TWN Info Service on Finance and Development (Sept14/03)
22 September 2014
Third World Network  

Greater 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 communities.
 
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 economic orthodoxy.
 
"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" policies.
 
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 economy.
 
"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 the agenda."
 
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 development.
 
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 Consensus".
 
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 flows.
 
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 multilateral agreements.
 
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 agreements.
 
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 economic growth.
 
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 sectors.
 
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 such transformation.
 
"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 industrial policies."
 
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 development strategy.
 
"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 sectors.
 
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," UNCTAD underlined.
 
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 been challenged.
 
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 manufactures."
 
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, UNCTAD concluded.