Chapter 7: The Formation of Regional Economic Blocs

    Globalization, of which the movement to freer trade is a part, has been associated with an unprecedented expansion of world trade and world output and, with some important exceptions, an unprecedented improvement in the human condition in developing countries. The causal links between trade and development are subject to dispute, but it is widely agreed that sustained and rapid expansion of international commerce creates a favourable environment for economic and human betterment. Despite the advantages of an open economy, regional trading arrangements have always had a number of intellectual attractions and practical schemes for regional integration have been created from time to time. Few have survived for long and only one, the European Community, can be said to have thrived.

    Many regional economic blocs have been formed as a reaction to actual or perceived unfavourable prospects for world trade. The decline in primary commodity prices in the 1920s followed by the Great Depression of the 1930s led to competitive devaluations, the construction of high tariff barriers to trade and the formation of regional currency and trading blocs. The results were a contraction of world trade, aggravation of the depression, a decline in living standards especially in the poorest regions of the world, and in the developed countries, the rise of authoritarian regimes. Protectionist policies continued after the Second World War, above all in developing countries, in part because it was believed that the commodity terms of trade were likely to move inexorably against developing countries, and growth in the volume of exports was unlikely to serve as an engine of growth.

    Protectionism in developing countries usually but not always centred on an individual state. That is, the protectionist walls coincided with national political boundaries. It was soon recognized however that especially in small countries, national protectionist policies entailed high costs in terms of economies of scale forgone, a generally inefficient cost structure, absence of competition, and a lower and more unequally distributed income. A number of countries, particularly in East Asia, responded by reducing protectionist barriers, introducing more discriminatory policy measures to support industrialisation and by adopting a more open economy strategy of development. Other countries, especially in Latin America and Africa, were more reluctant to move directly to multilateral trading arrangements and chose instead to form regional trading blocs. There are today approximately sixteen different regional trading schemes in the developing world. 42

    The point to be underlined is that the majority of the regional trading arrangements among developing countries were formed as a defensive reaction to real or imagined obstacles to an expansion of trade. That the regional blocs themselves were an obstacle to world trade is an irony that only became apparent later. The danger for the 1990s is that history could repeat itself. If the most important markets in the world, namely those of the developed countries, exhibit slow growth then this could result in (i) a deceleration of growth of production and trade worldwide; (ii) depressed levels of output, capacity utilisation, investment and employment in a great many parts of the world, particularly in those countries which have a relatively open economy; (iii) a further decline in the commodity terms of trade of primary producers; and (iv) extraordinarily high real rates of interest, a level of indebtedness in a score of countries that clearly is beyond their capacity to repay and a continuation of the large net transfer of resources from poor countries to rich.

    In other words, unless the global macroeconomy performs well there is a danger that the commonly held vision of globalization will become a mirage and the world economy will once again become fragmented, retreating into a defensive posture centred on regional groupings behind protectionist walls. Perhaps the most obvious groupings are (i) the European Community after 1992, probably enlarged beyond its present membership to include in some fashion parts of Eastern and Central Europe and the European Free Trade Association Countries (Austria, Finland, Iceland, Norway, Sweden and Switzerland); (ii) an East and Southeast Asian group centred on Japan and (iii) a North American group comprising the United States, Canada, probably Mexico and possibly parts of Central and South America as well.

    Whether or not the world economy fragments into three groups depends very much on the macroeconomic performance of the developed countries. The OECD countries have a special responsibility for sustaining global growth because they account for about three-quarters of world exports and world output.43 Because of the high weight of the OECD countries in trade and production, their performance is bound to affect growth, living standards and human development in poor countries. This does not mean that growth in the developed countries automatically trickles down to poor people in developing countries, but it does mean that given the global economic system, a fall in output in the developed countries, or even a slowing down of growth rates, can create serious difficulties in the developing world.

    If the developed countries as a whole pursue restrictive macroeconomic policies in the 1990s, as they did in the 1980s, perhaps because the struggle against inflation continues to be the highest priority, then it is likely that the rate of growth of the developed economies taken as a whole will continue to be modest. This could then lead to slow growth of world trade and this, in turn, could result in greater protectionism in the industrialised countries and movements toward regional groupings or blocs. Thus macroeconomic policies in the OECD countries are likely to determine the relative strength of the forces of globalization and regionalisation.

    Poor economic performance in the United States, recession and stagnation in the early years of the 1990s and the persistence of severe domestic and international imbalances have led to the beginning of a retreat from multilateralism and increasing reliance on unilateralism combined with bilateral negotiations with selected trading partners (Canada, Mexico, Israel) and competitors (Japan). At the same time the United States has adopted a unilateral interpretation of anti-dumping rules and other allegedly unfair trading practices and even gone so far, under the 1988 trade act's "super-301" procedure, as to draw up and publish its own list of countries with unacceptable foreign trade policies. This is perhaps merely an early warning of what could happen if the growth of world output and trade do not accelerate to something approaching the pace of the 1960s. Heightened economic conflict among the developed countries--"Japan bashing" and the like--cannot be ruled out for the 1990s. The dispute between the United States, on the one hand, and the European Community and Japan, on the other, over agricultural protectionism is possibly a harbinger of things to come.
 

