Report of the Secretary-General of UNCTAD to the ninth session of
the Conference
June 1996
TRADE AND DEVELOPMENT IN A LIBERALIZED AND
GLOBALIZING WORLD ECONOMY
A. Introduction
1. The progress of development since UNCTAD VIII has been uneven. A number of
developing countries, particularly in Asia, have sustained the high rates of growth
already in place at the time of UNCTAD VIII, and some have been able to accelerate growth.
Since the last Conference, Latin America has definitely emerged from the debt crisis that
had weighed on economic performance in that region for a decade. However, in many of the
poorer developing countries, especially those in Africa, progress has been modest. In many
cases output has barely succeeded - or has not succeeded - in advancing at the same pace
as population, and well-being has stagnated or, for some segments of the population,
declined. Overall, the disparities in economic conditions among developing countries
appear to have widened since UNCTAD VIII.
2. These broad trends have taken place against the background of rapid changes in the
world economy - changes that can be described by the general concepts of liberalization
and globalization. These changes, together with the growing recognition of the need to
ensure that economic advance is sustainable, are altering the way the international
economy operates and affecting the character of successful policy approaches to
development. This report examines the opportunities for growth and sustainable development
offered by the processes of liberalization and globalization, as well as the risks and
potentially negative consequences for development that might flow from them, and discusses
some of the policy approaches that would allow the opportunities to be fully grasped and
the potentially negative consequences to be avoided or overcome.
B. Liberalization and a globalizing world economy
1. Liberalization and the broadening scope for private initiative
3. During the past decade, liberalization has been the hallmark of economic policy
throughout the world. Virtually all Governments have taken significant steps to widen the
role of private enterprise in economic activity. In some countries - for example the
former centrally-planned economies - this constituted a veritable change of regime. For
others - for example a number of Latin American countries - it constituted a major shift
in the philosophy and approach towards fostering development. In still others - for
example some European economies - it constituted an adjustment of the role of government
in a mixed economy.
4. A wide variety of specific types of measures has given effect to liberalization
policies. In countries with economies in transition, the change of regime has required the
disengagement of the State from production of goods and services across virtually the
whole economy, and the establishment of the institutions and legal frameworks appropriate
to the functioning of a market economy. In economies that relied mainly on private
enterprise to organize production, the role of the State has been reduced and revamped. In
both transition and market economies these moves have resulted in the privatization of
State enterprises. In market economies there has also been extensive reduction in
government regulations guiding private-sector activity, and some revamping of regulations
to meet emerging needs, as in the areas of finance and environmental protection, while in
most transition economies there is a need to put in place or strengthen regulatory
regimes. In all countries, however, ensuring that prices are a true reflection of relative
scarcities and giving freer rein to the energies of private enterprise were seen as
essential ingredients of successful economic policy. This, in turn, reflected renewed
emphasis on the role of privately-owned production units (firms, farms, cooperatives and
family businesses) as the most effective and efficient means for organizing economic
production.
5. In the developing world, liberalization has been taking place in a variety of
circumstances. In the dynamic economies of East and South-East Asia, liberalization has in
some cases been proceeding at a deliberate pace, with government measures to open markets
to foreign competition and reduce support for the private sector being put in place
gradually, as industries in the sectors in question acquired the necessary competitive
strength in international markets. In other Asian countries, liberalization was more
rapid. In all cases it took place against the background of high growth rates. In Africa,
liberalization has tended to be more hesitant, while in Latin America it has generally
gone forward at a brisk pace. In both Africa and Latin America liberalization has taken
place as part of a policy response to low growth and, in some countries, financial crisis.
6. In all countries, external transactions have been a key component of liberalization
strategies. This is because liberalization of international trade, investment and capital
movements can improve allocative efficiency and can bring about greater dynamism in an
economy, thus providing faster economic growth. Among the expected benefits of increased
openness to trade are the improvements in innovativeness and productivity of domestic
firms due to external competition. Consumers also gain from the wider choice of goods and
services and reduced prices resulting from increased international competition and
specialization. Economies open to competition from abroad are also presumed to be better
able to adjust to adverse external shocks, and less prone to wasteful rent-seeking. At the
same time, the increased mobility of factors of production - especially capital and, with
it, technology - can help a country overcome the dangers of being trapped by static
comparative advantage and achieve the continued shifts in its resource endowments required
for sustained economic growth and productivity gains. Further, liberalization of capital
movements means that the link between domestic savings and domestic investment can be
relaxed: that is, domestic investment need not be constrained by weak domestic saving
behaviour and, conversely, high domestic savings should flow abroad to where they are
demanded.
7. Liberalization has, however, proceeded at different speeds and in different ways as
far as trade, investment and finance are concerned. Multilateral trade liberalization, a
process that began with the establishment of GATT some 50 years ago, has taken a decisive
step forward with the completion of the Uruguay Round, which has dramatically reduced
tariffs and removed quota obstacles that traders encountered at the borders of all groups
of countries; these reductions furthermore have been bound into multilateral contractual
commitments with the possibility of recourse to workable dispute settlement mechanisms.
While there are still a number of sectors where liberalization has been partial -
including agriculture and textiles and clothing, which are of particular importance to
developing countries - liberalization of international trade has progressed to an
impressive extent.
8. Investment liberalization has proceeded in a much more uneven manner. While
virtually all developed countries have liberalized their regimes for inward and outward
foreign direct investment (FDI), especially over the past 30 years, most developing
countries and those of Central and Eastern Europe have joined in this process only
recently. Once convinced that FDI could play a positive role in promoting economic growth
and technological progress, developing countries and countries of Central and Eastern
Europe took substantial unilateral steps to liberalize their inward FDI regimes: between
1991 and 1994 alone, 368 out of 373 changes in national FDI regimes were in the direction
of greater liberalization. As a rule, changes involved the tempering or removal of
obstacles to foreign investors, the establishment of standards for their treatment, and
the increased use of incentives to attract FDI, with some steps also taken to ensure the
proper functioning of markets. Furthermore, these liberalization measures were generally
accompanied by other measures aimed at improving the investment climate for TNCs,
especially by granting better protection to foreign investors.
9. Such liberalization has been uneven, however, as far as sectoral coverage is
concerned. The manufacturing sector is now open to inward FDI in most countries while such
opening up has been much slower in natural resources and services - sectors in which even
most developed countries maintain certain restrictions. And, as far as outward FDI is
concerned, only a few developing countries have begun the liberalization process.
Furthermore, the great bulk of liberalization measures have been taken unilaterally or in
the context of regional integration efforts. They are not bound in a multilateral
framework, although efforts are under way that could eventually lead to such a framework.
Still, the overall trend is in the direction of greater liberalization, complementing
therefore more and more the international trade regime in terms of creating a situation
within which firms have the freedom to organize their activities across national
boundaries.
10. The liberalization of trade and FDI regimes has been accompanied by a
liberalization of financial transactions. In developed countries, since the early 1970s
freedom of capital movement has been increasingly viewed as an important policy objective;
and financial deregulation and liberalization have both accelerated during this decade.
Financial liberalization is generally less advanced in developing countries, but the pace
of change has been much more rapid. Inward investment by non-resident investors is
virtually free in a number of developing countries. As for outward transactions, an
increasing number of developing countries have adopted capital account convertibility in
recent years. Liberalization of transactions in foreign currency among residents has gone
much further. Indeed there has been a tendency to encourage residents to hold foreign
exchange deposits with banks at home.
11. The recent growth of portfolio investment in developing countries has been
accompanied by measures going beyond the obligations of IMF Article VIII, which requires
liberalization of many current-account financial flows such as interest payments on loans
and net income flows on other investments. These have included relaxations of restrictions
on capital inflows, many of them embedded in regulations originally concerned more with
restricting foreign ownership through FDI. At the same time capital repatriation has also
been made much easier. Thus, for example, at the end of 1993 only seven of a sample of 33
developing countries and economies in transition classified as emerging markets by the
International Finance Corporation (IFC) maintained restrictions on the repatriation of
capital invested in equities.
12. The internationalization of portfolio equity investment involves not only
transactions on stock markets by non-resident investors but also the buying and selling by
investors on their local stock markets of the shares of foreign companies. The equities of
many developing-country firms are now listed on stock exchanges in OECD countries, and
there has been a rapid increase in the trading of such securities since the beginning of
the 1990s, especially those issued by Latin American entities.
13. Liberalization of trade and investment has been influenced by the expansion and
intensification of regional integration efforts, which have continued even after the
successful conclusion of the Uruguay Round and the establishment of the World Trade
Organization (WTO). The weight of this factor is best measured by the fact that trade
among the members of regional groupings already accounts for almost half of world trade.
Beyond the recent launching of NAFTA, the enlargement of the EU and the implementation of
its Association Agreements with some Central European countries, several other regional
projects involving countries at different levels of development are in the making,
including some embracing both developed and developing countries. Subregional integration
among developing countries and various countries in transition is also making progress.
There is an increased emphasis within groupings on the liberalization of investment and
services and on technological cooperation, as well as on gradual harmonization of national
policies with an impact on trade and investment. Increasingly, regional arrangements tend
to include new spheres such as environment, competition, labour standards, the
liberalization of regional labour markets and monetary integration. All of this reflects
the desire by many Governments to have a range of opportunities for pushing forward with
liberalization, rather than relying solely on global multilateralism.
14. These developments are bound to affect the patterns of international trade,
production and investment of both members and non-members of regional groupings. Most
estimates concur that, overall, their trade-creation and dynamic-efficiency effects are
likely to outweigh potential trade and investment diversion effects for third countries.
However, for developing countries in particular, the emergence of economic groupings
involving major trading nations has given rise to concern. Even if the results of the
Uruguay Round should significantly reduce the risks of tariff-induced trade diversion by
integration groupings, trade diversion effects may still be significant in certain sectors
where tariffs remain high, which include sectors of interest to developing countries,
notably agriculture and textiles, and in the area of government procurement. The
trade-distorting impact of regional agreements may arise from measures such as restrictive
rules of origin and regional standards, and from regional information networks.
