Report 4 on UNCTAD meetings: Lively UNCTAD debate on policy space, development strategy

An interesting debate took place at the Trade and Development Board (TDB) of UNCTAD on the question of "policy space", on the imbalances of existing multilateral rules in some areas and their absence in others, and the impact of this on developing countries' ability to formulate national development policies.

Many developing country delegations supported the work of UNCTAD on these issues, particularly its 2006 Trade and Development Report, which had focused on policy space and on whether and how multilateral rules restrict national policy options.

However, several developed countries, including the United States, the European Union and Australia, questioned some conclusions drawn by the report.

UNCTAD officials - Secretary-General Dr Supachai Panitchpakdi and Heiner Flassbeck, officer in charge of the Globalisation and Development Strategies Division - presented and defended the report.

Opening the TDB's session on interdependence and global economic issues on 28 September, Supachai referred to the comments made the day before by WTO Director-General Pascal Lamy that trade is a crucial ingredient in a policy mix which however must contain other ingredients if it is to contribute to development and poverty alleviation.

As Lamy said, this means no blind adherence to free trade but also no blind adherence to governments doing pretty much anything including protectionism. "We totally agree," said Supachai.

But, asked Supachai, if trade liberalisation is insufficient to achieve growth needed to reduce poverty, then what other policies (industrial or otherwise) will do so? Many developing countries need to grow 7-8% annually to achieve the MDGs by 2015. How can they acquire the productive and trade capacity to cope with global economic interdependence?

This is what the TDR addresses. It explores policies that worked in some countries and identified why they did not succeed elsewhere, and what might work instead.

Over 15 years of traditional trade reforms have produced a number of positive outcomes but also instances of reduced growth rates and even declining GDP, with serious output and employment losses in the industrial sector. 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 TDR 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. "We do this not for the sake of controversy but to learn from what works and what does not."

Addressing what is needed to lift the productive and trade capacities of developing countries, the TDR intended to identify policies from recent and earlier experiences that will assist developing countries.

Supachai concluded that there may be disagreements with some of the policy options identified but that is the point of the debate and as the Sao Paulo Consensus confirmed, there is no one-size-fits-all approach. After choosing policy instruments, there is also a need to address the questions of the right dosage, timing and sequencing.

Presenting the TDR 2006, Flassbeck said a more flexible and pro-active macroeconomic policy should: (1) Put monetary policy at the service of investment and growth, not only price stability, and this requires non-monetary instruments to control inflation; (2) Target a real exchange rate consistent with external competitiveness, which requires pragmatic use of "intermediary" exchange rate regimes.

He added that additional policy space may also be gained through temporary capital controls.

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 technological change, and this requires a reform of macroeconomic and industrial policies.

At the same time, he added, developing countries have lost their policy autonomy. Having "good governance" is not enough to attain development success.

He said that industrial policies should aim at solving information and coordination problems in the investment process and at ensuring that production experience is translated into productivity gains.

There should be complementary trade policies aimed at achieving international competitiveness in increasingly sophisticated products. This is not a protectionist approach but an element of strategic trade integration.

Flassbeck concluded that there is a need for more coherence in multilateral rules and disciplines. There is an asymmetry in that while there are rules in the trading system, there is an absence in the area of international finance.

He cited a statement made in Singapore recently by retired senior IMF official Anne Krueger that "the absence of a multilateral framework governing international capital flows (and exchange rate mechanisms) is an important gap in the multilateral economic system."

According to Flassbeck, the "bottom line conclusions" are that:

• More rules are needed in international monetary and financial relations, but more flexibility is needed in the multilateral trading system.
• Multilateral rules and disciplines must be strengthened in the area of macroeconomic, capital account and exchange rate policies to avoid ever growing imbalances.
• Provisions on special and differential treatment could be made an integral part of WTO rules and disciplines rather than treated as exceptions; the level playing field is not sufficient to foster development and catching up.

In the debate that followed, many developing countries expressed appreciation of the TDR and UNCTAD's work on policy space. The G77 and China, represented by Pakistan, stressed the crucial importance to developing countries of both the policy space and of making it a priority issue for UNCTAD to work on in the future.

India agreed with the TDR's conclusion that an effective system of global governance must take into account developing countries' needs, ensuring the right balance between sovereignty in national economic policy making on one hand and multilateral disciplines and collective governance on the other.

India has argued for recognition of developing countries' need to have the space to choose what national strategy is most appropriate for their development within the framework of international disciplines. While the concept and specificities of "policy space" needs greater understanding, the concept itself should not be seen as inimical to international economic relations.

Commenting on the TDR's reference to current imbalances in the international financial architecture, India said it is essential to expand democratic functioning of the Bretton Woods institutions.

Iran called for a comprehensive assessment of the existing disciplines and arrangements in the international trade, monetary and financial systems to evaluate to what extent they are coping with the globalisation process and addressing developing countries' needs.

The TDR, which goes beyond conventional wisdom, will provoke debate at all levels, and it is the type of report expected of UNCTAD's analytical pillar. It appreciated the report's focus on redressing global economic imbalances. Due to asymmetries in global economic governance, international rules mainly address developed countries' priorities and leave little policy space for developing countries.

Argentina, on behalf of the Latin American and Caribbean Group, brought up the proposals by developed countries on cutting industrial tariffs in developing countries as an example of restricting policy space. If these NAMA proposals are adopted, what freedom will the developing countries have in the future to adjust their already low applied tariff rates upwards, asked Argentina.

Sri Lanka said the TDR was a very good intellectual work, and agreed with its key observations, referring especially to its conclusions that market-oriented reforms have not worked well and that pro-active government intervention is needed.

Egypt said the TDR shows the gap between the existence of rigid rules of the multilateral trading system and the lack of multilateral rules in the financial system. This enables the financial institutions to use their power without taking account of the interests of developing countries. The conditions imposed on aid and loans shackle the hands of governments and hinder development.

China praised the TDR as being a very good report, with very interesting conclusions that correspond to the realities of developing countries. Such studies can assist developing countries to get better insight into their problems.

The EU, represented by Finland, said it appreciates the TDR 2006 as a "thought provoking input" to the debate. However, it disagreed with the report's implied finding that multilateral rules are inimical to development. It disputed the suggestion that the sole remedy to many problems is increased policy space per se.

The EU also briefly registered its disagreement with the report's sections on subsidies, intellectual property rights, TRIMs and export subsidies.

The United States regretted that several recommendations of the TDR run counter to the sound policy and research of other organisations. On the TDR's attempt to operationalise the policy space concept, the US said it was not a useful concept and can be harmful as it perceives that developing countries should opt out of multilateral obligations. It added that the report wrongly says that the free trade agreements' intellectual property section has negative effects.

Australia also criticised the TDR for having a one-sided view on IPRs, whereas it should take a balanced view on the lively debate on the issue of IPRs and development.

In response to the comments, Flassbeck refuted the criticisms that on policy space the report suggested that developing countries should opt out of international disciplines.

"We say there's a trade-off between multilateral rules and policy space. To say that we don't recognise this is not true. The point is that policy space can only be matched to benefit development if the rules are fair."

Flassbeck said the report asked whether some of the rules are fair in terms of their economic impact. Examples were given based on empirical evidence and logical thinking.

For example, on TRIPS, while the IP protection aspect is on the basis of binding rules, the technology transfer aspect is on only a best endeavour basis, and thus there was asymmetry.

He added that the report was not questioning the need for multilateral rules, but the current asymmetrical 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.