Regional issues in Europe

    A specific issue is the attitude of the OECD countries toward assistance to Eastern and Central Europe and the republics of the former USSR now grouped together into a Commonwealth of Independent States (CIS). The Western European countries, led by Germany, France and Italy, are determined to do what they can to dampen political instability in Eastern and Central Europe and the CIS, prevent an economic collapse and thereby discourage a large number of workers from Eastern Europe from emigrating and seeking a better livelihood in the more advanced economies of Western Europe. Because of close proximity, Western Europe has a direct political and economic interest in the unfolding events in Eastern and Central Europe and Russia. The European Community has advocated a large foreign aid programme for the former Soviet bloc and agreed that it should be launched without delay.

    The United States, while prepared to offer technical assistance to support the reform process and limited amounts of humanitarian relief, has been sceptical of the need for large scale foreign assistance, particularly in the absence of a detailed plan for economic reform, and has been unwilling to commit itself to an aid programme for Russia and the other countries which have split off from the former Soviet Union. The position of Japan has been similar to that of the United States, with the added twist that Japan's cooperation depends upon settlement of its dispute with Russia over the Kurile Islands.

    There is thus a possibility that the OECD countries may not come to an agreement on policy toward Russia and Eastern Europe. If the United States and Japan remain aloof, the European Community may decide to go ahead on its own and address the trade and aid issues within a regional framework. If that should happen it is highly probable that European aid to the former Soviet bloc would be at the expense of aid to developing countries. Thus the developing countries may have greater self-reliance forced upon them whether or not they like it. More important, preferential trading access to the European Community by the former Soviet bloc countries is bound to have a significant negative impact on exports of manufactured goods from some developing countries since both groups of countries produce and export low and medium technology products.

    Thus it is in the interest of the developing countries that the problems of the former Soviet bloc be addressed within a global rather than a regional framework. Piecemeal aid and trade programmes designed to assist the former Soviet bloc should be examined for their implications for social and economic progress in the poor countries. Indeed the restructuring of the economies of Eastern and Central Europe, Russia and the other CIS countries and their integration into the global economy makes it even more important for the developing countries that world trade expand rapidly. If instead there is continued relatively slow growth of output and world trade, this may be used as an excuse by the developed countries to persist in discriminating against trade from developing countries, for example, by erecting more non-tariff barriers to trade or continuing "temporary" quota restrictions under the multi-fibre agreement, now eighteen years old.

    Nothing said above should be interpreted to imply that steps toward greater regional integration are always defensive in nature or a response to a poorly functioning global economy. In fact we shall give examples below of regional schemes being used as stepping stones to a more open economy. More generally, the formation or strengthening of regional groups may occur independently of trends in the world as a whole, but the form taken by regional integration may be affected by global trends. Regionalisation evidently is not a process with uniform characteristics. It comes in many shapes and sizes and responds to a variety of forces--cultural, political, military and economic--but the argument here is that the types of regional groups likely to be prominent in the decade or so ahead, and their consequences for human development, will depend in large part on whether or not globalization continues. For example, the European Community, whether or not it is enlarged, could become a "fortress Europe" after 1992 if intense competition in an environment of slowly growing world trade strengthens protectionist forces, but the European Community could equally well remain a relatively "open" regional grouping if rapid growth strengthens the political position of those who advocate free trade. Obviously, human development in poor countries would be better served by an open regional grouping in Europe than by a closed one.
 

Regional groupings among developing countries

    There has recently been a great revival of interest in regional groupings among developing countries, particularly in Latin America. This revival is taking place in a context of generally reduced tariff barriers and the construction of more open economy strategies of development. That is, reduced national protection and regional integration are advancing in parallel. Bolivia, Colombia, Ecuador, Peru and Venezuela intend to create an Andean Free Trade Zone in 1992 and an Andean Common Market by 1996. Argentina, Brazil, Paraguay and Uruguay are in the process of negotiating the formation of a Southern Cone Common Market (Mercosur) by 1995. The Central American Countries and Mexico aspire to a free trade agreement by 1996. Chile is the only large Latin American country that has not expressed interest in joining a regional group, preferring instead a fully open economy and free trade without regional discrimination.

    The United States has supported the various regional schemes in Latin America and has viewed them as steps to a free trade zone covering the entire Western hemisphere. Meanwhile, the US has entered into negotiations with Mexico to sign, with Canada, a North American Free Trade Agreement. In addition, the United States has proposed that a Multilateral Investment Fund be created to support economic reforms in Latin America. The size of the Fund would be $1.5 billion, to which Japan has promised to provide $500 million. This can be compared with the commitments in 1990-92 by the developed countries to Eastern and Central Europe and Russia of $42.6 billion in support of their reform efforts.

    The disparity of treatment is striking. The important point to note, however, is that regionalisation in Latin America in the 1990s is a step beyond economic nationalism and not, as in some earlier initiatives, an attempt to insulate vulnerable economies to shocks and unfavourable trends originating in the rest of the world. The success of this new approach will depend in part on whether the global economy grows at a rapid rate and this, in turn, depends, as we have seen, on the macroeconomic policies that are adopted in the developed countries.

