12:34 PM Jul 2, 1997

COMMANDMENTS, INDULGENCES AND THESES

Geneva, 2 July (Chakravarthi Raghavan) -- It was the day when the people got the word on the latest "eleven commandments", admixed with a moiety of the gospels about charity and compassion; of edicts, indulgences and promises, not of vision 20:20, but 2020; and the "theses" challenging these paths.

The UN's Economic and Social Council, under the theme of "Fostering an enabling environment for development: financial flows, including capital flows, investment, trade" was hearing the views of the heads of IMF, WTO, UNCTAD and the vice-president of the World Bank.

The commandments came from the International Monetary Fund, and the promises of 2020 when the developing countries will achieve a 270% increase in per capitas (if they followed trade and investment liberalization) were by the OECD relayed by the WTO head.

And like Martin Luther, who found himself stumped in the 16th century over St. Paul's concept of the "Righteousness of God" and the sale of papal indulgences that could get people around this wrath of the God, and went and nailed his 95 theses to the doors of the All Saints Church at Wittenberg, UNCTAD Secretary-General Rubens Ricupero came to ECOSOC and nailed the dogmas of globalization and liberalisation and untrammelled market forces bringing benefits to the masses.

Questioning some of the assertions of the Fund and the WTO, and their revealed truths, in some politely worded language and delivered in an undertone, Ricupero pointed to the shaky (and sandy) foundations on which the new structures for the next millennium are being erected.

At the outset, UN Under-Secretary-General, Mr. Nitin Desai, said the dialogue and the discussions should lead to some agreed conclusions from the ECOSOC: perhaps a "many-handed" draftsman from the secretariat, rather than the "two-handed" economists, with their "on the one hand this.. and on the other hand" arguments, about which Desai and his deputy spoke to the media on Tuesday.

The "eleven commandments", were not those given to Moses on Mount Sinai, but delivered by IMF head Michael Camdessus, on authority that IMF thinks comes closest -- from the 181 Finance Ministers at the IMF's interim committee last October.

The commandments (his words) were for "broadening and strengthening" the strategy of members in the second generation of reforms to follow on the first generation -- macroeconomic stabilization, trade liberalization, price reform, privatization etc.

With the first generation reforms put through under IMF advice and support, Camdessus claimed, even in countries with intractable problems of underdevelopment had improved their economic performance significantly.

And he mentioned the four important of the eleven commandments:

* quality of fiscal adjustment -- not only reducing budget deficits, but improving the composition of adjustment, by reducing unproductive expenditures and spending more on education etc;

* bolder structural reforms -- to remove obstacles to private initiative and foreign investments;

* the role of the state and good governance - better transparency, limit opportunities for corruption, enhanced public accountability, independence of the judiciary and better property rights and reliable public services; and

* strengthened fiscal institutions, including strengthening of domestic banking systems, and opening up capital accounts and liberalizing them -- areas on which the IMF has now got a new mandate for amending the charter to promote capital account liberalization with appropriate oversight for the IMF on capital movements, not to encourage developing countries to remove controls prematurely, but encouraging them to do with sustainable macro-economic policies.

The WTO Director-General, Mr. Renato Ruggiero, spoke of the "unsatisfactory, and even unacceptable" world in which they were living, citing the UNDP's Human Development Report data - of a fifth of the world population or 1.3 billion living on incomes below $1 a day, and with over 50% of the world population having less than five percent of global income. "Though we are part of an ever more integrated global economy, the distance between rich and poor is intolerably great."

But beyond this identification of the masses of the wretched of the earth, he had no solutions - but more assertions of the benefits of the new accords on global telecommunications and information technology products, and the need to successfully conclude the financial services negotiations. Financial Services should not be viewed through "outdated paradigm" of importers vs exporters or North vs South, but as one providing access to investments, and a pipeline for transfers of technology and managerial skills.

Ruggiero, however, drew on the UN's World Economic Survey to draw comfort that worldwide growth and living standards are also rapidly rising, with only 11 of the 95 developing countries covered in the survey failing to increase per capital output in 1996, compared to the 24 in 1995. And there was the el dorado awaiting the world: according to the HDR 1997 poverty has been reduced more in the last 50 years than in the last 500, and the OECD now predicts that per capita income in developing countries could rise by a remarkable 270% by year 2020, and in developed world by 80%, and developing world accounting in 2020 for half of world trade. Implied was the view that the globalized world, had problems, but was moving towards convergence.

Globalization will not solve all problems, Ruggiero said, but it provides the most powerful engine for growth the world has ever seen, and a new global "enabling environment" can only be built on foundations of an open and integrated global economy, and the WTO multilateral trading system as a key element for fostering an enabling environment for development.

