TWN Info Service on Finance and Development (Sept14/03)
22 September 2014
Third World Network
flexibilities, policy space needed to meet post-2015 goals
Published in SUNS #7878 dated 22 September 2014
Geneva, 19 Sep (Kanaga Raja) -- Meeting the global development goals
of a post-2015 development agenda will not be feasible without the
availability of greater flexibilities in policymaking, the UN Conference
on Trade and Development (UNCTAD) has said.
In the chapters of its Trade and Development Report 2014 (TDR) focusing
on the key theme of policy space and global governance, UNCTAD underscored
that in order to pursue rapid and inclusive economic growth and meet
future global development goals, developing countries will need sufficient
policy space at the national level to undertake the necessary structural
transformation of their economies.
"At the international level, the multilateral governance framework
will need to be more permissive and coherent if it is to facilitate
such structural transformation," it said.
According to the TDR, the discussions now under way on a post-2015
development agenda are aiming for an ambitious narrative that goes
beyond "business as usual" to establish a more universal,
transformative and sustainable approach than the one advanced through
the Millennium Development Goals (MDGs). As such, it will play a key
role in setting new goals and targets for policymakers, both at the
national and international levels.
The international community faces three principal challenges in fashioning
this new approach, said UNCTAD.
The first challenge is aligning goals and targets to a policy paradigm
that can help raise productivity and per capita incomes everywhere,
generate decent jobs on a scale needed to meet a rapidly growing and
urbanizing global labour force, establish a stable international financial
system that boosts productive investment, and deliver reliable public
services that leave no one behind, particularly in the most vulnerable
The TDR said that the second challenge facing any new development
agenda is the massive rise in inequality, which has accompanied the
spread of market liberalism. This is important because, in addition
to ethical considerations, and unlike the simple textbook trade-off
between growth and equality, growing inequality can threaten economic
progress and social stability, and undermine political cohesion.
The third challenge is to ensure that effective policy instruments,
and the space to use them, are available to countries to enable them
to achieve the agreed goals and advance the development agenda.
According to UNCTAD, addressing these three challenges would be a
formidable task even under ideal circumstances, but it is all the
more daunting now because of changes to the global economic environment
resulting from the financial crisis in 2008-2009.
The new development agenda is likely to face a harsher external environment
in the years ahead. The financial crisis also revealed a set of persistent
and highly interrelated economic and social imbalances that will inevitably
have a strong bearing on efforts to design new development strategies
aimed at tackling issues relating to a growing urban-rural divide,
formal and informal livelihoods, access to affordable energy sources
that minimize environmental damage, and food and water security.
"Rebalancing on these many fronts will require an integrated
policy framework encompassing more viable and inclusive national development
strategies, along with changes in the governance of the global economic
system to accommodate and support them," said UNCTAD, noting
that its report of last year had argued that mobilizing greater domestic
resources and building markets at the national and regional levels
were likely to be key to sustained growth in many developing countries
in the years ahead.
Maximizing the contribution of national resources for achieving the
economic and social goals envisaged in the post-2015 agenda will certainly
require a more assertive macroeconomic policy agenda. Such an agenda
would need to include the use of a broad array of fiscal, financial
and regulatory instruments in support of capital accumulation, proactive
labour market and incomes policies to generate more decent jobs, and
effective control of the capital account to limit potential damage
from external shocks and crises.
Building more competitive firms, moving resources into higher value-added
sectors and strengthening national technological capabilities cannot
rely on market forces alone; effective industrial policies and dedicated
efforts to support and coordinate private- and public-sector activities
will also be crucial, the report underlined.
Restoring a development model that favours the real economy - and
the constituencies that depend on it for their livelihoods and security
- over financial interests, will almost certainly require adding more
instruments to the policy toolkit than is currently contemplated by
"There are valid concerns that the various legal obligations
emerging from multilateral, regional and bilateral agreements have
reduced national policy autonomy by restricting both the available
range and the efficacy of particular policy instruments. At the same
time, multilateral disciplines can operate to reduce the inherent
bias of international economic relations in favour of countries that
have greater economic or political power."
Those disciplines can simultaneously restrict (particularly de jure)
and ease (particularly de facto) policy space, said the report. It
found that for the more developed countries, globalization a la carte
has been the practice to date, as it has been for the more successful
developing countries over the past 20 years. By contrast, many developing
countries have had to contend with a more rigid and structured approach
to economic liberalization.
This one size-fits-all approach to development policy has, for the
most part, been conducted by or through the Bretton Woods institutions
- the World Bank and the International Monetary Fund (IMF) - whose
surveillance and influence over domestic policymakers following the
debt crises of the 1980s were considerably extended giving them greater
authority to demand changes to what they deemed to be "unsound"
Countries seeking financial assistance or debt rescheduling from the
Bank or the IMF had to adopt approved macroeconomic stability programmes
and agree to "structural" and political reforms, which extended
the influence of markets - via liberalization, privatization and deregulation,
among others - and substantially reduced the economic and developmental
roles of the State.
