Impact of Rich Countries' Policies on Poor Countries

Towards a Level Playing Field in Development Cooperation

Rachel Weaving

• Publisher: Routledge
• Year: 2017
• eBook ISBN: 9781351513333
• Edition: 1
• Topic: Economics
• Subtopic: Development Economics
• Index: Economics

"All United Nations heads of state have endorsed the Millennium Development Goals, which aim to reduce the incidence of absolute poverty by half by 2015. To reach those goals, growth in developing countries will have to be twice the levels achieved in the 1990s for the next fifteen years. This will require, at the least, new rules of the development game.At present, rich countries exercise control over the institutions that oversee the global economy. This volume addresses a curiously neglected area of policy analysis--the impact of rich countries' policies on the global poor. Four-fifths of the world's people subsist on one-fifth of the world's income. One-fifth live in abject poverty, on less than one dollar a day. The main responsibility for reducing poverty reduction naturally rests with developing countries. But globalization means that rich countries must also play their part.Industrialized countries dominate global environmental management through the heavy ecological footprint of their production and consumption patterns. Adjustments of their policies by rich countries may be as critical as government reforms in poor countries. Past research has concentrated on policy adjustments that need to be made within poor countries to aid effectiveness, and trade reform.Relatively little is known about the economic consequences of migration, control of intellectual property, and environmental regulations. Even less research has been done on the interaction and combined impact of the full spectrum of rich countries' policies on the economy, society, and ecology in poor countries. These knowledge gaps inhibit rational debate, let alone evidence-based policymaking that may lead towards sustainable and equitable growth. At current levels, aid alone cannot deliver adequate progress towards the Millennium Development Goals.The surveys by eminent development analysts and practitioners included in this volume sketch a road map for a better understanding of the"

1
Overview

Robert Picciotto¹

The central issue of contention is not globalization itself, nor is it the use of the market as an institution, but the inequity in the overall balance of institutional arrangements—which produces very unequal sharing of the benefits of globalization.

—Amartya Sen

Over the past two decades, the development agenda has focused on actions that poor countries need to take to promote growth. Research has probed the structural and social constraints on development in diverse socioeconomic environments. Advisory services have been geared to the adoption of policies that emphasize market friendliness. Aid allocations have emphasized development performance.

Substantial intellectual resources have been mobilized to assess the effectiveness of aid. The development community has adopted common development targets and performance indicators—the Millennium Development Goals. In all low-income countries, country-based poverty reduction strategy papers (PRSPs) have been mandated. They are subject to public disclosure and systematic review by the International Monetary Fund and the World Bank.

No similar effort is underway to monitor the development effectiveness of rich countries’ policies. They have escaped scrutiny even though they determine the amount and quality of aid, foreign investment, trade, migration, access to intellectual property, and global environmental trends. Noisy anti-globalization street protests have mobilized the attention of the media and idiosyncratic domestic political considerations have dominated global policymaking.

In March 2002, the United Nations Conference on Financing for Development, held in Monterrey (Mexico), forged a historic development compact between rich and poor countries. The global partnership matched the adoption of improved policies and governance in developing countries with the provision of increased aid, knowledge transfers and trading opportunities by developed countries. Unfortunately, the obligations agreed at Monterrey are asymmetrical: only one of the eight goals addresses rich countries’ policies and it does so partially. Performance indicators are pointed south more often than north. More needs to be done to understand, measure, and monitor the impact of rich countries’ policies on the poor of the world.

Context

New technology has triggered the integration of national economies. Shipping costs are only 30 percent; air fares 16 percent, and telephone charges 1 percent of what they were seventy to eighty years ago. More than natural forces, policy choices determine the distribution of benefits resulting from globalization. An unprecedented number of business enterprises and civil society actors now exert influence on economic decision-making. But policy choices rest principally with the governments of the industrial democracies and their electorates.

