August 31, 2006 - New Report Questions World Bank Free Trade Policies; Vatican Representative Critical of Current Trade System

Background

On October 9, people around the United States will celebrate Columbus Day, the day on which the U.S. commemorates Christopher Columbus's arrival to the New World in 1492. Columbus Day is remembered for its sense of hope: anything was possible in the New World.

Students of history now know that while the creation of America and the values for which it stood is truly an event to be celebrated, serious challenges and injustices that followed Columbus's arrival must also be sadly remembered. One such challenge was the relationship of the settlers to the indigenous inhabitants to the land. The unfortunate reality of history is that discoverers of new worlds have often turned into exploitative, violent conquerors who have forced native peoples into submission and even extinction.

In 2006, colonialism in the traditional sense has largely disappeared, but advocates for the poor often point to exploitative actions by the industrialized world toward the developing world as "modern day colonialism." Today, the raping of the environment and of natural resources in poor countries by corporations who have little regard for the well-being of the land's inhabitants is one form of modern-day colonialism. The interactions of international financial institutions (IFIs), such as the World Bank and the International Monetary Fund (IMF), with the governments of many developing nations have also been seen as a form of colonialism.

One reason for this is that trade liberalization has for decades been part of World Bank and IMF policy "prescriptions" for the countries with whom they work.

Trade liberalization, also known as "free trade," refers to cutting tariffs and taxes on goods coming into and out of the country; ending subsidy programs by which governments give special assistance to vulnerable industries and sectors to help them compete in the world market; and ending other types of government-intervention to make products more competitive on the world market. Such types of government assistance to can be extremely important to ensuring a developing country's ability to compete with producers from richer countries.

Oftentimes, "conditional" loans are given to poor countries, meaning that the countries must adhere to Bank and IMF demands for policy changes, such as trade liberalization, if the poor countries would like to receive loans. For decades, the Bank and IMF have consistently insisted that trade liberalization is necessary for economic growth. Also for decades, developing countries and economic justice advocates have insisted that trade liberalization alone will actually worsen poverty and increase inequality within developing countries.

Those concerned about economic justice have argued that in order for the gains from trade to reach the world's poorest citizens, trade policy must be balanced and must emphasize social investment, adequate compensation to producers in developing countries and to the poor in exchange for liberalization, regulation of liberalization to make sure it is not hurting the most vulnerable persons, and other instruments by which governments can work with the poor to address their needs.

New Report Questions World Bank's Agenda of Trade Liberalization

The World Bank's promotion of trade liberalization was called into question in March 2006 when the World Bank's Independent Evaluation Group (IEG) published a new report confirming that trade liberalization has indeed failed to benefit the poor, in large measure because trade liberalization promoters did not "fully take the external environment into account sufficiently, and thus did not distinguish the impact of external trade policies and shocks on trade outcomes for different groups of developing countries" (pg. xv).

The report goes further to acknowledge that "Trade-related projects did not adequately attend to the poverty and distributional outcomes, including labor market dynamics, and this continues to be a major weakness in project design" (pg. xv).

The March 2006 report released by IEG revealed that over three decades the World Bank has failed to do enough to protect those in poverty from the affects of increased trade liberalization. "The evaluation confirms that liberalizing trade alone is not enough to generate growth and fight poverty," said Vinod Thomas, IEG's Director-General. "The World Bank has done the right thing in promoting more open trade worldwide, but not necessarily done everything right to help generate the desired payoffs."

The report, which covered the period 1987 to 2004, said that about eight percent of the World Bank's financial commitment, about $38 billion, went to 117 countries to help them become better integrated into the global economy, which includes trade liberalization. The IEG found that the Bank has often promoted specific trade policies in countries without adequately assessing the potential impact they might have on affected communities.

In addition, the IEG evaluation found little evidence that the Bank has been able to "learn" from its mistakes and make real changes to the policies it promotes. For example, the IEG found that between 1987 and 1995, only 31 percent of loans given to liberalize trade included compensation to cushion the impacts of liberalization on the poor. Since 1995, the percentage of loans that included compensation to mitigate impacts on the poor has only risen 7 percentage points, to 38 percent. Most loans to liberalize trade still do not include funds to reduce the impact on the poor.

Catholic Social Teaching and Free Trade

Recently, Vatican representatives have made stronger statements than ever about trade liberalization, or free trade, exhorting leaders of the industrialized world to always ensure that the policies they are promoting are not to the detriment of the world's poor.

At the World Trade Organization's plenary session, held December 13-18, 2005, Archbishop Silvano Tomasi, the Holy See's permanent observer to the United Nations, called for a more equitable trade system which does not protect "privileged segments of society," but rather acknowledges that "at the core of all social and economic relations, and hence of trade relations, is the human person, with dignity and inalienable human rights."

