 countries should pledge to a time-limited “holiday” on trade remedies (i.e, CVDs, AD, and safeguard measures) against imports from small developing countries.
While these measures concern a large number of small developing countries, few countries would want to resort automatically to all of them. Small developing countries with a trade surplus, a higher GDP per capita, and /or higher foreign exchange reserves should have more scope to consider alternative anti-depression measures rather than resort to trade protection.
Conclusions
Developing countries should not be viewed as a monolithic bloc in this current environment. Unlike the successfully-globalised top-20 emerging exporters who now have an interest and responsibility in preserving the openness of the trading system, most developing countries neither represent a significant amount of total world trade nor can they inflict a large detrimental effect on the trading system. They should thus be given more flexibility to respond to domestic pressures and to adopt well-crafted trade measures to counter the impact of the current economic crisis on a short-run basis.
