Global Trends by Martin Khor

Monday 3 November 2003

UN highlights developing countries’ financial woes

BlurbLast week, the United Nations convened a Dialogue to review the financing situation of developing countries as a follow up to the Finance for Development Summit of 2002.   The findings were somber.  Funds are moving out from developing countries, and their debt and trade conditions have not improved. Only a change in political will can improve matters.


In March 2002, the United Nations convened an International Conference on Financing for Development.  Held in Monterrey (Mexico), it was attended by many government leaders, including US President George Bush. 

There were high hopes then, for the Summit, and its “Monterrey Consensus”  committed rich countries to facilitate more funds to flow to developing nations, which in turn agreed to use resources more efficiently to help the poor.

But a year and a half later, the results of Monterrey are disappointing, even “alarming”, as one delegate put it.  Instead of funds moving from rich to poor countries, they are going the other direction.

It turns out that almost US$200 billion was transferred in 2002 from developing countries in net terms, double the amount from a few years ago.

This perverse situation – the poor helping to fund the rich – was highlighted last week at the United Nations in a “high level dialogue” on Financing for Development to review the implementation of commitments made by governments at the Monterrey Summit.

There were several Finance Ministers of developing countries present and quite a few Ministers of Development from the developed countries.  The heads of the IMF and World Bank and the deputy chief of the WTO also came for the opening session, besides the UN Secretary General and UN agency chiefs.

The discussions went through a whole jumble of issues, but one theme came through clearly: the financing situation has worsened for developing countries.

This is symbolized by the most talked-about figures at the Dialogue:  the rise in net transfer of financial resources out of developing countries to almost US$200 billion in 2002.  Instead or receiving funds, the poor countries are now transferring enormous amounts to the rich countries. 

The UN Secretary General’s report to the Dialogue shows that in 1994-1997 the developing countries were receiving US$30 billion a year on average.  But in 1998-2000 this had reversed, and they were transferring out $111 billion annually in net terms.

Then the situation further worsened, dramatically. In 2001, the net outward transfer was $155 billion, and it rose further to $193 billion in 2002.

Other key themes that emerged in the Dialogue:

** There was a bright spot in that the decline in official aid was reversed, though the levels are still far too low.

** The external debt situation remains critical, with the initiative to help the poorest countries proving inadequate and no solutions were yet found for middle income countries.

**  Developing countries are still waiting for gains from the promised development aspects of the WTO’s Doha programme, the Cancun talks collapse was a setback, and negotiations should re-start soon. Many delegates called for Northern agriculture subsidies to be quickly removed.

** There has been no progress towards a new international financial architecture.

** Monterrey called for increased participation of developing countries in decision-making at international organizations like the international financial institutions and the WTO, but there has been little progress on this.

** Monterrey was not an arrival point but only a point of departure and the work of implementation that has barely started has to be given an impetus.

** The Financing for Development (FFD) follow-up process and institutions are very weak and they need to be strengthened if any serious follow up work on implementation is to be done.   

** The key problem, identified by many, is the lack of political will by the developed countries.  There was no agreement on how that can be strengthened.

On developing countries’ lack of participation in decision-making, the structures and practices of the WTO, IMF and World Bank, came in for criticism.

At the opening session, UN Secretary-General Kofi Annan called for the reversal of the negative balance sheet and fix the economic system so that all countries and people, especially the poorest, can  benefit.

While foreign aid had increased to $57 billion in 2002, the modest gains had been dramatically offset by the largest-ever net resource transfer -- some $200 billion -- from the developing world, he said.  This defies common sense, he said, adding that funds should be moving from developed to developing countries, but those numbers revealed the opposite was occurring.

Funds that could be promoting  investment in developing countries, or building  schools and hospitals, are instead being transferred abroad, he added.

The results of Monterrey revealed a mixed report card. While aid had risen, it was still far short.  In the trade area, subsidies and tariffs were stifling poor countries’ ability to compete fairly. Foreign investment in the developing world was down.  Too many developing countries continued to carry too much debt, making it clear that existing measures are inadequate and that an international framework for debt restructuring is needed.

World Bank President James Wolfensohn said it was really no secret that much remained to be done if the aims of Monterrey were to be met. The industrialized countries must lead the way by living up to past commitments. But again, with the failure of
the WTO talks in Cancun,  lagging development aid and abiding inequities in the international trade system, it was clear that more cooperation, dialogue and action were needed.

The Bank was concerned with the imbalances, such as that $800 billion had been spent for defence budgets while only $56 billion went to development assistance.

Horst Kohler, IMF Managing Director, said the global economic outlook was improving.  But risks remained, especially the excessive dependence of the world economy on US growth.He believed resolving current account imbalances in an orderly manner should be the main aim of international economic policy. That required a cooperative approach involving all major countries and regions.

UN Conference on Trade and Development (UNCTAD) Secretary-General Rubens Ricupero said 2003 was the seventh year of negative net flows of financial  resources from developing to developed countries, thereby  suggesting the world may be in another “lost decade.”

