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IMF role in the International Economy


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Q. Give a brief account of IMFs financing

policies and benefits

IMFs financing policies

The International Monetary Fund (IMF) is an international organization that provides financial

assistance and advice to member countries. This article will discuss the main functions of the

organization, which has become an enduring institution integral to the creation of financial

markets worldwide and to the growth of developing countries.

The IMF was born at the end of World War II, out of the Bretton Woods Conference in 1945. It

was created out of a need to prevent economic crises like the Great Depression. With its sister

organization, the World Bank, the IMF is the largest public lender of funds in the world. It is a

specialized agency of the United Nations and is run by its 186 member countries. Membership

is open to any country that conducts foreign policy and accepts the organization's statutes.

The IMF is responsible for the creation and maintenance of the international monetary system,

the system by which international payments among countries take place. It thus strives to

provide a systematic mechanism for foreign exchange transactions in order to foster

investment and promote balanced global economic trade.

To achieve these goals, the IMF focuses and advises on the macroeconomic policies of a

country, which affect its exchange rate and its government's budget, money and credit

management. The IMF will also appraise a country's financial sector and its regulatory policies,

as well as structural policies within the macro-economy that relate to the labor market and

employment. In addition, as a fund, it may offer financial assistance to nations in need of

correcting balance of payments discrepancies. The IMF is thus entrusted with nurturing

economic growth and maintaining high levels of employment within countries.

The IMF gets its money from quota subscriptions paid by member states. The size of each quota

is determined by how much each government can pay according to the size of its economy. The

quota in turn determines the weight each country has within the IMF - and hence its voting

rights - as well as how much financing it can receive from the IMF.

Twenty-five percent of each country's quota is paid in the form ofspecial drawing rights (SDRs),

which are a claim on the freely usable currencies of IMF members. Before SDRs, the Bretton

Woods system had been based on a fixed exchange rate, and it was feared that there would not

be enough reserves to finance global economic growth. Therefore, in 1968, the IMF created the
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SDRs, which are a kind of international reserve asset. They were created to supplement the

international reserves of the time, which were gold and the U.S. dollar. The SDR is not a

currency; it is a unit of account by which member states can exchange with one another in

order to settle international accounts. The SDR can also be used in exchange for other freely-

traded currencies of IMF members. A country may do this when it has a deficit and needs more

foreign currency to pay its international obligations.

The SDR's value lies in the fact that member states commit to honor their obligations to use and

accept SDRs. Each member country is assigned a certain amount of SDRs based on how much

the country contributes to the Fund (which is based on the size of the country's economy).

However, the need for SDRs lessened when major economies dropped the fixed exchange rate

and opted for floating rates instead. The IMF does all of its accounting in SDRs, and commercial

banks accept SDR denominated accounts. The value of the SDR is adjusted daily against a

basket of currencies, which currently includes the U.S. dollar, the Japanese yen, the euro, and

the British pound.

The larger the country, the larger its contribution; thus the U.S. contributes about 18% of total

quotas while the Seychelles Islands contribute a modest 0.004%. If called upon by the IMF, a

country can pay the rest of its quota in its local currency. The IMF may also borrow funds, if

necessary, under two separate agreements with member countries. In total, it has SDR 212

billion (USD 290 billion) in quotas and SDR 34 billion (USD 46 billion) available to borrow.

IMF Benefits

The IMF offers its assistance in the form of surveillance, which it conducts on a yearly basis for

individual countries, regions and the global economy as a whole. However, a country may askfor financial assistance if it finds itself in an economic crisis, whether caused by a sudden shock

to its economy or poor macroeconomic planning. A financial crisis will result in severe

devaluation of the country's currency or a major depletion of the nation's foreign reserves. In

return for the IMF's help, a country is usually required to embark on an IMF-monitored

economic reform program, otherwise known as Structural Adjustment Policies (SAPs).

There are three more widely implemented facilities by which the IMF can lend its money. A

stand-by agreement offers financing of a short-term balance of payments, usually between 12

to 18 months. The extended fund facility (EFF) is a medium-term arrangement by which

countries can borrow a certain amount of money, typically over a three- to four-year period.

