The Death of Development?

27 January 2004

The Converging Policy Agendas of The World Bank and The World Trade Organization

By Lisa Jordan, Bank Information Center, November 1999

On this Page:

Preface

Globalization

The Battle For a Social Framework at the World Bank

The Threat of the WTO

• The Current Relationship Between the World Bank and the WTO.
• Education for Developing Country Governments.
• The Integrated Framework
• Trade Rules as a Development Project
• Involvement of International Center for Settlement of Investment Disputes

Consequences of Convergence

• Misdiagnosed Development Issues
• The Enforcement Mechanism
• The Burden of Adjustment

Options for the World Bank
References

PREFACE

In July of 1999 the National Wildlife Federation and Bank Information Center organized a workshop at the Pocantico Center of the Rockefeller Brothers Fund near Tarrytown, New York. The workshop brought together advocacy experts in the fields of trade and investment who discussed the convergence of the World Trade Organization (WTO) and the World Bank within the framework of an increasingly global economy.

This paper draws upon the lectures, discussions and readings presented at the workshop. It explores the choices available to the developing countries within the WTO framework and the position of the World Bank on trade. It is my view that the World Bank, as the single most important international development institution, has a special responsibility not only to help developing countries choose appropriate development paths but also to protect the right of countries to develop in ways that they themselves see as appropriate. Rhetorically at least the World Bank has embraced this and the responsibility to alleviate poverty. The international trade framework has already limited the range of development options available to developing countries and the amount of time available to developing countries in which they can get their national policies in tune with international market demands. The World Bank has not sounded the alarm bells in response to these and other problems created for developing countries in the WTO regime. Instead, the World Bank appears to have chosen to adjust its concept of ‘development’ to accommodate the existing international trade regime, even though some of its own staff argue that trade agreements have not taken into account the reality in developing countries. I argue that the World Bank should reconsider the parameters of its burgeoning alliance with the WTO to argue for adjustments in trade agreements that better take into account development. Otherwise, we may witness the death of development.

GLOBALIZATION

There is ample evidence that the economy of the 21st century will be a global economy largely driven by private capital flows. Private finance and investment is the most important factor in economic globalization. Private financial flows account for 1.9 trillion U.S. dollars a day. Public expenditures for development have decreased by 22 percent in real terms since 1990, while private capital flows to developing countries have soared by more than 500 percent. The Bretton Woods Institutions are the predominant public institutions used by nation states to facilitate this economic globalization.

This paper addresses the role of the Bretton Woods Institutions that facilitate private sector trade liberalization and international investment activities, namely the World Trade Organization and the World Bank. Trade liberalization and international investment have long been related, though the global rules and institutions responsible for each were largely developed independently from one another. Since the end of World War II, trade rules and on-going negotiations have taken place under the authority of the General Agreements on Tariffs and Trade (GATT) -- now administered by the World Trade Organization (WTO) after the GATT Uruguay Round in 1995. The WTO is responsible for establishing and implementing an international system of trade rights and obligations dedicated to eliminating all trade barriers that block the free flow of goods and services throughout the world. WTO member nations are bound to establish national policies in a manner consistent with the goals of the WTO. The World Bank, also established in the immediate post World War II period, has long been engaged in facilitating investments into developing countries. It is commonly understood to be a development institution that lends money. The World Bank helps develop the economic policies in borrowing countries that will attract investment. It also writes lending rules and disburses investments to the developing world.

Great power has been vested by the G7 and other nations into these institutions. As such, each has had enormous influence over the processes for which they were established. Together, they have helped to unleash the power of the private sector which in turn, and combined with technological innovations, has expanded the global economy to provide aggregate economic benefits.

