Tuesday, June 29, 2010

Developing Countries Confront Global Economic Crisis

The global economic meltdown was so yesterday. Seldom does the crisis make it on to the front pages of any of the major newspapers anymore, but the struggle for recovery continues in the shadows. Already, fissures are appearing in the once-unified front of the developed countries. European governments such as Germany are calling for a greater focus on controlling deficit spending, while President Obama has called for more spending to shore up flagging economies. But while the North struggles over the various modes of recovery, the developing world must deal with the fallout. This week, for the first time the World Trade Organization is set to discuss the impact of the financial crisis on those countries. A powerful coalition of developing countries, including India, South Africa, Argentina and Ecuador, had lobbied vigorously for such a discussion because in their view the North's massive bailouts amounted to illegal subsidies that have adversely impacted financial markets in the developing world. Can these bailouts prompt a WTO dispute brought on by developing countries?

Hamid Mamdouh, director of the WTO's services division, is reported to have said "There is a legal cover for situations where members might deviate from their legal commitments and obligations" but the situation is not so clear cut. The General Agreement on Trade in Services (GATS) does include what is known as a "prudential carve-out," which is meant to allow regulators the policy space to address financial crises. Article 2 of the GATS Annex on Financial Services states that a WTO member “shall not be prevented from taking measures for prudential reasons.” The prudential carve out is subject to WTO dispute settlement, however, if a member believes the provision is being abused, is discriminatory or is a disguised non-tariff barrier to trade. The matter has never been litigated before, and what standard of review the WTO would apply under the circumstances is an open question.

But would a developing country (or a group) actually raise a dispute settlement claim? Beyond the legal issues, there are both economic and political considerations for developing countries to deal with.
Countries like the United States have the political clout to fend off a potential case. Moreover, the economic recovery of the North is in everyone's interest -- developing countries rely on their markets, not to mention their technical and financial assistance. A dispute on this issue -- at least in the near future -- seems unlikely. But this makes the upcoming discussions at the WTO all the more important. The organization must provide a forum to at least acknowledge that developing countries are another in a long line of innocent victims of this economic crisis (photo credit).

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