Quoting Pope Paul VI, he argued against a system of completely free trade and emphasized that special rules should apply to poor countries:

Trade liberalization produces winners and losers, Tomasi said. "Trade reforms can, in the short term, bring about for the poorest countries adjustment costs that could have a harmful impact on the lives of their citizens," he explained. "International trade rules should enable governments to adopt the measures necessary to reduce the social costs of trade liberalization. Indeed, the global gain from trade liberalization should allow for 'compensating losers.'"

Free trade by no means brings automatic benefits, Tomasi continued: "Poor countries need be equipped in order to take this opportunity. Without appropriate infrastructure for access to markets, human capacity-building, it is unlikely that any country could benefit from trade," he said. He explained, "weak economies urgently need support for improving their supply capacity and trade-related infrastructure in order to be able to translate improved market access into increased exports."

He criticized the current way in which decisions about trade policy are made, with decisions often made in closed-door settings and the agenda set by rich countries with narrow interests in mind. The system instead "should encourage participation of all states, above all of the most disadvantaged, in the negotiation process," he explained. "Trade rules should be negotiated by all, in the interest of all, and adhered to by all, avoiding closed-door decision-making that lacks the transparency and democracy necessary for the participation of the weak and voiceless."

Above all, according to Tomasi, trade policy must have at its center the human person: "Free trade is not an end in itself but rather a means for better living standards and the human development of people at all levels," he stated. "The universal destination of the goods of the earth requires that the poor and marginalized should be the focus of particular concerns," Tomasi said.

Sources:
"Assessing World Bank Support for Trade 1987-2004: An IEG Evaluation" Independent Evaluation Group (IEG), March 2006, http://www.worldbank.org/ieg/trade/report.html

"Poor Not Benefiting from World Bank Trade Policies," Center of Concern, http://www.coc.org/index.fpl/1267/article/3760.html

Archbishop Silvano Tomasi, Message to the plenary session of the 4th Ministerial Conference of the World Trade Organization, Hong Kong, Dec. 13-18, 2005

Questions for Reflection and Discussion

1. Archbishop Tomasi repeatedly emphasized in his statement that trade policy must have "the human person, with dignity and inalienable human rights" at the "core." If the human person was at the core of trade policy, how might the current system be different than it is today?

2. How do you think the World Bank and IMF should respond to the IEG report? How should they change their policies?

3. Tomasi argued, "Without appropriate infrastructure for access to markets, human capacity-building, it is unlikely that any country could benefit from trade." In other parts of his speech, Tomasi advocated for a major increase in development aid from rich countries to developing countries if free trade is ever to "work." This is in contrast to U.S. leaders' push for "trade, not aid". The proponents of the "trade, not aid," idea believe that free trade by itself has merit and will bring about such benefits that trade can replace aid. What would you say in response to those who believe in "trade, not aid"? Why is aid so important? What can you do to encourage U.S. and world leaders not to abandon aid?

4. Tomasi identified as a problematic part of the current trade system the fact that "closed-door decision-making that lacks the transparency and democracy necessary for the participation of the weak and voiceless" occurs, thus denying poor countries of their voices and rights. Why is the participation of poor country governments so important in deciding trade policy?

5. A major criticism of trade liberalization is that while it might (or might not) spur economic growth in for a nation as a whole, this economic growth is often at the expense of the poorest persons in society. Likewise, a completely liberalized trading system might bring about more aggregate economic growth on a global scale, but may cause the economies of poor nations to suffer.

Does the social and economic well-being of the poor and of poor countries have to be at odds with national economic growth?

6. How do the following Catholic Social Teaching principles relate to the debate about free trade?
- The Option for the Poor and the Vulnerable
- The Common Good/Universal Destination of Goods
- Participation
- Global Solidarity
- The Dignity of the Human Person

Prayer for a Just Trading System

To your eyes, O God,
we are all equal.

Yet, we live in a world of unjust systems
that create vast inequalities.
The South looks to the North
and sees a wide canyon that cannot be crossed.

We pray for the reworking of our trading system, O God:

It brings benefits to those already rich
While entrenching more deeply the devastation of Your poor.

It claims to be "free,"
yet, in production, rich countries rise to conquer
because of monetary assistance they give to their own farmers
while demanding that poor countries cease their own practices.

O great God, we pray for the farmer in the sun-scorched field
In El Salvador, Tanzania, and Thailand.

We pray for poor governments shut out of decision making
and dictated the terms of trade.

Help us to cry out against injustice when we see it.
Inspire us to work for a system that is truly free -- one that is just
and in which respect for human dignity lies at the core.

Amen.

by Jill Rauh, Education for Justice, www.educationforjustice.org