Similarly, said UNCTAD, the Uruguay Round of trade negotiations extended
the authority of the World Trade Organization (WTO) to embrace services,
agriculture, intellectual property and trade-related investment measures,
thereby restricting, to varying degrees, the policy space available
to developing countries to manage their integration into the global
"Emphasizing the role of policy, and of the international economic
institutions in promoting one set of policies over another, is an
important correction to the view that globalization is an autonomous,
irresistible and irreversible process driven by impersonal market
and technological forces. Such forces are undoubtedly important, but
essentially they are instigated by specific policy choices and shaped
by existing institutions."
The report further said that the system that has evolved under finance-led
globalization has led to a multiplicity of rules and regulations on
international trade and investment that tend to excessively constrain
national policy options. At the same time it lacks an effective multilateral
framework of rules and institutions for ensuring international financial
stability and for overseeing extra-territorial fiscal matters.
"Within this imperfect system, policymakers in developed countries
are aiming to tackle a series of interrelated macroeconomic and structural
challenges, while those from developing countries are trying to consolidate
recent gains and enter a new phase of inclusive development. It is
therefore more important than ever before for national policy space
to be made a central issue on the global development agenda."
Looking at the origins of the post-Second World War multilateral system
and, in particular, at efforts to ensure that the space for a new
State-led policy consensus that avoided the mistakes of the inter-war
years would be consistent with multilateral arrangements and disciplines
in support of a more open, stable and interdependent world economy,
the TDR contended that the partial efforts to internationalize the
New Deal in the 1940s eventually gave rise to a more inclusive multilateral
agenda that was championed by the developing world.
"As the international community rethinks its goals for a post-2015
development agenda to succeed the Millennium Development Goals, it
is imperative to ensure that effective policy instruments are available
to countries to enable them to achieve the agreed goals and advance
UNCTAD argued that recent experience, historical evidence and theoretical
insights all point to the role that proactive trade and industrial
policies must play in that agenda.
It noted that developed countries adopted a variety of industrial
policies during their period of industrialization, and continued to
do so after the Second World War in their pursuit of sustained economic
growth, full employment and accelerated technological progress. Subsequently,
industrial policy was also high on the agenda of many developing-country
governments that saw industrialization as key to unlocking under-utilized
resources, addressing long-standing structural weaknesses and social
deficits, and closing the technological gap with the developed economies.
This post-war policy consensus on the utility of proactive trade and
industrial policies also informed the debates about reforming the
multilateral trade and financial systems in a way that would allow
developing countries the policy space to adopt the measures and instruments
they deemed necessary to foster rapid productivity growth and industrial
From the early 1980s, industrial policy largely disappeared from the
development agenda of many countries, particularly in Africa and Latin
America. This was partly a reaction to evidence of specific policy
mistakes and abuses, but it was also due to a more ideologically driven
debate that blamed government failures much more than market failures
for slow economic development and emphasized the need for market liberalization.
Just as important, in several developing economies the debt crisis
eroded the ability of States to pursue proactive policies. Not only
did they suffer from macroeconomic and fiscal constraints, but they
also had to submit to the growing policy conditionality attached to
loans extended to them by the Bretton Woods institutions.
According to the TDR, many countries reduced or abandoned proactive
trade and industrial policies and began to favour unfettered markets
and transnational firms, as endorsed by the so-called "Washington
Interest in proactive trade and industrial policies has revived since
around the turn of the millennium, for a variety of reasons. First,
and probably most important, was the accumulation of overwhelming
evidence that the most successful developing countries - notably the
newly industrializing economies in East Asia followed by China - were
the ones that had systematically followed a pragmatic approach to
promoting industrial development through a combination of macroeconomic
and structural policies as well as measured protectionism while gradually
opening up to trade and investment, and effective collaboration between
the private and public sectors.
Second, it was increasingly recognized that the policies associated
with the Washington Consensus were doing little to support economic
upgrading and diversification, which meant that countries would risk
falling into a "middle-income trap".
Third, mainstream economists started to accept some of the insights
into economic development from classical economics, such as the recognition
that economic development has a "structural" dimension,
the importance of linkages and learning for accelerating productivity
growth, and the key role of demand.
"It is clear that specific policy measures adopted by some of
the successful industrializing countries cannot easily be replicated
by other countries. This is not only because individual countries'
success stories are invariably linked to special economic and institutional
conditions that are unlikely to exist in other countries; it is also
because changes in the external economic environment affect both the
availability and effectiveness of specific policy instruments."
It is well known that export-led industrialization strategies must
sooner or later reach their limits when many countries pursue them
simultaneously, as competition among economies based on low unit labour
costs and taxes faces a fallacy of composition that leads to a race
to the bottom.