He stressed the need for better economic policy coordination among major developed countries to eliminate major macroeconomic imbalances that are a major cause of volatility in exchange rates and capital flows. The UN Economic and Social Council (Ecosoc) ECOSOC, should be a forum to discuss increased policy coherence.

UNDP Administrator, Mark Malloch Brown said today’s world was more unequal and more insecure than ever. In a world of 6 billion people, 1 billion owned 80 per cent of global wealth, while another 1 billion struggled to survive on less than one dollar per day. Poverty on that scale was no longer inevitable. The world possessed the means. What was too often missing was the political will.

The failure at Cancun to agree on the policies needed to create a pro-poor, legitimate global economic strategy thus constituted a step back in implementing Monterrey. All must now commit to renewing the spirit of partnership.

Francisco Thompson-Flores, Deputy Director-General of the WTO said while trade could be an engine for growth, developing countries faced too many obstacles in the present international trading system. The Cancun setback had proved to be a disappointment, but it was not a collapse. The WTO was already exploring ways to move forward; the first step being to identify the areas of greatest difficulty at Cancun and to get people discussing them again.

Later, at an “interactive session” in which governments, civil society groups and business groups spoke up, it was pointed out by many that there was a very weak follow-up mechanism to carry forward the work from the Monterrey conference. It presently comprises only a one-day annual dialogue between UN members and the secretariat heads of the IMF, World Bank and IMF;  and a three-day FFD Dialogue every two years.

As Roberto Bissio of Social Watch, representing the NGOs, put it to the delegates:  “The spirit of Monterrey that we all praise, needs to find a body to live in.  Otherwise it will remain a ghost.”

The General Assembly President, Julian Hunte, Foreign Minister of St. Lucia, referred to the “burning question” of how to reccharge trade negotiations after Cancun.  He criticized the undemocratic nature of how the Cancun Ministerial meeting was run.

Indian Minister of State for External Affairs Vinod Khanna said there was little progress in implementing the agreement to enhance participation of developing countries and giving them a greater voice in decision-making in decision-making processes of international trade, financial and monetary institutions.  It was extremely important to address this very early as the trading and financial systems do not always take developing countries’ interests into account

He asked the Secretary General to provide an assessment report on why, despite the Monterrey commitments, the net transfer of resources to developing countries not only continue to be negative but is getting aggravated to an alarming extent.. 

Brazil said developing countries could gain US$400 billion in 2015 should agricultural trade by liberalized, and thus subsidies should be reduced.   South-South trade including through the GSTP scheme was very important.  He stressed the importance of policy coherence and the central role of the UN and Ecosoc.

China called for a monitoring and assessment mechanism to be set up in the UN.  There should also be a Financing for Development committee.

Pakistan said the many good ideas should be fleshed out otherwise there would only be a repitition of “lip service.”  Kenya asked for removal of agriculture subsidies.  At present it was better to be a cow in Europe, enjoying $2 subsidy a day, than a person in a developing country where many live on below $1 a day..  He also questioned what steps were taken by the IMF and World Bank to increase developing countries’ participation in decision-making.

Italy on behalf of the European Union deeply regretted the Cancun failure.  The EU believed WTO negotiations must resume as soon as parties are ready.   

Norway’s Development Minister gave an account of how Norway had increased aid and cancelled all debt by the poorest  countries. .  She stressed the need for political will if implementation is to progress.  She proposed an effective review and monitoring mechanism to address the shortcomings of developed countries. 

The US stressed the importance of domestic resources for development.  Cancun was a missed opportunity especially for developing countries.  The US was willing to make deep tariff and subsidy cuts, but developing countries must also remove their trade barriers.

John Foster of the North-South Institute of Canada said with the Cancun collapse it was urgent that the assumptions and procedures of the trade system be reviewed.  Moreover the international financial institutions must cease their pressure to impose inappropriate liberalisation and privatization measures onto developing countries. The WTO needed to change its habits and end its manipulative and opaque processes. 

Roberto Bissio, of the NGO Social Watch, said the role of the UN has been reduced in the last two decades by a political decision of the rich countries.  The IMF, World bank and WTO have encroached in areas not in their original mandate.

The WTO should do trade, the IMF should do finance properly and the World Bank should support well designed projects;  these institutions should not stary into other roles.

And the UN should be strengthened again.

He added:  “Following the Monterrey recommendations, we need to change the voting powers in the Bretton Woods institutions, ensure more representation of developing countries in their boards and regular accountability towards the UN General Assembly. The WTO has to be brought into the UN family.

“There is a gap in global governance related to debt.  The world needs a UN led mechanism to ensure fair and balanced burden sharing.

“ECOSOC needs to be strengthened. A permanent ECOSOC executive committee needs to be set up.In summary, the spirit of Monterrey that we all praise, needs to find a body to live in.”