2. The globalizing world economy
15. The liberalization policies referred to above have progressively enlarged the
effective economic space available to producers and investors, fostering the process of
globalization throughout a large part of the international economy; that is, they have set
in train a process whereby producers and investors increasingly behave as if the world
economy consisted of a single market and production area with regional or national
subsectors, rather than of a set of national economies linked by trade and investment
flows. However, there is a marked difference between the degree of globalization as
reflected in trade, FDI and international finance. Over the past 10 years, the volume of
international financial transactions and the integration of financial markets of both
developed and developing countries into the global financial system has proceeded at a
more rapid pace than has the worldwide integration of other markets. Moreover, a
remarkable feature of the recent increase in international financial flows is the very
fast growth of cross-border financial transactions (that is, all portfolio transactions
between residents and non-residents) relative to total net capital flows among countries,
including developing countries. A large proportion of these international portfolio
transactions are short term, involving round-tripping of capital and very rapid reversal
of asset positions. International trade and production have not expanded at the same rate
as international financial transactions, but production by transnational corporations has
grown faster than trade. More importantly, trade and the internationally integrated
production of TNCs have acted both separately and in interplay with each other to increase
interdependence of economies in terms of production activities, lending a qualitative
dimension to globalization that distinguishes it from its earlier variants.
16. The principal driving force in the globalization process today is the search of
both private and publicly-owned firms (and more generally, producers and asset holders)
for profits worldwide. Their efforts are made possible or facilitated by advances in
information technology and by decreasing transport and communication costs. To maintain or
increase market share and maximize profits in a world economy with rapid technological
change, converging consumer tastes and liberalized flows of goods, services, capital and
technology across national boundaries, firms are pursuing strategies that allow them to
exploit all available sources of competitive strength, combining their own, firm-specific
assets with assets that are specific to particular locations. They minimize transaction
costs and maximize efficiency and profits through appropriate choice of modes of
international transactions and distribution of assets and of international production
activity.
17. The most widely acknowledged factors promoting the globalization of both production
and finance are the recent advances in information technology; technical progress that has
led to a steady decline in the costs of international transportation of goods and people
and of international communication; and technological progress in manufacturing which
makes it feasible to decompose production processes. The scope of the international
division of labour, as well as of international financial transactions, has consequently
been considerably widened. The sharp decline in international transport and communications
costs and the possibility of decomposing production processes have not only made a vast
number of goods and services which were formerly non-tradeables into tradeables, but have
also accelerated the process of internationalization of production and of services. At the
same time, the drop in the costs of international communications and recent progress in
information technology have opened vast possibilities for international financial flows.
18. The use of foreign production units, implemented through FDI, was facilitated by
advances in management science, which have considerably enhanced the ability of firms to
develop management structures capable of dealing with several production units located at
large distances around the globe. But perhaps the most important single factor permitting
the rapid globalization of production has been the revolution in semi-conductor, microchip
technology and its application in combination with technical advances in
telecommunications. With the ability to transmit virtually unlimited amounts of data at
very low costs, firms can easily diversify geographically the various stages of production
without losing managerial control. This technology has thus allowed firms to move beyond
economies of scale and to exploit economies of scope, or to combine large-scale production
with particularized production for individual market requirements.
19. All these factors have also had a pronounced impact on the globalization of
finance. They allow financial institutions to be instantly informed about conditions in
markets around the world, as well as to perform the detailed calculations necessary to
identify profit opportunities from the allocation of capital in different areas. Financial
globalization is further reinforced by the considerable expansion of the financial and
business media, and the growing acceptance of English as the lingua franca of
international business.
20. Globalization is the product of liberalization. But it has also set in motion
forces working to accelerate liberalization. As firms increasingly see transnational
production as necessary for their competitiveness and profitability, they are exerting
more and more pressures on Governments to provide conditions that will allow them to
operate worldwide. This involves not only further liberalization of international trade
but also freedom of entry, right of establishment and national treatment, as well as
freedom for international financial transactions, deregulation and privatization.
21. Macroeconomic forces have, meanwhile, exerted other pressures on firms and
Governments. Slow growth of demand, stagnant wages and persistently high unemployment in
the developed countries over the past 20 years have resulted in pressures from firms and
workers that have influenced these countries' policies. The slow growth of domestic demand
and the related squeeze on profits in developed countries has led firms there to intensify
their search for growth and profits in other markets; in so doing, they also apply
pressure on their home Governments to demand greater openness of foreign markets. On the
other hand, the persistence of high unemployment combined with these same factors has
increased the threat of protectionism and selectivity in the liberalization of
international trade in these countries.
C. Liberalization, globalization and development
1. The role of the State
(a) The State, enterprises and development in a globalizing economy
22. With market mechanisms now playing an increasingly important role in the
development process, the role of government is progressively shifting towards providing an
appropriate enabling environment for private enterprise, and facilitating and fostering
the establishment and expansion of private business. This is not necessarily a passive or
indirect role. A number of Governments in both developed and developing countries have
successfully pursued proactive policy interventions to influence the savings and
investment rates; to promote the efficient functioning of markets; to improve access to
international markets and the diffusion of technology; to promote core capacities in
manufacturing and services; and to create the best possible conditions for the
competitiveness of their firms. Such policies are particularly important for developing
countries, where enterprises need to build up their capacities in order to participate
fully and effectively in international markets and production. In these countries the
promotion of small and medium-sized enterprises is often a particularly important
component of Government policies to foster development.
23. Thus, the shift towards reliance on market forces as the primary means for the
allocation of resources and the organization of economic activity as a whole means a new,
but not necessarily less relevant, role for the State in promoting development.
Governments need to encourage entrepreneurship, to promote human resource development, to
develop and maintain internationally oriented infrastructures, and to ensure the free flow
of information. Governments also need to assist the main actors in the market - producers
and consumers - to adapt to the demands of a more competitive market-place, by
facilitating training and the availability of enterprise-support services.
24. There is a growing recognition in nearly all countries that Government
interventions in the economic sphere which promote or perpetuate "rent seeking"
should be strongly discouraged. At the same time, in view of the successful development
and economic transformation experience of the East Asian countries, it is widely
acknowledged that Governments can pursue effective policies aimed at enhancing the
capacity of their enterprises and corporations to meet international competition, and that
they can adopt specific policy measures to increase domestic savings and investment rates.
An important lesson learnt from the East Asian countries' experience is that policies used
to increase the rate of capital accumulation can have as much influence on promoting
technical change, international competitiveness and industrial development, as do export
promotion and other policies more focused on individual sectors or industries.
(b) The State and the sustainability of development
25. Appropriate Government policies or interventions may also be required to deal with
market failures or deficiencies associated with the consistent inability of markets to
deal with the phenomenon of externalities. An important example in this regard is the
inability of markets to ensure on their own the environmental sustainability of economic
activity. Markets and the associated accounting systems (market prices) often fail to
recognize natural resources, which notably include all environmental resources, as assets,
or to value properly resource-based goods and services, or the costs and benefits
associated with external effects of production and consumption activities. In the absence
of Government intervention, and well defined property rights for public goods, or goods to
which access is generally open, such as clean water, clean air, biodiversity, etc., those
environmental assets tend to be treated as free goods in the economic production process
and consequently over-used in production activities. In these cases, especially where the
sustainability of environmental services is endangered, there is a clear need for
Governments to intervene in order to create the conditions for the internalization of
those external costs associated with such over-use. However, in order to avoid creating
excessive rents, Government intervention should rely to the greatest extent possible on
market-related instruments for internalization of external costs and benefits.
26. It may be noted, however, that in some cases Government intervention has worsened
the situation, for example by underpricing certain resources either by providing them
below their marginal cost or by subsidizing private producers. Thus, prices of water,
energy, pesticides and fertilizers are frequently set at less than their marginal cost to
society and, in certain cases, at even less than the private marginal cost of production.
Governments intervene in agricultural commodity markets through price support,
agricultural taxation and export taxes. Whereas in the developed countries, intervention
usually seeks to keep domestic agricultural prices above world market levels, in the
developing countries, agricultural production is often influenced by interventions to keep
domestic agricultural prices below world price levels. Both types of intervention have
adverse consequences - both static and dynamic - for the management of natural resources:
resources are misallocated and prematurely depleted, to the detriment of future
generations.
27. Distortions affecting the management of natural resources do not arise solely from
policies directed to the natural resource sectors. Policies which promote
industrialization at the expense of agriculture discourage investments in land
conservation and encourage encroachment on marginal lands. Certain trade policies can also
create problems: agricultural protectionism leads to more resources being used in farming
than is environmentally or economically justified and impedes market access for low-cost
producers, thus raising consumer prices in developed countries while lowering incomes in
developing countries.
28. The lessons of this experience are twofold: first, the market system by itself
sometimes provides incorrect signals and misleading information and therefore needs to be
complemented by necessary Government intervention; secondly, such Government intervention
should seek to ensure that levels of benefits and costs reflect the fullest information
about scarcity and price, rights and responsibilities, actions and consequences. The use
of such information by society is a necessary precondition for an effective human
interface with the natural environment and for the promotion of sound management of
natural resources and sustainable development. Non-governmental organizations can play a
positive role in this regard.
(c) The State and the distribution of economic benefits
29. Government also has an increased role to play in combating the unwanted
accompaniments of liberalization and globalization. In particular, there is a need for
public policy to address issues related to poverty and income distribution. Many economic
actors, such as poor and vulnerable groups, are unable to seize market opportunities to
achieve even minimum income levels. To assist these groups to gain access to, and to
exploit, market opportunities, Governments have a critical role to play in promoting
social human development and in providing the poor with the necessary working skills.
Adequate safety-net provisions for the unemployed are also important.
30. Many industrialized countries, however, have been searching for ways to slow down
or roll back the impact of the growth of employers' social security contributions on
labour costs, with consequent implications for the well-being of the vulnerable and
unemployed. One reason for this has been the desire to make wages more competitive with
those prevailing in other countries. But there have also been broader concerns leading to
the need to reform social security. These included the mounting costs associated with
population ageing, changing family structures, ever more expensive medical care,
persistent unemployment and public concern over the abuses and disincentive effects of
social welfare. These factors, together with the constraints of slow economic growth and
the maturation of pension schemes with respect to funding have led to spiralling costs of
social security systems.
