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Political Economy of Trade and the BRIICS
The process of global integration is far from complete, and substantial gains from international specialisation remain untapped. Capturing gains from openness, however, depends on additional factors: initial conditions for reform, including a country’s factor endowments and historical legacy; complementary domestic market-based reforms; and the state of and improvement in domestic institutions. In particularly, successful external opening depends crucially on domestic politics and institutional capacity. And, this is an area where there are very large and arguably increasing differences within the developing world – and indeed among the BRIICS.
The politics of economic policy reform is as much about distribution as it is about wealth-generation. Shifts in trade policy – from protection to openness or vice versa – trigger redistribution of gains and losses between regions, sectors of the economy, classes and even between ethnic groups. Such disruption, especially in the short-term, can be particularly unsettling in developing countries with political instability, wide disparities in wealth and influence, meagre safety nets, ethnic divides and generally brittle institutions.
Through the 1980s and 1990s, there has been a veritable policy revolution in developing countries and countries in transition. Average applied tariffs in developing countries have declined from 30% in 1985 to 11% in 2005. Core non-tariff barriers declined correspondingly in all developing-country regions. Services sectors have been opened to international competition through FDI liberalisation, privatisation and domestic deregulation. However, this still leaves considerable levels of protection around the world. There are pockets of developed-country protection. But developing countries’ own protection - on tariffs, NTBs, FDI and services - is much higher.
There is less appetite in policy circles for further liberalisation and associated structural reforms now. Reforms have not been reversed, but their forward momentum has slowed. Governments are more skeptical and defensive about further liberalisation; and there has been relatively little in the way of “second-generation” reforms (in domestic trade-related regulations and institutions) to underpin external liberalisation and boost competition.
The BRIICS fit well into this big picture. Much trade and FDI liberalisation has already been accomplished but the BRIICS still have relatively high barriers compared to OECD countries. In Russia, liberalisation has stalled or even been reversed in energy sectors. In India, Brazil, Indonesia and South Africa, liberalisation has not been reversed, but it is in a slower gear. China kept up a faster liberalising pace before and soon after WTO accession, but there are recent signs of reform slowdown there too.
For all BRIICS, a future trade-policy reform agenda contains “unfinished business” in terms of extra trade and FDI liberalisation. But it will increasingly entail tackling relatively high domestic regulatory barriers that affect external trade and FDI, in addition to domestic trade and investment. These cut to the heart of domestic economic regulation, institutions and governance. The political economy of these second-generation reforms is complex; and they raise fresh questions about the balance between unilateral measures, on the one hand, and trade negotiations and trade agreements, on the other.
Questions for discussion:
● What are the prospects for a fresh wave of trade and FDI liberalisation and associated structural reforms in the BRIICS?
● What are the future trade-policy reform priorities in the BRIICS? How do domestic regulatory barriers fit into the picture?
● Maintaining the momentum of trade reform in the BRIICS has proven difficult. What have been the political economy impediments (e.g. interest groups, anti-reform ideas, institutions, factor endowments, foreign policy)?
● Which national and multilateral institutional changes might improve trade policy in the BRIICS?
Back to the Programme of the Global Forum on Trade, June 2008
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