Storm over WTO proposal to ban subsidies

Martin Khor

A new controversy erupted in the World Trade Organisation when the United States recently proposed that many types of subsidies provided by governments to their industrial and service enterprises be banned.
   If adopted, the proposal will have grave implications for developing countries since most of them make use of the practices which the US now seeks to ban.
   Development experts have attacked the proposal, saying it would halt industrial development in developing countries by affecting growth or even the survival of their firms.
   "The proposal is very much against the interests of developing countries, which will lose the ability to use these subsidies which are now permitted in the WTO," said Bhagirath Lal Das, an international trade expert who was formerly a high level United Nations official.
   The experts point out that developed countries have also been making use of these subsidies, particularly when they were at their development phase. Now that their companies have become giant multinationals, the rich countries want to prohibit practices in other countries to prevent the entry of new competitors.
   Moreover, the US wants to exempt the agriculture sector from the subsidy ban. In agriculture, the US is providing massive domestic subsidies, including some of the varieties that it seeks to prohibit in other sectors.
   The double standards in the US proposal are causing the developing countries to call "Foul!"
   The US proposal was made as part of the Doha Round negotiations. It wants to amend the WTO Agreement on Subsidies and Countervailing Measures (SCM) by adding five new types of subsidies onto the two subsidies (export subsidies, and subsidies that promote the use of domestic goods over imported goods) that are now prohibited.
   The five subsidies are: (1) government payments to companies to cover operating losses; (2) forgiveness of government-held debt; (3) government lending to 'noncredit-worthy' companies; (4) government equity investments in 'unequity-worthy' companies; and (5) other financing, such as 'royalty-based' financing that is not commercially available.
   The US also wants countries to notify the WTO of details of government or public-sector ownership of an enterprise.
   The information to be notified includes: (1) any changes in such ownership or provision of equity capital, as well as explanations whether the government investment is consistent with the 'usual practice of private investors' in the country; and (2) the percentage of government or public-body ownership in the enterprise and terms and conditions of any government financial contribution to the enterprise (including government revenue foregone or not collected).
   This is presumably to assist the WTO and its members to monitor and track down any practice of governments providing the prohibited subsidies to enterprises.
   US Trade Representative Susan Schwab said that "the subsidies we want to prohibit maintain inefficient production capacity in industries ranging from steel to semiconductors. Stronger rules for these subsidies would address trade-distorting practices of many of our trading partners that often lead to unfair trade."
   However, many development experts see the US move differently.
   "The United States wants to preserve the use of subsidies that it continues to use, especially in agriculture where it is refusing to even discuss changing the rules to limit and discipline subsidies known as the Green Box," remarked Chakravarthi Raghavan, a veteran analyst of the GATT/WTO trading system.
   Dr. Ha-Joon Chang, a development economist in the University of Cambridge, and author of several books including 'Kicking Away the Ladder', said the US proposal "appears to be a monopolistic attempt by the existing producers to freeze out competition."
   Chang asked: "Who decides which company is 'creditworthy' or 'equityworthy'?" For example, Nokia, the electronics company, which was founded in 1960, incurred losses for the first 17 years of its existence.
   "Now, in that situation, if the Finnish government wanted to invest in Nokia electronics in, say, 1965, that would go against the proposed US rule, as the company was definitely not equityworthy", said Chang.
   "The point is that some developing country firms may need to run losses for some time to get into new industries. If the government cannot help them, that will be the end of industrialisation in developing countries. In the long run, this is not even good for the rest of the world.
   "In the short run, it may be more 'efficient' not to allow new producers to enter the market, but in the long run, it may be more 'efficient' for the world to have new producers emerge with the use of subsidies.
   "Consider the Japanese and Korean steel or automobile industries, which all emerged thanks to government subsidies, but eventually they brought the prices of steel and cars down."
   Dr. Ajit Singh, Professor of Economics at the University of Cambridge, commented: "Many successful companies had long periods of negative profits.
   "In view of the unequal playing fields and the great inherent advantage of advanced country corporations over those of developing countries, the five extra disciplines the US wishes to introduce into the WTO's subsidy regime may cripple the development efforts of emerging countries."
   "Such a proposal is remarkably ill-advised" said Yilmaz Akyuz, a former Director of UNCTAD.
   He said many developing countries often cover operating losses of public or semi-public enterprises that render social functions, such as providing essential inputs to certain segments of producers, including credits. Most subsidies in the developing world focus on these.
   "The proposal is in effect using creditworthiness as a measure of subsidy-that is, loans to a creditworthy firm is not a subsidy," said Akyuz. "Can you trust market assessment in this respect?
   "Many Wall Street firms that were deemed creditworthy have gone bust with the bursting of the dot.com bubble while several Korean firms that looked unviable in the 1960s and 1970s turned out to be highly successful."
   -Third World Network Features

