Ethiopia: Strategic arenas for WTO accession

Strategic arenas for WTO accession: Public Policy Trajectories that lure in the rewards of Globalization to Ethiopian Businesses
Costantinos BT Costantinos, PhD
School of Graduate Studies, College of Business and Economics, AAU, costy@costantinos.net

Introduction - While Ethiopia has recorded significant achievements in GDP growth, it faces predictable armor of trials rife in poor nations with too few mechanism and wherewithal, while also wrestling with the perennial problem of sequencing policy reforms, all subject to doctrinal reins. Given the very slim boundaries for maneuver imposed by abject poverty, deficits and a complex interlace in its political fabric, getting the priorities right are the central issues to be addressed. Using comparative analyses with other African nations that have ac¬ceded to WTO accords, the research delves into impact of WTO accession on businesses and the requisite preparatory basis of a reform pedestal on which the nation can be a winner in this game. Findings of the research undergird eloquent testimony of complexity and uncertainty theories and functioning economic models that Ethiopia can emulate, not only to accede to WTO revised accession regimes, but also to compete successfully in the global arena; underpinning the fact that this can be complex, when reforms are subject to ideological therapy. Hence, managed restructuring of the public sector, establishing institutional capacity for policy analysis, formulation and coordination, regulatory capacity, advancing fiscal sustaina¬bility are gleaned as a panacea for change and transformation. Creating a merit based and metric civil service is a basic requirement for competing in the WTO arena to achieve higher allocative and productive efficiency, augmenting private sector share, improving public sector financial health and PPPs.
Economists have identified theoretically the reason why countries join WTO stating the argument that governments may be in the position to pursue what is known as beggar-thy-neighbor policies and that they will agree to sign international trade agreements as a way of mitigating the incentives to do so (Staiger, 1995). Countries can pursue the beggar-thy-neighbor policies by imposing externalities on their trade partners in the absence of an agreement, and the main mechanism through which a country can do so is through changes in terms-of-trade. These changes are, of course, only possible due to the countries large size or its monopolistic position in the market. The economy of poor nations like Ethiopia is characterized by remoteness (large economic distance from major markets, reliance on a small number of export good, mostly raw materials, weak administrative capacities, large economic and ecological vulnerability, lack of market-oriented institutional infrastructure and political instability often compounded by civil disorder. Given such characteristics, the gains from WTO membership seem to be small if they are assessed only in terms of improved market access for the traditional exports (Ibid). Raw materials mostly enjoy low or zero tariffs in OECD countries and bottlenecks on the exporting nation’s side seem to hamper export expansion more than policy-induced barriers on the demand side. Furthermore, the poor nations are typically not price setters in the world markets of individual raw materials and therefore have not been targets of anti-dumping measures, quantitative restrictions, or other non-tariff barriers to trade.
Nevertheless, there are a number of good reasons for LDCs to join the WTO (Rolf et al., 2000). The attractiveness of WTO is that governments are able to obtain an improved access to markets for their exports. The accession itself will not affect the most favored nation rates of trade partners of the acceding countries. However, the latter will be able to benefit from all commitments made by signatories of the WTO agreements in trade negotiations. By staying outside the WTO, the countries’ trade partners would be in the position to apply discriminatory tariffs against non-members. In addition, non-member countries would have to negotiate border measures with their partners bilaterally or regionally. This may result in exposure to undue negotiating strength of their partners. The multilateral trading system is, therefore, particularly important for small countries which have a limited power to exploit their (small) size to improve their terms of trade. Their impact on terms of trade may be enhanced if terms (and, therefore, world prices) are negotiated on a multilateral level. The beneficial effect of the WTO is also based on enhancing the credibility of government policies.
Governments often face a “credibility gap” in trying to convince foreign and domestic investors, and the rest of the business community about their commitments to particular polices. By framing the countries’ concessions into legal commitments, the WTO membership provides powerful guarantees of governments’ policy directions. Unlike unilateral policy reforms, multilateral commitments are more credible, in particular, because of the strategic interaction between government and private sector, which makes the agreement more attractive. In this setting, governments use international trade agreements to enhance the credibility of their policy choices with respect to the private sector. The ‘credibility gap’ is particularly important and present in the case of many if not most transit and less developed countries. There is also beneficial effect of the membership on domestic policies and institutions involved in the conduct of international trade. Acceding countries are required to put in place a set of norms and institutions, which support liberalization in practice. Countries have been often benefited from reductions of MFN rates even if they remained outside the GATT/WTO. In such situations, the main benefit of joining the WTO would be the certainty of markets, increase transparency, and promote the rule of law, contract enforcement and the evaluation of an independent judicial system.