    If the developed countries adopt a defensive posture and retreat into protectionism and relatively closed regional blocs of their own, this could have serious consequences for many developing countries, particularly small countries with open economies and those without privileged access to markets in developed countries. The economic distress suffered by Africa in the 1980s, partly as a result of the collapse of the terms of trade and the debt crisis, and the consequent disruption of long term programmes for human development is an illustration of what could happen. There is a possibility that the weakest of the developing countries could become further marginalised and indeed might become involuntarily de-linked from the rest of the world economy. Involuntary de-linking might induce many developing countries either to seek bilateral trading agreements among themselves (as was common in Latin America in the 1930s and 1940s) or to try to establish or strengthen trading blocs of their own of essentially a defensive nature. It would be a mistake to assume that if some countries become involuntarily de-linked from the world economy they will accept their fate passively and make no attempt to better their situation. We have mentioned a number of regional groupings in Latin America. There has been a similar revival of interest in Asia and Africa. The Association of South East Asian Nations (ASEAN) and the South Asian Association for Regional Co-operation (SAARC) between them cover virtually all of Asia east of Afghanistan. There are at least seven trading groups in Africa, of which SADCC is perhaps the most active. Historically, trade blocs in Asia and Africa have been short lived, have suffered from disputes over the division of benefits and have been prone to failure; their results have been generally disappointing. But if global economic conditions deteriorate, inward looking regional groupings could emerge. Indeed, as we have shown, the institutional framework already is in place.

    Inward looking economic development and defensive regional trading blocs are not necessarily incompatible with human development. China, after all, was essentially a closed economy for over three decades yet it managed to achieve remarkable progress. None the less, a flourishing global economy and a more open strategy by developing countries which does not discriminate against exports can create an environment that facilitates human development in countries otherwise predisposed to give it high priority.
 
 

Ocassional Paper 2 -    Globalization and the Developing World: An Essay on the International Dimensions of
                                       Development in the Post-Cold War Era

    We have argued that economic forces, loosely described as processes of globalization and regionalisation, are weakening the conventional territorial state from above. Globalization has reduced the power of the state to manage its economic affairs; national sovereignty in this sphere has been eroded. Other forces, which we shall loosely describe as subnationalism, have begun to erode the state from below, to challenge its political legitimacy and to threaten its territorial integrity. We thus have what could be called "a dialectic of subnationalism and supranationalism."44

    Subnationalism takes many forms but at the most general level all forms of subnationalism can be seen as manifestations of a search for community or identity different from the community or identity offered by shared citizenship of an existing state. In some cases the search has taken the form of a resurgence of religious identity, as in the revival of Islam in many parts of the world, the separatist movement by the Sikhs in north-western India and the emergence of Hindu nationalism in other parts of India. In some cases subnationalism centres at least in part on differences in language, as in French and English speaking Canada, the Basque movement in Spain and the language conflict between the Flamands and Wallons in Belgium.

    A number of examples can be cited of separatist national movements within existing multinational states: the struggle--now virtually accomplished--for Eritrean independence from Ethiopia, the recent disintegration of the USSR as a result of insistent demands for independence by the republics (Latvia, Lithuania, Estonia, Georgia, Ukraine, etc.), the declaration of independence by Slovenia and Croatia from Yugoslavia, the failed attempt of Biafra to secede from Nigeria, the separatist movements in Sri Lanka and the Sudan. Old empires as well as new states cobbled together by departing colonial administrations either have fallen apart or are in danger of falling apart because of subnationalist movements working from within. Cases can also be found of nationalist movements that cut across existing state boundaries and that ultimately aspire to create a new state of their own from portions of existing states. The movement for a greater Kurdistan--potentially absorbing territory from Iraq, Iran, Turkey and Syria--is an obvious example.

    The assertion of ethnic identities has in many countries replaced ideological differences as a major source of domestic conflict. Ethnicity is not of course a precise concept and those who march under a particular ethnic banner usually have in common a bundle of attributes--a shared history, language, religion and culture and usually also a common racial origin (itself an imprecise term). An arbitrary list of ethnic conflicts includes the conflict between Indians (imported as labourers by the British during the colonial period) and indigenous South Pacific islanders in Fiji, the conflict between Africans (originally imported as slaves) and South Asians in Guyana, between the Tutsi and Hutu in Burundi, between the Amerindians and those of European origin in Guatemala and Peru, between blacks and whites in South Africa, between the Malays and Chinese in Malaysia and so on.

    Ethnic identities and the clash of ethnic groups are not new of course, but the rise of ethnicity as a political force worldwide is recent, at least in its current form and intensity. Moreover, the end of the Cold War could well mean that the politics of ethnicity will increase in intensity in the years ahead. The same process of globalization that has undermined state power threatens to "unleash subterranean cultural pluralism."45 Ethnicity thus poses a challenge to global peace and stability, but the search for a new basis for community and group identity should also be seen as an opportunity--an opportunity for more self-determination, for people to choose the polity under which they live, an opportunity to enlarge personal and group freedoms. Freedom, choice, self-determination are integral to what is meant by human development and for this reason the attack on the state from below should not be seen as a subversive movement but as a process which in many places could contribute to increased human development.

    There is also however an ugly side to the rise of subnationalism--and this poses a danger to human development. We refer to the intolerance that sometimes accompanies the search for identity and a new community. At their best, ethnic and subnational movements are inclusive and sharing; they encourage participation and strong loyalties. At their worst, when carried to excess, they are narrow and exclusive, socially divisive and sources of communal strife. Thus human solidarity and its opposite are characteristic of subnational movements. The resurgence of anti-semitism in Eastern Europe, the rekindling of ancient hatreds between Serbs and Croats in Yugoslavia, the eruption of nationalist conflicts within the former Soviet Union, and the persistence of deeply entrenched animosities throughout the Middle East are but a few examples of the ugly face of subnationalism. The challenge before the world is to channel the forces driving subnationalism in a constructive direction, in the direction of freedom and self-determination.
 

