Global Trends by Martin Khor

Monday 2 October 2006

UN debates need for “policy space”

The United Nations in Geneva last week debated what policies help development and whether international rules restrict the policy choices of developing countries.  Developing countries asked for “policy space” but some developed countries refuted even this concept.


An interesting debate has been taking place at the United Nations on what it takes for a country to have good development policies, and whether international rules help or hinder the process.

This was a controversial issue at the board meeting of the UN Conference on Trade and Development in Geneva last week.

But the biggest news was that UNCTAD’s secretary general, Dr Supachai Panichpakdi, was there at all to give the opening speech.

There had been news reports he had been offered the job of interim Prime Minister of Thailand, and even that he had returned to Bangkok.  

However, Supachai turned up at the UN building as scheduled and laughingly told a group of Ambassadors who went up to congratulate him that he was “still here”.  He however neither denied nor confirmed whether he had been offered nor whether he was accepting an offer.

The World Trade Organisation’s director general Pascal Lamy spoke on the first day.  He said trade is a crucial ingredient in a successful development policy mix, which must also contain other ingredients. This means no blind adherence to free trade but also no blind adherence to protectionism. 

Lamy went on to question some aspects of a recent UNCTAD report that argued that developing countries had lost a lot of “space” or freedom to choose policies needed for their development, because of international rules set by the WTO and other organisations.

The next day, Supachai said he agreed with Lamy’s view that there should be no blind adherence to either free trade or protectionism. But if trade liberalisation is insufficient to achieve growth, then what other policies will do so?  Many developing countries need to grow 7-8% annually to achieve development.

Over 15 years of traditional trade reforms (rapid liberalisation) worked in some instances but in others there was reduced growth, declining incomes and job losses. By contrast some countries that took a more cautious approach to reform and used pro-active industrial policies have enjoyed remarkable success.

Supachai said that the UNCTAD report focused on pro-active industrial policies with cases in both North and South where the use of subsidies and tariffs has helped in the past.  It also looks at how WTO rules affect the application of such policies.

A senior UNCTAD official, Heiner Flassbeck stressed the need to re-orientate development policy, as market-oriented reforms in the past 25 years did not deliver the expected results.  More attention is needed on enhancing productive capacity and this requires a reform of macroeconomic and industrial policies. 

At the same time, he added, developing countries have lost their policy autonomy.  There are some rules in the trade system which affect the ability of countries to use certain policies.

At the same time there were no rules in the global financial system, which led to problems of instability of capital flows and exchange rates.

He called for more flexibility in the rigid rules of the trade system, and the establishment of multilateral rules and disciplines in the area of macroeconomic, finance and exchange rate policies to avoid ever growing imbalances.

In the debate that followed, many developing countries expressed appreciation of UNCTAD’s work on policy space. 

The Group of 77 and China stressed the crucial importance to developing countries of policy space to choose and use various economic policy instruments to boost development, and that international organisations and rules should not impinge on their ability to use these policies.

India agreed with UNCTAD that the global system must take into account developing countries’ needs, ensuring the right balance between sovereignty in national economic policy making on one hand and multilateral disciplines on the other.

However, the developed countries were clearly disturbed by the UNCTAD report and by the views of the developing countries on policy space.

The European Union disagreed with the report’s finding that multilateral rules are inimical to development.   The United States disputed the concept of policy space itself, saying it can be harmful as it perceives that developing countries should opt out of multilateral obligations. 

In response, Flassbeck refuted the criticisms that UNCTAD suggested that developing countries should opt out of international disciplines.

“We say there’s a trade off between multilateral rules and policy space.  The point is that policy space can only be matched to benefit development if the rules are fair.”

Flassbeck said the UNCTAD report asked whether some of the rules are fair and examples were given based on empirical evidence and logical thinking.

He added that the report was not questioning the need for multilateral rules, but the current imbalanced situation.  There is need for more multilateral rules.  There should not be a situation, as now, where you are punished if you violate rules in some areas (such as trade), but in other areas such as finance they can do as they want as there are no rules there.