Global Policy Forum

Coherence between Financial and Trade Institutions

By Aldo Caliari

A Ministerial Declaration on Policy Coherence, issued simultaneously with the creation of the World Trade Organization (WTO) in 1995, stressed the need to achieve greater coherence in policy-making among financial and trade institutions. Building upon the declaration, the WTO signed cooperation agreements with both the World Bank and the International Monetary Fund (IMF). In the following years, the WTO, World Bank and IMF have intensified efforts to achieve "policy coherence."

The influence of the international financial institutions (IFIs) in the trade policies of their borrowing countries is not something new. Already in the 1980s they had begun to make stabilization and structural adjustment loans, which usually intended to restructure the whole economy of the borrowing country along the premises of an export-led growth strategy. Slashing tariff and non-tariff restrictions and reducing subsidies were, therefore, among key prescriptions in those loans. There are, however, other more subtle but equally powerful mechanisms by which IFIs have influenced trade policy in borrowing countries. For example, the role that they play as providers of research and training to policy-makers in developing countries, their assessments of country policy and institutional environments and their trade-related technical assistance programs are also important in shaping trade policy in developing countries and excluding the search for valid alternatives.

A look at the influence that IFIs have had in the past in prying open agricultural markets in developing countries provides many reasons to worry about what greater cooperation among them and the WTO actually means for food security and farmer's livelihoods.

For example, before the creation of the WTO, many developing countries reduced tariff protections and subsidies to farmers in order to abide by conditionalities attached to loans they desperately needed in order to repay growing external debt. At the same time, industrial countries, in no need to borrow from the IFIs, were able to maintain large agricultural subsidies and tariff barriers. Thus, small farmers in the South were forced to compete with Northern-based transnational food companies that benefited from protection by their governments. The WTO Agreement on Agriculture, to a great extent, locked-in the degree of liberalization existent in both the South and the North, without addressing such imbalances. Moreover, low tariff and subsidy levels that previously were the matter of policies in Southern countries became the matter of trade rules enforceable through trade sanctions. Thus, liberalization that had been open to the possibility of reversal became irreversible in practice.

But the "coherence" among the institutions does not stop there. Indeed, after the creation of the WTO, the IFIs have continued to promote reduction of tariff and subsidy protections to farmers oftentimes below the levels allowed by the WTO. IFI programs promoting the privatization of publicly provided services have led to states withdrawing from their role in the provision of irrigation, seed distribution and extension services that allowed poor farmers to receive them at a subsidized rate. This was regardless of whether subsidized provision of these services was considered legal under the WTO. The privatization of services has tended to drive rates up. Small farmers have been the most hard hit by rate hikes as the prices to pay for fertilizers, seeds, or water is often a key factor in the viability of their business. The IFIs have also promoted domestic and international financial liberalization. This has often led to the removal of sources of subsidized credits on which small farmers with scarce assets and uncertain incomes due to the price volatility of their products, need to rely in order to pay for the increasing costs of their inputs. Food state-marketing boards have also been targeted under IFIs programs in several countries, which means depriving small farmers of government marketing and distribution oversight. As a result, small farmers, facing increasing costs, reduced access to finance and unfair competition, end up losing their lands, which is leading to increased land concentration. Again, as industrial countries are not the borrowers in the IFIs institutions, these extra pressures are only exerted on farmers in developing countries, thereby working largely to the advantage of industrial countries and their corporations. The imbalances in the voting structure of the IFIs, where industrial countries hold more than 60 % of the votes, cannot be underestimated when analyzing the interests that their policies systematically benefit in the area of agricultural trade.

In the face of policy coherence efforts pursued by financial and trade institutions, it is important that NGOs, networks and movements working on food security issues improve their understanding of the ways in which the policies of financial institutions intersect with rules of the multilateral trading system. The advocacy efforts aimed at benefiting poor farmers in the South will no doubt be more effective if they deal with trade and financial areas not as separate, but in an integrated fashion. For example, developing countries' debt problems are greatly exacerbated by the decline of commodity prices on which they are dependent for exports. Thus, the establishment of a commodity policy or agreement that improves the prices of such commodities is a goal that would benefit both groups working on farmers and on debt issues.

At the same time, an integrated approach to trade and finance creates the potential for new civil society alliances that capitalize on synergies among civil society groups. Both civil society groups seeking reforms to the trade system and those seeking reforms to the IFIs should be proactive in proposing an alternative agenda on coherence. Civil society groups should challenge the official policy coherence agenda by putting forward a vision of what genuine policy coherence built around the protection of food security and the rights of small farmers should look like.

Furthermore, such an integrated approach would allow the extension of alliances beyond groups focusing purely on food security issues. Policy coherence as a trend is having a negative impact on the right of access to essential services, like education and health, as well as the ability of states to regulate foreign investors and support domestic entrepreneurs. Thus, an improved understanding of the common ground shared with other constituencies affected provides a fertile ground for joining forces in research, campaign and advocacy efforts.

*The Center of Concern, working with several groups interested in policy coherence issues, has already begun to explore the ways in which trade and finance issues intersect and is seeking to ensure that the potential value added of joint advocacy and research by groups working on trade and finance has an actual impact on policies in both the financial and trade side.