In the pluralistic industrial democracies, policymaking proceeds in fits and starts, under the sway of the civil society, the mass media, and ever-changing coalitions of interests. A bewildering diversity of nongovernmental organizations, interconnected on a global scale, has promoted social and environmental causes. The ascent of market-based policies following the dissolution of the Soviet Union has facilitated trade, investment and unbundling of “value chains” with little regard for national boundaries.

The volume of international merchandise trade today is nearly twenty times greater than it was in 1950. In parallel, foreign direct investment has surged, reaching a peak of $1.3 trillion in 2000. It has since fallen ($725 billion in 2001), but flows to developing countries have been more resilient than flows among developed countries. Policy-based lending by international financial institutions has moved the integration process along.

By now, most developing countries have become enmeshed in the global marketplace for goods, services, people, and ideas. Countries unwilling or unable to connect to the mighty engine of the global economy have fared worse than others. But the early and heady promises of globalization have not been fulfilled. It remains to be seen whether the current transformation will deliver not only economic and social dislocation but also improved living standards for a majority of middle- and low-income countries.

Globalization Has a Long Way to Go

The nation state remains the dominant policymaking institution. Geography, political borders, currency risks, and cultural and legal differences, along with preferential trading arrangements and trade restraints, continue to inhibit global economic integration. Markets for labor and capital were far more integrated at the beginning of the twentieth century than they are today. In the last twenty-five years, only 2 percent of the world’s people have changed their permanent country of residence, compared to 10 percent in the twenty-five years before World War I.

While world trade grew twice as fast as world output in the second half of the twentieth century and foreign direct investment three times as fast, the ratio of trade to output has not risen much in Europe and has declined in Japan compared to what it was before World War I. The ratio of U.S. international trade to output would need to grow another six-fold to achieve neutrality between internal and cross-border trade. Thus, the potential of globalization is far from being fulfilled and its future is uncertain. History suggests that the process can be reversed.

Toward a Level Playing Field

Rich countries have dominated the policy agenda, its rules, and the modalities that govern global economic activity—a reflection of disparate economic and political strengths and the unequal access to the specialized skills that are needed to design, negotiate, and monitor the implementation of agreed international standards.

Characterized by volatile market conditions and a secular decline in commodity prices, globalization has had asymmetrical consequences. Developing countries have been vulnerable to financial contagion since their banking sectors and their capital markets usually lack depth and strength. The poorest and smallest countries have fared worst. Between 1970 and 1997, the cumulative terms of trade losses of non-oil exporting African countries amounted to more than half the cumulative net resource flows to the region. These losses, combined with interest payments, profit remittances, capital outflows, and reserve buildup have resulted in a net transfer of resources from Africa to the rest of the world.

Restraints on international trade have been damaging to the developing world. OECD countries provided over $300 billion in agricultural support, three-quarters of which is in the form of direct payments. These subsidies have created gluts of agricultural commodities that have crowded out developing country production. In addition, new trade-related intellectual property regimes have restricted access by poor countries to essential drugs and other knowledge-intensive products and services. Migration rules have been highly restrictive and stacked against the poor and uneducated.

Most developing countries have lacked the domestic institutions, the skills, and the access to capital needed to achieve economic growth on a scale sufficient to match their demographic expansion and generate substantial poverty reduction. At the end of the 1990s, more than eighty countries had per capita incomes lower than they had ten years earlier. To be sure, the international market has promoted efficiency and growth and social indicators have improved. In particular, the large economies of China and, to a lesser extent, India have scored substantial gains. As a result, aggregate poverty levels have declined somewhat and the world’s Gini coefficient of income inequality may be declining for the first time in two centuries.

On the other hand, environmental stress, economic volatility, and inequality within countries have grown. The resulting discontent has created doubts about the environmental and social sustainability of the globalization process. There is no mystery about the threats to the world’s ecology caused by demography and energy-intensive development, nor about the growing differentiation in economic performance across countries; in a global economy increasingly driven by trade, knowledge, and private capital, the penalties attached to unsound governance and lack of market-based institutions have been prohibitive. Countries already equipped with a favorable environment for private enterprise, a functioning civil service, and supportive economic policies have attracted the lion’s share of capital, entrepreneurship, and skills. The others have been marginalized and unable to reap the full benefits of globalization.