The EFF aims to address structural problems within the macro-economy that are causing

chronic balance of payment inequities. The structural problems are addressed through financial

and tax sector reform and the privatization of public enterprises. The third main facility offered

by the IMF is known as the poverty reduction and growth facility (PRGF). As the name implies, it

aims to reduce poverty in the poorest of member countries while laying the foundations for

economic development. Loans are administered with especially low interest rates.
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The IMF also offers technical assistance to transitional economies in the changeover from

centrally planned to market run economies. The IMF also offers emergency funds to collapsed

economies, as it did for Korea during the 1997 financial crisis in Asia. The funds were injected

into Korea's foreign reserves in order to boost the local currency, thereby helping the country

avoid a damaging devaluation. Emergency funds can also be loaned to countries that have

faced economic crisis as a result of a natural disaster.

All facilities of the IMF aim to create sustainable development within a country and try to

create policies that will be accepted by the local populations. However, the IMF is not an aid

agency, so all loans are given on the condition that the country implement the SAPs and make it

a priority to pay back what it has borrowed. Currently, all countries that are under IMF

programs are developing, transitional and emerging market countries (countries that have

faced financial crisis).

Because the IMF lends its money with "strings attached" in the form of its SAPs, many people

and organizations are vehemently opposed to its activities. Opposition groups claim that

structural adjustment is an undemocratic and inhumane means of loaning funds to countries

facing economic failure. Debtor countries to the IMF are often faced with having to put financial

concerns ahead of social ones. Thus, by being required to open up their economies to foreign

investment, to privatize public enterprises, and to cut government spending, these countries

suffer an inability to properly fund their education and health programs. Moreover, foreign

corporations often exploit the situation by taking advantage of local cheap labor while showing

no regard for the environment. The oppositional groups say that locally cultivated programs,

with a more grassroots approach towards development, would provide greater relief to these

economies. Critics of the IMF say that, as it stands now, the IMF is only deepening the rift

between the wealthy and the poor nations of the world.

Indeed, it seems that many countries cannot end the spiral of debt and devaluation. Mexico,

which sparked the infamous "debt crisis" of 1982 when it announced it was on the verge of

defaulting on all its debts in the wake of low international oil prices and high interest rates in

the international financial markets, has yet to show its ability to end its need for the IMF and its

structural adjustment policies. Is it because these policies have not been able to address the

root of the problem? Could more grassroots solutions be the answer? These questions are not

easy. There are, however, some cases where the IMF goes in and exits once it has helped solve

problems. Egypt is an example of a country that embarked upon an IMF structural adjustment

program and was able to finish with it.

Providing assistance with development is an ever-evolving and dynamic endeavor. While the

international system aims to create a balanced global economy, it should strive to address local

needs and solutions. On the other hand, we cannot ignore the benefits that can be achieved by

learning from others.
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Q. Discuss about the History of World Trade Organization

At the United Nations conference held at Geneva in 1947, twenty three countries including

United States of America signed General Agreement on Tariffs and Trade (GATT). During

the same year, a charter was put on the table for setting up, within the United Nations

Organization, of a new agency to be called International Trade Organization (ITO). Fifty

nations signed the charter in Havana the following year, but it was never subsequently ratified

by the required number of countries. The purpose of the agreement was to promote

international trade free of barriers in the aftermath of World War II, and to draw up proposals for

the implementation of policies based on those principles set in the agreement. It covered all the

issues like tariffs, quotas, taxes, international commodity agreements and whatever was

considered to have a bearing on the development of international trade, and was based on

policies of non-discrimination and tariff reductions.

GATT has been expanded and updated through a series of multi-year conferences. The most

famous have been the Kennedy Round (1963-1967), the Tokyo Round (1973-1979), and theUruguay Round (1986-1994). The Uruguay Round ended with the decision to dissolve GATT

and establish the more powerful and more institutionalised World Trade Organization (WTO)

in 1995. The WTO replaced GATT as an international organization, but the General Agreement

still exists as the WTOs umbrella treaty for trade in goods. Trade lawyers distinguish between

the GATT 1994, the updated agreement, and the GATT 1947, the original agreement which is

still the heart of GATT 1994.

