Lessons from the Hong Kong wto ministerial

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Lessons from the Hong Kong WTO Ministerial

Shahrukh Rafi Khan; Former Executive Director

Trade, according to economists, is not a zero-sum game because it makes all parties better off. This is true in essence, although in a changing world the application of static theory is far from straightforward. Thus, low-income countries need to protect their policy space to enable industrialization until they are ready to compete, as was done in the past by the currently high-income countries. That is one reason why trade negotiations can be a zero-sum game where some groups of countries gain at the expense of others. It is also why trade negotiations are so complex and time consuming.

As the dust settles, the decision-making process in Hong Kong during the WTO “ministerial” (attended by Trade Ministers) can be interpreted. Given the WTO requirement of decisions by consensus, with every country wielding a veto, it is a miracle that any agreement is reached at the WTO ministerials that are held every two years. Ministerials arrive at agreements based on the intense bargaining, negotiations and ploys that go on in Geneva and the major capitals of the World in the two-year run up to the meetings. The process reaches a crescendo at the ministerial. The ministerials themselves are framed within “rounds” and the current round - the Doha development (to benefit low-income countries) Round - was initiated in 2001 and slated for completion by 2005. This was an ambitious target, and, given that negotiations are still pending, even the next ministerial may not deliver an agreement. This slow decision-making process is a boon for low-income countries that require more time to catch up and hence be able to frame policies free of WTO/World Bank/IMF constraints.

Decision-making by consensus potentially empowers the majority of low-income countries that woke up after they had unwittingly signed away too much during the last Uruguay Round. Thus, for example, TRIPS (Trade Related Intellectual Aspects of Property Rights) and TRIMs (Trade Related Investment Measures) were agreed to, but they realized too late the closing of policy space these measures represented and that that virtually everything is trade related. In order to avoid repeating the same mistakes, the low-income countries adopted strong positions in the Doha Round, during which the first two ministerials, at Seattle (2001) and Cancun (2003), failed.

The main players have always been the high-income countries, particularly the USA and the EU. They have the means and ability to bring others into line, provided they themselves agree. Their lack of agreement - mainly on farm subsidies – caused the ministerials at Seattle and Cancun to fail and nearly caused a failure in Hong Kong. This fissure also provided an opportunity for low-income countries to seize the initiative. In Hong Kong, Brazil and India assumed the leadership of the G-20 (the negotiating group of the like minded Group of 20 within the WTO) and more broadly of the low-income countries, with Pakistan in a strong support role. They refused to make the further concessions demanded by high-income countries on tariff reductions on non-agricultural goods and services and other concessions such as on trade facilitation. Unlike at Cancun, China was a spectator rather than a leader of the G-20 at Hong Kong, partly because, as a major industrial powerhouse, its interests on industrial tariffs have shifted.

The G-20 rightly realized that further concessions by low-income countries could be blocked until the EU and the USA stopped subsiding agriculture in their own countries. They also understood the political resistance to subsidy cuts in high-income countries, including Japan and Korea: this strategic move could have bought some breathing space for low-income countries by blocking agreement. Although Brazil has much to gain from agricultural trade liberalization, other low-income countries may not. The subsidies keep world food prices low for most low-income country consumers and subsidy-driven US surpluses provide valuable emergency food aid (that the EU opposes). Large corporate agriculture in some other medium and low-income countries may also benefit, but there will be many more losers than gainers.

The disagreement over agricultural subsidies resulted in an impasse at Hong Kong until the last evening of the five-day meeting. The USA and EU had already made their offers, the former more generous than the latter due to France’s intransigence. Eventually, the breakthrough came via Brussels when the EU agreed, one day before the conclusion of the Hong Kong ministerial, to phase out agricultural export (not domestic) subsidies by 2013. Thus an agreement was reached on issuing a Hong Kong declaration.