In principle, nothing would prevent governments from putting in place these norms and regulations on a unilateral basis. The role of the WTO in this process is to facilitate the introduction of effective reforms not only by reinforcing the credibility of the government’s trade policies but also help introduce the policies that are based on best-practices and that must be harmonized (Kiichiro, 2000). WTO is considered to play an important and positive role is its contribution to the predictability, security and transparency of market access and the WTO’s dispute settlement mechanism. The possibility of resolving dispute through the dispute settlement mechanism may appear, in particular to smaller and weaker countries, as one of the most tangible benefits from WTO accession (Mansoob, 1999).
There are very few effective vehicles to resolve international trading dispute outside commercial arbitration, and those that exist can pity small trading nations against big ones. The WTO dispute settlement mechanism provides a uniquely fair, accessible and effective opportunity to each WTO member. WTO membership including the process of accession, leads to sizeable technical assistance in the form of training with respect to the legal framework of the multilateral trading system and its economic underpinnings. Such human capital is indispensable for building up institutional infrastructure, in particular for anchoring private property rights. WTO is institutionally prepared and financially endowed to help poor countries to form human predictability of such benefits, which are by no means guaranteed for outsiders (Langhammer and Lucke, 2000).
WTO membership encourages LDCs to open their domestic markets even if they can take a free rider under “special and differential treatment” for a certain period. Apart from the medium term allocative efficiency gains of import market opening in terms of lowering the implicit tax on exports and stimulating resource reallocation and export diversification, import market opening implies a concrete short term gain. Domestic prices of imports will often fall by more than the experience of sub-Saharan Africa (Yeats, 1999) that countries with high tariff levels also pay higher CIF (Cost Insurance Factor) prices for imports because restrictive tariff regimes are inextricably intertwined with rent seeking activities of traders and domestic procedures(ibid). Finally, the opportunity for acceding countries to shape the further rules and disciplines of the WTO is cited as a benefit. Acceding countries will undoubtedly be interested in participating actively in subsequent multilateral trade negotiations since only through direct negotiations rather than through an oversight from sidelines may they hope of protecting their interests (Kiichiro, 2000).
The fiscal costs of reducing import tariffs may be significant because taxes on international transactions are a major source of government revenue. This may be less of an issue in the early stages of trade liberalization when prohibitive tariffs are lowered and imports increase. In the medium to long run, however, substantial reductions in average tariff rates require a broadening of government’s tax bases. In the meantime, poor nations may need to concentrate on reducing the dispersion of tariff protection across commodity groups in order to eliminate the resulting distortions, while reductions in the average level of protection remain limited by fiscal considerations. A more liberal trade regime encouraged by membership may expose businesses to stronger competition from abroad, often from more advanced developing member states rather than from OECD countries. The result may be a short-term deterioration of the current account since higher imports due to market opening materialize faster than higher exports due to imported market access abroad.
The external vulnerability of countries may thus be aggravated if the time lag between the two effects cannot be shortened. In any case, least developed countries can resort to long adjustment periods as they accede to the WTO (Murshed, 1999). Sovereignty is curtailed and short-term maneuvering in trade related polices is discouraged and restricted, even for developing economies that invoke special and differential treatment. Politician and interest groups who are used to acting selfishly will take the political cost involved in ‘tying their hand’ seriously (Wang and et al., 1998). There are economic costs in terms of the opportunity costs of employing high skilled personnel for the implementation of WTO commitments and active participation in WTO negotiations. Using this particular scarce resource- provided it is available- in Geneva precludes its use at home and in other activities, perhaps including the private sector.