The WTO has nearly 150 members, accounting for over 97% of world trade. Around 30 others

are negotiating membership. By definition, the World Trade Organization (WTO) deals with the

rules of trade between nations at a global or near-global level. But there is more to it than that.

There are a number of ways of looking at the WTO. Its an organization for liberalizing trade. Its

a forum for governments to negotiate trade agreements. Its a place for them to settle trade

disputes. It operates a system of trade rules. (But it is not a Superman, just in case anyone

thought it could solve or cause all the worlds problems!). The WTO is like a table.

People sit round the table and negotiate, and resolve trade disputes.

Essentially, the WTO is a place where member governments try to sort out the trade problems

they face with each other. Therefore, the first step is to talk. The WTO was born out of

negotiations, and everything the WTO does is the result of negotiations. Where countries have

faced trade barriers and wanted them lowered, the negotiations have helped to liberalize trade.

But the WTO is not just about liberalizing trade, and in some circumstances its rules supportmaintaining trade barriers for example to protect consumers or prevent the spread of

disease.

WTO also ensures that individuals, companies and governments know what the trade rules are

around the world, and gives them the confidence that there will be no sudden changes of policy.

In other words, the rules have to be transparent and predictable.


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Q. Write down the Principles / Characteristics of

WTO Trading System.

The World Trade Organization is based on the following core-principles or characteristics:

1. Trade without discrimination:

The main principle in the charter of the World Trade Organization is to promote international

trade without any discrimination. This principle is further elaborated into two MFN and

national treatment:

(a) Most-favoured-nation (MFN) treating other people equally: Underthe WTO agreements, countries cannot normally discriminate between their trading

partners. If a member country grants a special favour (such as a lower customs duty) to

another member country, she has to do the same for all other WTO members.

This principle is also known as most-favoured-nation (MFN) treatment. It is so important

that it is the first article of the GATT, which governs trade in goods. MFN is also a priority

in the General Agreement on Trade in Services (GATS) and the Agreement on Trade-

Related Aspects of Intellectual Property Rights (TRIPS).

However, some exceptions are allowed. For example, countries can set up a free trade

agreement that applies only to goods traded within the group discriminating againstgoods from outside. Or they can give developing countries special access to their

markets. Or a country can raise barriers against products that are considered to be

traded unfairly from specific countries. In general, MFN means that every time a country

lowers a trade barrier or opens up a market, it has to do so for the same goods or

services from all its trading partners whether rich or poor, weak or strong.

(b) National treatment Treating foreigners and locals equally:Imported and locally-produced goods should be treated equally at least after the

foreign goods have entered the market. The same should apply to foreign and domestic

services, and to foreign and local trademarks, copyrights and patents.

National treatment only applies once a product, service or item of intellectual property

has entered the market. Therefore, charging customs duty on an import is not a violation

of national treatment even if locally-produced products are not charged an equivalent

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2. Freer trade:

First of all it should be noted here that the WTO is not for free trade at any cost. It is all about

lowering trade barriers between trading countries. The barriers concerned include customs

duties (or tariffs) and measures such as import bans or quotas that restrict quantities selectively.

From time to time other issues such as red tape and exchange rate policies have also been

discussed.

Opening markets can be beneficial, but it also requires adjustment. The WTO agreements allow

countries to introduce changes gradually, through progressive liberalization. Developing

countries are usually given longer to fulfil their obligations.

3. Predictability:

Sometimes, promising not to raise a trade barrier can be as important as lowering one, because

the promise gives businesses a clearer view of their future opportunities. With stability andpredictability, investment is encouraged, jobs are created and consumers can fully enjoy the

benefits of competition choice and lower prices. The multilateral trading system is an attempt

by governments to make the business environment stable and predictable.