There are however, troublesome consequences that arise from a global economy that are not well addressed through the World Bank and the WTO. Expansion of market economies, trade liberalization, export driven development and privatization may have contributed to growth but have had negative consequences as well. Economic globalization in its current form has resulted in a concentration of wealth within the rich industrialized countries and growing environmental degradation caused by primary resource extraction in the poor countries. Gaps between rich and poor both nationally and globally continue to grow (World Development Report 1999). National economic destabilization is a more frequent phenomenon within the globalized economy and is especially hard-hitting in developing countries.(Soros, 1999) On the latter issue, rapid changes in the availability of private capital are largely responsible for the current instability in Asia, Russia and Brazil. Developing nations that have responded to pressure to liberalize their national economies have suffered greatly in the last two years from overexposure to international investors. Weak regulatory structures and market failures combined with nervous international investors have in effect created a situation where there are now millions of newly poor people in developing countries.

In an effort to address the above inequities and other social problems created by globalization, the public is becoming increasingly focused on the WTO. The World Bank has already been under the looking glass for two decades. These institutions have been targeted by advocacy organizations from industrialized and developing countries in order to counter the impacts of economic globalization on the poor, on labor, on governance and on the environment. The reoccurring theme in all of these battles is the question of whether these institutions will help to embed the global economy into a social framework or will they just facilitate an unbridled global economy?

THE BATTLE FOR A SOCIAL FRAMEWORK AT THE WORLD BANK

The development paradigm underpinning the World Bank is predicated on the assumption that economic growth will alleviate poverty. For over two decades the preferred pattern of economic growth has been through facilitating developing countries to participate in the global market place. The World Bank has emphasized exports and policies that attract international capital. The World Bank’s macro-economic policy advice is predicated on the assumption that the policies should facilitate expanding trade and investment.

The World Bank’s singular adherence to the doctrine of growth prompted a wave of policy prescription where a premium was placed on private investor needs. Social services for the middle class and the poor were disrupted while State services to the private sector increased. (Hilyard, 1998) Prescriptive policy conditions that accompany structural and sectoral adjustment loans continue today to be oriented towards privatizing public goods like energy and water and reforming sectors that private investors need in order to have a stable business environment like the financial sector. Impacts on the public, either positive or negative, are either not taken into account or given a cursory review. (World Bank, Bermudez, 1999)

Critics have attacked this model for almost as long as it has existed because of its impact on the poor. Midway through the 1990s the World Bank tacitly admitted that negative social impacts were evidently resulting from policy conditions placed upon developing countries. Senior World Bank officials publicly acknowledged that choices made through structural adjustment programs can result in lost opportunities for whole generations and thus, lost generations (Wolfensohn, 1998). The World Bank now lends for social safety net programs to mitigate the negative impacts of its prescribed economic policies. In 1998 the World Bank counts half of its adjustment lending as social safety net lending, meant to mitigate the impact of cost-cutting policy prescriptions (World Bank, Salop 1999).

There are now further signs that the World Bank is rethinking its approach to development. While growth still appears to be the holy grail, the World Bank is now attempting to better incorporate social research into its lending operations; to understand the influence of governance on a country’s capability to grow; and to look at equity and distribution as an indicator of development. Over the past two years the Chief Economist at the World Bank, Joe Stiglitz, has publicly denounced the Washington consensus on growth and argued that a more nuanced approach is necessary if developing countries are not to be ravaged by unfettered global market forces. The President of the World Bank, James Wolfensohn, emphasizes the plight of the poor as his first priority. A subtler change that could speak volumes in the future has been the importation of World Bank outsiders to key senior positions. Recently, major positions have been filled with people who have not climbed the ranks and have reputations that in some cases are nothing short of revolutionary. There are also signs that the World Bank may incorporate human development indicators developed by the United Nations Development Program in its measures of success. And social principles have become important facets of development.