WTO accession - Ethiopia
Ethiopia has been accorded an observer status in the WTO since 1997. Ethiopia’s request for accession was circulated on January 13, 2003. A month later, on February 10, 2003, the WTO General Council established a Working Party under the leadership of N. Mac Milan of the United Kingdom (UK). The Working Party has not, however, met because Ethiopia submitted its Memorandum on its Foreign-Trade Regime (MFTR) to the WTO Secretariat only recently, following approval of the Council of Ministers. The MFTR was prepared by a technical committee whose members were drawn from the various public institutions. Prior to the official request for membership to the WTO, a study was conducted in June 2000 to identify the pros and cons of joining the WTO. The study was under-taken by a committee made up of representatives of government Ministries, civil society, and academics. It analyzed WTO Agreements vis-à-vis the economic policies of the country and came up with a conclusion that the benefits of joining out-weigh the costs and, hence, recommended that Ethiopia join the WTO (Yusuf et al., 2008).
One of the prime objectives of the WTO is to smooth trade flow and improve market access by lowering tariffs as well as non-tariff barriers and by helping with dispute settlements. It is argued that since the establishment of the GATT/WTO international trade has significantly increased (WTO, 1998). However, not everyone share this optimism. Langhamer and Lucke (2000) concluded that the benefits springing from WTO membership in terms of improved market accesses for traditional exports are likely to be limited, given the reliance on a small number of exports goods, weak administrator capacities, large economic vulnerability, lack of market-oriented capacities and political instability. Few empirical studies have been undertaken on the consequences of Ethiopia’s accession to WTO on its economy in general and foreign market access in particular. The Diagnostic Trade Integration Study showed that a 50% reduction of tariff and subsidies by all WTO members might be able to change the welfare of the poor marginally, albeit without an immediate benefit except to signal that its trade regime is bound to the international rules (World Bank, 2003).
Ethiopia has reduced its tariff substantially and “has already undertaken reforms that are consistent with WTO rules and disciplines such as non-discrimination and reduction of qualitative restrictions to less than 2% of imports, which could bring about earlier benefit if it joins the WTO. However, others argue that with many suppliers of an agricultural raw materials to limited international markets, substantial price increases is unlikely to happen, particularly in the short run. Moreover, in light of the frequently recurring drought, it has demonstrated that it could not regularly supply given volume of agricultural goods to the export markets (Keyzer et al., 2000). Pohl Consulting and Associates (2005) in its studies using dynamic CGE model under different scenarios indicated the impact of reducing and /or dismantling technical and non-technical barriers. The main impact of trade liberalization process they found mainly fiscal, stressing that the Ethiopian government will have to rapidly find ways to keep to amounts of tax revenues stable in order to maintain the level of investments that would sustain economic growth. The present research, therefore, focuses on investigating the effect of accession to WTO on its exports using gravity equation.
WTO membership will have wide-ranging social, cultural, and economic impacts, as accession would mean a commitment to open one’s economy to external competition and to benefit from a multilateral trading system. Only firms that can compete effectively can, however, draw tangible benefits from access to new markets. While the benefits to be gained may be diffused and drawn out, the immediate costs of accession will have to, nevertheless, be borne upfront (AACCSA, 2008). Accession to the WTO is necessary but not sufficient in itself to ensure economic well-being and membership in the WTO alone is not a panacea for all development problems facing Ethiopia. Complementary policies such as investment in physical, human and organizational capital, and structural transformation including industrialization are required.
WTO accession negotiations should not be cumbersome to Ethiopia nor should the process be “accelerated”; there should be a reasonably sufficient time for accession preparation and learning. The pace of accession negotiations should be determined by institutional, financial and technical capacities, and any obligations there from should take into account the specific socioeconomic conditions and needs of the nation. Membership in the WTO should be viewed from the perspective of “qualitative integration” of the county into the MTS but not based on an implicit quest for the “universality” of the trading system only (Delelegn, 2005 in Lenchisa, 2013).
The real effective exchange rate index (REER), which is the measure of the prices of the country’s goods relative to the prices of its trading-partner countries, both expressed in domestic currency, is a quantitative indicator to assess the competitiveness of the country’s export sector vis-à-vis the rest of the world. A fall in the value of the REER, indicates a real depreciation of the exchange rate and, thus, the enhanced the competitiveness of the country’s vis-à-vis foreign goods (Ibid).