One way of making investment stable and predictable is to bindthe member countries to their

commitments. For example, ceilings on customs tariff rates, etc. However, a country can

change its bindings, but only after negotiating and compensating its trading partners.

There are other ways as well to improve predictability and stability. One way is to discourage

the use of quotas and other measures used to set limits on quantities of imports. Another way

is to make countries trade rules as clear and transparent as possible. Many WTO agreements

require governments to disclose their policies and practices publicly within the country or by

notifying the WTO. The regular surveillance of national trade policies through the Trade Policy

Review Mechanism provides a further means of encouraging transparency both domestically

and at the multilateral level.

4. Promoting fair competition:

WTO is a system of rules dedicated to open, fair and undistorted competition. The rules on

non-discrimination MFN and national treatment are designed to secure fair conditions of

trade. So these rules also apply on dumping and subsidies. Many of the other WTO

agreements aim to support fair competition, for example, in agriculture, intellectual property,

services, etc.


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5. Encouraging development and economic reform:

The WTO system contributes to development. On the other hand, developing countries need

flexibility in the time they take to implement the systems agreements. Over 3/4th of WTO

members are developing countries and countries in transition to market economies. During the

seven and a half years of the Uruguay Round, over 60 of these countries implemented trade

liberalization programmes autonomously. At the end of the Uruguay Round, developing

countries were prepared to take on most of the obligations that are required of developed

countries. But the agreements did give them transition periods to adjust to the more unfamiliar

and, perhaps, difficult WTO provisions particularly for the poorest or least-developed

countries such as Bangladesh, Cambodia, Djibouti, Central African Republic, Guinea,

Madagascar, Myanmar, Nepal, Uganda, etc. A ministerial decision adopted at the end of the

round says better-off countries should accelerate implementing market access commitments on

goods exported by the least-developed countries, and it seeks increased technical assistance

for them. More recently, developed countries have started to allow duty-free and quota-free

imports for almost all products from least-developed countries.


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Q. What are the Benefits of World Trade

Organization

The following common benefits of the WTOs trading system doesnt claim that everything is

perfect, otherwise there would be no need for further negotiations and for the system to evolve

and reform continually:

1. The system helps promote peace. Peace is partly an outcome of two of the mostfundamental principles of the trading system:

helping trade to flow smoothly, and providing countries with a constructive and fair outlet for dealing with disputesover trade issues.

It is also an outcome of the international confidence and cooperation that the system

creates and reinforces.

2. Disputes are handled constructively. As trade expands in volume, in the number ofproducts traded, and in the numbers of countries and companies trading, there is agreater chance that disputes will arise. The WTO system helps resolve these disputespeacefully and constructively.

Around 300 disputes have been brought to the WTO since it was set up in 1995. Without

a means of tackling these constructively and harmoniously, some could have led to more

serious political conflict.

3. A system makes life easier for all. Decisions in the WTO are made by consensus. TheWTO agreements were negotiated by all members, were approved by consensus andwere ratified in all members parliaments. The agreements apply to everyone. Thismakes life easier for all, in several different ways. Smaller countries can enjoy someincreased bargaining power. Without a multilateral regime such as the WTOs system,the more powerful countries would be freer to impose their will unilaterally on theirsmaller trading partners. Smaller countries would have to deal with each of the majoreconomic powers individually, and would be much less able to resist unwanted pressure.

In addition, smaller countries can perform more effectively if they make use of the

opportunities to form alliances and to pool resources. Several are already doing this.

4. Freer trade cuts the costs of living. Protectionism is expensive as it raises pricesthrough imposition of import duties and quotas. The WTOs global system lowers tradebarriers through negotiation and applies the principle of non-discrimination. The result isreduced costs of production (because imports used in production are cheaper) andreduced prices of finished goods and services, and ultimately a lower cost of living.


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5. It provides more choice of products and qualities. This expands the range of finalproducts and services that are made by domestic producers, and it increases the rangeof technologies they can use. When mobile telephone equipment became available,services sprang up even in the countries that did not make the equipment. Sometimes,the success of an imported product or service on the domestic market can alsoencourage new local producers to compete, increasing the choice of brands available to

consumers as well as increasing the range of goods and services produced locally.