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Share Shah

Late Professor John McMillan of Stanford University, USA gave us a simple and straightforward understanding of the market. His book 'Reinventing the Bazaar: A Natural History of Markets' is a wonderful exploration of why markets work or fail, based on deep theory but accessible to a lay audience.
   His research and writing culminated in the book which was evocative and had a natural instinct for employing simple ideas to breakdown complex concepts into their component pieces, the book simultaneously articulates the power of market forces and the need for markets to be robustly well designed and regulated. Failure to harness market forces results in Soviet-style stagnation, while poorly designed markets lead to spectacular efficiency failures.
   He wrote about how governments can minimise the cost of procurement of everything from battleships to French fries and efficiently sell assets like radio spectrum and oil tracts. He mentioned his concern how collusion can be achieved by bidding rings such as groups of antique dealers bidding at estate sales if they cannot secretly make side payments to one another. In the context of government procurement, concerns the problems that arise when aggressive firms bid for contracts where the winning firm's post-auction performance is of critical importance to the government.
   In addition, McMillan put theory to practical use. As consultant to the Federal Communications Commission, he oversaw the implementation of the 1995 spectrum auctions, which were wildly successful and imitated around the world. He navigated political landmines in auctioning spectrum in Mexico, which created the world's first free market in spectrum, as well as raising over US$1 billion in the sales of the cellular spectrum.
   During the period of transition of formerly socialist economies in East Asia and Eastern Europe, McMillan became fascinated with the question of what made markets work or fail. The central question concerning these transition economies was whether they should move quickly and directly to free markets-the "big bang" approach-or whether a more gradual transition would be better. McMillan led the group of scholars that argued for gradual transitions. The big bang approach, he argued, would only work if unrealistic assumptions were met about how markets work and grow, and in particular how market participants acted and interacted. While the big bang may have worked well after World War II in Europe, circumstances were different in this case. A big bang creates opportunities for all sorts of rent-seeking behavior, and not necessarily the kind that encourages the growth of a stable market economy.
   There is little doubt that our Securities & Exchange Commission has taken up a strategy to gradually develop the market. In this effort various stake holders view the Commission's efforts from different perception. After all everyone cannot be made happy. But one fact that concerns the mom-pop investors should truly be the concern of the regulator. For instance the efforts that are being made to introduce the book building system will mean that the market is going to be in the hands of the big players who after capturing the IPO will resell at a profit to the others.
   This means the entire nature of our stock market is going to be changed. Definitely the large issuers are going to be very happy but then again the small investors will be at their mercy. I would like to clarify that the so called book building approach had been working in a clandestine manner earlier. What used to take place was that large chunk of shares were sold or given off the market, to friendly brokers and friends. Of course there was a routine public offering but that was only a show. Once listed these friendly brokers pumped the price to astronomical levels and as soon as the small investors started buying, they dumped and eventually shared the loot with the issuers. Many suspect that this is also going on with the power sector companies which are trading far above their fundamentals.
   Only if our past political governments had heeded some of the current institutional problems would not have cropped up. The Rupali Bank affair may probably go down in the history as the biggest farce. How could the Privatization Board agree to an uneven undertaking? Lest not forget how the government flunked the Bangladesh Biman privatization endeavour. Why did it fail? The people must know and the World Bank also be held responsible for their wrong advice. It would be water under the bridge but never the less abstruse fact of the giving away of the cell phone companies. It is a shame that today these companies refuse to go public preferring to remain shrouded in the secrecy of their culpable acts.

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Dhaka to get US$ 100m from World Bank

Holiday Desk

Bangladesh Government has signed an agreement worth US$ 100 million with the International Development Association (IDA) to deepen and sustain education sector reforms in the country, says a World Bank press release.
   M. Aminul Islam Bhuiyan, Secretary, Economic Relations Division and Xian Zhu, World Bank Country Director signed on behalf of the Government and the World Bank respectively at a simple ceremony at National Economic Council Conference Room at Agargaon, Dhaka.
   The Third Programmatic Education Sector Development Support Credit is designed to address systemic governance issues in order to make the best use of the resources in improving quality and enhancing access to secondary education. The first and second credits were approved in 2004 and 2006 respectively.
   The World Bank has been supporting the Government's initiative to tackle governance problems in secondary education, enhance quality of secondary school teachers and link government support to the performance of the institutions. The programme is expected to lead to greater access to secondary education for all children, especially the poor and marginalised who cannot afford the expenses of secondary schooling.
   The credit from the International Development Association (IDA), the World Bank's concessionary arm, has 40 years to maturity with a 10-year grace period; and it carries a service charge of 0.75 per cent.