THE THREAT OF THE WTO

An emerging convergence between the World Bank and the WTO is likely to end these fledgling attempts to define the development paradigm through a social lens. The convergence of the world’s premier development institution with the WTO could spell the death of development, though not the end of poverty. There are three major reasons for this. First, some of the current trade agreements fundamentally misdiagnose development problems and therefore impose heavy burdens on development countries. Second, the enforcement mechanism at the WTO can reinforce liberalization in a way that the World Bank has never been able. Furthermore, the enforcement mechanism presents a real threat to democratic due process in developing countries and can limit the development options of very small and poor countries. Third, trade agreements place a burden of adjustment on those countries not able to represent their own interests when the agreements were formulated. The properties of convergence between the WTO and the World Bank indicate that the World Bank is already making a choice – whether deliberate or otherwise - to reinforce a singular approach to growth. It is also relegating itself to a secondary position in the global public policy arena as an institution that no longer makes decisions but can only address the consequences of decisions taken elsewhere.

Before deliberating upon the above arguments we first have to take look at the current relationship between the World Bank and the WTO. Then we can return to the consequences of choices that appear to have already been made.

1. The Current Relationship Between the World Bank and the WTO.

In the 1980's the World Bank and GATT negotiators began introducing themselves to one another through informal contact and information exchange. The World Bank invited trade experts to explain the General Agreement on Tariffs and Trade (GATT) to World Bank staff through seminars. Shortly thereafter, World Bank staff and administrators at the WTO began to collaborate on professional programs. This is a relationship that continues today and is facilitated within the World Bank by the Trade Group; the World Bank Institute, formerly known as the Economic Development Institute (EDI); and the Private Sector Development Group. The smallest of these groups, the Trade Group, consists of eight professionals that analyze opportunities for the World Bank to work together with the WTO. Staff exchanges between these eight professionals and the WTO are common. The World Bank also has permanent staff in Geneva to work on trade related issues. Most recently, they have made, what they call a "Coherence Agreement", the substance of which has yet to be determined. At the WTO Ministerial Meeting, scheduled to be held in November in Seattle Washington, U.S.A., the World Bank, the IMF and the WTO are expected to issue a Joint Declaration that recognizes the convergence of the policy agendas of these three institutions.

The relationship between the World Bank and the WTO is characterized by World Bank staff as one of the best partnerships in which the World Bank is engaged. There are four main mechanisms that the World Bank Group uses to involve itself in trade: education for developing country governments, implementation of the integrated framework; interpretation of trade rules at the project level; and through the International Center for Settlement of Investment Disputes (ICSID).

2. Education for Developing Country Governments.

In documents prepared for its Board, the World Bank recognizes that the WTO has done very little to build developing country ownership of the new trade regimes. There is also subtle evidence that the World Bank recognizes that some trade rules are not necessarily beneficial to developing countries. In a paper prepared for the World Bank’s Committee of the Whole, the World Bank notes that trade reforms require approaches that focus on the development needs of poorer countries if they are to have a development payoff (World Bank, Martin, 1999). The World Bank argues that the required approaches would differ considerably from those approaches now embraced by the WTO that simply duplicate practices in industrial countries. The World Bank also acknowledges that the WTO and its signatories underestimate implementation problems faced by developing countries.

Developing countries have long recognized and noted both sets of issues. Many have called for the renegotiation and/or review of existing agreements. Furthermore, Malaysia, India, Egypt and many African countries are opposed to any new issues in a so-called Millenium Round. The World Bank’s response to the inconsistent approaches and implementation problems has not been to support calls coming from some of its major borrowers for renegotiation. As the premier global development institution, the World Bank could support its major borrowers call for renegotiation. However, the World Bank is silent on this issue. What it has done is help its borrowers prepare for the upcoming round.

As part of its educative efforts, the World Bank provides a number of services to developing country governments. For example, the EDI organizes educational workshops on economics for diplomats engaged in WTO negotiations. EDI and the WTO also run a joint web site through the Trade and Development Institute (TDI) that is predominantly meant to educate developing country governments. In preparation for the WTO ministerial meeting in Seattle, the World Bank is helping to provide resources for educating developing country governments. Fifty percent of these resources are going towards the agriculture issue while the rest are distributed among a number of other pertinent issues. As a part of the efforts, the World Bank will be sponsoring programs for diplomats, coordinating regional workshops, commissioning 20 papers and writing a handbook for negotiators.