6. Trade raises incomes. Lowering trade barriers allows trade to increase, which adds toincomes national incomes and personal incomes. But some adjustment is necessary.Trade also poses challenges as domestic producers face competition from imports. Butthe fact that there is additional income means that resources are available forgovernments to redistribute the benefits from those who gain the most for example tohelp companies and workers adapt by becoming more productive and competitive inwhat they were already doing, or by switching to new activities.

7. Trade stimulates economic growth. This is a difficult subject to tackle in simple terms.There is strong evidence that trade boosts economic growth, and that economic growth

means more jobs. It is also true that some jobs are lost even when trade is expanding.But the picture is complicated by a number of factors. Nevertheless, the alternativeprotectionism is not the way to tackle employment problems. In fact, the protectionismhurts the employment in the long run. For example, the US car industry, when the USGovernment designed trade barriers to protect the jobs by restricting imports ofJapanese Cars, the American cars became more expensive, fewer cars were sold andthere were major job cuts.

8. The basic principles make life more efficient. One of the most important features ofWTO is that it provides efficiency in the international trade mechanism. It helps to cutcosts because of important principles enshrined in the system. Such principles includenon-discriminatory trade, transparency, increased certainty in trade conditions,simplification and standardisation of customs procedures, removal of red tapism,removal of bureaucracy, centralised databases of information, and such other measuresthat come under the head trade facilitation.

9. Governments are shielded from lobbying. One of the lessons of the protectionismthat dominated the early decades of the 20th Century was the damage that can becaused if narrow sectoral interests gain an unbalanced share of political influence. Theresult was increasingly restrictive policy which turned into a trade war.

Superficially, restricting imports looks like an effective way of supporting an economic

sector. But it biases the economy against other sectors which shouldnt be penalized

if you protect your clothing industry, everyone else has to pay for more expensiveclothes, which puts pressure on wages in all sectors.

Governments need to be armed against pressure from narrow interest groups, and the

WTO system can help. The GATT-WTO system covers a wide range of sectors. So, if

during a GATT-WTO trade negotiation one pressure group lobbies its government to be

considered as a special case in need of protection, the government can reject the


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protectionist pressure by arguing that it needs a broad-ranging agreement that will

benefit all sectors of the economy.

10. The system encourages good government. Under WTO rules, once a commitmenthas been made to liberalize a sector of trade, it is difficult to reverse. The rules also

discourage a range of unwise policies. For businesses, that means greater certainty andclarity about trading conditions. For governments it can often mean good discipline.

The WTO agreements help in reducing corruption and bad government. But, quite often,

governments use the WTO as a welcome external constraint on their policies. This

cannot be done because it would violate the WTO agreements.


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Q. Write down the Criticism on World Trade

Organization

Criticisms of the WTO are often based on fundamental misunderstandings of the way the WTO

works. Following are most common misunderstandings or criticisms on WTO:

1. The WTO dictates policy. According to critics, the WTO dictates the trade policy on itsmember countries. But that is not the case; in fact, its the governments who dictate tothe WTO. WTO is a member-driven organization. The rules of WTO are based onagreements resulting from negotiations among member governments. These rules areratified by members parliaments. And all the decisions taken in the WTO are virtuallymade by consensus among all members.

2. The WTO is for free trade. There is another criticism on the World Trade Organizationis that it promotes free trade. According to critics, free trade could hamper the domesticproduction and serves the interests of giant global companies. Small domesticcompanies are unable to compete with such multinational companies and would not beable to survive. As a result, unemployment increases and national income decreases. Itis true that it is one of the principles of WTO system that the member countries shouldlower their trade barriers and allow trade to flow more freely. But how low those barriersshould go depends on the bargaining of member countries.

Moreover, the rules written into the agreements allow barriers to be lowered gradually so

that domestic producers can adjust.