Economics and subnationalism

    Subnationalist movements on balance, if they are successful, are likely to lead to a smaller size of state. That is, freedom in the sense of self-determination and small states are likely to go together. This does not imply of course that democracy is impossible in a large state,46 but it does call attention to the view that "participatory democracy puts severe constraints on the size of the polity."47 Given that this is so, it is natural to ask whether there is a conflict between the political desirability of small states and their economic efficiency. Are free people, organized into small polities likely to suffer from diseconomies of scale?

    It is certainly possible to imagine that small states would be at an economic disadvantage. The costs of public administration are likely to rise less than proportionately as the size of state increases. One head of state is needed whether the state be large or small, and the cost is unlikely to vary directly with the number of subjects or voters. A central bank, an array of ministries, a tax collecting bureaucracy, etc., will be needed by every country, but the costs to small countries may be disproportionately high. In other words, there may be economies of scale in providing the basic machinery of government. If so, small states will be at an economic disadvantage.

    They clearly are at an economic disadvantage when it comes to military power and warfare. The cost of maintaining armed forces capable of defending national frontiers is high and rising; a credible deterrent already is beyond the means of most small countries. This does not mean that all small states are incapable of defending themselves (Switzerland suggests otherwise), or that small states can never hope to defeat a major power (Vietnam shows that it can be done), but it does imply that insofar as military power is an objective, economic considerations tend to favour large states.

    There are also economies of scale in production. In developing countries falling unit costs are most apparent in the manufacturing sector, but they can also exist in services and agriculture, particularly in countries where relative factor prices make a high degree of mechanization profitable. If small countries have to rely on their domestic markets, they will be forced to operate sub-optimal units of production and average incomes will consequently be lower than would otherwise be the case. Low income, in turn, will make it more difficult to accelerate human development.

    It is here however that globalization meets subnationalism, that the attack on the state from above comes to the aid of the attack on the state from below. Liberalisation and the creation of an integrated global market make it possible for small states to exploit economies of scale in production. Only if economic policies favour autarky need small states pay a penalty in the form of reduced efficiency and lower incomes. Similarly, national alliances, collective security and international mechanisms for keeping the peace--still only embryonic--provide alternative ways for small states to achieve a degree of military security. Much more could be done at the international level to increase the security of small states--for example, international guarantees of national boundaries, compulsory international arbitration of disputes, internationally enforceable treaties by the International Court of Justice. If it did no more than establish a precedent that large states cannot invade small ones with impunity, the Gulf War, fought at least nominally under the authority of the United Nations, can be regarded as a step forward.

    Globalization has not yet significantly affected the administrative costs of statehood, but as we shall see in the next chapter there is considerable scope for improving global economic governance. Small states would benefit disproportionately from reforms in governance and since the majority of small states are developing countries, one can be fairly confident that small poor countries have the most to gain from international economic reform. Be that as it may, international free trade, effective global organisations and mechanisms that reduce the likelihood of armed conflict all permit and perhaps encourage a smaller size of state.48 Subnationalism and the search for an identity based on smaller communities are increasingly compatible with processes of globalization.
 
 

Ocassional Paper 2 -    Globalization and the Developing World: An Essay on the International Dimensions of
                                       Development in the Post-Cold War Era 

    Globalization, however, does imply a need for global economic management. If at one extreme globalization (in combination with subnationalism) has weakened the ability of the state to manage its national economy, at the other extreme it has begun to raise questions about how best to manage a truly global economy in the interests of all participating countries or, more accurately, in the interests of the world's people as a whole. It is evident that the existing international economic institutions were not designed to manage an integrated global economy, much less to manage it in the interests of the people as a whole, most of whom are very poor. Our international institutions are inter-governmental agencies, not supranational agencies. They were designed to serve a system of nation-states in which each state was assumed to be able to exercise sovereignty over its domestic economic affairs. The international institutions were intended essentially to smooth out the rough edges at the interface between states.

    The leadership of the United Nations system, including the international financial agencies, is selected and appointed by governments, with elaborate if informal geographical quotas and posts reserved for specific countries. 49 This procedure could perhaps be justified when the task of the leadership really was to smooth out the rough edges where the interests of a few major states rubbed up against one another, but globalization has changed all that and a new type of leadership and new selection procedures are urgently needed.50

    Also needed is a refocusing and reorganisation of the specialised agencies, the World Bank and the International Monetary Fund. The IMF, for instance, was never intended to become a world central bank, nor were the specialised agencies of the United Nations conceived as equivalents at the international level of functional ministries at the national level. The Secretary-General of the United Nations was not envisaged as directing a UN cabinet with global responsibilities for governance. Now, however, it is becoming widely recognized that the present structure is quite inadequate and that "the system-wide responsibilities and authority of the Secretary-General concerning interagency coordination and cooperation should be firmly established."51

    The Economic and Social Council of the United Nations never has played the role originally envisaged for it and a strong case can be made for strengthening and streamlining ECOSOC. At the very least the charter of the United Nations should be revised by deleting the amendments of 31 August 1965 and 24 September 1973 and thereby reducing the members of ECOSOC to a more manageable 18.52 ECOSOC should then be given responsibility for coordinating the implementation of the International Development Strategy, in which human development is a central plank, and monitoring its progress. While it might not have executive authority, it should be restructured so that it can exercise intellectual leadership in its areas of responsibility.

