Trade can be an effective catalyst for growth and development. However, the growing use of market-distorting subsidies undermines the multi-lateral, rules-based trading system that has promoted trade liberalization and global growth in the past. At a time when the global economy is coping with multiple shocks, including the pandemic, the Russian invasion of Ukraine and supply chain disruptions to food and other goods, governments are increasingly turning to subsidies for relief. But the costs can be very high, in terms of public spending and distorted incentives for investment and consumption. How can international cooperation help create a fairer trading system for countries at all income levels?
During the 2022 World Bank Group-IMF Spring Meetings, the heads of the four key global economic policy institutions—the World Bank Group, the International Monetary Fund (IMF), the Organisation for Economic Co-operation and Development (OECD) and the World Trade Organization (WTO)—discussed the importance of trade and global cooperation for overcoming current challenges and implications of subsidies for markets and poor countries. They called for more transparency and proactive measures to reduce their harm, especially for the largest and most distortive subsidies. Listen to the Spring Meetings highlights in a special series of The Development Podcast.
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Featured Voices
- David R. Malpass, President of the World Bank Group
- Kristalina Georgieva, Managing Director, International Monetary Fund
- Ngozi Okonjo-Iweala, Director General, World Trade Organization
- Mathias Cormann, Secretary-General, Organisation for Economic Co-operation and Development
Transcript
[00:00] Ntombie Siwale: Welcome to a special edition of The Development Podcast from the World Bank Group. I'm Ntombie Siwale. This is episode 4 of 5 recapping the World Bank Group-IMF Spring Meetings. This year's discussions took place as the world tackled overlapping crisis and conflicts. In today's show the heads of four key global economic policy institutions discussed the importance of trade and global cooperation in overcoming those current challenges. We are talking trade, subsidies, and how to reimagine globalization for future prosperity.
Kristalina Georgieva: I worry most about multiple shocks simultaneously hitting us and our proven inability to deal with more than one crisis at one time.
David Malpass: So we need to find a way to have trade that occurs in an efficient way to get the gains for the people around the world. It's going to help the poorest people the most.
Ngozi Okonjo-Iweala: Once you start this subsidy thing, it's a race to the bottom. And poorer countries cannot compete.
Ngozi Okonjo-Iweala: So we live in a world in which the rich will get to do everything and the poor will get left out.
Mathias Cormann: I think the way to look at globalization is that we, it's not a matter of throwing the baby out with the bath water and stepping back from it. It's about making it work better for people.
Ntombie Siwale: That's all coming up in The Development Podcast from the World Bank Group.
Ntombie Siwale: At a time when the global economy is coping with multiple shocks, including the pandemic, the Russian invasion of Ukraine and supply chain disruptions to food and other goods, governments are increasingly turning to subsidies for relief. But the costs can be very high in terms of public spending and distorted incentives for investment and consumption, especially for the poorest countries. The heads of four key global economic policy institutions, David Malpass President of the World Bank Group, Kristalina Georgieva Managing Director of the IMF and Ngozi Okonjo-Iweala Director General at the World Trade Organization, and Mathias Cormann OECD Secretary General, discussed the implications for global trade and developing economies with Shawn Donan of Bloomberg News. The four organizations have just released a report subsidies, trade, and international corporation. And Ngozi Okonjo-Iweala began the discussion
[02:54] Ngozi Okonjo-Iweala: Subsidies are on the rise across sectors and countries. They constitute the most frequent type of intervention since the financial crisis, more than tariffs and other non-tariff measures. They can distort trade and investment, undermine other trade policy commitments, and erode public support for open trade. Currently subsidies are main driver of trade tensions among some of our members. They can have significant macroeconomic costs and trigger retaliatory action. It's a complex subject matter. Clearly subsidies can be an important tool to address market failures, but examples abound where subsidies do little to achieve their intended goal or do so at a non necessarily high cost domestically abroad, or with regard to global commons.
Ngozi Okonjo-Iweala: In building a broad correlation of interest across borders, it should be possible to improve their effectiveness, limit their international spillovers and reduce harm to others. Both finance and trade ministries need to work together. In this effort, we need to support government efforts in international rule, making notably in updating the WTOs rule book. When these rules were made many current developments affecting or being affected by the use of subsidies were not foreseen. Notably, the importance of climate change, the growth of the digital sector, or increasing international activity of state-owned enterprises. A better grasp on the prevalence of subsidy programs and the effects can help develop and shape the necessary rules. Not to forget, we are starting from a solid base of existing WTO rules and a few adjustments and updates to those rules might already go a long way in boosting the effectiveness to address the challenges of today's world.
