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1. Trade liberalization has been a key element of Fund-supported programs over the past twenty years.1 This stems from the purposes of the Fund and the importance of open trade regimes for sustainable growth, durable macroeconomic stabilization, and balance of payments viability. The Fund is mandated to facilitate the expansion and balanced growth of international trade and, by making its resources temporarily available, to give members the confidence to correct their balance of payments problems through appropriate macroeconomic and structural measures rather than resort to the kind of exchange and trade restrictions that plagued the inter-war period.2 2. This paper provides background to the review of structural conditionality. It examines the role of trade policy in Fund-supported programs and the extent, focus, and effectiveness of conditionality in this area of structural reform.3 The role of trade policy conditions was selected as a specific example because: (i) it represents a discrete policy area where there is substantial agreement on what constitutes "best practices" and where there is a significant time series of policy actions to review; and (ii) trade policy is an example of a policy area of common interest and shared responsibility between the Fund and other institutions, especially the World Bank and the World Trade Organization (WTO). The paper seeks to clarify the respective roles of these institutions in trade policy (Box 1) and also discusses how the Fund collaborates with these institutions in the context of the use of Fund resources. 3. The paper is organized as follows. To provide background for the review of trade policy conditionality, Section II discusses the role of trade policy in Fund-supported programs and the progress countries have made toward open trade regimes. Section III examines the extent and focus of trade policy conditionality. Section IV discusses monitoring and its effectiveness and how the Fund has collaborated with the World Bank and the WTO in this area. Section V summarizes the main findings.
II. The Role of Trade Policy in Fund-Supported Programs 4. The overall objectives of Fund-supported programs are to achieve macroeconomic stability and a viable external position with a high degree of resource use. As is well known, trade liberalization plays a key role in achieving these objectives.4 5 More generally, trade liberalization both depends upon and contributes to a credible and consistent macroeconomic policy framework. Macroeconomic stability, an appropriate level of the real exchange rate, and efforts to strengthen the domestic tax system (e.g., diversifying the tax base through domestic tax reform, including introducing broad-based domestic consumption taxes) are essential to sustain market-opening measures.6 In turn, well-designed trade reform geared toward the medium-term objectives of moving to a trade regime characterized by the absence of quantitative restrictions and low, relatively uniform tariffs enhances the effectiveness of exchange rate policy and supports fiscal and external sustainability. 5. Trade liberalization has a particularly important role to play in attaining program objectives in countries facing protracted balance of payments problems of a structural nature.7 Fund facilities designed to address such problems--the Extended Fund Facility (EFF) and the Poverty Reduction and Growth Facility (PRGF)--emphasize structural reform, including the liberalization of restrictive trade and exchange regimes and complementary structural measures, to help alleviate external and domestic constraints on growth and achieve a viable external position. 6. As regards the sequencing of trade liberalization, in the first stage of liberalization, replacing distortionary quantitative restrictions with price-based measures permits the transmission of changes in international prices and exchange rates to the domestic economy; this also strengthens revenue performance by shifting rents from producers and importers to the budget. The next stage, involving the simplification of the tariff structure, the elimination of exemptions, and the reduction of the highest tariffs, is also normally revenue enhancing. Early action to develop and strengthen the domestic tax system is required to support the final stage of moving to low, relatively uniform tariffs, which improves the overall efficiency and competitiveness of the economy and reduces the dependence of the budget on trade taxes. 7. During the past two decades, most countries have made considerable progress toward more open trade regimes. Industrial countries have mainly liberalized in accordance with multilateral and regional commitments. Other countries, while also influenced by multilateral and regional initiatives, have more often liberalized unilaterally. Unilateral liberalization represented a major shift in the attitudes of developing and transition countries away from inward-looking policies of import substitution that earlier characterized their policymaking. The depth of unilateral trade reform has generally been proportional to the initial degree of restrictiveness, with the transition being most evident in Latin America and Central and Eastern Europe, followed by East Asia (Figures 1 and 2). Progress in the same direction, albeit to a lesser extent, has been made in the Middle East, sub-Saharan Africa, and South Asia. 8. Many of the trade reforms have been undertaken in the context of Fund-supported programs.8 The 1997 review of trade policy content of Fund-supported programs found that nearly three-quarters of the countries covered had restrictive trade regimes at the outset of their programs.9 Two-thirds of these countries targeted quantifiable reductions in trade restrictiveness and, for the most part, these objectives were achieved. Since that review, trade reform in these countries has continued, often in the context of subsequent Fund-supported programs, with almost three-quarters of them further reducing their trade restrictiveness ratings. For the remainder there was no backtracking, so that at present only about 18 percent of these countries have restrictive trade regimes. This movement toward openness since the 1997 study is also reflected for all Fund members, although progress has varied and, as a group, PRGF-eligible countries continue to have more restrictive regimes than others (Table 1).
