1. INTRODUCTION

The decade from 1985 to 1995 was a period of dramatic trade policy reform, particularly by developing countries. Many of them shed import substitution policies that had been in place since the 1950s and embraced exchange rate and trade reforms that opened their economies to the world (Dean, Desai, and Reidel 1994; Irwin 2022). In doing so, previously closed economies such as China and India became open to world trade and investment, and other emerging markets in Latin America, Asia, and Africa reduced their trade barriers and increased their participation in global trade. These policy changes reshaped the world economy, enabled the emergence of global supply chains, and produced the high level of interdependence that we see today.

Most countries opened their economies by performing the trade policy threestep: (1) devaluing their currencies and establishing competitive exchange rates, (2) abolishing foreign exchange controls and converting quantitative import restrictions into tariffs, and (3) gradually reducing the dispersion and level of those tariffs. In most cases, these reforms were undertaken unilaterally, often in the midst of an economic crisis. The lessons of experience, such as the success that Taiwan and Korea enjoyed after opening their economies in the 1960s, along with changing ideas about economic policy, contributed to the decision to reform their trade policies (Krueger 1997).

The World Bank, the International Monetary Fund (IMF), and the General Agreement on Tariffs and Trade (GATT)—then the World Trade Organization (WTO) after 1995—supported and encouraged the reform efforts. These institutions play an influential role in shaping international economic policy and their charters gave them a common purpose in promoting world trade.1 Although these organizations may not have been the driving force behind the reform efforts, what impact did they have in promoting the trade reforms of the 1980s and 1990s?2

Evaluating the contribution of these institutions to trade reform in developing countries is challenging because they approached the goal of expanding trade in very different ways. The GATT established trade rules and facilitated multilateral negotiations to reduce tariff and nontariff barriers to trade. The World Bank made loans to countries conditional on their making changes to their trade policies. The IMF sought “exchange rate stability” to help “in the elimination of foreign exchange restrictions which hamper the growth of world trade.” The institutions also differed in their ability to influence a country’s policies. The GATT/WTO was the weakest of the three in having virtually no leverage over sovereign governments. The World Bank and IMF had financial resources that they could use to win compliance with the policies that they deemed desirable.

Empirical assessments of the impact of these multilateral institutions on government policies and economic outcomes are plagued with difficulties. Studies based on observational data suffer from sample selection problems: the countries that choose to join the GATT/WTO, accept a World Bank loan, or enter into an IMF program are not randomly selected. These institutions dealt with different countries at different times and in different ways. The degree of compliance with loan conditionality is hard to observe. And it is not possible to know the counterfactual of whether a country’s policies would have changed even in the absence of those actions.

That said, it is possible to reach some tentative if impressionistic judgments, perhaps even surprising ones, about the contribution of these institutions to the trade reform process. One might suspect that the GATT/WTO, which of the three institutions focuses most directly on trade, had the biggest impact on developing-country policies, but on closer examination its impact was limited. The World Bank provided billions of dollars in trade policy loans, but this may not have had a decisive influence on a country’s decision to undertake trade reforms. Of the three, the IMF’s role in promoting trade reform may be the most underrated. The IMF focused more on stabilization and macroeconomic stability and yet it provided critical ingredients to trade reforms by encouraging countries to devalue overvalued currencies and start the process of eliminating exchange rate controls and import restrictions.

Douglas A. Irwin is a nonresident senior fellow at the Peterson Institute for International Economics since February 2018, is the John French Professor of Economics at Dartmouth College.

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Trade can also play a key role in addressing the challenge of global warming. While trade results in carbon emissions, it is fundamental to the solution to climate change in terms of facilitating the transition to low-carbon growth and supporting adaptation to rising temperatures and changing precipitation patterns. Trade is also critical to recovery from increasingly frequent extreme weather events.

Open trade policies and efforts to reduce trade costs remain critically important while recognizing the need to recalibrate an approach to trade that places it firmly and squarely within a resilient, inclusive, and green approach to development. [1] This note summarizes three inter-related policy challenges to which trade can be a fundamental part of the answer: (i) the recovery from COVID-19 and economic resilience to future global shocks; (ii) delivering on the promise to end extreme poverty and achieving a more inclusive world; and (iii) mitigating carbon emissions and adapting to climate change.

