Speech

Remarks by Anne O. Krueger, First Deputy Managing Director, IMF, for the Fund-Bank Panel on Aid for Trade

December 13, 2005

Good morning. I'm pleased to have the opportunity to address some of the issues raised by my colleagues on this panel.

Open trade is of central concern to the International Monetary Fund. Our principal mandate is the maintenance of international financial stability: but our Articles of Agreement make clear that this is in order to: "facilitate the expansion and balanced growth of international trade." The rapid growth of world trade since the Second World War has been a key driving factor of the postwar global expansion. The progressive liberalization of world trade has fuelled a dramatic rise in living standards for most of the world's citizens that has no historical parallel. And we all know what happened in the 1930s: the protectionist beggar-thy-neighbor policies, with high tariff barriers and competitive devaluations, contributed greatly to the length and depth of the Great Depression.

A successful—and ambitious—Doha round agreement will make a major contribution to global growth and to poverty reduction. We all need to recognize that eliminating trade barriers is in our own self-interest. We hear too much talk of the need to make concessions in trade negotiations, as if somehow governments were acting against their national interest. Since the multilateral framework was established at the end of the Second World War, experience has repeatedly shown that even unilateral trade liberalization benefits the countries undertaking it. Indeed, none of the successful emerging market countries has achieved sustained rapid growth without opening its economy to trade.

Those countries that have grown most rapidly, and experienced the most significant poverty reduction are, without exception, those that have done most to liberalize trade—lowering or removing tariffs, eliminating non-tariff barriers and encouraging competition.

Some low income countries have yet to benefit fully from the expansion of world trade, largely because they have shied away from trade liberalization. They have done better than they would have without rapid global growth, but their own trade barriers are an obstacle to the significantly higher rates of growth they need to achieve substantial and lasting poverty reduction. It is they who have most to gain from a Doha agreement: in part because liberalization brings the most benefit to the country doing the liberalizing and in part because all poor countries will benefit from the accelerated global growth that a successful Doha outcome would underpin. So it is important that we do all we can to help all countries reap the full benefits of an open trading system.

As I say, the biggest impetus needs to come from the poor countries recognizing the benefits of their own liberalization. As a matter of principle, I believe the industrial countries should liberalize further, especially in agriculture: they should open their markets and get rid of farm subsidies. But even if they were to eliminate all such barriers overnight, the beneficial impact on poor countries would be but a fraction of the gains to be had if those poor countries reduced or removed their own trade barriers.

But there are ways in which we can help poor countries. We can help them to create the human and institutional capacity that would accelerate the gains from trade liberalization. We can help them alleviate infrastructure and supply constraints. And we can provide assurances to countries concerned about short-term adjustment costs that might arise from preference erosion, the loss of tariff revenue, or changes in the terms of trade. Temporary adjustment costs should not be a reason to forego the much greater medium and long term benefits that flow from trade liberalization.

Pascal Lamy approached the Fund and other institutions seeking our help in putting together a package of support measures for low income countries that need help in maximizing the gains from trade liberalization. We have enthusiastically endorsed the WTO's Aid for Trade initiative and will do all we can. Indeed, we have been active in this area for some time and this morning I want to spell out what we have been doing and where we are looking to do more.

The Fund's contribution to Aid for Trade

The Fund has long supported countries in their efforts to gain more from trade with the rest of the world through the provision of policy advice and technical assistance. Sometimes access to financial support can be crucial. Two years ago, in Cancun, I announced the Trade Integration Mechanism. Set up in 2004, this provides added financing assurances to countries concerned about the short-term balance of payments impact of liberalization in the markets of their trading partners. Two countries, both facing increased competition in their textile markets, have already made use of this mechanism. Several other countries are considering seeking support under TIM. But the mechanism will only come into its own once a Doha agreement has been reached, and that was the purpose for which it was established.