9. The trend toward openness, along with other factors such as decreases in transportation, communication, and computing costs, has contributed to the rapid expansion of trade and the further integration of countries into the global economy. Worldwide, the growth in export volumes outstripped real GDP growth during the last two decades, and especially during the 1990s when the growth in export volumes and real GDP of developing countries far exceeded that of the advanced countries (Table 2). Regions with the most open trade regimes (e.g., Asia and the Western Hemisphere) have registered the most impressive growth in trade volumes. Moreover, when adjustments are made to exclude countries experiencing conflict, trade performance in some other regions, such as sub-Saharan Africa, has been better than portrayed in Table 2.10 III. Extent and Focus of Trade Policy Conditions 10. This section examines the overall trends in structural conditions related to trade policy in Fund-supported programs during 1987-99 based on data from the database for monitoring Fund arrangements (MONA). Drawing upon a sample of 24 recent programs, it also tries to ascertain how trade policy conditions were related to the overall objectives of Fund-supported programs. Trends in Trade Policy Conditions 11. During the period reviewed in the study of structural conditionality in Fund-supported programs (1987-99), data from MONA indicate that the number of structural conditions related to trade policy was relatively stable but that the share of trade-related conditions in total structural conditions declined significantly.11 The number of trade-related conditions averaged somewhat less than one measure per program year, with a slight rise during the second half of the 1990s related mainly to increased use of benchmarks and prior actions (Figure 3). Regarding variations across types of countries, the use of structural conditions in trade policy has been most prevalent in programs of transition countries and PRGF-eligible countries.
Trade Policy Conditions and Program Objectives 12. The importance of trade policy measures for the attainment of overall program objectives was examined using the sample of 24 programs included in the area department survey undertaken as part of the structural conditionality study.12 The sample included 4 countries with restrictive trade regimes (measured on the basis of TRI) at the outset of their programs, 10 with moderately restrictive regimes, and 10 with open trade regimes. The sample is well balanced in terms of the types of countries and programs, providing a good basis to examine trade policy conditionality (Table 3). 13. The relationship between trade policy conditions and program objectives is examined based on the views of country teams; the restrictiveness of trade regimes at the outset of programs and hence, the potential contribution of trade liberalization to improved economic performance; whether conditionality was focused on the most restrictive aspects of countries' trade regimes; and the incidence of trade policy conditionality across types of programs. 14. Key trade reform measures were considered by country teams to be critical for the achievement of the broad program objectives in four cases: three where an initially restrictive regime was being liberalized (Côte d'Ivoire, Jordan, and Mauritania) and one where an existing, recently liberalized regime needed to be sustained (Moldova). In eight other cases, trade reform was regarded as important for the attainment of program objectives--without such reform the attainment of program objectives would have been difficult but not impossible. For the remaining programs, the trade reform measures included in the program were not expected to affect significantly the broad program objectives (Table 4).
