David & Goliath Lay Down Their Arms: Cape Verde Joins the WTO

What’s a small island nation like Cape Verde doing joining the World Trade Organization?

With a population just short of 430,000, per capita income of $1,400, and exports totaling about $3 million annually, Cape is hardly in a position to compete with perennial export giants like the United States, China, and the European Union. And yet, this small archipelago of 10 islands and eight islets located in the extension of a vast semi-arid and arid zone of the Sahel in West Africa seeks to join “The Club” of nations in the World Trade Organization.

The World Trade Organization is the international community’s most powerful economic institution, with a membership of 153 countries and control over 97 % of world trade. Can a powerful organization dedicated to the principles of free trade help a small and poor country like Cape Verde?


Barefoot Divas and The Big Bang: A Brief History of Cape Verde

In the economic arena, Cape Verde has little in the way of comparative advantage. Nearly 300 miles of Atlantic Ocean and a vastly different geography separate Cape Verde from Senegal and the African continent.

Best known for the soulful music of Cesaria Evora – The “Barefoot Diva” – the Island nation lacks the resource base to become an industrial power. Agriculture, the backbone of many African economies, is not viable because of the Islands’ rocky and mountainous topography, lack of rain, and extensive soil erosion.

The size of Rhode Island, nearly fifty-four percent of Cape Verde’s land is non-cultivatable, and the only agriculture to speak of is the subsistence farming rural families engage in with the help of drip irrigation. The fisheries sector is not commercially significant because the Island lacks a continental platform.
Despite seemingly insurmountable odds, Cape Verde’s history leaves room for cautious optimism. When the Portuguese walked away in 1975, after 500 years of colonial rule, the Island was in shambles: In the whole country, not a single secondary school could be found, and the only roads in existence were ones that served a strategic commercial purpose. Faced with massive illiteracy, little infrastructure, and few natural resources for development, the new government turned to a Soviet-style command economy.

For years, Cape Verde’s development model sought to build the internal market through import substitution and state intervention in the economy. The government regulated prices and created numerous state enterprises ensuring wide spread employment and access to affordable basic goods, but at great societal cost. The country stumbled along facing a massive debt load, weak productivity and profitability in the public sector, an underdeveloped private sector coupled with a growing informal sector, and a constantly shrinking pool of development assistance.

By 1991, Cape Verde had reached a critical stage in its development; politically and economically, change was necessary. The country opted for the “big bang” approach to development: Almost overnight, the state moved from a one-party to multi-party political system, and economically it transitioned to a market economy. In both transformations, Cape Verde has some success stories to share.


The Politics and Economics of Cape Verde

In a set of events mirroring the Bush v. Gore campaign, Cape Verde’s 2001 presidential elections found two candidates separated from the Presidency by roughly 17 votes. After presumed winner Pedro Pires took office, the Supreme Court invalidated a few fraudulent ballots. At least some Cape Verdeans argued the presumed loser, Carlos Veiga, was the “real” president. In the face of mounting tension, Veiga graciously stepped aside for the greater good of the country.

Along with its political maturation, Cape Verde has seen real improvement in its economic outlook. The government adopted a liberal foreign investment law, and by 2002, Foreign Direct Investment had risen from $2 million to over $27 million. The country also created an export market, focusing on textiles, footwear, and some fish and fish products. Recently, Cape Verde qualified for benefits under the African Growth and Opportunity Act, a U.S. initiative providing enhanced market access, particularly in textiles, to eligible sub-Saharan African countries. In addition to these efforts, Cape Verde also made the decision to join the World Trade Organization.


Cape Verde Seeks Development: Can Joining the WTO Help?

So, back to the original question: Why would a country like Cape Verde want to join the World Trade Organization?

For starters, Cape Verde seeks to bridge the “credibility gap”. The government’s new development policy looks to services – primarily tourism and banking – as the engine for economic growth. The services sector is particularly sensitive to the perceptions and myths held by would-be foreign investors, and as a small, least developed, African transition economy, Cape Verde has enormous perception challenges to overcome. For Cape Verde, WTO accession represents concrete evidence, both domestically and to the world community, that its autonomous liberalization efforts are working.

Equally as important, Cape Verde wants its liberal trade policy to mobilize increased resources for economic development. While a debate rages in the international community over whether the benefits of multilateral trade liberalization ever trickles down to developing and least developed countries, Cape Verde is betting in the affirmative. Whether it is to attract a higher, more export-oriented level of foreign direct investment, or to loosen the purse strings of international donors who insist that recipient states make real progress toward free markets and the implementation of international “best practices” in economic policy, Cape Verde is hoping that World Trade Organization accession translates into more money in the bank.