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Governments, households, and firms all need to embrace a changed economic landscape. While protecting the most vulnerable, successful policies will be needed that allow capital, labor, skills, and innovation to shift to new purposes in order to build a greener, stronger post-COVID economic environment. Some countries already moving toward this type of dynamism and resilience, will need to redouble their efforts. For others, change is especially critical now, when fiscal positions are severely stretched by the pandemic and other drivers of long-term growth have weakened.

Investment, in particular, collapsed in 2020 in many emerging market and developing economies, following a decade of persistent weakness. Investment growth is expected to resume in 2021, but, despite an uplift from advances in digital technology, not add enough to reverse the large 2020 decline. The experience of past crises raises a further concern—without urgent course correction, investment could remain feeble for years to come.

To counter the investment headwind, there needs to be a major push to improve business environments, increase labor and product market flexibility, and strengthen transparency and governance. These can re-kindle investment and help allocate it more effectively, but unsustainable debt burdens are a major obstacle. Already at record levels before the pandemic, both domestic and external debt burdens have become much heavier due to the devastating contraction in incomes across emerging market and developing economies.

To address the external debt burden, a comprehensive set of policy interventions is needed: broader participation by all private and official bilateral creditors in existing debt service relief efforts; deep debt reduction for countries in debt distress to increase the attractiveness for investment; better debt transparency practices that overcome secrecy and restrictions in debt contracts; legislative reforms to expedite the restructuring of private sector debt; and enhanced sequencing of these processes, which may involve countries running arrears with creditors as they work with international financial institutions to achieve debt sustainability.

Complicating the debt sustainability problem is the possibility that contingent liabilities from soaring private debt may be added to already high public debt. During the pandemic, many governments have supported lending to firms to address liquidity constraints, including loan guarantees, payment moratoria, and regulatory forbearance. These interventions highlight the challenge of balancing efforts to increase the availability of credit while maintaining proper regulatory standards to mitigate financial risks. As the health and economic crisis abates, these policies need to be reassessed periodically to ensure asset quality transparency and avoid undermining bank capitalization.

Policymakers also need to enhance supervisory assessments of loan quality and improve resolution and recovery regimes to address the potential challenges associated with elevated corporate debt levels. With non-performing loans likely to rise, more rapid bankruptcy and domestic debt resolution processes will be important in allowing assets to be relieved of litigation and repurposed for new uses. Adding new investment to productive existing assets will be vital for sustainable development.

In both the external and internal debt resolution processes, transparency is critical to bolster accountability, make future investment and debt more productive, and support the economic recoveries that are crucial for poverty reduction. Left unaddressed, the problem of unsustainable debt, and restructurings that do too little, will delay vital recoveries, especially in the poorest countries.

Mounting climate and environmental challenges add to the urgency of policy action, including on debt reduction and an improved investment framework. As countries formulate policies for recovery, they have a chance to embark on a greener, smarter, and more equitable development path. Investing in green infrastructure projects, phasing out fossil fuel subsidies, and offering incentives for environmentally sustainable technologies can buttress long-term growth, lower carbon output, create jobs, and help adapt to the effects of climate change.

Making the right investments now is vital both to support the recovery when it is urgently needed and foster resilience. Our response to the pandemic crisis today will shape our common future for years to come. We should seize the opportunity to lay the foundations for a durable, equitable, and sustainable global economy.

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At the onset of COVID-19, the Bank Group took broad, decisive action in delivering a fast-track facility to help countries respond quickly to this crisis. We expect to deploy up to $160 billion in the 15 months ending June 30, 2021, through new operations and the restructuring of existing ones to help countries address the wide range of needs arising from the pandemic. This will include over $50 billion of IDA resources on grant and highly concessional terms.

By May, we reached the milestone of emergency health operations in 100 countries. Our initial projects focused on limiting the pandemic’s spread and boosting the capacity of health services. We helped countries access essential medical supplies and equipment through support for procurement and logistics, including negotiations with suppliers on their behalf. Many developing countries are dependent on imports for supplies, making them highly exposed to price fluctuations and trade restrictions. Through IFC and MIGA, we provided vital working capital and trade finance for the private sector in developing countries, particularly firms in core industries, and helped financial sectors continue lending to viable local businesses.

