5.  A New Institutional Framework for Cooperation

Our institutions of global governance are exceedingly weak. Indeed it is only a slight exaggeration to say that we have no effective institutions of global governance. The need for international action is large and the capacity to meet the need is small. Moreover the gap between needs and capacity is widening. In the economic sphere, the International Monetary Fund controls only about ten per cent of international liquidity, the General Agreement on Tariffs and Trade regulates only about seven per cent of global trade and the World Bank exercises negligible influence over global capital flows, most of its lending representing a recycling of earlier loans. In the political sphere, the Security Council lacks the means to impose its will, having neither a standing security force nor the power to raise revenues to obtain such a force. We cannot continue in the old way; change is becoming imperative.

Prescriptions for the future inevitably are based on values. We share a belief with hundreds of millions of others that the global polity should be democratic and the global economy genuinely liberal, with provision for a safety net for those most in need. This is not the place to explore how democratic values can best be applied in the international arena, but these values are implicit in our recommendations for economic reform. We seek the creation of a global community in which the distinctions between "us" and "them", "donors" and "recipients" give way to a sense of mutual interest and cooperation in pursuit of universally held goals. The task of global economic cooperation in such a vision is not to provide a framework for North-South relations but to begin to shift the emphasis from states to people, to construct a body of global norms or standards and to ensure that global opportunities are equitably shared.

Global markets for goods and services, technology, capital and labour are far from free and they are structured in such a way that the benefits of global transactions accrue disproportionately to the developed countries. That is, the present system operates to the relative disadvantage of the developing countries. Several of our proposals are intended to correct this by creating a genuinely liberal global economy in areas which are of particular interest to poor people and poor countries. In cases where the politics of negotiation make the extension of markets impossible, we propose that compensation be paid when harm is inflicted upon the poor. In cases where externalities and free rider problems inhibit the proper functioning of markets, we propose that a mechanism be created to facilitate mutually advantageous transactions and payment for services rendered. In cases where massive poverty persists despite global policy reforms, we propose that a system of transfer payments be created and financed through a progressive international income tax on rich countries. This, then, is the vision. What are the specific reforms?

First, there must be an acceleration of global growth. We do not view faster growth as logically preceding or as of higher priority than greater equity, but in the current circumstances of the world economy, it is unlikely that political agreement can be reached to redress some of the global inequities unless average incomes are growing more rapidly than is at present the case. High unemployment, falling per capita incomes and stagnation of production are not compatible with human development and an improvement in living standards worldwide. The developed countries have a particular responsibility here, partly because they account for a very large proportion of global output and partly because their rates of growth on average have been very low for the better part of a decade. A more expansionist policy stance in the developed countries, even at the risk of higher inflation, would benefit not only the people who live and work in the developed countries but those who live in other regions of the world as well. The reason for this is that growth in the developed countries stimulates an expansion of output and incomes in the developing countries, possibly in the ratio of 1:0.6 or 1:0.7, and thus prosperity in one region creates opportunities for betterment in other regions. Growth is a positive sum game; everybody gains. Note, however, that faster growth in the developed countries, while raising rates of growth elsewhere, does not raise growth rates by an equal amount. The implication of this is that if the rest of the world relies on the developed countries to provide the "engine" for global growth, inequalities in the global distribution of income rapidly will become worse. This, clearly, is not acceptable and hence it is important that the developing countries on their own initiative should alter their policies to favour faster growth and human development. This is vital above all in Africa and Latin America, where growth rates were low or negative for most of the 1980s.

Next, at the very least a liberal global economy implies that discrimination against exports from developing countries should be eliminated, and failing that, those most seriously affected should be compensated. At present, trade protection in the developed countries is biased against imports from the developing countries and the extent of protection is rising. The world should be moving in the opposite direction, namely, removing biases against poor countries and reducing the overall level of protection. An equitable sharing of global opportunities is not consistent with the perpetuation of barriers to international trade.

The protracted negotiations under the Uruguay round, and the inability of GATT to ensure steady and rapid progress in trade liberalization, underline the weakness of our existing institutions in this area. UNCTAD is ineffectual and GATT is feeble. They should be closed and in their stead an International Trade Organization (ITO) should be created with comprehensive responsibilities for all international transactions. In particular, the ITO should be responsible not only for trade in goods and services, but also for policies regulating the international capital market, the flow of technology and the global labour market. A liberal global economy does not imply laissez faire or anarchy. We need an institution to make the rules of the game and enforce them.

