The WTO and the World's Poor

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Dean Baker
Truthout, July 12, 2006

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As President Bush once tried to say, "Fool me once, shame on you. Fool me twice, shame on me." Paul Wolfowitz, who fooled us once when he was pitching the line about weapons of mass destruction in Iraq as the Deputy Secretary of Defense, is now out to fool us again. In his new job as president of the World Bank, he is pitching the line that a new WTO agreement is the best way to help the world's poor.

His basic story is that protectionist barriers and subsidies in rich countries, especially in agriculture, are hugely harmful to the world's poor. He claims that if these barriers were removed, it would provide enormous benefits to the world's poor. Given Mr. Wolfowitz's track record, anyone who is not a fool would examine his claims very closely.

The standard economic models don't provide a basis for great hopes about a new WTO agreement. One recent analysis showed that the worldwide gains would be $54 billion a year. This might sound impressive, until you realize that it is equal to approximately 0.1 percent of world income. According to this model, approximately 1.9 percent of the gains would go to the world's poor, or close to $2 billion a year. With 1 billion poor people, this translates into an average gain of $2 a year.

Even this story might be too optimistic. Some of the world's poor will end up as losers from a WTO agreement. Cutting back subsidies to rich country farmers could be good news to the farmers who compete with them in the developing world, but it is surely bad news to consumers of these crops. They will have to pay more for their food. Some developing countries are net importers of agricultural products. They will end up as losers because they will be paying higher prices for their imports, with little or no gain on their exports.

The standard models also assume that the work force will remain fully employed. In the real world, workers who lose their jobs in the agricultural sector in developing countries may not be able to simply find new employment elsewhere. The mass displacement in Mexico's agricultural sector that followed in the wake of NAFTA has been one of the factors driving immigration into the United States.

The standard models also employ a bit of economic chicanery. They assume that the tariff revenue that developing countries lose when they cut their tariffs is made up from a "lump sum" tax. Lump sum taxes can be a useful modeling tool, but they don't actually exist in the world. A lump sum tax means that the government effectively sucks money out of the economy to pay its bills.

Using lump sum taxes in trade models is dishonest, because lump sum taxes do not lead to economic distortions. Real world taxes, like income taxes, sales taxes, or value-added taxes all lead to economic distortions - meaning that they reduce income. In other words, if the models assumed that the lost tariff revenue from a WTO agreement was made up through any real world tax, the projected gains would be even less than 0.1 percent of income. In short, there is little reason to believe that the world's poor stand much to gain from a new WTO agreement.

It wouldn't be difficult to design policies to aid the world's poor, if anyone cared. For starters, we could exempt them from US-type patent and copyright protections. This would mean that poor countries could always import generic versions of any drug, saving themselves both money and/or the time needed to arrange lower cost shipments from the drug industry. This could potentially save millions of lives as well. Exempting poor countries from patent and copyright rules would save developing countries money on everything from computers and software to books and recorded music and videos. The gains from this policy would vastly exceed even the most optimistic projections of gains from a new WTO agreement.

Of course, Paul Wolfowitz has told us that approving a new WTO agreement is essential for the world's poor. The problem is that there just is no evidence to support this claim. While it may be no easier to know his true motive for promoting a WTO agreement than it is to know Wolfowitz's true motive for promoting the invasion of Iraq, we should not get fooled again.


Dean Baker is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of The Conservative Nanny State: How the Wealthy Use the Government to Stay Rich and Get Richer. He also has a blog, "Beat the Press," where he discusses the media's coverage of economic issues. You can find it at the American Prospect's web site.