Conclusions
The impact of WTO membership is dependent on the ability to take advantage of the opportunities offered by trade liberalization and to manage the changes induced by WTO membership. Hence, it is important to understand the economic realities on the ground-including resource endowments, the characteristics of the external sector, and the economic policy environment- in order to assess the impact of WTO membership. If Ethiopia is to participate meaningfully in the WTO dispute settlement system, it will need to continue to increase institutional capacity and coordination of trade policy at multiple levels, from the national to the regional to the global. Ethiopia will need, in particular, to develop its own coordinative mechanisms to include private sector and civil society representatives. Capacity building endeavors generally will be most sustainable if it permeates broadly throughout institutions and societies.
In a review of recent African country experience of the fiscal impact of trade liberalization commissioned for the OECD Development Center, Fukasaku (2003) finds that the overall impact of trade liberalization in SSA is ambiguous and depends on a multiplicity of facts, especially the nature and sequencing of reforms. Examining a database of 22 African countries, he finds that trade liberalization in the last decade has contributed to declines in the ratio of trade tax revenue/total government revenue of more than 20 percent (Mauritius), more than 10 percent (Côte d’Ivoire and Senegal), and more than 5 percent (Cameroon, Tunisia, and Mozambique). In several countries, notably Mauritius and Senegal, domestic indirect taxation and the value added taxes compensated for the fiscal losses, while in most other countries, domestic resource mobilization was somewhat weaker. The author concludes by stressing that reductions in tariff rates in Africa should be compensated by increases in domestic commodity taxes, an effective VAT and the institutionalization of trade-policy-cum-tax reform, particularly in countries with a regional trade agreement. (Ali Zafar, 2005:2)
If Ethiopia is to deploy WTO law to her advantage, it will need to maintain routine on-going procedures for gathering, processing and prioritizing information from foreign embassies, the private sector, and international trade consultants regarding foreign trade barriers. By working more consistently with the private sector, Ethiopian officials can foster the development of reflexes in firms and trade associations to view the WTO as an opportunity to ensure market access, thereby more effectively using the WTO system. For Ethiopia, bilateral or regional approaches to trade agreements cannot substitute for joining the multilateral trading system. In order to balance its rights and obligations in the MTS and fully benefit from the system, Ethiopia should
• improve her capacities to evaluate and link key provisions of the WTO agreements of particular interest to her specific circumstances and assess its impact on livelihoods;
• take into account political realities of domestic constituents and interest groups that can play important roles in terms of both assistance during the accession process and the eventual implementation of commitments and have a realistic expectation of the economic benefits from its membership in the WTO;
• It should demand the maximum period, which could be allowed for the transition period. The transition period will also give it a breathing space to promote its industries with relatively less pressure from the WTO. Therefore, Ethiopia should take all the time it could to put its industries in-order, that is, with greater shock resistance, more productive and competitive, before the elapse of the transition period. In other words, it has to request for maximum transition period possible, carefully study and exploit fully all the provisions available. Hence, the country must specifically make sure that it is in a position to exploit the opportunities rather than pay undue price by joining earlier and unprepared (Ibid, Lenchisa:8).
This has a normative rationale in the creation of well-functioning credit and capital markets (as a magic po¬tion for the prevailing treacherous deregulated sales of company shares and an investor-friendly environment in the economy. The relevance of this is meant to achieve much broader and involve, as a fundamental component, the improvement of microeconomic efficiency. These would in turn entail, competent economic management, efficient public services, sound infrastructure and liberalization and commercializing activities in the role of lending institutions, establishment of sound information systems on micro-economic behavior and markets and trade and investment policy priorities. Strengthening fiscal sustainability requires fiscal rules, transparency requirements, responsibility laws and new institutional arrangements, which are not necessarily mutually exclusive. This in turn is hinged on a broad financial sector reform and adjusting the monetary policy mix, expanding industrial capacity and slashing trade cost.
See the lecture here or https://www.academia.edu/4941345/Strategic_arenas_for_WTO_accession_Public_Policy_Trajectories_that_lure_in_the_rewards_of_Globalization_to_Ethiopian_Businesses