Asia Program

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The Policy Space Debate: Does a Globalized and Multilateral Economy Constrain the Ability of Developing Countries to Pursue Development Policies?

December 14, 2006 // 1:00pm4:30pm
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Latin American Program
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Developing countries often view engagement in the world economy as a trade-off between obtaining the benefits of multilateral rules and commitments and losing policy space for the pursuit of their individual national development strategies. Keynote speaker Jomo Kwame Sundaram affirmed that in the last few years the international community has acknowledged the importance of policy space in realizing the development aspirations of developing countries. The UNCTAD meeting in Sao Paulo, Brazil in 2004, the UN World Summit in 2005, and the 2006 UN Trade and Development report have reinforced the international community's commitment for developing countries to pursue their own development strategies, while also recognizing the myriad problems associated with the poverty-reduction programs of the international financial institutions (IFIs). Jomo demonstrated that although there exists a rich and complex range of development experiences in the developing world, world inequality has increased since the 1980s when the rapid growth of China is taken out of the picture. Growth and poverty reduction have decreased and only modest welfare increases have occurred. A significant part of the explanation lies in the conditionalities upon which IFI loans are extended to developing countries. These conditionalities, Jomo argued, reduce public spending, privatize public services, prioritize trade and financial liberalization, and strengthen intellectual property rules. Trade liberalization, he asserted, has not had a uniformly positive impact on developing countries as international terms of trade move against developing countries. This has occurred through "historically declining" primary commodity prices and the concentration of generic goods production in developing countries "where there are no strong barriers to entry and thus a downward pressure on prices through competition." A judicious use of trade policy through effective protection is "crucial for developing countries to be able to ‘catch up.'" Furthermore, if the poverty reduction strategies of the IFIs are to achieve poverty reduction, employment generation needs to be prioritized within the strategies. Jomo pointed out that "only a quarter of the World Bank's poverty-reduction papers have anything to say about employment generation." Jomo emphasized that the objective of macroeconomic policy should be to "mutually reinforce employment generation, investment and growth," rather than the conventional approach of deflating the national public budget and liberalizing the local financial market. In conclusion, he stated that in addition to addressing the flaws in multilateral approaches to development, "developing countries should also take more responsibility for their own development through more effective national resource mobilization."

Focusing on the linkage between macroeconomic policy and sustainable economic development, Heiner Flassbeck argued that a multilateral financial system which establishes rules and disciplines for macroeconomic and exchange rate policies is necessary to make development work. Flassbeck stated that financial liberalization had been encouraged by the IFIs in developing countries without an adequate consideration of the negative economic consequences, which consequently led to the Latin American and East Asian financial crisis in the 1990s. The financial crises forced developing countries to realize that they need more control over their macroeconomic policies by becoming less dependent on international capital markets. Flassbeck explained how most developing countries were pushed to quickly open their trade and capital markets in the early 1990s, as "the emphasis of the Washington Consensus on ‘getting the prices right' threw developing countries into the cold waters of capital markets without being told how to steer." One of the central components of macroeconomic policies is the exchange rate, which Flassbeck described as "the most important international price." He contended that a multilateral solution for exchange rate stability, which offers developing countries the ability to fix their exchange rates at undervalued levels, allows them to finance their developmental needs better than through either fixed or floating exchange rates. He stressed that the core of the exchange rate problem is that "we have a multilateral phenomenon called the exchange rate, but nobody is willing to consider it a multilateral phenomenon." In fact, a multilateral trading system will not spur equitable, long-term economic growth in developing countries without a complementary multilateral financial system which, Flassbeck urged, needs to be acknowledged on an international and multilateral level.

One of the core components of the multilateral trading system, that of intellectual property (IP) regimes, was subsequently addressed by Carlos Correa. The IP system was conceived in the late 19th century by the Paris Convention and the convention on copyright rules. These conventions "gave flexibilities to nations and discriminated against foreigners and foreign companies." For example, Correa illustrated how the technological basis for industrialization in the United States was achieved through the illegal use and subsequent improvement of British IP. Today, with the tightening of multi- and bilateral rules on IP, driven significantly by special interest industry coalitions, developing countries are not able to do the same. It is assumed that stronger IP rules "promote innovation, and thus, the more IP rules the better." However, Correa argued that this assumption is categorically false because "the patent system does not promote any innovation in low-income countries where the basic conditions for innovation do not exist." Furthermore, while the World Trade Organization's agreement on IP rights still allows some flexibilities through generic manufacturing and imports, bilateral trade agreements undermine these rights and "erode the flexibilities" afforded by the multilateral trade regime. In conclusion, Correa stated that "one size does not fit all," and thus, "we need to offer different levels of IP enforcement to countries at different stages of development."

Elaine Zuckerman examined the gendered impact of the economic conditions attached to IFI loans through country-level examples. Zuckerman argued that privatization, a key condition in multilateral loans to developing countries, lacks an analysis of the gender-poverty nexus. Thus, as public water facilities in lower-income countries are privatized and the price of water increased, it is the women and children of poor families who must walk far lengths to fetch water for daily use. In the field research conducted by Zuckerman in Malawi and the Democratic Republic of Congo (DRC), women have stated that if they did not have to spend their time carrying water, they could instead earn an income or send their children to school. In Malawi, the privatization of the state marketing board and grain reserves, which used to keep maize affordable, has contributed to a food crisis where women wait in long lines at night for food handouts, or scavenge and engage in prostitution to avoid chronic hunger. Zuckerman brought attention to the multiple effects of these consequences, as prostitution intensifies the HIV/AIDS epidemic in the African continent. In Serbia and Montenegro, multilateral conditions on labor and pension reforms increase labor market flexibility. This flexibility facilitates lay-offs in the predominantly female labor force of the domestic textile industry and furthers economic insecurity through cutting severance pay to dismissed workers. Zuckerman stressed that such economic conditions attached to IFI loan programs "worsen income distribution and ultimately make it impossible for developing countries to meet the Millennium Development Goals."

As commentator, Mark Allen responded to the panelists' critiques by stating that the current increase of policy space in large countries, especially across Asia and Latin America, is due in large part to the global imbalance between the U.S. trade deficit and the trade surplus of other countries, both developed and developing. Allen admitted that with regard to large borrower countries, "the IMF has indeed been put out of business recently." However, he warned that the challenge is to ensure that this newfound policy space is well managed and that innovative policies at the country-level do not increase the chances of a global recession. Responding to Flassbeck, Allen confessed that the IMF has had "a learning experience on how to run exchange rate programs" in developing countries. He claimed that the IMF's thinking on fixed exchange rates has changed, as it now acknowledges the vulnerability of pegged currencies to speculative attacks which can instigate financial crises that ripple worldwide. In response to Jomo, Allen stated that it is "certainly true" that IFIs pressure developing countries to liberalize their trade and financial markets. Nonetheless, a reversal of liberalization processes is not necessarily evident in the large developing countries that have an increased amount of policy space. This is due to the growth of the domestic corporate sector, as Allen argued that liberalization is required in order for the corporate sector to be globally competitive. He concluded by bringing attention to one of the key benefits of the multilateral system, stating that the establishment of rules through the multilateral process offers developing countries far more bargaining power than they otherwise have in bilateral processes.

Bhumika Muchhala, Program Associate, Asia Program, Tel: 202 691 4020

Robert M. Hathaway, Director, Asia Program

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