How can trade agreements push for good governance?

Rima Younes El-Khatib, 15 Jun 2016

Academics and development practitioners have identified lack of good governance as one of the main obstacles to development and economic prosperity in the Arab region[1]. In effect, many of the domestic problems, namely structural corruption, weak education systems, and high unemployment, could be linked back to and explained by poor levels of governance, in all of its three dimensions, namely political, economic and institutional.

 

In designing structural reforms and solutions to overcome the lack of good governance, trade policies have long been overlooked. Nevertheless, trade agreements can play a functional tool in pushing for reforms that are conducive to good governance.

 

Past experiences have shown that member states have long used the mandates of both the World Trade Organization (WTO) and its predecessor agreement, the GATT, to improve governance in a number of WTO member countries as well as in acceding countries; even though the WTO does not address regulations that directly tackle corruption per se. Member states have been able to use WTO’s three mechanisms (accession process, trade policy reviews, and ultimately, trade disputes) as anti-corruption tools, by holding governments accountable – and thus pushing them to align to improved governance practices. Indirectly, the policy commitments that countries should adopt  can be viewed as anticorruption counterweights in that they contribute to enhancing the ability of citizens to monitor their government and hold it accountable[2].

 

That said, accession to the WTO has compelled member states to enhance their governance practices towards foreign market actors. In their negotiations to become WTO members, governments have to commit to policy reforms that goes beyond trade-related issues like market access, competition policy, and price controls, and these relate to broader policy areas such as investment policy, privatization plans and government procurement system, thus bolstering transparency requirements. If at any point these policy commitments are reversed, then countries would be subject to enforcement through the WTO’s dispute settlement mechanism.

 

The positive spillover effect of these measures helped acceding countries improve the investment climate not only to foreign investors but also to domestic actors, thus contributing to the improvement of countries’ investment climate and to enjoying higher economic growth.[3]

 

A study conducted by Tang and Wei (2008)[4] showed that WTO/GATT accessions are often associated with significant increases in growth and investment that last for about five years, but the effects work only for those countries that have to undertake substantial reforms. While the pickup in the growth rates is only temporary (five years after accession), the economy is permanently larger (by 20%) as a result. The study also finds that the beneficial effects of policy commitments seem more pronounced among countries with poorer governance, since these countries were forced during their accession process to commit to a wider set of policy reforms.

 

For example, China acceded to the WTO only after 15 years of on-and-off negotiations and had made a substantial number of important and targeted commitments in rule of law-related areas of transparency, judicial review, uniform enforcement of legal measures, and nondiscrimination in its commercial policy. In fact, to be accepted as a member of the WTO, China had to make 147 commitments listed in its Working Party Report, while other countries had at most 29 commitments[5].

 

Far from being the silver bullet for anti-corruption, binding policy changes enforced by a credible third party (WTO) serve as an instrumental tool in enhancing good governance and in promoting economic development. Trade reforms, as a quick fix, or at least a starting point to unleash reform governance practices, is viable in the short run. Yet effective and structural institutional reforms must take place to ensure sustainability. Only inclusive and legitimate institutions can help create a meaningful governance system pushed towards higher good governance standards. 

 


[1] Muasher Marwan, Improving Governance In The Arab World ,May 13, 2016, https://www.project-syndicate.org/commentary/improving-governance-in-arab-world-by-marwan-muasher-2016-05  retrieved on May 18,2016.

[2] Ariel Aaronson Susan And Abouharb Rodwan, Does The WTO Help Member States Improve Governance?, World Trade Review, Available On CJO 2013 Doi:10.1017/S1474745613000244

[3] Tang Man-Keung and Wei Shang-Jin, Is Bitter Medicine Good For You? The Economic Consequences of  WTO/GATT Accessions, paper presented at the Trade Conference, Research Department Hosted by the International Monetary Fund Washington, DC─April 13, 2006.

[4] Tang Man-Keung and Wei Shang-Jin, The Value of Making Commitments Externally: Evidence from WTO Accessions, NBER Working Paper No. 14582, December 2008, JEL No. F1,F5,O4.

[5] Tang Man-Keung and Wei Shang-Jin, Is Bitter Medicine Good For You? The Economic Consequences of  WTO/GATT Accessions, paper presented at the Trade Conference, Research Department Hosted by the International Monetary Fund Washington, DC─April 13, 2006.

 


Rima Younes El-Khatib is head of the International Relations Division at the Foreign Affairs Department of the Central Bank of Lebanon. She is member of the Lebanese Official Delegations for multilateral, regional and bilateral Trade in Services Negotiations, namely she is the Chief Negotiator for Services with the World Trade Organization (WTO), the European Union (EU), and Arab countries. She is currently pursuing her PhD studies in International Relations and Diplomacy.

 


The views expressed here are solely those of the author in his/her private capacity and do not in any way represent the views of neither the Arab Development Portal nor the United Nations Development Programme. 

Rima Younes El-Khatib Rima Younes El-Khatib

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