Perhaps the third most important rationale for the Island’s WTO accession plan lies in Cape Verde’s view that it can only hope to influence international trade policy by joining forces with other developing countries. Fully three quarters of WTO members are developing countries; like most such members, if Cape Verde has an export advantage at all it may well be its populace. The Island’s literacy rate has risen to an astonishing 77 %, and the country has a long tradition of exporting labor to increasingly better paying jobs in the developed world (Cape Verdeans have been immigrating to the United States since the 1800s when New England whaling ships would sail in to port and take on new recruits). In fact, there are more Cape Verdeans living in New England than in Cape Verde. The country is highly dependent on expatriate remittances to cover its massive trade deficit, and the government would like to facilitate easier access to developed country labor markets. But free movement of labor is not covered in the WTO Agreements. Developing countries have long lobbied for its inclusion, believing that the WTO’s rules-based system is their best hope for obtaining fair access to rich country labor markets.

The notion of the World Trade Organization as a referee ensuring a level playing field among its membership is not quite as farfetched as some believe. Recently, Antigua & Barbuda, a small island nation in the Caribbean with a population less than a quarter the size of Cape Verde, brought the world’s super power before the WTO’s dispute settlement body. Antigua & Barbuda maintain that a U.S. prohibition on cross-border gambling and betting services has led to a $4 million loss to the Caribbean nation’s economy. The WTO has not yet issued a ruling, but whatever the relative merits of the Caribbean Island’s claim, it is a sure bet that they would have had no success in getting the United States to address the issue but for the World Trade Organization’s mandatory dispute settlement mechanism. Membership really does have its privileges.


The Costs of WTO Membership

But membership comes with real costs. Unlike most African countries that joined GATT (the precursor to the WTO) in the 1960s and 70s on the sponsorship of their former colonial rulers, Cape Verde will join under the full WTO accession process. The WTO treaty is largely silent on the requirements for accession, providing only in Article XII of the Marrakesh Agreement that a country may accede “on terms to be agreed between it and the WTO.”

In practice, World Trade Organization accession is a two-step process: the acceding country must negotiate increased access to their markets on those products of interest to World Trade Organization members. In addition, the acceding country must also negotiate on the rules applicable to its membership. For example, developing countries traditionally have been entitled to “special and differential treatment”, which allows them, among other things, extended periods of time to implement their World Trade Organization commitments. An acceding country is not automatically entitled to an extended implementation period. It has the burden of demonstrating the need for such a period.

Practically speaking, World Trade Organization accession amounts to significant costs for Cape Verde and these transition periods can be crucially important. For example, the Island’s customs regime, one of the key sources of revenue for the government, will need to be overhauled as it does not conform to the WTO’s Custom’s Valuation Agreement (CVA). New legislation and implementing regulations will have to be drafted; Customs officials, judges, lawyers and the business sector will all need to be trained in the new procedures. But more fundamentally, the dominant view in Cape Verde is that the government will lose revenue once it implements the CVA. There is little support for implementing the Agreement at all, let alone on an accelerated timetable.

Similarly, World Trade Organization accession means that Cape Verde will have to create and enforce an intellectual property rights regime. The country currently has no IPR regime to speak of. It will take not only time, but enormous financial and human resources to create a viable regime. While much of the rest of the world – including developed countries – took years, even centuries, to create their systems, Cape Verde will have to implement a regime within a handful of years. And implement it must because under the World Trade Organization’s “single undertaking” approach, all WTO members must sign on to nearly all WTO Agreements.


Conclusion

Cape Verde’s accession to the World Trade Organization presents something of a crossroads for the international community. There are no models to look to given that the only previous least developed countries to complete the full accession process – Cambodia and Nepal – did so only as of September 2003 (the only success stories to have come out of the failed World Trade Organization Cancun Ministerial Conference). It would be tragic if WTO membership brought additional administrative costs and failed to bring sustained economic growth to Cape Verde and its people.

Having achieved laudable results in the face of a challenging history, Cape Verde has demonstrated its commitment to a free market-based economy. The international community must in turn support its efforts to ensure that World Trade Organization accession brings real benefits to this small island nation.


Originally published in slightly different form in the American Bar Association International Law Section Journal (Spring 2004).Update: On July 23, 2008, Cape Verde became the 153^rd member of the WTO.