    The IMF and World Bank should become fully integrated into the United Nations system. If our proposals for the reform of international aid are accepted, the role of the World Bank would change radically. Its IDA functions could be replaced by a much smaller agency administering aid funds. It is not clear what role its IBRD functions might have in future but these should be separated from the functions of the proposed new agency administering aid funds. The IMF, in contrast, should be strengthened. A logical way to do this would be to expand the use of Special Drawing Rights (SDRs), first created in 1969, so that they become the key instrument in a new international reserve system. In order to increase the attractiveness of SDRs as a reserve asset, private institutions should in future be permitted to hold them.

    The agency responsible for international trade, the General Agreement on Tariffs and Trade (GATT), should be strengthened and transformed into an International Trade Organisation (ITO), as envisaged when the Bretton Woods system was designed. The ITO could then absorb the functions of the United Nations Conference on Trade and Development (UNCTAD). The central purposes of the ITO would be to maintain and enlarge the liberal trading environment, combat protectionist tendencies worldwide, prevent discrimination against trade from developing countries, counter the tendency for trade negotiations to be initiated by rich countries and conducted on a bilateral basis (U.S.-Japan; US-Mexico; US-EC) and to reestablish the centrality of multilateral as opposed to bilateral trade negotiations as the only effective way to take into account the interests of all people everywhere.

    The issues of global economic governance go beyond questions of human development, but if the global economy is poorly managed, the prospects for human development will be diminished. There is a real danger that as the process of globalization proceeds the existing set of international institutions will become increasingly ineffective and obsolete. We may soon reach a situation where no governmental organisation, be it national or international, is in effective control of global economic events and where no one can be held accountable for what happens in the global sphere. If this view is correct, then the issue of international governance is likely to command increasing attention and be high on the agenda in coming years.

    Although the Group of Seven (G-7: the US, Japan, Germany, France, the UK, Italy and Canada) can hardly be described as an institution of international governance, the G-7 is the closest thing we have at present to a forum where global economic issues are discussed and policies agreed. This clearly is unsatisfactory. The G-7 is a club of rich countries representing a minority of the world's population. It has no authority or indeed inclination to speak for the rest of the world or take their interests into account. Even if the G-7 were enlarged, e.g., to include Russia, it would not be an acceptable body to guide the world economy. Something more democratic, more stable and more professional is needed.

    Movement towards an effective system of global economic management is bound to be slow, although recognition is widespread that something is amiss with our system of international institutions. The pace of change almost certainly will be determined by the speed at which the advanced economies are prepared to move. Particularly in the case of the largest economies--the United States, Japan, Germany--the state still remains relatively strong and the benefits from participating in international economic institutions are relatively meager. The same once was true of the USSR, but recent events have shown that Russia and the other republics of the former Soviet Union are eager to join the World Bank and the IMF and become closely integrated into the global economy. Whatever finally emerges after the disintegration of the USSR and the creation of the CIS, closer integration into the world economy is certain. The United States for a long time enjoyed a commanding presence on the global scene and its wealth, military power and political prestige enabled it to exercise uncontested leadership in virtually all international organisations. This domination, however, gradually declined and with the decline came an erosion of interest in the United States in multilateralism. The Gulf War, however, perhaps only temporarily, and perhaps only for opportunistic reasons, led to a revival of interest in multilateralism in the United States.

    Looking ahead, there are three broad possibilities. First, the United States could continue to withdraw gradually its financial and political support from the existing international organisations. This could lead to the disintegration of the present system of international governance and to even greater anarchy than prevails at present. Such an outcome is plausible given the fact that the United States is $670 million in arrears on its payments to the United Nations, but it does not sit well with President Bush's statement to the U.S. Congress that, "We are now in sight of a United Nations that performs as envisioned by its founders."53 The President's statement suggests a greater inclination on the part of the US to engage with the UN, not the reverse, and it is perhaps this reading of events that emboldened the writers of the Stockholm Initiative to state:

Withholding contributions has become a destructive way for some to exercise influence. It must not pay not to pay. Those who choose not to adhere to the financial rules should be deprived of the right to vote, strictly in accordance with the UN charter.54

    The third possibility, and by far the most desirable one, is that a consensus could emerge in favour of reforming the existing institutions, and if necessary creating a few new ones, in order to strengthen the multilateral approach to international governance. The obsolescence of existing institutions urgently needs to be addressed, yet this must be done while recognising that several important states are unconvinced that their interests would be best served by transferring part of their increasingly nominal sovereignty to supranational institutions. The question therefore is not what would be the optimum or best international arrangements for managing a continuing process of globalization, for that is to seek a utopian solution. Rather one should pose a more modest question and ask what are the minimum changes needed to ensure that the system as a whole functions tolerably well. This minimum should include provision for a greater voice, not of poor countries but of poor people. Of course, there is no guarantee that the minimum changes needed to create an effective system will be politically acceptable to the advanced countries; they may well be rejected, at least for the time being. In that case it is likely that globalization may not continue to function tolerably well. This then raises the possibility that the process of globalization may be reversed, that protectionism will increase significantly and that regional groupings may re-emerge or new blocs be formed. If regionalisation becomes a defensive strategy by advanced economies rather than a step toward multilateralism by developing economies, the prospects for global economic expansion will be harmed and human development in the poorest countries may be retarded.