31. One of the main social challenges that developed countries have had to face in a
more competitive world has been how to deal with low-skilled workers endowed with only
limited potential or will to increase their skills. Although jobs exist in non-tradeable
activities, the pay and job security are generally not attractive. In the production of
tradeables, such workers run the risk of being marginalized, since unless training and
retraining activities are put in place to enable them to enhance their skill levels,
unskilled workers in developing countries can often do the same work at much lower cost.
32. Budgetary cutbacks in social services have also occurred in many developing
countries, in particular in Africa and Latin America. Following the reductions initiated
in the early 1980s as part of the stabilization and adjustment measures to cope with the
foreign debt crisis in most countries in those regions, the levels of social service
funding per capita, adjusted for inflation, still generally remain below the levels
attained in the 1970s. Both quality and, to a lesser extent, coverage have declined as a
result. In some countries, already inadequate social infrastructure, in areas such as
health and education, has likewise deteriorated.
2. Seizing the opportunities
33. The processes of liberalization and globalization referred to above open up new
opportunities for development. The successful completion of the Uruguay Round promises to
expand the effective scope of world markets available to exporters and potential exporters
in developing countries. The growing flow of foreign direct investment is offering greater
opportunities to secure investment finance from abroad, but also - sometimes more
importantly - to secure access to the technology, skills and management practices
essential to development. And the sharp growth of flows of portfolio capital enlarges
considerably the possibilities for firms to secure their own financial needs through
capital markets on attractive terms. Opportunities thus exist which, if grasped adroitly,
can add new momentum to the development process.
(a) Trading opportunities arising from the Uruguay Round
34. The UNCTAD secretariat has undertaken an initial assessment of the outcome of the
Uruguay Round with emphasis on the interests and concerns of developing countries and on
the new trading opportunities resulting from the implementation of the Agreements. The
analysis has concluded that the outcome of the Uruguay Round does indeed open up important
trading opportunities. They stem, to begin with, from the significant tariff cuts which
have been achieved. In major industrial countries, duty-free access for products will
increase from 20 to 43 per cent of total imports, and the trade-weighted average tariff on
imports of industrial products from all sources will be reduced by 40 per cent, from 6.3
per cent to 3.7 per cent. On imports from developing countries, the reduction in the
average tariff will be somewhat smaller - 30 per cent.
35. New trading opportunities stem also from the fact that the Uruguay Round
effectively addressed areas and sectors where, until then, the absence of international
consensus and workable rules had given rise to discriminatory protective measures and
trade tensions. This refers particularly to the Agreements on safeguards, subsidies and
countervailing measures, agriculture, and textiles and clothing.
36. The Agreement on Safeguards specifically prohibits voluntary export restraints
(VERs) and other "grey area" measures, which are to be phased out over a period
of four years, thus dealing with a major element in the erosion of the multilateral
trading system. The Agreement on Subsidies and Countervailing Measures for the first time
defines a subsidy, and reflects a consensus as to the appropriate role for Governments in
supporting production and trade.
37. The Agreement on Textiles and Clothing provides for the phasing out of the
Multifibre Agreement (MFA) with its discriminatory and restrictive regime. The MFA
distorted world trade in textiles for over three decades, and penalized developing
countries in particular. The new Agreement involves the integration of the textiles and
clothing sector into the GATT/WTO multilateral rules and disciplines over a period of 10
years, supplemented by a progressive expansion of quotas during the transitional period.
38. The Agreement on Agriculture converts virtually all the non-tariff barriers to
tariff-based protection, and includes a reduction by 36 per cent in the resultant and
other agricultural tariffs, on a simple basis, in developed countries (with a minimum
reduction of 15 per cent per tariff line) and by 24 per cent in developing countries. It
also requires reductions in export subsidies and in domestic support to agricultural
producers. The Agreement is a major step towards a market-based world agricultural
economy. In addition, the Agreements on clarifying technical issues related to sanitary
and phyto-sanitary regulations, technical standards, customs valuations, import licensing
and preshipment inspection should reduce the risk of their being used as protectionist
devices.
39. Also conducive to increased trading opportunities is the extension of multilateral
disciplines to trade in services. The General Agreement on Trade in Services (GATS) will
provide a framework for a more secure and open market in services in a similar manner as
the GATT has done for trade in goods. Its scope is impressive, covering such diverse
aspects as investment, movement of persons and professional qualifications, and movement
of electronic data across national frontiers. It provides a negotiating framework which
permits developing countries to obtain reciprocal concessions in sectors of interest to
them, including access to technology in return for opening their markets to trade and
investment in services of interest to the developed countries.
40. The internationalization of services, combined with the liberalization of trade in
services, should enhance the ability of developing countries to develop efficient producer
services. These, given the rising service intensity of production, are acquiring
increasing importance for the competitiveness of the whole economy. They facilitate the
application of new management techniques, make relations between various stages of design,
production and marketing of products and services more expeditious, allow customized
services to appear, help to generate greater economies of scale and facilitate an
efficient globalization of the production and distribution functions. There are also
greater opportunities for the export of labour-intensive services through information
networks. The effective implementation of the development-oriented provisions of the GATS
would create opportunities for developing countries to increase their exports of services,
which would be an essential element in their integration into the world trading system.
41. All the above new trading opportunities have emerged in the context of a greatly
strengthened multilateral system of rules and disciplines embodied in the World Trade
Organization (WTO). All WTO members must accept all of the component multilateral trade
agreements, and the multilateral rights and obligations of all countries have been raised
to broadly comparable levels. The various agreements have been linked together within the
formal institutional framework of WTO through a common and much improved system for the
settlement of disputes. The outcome of the Uruguay Round has also served to dilute many of
the discriminatory aspects of regional trade agreements, by reducing tariff preferences
for regional partners and often establishing multilateral disciplines of equal or greater
stringency than those in regional agreements. While there has been a dramatic increase in
the multilateral obligations of most developing countries, differential and more
favourable treatment in their favour is now established in a contractual manner, thus
providing them with further security and predictability.
42. However, there are difficulties facing the actual translation of the commitments
made in the Uruguay Round Agreements into concrete trading opportunities. Some of the
agreements leave a margin of interpretation that could allow the reintroduction of
protectionist measures. Moreover, developing countries and economies in transition often
face constraints on taking full advantage of the trading opportunities created. The issues
concerned can be considered under two headings: those that relate to trade policy, and
those that relate to trade efficiency.
(i) Trade policy implications
43. A number of features of the results of the Uruguay Round can be constraining
factors for developing countries' efforts to take full advantage of the trading
opportunities. Also, countries in transition face special problems which could severely
limit their ability to benefit from the multilateral trade liberalization.
44. Tariff reductions for industrial products, significant as they are, do not cover
all dutiable imports in the markets of the major developed countries. Moreover, virtually
no reduction was offered on the 22 per cent of dutiable imports which were deemed
"sensitive". These include products of particular export interest to developing
countries such as items in the leather, rubber, footwear and travel goods category. In
addition, a relatively high degree of tariff escalation will persist in most product
groups, particularly those of export interest to developing countries. These include
tropical and natural resource-based products.
45. Constraints on the ability of developing countries to take full advantage of
trading opportunities in the textile and clothing and agricultural sectors derive from the
considerable latitude which countries have in the implementation of their commitments. The
"end-loading" feature of the Agreement on Textiles and Clothing, in conjunction
with the "integration" choices of governments, could postpone the realization of
new market opportunities until the end of the 10-year implementation period. Additionally,
the possibility of recourse to the transitional safeguard provisions, which permit new
quantitative restrictions to be imposed on a discriminatory basis for up to three years,
including against countries and products which were not restrained under the MFA, could in
fact reduce export opportunities in the short run.
46. Under the Agreement on Agriculture, Governments have a degree of flexibility in the
implementation of their commitments on market access, export subsidies and domestic farm
support which could reduce potential trading opportunities. The tariffication process has
resulted in very high levels of tariffs on affected products, the protective effect of
which is supplemented by the Special Safeguard Clause, which permits additional duties on
imports of those items subject to tariffication if imports of a given product exceed a
"trigger price" or "trigger volume". Tariff quotas, which are provided
at lower rates to implement current and minimum access commitments, may represent the only
real market opportunities created by the Agreement. The arrangements which importing
countries adopt to allocate quotas among countries will have a significant bearing on
trading opportunities actually created.
47. With regard to export subsidies, reduction commitments have been established for
broad product groups rather than at the individual product level. There is therefore an
element of uncertainty as to how the overall commitment will affect specific products.
Furthermore, since there is no restriction on how the remaining allowable subsidies can be
used across markets, it will again be a matter of policy to decide in which markets
subsidized exports will actually be reduced, or whether a sequential targeting of markets
would not occur. Concerning domestic support, as AMS (Aggregate Measurement of Support)
reduction commitments are sector-wide, countries have considerable flexibility with
respect to product-specific action.
48. The Agreement of Safeguards contains provisions which provide for the possibility
of negotiating quotas with supplying countries, as well as for countries' deviation from
strict MFN treatment ("quota modulation") where there has been a
"disproportionate increase" of imports from certain supplying countries. The
Agreement did not include provisions on "circumvention", which introduced an
element of uncertainty.
49. In the GATS there is considerable imbalance as to the extent to which different
sectors or modes of supply have been made subject to specific commitments in the
schedules. Most offers only provide a standstill in a wide range of sectors. Moreover,
some developed countries have entered far-reaching MFN exemptions on some important
services sectors. The mode of supply most frequently found is commercial presence. Few
developing countries, however, are in a position to benefit from this mode of supply,
given the high cost of establishment in developed countries and the weakness of the
developing-country firms in terms of financial and human capital and access to
distribution networks and information channels and technology. Thus, the immediate major
beneficiaries of the GATS are those transnational service enterprises which are able to
establish a commercial presence elsewhere. The mode of supply in the form of movement of
natural persons, on the other hand, is mainly bound through horizontal commitments without
sectoral specificity. A few countries have offered access to specialty occupations and
contract-related professionals.