Then, we should begin to explore ways to create a freer international labour market. Measures which permit greater spatial and occupational mobility of workers, nationally and internationally, contribute to higher global output and incomes. They raise efficiency in the use of human resources and because of this, measures which increase labour mobility potentially are of benefit to everyone. They are a positive sum game. Often the popular perception in the receiving countries is that immigration is harmful and this perception contributes to the social hostility which immigrants sometimes encounter and to resulting political agitation in favour of more restrictive immigration policies. It is obvious that there is a need for greater enlightenment and public education in the countries of immigration. In the sending countries, too, one sometimes encounters the view that emigration is damaging, but apart from forced migration of refugees and certain types of "brain drain", this is highly doubtful. Voluntary decisions by workers and peasants to migrate to another country rarely inflict harm on those left behind and their migration almost always results in a net gain. 59

Despite the benefits of greater mobility, the large number of restrictions in the international labour market is the most illiberal feature of the global economy. It is also the feature which most harms poor people. Thus on grounds both of equity and efficiency, greater liberalization of the global labour market should be high on the economic and social agenda in the years ahead. There is work to be done by the International Labour Organisation in conducting research, educating trade unions, management and policy makers in receiving countries and in formulating labour standards. There is also a role for the proposed ITO to devise and then enforce more liberal rules governing international flows of labour.

Fourth, we recommend that the UNDP be transformed from an agency primarily concerned with technical assistance into an instrument for channelling grants and other non-commercial resources to developing countries. This UNDP would have three windows of operation. The primary window would provide a global safety net by transferring grants from rich countries to the very poorest countries. These grants would be financed by a progressive international income tax and they would be distributed in accordance with the principles of a negative international income tax. This global safety net would supersede the conventional foreign aid programmes, multilateral and bilateral, that now exist.

Conventional aid programmes in any case are in sharp and perhaps terminal decline. Between 1991 and 1992 receipts by developing countries of official development assistance declined in real terms (at 1991 prices and exchange rates) from $57.4 to $54.9 billion. This represents a fall of 4.36 per cent. If to this we add the average rate of growth of the population of developing countries of 1.9 per cent per annum, the fall in the real amount of aid received per capita was 6.26 per cent. 60  It would not take many years of such decline for aid to dwindle into insignificance.

The second window of the UNDP exists to facilitate payment for services rendered. There are a number of potential exchanges, the most interesting being between Group A and Group C countries, which would be beneficial to all concerned but which none the less do not occur because there is no market that brings the parties together. A typical example would be the purchase of environmental services by rich countries, such as the preservation of biodiversity, the protection of the world's "green lungs" in the tropical forests, and the abnegation by developing countries of the right to use environmentally damaging chemicals long used in the developed economies. Whenever there are global or transnational externalities, i.e., whenever the benefits of an activity accrue outside the jurisdiction of the state where the costs are incurred, there is scope for making everyone better off through cost sharing. The role of the second window is to identify cases where cost sharing would be mutually beneficial, to help in negotiating agreements among the parties concerned and to administer the financial side of the agreements, collecting and disbursing funds among the contracting countries.

The third window of the UNDP would be created to handle compensation payments for damages inflicted on Group C countries by Group A countries. The principal cause of these damages is the unwillingness of some Group A countries to practice what they preach, to liberalize international markets and to share global opportunities with everyone regardless of their place of residence. In a liberal global economy there can be no legitimate justification for discrimination and where discrimination occurs, particularly when it is by the richest countries against the poorest, the norms of acceptable behaviour require that compensation be paid. The third window of the UNDP would be the institutional mechanism for effecting a system of global compensation when there are serious departures from the rules of a liberal economy.

In our judgement the most blatant forms of discrimination in the international economy are barriers restricting the emigration of low-skilled labour from developing to developed countries and barriers which discriminate against exports from developing countries. Were these barriers to be removed, once again, everyone potentially could be better off. Failing removal of the discriminatory barriers, those most severely effected, the Group C countries, should be compensated. Hopefully, the requirement to pay compensation would create a strong incentive to remove the barriers and the UNDP could then close the third window. In an ideal world, only the first and second windows would remain a permanent feature of the new framework for development cooperation.

The transformation of the UNDP in the ways described would permit the abolition of the World Bank and the other multilateral regional development banks. Our fifth recommendation for reform of the institutional framework is that this be done. The three windows of the UNDP would handle a larger volume of transactions than all of the multilateral banks combined. There would be nothing useful left for the World Bank and its sister institutions to do. Loans, equity investments and direct foreign investments in developing countries can occur through the global financial markets; pure transfers of aid will occur through the UNDP. Unless the World Bank and the other multilateral regional banks can find a new role to play, there is no reason for them to continue. They will have become obsolete and they should be dissolved.

