Global Trends by Martin Khor

Monday 28 May 2007

Reforming global economic governance

At last week’s Kuala Lumpur Roundtable on Global Governance, participants grappled with the inequities and inadequacies of the global economic system and came up with proposals on how to increase the developing countries’ voice in decision-making.


In an unequal world, how can we bring about greater participation of developing countries and reshape the world economic order?

This was the topic of the Kuala Lumpur Roundtable on global governance organised last week by Wisma Putra (Ministry of Foreign Affairs, Malaysia) as part of the Helsinki Process, an initiative led by Finland and Tanzania to bridge the North-South divide.

The Roundtable, which brought together 80 experts and representatives of about 10 governments as well as non-governmental organisations, discussed globalisation, the trade regime, the international financial system, strengthening the UN’s role, and national development strategies.

Kicking off the discussion, Foreign Minister Dato’ Seri Syed Hamid Albar said global economic inequities have worsened under globalisation and technological change.

In some areas, especially finance, there was an absence of global rules (leading to unregulated capital flows and financial instability) while in other areas (like trade) there were rules but these were often skewed towards the rich countries’ interests.

He called for a reform of global institutions to enable developing countries to have more effective say, and a strengthening of the United Nations system whose governance was more fair and balanced and which should have more authority in economic and social affairs.

Tanzanian Foreign Minister Bernard Membe called for coordinated changes including a reform of the global economic system and strengthening governance institutions at local and global levels, to correct the politically unsustainable global imbalances.

The dimensions of global governance include the decision-making process and the nature and effects of multilateral rules and practices, said Yilmaz Akyuz, former Chief Economist of the UN Conference on Trade and Development.

The current world order is marked by asymmetry and imbalances which benefit mainly the developed countries.  For example they protect areas in their interest such as agriculture, labour movements and technology transfer, while asking the South to liberalise in industrial goods, capital flows and FDI.

The current globalisation arrangements restrict governments from regulating financial markets, and the policy space of developing countries is being increasingly constrained by global rules in the trade regime or through loan conditions of the international financial institutions.  However there are still degrees of policy autonomy and countries are pursuing diverse policies even though they face the same constraints.

The International Monetary Fund and the World Bank have reached historic lows in credibility and relevance, and their mandates should be reformed, said Akyuz. 

The IMF should focus on ensuring global financial stability, and leave development and trade policy to other institutions.  The World Bank should become a genuine development bank and not be involved in developing countries’ “structural adjustment” but focus on project funding.

On the trade regime, the international trade expert Bhagirath Lal Das said the multilateral trade system provides developing countries some security against unilateral actions of stronger countries.   However there are imbalances in the rules, operations and decision-making system of the WTO, which do not favour the developing countries.

For example, the “national treatment” principle prevents giving preferences to domestic products and this makes it difficult for weaker countries to upgrade their production structure.

The agriculture agreement enables huge subsidies to continue in developed countries, while developing countries also have to restrict their subsidies as well as reduce their tariffs significantly.  And developing countries also face protectionist devices such as anti-dumping measures and non-trade barriers.

Commonwealth Deputy Secretary General Ransford Smith stressed that the WTO should change to become an organisation oriented to development, rather than continue to be  focused on liberalisation.  The decision-making system also needs to change to accommodate developing countries.

In the discussion, participants felt that if the WTO’s current Doha Round were truly developmental in content, then its conclusion would benefit the developing countries. 

However, many were of the view that the proposals lack development content, with a neglect of the “development issues”, like strengthening special and differential treatment for developing countries.

 And the developed countries are more interested in pressuring developing countries to give them more “market access” in agriculture, industrial goods and services. If these proposals are adopted, the developing countries’ policy space would be further curtailed.

On bilateral free trade agreements, many participants raised serious concerns that FTAs involving a powerful developed country and a weaker developing country can lead to many disadvantages and problems for the developing countries.

Many participants explained that they were not against liberalisation but were in favour of developing countries managing liberalisation in a strategic and phased manner that supports their development.  

The Roundtable also discussed intellectual property (IP).  Prof. Gurdial Singh Nijar of University Malaya’s Law Faculty said that previously IP policies were determined as part of national policies and countries would decide on the balance between the monopoly terms granted to IP holders and the public interest.

But with IP becoming part of the WTO, the policy space of developing countries has been restricted, as they have had to adopt higher IP standards, which tilted the balance in favour of IP holders, with detrimental effects on social and economic development. 

Participants pointed to how prices of medicines have increased, and developing countries find it more difficult to upgrade technology.  At the same time there is misappropriation of biological resources and traditional knowledge. 

Nevertheless there are “flexibilities” in the TRIPS agreement that allow countries to determine the criteria for “invention” (which is one of the grounds for patentability),  exceptions and compulsory licensing.  However the use of many of the flexibilities are threatened by FTAs.

Developing countries should take pro-active measures at national level as well as collectively in international negotiations to make use of existing pro-development flexibilities in IP regimes, as well as to reform the regimes to be more development-oriented. 

Bank Negara Governor, Tan Sri Zeti Akhtar Aziz spoke on the global financial architecture.  She pointed to new problems in the financial system, including unregulated cross-border capital flows, new financial instruments like derivatives which represent a risk to the global financial economy, and greater inter-dependence among countries which increased the risk of contagion.

There was need for a reform of the financial architecture to deal with these new issues.  But little reform has been achieved at the global level.  However there has been more cooperation at the Asian regional level, with a surveillance mechanism, macro-management system, crisis management and resolution framework and capacity building.

Former Indonesian Economy Minister. Dorodjatun Kuntjuro-Jakri agreed that financial integration had increased the risks of contagion, but that the changes had benefited the rich countries which made them reluctant to carry out the needed changes.

In the discussion, participants agreed on the need for a global system to manage financial flows and to regulate financial institutions and especially powerful financial instruments such as hedge funds and private equity funds.  . 

Developments of new technology and financial instruments have overtaken and outrun regulatory frameworks, and thus this demands the creation of new structures of global financial governance and regulations.

In the absence of a global regulatory framework, developing countries should pursue regional financial cooperation.  At the same time, they should also cooperate to attempt a reform of the international system.

On strengthening the United Nations, Pakistani Ambassador Munir Akram, who chairs the Group of 77, said the UN has made major contributions in developing norms and standards in the economic, social and humanitarian fields.

Its role has been sidelined by major powers.  However the current decline in the IMF and World Bank provides opportunities for enhancing the UN’s economic role.  The UN is well placed to bring about more coherence and coordination in global economic governance. 

In the discussion on national development strategies, participants agreed that  “national policy space” (the ability to choose between various development policies) had  been constrained by global markets and global rules.

It was stressed that developing countries should place priority on formulating policies that take account of the present realities and effects of globalisation, and at the same time collectively attempt to change global rules and frameworks that are disadvantageous to developing countries.  Developing countries can also usefully learn from the experiences of one another.

In a closing speech, Dato Seri Syed Hamid Albar, presented a summary of conclusions and urged participants to follow up on the proposals emerging from the Roundtable.