50. The trade-policy implications of the trading opportunities offered by the Uruguay
Round are, of course, closely intertwined with issues concerning the export supply and
market capabilities of developing countries. Internal conditions in those countries,
especially in the least developed countries and other structurally weaker economies such
as those in Africa, may place constraints on their ability to take full advantage of
trading opportunities. Most developing countries do not possess internationally
competitive production bases. Equally constraining is the limited capacity of economic
actors in these countries to identify new comparative advantage niches, to mobilize the
necessary investment and marketing resources and to contend successfully in a highly
competitive global market, especially in areas where trade preferences have been reduced.
In some cases, the task of developing these sectors and capacities is handicapped by the
lack of an enabling policy and institutional environment. These problems are further
exacerbated in the case of countries which are heavily commodity-dependent - an issue
which is taken up in section 3 (c) (ii) below.
51. The difficult situation of these countries is further exacerbated by a partial, or
in some cases total, erosion of preferential tariff margins enjoyed by a large number of
developing countries under the GSP and other preferential trade arrangements such as the
Lomé Convention and the Caribbean Basin Initiative as a result of the Uruguay Round
tariff reductions. Without the price advantages which allowed those countries to compete
more effectively with imports from non-preference-receiving countries, some of them may
not be able to maintain their market shares.
52. Countries in transition face a special situation. Many of these countries have not
yet fully adapted their economic institutions and policies so as to be able to pursue
trade-oriented growth strategies. Most of them, moreover, are not WTO members and did not
participate in the Uruguay Round. Almost all of the non-members have initiated WTO
accession procedures, but in most cases the process is only at an early stage.
53. Finally, the economies in transition still face a number of "residual"
restrictive elements in the trade regimes of major developed countries. Although in recent
years the latter have taken measures at the bilateral and regional levels to open their
markets to countries in transition, in particular by eliminating or liberalizing
quantitative restrictions and extending the benefits of GSP treatment to those countries,
countries in transition are still subject to selective non-tariff measures applied against
their exports, including selective safeguards and special anti-dumping duties.
(ii) Issues of trade efficiency
54. It has been estimated that the cost of trading procedures represents at least 10
per cent of the total value of international trade. Thus, efficiency in the conduct of
international trade transactions (i.e. reduction in the costs of international
transactions), as well as access to global trade-related information flows and networks,
have become increasingly important factors for countries and firms to enhance their
participation in international trade and to seize trading opportunities arising from trade
liberalization. In most countries, failure to reduce such costs results in lost trade
opportunities, reduced government revenues from trade, and lower international
competitiveness. As modern management techniques linked to outsourcing and
"just-in-time" production and delivery continue to spread worldwide, inefficient
trade procedures and business practices lead almost inevitably to a country's inability to
take full advantage of trading opportunities.
55. From the point of view of the international community as a whole, the broader
adoption of efficient business practices is vitally important, since it is a necessary
element in the facilitation and cost-minimizing of global trade. One particularly
important case is that of Electronic Data Interchange (EDI), which has the potential to
contribute to cheaper, safer and faster exchange of trade-related documentation, but will
not generate its full potential benefits in the absence of universally accepted norms and
standards. At the same time, those enterprises which have not adopted EDI may find
themselves severely handicapped in entering certain markets. This is of particular concern
for SMEs (especially those that depend on subcontracts from larger firms), and for
developing countries.
56. In developing countries, especially the least developed ones, capacities for
reducing transaction costs and for accessing trade-related information flows are generally
limited, which is a major constraint on their ability to derive adequate benefits from
globalization. In preparing for the United Nations International Symposium on Trade
Efficiency held in Columbus, Ohio, in October 1994, UNCTAD, in cooperation with relevant
international institutions, formulated a large number of practical measures that could
significantly reduce the cost of international transactions and allow weaker participants
in international trade to take greater advantage of trading opportunities arising from the
twin processes of globalization and liberalization. These measures (annexed to the
Columbus Ministerial Declaration) concern six areas: trade facilitation/better business
practices, customs procedures, financial services, transport, telecommunications, and
business information.
57. In many developing countries, inefficient customs procedures often constitute a
major constraint on their participation in international trade. With the rapid spread of
modern trading techniques, especially in the area of electronic commerce, such constraints
are rapidly becoming even more severe handicaps and a cause of exclusion.
58. Regarding trade-related financial services, in the absence of local capabilities in
many developing countries, traders must rely on external suppliers of these services, most
of whom are large banks and insurers based in developed countries. But SMEs are rarely
among the clientele of foreign financial institutions and are therefore deprived of access
to global network-based services (such as those of the Society for Worldwide Interbank
Financial Telecommunications, SWIFT). Until now, no international instrument has been
designed to assist SMEs to access financial services abroad.
59. New technologies have vastly increased the amount and variety of available business
information and drastically reduced its cost. But inequalities of access to information
and information networks continue to be a factor that prevents millions of traders from
realizing their competitive advantages. While merchandise trade has benefited from the
adoption of international standards at various stages of commercial transactions, no
equivalent exists for the exchange of business information. However, the use of standards
is a fundamental requisite for an efficient use of information technologies. Business
information mostly tends to flow to and from developed countries. Developing countries are
for the most part passive recipients rather than active sources of business information,
even of that directly concerning them. A truly global trade system requires trade
information flows that do not bypass the majority of the world's population. Efforts are
needed in the standardization of business information and in the closing of existing gaps
in its availability, both in terms of physical access and of cost.
60. The technical and economic evolution of international transport imposes further
constraints on developing countries' ability to use international trade as an instrument
for their economic development. Transportation services are becoming increasingly
multimodal, involving a wide range of network and distribution channels. Many developing
countries have difficulty in developing these services for lack of suitable physical
infrastructure, such as seaports, airports, roads, or rail lines. The growing general use
of management techniques such as "hubs and spokes" has led progressively to the
disappearance (or higher cost) of "thin lines" in international transport. At
the same time, the transport industry is being affected by massive concentration on the
supply side, as well as on the demand side, where huge transnational companies have
increasingly globalized their transport requirements through global carriage contracts
with ocean carriers.
61. It should be emphasized, however, that the increasing impact of information
technologies on the modalities of international trade also offers important opportunities
for developing countries and their integration in international trade. Among others, it
opens up possibilities to diversify away from their traditional array of exports
(commodities, labour, transport and tourism), and it even alters their capacity to
generate revenues from such traditional exports. Moreover, availability of mobile and
affordable information technologies is affecting the fundamental mechanisms through which
wealth is created and distributed, with immediate and significant impact on trade, growth
and employment. While the importance of information keeps increasing as a strategic factor
in international competition, its price has lowered dramatically and its ease of use has
increased exponentially. For developing countries, which are generally affected by lower
endowments in technologies and capital, this is both an additional obstacle to integration
in global trade and an unprecedented opportunity to "leapfrog" to some of the
most advanced segments of production and trade.
62. As the strategic role of information as a factor of trade competitiveness becomes
more obvious every day, it also becomes clear that technology is only one condition of
access to relevant information. Of equal importance will be the building up of local
capacities to use and manage such information, which will require the production and
development of interfaces, software and systems adapted to local needs and constraints
(e.g. languages), and the diffusion of "generic" (as opposed to
hardware-specific) knowledge through suitable training programmes. However, appropriate
attention needs to be paid to ensuring that poorer economies have access to external
providers of information: this will require the setting up of truly decentralized and
global information systems with a clear focus on trade and development. The development of
the Global Trade Point Network, discussed in the next chapter, is a concrete way of
addressing this issue.
(b) Opportunities related to international capital flows and the financing of
development
63. Increased access to international financial markets is a source of both
opportunities and risks. The opportunities relate to additional external financing for
development, thus allowing domestic investment to exceed domestic savings. External
financial transactions also allow greater flexibility in the financial management of
firms. The risks result from the problems to government's macroeconomic policy posed by
surges of external financing, and from the volatility of some categories of external
portfolio investment (see sect. 3 (b) below).
64. Historically, foreign private capital has in many cases played an important role in
supporting the development process. This was true both in the nineteenth and early
twentieth centuries for certain now developed countries, and more recently for a number of
developing countries, principally in Asia but also in Latin America. Most of this capital
was in the form of external bonds, direct investment, and (in the more recent historical
experience) medium- and long-term bank loans. External portfolio equity investment in
developing countries on a substantial scale is a phenomenon of the last few years.
65. The increased flexibility associated with access to private financial markets
(which must, of course, be exercised so as to sustain confidence and creditworthiness) not
only gives rise to additional loosening of the link between national savings and domestic
investment, but for some countries also loosens the link between public-sector revenue and
expenditures. Even for developing countries that do not benefit from access to private
external financing these links may not be rigid since most are recipients of bilateral and
multilateral ODA. Nevertheless, the agreements upon which ODA flows are based are
generally incapable of being adapted to the full range of the financing needs of, and
investment opportunities in, recipient countries. Many of these needs and opportunities
can be met only, or much more easily, by private sources of external financing.
66. Flexibility in firms' financial management is facilitated by access to external
financing. This applies both to domestically-owned firms and to units or affiliates of
transnational corporations. The flexibility results from the greater range of financing
instruments available to firms with such access, and from the ancillary services which are
typically supplied by banks and other financial institutions in international financial
markets. Since access to external financing is closely connected to creditworthiness, it
is also generally accompanied by lower transaction costs, owing to the influence which
creditworthiness has on charges and insurance premiums for payments and financing
arrangements in international trade and investment.
67. The expansion in private external financing for developing countries since the
beginning of the 1990s has been concentrated partly on countries which largely or
completely avoided being affected by the debt crisis of the 1980s (principally in Asia),
and partly on countries in Latin America whose access to international capital markets was
severely restricted during this period, but regained lender confidence following changes
in government policies and underlying macroeconomic conditions. Asian borrowers were the
main recipients among developing countries of loans from banks in the 1980s; and seven
countries from this region accounted for a large share of bank lending to developing
countries in 1992-1994. In the case of external bond issues, the main recipients were the
same group of Asian countries and four from Latin America. Similarly international equity
issues have emanated from a limited group of Asian countries (which includes the main
recipients of external bond and bank financing) and of Latin American countries. High
degrees of concentration have also characterized external debt financing in forms such as
medium-term Euronote facilities and Eurocommercial paper. FDI flows are influenced by
particularities of countries (such as the possession of natural resources) which are not
necessarily correlated with access to external bank financing and portfolio investment.