In March, the World Bank and IMF called for official bilateral creditors to suspend debt payments from IDA countries. In April, G20 leaders issued a historic agreement suspending official bilateral debt service payments from May 1 through the end of 2020 and called for comparable treatment by commercial creditors— a powerful example of international cooperation to help the poorest countries. Beyond immediate health concerns, the Bank Group is supporting countries as they reopen their economies, restore jobs and services, and pave the pathway to a sustainable recovery. Many of our client countries have enhanced their transparency and attractiveness to new investment with fuller disclosure of their public sector’s financial commitments. The Bank is helping the most vulnerable countries evaluate their debt sustainability and transparency, which are both essential to good development outcomes.

The Bank Group is supporting countries’ efforts to scale up their social safety nets. This includes cash transfer operations through both in-person and digital options so that governments can efficiently deliver this critical support to their most vulnerable people. We are also engaging with governments to eliminate or redirect costly and environmentally harmful fuel subsidies and reduce trade barriers for food and medical supplies.

In fiscal 2020, IBRD’s net commitments rose to $28 billion, while disbursements remained strong. IDA’s net commitments were $30.4 billion, 39 percent higher than the previous year. The 19th replenishment of IDA was approved in March, securing a three-year $82 billion financing package for the world’s 76 poorest countries. This will increase our support to countries affected by fragility, conflict, and violence (FCV) and strengthen debt transparency and sustainable borrowing practices. Over the last year, we realigned the Bank’s staff and management to drive coordinated country programs and put high-quality knowledge at the center of our operations and development policy. We are increasing our global footprint to be closer to our operations on the ground. We also strengthened our focus on Africa by creating
two Bank vice presidencies, one focusing on Western and Central Africa and the other on Eastern and Southern Africa, to take effect in fiscal 2021. I appointed four new senior leaders: Anshula Kant as Managing Director and Chief Financial Officer, Mari Pangestu as Managing Director of Development Policy and Partnerships, Hiroshi Matano as Executive Vice President of MIGA, and Axel van Trotsenburg as Managing Director of Operations on the departure of Kristalina Georgieva to head the IMF. In addition to these appointments, there were 12 vice-presidential appointments or reassignments over the last year. Together, the strong leadership team and a highly dedicated and motivated staff are striving to build the world’s most effective development institution, with a resilient and responsive business model that can help each country and region achieve better development outcomes.

At our Annual Meetings in October, we presented a new index to track learning poverty—the percentage of 10-year-olds who cannot read and understand a basic story. Reducing learning poverty will require comprehensive reforms, but the payoff—equipping children with the skills they need to succeed and achieve their potential as adults—is vital for development.

By helping countries leverage new digital technologies, we are expanding access to low-cost financial transactions, particularly for women and other vulnerable groups. Digital connectivity is one of many key steps in helping women unleash their full economic potential. The Women Entrepreneurs Finance Initiative (We-Fi), hosted by the Bank Group, works to remove regulatory and legal barriers that women face and help them gain access to the financing, markets, and networks they need to succeed. Bank operations also focus on providing women with greater agency and voice in their communities, working to ensure that girls can learn effectively and safely in schools, and promoting quality health care for mothers and children.

We help countries strengthen their private sectors, which are central to creating jobs and boosting economic growth. In fiscal 2020, IFC’s long-term finance commitments increased to $22 billion, which includes $11 billion of its own commitments and $11 billion in mobilization, commitments from private investors, and others. In addition, IFC extended $6.5 billion in short-term finance. MIGA’s commitments totaled $4 billion, with an average project size of $84 million. Looking forward, MIGA’s product line, staffing, and upstream efforts are well suited to help in the Bank Group’s COVID-19 response, including a focus on smaller projects in IDA-eligible countries and countries affected by FCV.

None of these achievements would have been possible without our staff’s hard work and successful adjustment to home-based work during the pandemic. Working around the world and at all levels, staff continued to deliver solutions to address countries’ most urgent needs. I am deeply grateful for their dedication and flexibility, especially amid these difficult circumstances.

