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International Trade as Engine of Growth Uri Dadush Director, International Trade Department The World Bank June 13, 2003.

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Presentation on theme: "International Trade as Engine of Growth Uri Dadush Director, International Trade Department The World Bank June 13, 2003."— Presentation transcript:

1 International Trade as Engine of Growth Uri Dadush Director, International Trade Department The World Bank June 13, 2003

2 2 Outline Trade and foreign direct investment (FDI) are important for Madagascar Global trends in trade and FDI, and how Madagascar compares Policies and institutions important for trade and FDIlessons from Integrated Framework Way forward for Madagascar

3 3 Why is trade important for Madagascar? Tap into global markets –Madagascar is a small player in a large and increasingly globalized world (world economy is almost 7000 times the Madagascar economy, and almost 100 times all of SSA together) Doha agenda –Development now given center stage in multilateral trade talks –Technical assistance provided by developed countries (under the Integrated Framework)

4 4 The role of foreign direct investment (FDI) in trade Key role in trade in services Key role in setting up supply chains across countriesan increasingly important feature in global trade Madagascar needs much more FDI to sustain exports and growth; this requires reforms identified in IF

5 5 Trade has become more important in all regions Trade (exports plus imports) as share of GDP (real)

6 6 Developing countries as a group have increased their share of the global market... Share of developing countries Percent

7 7 Share of developing countries (lhs) PercentUS$ millions..gaining share essentially in manufacturing..

8 8...but the poorest countries have fared badly Increase in world market share, percentage points, 1991-99 Exports of non-energy goods

9 9 Poorest countries have failed to gain world market shares.. Continued dependency on agriculture and labor- intensive manufactures, exports of which have not kept pace with world trade growth because of: –High tariffs in developed countries –Tariff escalation in developed and developing countries –Distorted global agricultural trade including high levels of domestic support to agriculture –Restrictions on textile and clothing exports Domestic supply constraints –Border and behind-the-border barriers

10 10 Why does it matter? Integration with global markets is associated with faster growth Average annual per capita growth, 1980-99 Increasing export share in GDP Decreasing export share in GDP

11 11 FDI to developing countries (US$ billions) FDI to developing countriesGlobal FDI Source: GDF 2002

12 12 FDI is increasingly important in developing country economies FDI as a share of GDP, in percent

13 13 Significant trade liberalization over the last decade Average unweighted tariffs, in percent

14 14 Trade liberalization is not enough..(1) Requires supporting environment and institutions: –Sound governance –Macroeconomic stability sound fiscal framework stable and competitive real exchange rates

15 15 Trade liberalization is not enough..(2) Some governance issues in Madagascar: –low capacity of the legal system to guarantee contracts and effectively impose sanctions in the event of litigation, constraining private sector access to finance, inhibiting investments and exports –Excessive use of discretionary measures resulting in unstable and unpredictable rules, overlapping and contradictory legislation, all of which discourage investment and trade

16 16 Remaining trade reform agenda Issues and lessons emerging from the diagnostic studies under the Integrated Framework: –Unfinished trade liberalization –Regionalism –Institutional capacity –Behind-the-border (customs, transport, other infrastructure, supply chain logistics) –Trade and poverty

17 17 Unfinished liberalization (1) Cascading tariffs resulting in high effective protection –Madagascar needs to reduce tariff dispersion; most imports come in either at 5 percent or 30 percent (the minimum and maximum tariffs) Higher protection in agriculture and labor- intensive manufacturing (in developed and developing countries)

18 18 Unfinished liberalization (2) Incomplete services liberalization Trade in services becoming much more important for developing countries –Madagascar has high potential in trade in information technology (data processing) and tourism

19 19 Services liberalization Services liberalization index Financial services Telecoms Greater competitiveness

20 20 Rising Regionalism (1) Proliferation of bilateral, regional and preferential trading arrangements (RTAs) Generally inferior to multilateral free trade although there could be benefits: –Larger markets than otherwise –Can help accelerate trade and investment reforms (especially North-South arrangements)

21 21 Rising Regionalism (2) Benefits from preferential trade agreements have sofar been limited (e.g. AGOA, EBA, Cotonou) –Often only small shares of LDC export baskets eligible for preferences –Complicated and administratively-burdensome rules of origin requirements

22 22 Rising Regionalism (3) MadagascarAGOA has complicated customs services: –nearly one-fourth of customs resources are devoted to checking conformity of transactions to the AGOA rules –Special service employed by customs is counterproductive, penalizing regular operators and benefiting semi-illegal operators –Physical inspection approaching 100 percent and supplemented by audits of manufacturers facilities to review export/import documentation

23 23 Weak institutional capacity Policy-making capacity Public-private dialogue –Governments need to work with industry associations and producer groups Export support institutions (export promotion agencies, duty drawback schemes, business development services, etc.)

24 24 Key behind-the-border agenda (1) Customs –Lengthy clearance times and weak risk assessment capacities –Informal fees –In Madagascar recent improvementsadopting ASYCUDA and expected adoption of preshipment inspection Serious problems remainlow use of information technology; abuse of physical inspection, excessive delays in customs clearance

25 25 Key behind-the-border agenda (2) High transport costs need to be addressed: –Increasing domestic competition –Revisiting airfreight policy and landing rights –Dealing with intra-country corridor arrangements –Infrastructure investments –For Madagascar transport costs for childrens clothes exported to Paris are one-third higher than those from Sri Lanka reducing connection costs for information technology sector would allow sector to boom

26 26 Trade and Poverty (1) Agricultural trade important for poverty reduction –77 percent of rural households live below $1 a day in Madagascar External constraints to agricultural exports –high protection and support of farmers in rich countries reduce world prices Domestic constraints to agricultural exports –Transportation –Post-harvest marketing infrastructure –Water control infrastructure –Quality and standards –In Madagascar, government control of sugar and cotton industries resulting in subsidies have negatively affected the agro-food sector

27 27 Trade and Poverty (2) Poor domestic market integration reduces benefits of global integration to the poor –Transportation bottlenecks –Informal fees and internal check points –Studies and experience of Malagasy companies show that investments in basic infrastructure increases economic output

28 28 Trade and Poverty (3) Need to strengthen social safety net –Madagascar needs to restructure public expenditures towards pro-poor expenditures social sectors and infrastructure

29 29 Way forward for Madagascar Anchor FDI in Export Processing Zone –Particularly urgent in light of abolition of MFA in 2004 that reduces value of preferential schemes and hence attractiveness of Madagascar as production base –Requires customs reforms Restructure public expenditures towards pro-poor expenditures (social sectors and infrastructure) Streamline legal and regulatory framework for firms

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