3. According to critics, the commercial interests take priority over development.Whereas, the WTO agreements are full of provisions taking the interests of developmentinto account. Freer trade boosts economic growth and supports development. In thatsense, commerce and development are good for each other.

4. Environmental issues. In WTO system, commercial interests do not take priority overenvironmental protection. Whereas, many provisions of WTO take environmentalconcerns specifically into account. For example, the preamble of the Marrakesh(Morocco) Agreement establishing the World Trade Organization includes among itsobjectives, optimal use of the worlds resources, sustainable development andenvironmental protection.

5. Health and safety issues. Key clauses in the agreements (such as GATT Art. 20)specifically allow governments to take actions to protect human, animal or plant life orhealth. But these actions are disciplined, for example to prevent them being used as anexcuse for protecting domestic producers protectionism in disguise.

6. The WTO destroys jobs and worsens poverty. Another accusation on WTO is thatWTO system destroys jobs and widens the gap between rich and poor. In other words,it promotes economic inequalities internationally. The accusation is inaccurate and


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simplistic. Trade can be a powerful force for creating jobs and reducing poverty.Sometimes adjustments are necessary to deal with job losses, and here the picture iscomplicated. In any case, the alternative of protectionism is not the solution. It should beborne in mind that the biggest beneficiary is the country that lowers its own tradebarriers.

7. Small countries are powerless in the WTO. But small countries are not powerless inWTO. In fact, they would be weaker without WTO. The WTO increases their bargainingpower. In recent years, developing countries have become considerably more active inWTO negotiations, submitting an unprecedented number of trade proposals. Theyexpressed satisfaction with the process leading to the Doha declarations. All of thisbears testimony to their confidence in the system.

8. The WTO is the tool of powerful lobbies. This is a common misunderstanding that thesystem of the World Trade Organization supports the powerful countries such as US,EU, Japan, etc. Giant corporations get undue protection from the WTO. The answer isthat the WTO is a common platform for all the governments. The WTO treats all thecountries equally. Therefore, WTO is not the tool of powerful lobbies; in fact, it offers

governments a means to reduce the influence of narrow vested interests. The mostcommon feature of the WTO is the negotiations that took place between thegovernments. These negotiations create a balance of interests. Governments can findit easier to reject pressure from particular lobbying groups by arguing that it had toaccept the overall package in the interests of the country as a whole.

The WTO does not support the giant multinational companies. The WTO is an

organization of governments. The private sector, non-governmental organizations and

other lobbying groups do not participate in WTO activities except in special events such

as seminars and symposiums.

9. Weaker countries are forced to jointhe WTO. Another criticism about the WTO is thatthe weaker or developing countries or poor countries are influenced by developedcountries or by the WTO itself to join the WTO. In fact, weaker countries do have achoice to join the WTO or not. However, they are convinced to join the WTO, becausethey can enjoy the benefits that all WTO members grant to each other. They have theopportunity to trade, negotiate, and settle their disputes with advanced countries withinthe WTO. Whereas, outside the WTO, i.e., under bilateral agreements, smallercountries are weaker and cannot increase their bargaining power esp. with advancedcountries.

10. The WTO is undemocratic. Some theorists claim that the system of the WTO isundemocratic. Whereas, decisions in the WTO are generally by consensus. In principle,

thats even more democratic than majority rule because no decision is taken untileveryone agrees.


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Implementation of provisions favouring developing countries,

Guidelines for technical cooperation,

Increased participation of developing countries in the trading system, and

The position of least-developed countries.

Member-countries also have to inform the WTO about special programmes involving

trade concessions for products from developing countries, and about regional

arrangements among developing countries.

(b) Sub-Committee on Least-Developed Countries: The Subcommittee onLeast-Developed Countries reports to the Trade and Development Committee, but it is

an important body in its own right. Its work focuses on two related issues:

Ways of integrating least-developed countries into the multilateral trading

system

Technical cooperation.