15. The rankings based on the survey were broadly in line with the initial restrictiveness of countries' trade regimes, suggesting that there was a link between the perceived need for trade reform and trade policy conditionality. The data show that 9 of the 24 programs examined did not include any trade policy conditionality. Five of these were programs of countries with open trade regimes. The other four were capital account crisis cases with moderately restrictive trade regimes. Other countries with open trade regimes had one or two trade-related structural conditions, except for Moldova, which had 13 structural conditions related mainly to tariff measures, including seven prior actions to reverse tariff increases. This anomaly can be explained by the volatility in Moldova's tariff regime and the importance of maintaining an open trade regime for the success of the program. The seven other cases that contained more than 2 structural conditions were programs of countries that had restrictive or moderately restrictive trade regimes. Two of these cases were Jordan and Mauritania, where country teams considered key trade reforms critical for the attainment of program objectives; in the other cases the reforms were considered important. 16. The use of structural conditions was fairly evenly divided between tariff and NTBs and focused on the most restrictive aspects of countries' trade regimes. In the cases of Côte d'Ivoire, Jordan, and Tanzania, which had relatively high tariffs, conditionality focused on tariff reform. In Côte d'Ivoire, Mauritania, and Yemen, emphasis was placed on reducing extensive NTBs. In these cases and in general, tariff reforms tended to be broad based, aiming to reduce the level and dispersion of the tariff system and broaden its base by eliminating exemptions. In contrast, measures related to NTBs tended to be sector-specific. Removal of sector-specific NTBs was important because the sectors concerned represented a large part of the economy, its exports or its imports (e.g., coffee marketing in Côte d'Ivoire and fishing in Mauritania); the sector was an important determinant in the performance of other sectors (imports of refined petroleum in Cameroon and Côte d'Ivoire); or because the NTB raised important governance issues which had significant macroeconomic consequences (such as the abolishment of certain external trade monopolies in Yemen). The predominance of sector-specific NTBs also reflected the fact that most of the countries included in the sample had already dismantled broad-based licensing requirements and other discriminatory NTBs. Notably, nearly half of the NTB measures related to the reduction of barriers to exports. 17. The incidence of trade policy conditions varied by types of programs, reflecting the different orientations of Fund arrangements (Table 5). In total, the sample averaged one trade-related structural condition per program year. Programs of transition economies had the highest number of such conditions (1.6), followed by those of PRGF-eligible countries (1.1), and those of other countries (0.6). Extended arrangements had the largest number of structural conditions per program reflecting the relatively large number of conditions in the programs of Bulgaria, Jordan, Moldova, and Ukraine. PRGF arrangements had about half as many trade-related structural conditions per program as extended arrangements, with relatively high concentrations in the programs of Mauritania and Yemen. In contrast, among the eight stand-by arrangements there were three structural conditions related to trade policy—all benchmarks.
18. Overall the use of structural conditions related to trade policy was moderate and did not contribute materially to the large expansion of structural conditions during the 1990s. The available evidence also suggests that structural conditions were mainly applied in cases where trade reform was likely to contribute significantly to the overall objectives of the program. As expected, there were only a few cases--primarily involving countries with restrictive trade regimes--where trade policy reform was considered critical to the success of the program. IV. Monitoring and Implementation 19. This section examines the conditions applied to trade measures, specifically, the type of conditions, how they were applied (e.g., level of detail), and their relationship to implementation. It also discusses collaboration with the World Bank and WTO in the design and monitoring of trade policy reforms. Conditions Applied to Trade Measures 20. Performance criteria were used sparingly for trade measures, constituting only 3.2 percent of total trade measures in the sample of 24 countries. Given the nature of trade policy reforms, much greater use was made of structural benchmarks and prior actions. As the structural conditionality study observed in a more general context, more than half of the trade measures mentioned in letters of intent and policy matrices were not covered explicitly by structural conditions, although many of these measures were monitored in the context of reviews. 21. A similar pattern in the use of the instruments of conditionality was evident in the 1994 and 1997 reviews of trade reform in Fund-supported programs.13 However, those reviews, which covered countries with predominantly restrictive trade regimes, found greater use was made of performance criteria. They also reported a substantial number of policy intentions related to trade reform that were not covered by structural conditions, as also noted in the present study. 