Similarly, with knowledge driving economic efficiency, returns on education and entrepreneurship have risen while the unskilled have seen their standards of living erode, and income differentials have widened. Countries and individuals already at the top of the economic ladder have received a disproportionate share of the benefits of increased economic activity while those lacking financial assets and skills have been unable to share equally in the opportunities offered by market activities. Without a level playing field, those already endowed with know-how and access to capital have benefited disproportionately from globalization.

The Governance Gap

The promise of globalization was grounded in the notion that foreign investment would create new incentives for protecting property rights and adopting sound macroeconomic policies and good governance practices. Larger wage gaps would induce more people to acquire skills. Higher returns to entrepreneurship would trigger creativity and innovation. Over the long run, increased inequality in open and competitive global markets would be the price to be paid for growth and poverty reduction.

But as Keynes famously remarked, in the long run we are all dead. Whereas developed countries have gradually evolved an enabling environment combining market orientation with social development and environmental protection, through a combination of fiscal tools, public goods delivery, and regulatory frameworks, only the rudiments of such a structure exist within developing countries and the prospects for a new financial and development architecture appear distant.

Currently, the intergovernmental process governing global rule making is cumbersome and ineffectual. More than 40,000 treaties and international agreements have been registered with the UN Secretariat, and more than 500 multilateral instruments—covering matters such as human rights, disarmament, commodities, refugees, the environment, and the Law of the Sea—have been deposited with the UN Secretary General. But intergovernmental conventions are years in the making and monitoring and enforcement mechanisms are ineffectual.

The private sector and nongovernmental organizations have sought to fill the global policy gap. There has been an explosive growth in formal and informal partnerships between voluntary agencies, governments, and multilateral institutions. They have diverse goals: to improve access by the poor to potable water; to promote the use of renewable energy in rural areas; to bridge the digital gap in developing countries; to protect endangered species in vulnerable forest areas; to harmonize accounting standards, etc. But their record is mixed and recurring questions arise as to their efficacy, legitimacy, and accountability. Thus, global governance remains fractured, inefficient, and unfocused on results. In sharp contrast with economics, politics remains stubbornly local and national.

Over time, a normative shift towards cosmopolitan values may lead to the empowerment of representative global institutions that elicit broad-based public trust. But such an evolution is unlikely to take place without the stalwart support of national governments. For decades to come, progress will hinge on inducing coherent policy reforms through national political processes in the industrial democracies. In turn this will require more recognition by private firms in industrial countries that their interests coincide with those of developing nations, since this is where new markets and new sources of wealth are located. A judicious combination of policy research, shrewd advocacy, and effective coalition building must channel public emotion towards more effective international cooperation, a greater voice for the poor, and policy reform in the industrial democracies.

The Policy Reform Agenda

In sum, human development depends on enhancing the coherence of rich countries’ policies. For globalization to work for the poor, the transmission belts of aid, foreign investment, trade, intellectual property, migration, and the environment must be re-engineered. Development is grounded in physical, human, and natural capital. At the global level, trade policy induces efficient resource allocation. Aid and foreign investment matter because they affect the level and quality of physical capital allocations. Similarly, intellectual property and migration policy reforms could help to improve the distribution of human capital (including knowledge). Last but not least, natural capital endowments are heavily affected by the environmental policies of rich countries.

Aid

Aid is at a crossroads. According to ActionAid, “Never has there been such a large or obvious gap between the stated commitments of the rich world (in the form of the MDGs) and the resources and policies supposed to meet them.” The quantity of aid is currently inadequate and its quality undermined by geopolitical motivations, policy incoherence, weak donor commitment, poor accountability, and dysfunctional aid practices.

The Monterrey consensus about goals and principles has not been matched by commensurate action. The commitment to double official development assistance has not been fulfilled. Little has been done to moderate global market volatility, protect developing countries from financial crises, achieve debt sustainability, enhance developing countries’ access to rich countries’ markets, cut the costs imposed by trade-related intellectual property rights, or channel more private investment toward the least developed countries.