The subcommittee also examines periodically how special provisions favouring least-

developed countries in the WTO agreements are being implemented. The following are

the WTO member countries categorized as least-developed countries by the UN:

Angola, Bangladesh, Burundi, Cambodia, Central African Republic, Chad, Congo,Djibouti, Gambia, Guinea, Guinea Bissau, Haiti, Madagascar, Malawi, Maldives, Mali,

Mauritania, Mozambique, Myanmar, Nepal, Niger, Rwanda, Senegal, Solomon Islands,

Tanzania, Uganda, Zambia, etc.

Some additional least-developed countries are in the process of accession to the WTO.

They are: Bhutan, Ethiopia, Laos, Sudan, and Yemen.

2. WTO Technical Cooperation:

The second area of working on developing countries within the WTO is associated with thetechnical cooperation or the training of government officials and businessmen from developing

countries. It is devoted entirely in helping developing countries and countries in transition from

centrally-planned economies to operate successfully in the multilateral trading system. The

objective is to help build the necessary institutions and to train officials. The subjects covered

deal both with trade policies and with effective negotiation.


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The WTO holds regular training sessions on trade policy in Geneva. In addition, it organizes

about 400 technical cooperation activities annually, including seminars and workshops in

various countries and courses in Geneva.

Targeted are developing countries and countries in transition from former socialist or communist

systems, with a special emphasis on African countries. Seminars have also been organized inAsia, Latin America, the Caribbean, Middle East and Pacific.

Funding for technical cooperation and training comes from three sources: the WTOs regular

budget, voluntary contributions from WTO members, and cost-sharing either by countries

involved in an event or by international organizations.


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Q. What are the challenges to the developing

countries? Give some suggestions to overcome it.

Challengesto the Developing Countries:

The developing countries under the new WTO regime are faced with a considerable increase in

their obligations particularly in respect of government procurements, subsidies, anti-dumping,

customs valuation and import licensing procedures. Again, the new obligations that they have

accepted in the area of services and intellectual property rights could have adverse economic

impact on their development.

The developing world, which consists of two-third majority of the total WTO membership, has

not reaped plausible benefits under WTO regime. They also have a strong feeling that their

voice is not being heard, and the issues raised by them are not being addressed. However,

some noticeable change of strategy at the WTO seems to have taken place in recent years.

Major share of the world trade is controlled by the developed world. According to a survey only

17 countries control 72% of the world trade. A major dilemma faced by the developing countries

in the trade liberalisation process is that a country may be able to control the speed of trade

liberalisation, but cannot determine by itself how fast its exports should grow. Exports

performance depends on quality, price and competitiveness of exportable commodities. Also, to

become competitive, investment is required in developing the infrastructure, technology, human

resources, and enterprise capacity for new exports, which is a long-term process and not easilyachieved. The interesting phenomenon is that the developed world continues to insist on free

trade and services and bringing down the tariffs in order to ensure fair competition between

local and imported products. While, on the other hand, the developed world itself continues to

follow protectionist policies in the case of agriculture to safeguard its costly products against

cheaper foodstuff from the developing world.

Suggestions to the Developing Countries:

The developing world has tried to raise its voice on various forums but without much success.

Apart from raising hue and cry for better treatment by the WTO and the developed world itshould have its own strategy for economic development. Following are the suggestions for the

developing countries:

Identification of core strengths and competitive edge, Concentrate mainly on industries which use local raw material, Improve efficiencies, lower costs and upgrade quality of products in order to be able to

make them export oriented to earn valuable foreign exchange,


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Develop small and medium enterprises, Continue to improve productivity in agriculture / fishing in order to remain self reliant in

food production and earn good value for their exports, Develop human resource through education, training, healthcare and social justice, and The Government should reduce its role in running business.

But, unfortunately, most of the developing countries to-day is plagued by inefficiency, corruption,dishonesty, low productivity and a lack of will and desire on the part of elected representatives

to improve the status quo. The developing countries cannot prosper on the prescriptions laid

down by the World Bank, IMF or regular dole from rich nations. South Asian economies,

especially Malaysia, Singapore, South Korea and China are a glaring example of what can be

achieved through following a pragmatic path. Even the Indian economy has grown rapidly over

the past decade with real GDP growth averaging some 6% annually, in part due to continued

structural reform, including trade liberalisation. In recent years, though, Bangladesh has also

shown a remarkable performance in real GDP growth rate but yet there are many reforms to be

made especially in manufacturing and service sectors.