Shawn Donan: David, I'm going to come to you next because you are really our co-host here this week at these Spring Meetings. What do you think about where we're landing now?
David Malpass: So I have strong views on this one is that trade is really a very positive force. If you think of the cornerstone of development is commerce, is people trading because they get some efficiency from not making everything themselves. And that applies to a village, that applies even to a household. There's some specific task that some of the family does better than other in the family. So we need to really build on that and see the productivity from it. So I want to avoid a little bit the word globalization, that sounds almost like we're talking about agreements where all countries join in the same idea, that's hard to achieve.
David Malpass: But what we have to preserve is the idea of efficiencies from companies trading with each other, people being able to sell their skills in different countries. But that gets us right to the point of this report. Subsidies, distort that ability to do it efficiently. If I try to achieve globalization, but then some players are subsidizing, I'm undercutting my goal. So we need to find a way to have trade that occurs in an efficient way to get the gains for the people around the world. It's going to help the poorest people the most, if they can have their skills be part of the global supply chain.
[06:19] Shawn Donan: But we're clearly in a world where we're no longer focused on efficiency. We're focusing on national self-interest as well. And that is something that's playing out, Mathias in, well your new home in France, you've come from Australia, which is a country that's benefited hugely from globalization. I wonder if you have a different take on it now.
Mathias Cormann: Global trade, doing business with each other around the world, that has delivered enormous benefits to billions of people around the world over the last several decades. I mean, it has lifted many, many people out of poverty, but it's also true. It comes with challenges. I mean, exposing yourself to competition can be extremely disruptive and uncomfortable, but there's not really an alternative because that is the engine of innovation and progress. I mean, the conversation that we ought to have is how we can manage global competition, global triad and those sorts of disruptions better and make them work better for people. When you have structural transformations, like the digitalization of our economies at the same time, as you are involved in global competition, entire population segments can be severely disrupted and need appropriate support to be able to participate and benefit from all of the upsides of global trade.
Mathias Cormann: And there's certainly an important role for public policy there. But I also want to support the point that David has made. The problem is that when we have a global market and the idea is that we all do business with each other and that whoever is able to deliver the best product or the best service at the best price is the one that supplies those products and services into markets around the world. But then you have governments interfering by providing subsidies and creating an unlevel playing field, helping to keep businesses alive and successful, even though they're not competitive and not innovative and squeezing out innovative and more competitive businesses in the process, then everybody loses. And, that is why it's so important to really focus on this work on subsidies, which also create often environmentally harmful consequences because they drive overproduction. I think the way to look at globalization is that, it's not a matter of throwing the baby out with the bath water and stepping back from it. It's about making it work better for people.
[08:34] Shawn Donan: Ngozi, I feel like you have, again, a unique perspective. You have worked as a policymaker in Nigeria. You've also spent a lot of time here in Washington at the bank and elsewhere. And you are now at the WTO in Geneva. Do you think you are looking out at the end of an era here of globalization? How do you think about it?
Ngozi Okonjo-Iweala: Certainly there are challenges to globalization, but are we looking at the end of an era? I think we need to be very careful in saying that in the sense that this globalization, this multilateral trading system that has been built, it's a global public good. It took time to build it since the end of the second World War. And it has delivered, lifted more than a billion people out of poverty. So yes, it's not perfect. Some people have been left behind, poor people in rich countries. There are poor countries who have been left behind, but that does not mean that throwing the baby out with the bath water. No, what we need to ask ourselves is how do we improve? It cannot be the old globalization. How do we improve what we have? How do we reimagine globalization so that we can correct those problems and use it to lift more people out. What I call re globalization, but we can't do it if we have lack of transparency and these subsidies many times they're hidden. And therefore for us at the WTO, it leads to a break in trust.
Shawn Donan: Kristalina, you wanted to jump in.
Kristalina Georgieva: Well, I wanted to make a point on enlightened self-interest, all the way back to Adam Smith, that we don't do it because we want to be good to others. We do it because it is good for us and leaders that want to serve their populations, they don't want people to get poorer. They want them to be wealthier. And in that sense, one of our main tasks and we probably haven't done a good enough job yet, is to calculate the cost of stepping back and the benefits of stepping forward. What is very troubling from this paper when you read it, is that it really brings more in the hands of those who already have more. We calculated that agricultural subsidies are 447 billion out of this 447 billion, 376 in the four giants, the EU, the US, China and India. So we have to think about fairness without which we cannot sustain support for a trading system that is more efficient. And we have to continue to both show what works, what doesn't and who it works for and who it does not serve.
