Trade, aid and Iraqi debt

Caspar Henderson
19 May 2003

Elephant fight, from a Moghul miniature


‘When two elephants fight, it is the grass that gets trampled’. This proverb (African or Indian, depending on who you talk to) applies to negotiations in the world trading system, which seem ever less like negotiations and ever more like Fight Club. The European Union and the United States together account for more than 40% of world trade. They seem to be heading for a train wreck, an all-out trade war. Those likely to suffer most are the world’s poorest countries.

The EU has given the US until the end of September 2003 to repeal the Foreign Sales Corporations provision, which provides tax benefits for large exporters such as Microsoft and Boeing, or face $4 billion worth of sanctions. It is the largest threatened retaliation package in the history of the World Trade Organisation (WTO). BAM!

And the US is returning fire. Last week, President Bush launched a legal challenge at the WTO intended to force Europe to reverse a five-year ban on imports of genetically modified crops. KERPOW!

With the energy of these doughty pachyderms concentrated on their mutual grievances, the prospects of developing countries receiving their due share of attention in the run-up to the WTO ministerial meeting in Cancun, Mexico in September 2003 are greatly reduced. SPLAT!

The fabled Doha development round was intended to help save the world after the shock of 11 September 2001 by creating a trading regime that is fairer to developing countries, especially in agriculture. Fairer trade is supposed to mean a fairer world and, ultimately, less violence.

It didn’t happen.

How did we get here? Poor countries have been forced to open up their markets while rich western countries have kept their quotas and continued to subsidise their agriculture.

What does it cost? In agriculture (the biggest but not the only area of contention), rich countries spend nearly $1bn a day – well over $300bn a year – subsidising their farmers. The EU’s common agricultural policy (CAP) costs each family the equivalent of 2% additional income tax. And in the US, President Bush’s farm bill of 2002 promised to raise the subsidies and allocated over $190bn over the next decade to protect US agriculture. They hypocrisy of the situation has been well described on openDemocracy by Kevin Watkins.

Who benefits? The richest farmers in both Europe and the US make out like bandits. Around 80% of the subsidies go to the top 20%.

Who loses? Above all, it is commonly argued, the poorest countries. Those agricultural subsidies encourage over-supply and lower farm-gate prices in the rich countries which then ‘dump’ their subsidised goods at less than the cost of production. Result: local agricultural production in poor countries is decimated.

So how would removal of tariffs and subsidies help? On this last point the answer may actually be a little more complicated.

According to development economist Dani Rodrik, developing countries’ interest in agricultural liberalisation is far from uniform. Aside from a few middle-income countries such as Argentina, Brazil, Chile and Thailand (members of the Cairns Group) which are important agricultural exporters, few developing countries have ever looked at this area as a major source of gain. Research done at the World Bank during earlier rounds of trade negotiations indicated that most sub-Saharan African nations could actually end up worse off as a result of a rise in world food prices produced by a reduction in European export subsidies.

A contrary line of argument is that the pain attending the removal or reduction of subsidies would be short-lived and worthwhile: poor countries would adjust and their domestic agricultural sectors would revive. The consequent benefits would include increased income for local farmers and reduced carbon emissions from long-distance transport. But one of the difficulties in accepting this case is that the poorest countries have the fewest resources to mitigate the pain of the adjustment period.

Ah, now it starts to get hard. The complexities touched on here – a small subset of the whole in agriculture, never mind the broader trade agenda – show that answers are not going to be simple.

This is not to deny the essential need for ‘fairness’, so eloquently stated by the Trade Justice Movement, among others. It is just to reiterate that carefully calibrated solutions are needed. Corporate lobbies may at present manipulate rich country government delegations at the WTO, but leaving the WTO would simply mean more bilateral deals in which small countries are at an even greater disadvantage with respect to big players.

Sophisticated campaigners know these things. But campaigning for complex solutions is hard to do. The law of unintended consequences may apply.

Further, concentrating on trade may mean missing some larger issues. Reviewing a book by Michael Moore (the former head of the WTO, not the author of Stupid White Men), Rodrik argues that agricultural liberalisation was ‘sold’ for tactical reasons, and that the price was to ignore other measures which could have brought greater benefit to poor people in poor countries:

“There were ways in which the negotiating agenda could have been broadened in a truly development-oriented way. To take the most glaring omission, developing nations would have benefited most from reform in an area in which the Doha framework makes no commitments at all: the liberalisation of temporary international labour flows. It is hard to identify any other issue in the global economy with comparable potential for raising income levels in poor countries while enhancing the efficiency of global resource allocation. Even a relatively small programme of temporary work visas in rich countries could generate greater income gains for workers from poor countries than all of the Doha proposals put together.”

The challenges of making temporary international labour flows work for the good of all (effective regulation? choice rather than coercion for workers?) could be a topic for discussion in openDemocracy’s migration debate. If you have a view or story that would illuminate the issues, please go straight to the migration discussion.

Debt and aid

Building an effective fair trade movement would require massive civil society involvement across many countries. It could happen. A model here is the international debt forgiveness campaign, which successfully mobilised a large swathe of global public opinion.

As Bob Geldof writes, in 1998 – five years ago last weekend – 70,000 people gathered at the Birmingham G8 Summit and put an arcane and obscure finance issue on the global agenda: the unpayable, multilateral, bilateral and commercial debts of the world’s poorest countries. They were part of a much wider coalition that put sustained pressure on politicians, and made a real difference. The result: a huge amount of debt – over $36bn – was written off.

But the debt campaign, for all its success, leaves substantial problems unsolved. $36bn is a lot of money but it is less than one-third of $110bn in debt relief promised for fifty-three of the world’s poorest countries. Many are still suffering unsustainable debt burdens and cannot afford the most basic education or healthcare. Further, debt forgiveness has been accompanied by reduction in aid flows from wealthy countries. Meanwhile, depressed commodity prices have hit some of the poorest countries very hard.

