Thursday 25 March 1993

THE JACK IN THE BOX POPS UP AGAIN

Geneva Mar (Chakravarthi Raghavan) -- A successful conclusion of the Uruguay Round and the trade liberalization resulting from it would produce annual income gains of more than $200 billion dollars of which over ninety billion would accrue to the Third World countries, the OECD Development Centre has again claimed, at an informal meeting of the UNCTAD Trade and Development Board on 16 March.

The director of coordination of the Centre, Mr. J.Bonvin and one of the centre's researchers Mr. Dominique van der Mensbrugghe repeated the claims when speaking at the informal Board meeting on 16 March 1993. The projections and claims were first made by the centre in March 1992 in a policy brief and, as Bonvin and Mensbrugghe approvingly noted, the figures had been cited repeatedly in the media and used by political leaders. The benefits, the two went on to claim would in fact be more.

The copy of the OECD Centre's publication, a 40-page thin policy brief including appendices and bibliography, titled "Trade Liberalisation: What's At Stake" by Ian Goldin and Dominique van der Mensbrugghe, was also made available to the delegates.

Bovin at the very outset though made clear that the Centre's research studies and publications, and his own remarks at the informal in no way committed the OECD itself, that the Centre was not an "academic research centre" but an autonomous and independent unit set up by the OECD to look at specific problems that would be of concern both to OECD members and non-members and make policy recommendations.

He also brought out that when it was known that US President George Bush and EC Commission President Jacques Delors were to meet in March 1992 to look at the impasse over the Uruguay Round, he had asked his researcher to look at their work and come up with some estimations and recommendations and the Centre's policy brief was the outcome of it.

When the projections and claims were made, they were uncritically accepted and cited by those parts of the media who were ideologically pushing for the Uruguay Round policy objectives, as also by public figures like British Prime Minister Major and President George Bush and others.

But they came under real scrutiny and challenge in October of last year when suddenly it looked as if the US and EC would do a deal and the Round would be concluded.

Economists and econometricians in other organizations recall that after the study was published in March, and questions had been raised in private, the study and its claims were put on the shelves for a while, but surfaced again towards end of 1992 when the US-EC trade disputes flared up and attempts to resolve their differences on agriculture were renewed, both just before the American polls and immediately after.

Soon after the US Presidential elections, when the lame-duck Bush administration renewed the talks, the Wall Street Journal (November 9, 1992), after talking to the two authors of the report, ran a story that even if a trade agreement under the Round was initialled immediately, it wouldn't provide the kind of boost to the world economy that many were predicting over the short-term and that the results could only come gradually over a period of ten years.

The WSJ also quoted the two authors of the study, which had "prompted this rosy scenario" (of a boost to the world economy mired in recession), as saying that "they've been misunderstood and that people are hoping for the moon". The WSJ then noted that while the authors had found that the conclusion of the Round would yield benefits of over $195 billion annually -- with $95 billion accruing to the developing countries and former centrally planned economies -- their predictions would apply ten years into the future, and that by 1996 the benefits would only be about 70- 80 billion dollars, that trade reforms would provide for long- term shifts and "won't pull an economy out of a cycle" and that in the short-term the global economy could expect little help.

Soon after, in December, when the claims and the basis for these econometric projections began coming under greater scrutiny and to be questioned, the OECD Secretary-General Jean Claude-Paye (according to a Reuter news agency report from Paris of his luncheon meeting with French journalists) had characterised the projections and the report of the Centre as a "pretty theoretical study" and had blamed the media for wide use of the study but missing its point that it would take ten years to achieve it or that some nations, particularly in the developing world would be hurt.

In their interventions and responses to questions at the informal meeting of the Board where a group of panellists spoke on adjustment and trade policy reforms, Bovin and Mensburgghe made some carefully crafted statements and responses on these issues. The panel itself, by coincidence or otherwise, appeared to represent a particular neo-classical, neo-orthodox view and, while it had some economists, none of the panellists or delegates raised some of the critical questions. 

But the two officials from the OECD centre several times made references to the econometric model -- the so-called Rural/Urban- North/South Model constructed by the centre and the World Bank -- and its being a 'dynamic model' to leave the overall impression on the delegates about its scientific nature and fair degree of accuracy of its outcome and projected results -- almost like an equation or formulae in the hard sciences that could be tested by anyone repeating the experiment.

The study has made the claim that developing countries had "much, and perhaps even most, to gain from the discussions (in the Round) on services, Trips, Trims and textiles (while) the discussions concerning agriculture have occupied the centre stage".