The above educative efforts are undoubtedly useful to developing countries. The World Bank seminars appear to be well attended, and the World Bank cites the popularity of its last handbook on the Uruguay Round. Materials that are in the public domain, however, are virtually all very one-sided. The web site, for example, is a virtual advertisement for trade liberalization. Frequently Asked Questions a section of the web site, never once addresses risks or costs associated with implementation for developing countries. The web site characterizes benefits of free trade as benefits and risks of free trade as ‘challenges.’ Out of 17 questions only four actually hint that trade agreements might be difficult for developing countries to implement. The authors of the web-site offer more structural adjustment as the ‘solution’ to most ‘challenges.’ Within the seminars, the opinions expressed are slightly more diverse. Risks are more clearly identified, though the supremacy of liberalization continues to prevail in the overall tone. Furthermore, World Bank officials speak only on their own behalf in these seminars and not on behalf of the institution. While official World Bank documents may lay out the risks associated with accession to the WTO, these documents are not publicly accessible.

3. The Integrated Framework

One of the most important elements of the World Bank’s involvement in trade is the Integrated Framework. The ‘Integrated Framework’ augments the capacity of developing countries to use trade as a vehicle for development. The Integrated Framework was initiated by the 1996 WTO Ministerial Declaration for a Plan of Action and launched in 1997 in Geneva. It has two official objectives: to enable least developed countries to use trade as an effective vehicle for development and to effectively advance their interests through the WTO. Staff at the World Bank describe the Integrated Framework in the following ways: a tool through which developing countries can increase their capacity to make trade rules useful; a mechanism through which the World Bank can help the WTO generate a broader sense of local ownership over the new trade rules within developing countries. The Integrated Framework operates as a joint program between the World Bank, the WTO, the International Monetary Fund, UNDP, and the United Nations Committee on Trade and Development to provide an integrated framework of trade related assistance. This could also be understood to mean providing assistance in an efficient manner, i.e. one that avoids duplication. Currently, there are two countries that have used the integrated framework - Uganda and Tanzania; Bangladesh is the next planned country. Ethiopia, Malawi, Mali, The Gambia, Haiti and Guinea are all expected to present to donor countries trade-related assistance strategies in FY1999-2000 during Consultative Group meetings. Forty developing countries have undertaken trade related needs assessments, the first step in joining the Integrated Framework.

In Tanzania, the most recent Country Assistance Strategy (CAS) and policy based lending programs (which include structural adjustment loans, sectoral investment loans and sectoral adjustment loans) already take into account the multilateral trade regime and its rules. Uganda has also embarked on a process of incorporating trade reform as part of its development path. Bangladesh is using the Integrated Framework to establish various trade reform issues and for inclusion in its next CAS. The World Bank would like to go further in integrating trade into the Country Assistance Strategies (CAS), but this integration requires trade-specific diagnostic tools that have yet to be developed (World Bank, Martin, 1999).

4. Trade Rules as a Development Project

While the Integrated Framework provides the background for integrating trade into development, the implementation of trade rules is actually done at the project level. It is here at the operational level that trade can break out of the poverty alleviation framework. Policy-based lending rarely mentions trade rules or trade reform as a goal. However, loans often are predicated on the same objectives as those underscored by trade rules. According to the World Bank’s own accounting, between 1981 and 1994 it made 238 loans that supported liberalization of trade or foreign exchange policy to 75 different countries. Since 1995, fifty-four additional IBRD and IDA adjustment operations (65% of all adjustment operations) have supported exchange rate and trade policy reform.