However, even here flows have been fairly concentrated, the main recipients including the
Asian and Latin American countries already mentioned.
68. A few developing countries not belonging to these groups have also recently raised
money in the form of external bond issues or syndicated medium- or long-term international
bank loans, either for the first time or after a long absence from international financial
markets. However, there continues to be a segmentation of developing countries by lenders
with respect to access to private external financing. The great majority not only lack
such access, but also, owing to unfavourable perceptions of their creditworthiness, face
high costs for short-term financing, payments and insurance in their international trade.
(c) Opportunities provided by international production
69. International production - including production by transnational corporation (TNC)
parent firms, their foreign affiliates, and other firms related to TNCs through non-equity
agreements and alliances - is also a potent source of opportunities for growth and
development. It can bring together a mobile package of assets, including capital,
technology, and technological and managerial capacities and skills, as well as the
locational assets of host or home economies, to generate goods and services. The
components of the package provided by TNCs constitute important resources and assets that
could strengthen growth and development in the countries concerned. One of them is capital
to finance investment. Foreign direct investment (FDI) is becoming an increasingly
important component of long-term net resource flows to developing countries. During
1985-1992, the ratio of FDI flows to gross fixed capital formation in developing countries
increased from 2 per cent to 7 per cent, a share higher than that in developed countries.
To be sure, the actual increase in the direct contribution of FDI to capital formation is
less than is suggested by these figures, since a certain proportion of FDI takes the form
of purchases by foreigners of existing assets. Nevertheless, the role of FDI in capital
formation in developing countries has undoubtedly grown, and appears set to continue to do
so.
70. International production can also be an important source of opportunities for
countries to strengthen their technological and organizational capacities and human
resource capabilities. These capacities and capabilities, which determine the way in which
tangible and intangible resources are converted into intermediate and finished goods and
services, are generally agreed to be the key determinants of economic progress for
countries today. For developing countries, the potential opportunities offered by
international production in this respect are particularly important: technological and
organizational capacities are still highly concentrated in the developed countries and
most developing countries must rely on foreign sources for the technology they need for
rapid growth. Among these foreign sources, TNCs are particularly important, accounting as
they do for an estimated three fourths of civilian R & D undertaken in market
economies. The production and R & D activities of these firms (as well as their
international trade) are thus important vehicles for the dissemination of technology,
capacities and skills. They also provide opportunities for host and home countries to add
to the technologies they possess and control and to their capacities for further
technological progress. The success with which these opportunities can be realized depends
on countries' abilities to attract FDI, to ensure that it carries the necessary
technological and organizational components, and to exploit the latter through domestic
efforts geared to learning and wider dissemination of the knowledge, capabilities and
skills that international production brings with it.
71. In addition to the opportunities for accessing resources and strengthening
technological and organizational capabilities and skills, international production can
enhance the opportunities for countries to reach markets and expand trade. The role of
international production in the exploitation and marketing of primary commodities has
traditionally been significant. Over the past few decades, many developing countries have
developed indigenous capabilities to finance, exploit, process and market their natural
resources and raw materials; but for many others, the resources, and particularly the
marketing links of TNCs, continue to provide important opportunities for developing
resource-based activities. More importantly, the trend towards integrated international
production in manufacturing and services provides opportunities for developing host
countries to expand trade in goods and in services in which they have - or can rapidly
acquire - comparative advantage. For some, these opportunities may, at least initially,
take the form of integration into the international networks of TNCs that pursue simple
integration or outsourcing strategies, through the provision of low-cost, labour-intensive
inputs or products. For others, the opportunities could be more diverse and involve more
sophisticated activities, as they exploit their competitiveness as locations for the
establishment of functional components in the production chains of TNCs that organize
their international production in a more complex fashion.
72. It should, however, be recognized that the countries which had initial conditions
better able to serve TNC infrastructural, skill and market needs have, with time, become
increasingly attractive for inward FDI, whereas those countries that did not meet those
conditions initially have difficulty in attracting inward FDI. The dynamics of this
situation, unless countered by appropriate policy measures, will aggravate cross-country
disparities in economic growth, infrastructure, skill and human resources development, as
well as access to technology. Moreover, as more countries liberalize their FDI regimes,
they are converging towards common standards which, in general, cover the right of
establishment; fair and equitable treatment, including non-discrimination in the
application of the law; protection against nationalization (except under clearly defined
conditions), and standards of payment of compensation; international dispute settlement,
including arbitration; and assurances for the repatriation of earnings and capital.
73. With FDI regimes converging, the appeal of any host country to potential investors
is increasingly determined by other factors such as the macroeconomic environment,
physical infrastructure and human resources. Government policies to affect these
positively are therefore crucial.
(d) Globalization, liberalization and economic and technical cooperation among
developing countries
74. In a globalizing and liberalizing world economy, economic cooperation among
developing countries (ECDC) is seen not only as an important component of an international
strategy for promoting sustainable development, but as an instrument in itself for
promoting the integration of developing countries into the world economy. It is now
increasingly recognized that for ECDC to fulfil these twin objectives, it will need to
evolve towards an open and flexible process - a process that emphasizes open membership;
adopts international norms for the working of integration groupings; emphasizes
harmonization of open and sound macroeconomic policies of member States; and allows
flexible arrangements among interested countries. In that process, technical cooperation
among developing countries (TCDC) has an important role to play.
75. This new "open and flexible ECDC" has served to channel cooperative
efforts into what may be described as "viable economic spaces". The rise of
geographically non-specific groupings (e.g. the Group of Fifteen), of groups of countries
at different levels of development (e.g. NAFTA and APEC) and of subregional partners with
specific interests (e.g. MERCOSUR, COMESA, SARC, UMA and GCC) are all examples from the
various regions of this new paradigm of cooperation.
76. In this context, the ECDC process is increasingly contributing through its own
dynamics to the global economy. As noted at the Fifth Summit Meeting of the Group of
Fifteen, the emergence of new and dynamic economic groupings in the South representing
alternative economic centres can serve as a powerful engine to boost South-South
cooperation in such areas as trade, transport, telecommunications, exchange of information
and technology, technical expertise and infrastructural development.
77. The strategy of ECDC in the context of globalization and liberalization must not
only be open and flexible but should also emphasize the exchange of experiences as a means
of learning from successful examples, whether these be regional or interregional
experiences. Transmitting such experiences requires TCDC, the funding of specific
cooperation projects by traditional donors, and global institutional support. The first
two objectives can be met through tripartite arrangements in which developed countries
provide financial support to the exchange of expertise and technical assistance among
developing countries. Some developed countries have shown marked interest in this type of
triangular cooperation. In practice, the exchange of experiences often has to involve
governmental representatives and private-sector actors from developing countries.
78. The conclusion of the Uruguay Round provides a good opportunity for developing
countries to reflect on the implications of the Round for ECDC. The ECDC process and the
new rulesmay be seen as mutually reinforcing: they will enable cooperative groupings to
use "open and flexible" ECDC to take maximum advantage of the new trading
opportunities, as well as to serve as focal points for collaboration to obtain optimal
results from the new institutional instruments of the multilateral trading system.
3. Meeting the challenges
79. The processes of globalization and liberalization can also give rise to a number of
potential negative consequences and challenges to development. Some of the more important
of these are: the loss of policy autonomy in some areas at the national level which
restricts or alters the scope of development policies; the risk of instability and
disruptions resulting from financial openness; and the risk of marginalization.
(a) Loss of policy autonomy
80. The economic liberalization policies being implemented in most developing
countries, and consolidated in more stringent multilateral disciplines, have the effect of
narrowing the policy instruments available to these countries. Specifically, the Uruguay
Round Agreements involve an element of limitation of the range of policy options
available. For example, developing countries may not be able to emulate the industrial
policies previously followed by the successful developing countries in East Asia, in
particular with respect to measures aimed at increasing the competitiveness of industry
and exports such as export subsidies, investment performance requirements and compulsory
licensing. (It is fair, however, to say that the ultimate benefits of such policies have
always been the subject of controversy). Differential and more favourable treatment for
developing countries has largely been limited to the granting of longer periods for
implementing obligations applicable to all countries, although some agreements provide for
more favourable thresholds for undertaking certain commitments.
81. Loss of policy autonomy does not arise only, and perhaps even mainly, from the
obligations countries undertake in international agreements. Increased financial openness
and the dismantling of barriers to capital flows have considerably strengthened the links
between the financial markets of national economies, reducing the ability of national
governments to use macroeconomic policy instruments to influence objectives such as the
volume of output, the level of employment and the rate of inflation. As is now well
established, it is no longer possible to delink national interest rates from those abroad
without suffering large amounts of capital flows and sharp swings in the external value of
the currency. Nor is it always possible to pursue expansionary macroeconomic policies
regardless of the pace of demand abroad, because that would lead to a deterioration in the
payments position. Attempts to check the leakage of demand and jobs through depreciations
will tend to increase the import of inflation, whereas a greater emphasis on exchange rate
and price stability will tend to make it more difficult to generate home employment. Such
difficulties faced by a single country in attaining a high level of employment and price
stability can give rise to pressures for protectionism and competitive devaluations.
(b) Financial openness and the risk of instability and disruption to development
82. As many countries in Asia and Latin America are progressively integrated into the
global network of financial markets, they have experienced not only sharp increases in
capital inflows but also occurrences of volatility, owing to abrupt shifts in the
sentiments of external investors. These inflows have become the subject of a new focus of
concern among policy makers. While long-term foreign investment responding to a country's
fundamentals is welcomed, policy makers are now much more aware of the problems that can
be associated with large surges in inflows of portfolio capital. These problems are due
not only to the volatility of much external portfolio investment but also to the challenge
which large and unexpected inflows can pose to macroeconomic management.