[11:28] Shawn Donan: The OECD's been measuring agricultural subsidies for something like 30 years now. What are the lessons you take from that exercise and measuring those subsidies.
Mathias Cormann: They are overwhelmingly market distorting. It's a very inefficient way of providing income support to farmers. The politics of removing agricultural subsidies are very, very difficult. In fact, the politics of removing subsidies once introduced, incredibly difficult. And they also distort production decisions and have both economically and environmentally harmful consequences. And, as we talk about the green transformation and moving forward towards carbon neutrality, removing environmentally harmful subsidies, and most of the agricultural subsidies are, is going to be a very important part of the equation. And it is about having a level playing field, making sure that resources are allocated to where they can have the most beneficial economic impact for everyone and subsidies really distorted that greatly.
Ntombie Siwale: A reminder that you're listening to the Development Podcast from the World Bank Group.
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Ntombie Siwale: Let's rejoin that high level discussion about subsidies and global trade with Kristalina Georgieva Managing Director at the IMF, Ngozi Okonjo-Iweala Director General at the World Trade Organization, Mathias Cormann OECD Secretary General, David Malpass President of the World Bank Group, discuss the implications for global trade and developing economies.
[13:40] David Malpass: What we can do is try to identify some of the most costly and distortive subsidies and work on those. I think it's hard to even define subsidies. What if one country has better infrastructure than another, then they become in a competitive, or if they've gotten the leap on digitalization, is that a subsidy that gives them a comparative advantage over their competition? One of the very expensive subsidies the US is doing now is for ethanol. Is that environmentally sound? It's distorting the corn markets massively at a time when the world needs corn.
David Malpass: I think we have to put it in the same basket as price controls, those end up being distortive and costly. One immediate problem that we face as commodity prices go very high. The temptation for politicians to subsidize is there. And oftentimes the cost goes up automatically as the price goes up. If you've decided that you're going to produce a certain amount of ethanol, the cost goes through the roof, as the bushels of corn price goes up. We want to let people invest in the things that are going to be productive into the future. And these subsidies really, really stop that process.
Shawn Donan: And there is a food price crisis in the world today. Emerging economies today, they are facing a set of shocks that is akin to what we've seen since and then we were seeing in the 1990s.
Mathias Cormann: And yet not because there's a lack of supply, available supply right now. It's because there's challenges with getting the available supply to market.
Shawn Donan: Absolutely.
Mathias Cormann: And there's various other related risks, an expectation about the-
David Malpass: Food relative to 2008 and nine, there was a shortage. Then this time there is enough food in the world and it's getting it to the market.
Mathias Cormann: That's right.
David Malpass: And avoiding some of the distortions that are so tempting.
Shawn Donan: But it's also generating these politics, right? Which are incredibly difficult. And if doing subsidy policy in a peaceful world is tough. It's even tougher surely in a world that's in crisis mode, right? Economic policy, good economic policy isn't always made in a crisis.
Ngozi Okonjo-Iweala: That brings me back to the question you posed about the issue of subsidies for semiconductors, industrial policy French, or if you will, in a world of shocks, multiple shocks, such as we live in, we've seen of course, politicians and governments will try to do some of that. But as David said, it's very costly. And the good news is when you talk to business people, they don't quite talk that language. They talk of how they will manage their risks. They talk of diversification of sources of supply. So I think governments may want to do some of this [inaudible] and reshoring, but businesses are going to make their calculus slightly differently. So let's see, of course, if I'm a business person and I'm offered a large subsidy to do something, now I'll take it with both hands, but ultimately it's not sustainable for governments. It's very costly. That is why I think we need to be very, very careful because not all governments can afford those types of subsidies. It doesn't set a very good example.
Kristalina Georgieva: Actually, we know that we are in a more shock prone world. That's a fact, we got the shock of the pandemic. We now have the shock of the war. Luckily we have climate shocks and that drives the conclusion that we have to work more on supply chain resilience. It has to happen after the shock of the pandemic, many countries looked into, wait a minute, we are getting all our medicines from one place. We have to diversify. There is nothing wrong in this approach. I don't know whether it applies to semi-conductors, but I can objectively say that our institutions have a role to play, to build this supply chain resilience, to recognize there is a security issue for the functioning of the economy, and then come up with transparency of how you make this decision. Well-motivated, well designed, if subsidies are to be used in place and something that is missing some way in which we can review subsidies and then have a fair judgment on what works and what doesn't.