At the present juncture, said UNCTAD, when developing countries' opportunities
to increase exports of manufactures to developed countries are likely
to remain weak for some time, the limitations of such a growth strategy
are becoming even more obvious. A re-balancing of developing countries'
growth strategies towards a greater emphasis on domestic and regional
demand could reduce this risk.
The TDR went on to discuss the impacts of the various trade, investment
and comprehensive economic partnership agreements on national trade
and industrial policy space, highlighting in this regard areas where
provisions in Uruguay Round (UR) Agreements and RTAs (Regional Trade
Agreements) have constrained such policy space for developing countries,
as well as areas where flexibilities remain intact.
It examined the constraints faced by developing countries in adopting
the trade and investment policies they deem to be the most suitable
for structural transformation, focusing in particular on the multiplicity
of trade agreements (multilateral, bilateral and regional) and how
they restrict national policy space.
"Multilateral agreements maintain some flexibilities and incorporate
some special and differential treatment (SDT) for least developed
countries (LDCs); however, they typically limit or forbid the kinds
of policies that played an important role in successful processes
of structural transformation in the past," it said, noting that
this process of limiting national policy space began with the UR Agreements,
which included several rules that were not directly related to trade
Subsequent bilateral and regional trade agreements have increasingly
included rules that can be important for the design of comprehensive
national development strategies, such as government procurement, capital
flows, trade in services, and environmental and labour issues. Many
of them have also included disciplines concerning IPRs and investment-related
measures that are more stringent than those already incorporated in
Analysing several UR Agreements such as the Agreement on Trade-Related
Investment Measures (TRIMs), the Agreement on Trade-Related Aspects
of Intellectual Property Rights (TRIPS), the General Agreement on
Trade in Services (GATS), and the Agreement on Subsidies and Countervailing
Measures (SCM), the TDR argued that the UR Agreements have reduced
the policy space available to WTO member States, even as the multilateral
trade regime has preserved policy space in some areas.
In terms of constraints, the UR Agreements have placed restrictions
on the imposition on foreign investors of performance requirements
on exports, on domestic content and on technology transfer, all of
which have historically been very important in promoting late industrialization.
They also make it more difficult or costly for domestic producers
to undertake reverse engineering and imitation through access to technology
that is covered by patent or copyright protection, said the TDR.
However, the TDR added, WTO members retain the possibility of using
tariffs to protect certain sectors, and have some flexibility in the
use of both IP and regulatory measures concerning FDI. Perhaps most
importantly, WTO members can continue to use certain kinds of subsidies
and standards aimed at fostering structural transformation that involves
the generation of new productive capacity by helping to promote R&D
and innovation activities.
Turning to RTAs, the TDR said that since the early 1990s, a wave of
RTAs (i. e. regional trade agreements with reciprocal commitments
between two or more partners) has eroded a considerable degree of
policy space that was preserved under the multilateral trade regime.
This has happened by strengthening enforcement, eliminating exceptions
or demanding commitments not included in the UR Agreements. RTAs also
have increasingly incorporated investment provisions, which, traditionally,
were dealt with in separate bilateral investment treaties (BITs).
Regarding the scope of RTA provisions, the TDR said that the evidence
shows that they have become more comprehensive over the past 20 years,
and many are now formally described as comprehensive economic partnership
It also seems that North-South agreements generally contain a larger
number of both WTO-plus (i. e. more stringent provisions than those
already covered by the multilateral trade regime) and WTO-extra (i.
e. deal with provisions that go beyond current multilateral trade
agreements) provisions than either North-North or South- South agreements.
Regarding TRIPS-plus commitments, the TDR noted that RTAs generally
include more stringent enforcement requirements or provide fewer exemptions
(such as allowing compulsory licensing only for emergency situations).
They also prohibit parallel imports, and extend obligations to cover
additional IP issues (such as life forms, counterfeiting and piracy)
or exclusive rights to test data (such as those relating to pharmaceuticals).
Furthermore, they may contain more detailed and prescriptive IP provisions,
and reduce the possibility for States to tailor their IP laws to their
specific domestic environments or adapt them to changing circumstances.
Turning to industrial policy, the TDR said that in recent years there
has been a global revival of interest in such policies. A number of
developing countries, including the largest ones, have reassessed
the benefits of industrial policy for structural transformation and
Reassessments of the potential benefits of industrial policy have
not been limited to developing countries only. Many developed countries
have begun to explicitly acknowledge the important role that industrial
policy can play in maintaining a robust manufacturing sector, with
the associated benefits in terms of productivity growth, innovation
and employment creation.