Aid works in the right circumstances. Its effectiveness is improving. There is a large reservoir of popular support for the Millennium Development Goals (MDGs). Yet, public perceptions about development assistance remain unfavorable, in large part because of unrealistic expectations about what aid can achieve without concurrent improvements in the key policies that govern globalization.

The public vastly overestimates the share of government budgets allocated to aid. There is very little awareness that official development assistance as a share of national income has declined from about 0.65 percent in 1967 to 0.22 percent in 2001—despite endorsement by numerous UN conferences of a target of 0.7 percent of national income—or that only five out of twenty-two DAC countries have reached this target.

Aid quality matters as much as its quantity. The following reforms in aid policies would greatly enhance development effectiveness: (1) aid allocations based on development considerations rather than geopolitical objectives; (2) greater concentration of aid towards poor countries; (3) untied aid and reduced reliance on expatriates in aid implementation; (4) harmonization of aid practices; and (5) reduced transaction costs for aid recipients.

Foreign Investment

With globalization, improved investment climates have become a frequent focus of aid, and the corporate policies set by multinational companies have become more influential in developing countries. Market-based capital flows to developing countries are now far larger than aid flows, although they peaked at nearly $300 billion in 1997 and have dropped sharply in the wake of the current economic slowdown, reaching $175 billion in 2001 and $140 billion in 2002.

The distribution of foreign direct investment (FDI) is highly skewed. Least developed countries collectively receive only 0.5 percent of global FDI flows. Of this, 86 percent is concentrated in ten countries, of which more than half goes to four oil-producing countries. Africa as a whole is a marginal recipient, receiving less than 2 percent. Within Africa, as elsewhere in the developing world, FDI flows go to only a handful of countries. Yet, FDI (unlike the turbulent flows of short-term capital) is critical to technology transfers, human capital creation, technical and management skills enhancement, and better integration of national economies within the international trading system.

FDI can promote a more competitive business environment and generate domestic and enterprise development. Amar Inamdar’s chapter suggests that, beyond promoting a larger quantity and a broader distribution of FDI among developing countries, the quality of investment flows deserves emphasis. Both the quantity and quality of private investment are shaped by the enabling environment —good macroeconomic management, a sound judiciary and legal environment, physical and social infrastructure, resilient financial and other market institutions, and innovative support to micro, small, and medium enterprises.

Corporate behavior matters, too. FDI may not create net benefits to host countries if associated with capital-intensive development, corrupt use of royalties, limited links to the local economy, negative environmental impacts, or deleterious social consequences for local communities. Hence, the rationale of the United Nations Global Compact, a network of private companies dedicated to the observance of human rights, labor standards, and environmental sustainability. In turn, the corporate investment policies and operating practices of multinational companies are responsive to public opinion and the policy stances adopted by rich countries and international institutions.

Competition, financial transparency, and corporate social responsibility could be enhanced by fair and predictable rules for international investment taking accou...

Table of contents

• Cover
• Half Title
• Title
• Copyright
• Contents
• Preface
• 1. Overview
• 2. Reducing Poverty in a World of Plenty: The Crisis of Aid
• 3. Globalization, Developed Country Policies, and Market Access: Insights from the Bangladesh Experience
• 4. Rich Country Policies and the Poor: Harnessing Foreign Direct Investment for Pro-Poor Development
• 5. The Development Impact of Developed-World Policies on Developing Countries: The Case of Trade
• 6. The Development Impact of Rich Countries’ Policies: The Case of Intellectual Property Rights
• 7. Migration as a Factor in Development and Poverty Reduction: The Impact of Rich Countries’ Immigration Policies on the Prospects of the Poor
• 8. Impacts of the Policies of Rich Countries on the Prospects for Growth and Poverty Reduction in Poor Countries: Focus on the Environment
• 9. Some Observations on the Question of Coherence and Development
• 10. Linking Research, Monitoring, and Advocacy: Worlds Together or Worlds Apart?
• 11. Security and Development