The view that developing countries would gain from services, Trips and Trims was itself a strange claim, as many Third World negotiators note. In fact the entire basis of the launching of the Round and the negotiations on liberalization in traditional goods areas, frequently articulated by the centres and the GATT secretariat officials, has been that the industrialized countries would gain on services, Trips and Trims and thus be able to make concessions to the developing countries in market access, agriculture and textiles.

The Commodity Composition of the RUNS model is said to include under Agriculture -- Wheat, rice, coarse grains, sugar, beef, veal and sheep, other meats, coffee, cocoa, tea, oils, dairy, other food, wool, cotton, other non-food; and under Non- Agriculture -- other manufacturing, energy, services, equipment, fertilizers.

The regional composition is cover China, India, Indonesia, Low income Asia, Asean and other Asia, sub-Saharan Africa, Maghreb, Mediterranean, Gulf Region, Brazil, Mexico, Other Latin America, USA, Canada, Australia and New Zealand, Japan, EC, EFTA, European Economies in transition and former Soviet Union.

But the responses to questions by Bovin and Mensbrugghe repeatedly made references to the agricultural issues and liberalisation and somewhat in passing to a World Bank study on liberalisation of textiles and clothing sector, but without any reference to or indication of awareness that the Dunkel text on textiles and clothing is somewhat (and from the exporters point of view more disadvantageous) liberalisation process 

The study has taken as its 'working hypothesis' the Dunkel Draft Text or the DFA tabled by Arthur Dunkel in December 1991, a 30% reduction in tariffs in agriculture and other areas, 30% reduction in subsidies for purchase of agricultural inputs -- assumptions said to coincide with the initial negotiating positions at beginning of 1991 and hence claimed to be "close to the scenario of the DFA".

Bovin told the informal Board session their model did not include the "considerable" non-tariff barriers. And though the world markets have conditions of imperfect competition, the model assumed perfect competition. But recent studies, Bovin said, showed that in conditions of imperfect competition, welfare gains by liberalisation were higher.

However, neither the study nor the interventions give any indication of how the Dunkel proposals were translated into quantitative terms for specific product projections, the elasticities used and how they were arrived at or the assumptions made for this, what specific estimates were made of the impact of trade liberalisation on output growth and its diffusion in the South.

Though the claim of its being a "dynamic model" projected over ten years was made, the study gives no clue on the assumptions about other variables used over the period and how they might affect the results -- exchange rates, flows of capital resources, use of other resources, productivity increases, technology flows and changes and their impacts on factors of production -- all of which would be the most truly dynamic factors.

The RUNS model has been described in the study as in the class of "applied (or computable) general equilibrium models", incorporating supply and demand relations for different economic sectors, rather than only of sectors of interest as in partial equilibrium models and including factor markets, labour, land and capital and feedback effects from income to demand and savings. 

Yet, Bovin said it had been assumed that there would be no change in world allocations of foreign direct investment, that the regional balances would remain the same and that effects of productivity gains had not been taken into account.

He however made clear that the model used was not an economic forecast model and hence could not answer questions as to what effect the conclusion of the Round would have on current world recession, but that the liberalisation would bring about structural changes which were more important.

An econometrician from another international organization who was present at the informals said the 200-250 billion dollar trade gain after ten years should be seen in context. He noted that world trade (including goods and services) in 1992 was estimated to be of the order of 4600 billion dollars and had been growing from 1983 at annual percentages ranging from 2.5 to as high as 8- 9 percent, and is generally estimated to have started accelerating in 1992 to a little over four percent.

The 200-250 billion dollar figure at end of ten years, seen in this perspective, is just five percent of the world trade and would probably add to the world gdp (now about $20,000 billion and even normally expected to be $23,000 billion after ten years) 0.8 percent. This assumed that other variables won't change: a somewhat difficult assumption to make either in theory or in actual experience.

The growth projection was very small in terms of alternate growth-oriented policies. In other words if the efforts spent on the Round had been devoted to alternate growth policies, the results would have far outstripped the gains from the Round after ten years..

Another economist said all these projections and claims appeared to be driven by the OECD ideological view about the Round and that its conclusion is desirable for the interests of the OECD countries and assumed that if trade restrictions were removed and trade liberalized, world trade and output would grow.

It is like assumption over a car stalled on a road before a closed gate, he said.

Even if the gate was opened, the stalled car won't start and move forward until the reasons for its stalling are removed. It could be a simple case of lacking petrol or more serious one of major structural problems like a conked engine or a broken gear box.

Econometrics, another said, is little understood even by most economists who use its results. It can be a useful tool if its limitations are clearly understood, and econometrics used to look at some possible trends. But no one can take decisions on such projections and any entrepreneur, proceeding on basis of projections would quickly come to grief. The results of economic theory depend on behaviour and decisions of individuals and collectivities and hence social and political dimensions -- a fact that most often is ignored.