The wide variation across countries in the pace and scale of development
of their manufacturing activities indicates that country-specific
factors - such as resource endowments, size of the domestic market,
geographical location and institutional development - are likely to
have a strong bearing on the timing and extent to which labour shifts
towards more productive activities, both across and within economic
According to the TDR, evidence shows that the impact of developed
economies' GDP growth on their imports is becoming smaller, and that
the positive effect of their income growth on developing-country exports
is also weakening. The challenges that developing countries face in
achieving structural transformation under favourable global demand
conditions are even greater when they are unable to rely as much as
before on growing manufactured exports to developed countries to support
"This may require a rebalancing of their growth strategies by
according greater importance to domestic and regional demand, with
the ensuing need to align their production structure more closely
with their demand structure, as discussed in TDR 2013. In other words,
the current global economic situation increases the policy challenges
facing developing countries and necessitates the deployment of creative
Addressing the issue of production networks and the role of industrial
policies, the report said that taken together, international production
networks may provide opportunities for countries at an early stage
of structural transformation to accelerate industrial development
in some sectors. But participating in such networks should not, in
most cases, be seen as the only element in a country's industrial
"Developing countries that have achieved some degree of industrial
development will need to weigh very carefully the costs and benefits
associated with renouncing remaining policy flexibility when participating
in international production networks, particularly in terms of the
extent to which this contributes to economic and social upgrading."
Moreover, the importance of international production networks may
well shrink to the extent that there is a prolonged period of slow
growth in developed countries and/or a decline in the positive effects
from their income growth on developing-country exports. This is more
than a transitory phenomenon, said the TDR.
The benefits that developed-country enterprises reaped from off-shoring
have declined as a result of higher transportation costs following
the rising price of oil since the early 2000s. This may reinforce
tendencies towards re-shoring manufacturing activities back to developed
countries and efforts in those countries to strengthen their own manufacturing
On the other hand, said the TDR, the importance of South-South production
networks, which are currently poorly developed in most developing
regions, will increase if developing countries rebalance their growth
strategies by giving greater importance to domestic and regional demand.
The main point is that none of these shifts provides a rationale for
renouncing policy space to the benefit of developed-country firms.
"Implementation of effective policy strategies with a view to
meeting the global development goals that are likely to emerge from
discussions on a post-2015 development agenda will not be feasible
without the availability of greater flexibilities in policymaking,"
Building sustainable and inclusive growth paths will certainly require
devising a more effective macroeconomic policy mix and addressing
the major systemic issues in the financial system. However, improving
the governance of global trade will need to be part of a more comprehensive
and integrated package to help preserve the policy space for proactive
trade and industrial policies, and should complement the macroeconomic
and financial reform agenda.
On the steps that could be taken towards strengthening global trade
governance in support of development, the TDR suggests that the most
important would be a strengthening of multilateral mechanisms. Multilateral
rules provide a compass for national policymakers to ensure the consistency
of rules across countries.
Capitalizing on the new momentum from the WTO's Bali Ministerial Conference
in December 2013, the Doha Round negotiations should progress in a
manner that would justify its being dubbed a "development round".
The TDR said that steps in this direction would include an emphasis
on implementation issues (paragraph 12 of the Doha Ministerial Declaration).
They would also need to maintain the principle of a single undertaking
(as stated in paragraph 47 of the Doha Declaration), rather than moving
towards a variable geometry whereby a range of mandatory core commitments
is supplemented by plurilateral agreements among only some members.
"The most important benefit from all this may well be simply
maintaining the public good character of multilateral rules and precluding
powerful countries from coercing others into competitive liberalization
that may be ill-suited to their development prospects."
Second, said UNCTAD, refocusing trade negotiations on multilateral
agreements would imply a reconsideration of WTO-plus and WTO-extra
provisions, as well as allowing greater flexibility in the application
of the UR Agreements. This could respond to a number of recent developments.
In the area of IPR protection, for example, the role of patents in
promoting innovation (i. e. the commonly cited basic rationale for
the adoption of strict rules on such protection) has increasingly
According to the TDR, it may be advisable for developing countries
to maintain a flexible system of IPR protection while being given
appropriate technical support to make full use of the available flexibilities
in order to support technology adoption and innovation at all stages
of structural transformation.
A reconsideration of WTO-plus and WTO-extra provisions would also
imply renouncing investment provisions that go beyond the TRIMs Agreement.
Arguments that international production networks provide a rapid path
to structural transformation, and that joining such networks requires
a hands-off approach to international business, have recently given
new impetus to making such provisions more restrictive.
"Yet, for countries at early stages of structural transformation,
it is far from clear how adopting far-reaching investment provisions
would allow, or even foster, the developmental gains to be had from
their industries joining such networks, particularly beyond the benefits
of increased low-skill employment and initial experience in producing
The risk of being trapped in some low-level niche of the value chain,
and not being able to upgrade, may be too high for countries to give
up the possibility of using instruments that in the past have proved
to be effective in supporting industrialization and overall production,