Ocassional Paper 2 -    Globalization and the Developing World: An Essay on the International Dimensions of
                                       Development in the Post-Cold War Era 

    Human development, the reduction of poverty and increased output of essential goods and services largely depend on national efforts. Given the organisation of the globe into sovereign states, the impact of international policies and measures cannot be decisive, although a supportive international environment can make a contribution, occasionally a large contribution, when national policy makers attach high priority to human development. It must be said straight away that despite criticism in specific cases and many general qualifications, individual states, operating largely on their own, have not done too badly when their performance is viewed from a global perspective.

    The quality of life of hundreds of millions of people has improved; living standards have risen; human development has occurred. One indication of progress is the reduction in the incidence of world poverty. Table 10.1 contains information on the number of persons living in poverty in 1970 and 1985 in the developing countries as a whole, excluding China. It can readily be seen that during that fifteen year period the number living in poverty, i.e., the number whose income was insufficient to provide a minimum adequate diet and essential non-food needs, increased by 212 million. Although most of the poor continue to live in rural areas, nearly 61 per cent of the increase in poverty occurred in urban areas.
 
 

Note: China is excluded from the calculations.
Source: Deonanan Oodit, "Persistent Poverty: A Brief Examination of Causes and Possible Cures," UN, DIESA, Working Paper No. 15, January 1991, Table 1, p. 19.

    This is the context in which we should examine international policies to ensure that at the global level, opportunities for human development are distributed more evenly and equitably. Our recommendations for restructuring the international economic system are organised below into five subject areas: international trade policies; international capital movements; international flows of labour; self-determination and international governance; and action by developing countries.
 

International trade policies

    The developed countries have a responsibility to the world as a whole to adopt macroeconomic policies that encourage an expansion of world trade and create conditions that are favourable to sustained rapid growth of the global economy. Although we have seen that growth in rich countries does not automatically trickle down to the poor in developing countries, stagnation of the global economy makes it difficult to implement national policies which, when aggregated across countries, result in greater human development and less poverty and misery.

    As noted in Chapter 1, even the optimistic estimates of the World Bank show that increased growth in rich countries is not translated into an equivalent increase in growth in developing countries. The elasticity of third world growth with respect to OECD growth should be raised by adopting appropriate policies, two of which we discuss below.

    First, we have shown in Chapter 1 that there was a tendency during the 1980s for the OECD countries to increase their non-tariff protection and to bias protection specifically against exports from developing countries. The potential benefits to the developing countries of this protection being removed exceeds by far the amount of foreign assistance received by poor countries. The point is well made in the Stockholm Initiative on Global Security and Governance:

The protectionism of industrial nations is today costing the developing countries much more than they receive in aid. The potential annual gains of fully liberalized world trade in two areas, agriculture and textiles, have been estimated at 100 billion and 50 billion dollars, respectively. Together this is about three times the annual amount of development assistance provided by the industrial countries.56

International capital movements

    There are a number of steps that could be taken to help international capital flows contribute more directly to human betterment. First, the foreign debt problem of the developing countries must be resolved. This is in the common interest of poor and rich countries alike and merits high priority. All or at least a substantial part of the foreign debt of the most severely indebted developing countries should be cancelled, and real rates of interest on the remaining debt lowered and repayments rescheduled. There are a number of ways by which the indebtedness of poor countries could be reduced. The problem is that so far few creditor countries and institutions have believed it was in their interests to do so.

    A possible breakthrough occurred in March 1991 when the Paris Club of Western creditor governments agreed to reduce by half Poland's official debt of approximately $33 billion. This is by far the most generous cancellation of government-to-government debt since the onset of the debt crisis and the agreement is certain to strengthen the bargaining position of developing countries in future debt negotiations. Hence the agreement is to be welcomed. None the less, it is discomforting that this precedent for slashing outstanding debt by 50 per cent should be established in a relatively well-off country rather than in one of the poorest developing countries. Poland's per capita GNP in 1989, for example, was more than five times that of Sub-Saharan Africa ($1790 as compared to $340) and thus it is not clear why Poland should be singled out for uniquely generous treatment. Evidently, a more orderly, less ad hoc approach to debt relief would be desirable.

    Be that as it may, once the debt problem is resolved and the world once again moves towards greater multilateralism in trade negotiations and greater liberalisation of international economic relations, movements of commercial capital, both loans and equity capital, may begin to flow in significant volume toward the developing countries. Policy reforms in both developed and developing countries could help this by reducing incentives for capital flight. More realistic exchange rates in developing countries, the introduction of withholding taxes on interest earned by foreign owned deposits in developed countries and closer supervision of international commercial banks are some of the policies that deserve high priority.

    The most important issue linking human development and international capital revolves around the role of foreign aid. Foreign aid includes the highly concessional loans and outright grants to developing countries from the OECD and other rich countries, channelled both bilaterally and through multilateral development agencies such as the World Bank and the Regional Development Banks. It is often taken for granted that foreign assistance actually assists developing countries. Often, alas, this is not the case. The Committee for Development Planning reflects an emerging consensus when it states that far too much aid serves no developmental purpose but is used instead to promote the exports of the donor country, to encourage the use of (imported) capital-intensive methods of production or to strengthen the police and armed forces of the recipient country.57

    But while agreeing that much aid in the past has been wasted, there is evidence that when donor and recipient act responsibly, foreign aid can indeed be of benefit.