Besides the TIM, the Fund continues to stand ready to offer support for balance of payments adjustment needs resulting from trade reforms undertaken by member countries themselves (as opposed to reforms in other countries, for which the TIM is designed). To provide more flexibility, the Fund's Executive Board has approved the use of so-called "floating tranches" under Fund programs, directed at supporting a country's own trade reforms. These floating tranches would become available if and when a member decides to take specified reform measures that might cause a temporary worsening of the balance of payments - for instance because of a sharp increase in imports, or a shortfall in fiscal revenue. The decision on and the timing of the reforms would be entirely up to the government concerned.

And just a couple of weeks ago, the Fund's Executive Board approved a third new instrument of potential interest to countries facing volatility in international markets: the Exogenous Shocks Facility. The ESF is offered on concessional terms to low-income countries faced with exogenous events that cause a sudden and sharp change in their external balance, and where the underlying macro-economic framework is sound. This facility should be particularly helpful in managing commodity price shocks, some of which may be linked to trade interventions.

Financial assistance from the Fund might not always be appropriate, of course. Some countries might not wish to negotiate a full-fledged Fund program when faced with what they perceive to be a fairly specific and narrow challenge. Let me give an example. The impending changes to the international sugar and banana markets have important implications for several countries in the Caribbean and elsewhere. We will be working with these countries to analyze the implications of the forthcoming changes; to advise on policy options; and to identify possible financing needs. Fund Staff is planning to meet with the authorities early next year.

Our technical assistance work accounts for about one third of our activities. Some of this work is directly relevant to countries seeking to maximize the benefits of trade liberalization. The Fund has a long-established program of assistance for customs reforms, directed primarily at strategic issues of process design and at the linkages with the broader fiscal framework. We also provide technical assistance to help countries rebalance their tax systems following reductions in import tariffs. Experience tells us in any case that the stimulus to imports and economic growth that will flow from a liberalized trade regime will compensate for at least part of any revenue loss. And in many cases, the revenue implications of tariff reductions can be mitigated by rationalizing import regimes, for instance by tackling non-tariff barriers and by reducing or eliminating exemptions. But some countries may nevertheless need to strengthen other aspects of their tax regimes as part of trade reforms.

Then there is the Integrated Framework: potentially this can be useful for identifying aid-for-trade needs in low income countries; establishing priorities for trade-related reforms and linking them to national poverty reduction strategies; and for helping to mobilize donor funding. The Integrated Framework incorporates the lessons we have learned about aid effectiveness. So we welcome the plans for strengthening the Integrated Framework. A task force has been established to take this work forward and is due to produce proposals by next April. We also think that the WTO should continue to have a central role in any new structure. And it is also clearly worth considering how an IF-like approach could be designed to benefit deserving countries that are not LICs.

The Fund can also help low income countries gain from trade liberalization through its extensive research program and its policy advice. At an earlier stage in the Doha round we prepared four research papers that Mr. Lamy's predecessor, Dr. Supachai, regarded as particularly helpful. We hope to continue to offer valuable inputs into trade reform discussions.

The Fund is working hard to encourage trade liberalization, by helping member governments put in place the appropriate macroeconomic framework that includes an exchange rate regime that provides sufficient incentives for exporters. We also want to reassure low income countries anxious about the potential costs and difficulties of adjustment. Since in most cases, the adjustment costs will be small and short-term: it is essential that countries do not lose sight of the significant medium and long term benefits that experience has repeatedly taught us will flow from trade liberalization.

The Fund is only one of the international institutions involved in the co-operative effort to help countries realize the gains to be had from greater participation in an open trading system. But there is a role for bilateral donors too and the promises of funding need to turn into firm financial commitments if low income countries are to feel reassured that they will get the support they need.

Underpinning trade reforms with financial and other assistance is vital if we are to increase the gains from the trade reform process, of course. But it is the reforms themselves that will lead to increased trade and drive economic growth: and we need to focus on this. The work I've described this morning is a complement to a Doha agreement. The development potential of trade liberalization is enormous—we have seen that repeatedly in the past six decades or so. We now need to ensure that the countries that have yet to gain can do so—and that means a successful outcome to the present round.

Thank you.