URUGUAY ROUND OUTCOME WILL REDUCE POVERTY

9:03 AM Jun 14, 1995

URUGUAY ROUND OUTCOME WILL REDUCE POVERTY
Geneva 12 June (Chakravarthi Raghavan) -- Absolute poverty in developing countries as a whole will decline by 1.4 percent as a result of the Uruguay Round of trade liberalization, the secretariat of UNCTAD has suggested in a report for the current meeting of its Standing Committee on Poverty Alleviation.

The estimation brought out in a secretariat press release, while qualified in the report as 'tentative' is explained on the assumption that China if it acceedes to the World Trade Organiyation and India are expected to increase substantially their share of world markets in clothing and other labour intensive export manufactures.

The report also suggests that the overall projections themselves have been drawn from some econometric modelling exercises of questionable value for such estimations.

This is acknowledged elsewhere in the report which says of the modelling exercises and their estimates "...the one-time effects of the Uruguay Round on growth in the developing countries are very small. In fact even the signs change for some countries, depending on the different assumptions made. Such findings suggest that quantified estimates of changes in poverty as a consequence of the Uruguay Round should be treated with extreme caution."

The two modelling exercises and their conclusions about the likely GDP growth and welfare benefits (but not related to the issue of poverty) were presented at a World Bank symposium in Washington early this year -- one by Harrison et al (on manufacturing and MFA liberalisation) and the other by Goldin and van der Mensbrugghe, "Uuguay Round: an Assessment of Economywide and Agricultural Reforms" using the RUNS model.

Any attempt by the UNCTAD secretariat to undertake any independent overall study of the gains and losses of the Uruguay Round, and taking not only the tariff and nontariff areas, but the entire outcome including those like TRIPs which are negative for the developing world have been discouraged and opposed by the industrialized countries.

Some recently available internal documentations of the executive wing of the European Union, the European Commission, shows that they have been coming down heavily against any attempt by UNCTAd to undertake any independent study since it may impact on their overall objectives of expanding the access to the developing country markets in goods, services and investments for their transnational companies.

The EC commission has been taking the position internally that UNCTAD should only look at the "positive" effects of the Round and how the developing countries could take advantage, and not make any attempt at exploring the gains and losses or 'winners and losers'. Even the Marrakesh decisions about negative effects on least developed countries and the net food importing countries, in this EC Commission view, is to be looked at narrowly.

Using the outcome of these modelling exercises, with their assumptions of welfare gains flowing out of the neoclassical theories of trade liberalisation producing efficiency whose benefits trickledown in terms of welfare and GDP gains, the UNCTAD report explains its estimation of the effects on reduction of poverty in these terms:

"The main reason that overall poverty is likely to be reduced is that China if it acceedes to the World Trade Organization, and India are expected to increase substantially their share of world markets in clothing and other labour-intensive export manufactures. Since around half of the world's absolute poor live in these two countries, any significant gains to them from the Uruguay Round are likely to swamp all other effects on poverty in other developing countries. However, if the removal of MFA quotas were to loead developed countries to erect new types of barriers, the gains for China and India on the MFA could be blunted and the net impact of the Uruguay Round on global poverty reduction could be small.."

At a recent brainstorming exercise organized by the UNCTAD secretariat, the calculations and projections based on such modelling exercises were itself challenged by several participants, one of whom an economist in an international secretariat noted that while economists knew the outcome of the efficiency gains arising from the operation of the market and free trade, they had no answers to the issues of distribution arising from them.

The International Textiles and Clothing Bureau, which has recently done some analysis of the outcome of the Uruguay Round in the textiles and clothing sector, and the integration plans outlined by the major importing developed countries, has underlined the even more modest likely outcomes.

And the modelling exercises and their projections do not take account of the considerable other variables operating on the economy including such elements as inflation, exchange rate variations, interest rates and the question whether at all the neoclassical and WTO liberalisation programmes are sustainable in developing countries if the import liberalisation (which underpins the neoclassical economic theories of welfare gains) cannot be paid by assured export earnings.