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Singapore seeks to set up special EPZ under BEPZA

Holiday Desk

Singapore has shown profound interest to invest in the Export Processing Zones of Bangladesh, saysa BEPZA press release.
   Leader of the 22 member high powered business delegation from Singapore Benny Pua, President of Textile and Fashion Federation (TFF) of Singapore disclosed this during a meeting with Brig. General Ashraf Abdullah Yussuf, Executive Chairman of Bangladesh Export Processing Zones Authority in Dhaka last Thursday. Syed Farhad Ahmed, Managing Director, Texas Group of EPZs accompanied the delegation.
   The Executive Chairman of BEPZA described the delegation about the entire gamut of EPZs including incentives and facilities offered by BEPZA.
   Brigadier Ashraf sought investment from the Singaporean businessmen particularly to avail the facilities of 50 per cent discount tariff rate on land and standard factory building in Mongal, Ishwardi and Uttara Export Processing Zones.
   Benny Pua lauded BEPZA for package of incentives and shown interest to invest in EPZ of Bangladesh. The delegation placed a proposal to create a special EPZs under BEPZ umbrella for Singaporean investors. In this regard BEPZ's Executives Chairman assured them that they would get priority to create special enclave in any EPZs of North Bengal as a Singaporean EPZ. Moreover he expressed view that expansion area of Karnaphuli EPZ located at CSD in Chittagong may be allotted for the Singaporean special EPZ.
   One member of the TFF delegation proposed to establish Effluent Treatment Plant (ETP) as service oriented industry in EPZ. BEPZA Chief responded about this in positive way. Besides the establishment of Singaporean special EPZ, delegation have also shown egerness to invest in Adamjee, Karnapphuli, Comilla and Ishwardi EPZs.

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IFC partners with Exim Bank to enhance trade finance

Holiday Desk

IFC, the private sector arm of the World Bank Group, has announced that Export Import Bank of Bangladesh Limited (Exim Bank) is joining its Global Trade Finance Program, says a press release.
   IFC is providing Exim Bank with a facility of up to $5 million within the program. This will be IFC's first facility to an Islamic bank in the country.
   Paolo Martelli, IFC Regional Director for South Asia, noted, "In Bangladesh, where the Muslim population exceeds 88 per cent, Islamic banking is expected to increase its foothold significantly in coming years. Better regulations and risk management tools are expected to gradually improve the operating environment for Islamic banks."
   IFC's support to Exim Bank fits well with its strategy to partner with financial institutions and banks that are committed to developing Bangladesh's corporate and small and medium enterprise (SME) sectors. IFC's Global Trade Finance Program will provide Exim Bank with risk coverage in a difficult market and a global network that will help grow its trade finance business.
   Kazi Masihur Rahman, Managing Director of Exim Bank, welcomed the partnership, saying, "We are delighted to establish our relationship with IFC through its Global Trade Finance Program. IFC's support will help us create new and valuable business opportunities for our clients in Bangladesh and around the world."
   The IFC Global Trade Finance Program supports trade with emerging markets worldwide and promotes the flow of goods and services between developing countries. IFC provides partial or full guarantees against underlying trade instruments and covers the payment risk of participating issuing banks. The program allows issuing banks, such as Exim Bank, to increase the volume and value of trade transactions, with enhanced tenors and access to competitive pricing terms.
   Per Kjellerhaug, IFC Country Manager for Bangladesh, Bhutan, and Nepal, said, "The Global Trade Finance Program is one good example of the many products IFC offers to help develop a sector. It is an important mechanism to get local banks into an active global network that facilitates transactions in challenging markets, promotes competitive financing, and builds correspondent bank relationships with new institutions on a low-risk basis."
   IFC
   IFC, the private sector arm of the World Bank Group, promotes open and competitive markets in developing countries. IFC supports sustainable private sector companies and other partners in generating productive jobs and delivering basic services, so that people have opportunities to escape poverty and improve their lives. Through FY06, IFC Financial Products have committed more than $56 billion in funding for private sector investments and mobilized an additional $25 billion in syndications for 3,531 companies in 140 developing countries. IFC Advisory Services and donor partners have provided more than $1 billion in program support to build small enterprises, to accelerate private participation in infrastructure, to improve the business enabling environment, to increase access to finance, and to strengthen environmental and social sustainability.
   Exim Bank
   Exim Bank was established in June 1999 by 33 founding shareholders representing industry and trade in Bangladesh. It started as a conventional commercial bank but converted to a full-fledged Islamic Sharia-based bank in July 2004. The bank made its initial public offer in 2004 and is a listed entity on two bourses in the country. It had a rights issue in 2006 to augment its capital base.
   The bank has grown significantly and now has 32 branches covering both metropolitan and rural areas in Bangladesh. Its main focus is trade finance, although it offers a full suite of savings and investment products for its corporate and SME clients.

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