83. Surges in capital inflows are usually erratic and present the authorities concerned
with difficult dilemmas. When they are on a large scale they usually imply some loss of
influence by the authorities over domestic interest rates, exchange rates, or both. This
makes adherence to macro-economic policy goals more difficult, and risks creating doubts
in the minds of private-sector investors about the capacity of the authorities to maintain
a stable, predictable macroeconomic environment. Moreover, when the capital surge is
prolonged, the strong upward pressure it will exert on the recipient's real exchange rate
will have negative consequences for the competitiveness of exporters and
import-competitors, thereby weakening further the current account and contributing to a
situation in which at some point private investors could, usually correctly, judge the
inflows to be unsustainable.
84. When external deficits can no longer be sustained because of a slow-down or
reversal of capital flows, a sharp depreciation of the currency often becomes inevitable
in order to undertake external adjustment, thereby creating inflationary pressures.
Moreover, since it is not always possible to attain the required reduction in the external
deficit by an increase in exports alone, it also becomes necessary to cut imports by
reducing domestic absorption and growth. Thus the engineered reversal of a surge in
capital inflows can result in considerable damage to the real economy and the financial
standing of the country concerned.
85. Growing recognition of the dangers inherent in this type of volatility has produced
policy responses. At the international level, there has been recent agreement by the IMF
Interim Committee regarding procedures on the regular and timely provision of
comprehensive and good quality data to the Fund by members for surveillance purposes, and
regarding the establishment of exceptional procedures (the emergency financing mechanism)
that would enable the Fund to respond promptly and prudently in the event of a financial
crisis (see sect. D below).
86. At the national level, some countries have had recourse to specific measures
designed to influence capital flows directly so as to reduce inward surges, or mitigate
their effect. For example, minimum conditions have been laid down for external bond and
equity issues; limits have been placed on banks' liabilities in foreign currencies or on
their short-term obligations to non-residents; and queuing systems have been implemented
to slow external borrowing by private firms. Actions to reduce the profitability of
foreign borrowing have comprised the imposition of special reserve requirements on capital
inflows; reductions in the availability, and increases in the cost, of swap facilities at
the central bank; restriction of the assets which banks can acquire with liabilities
denominated in foreign currencies to those with a low return; and the levying of a stamp
tax on foreign credits. Financial outflows have been encouraged through the relaxation of
restrictions on foreign investment by individuals and institutions such as pension funds,
and on capital repatriation by foreign firms. Moreover, risks to foreign lenders and
portfolio investors have been increased by a widening of the bands within which exchange
rates are permitted to fluctuate.
87. Direct measures may also be used to stem or slow capital outflows. Their
effectiveness for this purpose is likely to depend on their timing as well as their
design. If their imposition coincides with a deterioration in perceptions of the
creditworthiness of the country in question (for example, owing to a political crisis), it
may be counterproductive and the capital outflow may actually accelerate (except in the
unlikely event that the controls are so comprehensive as to stop all outflows). However,
appropriately designed measures can increase the costs (and thus reduce the profitability)
of most ways of taking speculative positions against a currency. Even if they are imposed
after the outbreak of a foreign exchange crisis, they are capable of helping to slow the
capital outflow.
88. Such measures include limits on foreign investment by residents and on their
lending to non-residents, restrictions on residents' accounts in foreign currencies,
raising the costs of (or otherwise restricting) forward-exchange and swap facilities at
the central bank, the imposition of compulsory deposits at the central bank against rises
in foreign-exchange exposure, and other measures limiting such exposure.
89. Direct measures to influence capital flows can augment the capacity of
policy-makers to deal with capital account volatility. This is not to say that such direct
measures should be used whenever developing-country capital markets are subject to
external capital flows: individual country situations vary greatly, and some (perhaps
many) countries will not judge such measures to be desirable. But direct measures should
be part of the accepted policy arsenal available when and where needed.
90. For countries choosing to use them, direct measures need to complement sound
underlying fiscal and monetary policies (and not be a substitute for them) and must be
carefully tailored to minimize costs in terms of possible distortions and inefficiencies
in capital and foreign-exchange markets. Further, since such costs, even when minimized,
may be important, there needs to be a clear judgement that they are none the less smaller
than the likely costs of coping with capital surges without direct measures.
(c) The phenomenon of marginalization
91. Some developing countries, especially the least developed countries and other
structurally weaker economies such as those in Africa, have been unable to benefit from,
and meaningfully participate in, the globalization process. This phenomenon of
marginalization arises, inter alia, from the factors set out below.
(i) Supply-side impediments
92. The least developed economies are characterized by a variety of supply-side
constraints or structural weaknesses which are a barrier to the expansion of both
traditional primary products and non-traditional products, and to efficient
import-substitute production. Difficulties directly related to commodity dependence are
discussed in the next section. Additional supply-side constraints include: weak
technological capacity; lack of entrepreneurial, marketing, and technical skills including
those for quality control; paucity of long-term finance, expensive trade credit and
pre-shipment finance; and non-transparent legal and regulatory frameworks. The preliminary
results of a recent UNCTAD study on the financial systems of four African LDCs - Malawi,
Zambia, Uganda and the United Republic of Tanzania - suggest that there is very little
finance available for small farmers, small-scale enterprises, and long-term investors. The
deficiencies in the physical infrastructure are also major constraints in many countries,
especially because of limits on public expenditure programmes.
93. Globalization and liberalization have exposed additional supply-side constraints,
and have given new dimensions to "traditional" constraints in the LDCs and other
structurally weak economies as they attempt to adjust to the new, more competitive
international environment - the main features of which are the utilization of new
technology and production processes to increase efficiency.
(ii) Commodity dependence
94. Many developing countries, especially the LDCs and the other structurally weak
economies, are heavily dependent on a base of non- or semi-processed commodities, both in
production and for exports. This commodity dependence represents a major constraint on the
ability of many developing countries to take advantage of the trading opportunities
resulting from liberalization and globalization. Primary commodity prices are not only
more unstable than those of manufactures, but they have also tended to move downwards in
real terms over the past several decades. Such unfavourable characteristics have external
and domestic implications, which have often combined to generate significantly adverse
effects on the growth and transformation, macroeconomic stability and sustainability, and
creditworthiness of primary exporting developing countries.
95. In addition to these macro-level factors, the need to sell competitively in a
falling market affects commodity producers at the micro level. Primary production in poor
countries is characteristically price-inelastic. Many infrastructural problems, such as
the lack of irrigation facilities, inadequate research and extension services, and poor
transport facilities make it very difficult for farmers to switch from one product to
another in a timely fashion - or even at all - in response to new market opportunities.
The sunk costs of investments for tree and other perennial plantation crops are another
factor which weaken the supply response to price changes. A further factor compounding
commodity sector vulnerability is that the share of land and other fixed assets in
commodity production is very high. The pressing need to maintain employment, whether of
family or hired labour, transforms wages partially or even wholly into another component
of fixed costs. In these circumstances, production has to be carried on even in periods of
falling prices.
96. An additional source of structural vulnerability in the sector is that agricultural
production in a wide range of countries is often carried out by a very large number of
farmers producing almost homogeneous products, certain quality differences
notwithstanding. Thus, the impact of falling prices or demand, and of periodic price
instability, tends to be more generalized and widespread than in the case of
differentiated manufactured products coming from a smaller number of suppliers.
97. Moreover, technical progress and new discoveries in developed countries have
significantly delinked the previously strong raw-material input/final output connection.
Coupled with economic growth patterns and transformation which have become less
material-intensive, there appears to have been some substitution and displacement of
primary commodities, as well as some transmaterialization and dematerialization in certain
industrial-country markets.
98. Nevertheless, some such countries have indeed been successful in using the
commodity sector as a springboard for economic transformation and industrialization,
thereby escaping the poverty trap which for so many other countries seems to be an
inevitable result of their commodity dependence. There are several important lessons to be
learned from the experience of success stories. The first is that both sound domestic
macro-economic policies and political stability are sine qua non conditions for
attracting investment, from both domestic and foreign sources, into activities aimed at
diversification away from dependence on traditional export commodities. The second lesson
is the importance of trade policy: many of the less successful countries have followed
policies which effectively contained an anti-export bias for non-traditional products. At
the same time, the experience of the "East Asian miracle" countries shows
clearly that a "minimalist State" approach is inadequate (even if motivated by
past inadequacies of intervention): most analysts agree that an important factor in the
success of these countries was the use of "enabling" State intervention to
assist the private sector.
(iii) Difficulties in attracting FDI
99. Apart from the limitations in many cases arising from the political instability and
lack of coherent and predictable policy environment, LDCs and other weak economies face a
range of structural impediments to attracting FDI. These include:
(a) Low level of income and slow growth, as well as too small populations in many
countries to offer attractive markets;
(b) The low level of domestic savings, coupled with a paucity of entrepreneurs, which
reduces the scope for joint ventures and most non-equity forms of arrangements with
foreign investors;
(c) The shortage in many countries of managerial and a wide range of technical skills,
leading to inefficiencies and low levels of productivity;
(d) A lack of good infrastructure, notably a reliable power supply, good
telecommunications, adequate transport facilities, and efficient water supply - all
factors vital for modern industrial enterprises.
(iv) The decline in official development assistance (ODA)
100. Owing to their inability to attract FDI and other private capital inflows, LDCs
and other structurally weak economies continue to depend heavily on ODA for supplementing
their own domestic resources to finance development. After 1991, however, world ODA flows
declined significantly in real terms. The ratio of ODA to GNP for DAC donor countries
combined has fallen to 0.30 per cent, the lowest in more than two decades. DAC aid to the
LDCs has dropped to 0.07 per cent of donors' GNP, lower than the ratio reached a decade
ago, and less than half of the 0.15 per cent target. Moreover, Eastern Europe and the
former USSR have ceased to provide ODA; and OPEC donors have curtailed aid substantially
because of the deterioration of their own capital accounts.
101. Prospects for a significant increase in ODA in the near future are not
particularly bright. There appears to be a high degree of aid fatigue and loss of public
support in donor countries. Furthermore, aid fatigue is combined with a shift against
public spending (and, separately, against international public spending) in many donor
countries for reasons of domestic politics. One result is that the expected "peace
dividend" which, it was thought, could help to boost ODA flows after the end of the
Cold War, has never materialized: much of the significant defence spending cuts has been
used only to lower overall public spending. Another result is that public sector
programmes are being questioned more than ever before: for ODA, this means that donors are
being required by their ultimate funders to show stronger proof of aid effectiveness and
to counter impressions, right or wrong, that ODA was sometimes misused.