Ecuador provides an example of how this process actually works. Ecuador joined the WTO in 1996 and in the process of accession agreed to reduce or eliminate a number of trade barriers. The World Bank, immediately upon Ecuador’s accession, began to negotiate and create conditions for a $21 million trade investment. The International Trade and Integration Project is expected to improve the business environment for integration with the global economy, diversify exports, support small and medium enterprises with nontraditional exports, modernize the State’s institutional framework for international trade management and increase international market access.

The process of creating the project, the conditions that had to be put into place before the project was approved, and the partners involved are illustrative of the World Bank/WTO convergence. The first illustrative point on the process is that the World Bank initiated it. They made the first phone call, but to a receptive government according to Jim Hanna, the Task Manager. The World Bank may have been motivated to make the phone call by its partners in the project, namely the private sector operating within Ecuador. The private sector exporters in Ecuador have matched the Bank’s investment with $21 million bringing the total project budget to $42.6. The private sector’s interest in the project is clear. The project is oriented toward cutting through an enormous amount of red tape, streamlining the process to which exporters must adhere and eliminating indirect taxes placed upon exporters, reducing trade barriers, eliminating technical barriers to trade, and providing a framework for adherence to voluntary international quality standards like ISO 9000 and ISO 14000.

Through the process of negotiating the loan the Ecuador government had to adopt a number of new laws and as a condition must in the future rewrite regulations. The loan itself was conditioned upon the passage of a new Foreign Trade and Investment Law. Key provisions in this law are:

• The creation of a Foreign Trade and Investment Council that formulates and implements trade policies and regulations on a whole host of issues. The Council is made up of ministers and the Presidents of the federations of chambers of exporters, industry, agriculture and commerce. Labor and consumer groups do not have a seat at this table.
• Consolidation of public authority within one institution for trade policy-making and execution.
• Decentralization of support services for businesses and privatization for profit making activities.

Major components of the required regulatory reform are:

• Reducing second generation trade barriers by adopting the Code of Good Practices for Preparation, Adoption and Application of Standards of the WTO Agreement on Technical Barriers to Trade, and de-monopolizing product testing and certification services of public agencies.
• Preparation of legislation to establish a National Quality Council which would ultimately result in a national product quality management system and an internationally recognized accreditation system. Furthermore, the project seeks the privatization of commercial services now provided by an existing national standards body (the Ecuador National Institute of Standards).
• Eliminate indirect taxes and reduce administrative costs within the customs processes that now result in an anti-export bias.
• Establish WTO consistent procedures to address domestic consumer interest in safeguards, antidumping and countervailing duty mechanisms.

Most of these regulatory amendments were not made prior to project approval but are expected to be a part of project implementation. The WTO also had a role to play in project preparation. Some of the same technical people involved in accession were involved in the project in order to help determine the above regulatory reforms.

Lastly, on the process of creating this project, the World Bank appears to have gone to an extensive effort to practice participation. The effort included focus groups with as many as 53 firms, study tours all over the country, a survey of 150 firms to determine technical barriers to trade, four workshops and mechanisms to introduce new opportunities for the private sector in such areas as eco-labeling. The scope of participation in this project is breathtaking. It appears that the World Bank spared no expense in soliciting the opinions of key stakeholders. In comparison to other World Bank projects monitored by NGOs, a participation effort such as that described above has rarely been seen.

This project demonstrates how policy agendas can converge between the World Bank and the WTO. The World Bank’s role as a facilitator for the implementation of WTO trade rules is clear. The ultimate impact on Ecuador is too early to determine. However, what we do know is that large segments of the law in Ecuador have or will change in order to create a friendlier export driven environment for business. These laws were formulated without input from labor representatives. Labor is likely to be one of the first constituents impacted by the privatization components of the project and by the national foreign export board. Similarly, consumers groups were not represented in the participatory process that accompanied various project components. Consumer groups have a great interest in quality standards for exports and imports, yet were not brought into the process. The codification of what are essentially voluntary standards to replace national compulsory quality standards calls into question the purpose of the standards. Lastly, the lack of a national regulatory structure is disturbing.

