Small Island States and the WTO

Commonwealth Secretariat

Small Island States and the WTO

10 Years of Experience

2

Commonwealth Secretariat Endowments

Do small islands states, given their natural endowments, have a special economic and trade problem?– Common argument: Given relatively high GDP/capita,

small states do not have a problem.– Prosperity of many has been directly as a result of

smallness combined with other characteristics. – Trade preferences which suited production capacity of

small states is being eroded.

The problem is not the past but the future

3

Commonwealth Secretariat What are the problems

• Smallness is a problem but by no means overarching

• Isolation and geographic dispersion combined compound problem.

• Recent development results, while better that the LDCs, indicate a deteriorating situation

4

Commonwealth Secretariat Marginalisation

Why marginalisation?

• Declining share of world trade ≠ Declining welfare

• It is possible to have a declining share and have incomes rising.

• Marginalisation measures:– Productive and adaptive efficiency of the economy – Distributive equity of the system of globalisation – Political significance.

5

Commonwealth Secretariat

Trends in Marginalisation and Growth of Real GDP in Small States

Equatorial Guinea

Djibouti

Bahrain

MaldivesBotswana

Dominica

SaoTome&Principe

Comoros

Samoa

Gambia

Trinidad and Tobago

Suriname

GDP Growth Rate = 0.6579 Growth of Exports Share + 4.1811R2 = 0.6571

-2

0

2

4

6

8

10

12

14

-8 -6 -4 -2 0 2 4 6 8 10 12 14Trend growth rates in export share

GD

P g

row

th r

ate

Source: Razzaque and Grynberg (2004)

6

Commonwealth Secretariat

Share of LDCs and Small States in Global Inflow of FDI

0

0.5

1

1.5

2

2.5

319

72

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

Per

cen

t of

glo

bal

FD

I in

flow LDCs Small States

Source: Authors’ estimates from UNCTAD (2002)

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Commonwealth Secretariat Small States & trade

• Cost disadvantages resulting from being small island states have meant that economic activity has often been based upon ‘quasi-rents’ - transitory returns above opportunity costs.

• These rents are either: – market based eg niche markets or booming sectors; or– de jure rents stemming from legal arrangements eg

trade preferences, sovereignty (finance centres) or tax concessions

8

Commonwealth Secretariat Globalisation & Small States

• If small states survive on quasi rents, what is the problem?– De jure rents , especially trade

preferences, are eroding. The value of sovereignty is being decreased

– The international community sees no reason to intervene.

9

Commonwealth Secretariat

GDP per capita and Foreign Market Access (FMA)

Isolation and Distance

Source: Redding and Venables (2001)

10

Commonwealth Secretariat

YearTotal flows

(US millions)Total ODA

(US millions)

DevelopingCountries LDCs Small States

DevelopingCountries LDCs

Small States

1980 42591 9872 1693 32460 8724 1505

1985 41019 10257 1730 30180 9483 1353

1990 74122 17470 2872 56036 16747 2427

1995 70725 17064 1792 58706 17198 1811

1999 79165 11797 950 50543 11591 1076

ODA

ODA Levels – LDCs and Small States

11

Commonwealth Secretariat

Composite Relative Commodity Prices and Aid Flows in Small States, 1980-2000

0

200

400

600

800

1000

1200

1400

1600

1800

1980 1985 1990 1995 2000

US$

Mill

ions

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

Rea

ltiv

e C

omm

odit

y P

rice

Ind

ex

Small States Aid Flows Composite Price Index

12

Commonwealth Secretariat

• The hypothesis that all countries need to be treated the same is an empirical one – what if some countries cannot adjust?

• Adjustment not possible where the cost of inherited disadvantages are so large that there is no above zero factor price that will induce investment

• Will the investors come?

The Genesis of the Cost Study

Costs of Doing Business

13

Commonwealth Secretariat

The Sample

Size Group

Region Micro Very Small

Small Median Large

Pacific 11 2 1 - -

Caribbean 8 3 1 - -

Sub-Saharan Africa 1 5 2 10 1

Latin America - - 1 6 1

South Asia - - - 1 3

Rest Asia - - 2 2 5

OECD - - 7 11 8

14

Commonwealth Secretariat

Exemplar Economies

Classification Country Population

Micro Anguilla 12,100

Very Small Vanuatu 197,000

Small Singapore 4,020,000

Median Hungary 10,020,000

15

Commonwealth Secretariat

Summary of Cost Disadvantages(% deviation in costs relative to median economy)

Area of Cost MicroVery Small

Small

Airfreight Average 31.8 4.1 -1.7

Seafreight Average 219.6 70.5 9.1

Unskilled Wages Average 60.1 31.6 6.6

Semi-Skilled Wages Average 22.4 12.1 2.6

Skilled Wages Average 38.0 20.3 4.3

Telephone Average (marginal costs) 98.5 47.2 9.0

Electricity (marginal costs) 93.1 47.0 9.4

Water (marginal Costs) 0 0 0

Fuel Average 53.8 28.3 5.9

Personal Air Travel Average 115.7 56.8 11.0

Land Rent Average -3.5 -17.2 -8.9Source: Winters and Martins (2004)

16

Commonwealth Secretariat

Industry MicroVery Small

Small

Electronic Assembly 36.4 14.3 2.7

Clothing 36.3 14.3 2.7

Hotels and Tourism 57.5 28.5 6.2

Cost Disadvantage for Exemplar Economies by Industry(% by which target country costs of supplying exports exceed

median country costs )

Source: Winters and Martins (2004)

17

Commonwealth Secretariat Recognition in the WTO

• Paragraph 35, Doha Ministerial Declaration agrees a work programme to examine issues of the trade of small economies, the objective being:

“to frame responses to the trade-related issues identified for the fuller integration of small, vulnerable economies into the multilateral trading system, and not to create a sub-category of WTO Members”

18

Commonwealth Secretariat

• Contradiction – framing responses to the trade concerns of SVEs without identifying who the SVEs are

• No universally accepted definition of SVEs

• However defined, Small Island States share of world trade is miniscule

19

Commonwealth Secretariat

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0.00%

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% w

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98 -

200

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%

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0.49

%

0.20

%

collective % world imports of goods and services (not to scale)

Small Island States share of World Trade

20

Commonwealth Secretariat Dispute Settlement

• Bananas• Sugar • Tuna• Gambling

21

Commonwealth Secretariat Emerging Issues

• Fisheries Subsidies• Financial Services• Subsidies and Countervailing Measures

22

Commonwealth Secretariat The Future

• Precondition is that the international community recognise the inherent disadvantages of small island states