So what did the 149 negotiating nations achieve in Hong Kong? Based on press reports, the main achievements include the following:

  • Fifty income-poorest countries (Pakistan included) now have duty and quota free access to high-income country markets for 97 percent of their exports, substantially more than before;

  • Several billion dollars a year in aid has also been promised to the income-poorest countries by the high-income countries, to help them compete in global trade;

  • An earlier phase-out of cotton subsidies by 2008 will benefit five West African countries, another sticking point at the Cancun ministerial;

  • A vague agreement to ban subsidies to end over-fishing;

  • India delivered low-income country willingness to negotiate on liberalization in services like banking, insurance and telecommunications to the satisfaction of high-income countries (with Venezuela and Cuba reserving the right to opt out).

India will no doubt benefit from the liberalization in the information and communication sectors. The US and Brazil will be pleased with the phase out of agricultural export subsidies, although the US had to concede that it would not provide free food to countries without shortages and where the market might be disrupted as a consequence.

On balance, the low-income countries did gain from the concessions made, as they should have, because this is called a “development round.” However, the 3 percent exports from low-income countries that are still subject to restraints in high-income countries are the ones that really matter. The fact that many issues were deferred made observers call the ministerial a ‘non-failure’ but not a success. From a low-income country perspective, there has been little discussion yet on lowering agricultural and non-agricultural tariffs. This continues to give them some breathing space. Also, since limits on domestic farm subsidies were not discussed, low-income countries continue to have a bargaining chip that should be used wisely, since the impacts of removal are not straight-forward.

The other lesson from Hong Kong is that negotiations to protect low-income country interests will become ever more difficult as the negotiating terrain becomes increasingly treacherous due to changing interests and shifting alliances. Observing the change in China’s stance from one ministerial to the next should be sobering for low-income country trade representatives. Similarly, while Brazil and India did not sell out the low-income countries, their interests on several issues are now aligned with those of high-income countries. Pakistan, as a notably experienced and active negotiator, will no doubt take into account the changing dynamics. However, even as it protects its policy space as skillfully as possible through strategic alliances, it must engender internal competition policies, because having to compete internationally is now on the horizon for all.

Dr Abid Qaiyum Suleri and Arshad H. Abbasi

suleri@sdpi.org; abbasi@sdpi.org
The statement that "Pakistan is soon going to join water scarce nations" is made in the latest United Nations Environment Programme (UNEP) State of the Environment report. This is confirmed by the World Bank's latest publication on the Pakistan water situation, titled Pakistan: running dry. Population growth, rapid urbanisation, increases in per capita water consumption (due to improved life style?) and climate change are some of the reasons given for the increased water shortage in the country. However, we feel that it is the lethal combination of bad water governance, incompetence and high population growth which has pushed Pakistan into a situation of water scarcity which leaves no margin for error for our water management experts.

So far, it seems that the approach to averting a crisis is entirely erroneous. Our mindsets are historically tuned to explore new water resources, but in this era of conservation the focus should be on the efficient use of existing water resources, rather than trying to construct new ones. Unfortunately, those whose word is law in managing drinking water resources keep repeating the same mistake, paying no heed to new concepts and continuing to focus on preparing feasibility reports for tapping new 'water resources'. Their focus is on mega-and macro-interventions to rectify the situation, although the required prescription for today is the management of finite water sources through micro-management.

Why is this micro-management required? Take the example of Islamabad, where according to some government reports, 'unaccounted for' water (i.e. water lost between source and consumer) is more than 60 percent of the total. Three major water sources that cater to the requirements of Islamabad are the Khanpur Dam, the Simly Dam, and ground water extracted through tubewells. Consider the case of Khanpur Dam, built in 1985 with a huge investment of Rs 6.178 billion to cater to the water needs of the country's capital and its twin city of Rawalpindi till 2030 (keeping in mind population growth). Khanpur Dam had an original storage capacity of 110,000 acre feet (AF). Even today its storage capacity is only 91,000 AF, which is three times bigger than that of Simly Dam (27,800 AF). It is significant that the larger dam is producing less water (23 million gallons per day) than the smaller one (40 million gallons per day).