102. Aid is not necessarily given, in the aggregate, only on the basis of overall
poverty or development needs. Bilateral ODA, which is nearly 70 per cent of total ODA, is
often geographically allocated according to criteria which also include concerns - inter
alia political ones - other than poverty alleviation or genuine development needs.
This reflects difficulties for donors to adopt an aid distribution programme based on the
development and poverty-alleviation needs of recipient countries, given the competing
interests of their domestic funding sources and policy-makers.
103. While aid supply is declining, demand for aid remains significant and other needs
have emerged, adding to the traditional development needs. New claimants are also added to
the list of recipient countries. Many of the new demands arise from the need to address
global problems such as the environment, illicit drug trafficking, uncontrolled migration
and massive refugee flows, relief associated with civil conflict, and eventually
peace-keeping operations. Some of these claimants are programmes that are in the direct
national interest of donors.
104. Given the stringent and growing supply constraints, it is more important than ever
to establish clear priorities in aid allocation and to use resources more effectively.
There is a strong case for refocusing ODA on poverty alleviation and development
priorities, and for reducing its politicization. Clearly, more resources should be
directed to the poorest countries. In this regard, donors should redouble their efforts to
reach the aid targets for the LDCs. Country programmes could also be more focused on
poverty. It is therefore imperative to implement rapidly the 20/20 compact approved at the
1995 World Social Summit in Copenhagen, which calls for a mutual commitment between
interested developed and developing-country partners to allocate, on average, 20 per cent
of ODA and 20 per cent of the national budget to basic social programmes.
(v) Continued difficulties with external debt
105. Despite claims to the contrary, the debt crisis persists in many developing
countries. The crisis has changed in character since the early 1980s: it does not pose a
systemic threat to the international financial system; it affects a different category of
countries (mostly low-income countries); and the key problem now is official debt, both
bilateral and multilateral. The principal manifestation of the crisis is the accumulation
of massive arrears and the frequent reschedulings. However, some countries continue to
honour obligations, but at heavy social and economic costs. The various debt initiatives
have not yet cleared the debt overhang which continues to bear on many countries and is a
hindrance to investment and growth.
106. The adoption by the Paris Club in December 1994 of the Naples terms was an
important step in the evolution of the debt strategy. These terms will significantly
alleviate the debt burden of low-income countries if Paris Club creditors apply the
country eligibility criteria flexibly so as to let all low-income countries with
debt-servicing difficulties benefit from the 67 per cent reduction option. It is also
important to allow a generous proportion of that debt to be considered for debt reduction:
in the case of stock treatment, the size of the debt to be reduced is a critical factor in
determining whether the debtor country succeeds in exiting from the rescheduling process.
107. Even with the full implementation of the Naples terms, many heavily indebted
low-income countries would still face unsustainable debt burdens, largely because of the
heavy weight of debt owed to multilateral financial institutions, which has increased
rapidly in the past decade. These institutions, notably the World Bank and IMF, have
adopted schemes to lighten the burden of debt by, in effect, refinancing hard loans with
concessional funds. The "rights accumulation" approach has also been applied to
deal with protracted arrears. However, considering the severity of the problem, the scope
of these measures has been limited and resources inadequate. Bolder action is urgently
needed to bring about a significant alleviation of the multilateral debt burden. In some
cases this requires debt reductions.
108. Insufficient funding remains the principal constraint. A number of constructive
proposals have been made recently which are designed to provide additional resources for
multilateral debt relief without diverting funds from development assistance or increasing
the pressure on bilateral donors. These proposals include: the sale of a portion of IMF
gold reserves; a new SDR allocation, a portion of which would be used to provide
multilateral debt relief; and drawing on the reserves and loan loss provisions of
multilateral financial institutions. Serious consideration of these proposals is timely,
as any multilateral debt facility designed to alleviate the multilateral debt burden of
developing countries will be fully effective only if the associated funding is additional
to ongoing assistance efforts.
D. Managing a liberalized and globalizing world
economy in the pursuit of growth and development
109. The rapid changes occurring in the world economy have numerous important
implications for the formulation and execution of national policies. As mentioned above
(see section 3 (a)) globalization and liberalization have tended to reduce policy autonomy
at the national level. However, many of the policy concerns that can no longer be
effectively addressed at the national level could, in principle, be addressed through
coordinated action at the global level. Overall, the shift in the organization of
private-sector activity from the national to the global level has not been matched by a
shift in the organization of public policy from the national to the global level. This is
true for the regulatory environment governing the activities of private firms (see chapter
III, section C.2) as well as for macro-management. The establishment and further evolution
of international frameworks governing trade, international investment and money and
finance are critical elements in the development of systems of global governance.
1. Globalization, interdependence and economic management
110. The process of globalization, as manifested in the internationalization of
production and markets, has given substantial impetus to the growth of interdependence of
national economies, as well as of interlinkages in economic activities in areas such as
trade, investment, money and finance. In view of the economic interdependence among
countries, the ability of national policy makers to achieve national goals by using the
policy instruments at their disposal has declined, while policies and developments outside
a country's borders have come to have considerable influence on the country's economic
development. For example, national-monetary policies have immediate international
consequences. This is particularly true of the larger industrial economies, but even the
policies and developments in smaller economies may produce international consequences
similar to those of the larger countries. Just as the United States' decision in early
1994 to raise interest rates produced a world-wide collapse in bond prices, causing losses
which exceeded the United States stock market crash in 1987, so too the devaluation of the
Mexican peso later in the same year led to a significant fall in emerging equity markets
throughout Latin America and Asia.
111. The effective management of interdependence is thus acquiring increasing
importance in the context of achieving sustained growth and development in a liberalized
and globalizing world economy. This requires, among other things, stronger international
cooperation to ensure compatibility of policy objectives at three levels: among national
objectives of growth and full employment in the major industrialized countries; between
those, and the objectives of growth and development in developing countries; and between
all of the above objectives and global environmental and social objectives. The management
of interdependence must also address the problems of achieving greater coherence and
consistency among policies in the interrelated fields of trade, investment, money and
finance. The close connections, and thus the potential for mutually disruptive effects, of
policies in these fields has long been recognized: for example, currency devaluation has
competitive effects similar to those of an increase in import tariffs combined with export
subsidies; trade policies can both stimulate and impede foreign investment; and countries
which borrow from international financial markets may experience deteriorations in the
services account of the balance of payments due to a rise in international interest rates
which more than offset improvements in the goods balance. The difficulties which result
from such relations are generally important for developing countries whose economies are
more vulnerable to abrupt external shocks in the international markets for finance and
goods.
112. The need for coherence in global-policy making was explicitly recognized in the
Marrakesh Ministerial Declaration which accompanied the Agreement on WTO. The Declaration
emphasized the role of greater exchange rate stability - based on more orderly underlying
economic and financial conditions - in the expansion of trade, sustainable growth and
development, but also explicitly recognized that difficulties whose origins arise outside
the trade field cannot be redressed through measures taken in the field of trade alone.
While the Declaration notes that the strengthened multilateral trading system has the
capacity to contribute to more effective surveillance of policies, it leaves open the
modalities of such surveillance.
113. Within the framework of WTO, Governments have accepted a major loss of policy
autonomy by agreeing to restrict the use of trade-policy instruments in the context of
multilaterally agreed commitments. This was deemed necessary for the evolution of an
international trading system that can meet the challenges posed by a liberalized and
globalizing world economy. A similar reasoning would suggest that the principles and
standards of GATT and WTO might also serve as the starting point for reflection on the
construction of a framework for effective surveillance and the resolution of conflict over
monetary and financial issues. These principles are non-discrimination and the avoidance
of measures conferring unfair competitive advantage, as well as the recognition of the
need for safeguards and preferential treatment for developing countries. Thus market
access would be an overriding goal, but policies might be singled out for international
examination, and might be considered actionable, if they cause harm to another country's
capital market or balance-of-payments position. Any policy which could be shown to benefit
one country only at the expense of another, rather than improving the conditions in the
global economy, could be brought for resolution. The issue of sanctions could also be
considered.
114. In the past, there have been diverse efforts at improving the international
coordination of macro-economic policies in IMF, the G-10, the G-7 and the G-5. This
experience clearly demonstrates the extraordinary complexity and difficulty of any such
undertaking. Attaining a symmetrical and effective surveillance of national policies would
certainly require some ceding of national sovereignty, as well as the participation of all
countries. However, these difficulties are common to all aspects of global governance and
were successfully dealt with in the case of trade. This example, and the approaches that
made for success, can provide guidance as other aspects of global governance are tackled.
2. Evolving institutional, legal and regulatory frameworks
(a) The international trading system: new and emerging issues
115. The reduction and elimination of tariffs and other frontier trade barriers, and
the intensification and extension of multilateral trade disciplines achieved in the
Uruguay Round and consolidated with the establishment of WTO, have provoked initiatives to
continue the process of extending multilateral trade disciplines to related areas of
economic policy. These are reflected in the "new issues" identified in the
Concluding Remarks of the Chairman of the Marrakesh Ministerial Meeting and in subsequent
initiatives in other fora. The preoccupations of the proponents and the objectives sought
differ, and reflect different and even conflicting responses to the forces of
globalization and liberalization.
116. OECD has articulated a broad concept of market access, which encompasses not only
the conditions for export into the market but also the conditions for investing and
conducting business in it. This approach is based on the notion that markets are not
really open until foreign firms enjoy opportunities for producing and marketing goods and
services in it which are equivalent to those of domestic firms, including protection
against anti-competitive practices of the private sector which might frustrate the
multilateral market-access disciplines. Hence the proposals to establish new multilateral
rules in the areas of investment and competition policy involving the acceptance of the
principle of national treatment for, and most-favoured-nation treatment among, foreign
investors; and the introduction of multilateral rules for competition policy under which
Governments would be obliged to take action to eliminate anti-competitive practices. The
thrust of this package would be to maintain the momentum towards even further
liberalization by reinforcing the globalization process.