Into this world of assured heaven by following the commandments and the WTO's indulgences, waded in Ricupero, with his opening words that "we agree to disagree", appeared to be the phrase used in press reports summing up the results of major international meetings:

* the Denver G7 summit where leaders disagreed not only about mandatory carbon emission targets, but on choice between economic models that create jobs at price of inequality and those stressing social security but unsuccessful in conquering unemployment;

* In Amsterdam, where EU leaders differed on priority to public spending for job creation or budget reduction for monetary union;

* the recent ILO conference where disagreement erupted over proposals for a "global social label", just as the Singapore WTO had disagreements on labour standards and trade; and

* the UNGASS in New York which ended on a discordant note on how to match global responsibility for environment with corresponding access to adequate finance and technology.

"Are we starting to see the first signs of a growing trend towards divergence in the world economy?" Ricupero asked, and answered: "more than usually the case, the current world picture is one of light and shadows, a confusing and contradictory landscape painted in chiaroscuro."

There are indications that the world economy is polarising more than converging, Ricupero said, citing in this regard some elements:

* growth has been too slow to generate enough jobs with adequate pay or reduce poverty,

* the tendency to diverge being accentuated between industrialized and developing countries and widening the gaps between the NICs and other developing countries,

* a global trend of wage inequality between skilled and unskilled labour,

* the "hollowing out" of the middle class as a feature of income-distribution in many countries, and

* increased job and income insecurity becoming widespread as a characteristic of the global economy.

Some of these may be temporary dislocations, but others are more permanent, and unless halted soon, "these tendencies for increasing inequality among countries and inside societies could trigger a backlash that will jeopardise many of the positive elements of recent economic reforms in developed and developing countries." To deserve its name, globalisation has "to include, not exclude, to integrate not marginalise."

If some recent trends end up by causing social disintegration inside countries, and pushing nations and continents to periphery of History, then globalization would have betrayed its promise and its very name and "it would sound to many like a cruel joke - as it was in George Orwell's 1984, where black is called white and tyranny is given the name democracy."

Globalization is a fact of life that cannot be wished away, Ricupero agreed. "But it would be a great error to assume that in consequence, market forces must be given untrammelled free rein. As experience has shown, the role of governments today, and in the third millennium, will be more crucial than in the past - in setting the policy and legal framework, building institutional and human capacities, putting in place the necessary infrastructure, creating an appropriate enabling environment and, where necessary, sponsoring entrepreneurship and enterprise creation:"

As experience of South East Asian countries show, development does not happen simply by liberalising the economy; careful and sound policies are required to maximise benefits and minimise downsides. "If there is one indisputable fact of history, it is that no economic law exists that will make incomes of developing countries converge automatically towards those of developed countries."

The experience of countries that have liberalised, but find themselves excluded from the global market illustrates this, Ricupero said, and cited the example of African countries who have liberalised their investment regimes, signed some 260 bilateral investment regimes, but have received only 5% of total FDI flows to the developing world, half of Africa's share in the 1980s. And more than 50% of this FDI to Africa go only to three countries.

"Liberalisation efforts may be necessary, but on their own are insufficient conditions for investment."

The response of countries and peoples to globalization had not been on traditional North-South lines, but rather in three different groups, Ricupero went on:

* one group where a backlash against globalization is fuelling pressures to take measures to protect the population from adverse consequences, notably on employment, wage levels and environment;

* a second group of fast-growing countries that have benefited most from export-led growth and are increasing their own outward investment flows; and

* a third group of slow-growing or stagnant countries, a clear majority of the total number, which have so far missed out on promised benefits of globalisation and liberalisation.

"For those with little to sell on the international market, or whose supply capacities are insufficient to meet the test of international markets, or else are weighed down by heavy debt servicing burdens, to cite just a few common problems, the opportunities offered by trade liberalisation remained too few, too late."

Developed countries find themselves in the first group of countries in his categorisation, while a few developing countries and major industrialized economies are in the second. Developing countries and countries in transition are in the third group.

"Thus, the advantages and drawbacks of globalization cut across traditional lines, and a popular backlash is just as likely to come in Lyon as in LIbrevile - if not more so."

The UNCTAD noted that developed countries had taken the lead in international fora urging speedy and full integration of developing countries into the world economy and trading system - whether through accession to WTO or participation in a possible Multilateral Agreement on Investment or through bilateral trade and investment flows.

"But ironically, it is their own people whoa re most fearful of the consequences. The fear is that of the impoverishment of their workers, of a widening of the gap between people with skills and mobility and those without, and of a lowering of social and environment standards worldwide or what is popularly called 'a race to the bottom'."

But a different view of the negative aspects of globalisation comes from those who have been successful in taking advantage of the opportunities and revolutionary changes. But governments of these countries share the perception that trade is being seen by some developed countries as a means of global governance, to address the actions of governments or non-enforcement of norms. They fear a continuous pressure to expand the 'frontiers' of the multilateral trading system, pressures enhanced by the deepening of integration in the context of regional agreements.

"According to this view, international norms cannot be enforced without sanctions and that the only meaningful sanctions are trade sanctions - aptly reflecting Machiavelli's observation that only the armed prophets succeed!"

