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Incoherence is rational, when trade-off costs outweigh benefits

Geneva, 21 Oct (Chakravarthi Raghavan) - The World Trade Organization and its General Council will stage Friday an exercise about ‘coherence’ - “Coherence in Global Economic Policy-Making and Cooperation between the WTO, the IMF and the World Bank” - with the heads of the IMF and the World Bank appearing (along with the head of the WTO) to talk about coherence and what their respective institutions are doing.

After the meeting and their presentations at the WTO, Bank President, Mr. James Wolfensohn and the IMF Managing Director, Mr. Rodrigo de Rato, are due to visit the headquarters of the World Council of Churches (to present their views) to the churches who have become concerned and, in the US and elsewhere have been doing advocacy work, challenging the Bank and Fund policies - an encounter of the Market and Christian theologies!

Coherence, “as an abstract term is rhetorical”; and in so far as policy-making (national and global) is about trade-offs (weighing the costs and benefits before deciding on a particular policy measure), “coherence is non-operational”, declared Mr. Alan Winters, Professor of Economics in the School of Social Sciences at the University of Sussex (in the UK), in a paper presented in November 2001 at the Murphy Institute Conference on the Political Economy of Policy Reform.

Mr.Winters, has said in his paper that, when he was on the staff of the World Bank, he had been tasked with negotiating and implementing the coherence agreement with the staff of the WTO and the IMF, and that in these discussions he and his friends at the IMF and the WTO were “wondering what coherence was all about.”

Says Winters, in the opening para of his paper: “Hardly a month goes by without some eminent person or group calling for greater coherence in international policy making. ‘Coherence’ with the Bretton Woods Institutions (the IMF and the World Bank) is one of five specified functions of the WTO (Art.III.5 of the Marrakesh treaty). And yet none of these calls, still less the WTO Charter, is accompanied by a definition of coherence or proposals for implementing it..... while it is perfectly easy to define ‘coherence’, merely urging international organizations to be coherent in the abstract is not useful.  Policy-making is about trade-offs, and except in terms of some particular trade-off, coherence is non-operational: it begs the critical question of what point to cohere about i.e. where is ‘here’ in coherence. In practice, the only role for ‘coherence’ as an abstract term is rhetorical - as a means of signaling concern and persuading partners to pursue some course of action. I think we should be better off without it.”

In the paper, which can be accessed from the Tulane University website relating to that conference, Winters has said that to international policy economists, coherence is like “motherhood and apple pie” which is impossible to oppose, but that in the face of the costs and benefits of alternative actions one could take, “it becomes perfectly rational (in economics) to behave in apparently ‘irrational’ ways.”

Winters, no heterodox but liberal economist, promoting the ‘welfare’ benefits of trade and investment liberalisation, and the binding of tariffs at low levels, has discussed the concept of coherence, its origins and early history - in the Uruguay Round mandate ‘Functioning of the GATT System or FOGS’; he is only partially correct though in the motivations behind the undefined and residuary item’s inclusion in the Punta del Este mandate, and its subsequent use while concluding the Round to create the WTO.

Defining coherence loosely, as a situation in which different policies are all pulling in the same direction, or at least not pulling in different directions, and ‘incoherence’ as when policies are not pulling as hard as they could in the positive direction, Winters says international organizations cannot impose goals or policies on each other. Doing so requires political involvement and until there is broad political consensus, any attempt to do so is likely to misfire...  Coherence big time is not a job for international organizations. It is a high-level political task which will not be solved until there is high level political leadership.

“But it is the cost that will have to be paid to achieve general coherence, and until governments are willing to start seriously along this route, I think it would be better if they said less about coherence as a principle at institutional level. If coherence is no more than noise, it distracts organizations from their core tasks, which are still very important ... At present calls for coherence seem merely to be evidence that the caller has different objectives from the called, and should be treated as such.”

Understandably, given his past moorings, Winters does not point to the fact that in international institutional dialogues, calling for coherence by one on the other has become an alibi for explaining away the failures of policies advocated by one or the other (and in this case all three reflecting the views of the two or three majors). This is more so, when the IMF and the World Bank can’t prevail through conditionalities or surveillance over the industrial world, but can only exercise it over developing countries, particularly those seeking loans from them. And the WTO has discovered that even the two majors jointly can’t prevail over all the other members, or even the major developing economies in the Group of 20.

In this situation, perhaps the only thing, the WTO members, especially its developing country members, can demand is that the secretariats of the three organizations ensure coherence in their own internal workings and reports and policy advices, and that the heads of the institutions carry out these administrative tasks, each within their own secretariats, more efficiently.

For the General Council discussions, the WTO secretariat, in consultations with the staff of the IMF and the World Bank, has prepared and circulated a note on ‘coherence’.

The document, dated 12 October, refers to the General Council decision of 1 August 2004 on the Doha Work Programme about increasing the contribution that the WTO could make to achieving greater coherence in global economic policy making and the shared objectives of growth, development, poverty reduction.

The paper says it has been prepared jointly by WTO, IMF and World Bank staff for the General Council meeting on coherence. The paper has a box, citing the World Bank reports and estimates that the dynamic effects of “pro-poor” tariff reduction - of industrialized countries reducing their tariff averages and tariff peaks respectively to 5 and 10 percent in agriculture (along with decoupling of agricultural subsidies and ending export subsidies), and 1 and 5 percent in manufactures, and corresponding tariff reductions by middle-income developing countries to 10 and 15 percent in agriculture, and 5 and 10 percent in manufactures - would produce an additional income for developing countries of nearly $350 billion and would leave 8% fewer people, or 61 million, living below the extreme poverty average of $1 per day.”

