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G20: The shift in the global economy

WTO Director General

The G-20 first met in 1999, on the eve of the millennium. Its creation anticipated a great shift in the global economy – a shift in which trade would play a major role.

Since then we have seen strong evidence of how trade, as a critical component of economic growth and development, can make a positive difference in people’s lives. Rapid economic growth in many developing economies has been combined with deeper integration in the global trading system, helping to boost per capita incomes and set the stage for future growth. It is essential that trade, through the multilateral system, should continue to play this role. However, the period since the millennium has also seen an evolution in the challenges of development and the emergence of new trading patterns and practices. If trade, and the multilateral trading system, is to continue playing this positive role it is important to consider how the interplay between trade and development has changed – and how the system needs to respond.

There are a number of trends which have altered the way that trade affects development outcomes.

Roberto Azevêdo

First: the accelerated economic growth in developing countries since the start of the millennium. Average rates of economic growth have tripled compared to the 1990s, although there is marked variation from country to country. The growth trajectory seems to be in line with long-term historical experience, including that of Japan and the newly-industrialized economies in East Asia, suggesting that once a catch-up process commences, rapid development is possible and has the potential to push incomes toward developed country levels. In each of these cases, rapid growth has been accompanied by increasing trade flows, which in many instances were preceded by the lowering of tariff barriers.

This gives rise to a number of development challenges, such as how to initiate catch-up processes in those countries still left behind, or how to ensure, once growth begins to accelerate, that it is inclusive and sustainable. Recent experience has shown that while growth can lead to improvement in human development indicators, better environmental outcomes or a more equitable distribution of income do not automatically follow.

Second: the expansion of global value chains. Global value chains are not a new phenomenon, but they have expanded and deepened significantly in recent years, offering greater opportunities for developing countries to integrate into the global economy at lower costs. Tasks that were once performed in a single factory or country are increasingly divided up between different countries to take advantage of their different skills and cost advantages. This allows countries to export by mastering certain specific tasks or manufacturing certain components instead of the entire final product. Over the last decade developing countries have increased their involvement in global value chains and South-South chains have become more important.

However, access to global value chains is not automatic, and unlocking their development potential can pose a series of challenges for developing countries. A country wanting to integrate into these production chains needs already to be at the cusp of producing at globally competitive levels of quality and efficiency. In practice this has meant that some are not able to participate meaningfully in global value chains, with many least-developed countries being left behind. While initial integration into the lower end of value chains typically triggers productivity improvements, competition to carry out these low-skilled tasks is often intense. Upgrading to higher value-added tasks can enable developing countries to capture more benefits but can be difficult and costly to achieve. In addition, when competing for the investments that many countries require in order to participate, developing countries can risk being drawn into a race to the bottom on regulatory standards.

Third: the surge in agricultural and natural resource prices over the last decade, and the growing importance of commodity exports. This shift has bestowed significant gains on those developing countries that are in a position to export commodities. Although the risk of a reversal cannot be ruled out, the state of global demand — and especially the strong demand from emerging economies — suggests that prices of agricultural goods and natural resources will remain robust in the foreseeable future.

This means that the agricultural sector, which employs more than half of the labour force in developing countries, can continue to play a critical role in lifting people out of poverty. This role could be strengthened if remaining obstacles to agricultural exports were reduced, including lowering tariff barriers and distortive subsidies globally.

Fourth: the increasingly global nature of macroeconomic shocks. While the crisis of 2008-2009 had its roots in the financial markets of a number of developed countries, the impacts were felt globally. A sharp reduction in trade and investment flows, exacerbated by a fall in aggregate demand and the drying up of trade finance, helped transmit the economic shocks to producers and traders in developing economies. However, the fact that we did not see an outbreak of protectionism on the scale experienced in previous crises meant that a significantly worse fall in international trade was averted.

Some trade restrictions were put in place during the crisis, but neither developing nor developed countries systematically raised trade barriers. The WTO’s rules-based system and its monitoring of members’ trade policies played a crucial role in keeping protectionist responses under control. Ultimately, the coordinated response combining macroeconomic stimulus with a commitment not to introduce protectionist measures was critical in pointing the way back to growth and in safeguarding the development gains that were made in the period before the crisis hit.

In considering how the system should respond to these trends, it is useful to note how both trade and the WTO have been contributing to economic development during this period. Foremost, the WTO provides a trading environment with clearly defined rules. At the same time, it allows developing countries to take advantage of flexibilities in implementing their commitments. As a result, it has supported wider integration into global value chains, allowed developing countries to take advantage of rising commodity prices, and helped resist the adoption of protectionist measures during the global crisis.  The changes we have seen during this period underline the fact that an open, predictable, non-discriminatory, rules-based multilateral trading system will be a necessary tool to make trade work more effectively for development in the future.

However, while some developing economies have made significant progress in recent years, much still needs to be done to close the gap for many poor economies. In this sense the WTO’s work is even more crucial.

In December 2013, WTO members took a series of decisions in Bali that will help poor countries realize their export potential and sustain the development momentum created in the past decade. This was an important moment, but of course we need to properly implement those results and conclude other negotiating endeavours before us. Indeed, the scale of the changes in the relationship between trade and development since the millennium underlines the importance of further updating the WTO’s rules, disciplines and flexibilities. It will be essential that we do so if we are to ensure that all countries are able to participate fully in the global economy in the years to come, and that people all over the world are able to feel the benefits of trade in improving their lives and the prospects of their families and communities.

In this context the role of the G-20 in promoting trade and strengthening the multilateral trading system is more important than ever.

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