[18:03] Shawn Donan: When you think about tackling what has always been a difficult issue, in telling governments that they can't do the politically or they shouldn't do the politically expedient thing, sometimes. I wonder if you think the world is a more complicated place to make that argument right now?
Ngozi Okonjo-Iweala: Of course, it is a more complicated place. And we shouldn't minimize that. Of course, the geopolitics is not to be minimized. The need to feel secure in who you trade with and who you do business with. We'll take it into account, but we're saying I want to come back to something Kristalina said, all that being given, we need to watch the extent to which we undervalue what we already have. The cost of pulling back. WTO economists have actually started simulations of this. And they show just from looking at efficiency, losses, losses in scale economies, you lose 5% of GDP in the longer term. That's not trivial. So we need to be saying yes, the geopolitics will have to take care of some of this business, but to a certain extent only. Beyond that, to result in losses for everyone and especially the poorer country.
Shawn Donan: David?
David Malpass: That was the beginning of this report that the economic view is clear of the cost of subsidies and the need for efficiency for the world, especially for development. What's changed is one, is the recognition of how dependent Europe had become on energy from Russia. And the world's recognized that on China, over dependency, which is a step that probably the world wanted to do. And even I've argued that for China, it will be beneficial to not have people so dependent on them that gives them more range of motion. So, that's an okay step. And also the urgency because of the food spikes. This has to be addressed right now. This month, next month by the world to hold down trade barriers and to not fall into subsidies that are going to distort all of these markets.
Mathias Cormann: I got to say like, if anything, the need to tackle- this has become more urgent because I mean, governments around the world have had to spend a lot of money to deal with the impact of the pandemic. They've got to spend a lot of money to deal with many of the challenges that the world is facing. And quite frankly, efficient allocation of limited resources should be a key motivating factor to tackle this. We need the world to run on all cylinders. And this is part of what is holding the world back.
Kristalina Georgieva: Yes, you called one cylinder off. The driver of geopolitical consideration is there, but also the driver of governments having less money is there. And so with interest rates going up, governments having debt to service, they better be smart and not jump into committing to things that they may not be able to pay more.
Ngozi Okonjo-Iweala: Can I say one more thing I think?
Shawn Donan: Of course.
Kristalina Georgieva: Which is wasteful, on top of it is wasteful. Yeah.
Ngozi Okonjo-Iweala: And that brings me to the point that once you start this subsidy thing, it's a race to the bottom and poorer countries cannot compete.
Mathias Cormann: That's it.
Ngozi Okonjo-Iweala: So we live in a world in which the rich will get to do everything and the poor will get left out. And because they don't have the fiscal space to do things. So we also need to reflect that type of a world doesn't work.
Kristalina Georgieva: When there is strong international corporation, you can overcome a food crisis. There are three questions. One, is food being stored in rich countries, just as a precaution in quantities that are unnecessary? Two, do we identify where production can be increased, including in low income countries? In 2007, 2008, we had cases when just by providing seats and tools to farmers, you get production up and three, do we have a good information to help us move money and food where it is most needed? So we have identified the 26 countries that are in biggest short. We are now and actually the World Bank leads on that concentrating attention. So they have the money, they know where the markets are. They are facilitating bank bulk for multiple countries at the same time. And as David said, this is this week's, we are coming up with this action plan of international financial institutions, and it is truly pressing to get it to move. So we avoid people dying unnecessarily. The food is available. It just has to get to the right place.
David Malpass: One of the worries right now is countries in Europe are trying to stockpile natural gas for next winter. Well, that means that there's not natural gas available for LNG is really needed for making Urea, component of fertilizer and crops. So if we look around the world, that's the highest priority. Let people have that, but the advanced economies can buy up the whole supply and store it up for next winter. It'd be better to say, look, there's going to be enough and there's going to be extra production and supply to make that possible.
Kristalina Georgieva: Right. So we have to avoid vaccine two.
Ngozi Okonjo-Iweala: Yeah.
Kristalina Georgieva: A repetition of what was done in the beginning.
Shawn Donan: But, the vaccine experience was a lesson in the way the world is working today in which self-interest kind of takes over in a way, doesn't it?
Ngozi Okonjo-Iweala: I want to, yeah. I want to come in and of course we can't avoid a certain amount of self-interest, but on the vaccines, that's a very bad example because it's not even in the self-interest of a country in the pandemic to just look after their people.
Kristalina Georgieva: Yes.