The report however notes that after all the results of the Uruguay Round work themselves out, they will bring about trade flows and patters that would be distinct from the old and that the net effectgs of the trade-flow shifts and increases are expected to be small for developing countries as a whole.

While the net changes should "on balance" be positive for both economic growth and poverty reduction in the developing countries taken as a whole, the secretariat says that in terms of regional distribution Asia and Latin America will be expected to gain while the Caribbean and especially sub-Saharan Africa will be worse off.

The countries to gain are those which have been most cosntrained in the past by trade barriers, and those exporting manufactures for which tariffs are coming down substantially. The countries that have the most to lose are those which have benefited from preferential market access e.g. GSP and Lome, and whose preference margins would now be substantially eroded. Food deficit countries will also be negatively affected by higherf world food prices.

The secretariat report to the poverty meeting, also says that the agricultural reforms will result in shifts in suppliers and that world prices in temperate agricultural products, but that the markets of most developed countries will remain protected by high tariff equivalents.

As a result food surplus countries such as Argentina will be limited to exporting foodstuffs to food-deficit developing countries but will not be elbowed out in these markets by the subsidized exports from the developed countries.

In Asia, Thailand in particular should benefit from export of rice to Japan, which has liberalised its food imports, the report says.

"The net impact on poverty between food producers and consumers is an empirical question of weighing the benefits of increased seasonal employment for landless labourers against the higher costs of food food-deficit households."

The report also says that shifts will also occur in tropical agricultural products, with Latin American countries such as Brazil and Colombia gaining market share from African countries such as Cote d'Ivoire, Kenya, Cameroon and Ghana in coffee and cocoa exports.

The trade shift towards Latin Anerican producers is expected to oc cur as a result of the erosion of ACP preferences.

"Because of less mechanised forms of production and the less concentrated structure of land ownership in Sub-Saharan Africa, the loss of market share to Latin American countries should result in a net increase in global poverty," UNCTAD says.

In assessing the effects on poverty by the trade gains or trade creation, the UNCTAD secretariat says it has assumed that the effects of the Round are transmitted through its effects on economic growth.

It has also used the poverty line as on a one dollar per capita per day (1985 purchasing power parity terms) and lograthmic regressions of per capita gdp and income inequality variables (gini-coefficients) on the share of the poor in the total population.

On this basis a one dollar increase in per capita incomes is estimated to cause a decline in proportion of absolute poor, in percentage points, by 25.6/GDP per capita. On this basis it arrives at the figure that once all the effects of the trade regime work themselves out, the number of the absolute poor will be reduced by 15.8 million people or 0.5 percent of the total population of the developing world or a 1.4 percent reduction in poverty.

But in sub-Saharan Africa, poverty could increase by about a quarter of a million people as a result of the Round.

The secretriat says: "Since the quantified estimates of the effects of the enw trade regime on growth in developing countries are very small, it is natural that the effects on poverty should also be modest."

The report also concludes that by intensifying the trend towards competitiveness in global markets, the Uruguay Round will generate both gains and losses across regions, nations and groups within countries.

International competition on price and quality is likely to benefit a substantial number of countries in Asia and Latin America.

But it will prove detrimental to low-income countries, particularly in Africa, that are less able to compete: those countries risk losing market share and becoming marginal suppliers. As a result poverty could mount".

The benefits of trade liberalization, the report also agrees, cannot be disassociated from cost of adjusting to the new patterns of production.

"There could be losses of jobs and consequent poverty increases in the short and medium term as a result of production losses due to a switch to imported consumer goods.

"Such losses are likely to be offset only in the longer term, following investment in the production of other goods in response to the reduce trade barriers of other countries. The inter-temporal implications of the Round could thus be that poverty will grow in many countries before it declines."