Meeting all of these challenges may be beyond reach. But some politicians and campaigners are now trying to build a head of steam behind a related goal – the doubling of aid flows from rich to poor countries.

One idea getting attention since its January 2003 launch is the proposal for an International Finance Facility (IFF). This envisages a doubling of aid flows to $100bn a year through bonds backed by future aid budgets. Britain’s Chancellor of the Exchequer, Gordon Brown, says it is the only ‘realistic’ way of achieving the UN’s goal of halving world poverty and providing primary education for all children by 2015 (see this recent Globolog).

It is true that many questions surround the IFF. To name just a few: will the financial markets buy it; how would it create a promised step change in co-ordination of aid flows; and what happens after 2015 when rich countries would need to repay the bonds? Even if it works, 600m to 900m people will still live on the equivalent of less than a dollar a day in 2015.

But the IFF has attractive qualities. It is specific, measurable, time-related and – its advocates claim – achievable. It can also be presented as a simple message that is consonant with a sense of global community and justice. This gives it the potential – perhaps – to motivate large coalitions of people to unite.

Some commentators have said that a meeting of rich country finance ministers over the weekend of 17-18 May 2003 was the last chance to get agreement to support the IFF before the summit of G8 leaders in Evian (France) on 1-3 June. Whether or not that is true, the timeframe here may be too short.

At present there is no popular groundswell of support behind the IFF. Self-styled global justice campaigners contacted by Globolog said they were giving it a cautious welcome, subject to further examination. But right now, they were fully occupied with other matters such as trade justice.

Iraqi debt and development

Debt forgiveness and just, sustainable development remain central concerns in the case of Iraq. As this Globolog goes online, the future status of Iraqi debts remains uncertain. The US would like to see most of them forgiven; Russia and France, two veto-wielding members of the UN security Council who were by far Saddam’s biggest creditors, remain adamantly against (there’s an illuminating analysis (subscription only) – “Paying for Saddam’s sins” – in The Economist, 17 May 2003).

One thing that does look promising is a draft resolution tabled for the UN by the US and UK (it may be supported by the Germans, among others) under which the percentage of future Iraqi oil revenues that would be used to recompense Kuwait for Iraq’s 1990 invasion would be reduced from 25% to 5% of the total.

But the dangers of oil dependency for Iraq – highlighted in the last Globolog – remain (the dangers are not confined to Iraq, of course: a report from Christian Aid (UK) published in May 2003 shows how oil damages development across the world. BBC Online provided a handy summary of many of the key issues).

Globolog suggested that an oil trust fund, set up with assistance from the Norwegians, could play a useful role in ensuring that future oil revenues are used more responsibly in Iraq. Wrong, said openDemocracy discussion forum stalwart Gary Jones in the climate and energy discussion forum (‘Norwegian woods’): don’t trust government, privatise the oil, and allocate shares to Iraqi citizens.

The approach advocated by Mr Jones has been widely promoted, not least on the Op-Ed pages of the Wall Street Journal. “Getting the most money from oil means...privatizing it”, wrote Susan Lee in a 30 April commentary for the WSJ, “and getting the most money from selling means having an open auction with as many bidders as reasonably possible”. Oil fields, she continued, should be divided into the smallest manageable tracts and the resulting plots sold at open auction. “The existence of a larger number of small plots would give local entrepreneurial talent an opportunity to bid”. (What Ms Lee did not say is that this arrangement could also allow large foreign players to outbid impoverished locals).

In the approach Ms Lee supports, revenues from the sale would be allocated to citizens in the form of certificates. So, if the land producing oil is worth $100bn this would mean ownership certificates for each Iraqi worth roughly $4,000 – about double the average middle-class annual salary in the country.

It sounds simple and generous. No problems? Well, think about many of the privatisations in the ex-Soviet bloc in the 1990s. Large amounts of cash injected into a country without effective institutions, rule of law or appropriate cultural norms can be very disruptive. Brutal, criminalised rule by a tiny, super-rich elite can be the result.

Michael Prowse, writing in the less theological Financial Times on 20 April, recognised these potential problems. Individual Iraqis, he suggested, should be allocated shares but should not be allowed to sell them for a “long period” (length undefined) – “otherwise the experiment in popular share ownership – and poverty relief – might prove short-lived”. Indeed, he suggested, it might be best to start by making the citizens’ oil shares non-alienable (that is, the right of ownership would not include the right of sale).

The Iraqi state will need substantial revenues to pay for improved public services and the rebuilding of infrastructure. So it would have to tax (at source) the people’s oil dividend income heavily. Still, said Prowse, the reform would be worthwhile:

“If income from Iraq’s principal asset were privately owned, then taxed, rather than flowing directly into the hands of politicians, the normal democratic trade-offs would at least exist. Iraq’s future leaders would have an incentive to provide public services of real value because, as long as democratic institutions existed, they would face a challenge from a rival political party if they squandered tax receipts.”

The trouble is that even relatively free societies with parliamentary democracies like the United Kingdom are perfectly capable of squandering oil wealth. The question remains, therefore, how to increase the probability that future Iraqi governments spend the money from oil revenues – whether derived through taxation or direct ownership – wisely.

The demands on future Iraqi government budgets for immediate needs will be almost overwhelming. But unless successive administrations set aside a proportion of revenues the economy is likely to remain indissolubly wedded to oil.

This is where a trust, with a remit for long-term benefits, could come in. It could start small in view of Iraq’s extreme, immediate needs, and increase as a proportion over time. Outside help from people who have the capacity to organise such things in relatively non-corrupt ways and are not perceived as compromised by their previous actions, could help.

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