22. In the 24-country sample, a total of six performance criteria applied to trade measures. Four of these were applied to measures whose implementation had been delayed, reversed, or contained in an earlier program. Performance criteria applied to a variety of trade policy measures, both across-the-board and sector-specific. An example of an economy-wide measure was the implementation of the WAEMU common external tariff adopted by Côte d'Ivoire. Implementation of this measure, which involved the harmonization of customs tariffs and indirect taxation, was considered important from both trade and fiscal perspectives. It was also important from a regional perspective, given Côte d'Ivoire's prominence in WAEMU. In the case of Mali, a performance criterion pertained to the reduction of tariffs on rice imports, which affected an important sector with macroeconomic implications. Performance criteria were also applied to measures which were expected to enhance transparency and build confidence, such as the publication of a list of remaining import bans in Yemen (a measure not initially subject to a structural condition but which had been delayed) and a reduction in the number of products subject to mixed duties (which tend to be more protectionist) in Ukraine.14 Indonesia's EFF-supported program included a performance criterion on the first step of a phased reduction in export taxes on logs, which carried over from the earlier stand-by arrangement. While there may have been good reasons for using performance criteria in each of these situations, the importance of the specific measures for the broad objectives of the program, as judged by country teams, ranged from critical to useful. 23. Trade policy was more commonly monitored using structural benchmarks and prior actions. Structural benchmarks were often used if individual trade measures were building blocks for a more comprehensive trade policy reform which was important for the program objectives. Prior actions were typically used for more substantive measures, such as the adoption of legislation, the first step in a major reform of tariffs or NTBs, or to deal with important policy reversals or measures that had not been implemented on schedule. 24. To some extent, the degree of detail in trade policy conditions was related to the type of trade reforms undertaken. In many cases, the trade policy reforms consisted of phased reductions in tariffs and/or NTBs monitored in a series of steps. Generally, programs of countries with more complex tariff regimes or with relatively high tariff rates included more steps monitored by structural conditions, usually structural benchmarks, although practices varied. In the case of Albania, which had an import tariff regime with a few bands and an average tariff rate of about 16 percent, the program included one structural benchmark for a three-year phased tariff reform involving successive reductions in the maximum tariff rate, which eliminated the top band. In contrast, in the case of Bulgaria, which had an import tariff regime with over 60 bands and an average tariff rate of nearly 20 percent, the program included four structural benchmarks related to a three-year tariff reform involving the phased reduction in tariff rates and the number of tariff bands. And in the case of Jordan, which had an average tariff rate above 25 percent, the program incorporated seven structural conditions related to tariff reform (one prior action and six structural benchmarks), including phased reductions in the maximum tariff rate and the number of tariff bands. 25. Phased trade reforms were also implemented in the programs of Indonesia and Korea, but these were monitored mainly using policy matrices. In Indonesia's program, 10 out of 19 measures related to the elimination of export restrictions (such as bans and taxes). Five of these measures pertained to the phased reduction of export taxes on logs, sawn timber, rattan, and minerals and their replacement with resource based taxes as appropriate. As noted above, a performance criterion applied to the first step of this reform, but structural conditions did not apply to the subsequent steps. The other measures included phased replacement of export bans with export taxes, which were to be phased out subsequently. In Korea's Fund-supported program, five out of nine trade measures involved phased reductions in the coverage (by number of items) of the so-called import diversification program, which banned the import of specific goods from Japan. 26. In some other cases (e.g., Moldova and Ukraine), extensive monitoring was partly related to frequent intervention in the trade regime, for example, the granting of exemptions to import tariffs, the introduction of bans or taxes on imports or exports of specific products; or resort to import surcharges. 27. Implementation rates for trade policy measures subject to structural conditions were generally very good (Table 6).15 16 Implementation rates of measures covered by performance criteria and prior actions were quite high, with 85-100 percent of such measures fully or partially implemented. Over 80 percent of structural benchmarks were also fully or partially implemented. In contrast, around half of the measures which were not subject to structural conditions were fully or partially implemented. While the implementation rate of trade measures was generally good, some of the programs with the largest number of structural conditions related to trade measures had below average implementation rates (Jordan and Ukraine). Moreover, as mentioned above, in some cases, the number or strength of structural conditions tended to increase when the implementation of measures was delayed. Collaboration with the World Bank and the WTO 28. As noted above, the Fund, the Bank, and the WTO share common interests and complementary objectives in the area of trade. All three institutions share a common interest in trade liberalization; however, the Fund and the Bank are not party to the establishment of the rules-based trading system and do not have a mandate to enforce it. The use of Fund conditionality to liberalize trade supports the objectives of the WTO because the two organizations share the same view of liberalization being in the interest not only of the member concerned, but of all members. The staffs of the three organizations cooperate closely to ensure coherence in global economic policymaking and that Fund-Bank policy advice to a country is not contrary to its WTO obligations. In this regard, PDR (along with GEN) works closely with area departments to ensure that measures recommended by Fund staff do not contradict members' obligations under WTO Agreements. In all areas of cooperation, the three institutions are mindful of the need to avoid cross-conditionality.
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