South Centre Analytical Note - September 2002

SUMMARY

The existence of a relationship between trade and debt is a contentious issue. In fact, a clear divide exists between developed and developing countries regarding the subject, a division which has necessitated the formation of the Working Group on Trade, Debt, and Finance (WGTDF) within the World Trade Organization (WTO).

This paper is of the opinion that such a relationship does exist and that it has been and continues to be of a particularly negative nature. The problem of large debt overhangs in developing countries is unequivocally a result of the particular circumstances of their terms of trade within the international economic system. For this reason, the objective of this paper is to examine the impact of world trade conditions on the increasing debt burden, and the effect of external indebtedness on the trade performance of developing countries with a view to providing remedial measures and flexibilities within WTO provisions.

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South Centre Analytical Note - July 2002

SUMMARY (excerpt)

This paper provides a general background to the issues of Trade, Debt, and Finance, and what role they may have in future World Trade Organisation (WTO) negotiations envisioned through the Working Group on Trade, Debt, and Finance (WGTDF). Its aim is to assist developing countries in effective participation in the work programme of the WGTDF, by underscoring the main issues and objectives, and offering suggestions for future work.

It considers the context of the interrelationship of these three issues, noting the condition of the world economic system as run by the Bretton Woods institutions (IMF and World Bank) and the WTO. Since a Northern, neoliberal economic perspective permeates these institutions, developed country interests continue to take centre stage in the negotiating and decision-making processes. It is these interests which set the agenda on development and the relationship between trade, debt, and finance issues. Despite the inherent flaws in these bodies, efforts to reform policies and institutions recently have been unsuccessful. An example is the UN Conference on Financing for Development (FfD) held in Monterrey earlier this year.

The paper then proceeds to examine how these institutional and systemic flaws are reflected in global trade and finance, as well as through the burden of debt faced by developing countries. Trade issues include the nearly acrossthe- board dependence on the export of primary commodities. This is largely responsible for the vulnerability of developing countries’ economies to price swings (albeit generally on a downward trend) and their continued existence at the bottom (if even included) of any chains of production, and subsequently, for their poor trade performance. Additional trade issues include the persistence in usage of tariffs and non-tariff barriers to trade by developed countries.

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