The responsibilities of the International Monetary Fund, in contrast, should be enlarged. We recommend, sixth, that the IMF be transformed into a World Central Bank with powers to engage in open market operations to increase or decrease global liquidity. The most straightforward way to do this would be to allow the World Central Bank to create (i.e. sell) Special Drawing Rights (SDRs) when it is desired to expand liquidity and to buy them back when it wishes to reduce liquidity. The terms of sale or purchase, viz. the rate of interest offered by the World Central Bank, could soon become the anchor to world interest rates. This would give the World Central Bank a welcome influence over the pace of global economic expansion.

In order to increase the influence of the World Central Bank, SDRs should become a major global financial asset. Three things are necessary for this to occur. First, SDRs should become the international asset in which trade imbalances are settled. Second, exchange rates should be expressed in relation to SDRs instead of the U.S. dollar, Japanese yen or German mark. Third, it should become legal for private sector entities--international commercial banks and transnational corporations--to hold and transact business in SDRs.

At present the IMF has very little influence over global monetary affairs. 61  SDRs account for only a tiny fraction of global liquidity (3 per cent) and the IMF controls liquidity equivalent to only a tiny fraction of world imports (2 per cent). That is, the value of SDRs represents only 0.06 per cent of world imports. This is one measure of the impotence of the IMF, its inability to affect world trade and the global economy. It does not follow from this that the IMF is unable to influence events in a single country or in a group of countries simultaneously, but the influence of the IMF varies enormously from one country to another. Indeed it has virtually no influence in the rich countries. On the contrary, it is the rich countries that largely determine the policies of the IMF and the head of the IMF has without exception always been a representative of the rich countries. The poor countries, in contrast, have little direct influence on the policies of the IMF yet it is they who, for better or worse, find themselves compelled from time to time to be highly responsive to the advice of the Fund. Viewed as a group, however, the developing countries account for only 10 per cent of world liquidity and hence however powerful the IMF may be in developing countries, its power to affect the global economic system as a whole is minimal.

This suggests that the transformation of the IMF into a World Central Bank should be based on two principles. First, the new institution should be more democratic than the IMF, more accountable to the people of the world as a whole and more responsive to the needs of developing countries, where most people live. Secondly, the new institution should be given more power at a global level; it should be able to influence world liquidity and interest rates and hence be able to stimulate or retard global growth. We take it for granted that each country needs a central bank; we should also take it for granted that the global economy needs a World Central Bank.

Finally, we recommend that the Economic and Social Council of the United Nations (ECOSOC) be transformed into something akin to an Economic Security Council responsible for formulating policies and overseeing the efforts of the entire United Nations system in the fields of economic and social development. We have talked about the weakness of the institutions of global governance, indeed about their virtual absence. Behind this weakness, behind our inability to come to grips with global problems, are the unhappy circumstances of hundreds of millions of people: people living in poverty, people alienated from their own societies, people uprooted and expelled from areas which have been "ethnically cleansed", people who have been pushed to the margins of their economy, discriminated against and deprived of human rights, people who are excluded, who cannot effectively participate in the opportunities created by an expanding global economy. These are the problems which a new framework for development cooperation seeks to address.

These problems cannot be addressed within the existing framework. It is a ramshackle structure which no longer has rhyme or reason. Further tinkering is more likely to make it worse than better. A complete overhaul is needed, starting with a transformation of ECOSOC into an intellectually and politically powerful Council able to provide global leadership in its areas of responsibility. It should become small enough and strong enough so that the problems of agreeing on collective action in a global community organized into nearly 200 countries can be overcome62  and it should be democratic and representative, so that the voice of the people who live in developing countries is fully reflected. An institution so constituted would be well placed to formulate and implement global policies which command a consensus. Growth, redistribution, inclusion, social protection: these are ingredients of a viable solution. Foreign aid as conventionally understood has little to do with this. The task of the reformed Council is to draw the threads of a global strategy together, a strategy for human development, and inaugurate a new era of development cooperation.

59  See Keith Griffin, "On the Emigration of the Peasantry," World Development, Vol. 4., No. 5, May 1976.

60  OECD Press Release, Paris, 6 July 1993, Table 4, p. 18.

61  See Mahbub ul Haq, "Bretton Woods Institutions: The Vision and the Reality," a paper prepared for the North-South Roundtable on Bretton Woods Institutions and the Rest of the U.N., New York, 14-16 April 1993.

62  See Mancur Olson, The Logic of Collective Action, Cambridge, Massachusetts: Harvard University Press, 2nd ed., 1971.