These estimates and data are the outcome of an ad hoc mixture of dynamic partial equilibrium modelling exercises, and more general exercises - based on the Global Trade Analysis Project (GTAP) data and models. The GTAP itself is sponsored and funded by several of the international organizations, including the World Bank, the WTO and UNCTAD among others.

The GTAP models, and estimations based on it, figured at the WTO earlier this month, in the controversies and debates at the Council on Trade in Goods (CTG), over the phaseout of the 40-year old textiles and clothing discriminatory quota regime (and covered by the WTO Agreement on Textiles and Clothing for a final phase-out of quotas and full integration of this trade into the normal GATT/WTO rules), and where a WTO staff discussion study and its estimates were cited.

In that CTG meeting, the World Bank’s Senior Adviser in its International Trade Department, Mr. Carlos A. Primo Braga (who himself is involved in GTAP and uses its modelling in papers), had this to say:

“One should.... keep in mind that both general-equilibrium analyses (as the ones relying on the GTAP model) and partial-equilibrium estimates tend to overplay the role of relative prices in explaining the adjustment in the textiles and clothing industry.... In short, one should take these estimates with a pinch of salt.”

Mr. Braga tried to limit his criticism of the GTAP partial equilibrium model estimations to that in the WTO study on textiles and clothing trade. However other economists, orthodox and heterodox, in academia and international organizations in fact point out in their own analyses and writings, in cautionary words and caveats, on the limitations of partial equilibrium modelling exercises, where one variable is changed to study the outcome; these studies says that at best these estimates can give some possible trends on the basis of the hypothesis, but do not take account of secondary feed-back effects that can be obtained in a general equilibrium model exercise, that however is not too useful to promote institutional policy advices.

The WTO and its predecessor the GATT 1948, during the Uruguay Round and the runup to Marrakesh and later in the reports and presentations (at the 2nd Ministerial Conference in Geneva) for the 50th anniversary celebrations of the founding of the GATT, presented the view that liberalization would produce growth and lead to poverty reduction.

However a large number of country-studies have shown this has not happenned and in fact things might have gotten worse. Civil society groups have been focussing on this, and demanding change in institutional policies and advice.

Perhaps to explain away these outcomes, more recently, in this year’s World Trade Report, the WTO secretariat says, that to benefit from the liberalisation, and for poverty reduction and reducing inequality, countries have to take domestic measures of their own to benefit from trade liberalisation. This claim ignores the fact that trade liberalisation is part of a broader package of neo-liberal reforms which, as for example reported in UNCTAD‘s Trade and Development Report 2003, have led to stagnant investment, deindustrialisation and slow growth in Latin America, the continent that has pursued the package with most enthusiasm.

In fact, the vast literature on trade openness and growth has not produced the decisive conclusions suggested by the WTO secretariat’s note. This was demonstrated in a paper by Steve Dowrick and Jane Golly, ‘Development: Trade Openness benefits rich nations, more than the poor’ (SUNS #5642).

And, in a chapter (‘Trade Liberalisation, FDI and income inequality), in a recent book, “Understanding Globalization, Employment and Poverty Reduction” ed.Lee and Vivarelli (and published by McMillan Press), Prof Giovanni Andrea Cornia of the University of Florence has pointed to the trend of growing inequality, between countries and within countries, and the statistical weight of between-country inequality over within-country inequality, as showing that a 10% drop in former inequality would occur if poor nations grow faster than rich ones and thus global inequality would be reduced more rapidly. This is perhaps what leads many scholars to focus on how to accelerate the growth of poor nations, Cornia says.

On reducing within-country inequality, Cornia points out that between-country inequality is path dependent and not easily modified by the policy action of any single country, “save possibly, the USA, China and India.”

And in a study produced on the eve of Cancun, Brett Parris in a ‘World Vision’ report, “Risky development: Export Concentration, Foreign Investment and Policy Conditionality”, has noted that it is readily acknowledged that there are costs to trade restrictions, but that there are also costs and risks associated with “premature liberalisation and specialisation.” As a result, investors are advised to dversify and not put all eggs in one basket. The paper suggests that the same could also apply to trade specialisation - too great a concentration on the export sector, specialising and relying on too few products - and the appropriate trade and industrial policy, and carefully weighing long-term costs, benefits and risks of alternative strategies.

The World Vision report warned: “There are significant dangers then for developing countries in having their policy options foreclosed by IMF and World Bank loan conditionalities and by inappropriately restrictive WTO rules.”

Weighing the various options and controversies over trade and industrial policy, and the methodological disputes over the appropriate policy framework, the study by Brett Parris said:

“Formal mathematical models are crucial for economy analysis but the current formal models are not able to capture the pervasiveness of market failures caused by incomplete markets and externalities in developing countries. They are also unable to deal adequately with imperfect information, the richness between potential interactions between firms and governments and the dynamic interactions between growth, learning, innovation and poverty reduction.”

As the WTO and trade negotiators listen to the advice and words of wisdom of Wolfensohn and Rato, and Supachai, they might do well to mull over views of other academic and non-governmental studies and reports. – SUNS 5672

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