    The first thing that needs to be done is to depoliticise aid by bringing it under the control of a supranational authority operating under clearly defined and agreed principles. These principles should include both the mobilisation and allocation of aid funds. It may be too much to expect that the leading donor countries would agree to channel all foreign assistance through a supranational authority, but it should be possible to reach agreement to channel most foreign aid through such an authority while leaving individual countries free to supplement multilateral assistance with bilateral programmes if they wish to do so. This would not be a radical departure from present practice although it would change the balance decisively in favour of multilateral assistance.

    Agreement among donors might be facilitated if it were understood that all multilateral aid would be allocated to countries representing the poorest 60 per cent of the world's population. This implies that only countries with a per capita income of about $700 or less would be eligible for assistance. Having determined which countries are eligible, the next step is to agree on how the available funds would be distributed among the recipients. We suggest that the criteria for determining the amount of aid to be allocated to eligible countries reflect (i) the severity of poverty as measured by the shortfall of real per capita income from the agreed threshold of $700; (ii) the degree of commitment to human development as demonstrated by recent success and current programmes; and (iii) the size of the population.

    The desired total amount of foreign aid available for distribution might be set as an agreed proportion of the combined GNP of all potential recipients. The burden of financing this total should be distributed among the donor countries progressively so that a richer country contributes a higher proportion of its per capita income than a less rich country. This would make the total volume of aid predictable and the distribution of its burden among the contributors equitable.

    Consider the following illustration of possible orders of magnitude implied by our proposal. Assume the objective of international aid is to augment the resources of eligible recipients by 5 per cent of their combined GNP. 58 In 1989 this would have implied a total aid fund of $52 billion, a sum equivalent to only 0.35 per cent of the GNP of the OECD countries in that year. This is about the proportion of income currently devoted to official development assistance in the OECD countries and much less than the proportions that prevailed during the 1960s. Under our scheme aid contributions would fall within a range of say 0.25 per cent of GNP for Ireland to 0.45 per cent of GNP for Switzerland. These ratios are much lower than the 0.7 per cent target set by the world community several decades ago, a target that has never come close to being achieved.

    What is important about the suggested scheme is that while the volume of aid would not be huge, the method of generating resources and distributing aid would alter radically. Aid would be distributed as grants to the countries where the poorest 60 per cent of the world's population lives and would be allocated among recipient countries according to predetermined criteria administered by the United Nations. Moreover, there would be no uncertainty about the availability of the total volume of foreign assistance. The merits of the scheme are obvious. Aid would be depoliticised. There would be a strong incentive to make good use of aid to promote human development. The volume of external resources available for poor countries would be relatively stable and the burden of accelerating world development would become more equitable than it is today.

    If this scheme were implemented the concessional aid windows of the World Bank and the Regional Development Banks would cease to play a role. These institutions would either have to disappear or redefine their functions.

    There would still be a need for technical assistance in support of human development. It is unrealistic, at least in the short run, to expect developing countries to purchase on the open world market any technical assistance they might need, using national funds as well as those provided under a reformed international assistance programme. The continuation of an international technical assistance programme would in any case be desirable as a way of promoting international flows of knowledge among developing countries, something that unguided markets could not achieve alone.

    United Nations technical assistance programmes however should be reviewed and reorganised. Free technical assistance should be available only to those countries eligible for international aid. Technical assistance projects should be directed toward and actively promote the well-being of the poor and, at the very least, they should ensure that their projects do not actually harm the poor. The responsibilities of the specialised UN bodies providing technical assistance should be carefully reviewed to remove overlapping functions; low priority activities should be discontinued and those activities which contribute to human development should be strengthened.

International flows of labour

    There are many restrictions on the free flow of labour, particularly the migration of low skilled labour from poor countries. Yet the potential benefits to poor countries, and to the poorest people in poor countries, of a relaxation of immigration controls in rich countries are considerable. The migrants would benefit directly by an improved standard of living. Their kinfolk left behind would benefit from the remittances received. And the developing countries as a group would benefit when the migrants return with new useful skills and generally enhanced human development.

    A study of Egypt revealed that 64 per cent of the overseas migrants were peasant farmers or agricultural labourers with little or no education. Yet their remittances reduced the number of households living in poverty by 9.8 per cent and raised the per capita income of the migrants' households by 14.7 per cent. A large share of remittance income was devoted to investment.59

    Evidence such as this lends support to the recommendation that restrictions on the free flow internationally of low skilled labour be reduced substantially. More liberal migration policies in rich countries can help to create greater equality of opportunity for people everywhere and can contribute mightily to human development in developing countries.

Self-determination and international governance

    Globalization and the weakening of the state have been accompanied by the rise of many subnationalist movements. These movements are complex and take many forms, but they can be seen as a search for a community or identity different from the community or identity offered by shared citizenship of an existing state. Subnationalist movements have many objectives, one of which often is self-determination.

    This issue may appear somewhat distant from the objectives of human development. But the rise of subnationalist movements is so pervasive in many regions of the world today that a global programme for human development cannot ignore it. A failure to address this powerful force sensitively and intelligently could result in a catastrophic derailment of human development programmes in several regions.