The developing countries have a tough task ahead. If they do not take corrective measures

they will be rendered producers of raw materials and operating locally produced agro-based

industries only. They will, obviously, miss the opportunity to benefit from global trade.

According to a research report by David Dollar of the World Bank, the growth rate of the

developing countries during 1990s has been 5% (3.5% excluding China against 2% of the rich

countries. He believes that there is solid evidence available to prove that this has happened

due to participation in the free trade and globalisation process.

According to WTO Annual Report 2002, poor countries need to grow their way out of poverty

and trade can serve as a key engine of that growth. But currently products of developing

countries face many obstacles in entering the markets of rich countries. Rich counties need todo more to reduce trade-distorting subsidies and dismantle their existing barriers on competitive

exports from developing countries.


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Q. What are the Challenges faced by Bangladesh

Two schools of thought prevail in Bangladesh in regard to impact of WTO regime on the

economy. One group favours WTO Trade Agreements completely as it believes that free trade

will have a strong positive effect in enabling conditions for poverty reduction throughemployment opportunities, social welfare services, and infrastructure that can potentially benefit

the poor. On the other hand, the second school of thought believes that everything going wrong

in the developing world is the result of the WTO regime. They feel that the WTO has been

formed to further the interests of the developed world only. The fact of the matter is that we lack

any empirical study and the different opinions are based on assumptions only.

Major challenges faced by Bangladesh are as follows:

Lowering of tariffs leading to cheaper imports would pose serious threat to the localindustry, which, in spite of inefficiencies, has thrived to-date owing to protectionist

policies, An end to the quota system poses a serious challenge to our key foreign exchange

driver, Due to lowering of tariffs the taxes earned by the Government on imports are constantly

showing a marked reduction as a percentage to total taxes collected, Lack of a clear and transparent policy by the Government towards WTO regime and

lack of understanding of implications of Trade Agreements on our economic life.

Considering the challenges, the Government has identified the following industries with core

strengths that need most attention for development:

Gas and energy, Chemical, fertiliser and pharmaceuticals, Textile and allied industries, Light engineering, Information technology, Small and medium enterprises.

Other industries, which have been identified for improvements, are sports, surgical, cement,

sugar, automobile, etc. These industries will cater both for local and export markets. Needless

to mention that a number of industries will be at the risk of partial or complete closure, as they

will not be able to compete with the onslaught of cheaper imports. The local electronics

industry, where product replacements are extremely rapid, faces the risk of being phased out.

The industry, which needs our utmost attention, is textiles, as it has high contribution to our

exports. With the start of new open trade policy, Bangladesh is facing a serious problem of

tough competition from China, India, Pakistan and a number of other countries. Our machinery

is old, productivity is low, costs are higher and the manpower is not well-trained. We need to

invest at least US $ 5 to 6 billion in order to overcome these problems, and remain competitive

in the world market through exporting value added products.


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It is heartening to note that the Government is well aware of this problem, and constant efforts

are being made to produce contamination free cotton, and modernise the present outdated

machinery and infrastructure. However, both the Government and the industry will have to

move much faster in order to meet the foreign demands. If we are competitive with better

quality of products and acceptable prices, we may be able to gain a greater share of the textile

trade in the world market.

In the present scenario of the global trade, both developing and developed worlds have their

roles to play. The WTO and the developed world must make further concessions for the

developing countries, which are in majority and have a very small portion of the total world

trade, and are not in a position to compete with the advanced industrialised nations. On the

other hand, the developing world has its own responsibilities to share. They cannot continue to

live on grant-in-aids and consider others responsible for all their ills, while squandering their own

resources. They have to put in serious efforts for overall improvement in the quality of life of

their impoverished masses, through sustained economic growth. This would help them achieve

their due share in the global trade, rather than see it marginalized further.

imf and wto

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