Ngozi Okonjo-Iweala: This is one problem a country cannot solve. But since I have the floor, just a quick word on industrial subsidy, one of the things that at the WTO we're very worried about is that breaks trust, is these hidden industrial subsidies. And this report shows there's a real gap. We don't have enough information. We have a lot of information on agricultural subsidies, thanks to the work of OECD, the World Bank, IMF, but on industrial subsidies, we all need to put our analytical capabilities to work, to get information so that we can deal with this issue of feeling of unfairness and anti-competitive behavior.
Mathias Cormann: For markets to be well functioning. They need to be open and transparent, right? And access to information is critically important.
[24:42] Shawn Donan: We're in a world in which people aren't necessarily in the mood to share some of that information.
Mathias Cormann: And, that is why this conversation is so important. We can't just be limiting ourselves by the challenging situation we're in. We also got to look to where we want to be.
Kristalina Georgieva: And if you take the vaccine. Sorry.
David Malpass: In our meeting with Kristalina, Canada said it was going to produce more food.
Mathias Cormann: Yeah.
David Malpass: Once that stated people begin to adjust markets, [inaudible] sorry Kristalina.
Kristalina Georgieva: No, I just wanted to say that in the vaccine story, it took us a while to get everybody the producers, the organizations that are deploying vaccines. But once we got them in the room, it clarified that we have enough vaccines, that the problems are more around the last mile and distribution, and then you direct resources appropriately. And that is what we need to do on food as well. And we will do it.
Shawn Donan: When do we get this global agreement that everyone's going to get along and not do any subsidizing?
Mathias Cormann: It'll always be work in progress, but it is something that we have to continue working on.
Kristalina Georgieva: And the good thing is that we are not leaving Ngozi alone to go and work with the trade ministers. The reason all of us are here is because good decisions are made when finance ministers are involved, when industry ministers are involved, agriculture ministers are involved, the private sector is involved, and that is our task.
Ngozi Okonjo-Iweala: And for me, I have to say that getting this work started gives a lot of hope because we need to look at some of our agreements at the WTO. And we need to let members know that we are listening to what they're saying. They're very worried about each other's subsidies. So pushing to get more transparency at least, is will solve part of what they're looking for. It will be a work in progress.
[26:34] Shawn Donan: I want to go through just a very quick lightning round. I've got the four guardians of the world economy here on the table. I need to ask you this question. What is the shock you worry about next? Start with you, David.
David Malpass: I think energy is really important to sort out. It underpins fertilizer. It underpins crop yields. And so right now it's in disarray because people don't know how it's going to adjust. So, that's the shock it's going to last into next year.
Shawn Donan: Mathias.
Mathias Cormann: The thing that worries me most is that we're not getting issues off the table. That more and more issues are coming on the table. And, we are still dealing with the impact of the pandemic. We're dealing with the impact now of the war. We're dealing with structural transformation challenges related to climate change, digital transformation, pressure on the rules based trading system. I really do hope that we can start taking some of these issues off the table.
Ngozi Okonjo-Iweala: Can I be greedy and say, there are two things I'm worried about. One is geopolitical miscalculation. Some powers miscalculate each other's intentions, and that the conflicts on war spread fast. I'm really worried about that because the element of mistrust that exists in the world now is significant. The second thing that worries me is another pandemic because I don't really feel that we are prepared yet to deal with another one.
Shawn Donan: I'm going to close with our host.
Kristalina Georgieva: I worry most about multiple shocks simultaneously hitting us and our proven, inability to deal with more than one crisis at one time. Building that capacity to anticipate crisis and then build resilience to crisis and act on multiple crises is what I worry we are slow to build.
Ntombie Siwale: Kristalina Georgieva Managing Director of the IMF, rounding out that discussion on preserving open trade. The other participants were David Malpass, President of the World Bank Group Ngozi Okonjo-Iweala, Director General at the World Trade Organization and Mathias Cormann, OECD Secretary General. Thanks so much for listening to this podcast, recapping the 2022 World Bank Group-IMF Spring Meetings. The next episode will focus on the importance of investing in people. For example, through education, health and skills training. I'm Ntombie Siwale, the producer is Sarah Treanor, please join us next time.
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ABOUT THE WBG-IMF SPRING MEETINGS 2022
Preparing for future crises and strengthening international cooperation are essential to deliver a resilient recovery and a better future for those most in need. At these Spring Meetings, the World Bank Group convened leaders, experts and activists to discuss the impact of these global shocks on the most vulnerable communities.
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