Debate on policy space dominates UNCTAD Review

Original Publication Date: 
12 May, 2006
'Policy space', an issue that featured most prominently at the UNCTAD eleventh session in Sao Paulo in 2004, has re-emerged as a burning issue at the UNCTAD Mid-Term Review (MTR) meeting held here this week.

Developing countries reaffirmed the importance for them to have the space to choose between different policy options for their development strategy, and that this could be eroded by international trade and economic rules or conditionalities linked to loans or aid.

They stressed at the MTR meeting that one of the main achievements of UNCTAD XI was the agreement attained on the policy space issue, in paragraph 8 of the Sao Paulo Consensus, which was the first time an international consensus had been adopted on this issue.

However, the United States said 'policy space' could not be used as a roadmap for UNCTAD's work and 'certainly not' as a new principle in the international economic debate, adding that the concept was of 'dubious value' not grounded in fact.

The MTR thus was a re-visit of sorts of the heated debates that took place prior to UNCTAD XI when the developing countries led by the Group of 77 and China insisted on having the concept incorporated in the UNCTAD XI outcome, while many developed countries resisted and in the end tried to dilute the language.

Eventually, a compromise was reached at UNCTAD XI to produce paragraph 8 of the Sao Paulo Consensus as follows: 'The increasing interdependence of national economies in a globalizing world and the emergence of rule-based regimes for international economic relations have meant that the space for national economic policy, i. e. the scope for domestic policies, especially in the areas of trade, investment and industrial development, is now often framed by international disciplines, commitments and global market considerations.

'It is for each government to evaluate the trade-off between the benefits of accepting international rules and commitments and the constraints posed by the loss of policy space. It is particularly important for developing countries, bearing in mind development goals and objectives, that all countries take into account the need for appropriate balance between national policy space and international disciplines and commitments.'

This was one of 11 paragraphs on cross-cutting issues in the Chapeau of the Sao Paulo Consensus. Other issues include globalization, the role of the state, development strategies and the role of UNCTAD in cooperating with other organizations to enhance coherence of policies for development.

This week's meeting is the start of the Mid Term Review of UNCTAD XI. It is focusing on stocktaking of the implementation of UNCTAD XI. Other meetings will be held in June (focusing on strengthening the three pillars of UNCTAD) and September/October (comprising a high-level policy dialogue).

On Monday, at the opening plenary, the G77 and China chairperson, Ambassador Masood Khan of Pakistan, identified 'shrinking policy space for developing countries in the wake of increasing interdependence and rule-based regimes of international economic relations' as one of three most important cross-cutting issues in the Chapeau.

He also criticized the Secretariat for omitting the issues raised in the Chapeau from its report (prepared for the MTR) on stocktaking of the implementation of the Sao Paulo Consensus.

In the plenary and the discussion on cross-cutting issues, several developing countries highlighted the need for 'policy space.' Algerian Ambassador Idriss Jazairy, representing the Africa Group, said the obstacles and injustices faced by developing countries could be seen in the treatment given to countries seeking accession to the WTO.

Although these developing countries should be shown more leniency as they were going to be new members, in fact they are faced with exorbitant conditions for gaining entry, said Jazairy. They are asked to make concessions that even the developed countries do not give to one another. It is time that developing countries are given the room to maneuver so that they can adopt policies to respond to their own environment, he said.

China highlighted policy space as an area of concern to developing countries. Stressing that the concept is recognized by the Sao Paulo Consensus, China called on UNCTAD to conduct research on this issue, including how to combine commitments with flexibility.

Brazil said that the call for policy space does not mean that countries (promoting it) equate it with general exemption from trade rules. As an example of policy space, it cited the Doha Declaration on TRIPS and Public Health which involved consensus building.

Pakistan on behalf of the G77 and China repeated that it was shocking that the stocktaking report had neglected to refer to the Chapeau. It reiterated that policy space is the key cross-cutting issue (in the Chapeau). The G77 and China found it paradoxical that countries are primarily responsible for enacting their own policies, but are not provided with the policy tools.

It said that the issue had first arisen not in UNCTAD but in the WTO, but UNCTAD produced the first multilateral text on this core issue. The failure of structural adjustment policies and the rejection of the one-size-fits-all approach also provide the rationale for the promotion of policy space.

Pakistan added that the international system affects the policy space of developing countries with positive and negative effects. For example, the write off of debts of poor countries by the G8 affects policy space positively as it gives an opportunity to governments to invest in education and health care.

However, the net outflow of financial resources from developing to developing countries affects policy space adversely in relation to availability of finance. There is thus a need for UNCTAD to focus on development financing issues to address the reverse flow of capital.

Pakistan added that bilateral investment agreements and the way these are negotiated also have implications for the policy space of developingcountries. The Doha TRIPS and health declaration is a positive example of how policy space was created for the use of public health flexibilities.