As noted above, this project is one example of a converging policy agenda at the World Bank and the WTO. The combination of projects suited to integration and private sector needs, pro-trade policy advice on the TDI web site, the establishment of the integrated framework and its influence on the CAS demonstrate a strong and mutually beneficial relationship.

5. Involvement of International Center for Settlement of Investment Disputes

By providing some of the initial detail for the Multilateral Agreement on Investments (MAI) and the baseline model for dispute mechanisms between governments and investors, the World World Bank's International Center for Settlement of Investment Disputes (ICSID) is a point of additional convergence between the WTO and World Bank. The MAI essentially is meant to provide the private sector a set of guaranteed rights regarding investment and a standardize means of seeking recourse against host governments in investment disputes. As the only dispute mechanism of its kind, ICSID serves as a model for the MAI. While ICSID was only an "observer", as opposed to a "negotiator" of the MAI, much of the MAI's arbitration procedures are being founded on guiding principles and precedents of the ICSID. Thus, while not holding any official negotiating status during the MAI establishment, ICSID is nevertheless influential in its input to the dispute settlement piece of the Agreement. ICSID was also proposed as the main vehicle for MAI disputes. Although the MAI was negotiated under the auspices of OECD last year, the strong opposition voiced by civil society has halted these negotiations. The European Union’s current plan is for the WTO ministerial to become the new host for these negotiations. If it is successful in resurrecting this agenda, the WTO and the World Bank together will have great influence over the nature and role of private sector investments (Chamberlain, 1998).

CONSEQUENCES OF CONVERGENCE

As noted earlier in this paper, there are three major problems stemming from the convergence of the WTO and the World Bank. First, some of the current trade agreements fundamentally misdiagnose development problems. Second, the enforcement mechanism at the WTO can reinforce liberalization in a way that the World Bank has never been able to do. Furthermore, the enforcement mechanism presents a real threat to democratic due process in developing countries and can limit the development options of very small and poor countries. Third, trade agreements place a burden of adjustment on those countries not able to represent their own interests when the agreements were formulated. The World Bank seems to have chosen to help mitigate the impacts of the trade regime on its borrowers instead of reshaping the rules of negotiation and defending the right to develop. If this choice bears out with time, the consequences for developing countries, development and the World Bank will be profound.

1. Misdiagnosed Development Issues

According to research undertaken by the World Bank some of the current trade rules fundamentally misdiagnose development problems and impose expensive implementation burdens on developing countries that far exceed the necessary changes in industrialized nations. Stiglitz in a speech on trade has noted that the agricultural, customs and intellectual property rights agreements create more problems than they solve (Stiglitz, 1999 p.34). There is an enormous amount of material available on the impacts in developing countries of the agricultural and intellectual property rights agreements. The Customs Valuation Agreement is not in the limelight. But it is in the details of this and other rather innocuous agreements that one can also find threats to development.

The Customs Valuation Agreement directs the way in which value of a good can be determined for purposes of levying tariffs. The agreement is meant to assure that customs value would be based on the actual value of the good. There are two improvements it is meant to make; one, increased predictability for traders and two, control over the use of inflated customs values to restrict imports. The mechanisms chosen to resolve these problems are predicated on systems where the work is done before the goods arrive at the border (i.e. a trader can send a computerized invoice ahead of time, get clearance, and then wire the necessary funds or post a bond), where electronic tracking systems are in place, where there are built in incentives for self-compliance, where duties are generally low and where spot checks of a small percentage of the border traffic are the norm. These conditions only exist in industrialized nations. Problems experienced by developing countries are far broader than those addressed by the customs agreement. Basic things like computers to help countries develop systems to track what is coming in and out of their countries, training for border officials, addressing corruption at the border, appeals mechanisms, etc. are not yet in place in many countries.

Customs valuation is on