As people in developing countries worldwide grapple with the pandemic and deep recessions, the World Bank Group remains committed to their future, providing the support and assistance they need to overcome this crisis, and achieve a sustainable and inclusive recovery.

DAVID MALPASS
President of the World Bank Group and Chairman of the Board of Executive Directors

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World Bank. 2020. World Bank Annual Report 2020. Washington, DC: World Bank. doi: 10.1596/978-1-4648-1619-2 . License: Creative Commons Attribution–NonCommercial–NoDerivatives 3.0 IGO (CC BY-NC-ND 3.0 IGO).

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“The report comes out at an opportune time. The COVID-19 pandemic has provoked the deepest economic recession of our lifetimes. Recent WTO analysis shows that women risk losing some really hard-won progress towards greater gender equality because of this crisis. Looking forward, I have no doubt we need to lay the foundations for a strong, sustainable, and inclusive economic recovery. To build back better, we need to ensure that women are able to benefit from trade,” DG Azevêdo said at the launch.

“Although this research was done before the global pandemic, its conclusions are more relevant than ever. Gaining a better understanding of how women are affected by trade will be essential as countries develop and the global economy recovers from the pandemic. I hope the discussion today can help policy makers identify the potential opportunities that trade can provide for women and businesses and buttress support for a more inclusive rules-based trading system,” Ms Pangetsu said.

The publication features new data and analysis on how women benefit from trade in different ways to men in terms of wages, welfare gains and the quality and quantity of jobs available to them. It draws from a new dataset which, for the first time, provides labour data broken down by gender at the industry level for 72 countries. It also draws from the first database on explicit gender-related provisions in regional trade agreements.

The report finds that firms engaged in international trade employ a higher percentage of women than non-exporting firms (33% on average compared to 24% per cent for non-exporting firms). It also features findings on how trade increases wages, improves working conditions and is linked to higher levels of gender equality.

The report identifies trends pointing to opportunities for the further empowerment of women, namely the rise in services, the expansion of global value chains and the growing digital economy. It highlights trade policies countries could introduce to harness these opportunities, such as lowering tariff and non-tariff barriers on goods produced and consumed largely by women, further opening trade in services, and helping women traders and small enterprises benefit from market opportunities through trade facilitation measures and greater availability of trade finance.

The WTO has a key role to play, the report stresses. Ongoing talks related to services, agriculture (which employs a large number of women in developing countries), electronic commerce and micro, small and medium sized enterprises are key to identifying and eliminating barriers to women’s participation in trade. The WTO also provides a forum where members discuss tariff and non-tariff barriers across a range of sectors and members’ trade policies. Improving transparency on gender-related policies can help establish good practices and draw attention to the challenges that women face in participating in world trade.

The report highlights the need for complementary policies aimed at increasing opportunities for women in education, increasing access to finance, and enhancing information technology skills to maximize the gains from trade for women. In addition, collective efforts are required from governments, international organizations and the private sector to promote the role of trade in improving gender equality.

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Burdensome rules may drive businesses away from the oversight of regulators and tax collectors into the shadows of the informal sector or out of the country in search of a more supportive business environment. Foreign investors may shun economies where rules prevent economic activity from flourishing.

Cumbersome red tape holds back more than individual businesses or investors: an economy’s ability to grow sustainably may suffer. Economic freedom to do business goes hand in hand with economic development and a thriving private sector, and these in turn underpin poverty elimination and the pursuit of shared prosperity.

Doing Business 2020 measures regulations across 190 economies in 12 business regulatory areas to assess the business environment in each economy. Ten of these indicators were used to estimate an ease of doing business score this year, over the 12 months ending April 30, 2019. This is the 17^th edition of a study that has motivated governments worldwide to undertake business reforms with the goal of bolstering sustainable economic growth.

The study looks at rules affecting a business from inception through operation to wind-down: starting a business, dealing with construction permits, getting electricity, registering property, getting credit, protecting minority investors, paying taxes, trading across borders, enforcing contracts, and resolving insolvency.

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