The G77 and China said that this cross cutting issue cannot be avoided. It added that the work of all Divisions in UNCTAD should determine if the space exists, and the Secretariat should help to operationalise this concept.

On the other Chapeau issue of coherence, the G77 and China was of the view that UNCTAD, with its expertise on macroeconomic issues and its universal membership, can address systemic coherence in the UN as well as with other organizations such as the Bretton Woods institutions.

It said that development orientation and integrity of intellectual work of UNCTAD is key to systemic coherence. Macroeconomic work is a distinct part of UNCTAD and is key to its survival and sustainability.

Japan said the UNCTAD mandate should be reviewed to suit its comparative advantage, in areas like trade related capacity building, assisting the GSTP negotiations and analysis of investment and competition. On policy space, Japan believed there was a divergence of views on this concept and it was willing to discuss it.

The US said the MTR is an opportunity to speak about how UNCTAD can fulfill its basic objective, fostering growth and poverty reduction in developing countries. UNCTAD is over 40 years old, the world has changed since its inception and let us prove that UNCTAD's age has brought it wisdom to move forward rather than merely mid-life crisis, said the US.

Referring to the 'action-oriented' paragraphs of the Sao Paulo Consensus that direct UNCTAD to undertake work, the US said it does not consider paragraph 8 (on policy space) as giving any mandate to UNCTAD or any directive for work.

It said most of the Chapeau paragraphs do not give any instruction to UNCTAD, and it disagreed (with a previous statement) that the most important issues are in the Chapeau. Rather, the Chapeau is 'a hodgepodge of issues we didn't know where else to put.'

The US said there was still an important divergence of views on policy space. It had agreed to the policy space language in paragraph 8 in a specific negotiating context, not as a roadmap for UNCTAD's work and certainly not as a new principle in the international economic debate.

'We considered the concept of dubious value and still do,' said the US: 'Especially so since the term has since become for some a policy roadmap, a negotiating tool, indeed an orthodoxy, without any demonstrable grounding in fact.

'Indeed policy space has become a slogan par excellence. We do not believe that it is a core issue in the development debate, and do not believe that it should be a core area of UNCTAD's work.'

The US added that all countries are sovereign in policy making and it is by their own choice that they limit their policy options. If a country decides to give up some of its economic policy tools, it is because it believes that in the balance its economy will benefit, and it is the responsibility of each country to determine that balance and to negotiate the best deal for itself in international economic fora.

The US said it has seen no persuasive empirical evidence proving that on balance developing countries have systematically suffered in the long term by giving up some policy space in exchange for a trade agreement or IMF loan. It concluded that it is not policy space that contributes to development. 'We are familiar with results of bad policies, that can also be seen as the result of policy space.' It is good policy, not policy space, that countries need, and it is on good policy that UNCTAD should focus.

Cuba said the developed countries had unlimited policy space to work out their own policies. IMF and World Bank policies, applied in Latin America, had led to major problems and economic regression with political consequences. It said the policy space issue is part of flexibilities and the non-reciprocity principle in GATT. But there is less and less flexibility and non-reciprocity. Developing countries must be allowed a certain margin to work out their own policies.

India said policy space is not a threat to international economic regimes, but its recognition can ensure international economic relations will endure. It is policy space that can ensure the international economic regime does not come under stress, and it is the best bet to see globalization succeed.

India added that this issue must guide all aspects of the Sap Paulo Consensus. UNCTAD should do studies on how the developed countries used policy space for their development and draw lessons for developing countries. UNCTAD should draw up models of policy space so that developing countries can build their capacity for multilateral trade negotiations.

The Philippines said the Chapeau issues are key and have to be addressed in relation to other issues. The two important principles of the Chapeau are policy space and coherence. Coherence includes the inter-relation of issues such as trade and finance, while policy space includes how developing countries can respond to the development challenge through their own policies and the flexibilities in rules.

Honduras, speaking for the Latin America and Caribbean Group, said policy space is very important and can enrich the policy debate. It is not true that this concept is being used so that countries do not have to fulfill their international obligations. In fact the opposite is true, that the concept can promote flexibilities in policies so as to benefit our population, said Honduras.

Russia said it understands the G77's concerns. The concept of policy space is still emerging and different interpretations lead to controversy. There is need to define policy space.

Iran said policy choices must be based on the needs of countries. Developing countries should have the right to chose policies, and commitments should help them by having flexibilities. Since UNCTAD XI the concept has evolved, with the 2005 World Summit and in the UN General Assembly reaffirming the concept.

Pakistan for the G77 and China said UNCTAD with its proven competence on macroeconomic issues is equipped to engage in a study on policy space, especially since it had produced the first international consensus on the subject. Responding to the US comment, Pakistan said what constitutes good or sound policy is something subjective. Unless studies and impact assessments are carried out, it is difficult to determine what sound policies mean.