It does not require sophisticated analysis to understand why Khanpur Dam is not delivering as much water as it should. It is simply because of the wrong selection in 1986 of the water conveyance route from the reservoir to the twin cities by the apex decision-making body of the country, the Executive Committee of the National Economic Council (ECNEC).The catastrophic story of this selection started when, in 1983, the government of Pakistan requested the Japan International Corporation Agency (JICA) to carry out a detailed study on delivering water from Khanpur to Rawalpindi/Islamabad.

A team of the Japanese experts from JICA (on behalf of the government of Japan) conducted a detailed feasibility study and proposed three options for transporting water. These were: (1) Nicholson Monument utilising the 19 Km left bank canal (LBC) and pumping water to an elevation of 400 feet before supplying it to Islamabad/Rawalpindi (2) Direct supply from the Khanpur reservoir to Islamabad through a short tunnel, along with use of a canal and a pumping station and (3) direct supply from the reservoir through a long tunnel to Islamabad with gravity flow. The project was considered in an ECNEC meeting in 1985 in light of the JICA report. It was decided that the Water and Power Development Authority (WAPDA) should appraise the three alternatives and recommend the most suitable one.

This was done, and WAPDA recommended the third alternative as it was the most economical and sustainable route. But ECNEC turned down the recommendation in 1986 and opted for the first option. This meant that water had to flow down from the reservoir and then be pumped to an elevation of 400 feet. The monthly electricity bill for this pumping alone stands at more than Rs.7 million. The consequences of this decision are now proving more drastic than was apprehended by the experts. There are two problematic aspects of the situation: the high operational and maintenance cost of the water supply system, and the quality and availability of the water. The left bank canal passes through some sensitive and heavy industries in Taxila, where untreated effluent is disposed of in the water. Another primary problem is that the intake capacity of the LBC from Khanpur Dam has reduced from 440 cusec to 124 cusec over time because of the deteriorating canal structure. The leaky canal structure is also threatened by stone crushing operations all along its route, with debris continuously falling into it, which also reduces its capacity.

JICA carried out a post-project evaluation of Khanpur Dam in 2003 and concluded that the regional drought was responsible for the insufficient water supply in the dam. However, the evaluators ignored the fact that 4,560 million gallons of water had to be released from the Khanpur reservoir through its spillway (that is, this water was diverted from the canal) in March 2003 in order to protect the dam from bursting after it had filled to capacity. Water storage statistics for 2005 reveal that 20,266.47 million gallons of water had to be released through the spillway. This is more than Rawalpindi’s entire annual consumption of water.

In addition to this wasteful but necessary spilling of water, seepage is a major cause of loss. The daily seepage of Khanpur Dam is 16 MGD at the lower level and 40 MGD at the higher level. (The latter obtains when the reservoir is full.) Contrast this with Islamabad's average daily water requirement, which is 65 MGD, and you realise that preventing this seepage could play an important role in stabilising the water supply to the capital city.

Now that it is becoming increasingly evident that Khanpur Dam is unable to meet the water supply requirements of Islamabad, the official managers are once again bent upon taking the same error-filled route. To cope with the water deficiency, the Capital Development Authority has paid 15 million rupees to a consultancy firm for a feasibility study focused on carrying drinking water from either the Indus or the Jhelum to Islamabad. It must be kept in mind that the points where these rivers would be tapped are on average 800-900 feet below Islamabad. This means that if water is supplied to Islamabad from the two rivers, it will have to be pumped to at least an elevation of 800 feet.

This study of the Khanpur Dam reveals that much can be achieved if we focus our attention on conserving existing water resources and rectifying the mistakes of the past, rather than repeating them. If expensive blunders with a high cost to the national exchequer keep being committed in the federal capital, under the noses of the high and the mighty of the land, what is the state of affairs in rest of the country?

Let us conclude by saying that Pakistan is getting dry not only because of population growth or climate change, but also because of poor governance and flawed decision-making, both of which ignore the basic principles of sustainable development for short term gains. The findings of the study on the Khanpur Dam clearly support the contention that Pakistan can generate enough water resources to meet all its drinking and agricultural requirements simply by conserving and efficiently operating its existing resources. Who said it's a ‘do or die’ situation when it comes to constructing big dams?

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