Given these perceptions, Ricupero said, "further liberalisation of trade and investment have to take into account the legitimate aspirations of governments to protect their financial stability and right to determine the course of their own development strategy as well as the health of their populations, their cultural identity and physical environment."

"To do otherwise, would risk provoking a backlash that could unravel the 50 years of achievements of the multilateral trading system to be celebrated next year."

Globalization has considerable potential for good, but has also an undeniable downside and structurally weak developing countries, and hundreds of millions of people -- poor, unemployed and low-wage earners - fear the threat of marginalisation and exclusion.

While the success stories are well known, the fact is that over 80% of the total exports of developing countries are accounted for by just 18 countries, and the for the others the marginalisation risk is very real.

Throughout the Uruguay Round, developing countries with very few exceptions found themselves inadequately prepared and even the most advanced of them had only a partial awareness of full implications of the issues. UNCTAD had made some attempts to overcome this handicap, particularly in the services negotiations. But the results were still unsatisfactory in terms of providing developing country governments with a full understanding of the issues.

"Indeed, it is perhaps only now that many developing countries are starting to realize the implications of what they signed in Marrakesh. Overall, on their part, there was no positive agenda for trade liberalization."

The Singapore meeting confirmed that the WTO might become a forum for continuous negotiations and, in addition to the built-in agenda, new liberalization initiatives and new issues, already the subject of discussion among OECD countries, and which the developing countries are yet to fully understand or identify their interest have come up, posing additional challenges to developing countries -- that of defining a positive agenda on issues of crucial importance to them and ensuring they obtain equal consideration. UNCTAD, he said, had a major role to play in assisting developing countries meet this challenge.

Ricupero stressed that in the rush to enter into new agreements of primary interest to the developed countries, the WTO's built-in agenda should not be forgotten. They covered such important areas for developing countries as tariff peaks, tariff escalation, tropical products, sensitive products like leather, frozen and concentrated orange-juice, and many other agricultural products, and issues of trade rules such as abuse of anti-dumping measures.

Contrary to conventional wisdom, there was still much scope for further liberalization of tariffs. The Uruguay Round had succeeded in tariffying many non-tariff barriers, but the outcome was one of a series of extremely high tariffs, particularly in the agricultural sector, Ricupero stressed.

He referred to the example of "one of the leading and most open developed economy" (a reference to the US) where the MFN rate for agricultural products previously subject to QRs was several hundred percent. Even for industrial products in that country, for those that do not get GSP benefits, the MFN tariffs will exceed 12% and in some cases 20%, and for a few over 50%, for leather products; woollen, synthetic and cotton fabrics; clothing; footwear; ceramic and glass products; watches etc of export interest to developing countries. "These rates are prohibitive in today's highly competitive markets."

In another leading industrial economy (a reference to Japan), Ricupero said the post-UR MFN rate for leather footwear was almost 100%, or 30% for footwear supplied by developing countries; for cane molasses, exclusively supplied by developing countries, it is 117%.

Among the asymmetries of globalization is the fact that liberalization of the world economy has proceeded so far in a lop-sided way. As a result,

* liberalisation has proceeded more slowly in commodity areas where developing countries are competitive,

* freer trade in textiles, often the first step on the road to industrialization, will be achieved only in 2005, * major trading blocks continue to protect their agriculture sectors; and

* while liberalisation has succeeded in removing many restrictions on freedom of capital and skilled labour to seek out its most remuneration worldwide, no attention has been paid to abolish many restrictions on the freedom of movement of unskilled labour.

And while signs of improvement in FDI flows top sub-Saharan Africa was welcome, FDI was no universal panacea or substitute for ODA. The capital needs of most African countries needing basic infrastructure can, for the time being, be met only by ODA transfers.

For the LDCs, most of whom are in Africa, the threat of marginalisation is most acute. For them, as for the small and weak economies elsewhere, the challenge is that to make the market economy possible, they need actors to operate the markets - the enterprises. Enterprise development, both small and medium-sized, and entrepreneurial capacities should be key targets for international programmes. This should be cornerstone of an integrated programme for foreign investment, infrastructure building, debt relief and acquisition of technological and managerial skills. Only a company that first proves its ability to supply a domestic market and integrate itself into the distribution networks of TNCs can be a successful exporter.

The international economic system should focus through international cooperation on:

* the evolution of the international trading and financial systems that ensure stability in global markets, progressive but balanced liberalization of trade and investment, enhance mobility of other production factors and provide all countries with access to markets in goods and services, investment and technology;

* the enhancement of competitive supply capabilities of structurally weak economies; and

* provision of support and incentives. Recent initiatives for Africa may prove an encouraging example of how political will can mobilize market forces in the service of development, providing incentives for growth, trade and investment.

"The processes leading to globalization," Ricupero concluded, "have been the result of deliberate policy choices. Leaders today continue to have choices. After more than a reasonable dose of 'creative destruction',it is perhaps time for leaders to try instead to choose ways of reconciling the creative forces of the market with needs of the disadvantaged, in a word to engage in 'creative construction'."