117. A related line of thinking focuses on differences in national policies, or in the
application of international norms, which could create unfair competitive opportunities
and thereby frustrate multilateral disciplines aimed at free competition and distort the
flow of trade and investment. The concern here is to avoid a firm-driven "race to the
bottom" in which countries compete to establish the most favourable conditions for
investment and the most competitive conditions for export production by providing fiscal
incentives to firms, thereby burdening government budgets, lowering social welfare
responsibilities of firms and labour as well as environmental standards, and loosening
competition policy rules. Pressures for such "policy harmonization" also arise
from concerns that globalization and liberalization can lead to the erosion of social
welfare programmes, resulting from the increased ability of private enterprises to seek to
locate in those jurisdictions where they find the regulatory and fiscal structure less
constraining.
118. These factors combine to create political pressures for a harmonization of policy
measures among countries in pursuit of what has been termed the "level playing
field". Domestic political pressures for such harmonization become even more acute
when moral or ethical considerations are introduced into the discussion. The proposals for
including the links between international trade and labour rights, environmental
protection and competition policy can be seen in this light.
119. The proposal by some major trading countries at Marrakesh to include the issue of
trade and labour standards in the future agenda of WTO is based on the claim that, through
the non-enforcement of ILO Conventions, countries can artificially reduce costs to obtain
unfair trade advantages. It would thus negate the efforts undertaken in the Uruguay Round
to liberalize and strengthen the multilateral trading system. However, many countries have
strongly opposed any link between labour issues and trade obligations as they consider
that this would open up new possibilities for protective measures and harassment of trade.
Furthermore, some developing countries proposed at Marrakesh to link immigration policies
and international trade. This proposal was partly motivated by the limited character of
commitments with respect to the temporary movement of natural persons in the General
Agreement on Trade in Services (GATS), and partly by the concern that their participation
in the international division of labour and their development process were affected by the
fact that the international mobility of labour was becoming more restricted as a result of
tighter immigration policies, while the mobility of capital and investment was being
increasingly facilitated.
120. Concern has also been expressed that multilateral trade disciplines can also be
frustrated by action and policy measures which are not covered by comparable levels of
discipline. Most evident are the distortions caused by imbalances in the stringency in
multilateral disciplines governing different areas of economic policy. The much tighter
constraints on national trade policies resulting from the disciplines negotiated in the
Uruguay Round Agreements contrast sharply with the virtual absence of discipline over
national monetary policies (see preceding section).
(b) Current trends in the evolution of arrangements governing foreign direct
investment
121. The dramatic increase of FDI and the growing role that TNCs play in the world
economy has focused attention on the role that a stable, predictable and transparent
international framework could play in facilitating, promoting and guiding essential TNC
functions,particularly in mobilizing the capital, skills and technological resources
required to meet world growth and development needs. To be effective, the liberalization
of FDI regimes must be accompanied by intergovernmental cooperation to ensure the
efficient functioning of the market. In particular, there is a need to coordinate efforts
aimed at avoiding restrictive business practices among firms and elaborating standards for
consumer, health, safety and environmental protection. In this context, there is also a
need for multilateral cooperation to rationalize the use of incentives aimed at
channelling FDI away from other countries in order to avoid market distortions and ensure
that investment decisions enhance not only national welfare but also global welfare.
122. At present, there is no overall multilateral framework for FDI. Instead, the
present international arrangements consist of a variety of instruments which differ
considerably from one another and which, in line with changes in the world economy, are
themselves changing along three main trends:
(i) The intensification of policies aimed at facilitating and attracting FDI. This
represents the most obvious and widespread change in the regulatory climate since the
early 1990s, encompassing most countries in all regions.
(ii) The continuing proliferation of bilateral treaties for the promotion and
protection of FDI (BITs). These instruments are expanding in number and scope so as to
complement national protection standards, and to facilitate and promote FDI flows. Some
recent BITs have introduced new commitments regarding entry and establishment as well as
the prohibition of performance requirements.
(iii) The expansion of regional and multilateral agreements on FDI. A number of
recently concluded regional agreements such as NAFTA and APEC have adopted provisions
addressing FDI standards and regulations.
123. In recent years, a number of initiatives aimed at evolving a multilateral
framework for FDI have been taken. In 1992, the Development Committee of the World Bank
called the attention of Governments to a recommended set of "Guidelines for the
Treatment of Foreign Direct Investment". At the same time the World Bank's
Multilateral Investment Guarantee Agency (MIGA) and the International Centre for the
Settlement of Investment Disputes (ICSID) have provided mechanisms for insurance and the
settlement of disputes, which are usually considered to be necessary ingredients of a
facilitating framework.
124. The Uruguay Round of multilateral trade negotiations addressed a number of
investment issues for the first time. The Agreement on Trade-related Intellectual Property
Rights (TRIPs) should provide a major stimulus to FDI. The GATS provides a framework for
the negotiation of sectoral-specific commitments with respect to foreign investment in
services; the Agreement on Trade-related Investment Measures (TRIMs) prohibits investment
measures which infringe upon trade obligations, and envisages future consideration of
broader issues of investment policy. The OECD National Treatment Instrument and its
liberalization codes for capital flows and invisible transactions provide non-binding
rules on investment; negotiation of a binding "Multilateral Agreement on
Investment" has recently been launched in OECD.
125. These arrangements provide the elements of a framework for further international
cooperation on FDI aimed at facilitating global investment decisions and using the
opportunities for growth and development that accompany them, in the broader context of
enterprise development, especially in developing countries. Such cooperation could aim at
giving clarity and coherence to the positive standards that have been established at
various levels for FDI in areas such as entry and establishment, national treatment,
settlement of disputes, fair and equitable treatment and transfer of funds.
(c) Current trends in the evolution of the regulatory framework for international
financial flows
126. Against the background of increasing risk of financial instability arising from
financial liberalization and integration, there is wide recognition of the need for
international action to improve and coordinate national regulatory frameworks for
international financial transactions. An agreement was reached in 1988 by members of the
Basle Committee on Banking Supervision to establish capital standards for credit risk.
More recent work in this Committee has included an initiative to establish such standards
for market risk.
127. However, the proposals of the Bank for International Settlements are aimed
primarily at the internal operations of the global financial institutions themselves in
the interest of their own stability. They do not aim at preventing global financial
instability resulting from their operations. This will require international regulation
and surveillance of the operations of the banks and other financial institutions operating
in international financial markets, as well as increased dissemination of information on
the activities of these institutions.
128. With the growing integration of international financial markets and the increased
contagion risk, the issue of who will play the role of international lender of last resort
has acquired greater importance. This problem became obvious in the recent experience of
Mexico, where a liquidity crisis led to the collapse of the currency before an
international lender-of-last-resort agreement could be put together. The subsequent
multilateral support operation, which was mounted on an ad hoc basis, raised several
practical and procedural questions.
129. The main traditional multilateral instrument for providing financial support to
countries in balance-of-payments difficulties is financing under arrangements with IMF.
However, subject to certain minor exceptions, under IMF Article VI the Fund's resources
have not in the past been available to finance large or sustained outflows of capital.
Other major sources of external payments support are of a more restricted nature and in
many cases are linked to regional economic agreements. Such sources include reciprocal
currency or swap arrangements between central banks, principally those of OECD countries,
and various EU facilities.
130. In October 1995 the Interim Committee endorsed the decision of IMF's Executive
Board to establish exceptional procedures that would enable the Fund to respond to serious
financial crises. The precise nature of these procedures is not yet clear, but the
resources may eventually include those which would become available under the initiative
of the Group of Ten to develop new parallel financing arrangements complementing the
General Agreements to Borrow. These procedures represent a step in the direction of more
comprehensive global lender-of-last-resort facilities, and future experience with them
will show how adequate a response they represent to the problem of large capital flows.
E. Conclusions
131. The processes of globalization and liberalization provide a new and constantly
evolving framework within which sustainable development must go forward in the period
ahead. These processes, especially the phenomenon of globalization, are taking the world
economy into largely uncharted waters, and are giving rise in many countries to new
uncertainties and anxieties regarding growth and prosperity and the distribution of their
benefits. This is particularly the case for developing countries, where there are grounds
for anxiety if a country is being drawn rapidly into the globalizing world economy, and
equal - or greater - grounds for anxiety if it is not. This suggests the need for
continuous and detailed monitoring by Governments of the effects and impact of
liberalization and globalization on development. In this connection, particular attention
would need to be given to the evolution of the systems governing international
transactions, to ensure that this evolution is "development-friendly".
132. In the period ahead there is a wide range of opportunities in the areas of trade,
investment and finance which have recently emerged and which, if properly grasped, can be
utilized to accelerate development. There are also, of course, significant challenges.
Opportunities and challenges in the area of trade, and their specific implications for
policies, are taken up in chapter II of this report. These implications, as well as
specific policies in the areas of investment and finance, need to be approached by
individual developing countries, as always, within the framework of a broad strategy for
promoting development. For if globalization and liberalization establish certain
parameters for policy success that cannot be ignored, they do not mark the end of
development economics or of the need for development strategies.
133. Moreover, there is not yet a full and complete understanding of several important
aspects of successful development policies. The policy lessons to be learned from the
development experiences of the East Asian economies remain to be fully explored and
incorporated into the panoply of measures generally available to policy-makers. The
question of the appropriate pace and extent of the integration of the financial system of
an individual developing country into the global financial system is also outstanding, as
are issues relating to how best to maximize the development impact of the activities of
transnational corporations. An examination of the ingredients of successful development
strategies must thus be pursued, so that each individual country can have at its disposal
a full understanding of the options on the basis of which its own strategy can be
constructed or revised.
134. The threat of marginalization and the challenges that it presents must redirect
the attention of policy-makers to the implications of commodity dependence for development
prospects and for successful development strategies. This issue, as well as broader trade
issues facing weaker, commodity-dependent economies, is taken up in chapter II.
135. A main objective of any viable development strategy must be the fostering of a
vibrant, dynamic and competitive private sector. Policies for enterprise development, and
for establishing and sustaining an appropriate dialogue between government and the private
sector must thus stand at the centre of any successful development strategy. For in the
final a |