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COMPREHENSIVE REVIEW OF GATT ARTICLE XVIII SOUGHT

by Chakravarthi Raghavan


Geneva, 4 Oct 99 -- A group of developing countries has called for a complete review of Article XVIII, 'Governmental Assistance to Economic Development' of GATT 1994 to be taken up as an implementation issue and work completed in the first year of negotiations to be launched at Seattle.

Separately, the group has also asked, as part of the Ministerial Declaration to be adopted at Seattle, a decision clarifying that only the Committee on Balance of Payments "shall" have the authority to examine the overall justification of Balance-of-Payments measures (covered by Art.XVIII:B).

The proposals have been put forward at the informal General Council last week by Cuba, Dominican Republic, Egypt, El Salvador, Honduras, India, Indonesia, Malaysia, Pakistan and Uganda.

In their proposal for decision at Seattle, the group has also said that the clarification decision from the Ministers would also provide that in examining the overall BOP justification (for import restrictions), the BOP Committee "shall keep in view that Article XVIII is a special provision for developing countries and shall ensure that Art.XVIII does not become more onerous than Art XII."

Article XII, a general provision from inception, deals with restrictions that countries might put in place on grounds of balance-of-payments situations.

Article XVIII, about governmental assistance to economic development, was extensively revised in the 1950s to meet the situation of developing countries, "economies that can only support low standards of living and are in the early stages of development", and included special provisions about their BOP situations and about government aid to set up industries and give them protection.

But the ability of developing countries to use these provisions by government aid to set up industries, and provide some initial protection, has been made difficult, if not virtually impossible, by the provisions for compensating trading partners, as also the rules and prohibitions in the other WTO agreements.

Apart from the clarificatory decision putting the BOP justification issues within the sole remit of the BOP Committee, the proposals for negotiations and decisions by 1 Jan 2001, call for a complete review of Article XVIII to be undertaken "with a view to ensure that it subserves the original objective of facilitating the progressive development of economies in developing countries and to allow them to implement programmes and policies of economic development designed to raise the general standard of living of their people."

The concept of decisions on BOP questions, their justifiability, was viewed in the GATT from inception, and for a long period of time, as an issue of general decision-making handled in the BOP Committee - with the IMF given a pre-eminent position in presenting the data about a country's reserves and the adequacy of these reserves to meet any imminent threat to the BOP. This intention and practice over a long period under GATT 1947 was continued with the Uruguay Round understanding on these provisions, which involved some very difficult negotiations, and incorporated more or less similar language to the understanding on challenges to regional trade agreements.

However, the recent ruling by the panel and the Appellate Body in the dispute raised by the United States against India, has negated these and made the BOP justification also an issue that could be agitated before a dispute panel, and the panel enabled to go into this and provide its ruling, not only on any measures taken under BOP cover (affecting another member), but also the justification of BOP - an issue with political, economic and social dimensions.

And the stance of the IMF before the panel on how India could manage with its reserves and lift all import restrictions - through macro-economic management and structural changes in the form of agricultural reforms and reservation of production in some areas for the small-scale sector - and the observations of the panel, as well as by the Appellate Body on macro-economic policy and development policy has in effect reduced to nullity the provisions of Article XVIII and substituted the judgement of three panellists for that of the WTO members.

In response to questions from the panel, the IMF had said that its views of the adequacy did involve a "considerable degree of subjective judgement", that the reserves were adequate, and India with prudent macro-economic policies could manage without import restrictions. And while India's export performance had weakened in 1997/98 (growing only by 2-1/2 percent in value terms over the 4-1/2 percent of the previous year), this was partly due to weaker demand in the world market and sector-specific structural problems (in infrastructure and lack of reforms in small-scale sector, where units enjoy special protection against domestic and international competition, and over 800 products are reserved for production by them). In reply to another question, of the panel, the IMF also said that India could manage its BOP through macro- economic policy instruments "which would need to be complemented by structural measures such as scaling back reservations on certain products for small-scale units and pushing ahead with agricultural reforms."

India's argument that this involved its being asked to change its 'development policy' was countered by the panel with the view that India's arguments were in general terms, and that the IMF's views about structural measures, "appear only at the end of its answer, after it has suggested other liberalization measures such as tariff reductions" and not as a condition for preserving India's reserve position.

And the Appellate Body, in upholding the panel, and turning down the Indian appeal had distinguished between macro-economic policy and development policy, and said the IMF had not called for changes in India's development policy, but only macro-economic policy.

This view that development policy of a country (which under Art.XVIII.B.11 is not to be questioned or asked to be changed to obviate BOP restrictions) is different from macro-economic policy has made the situation of developing countries in GATT/WTO worse than that of developed countries. For, under Art.XII, the macro-economic policy of developed countries cannot be questioned.

And the absurdity of this economics has been brought out sharply by the views of the President of the World Bank, James Wolfensohn, who said last week at the Fund-Bank meetings in Washington that the world needed a "new development architecture" to match the new global financial system.

Wolfensohn then went on to say that the Bank would now press ahead with its comprehensive development framework which (according to Wolfensohn) aims to "COMBINE SOCIAL AND MACRO- ECONOMIC ASPECTS OF DEVELOPMENT POLICIES." (emphasis added) (SUNS4522)

The above article first appeared in the South-North Development Monitor (SUNS) of which Chakravarthi Raghavan is the Chief Editor.

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