Finance & Development, December 2010, Volume 47, Number 4

Dear Editor: 

I wish to offer a comment on an article that appeared in the December 2010 issue of Finance & Development titled “Poorest Economies Can Export More,” by Katrin Elborgh-Woytek and Robert Gregory.

The authors argue that one way emerging and advanced economies can boost the exports of the poorest countries is by the “extension and improvement of duty-free and quota-free (DFQF) trade preferences.” They go on to say such action could boost exports of the poorest countries by $10 billion. It would be interesting—and fairer—if the authors mentioned by how much the exports of poorer countries would rise if they were to reduce their own barriers to trade.

The authors’ call for expanded preference schemes is bad policy advice for at least three reasons. First, trade preference schemes are discriminatory in nature: some countries get them; others don’t. This type of discrimination is antithetical to the principle of nondiscrimination enshrined in the GATT/WTO. Second, there is evidence to suggest that trade preference schemes reduce the incentives recipient countries have to reform their own policies. Finally, preference schemes may make economic adjustment more difficult when international market conditions change. Take the example of bananas. The preference schemes available to certain banana-exporting countries in the Caribbean (and elsewhere) provided an incentive for these economies to specialize in the production of bananas, even though they did not possess a comparative advantage. And, when the market for bananas was liberalized, these economies faced an even tougher task of adjustment.

In short, a more sensible, and economically defensible policy prescription for the poorest economies is to make lasting reforms to their own trade policies. They have tried everything else—why not try that?

Stephen Tokarick
International Monetary Fund