    Participation, self-determination, freedom are all aspects of the wider notion of human development. Insofar as specific subnationalist movements embrace these ideals, they should be welcomed by the global community and ways should be found to adjust existing concepts of national integrity so as to reconcile the aspirations of subnationalist groups with the realities of state power.

    If successful, subnationalist movements are likely to result in a growth in the number of small states and autonomous political entities. The economic success of small states will depend in future, as it has in the past, on access to the global economy for trade and technology and possibly also for capital and as a vent for surplus labour. The processes of globalization described earlier increase the likelihood of success by reducing the economic costs of political self-determination. Small states, both those that already exist and others that might come into being, have a particularly high stake in the recommendations dealing with the reform of international trade policies, foreign aid and the free international movement of labour. In addition, in order to enable small states to avoid the heavy burden of defense expenditures, measures should be implemented to increase global political and military security. Such measures could include international guarantees of national boundaries, compulsory international arbitration of disputes and internationally enforceable treaties by the International Court of Justice.

    The combination of globalization and the growing strength of various subnationalisms implies a need for global economic management in the interests of the people of the world as a whole. Our present international institutions do not meet this need, in large part because they are inter-governmental agencies without a significant element of supranationalism. Issues of global economic governance are likely to come to the fore during this decade and the emphasis now being placed on human development will underline further the need to seek effective solutions.

    The need to introduce an element of supranationalism into global institutions makes it more important than ever that leadership positions be filled democratically and that the heads of international agencies be more accountable to world public opinion. The Secretary-General of the United Nations should be given system-wide authority, including authority over the system's financial institutions. He should have the power to set in motion a profound reorganization of the existing international agencies either individually or collectively. ECOSOC should be strengthened and streamlined and the number of members reduced to 18. It should be given responsibility for exercising intellectual leadership in the economic and social fields and for implementing the International Development Strategy, in which human development figures prominently. Many of the activities of the specialised agencies directly concerned with human development--WHO, UNESCO, FAO and ILO--deserve to be preserved, but there is plenty of scope to change the balance of activities within each agency. There is also a case for merging the GATT and UNCTAD and creating a new International Trade Organisation. Finally, personnel recruitment into the United Nations system should be freed from government quotas and political control by member states.
 

Action by developing countries

    The developing countries have an important role to play in creating an international order that is more compatible with rapid human development. Extensive changes in their own policies and actions will be required to complement changes introduced in the developed countries. Most important, the developing countries should continue the reforms of their foreign trade regimes by adopting and maintaining realistic exchange rates and by reducing arbitrary physical controls which result in irrational patterns of effective protection and generally high overall rates of protection. This would help promote greater efficiency in the use of domestic resources, a faster rate of growth of exports, a reduction in incentives encouraging capital flight and a removal of some impediments to capital inflows to finance direct foreign investment. It would also result in an improved distribution of income.

    Developing countries should intensify their pursuit of higher growth with greater equity. This can be done by improving the efficiency of investment and by mobilising additional resources for capital formation, physical and human. Countries confronting a structural imbalance of their external sector have no alternative but to give high priority to stabilisation. While it is unrealistic to expect that stabilisation can be painless for everyone, the evidence suggests that it is possible to combine stabilisation with protection of the poor and preservation of human development achievements.

    Some developing countries may wish to create mechanisms for financing joint ventures and coordinating international specialisation among themselves while others may seek out opportunities for regional cooperation and trade liberalisation within a restricted group. Regional groups of developing countries may be able to make a positive contribution, but the developing world as a whole would not benefit from the fragmentation of the world trading system into protected regional trading blocs. Developing countries should be firmly on the side of multilateralism.

Footnotes:

42: Committee for Development Planning, Regional Trading Blocs: A Threat to the Multilateral Trading System?, New York: United Nations, 1990, table on pp. 26-7.

43: According to World Bank data published in the World Development Report 1990, the OECD countries in 1988 accounted for 77.1 per cent of exports from 121 countries and 79.3 per cent of the GDP of these countries. The World Bank's data, however, exclude the USSR and some Eastern and Central European countries and hence the percentages slightly overstate the weight of the OECD countries in the world economy.

44: James H. Mittelman, "The End of a Millennium: Changing Structures of World Order and the Challenges of Globalization," a paper delivered to the Dalhousie University Workshop on "Political Economy and Foreign Policy in the Third World in the 1990s," Halifax, Nova Scotia, September 26-28, 1991.

45: Ibid., p. 10.

46: Still less does it imply that democracy is inevitable in small states.

47: Donald Wettman, "Nations and States: Mergers and Acquisitions; Dissolutions and Divorce," American Economic Review, May 1991, p. 126.

48: This point also is made in Donald Wettman, ibid., p. 129.
49: The head of the World Bank, for example, has always been a US citizen.

50: A number of constructive suggestions are made in Brian Urquhart and Erskine Childers, A World in Need of Leadership: Tomorrow's United Nations, Upsala, Sweden: Dag Hammarskjold Foundation, 1990.

51: The Stockholm Initiative on Global Security and Governance, Common Responsibility in the 1990s, Stockholm, Sweden: Prime Minister's Office, 1991, p. 38.

52: See Maurice Bertrand, "The Role of the United Nations in the Economic and Social Fields," Journal of Development Planning, No. 17, 1987 and John P. Renninger, "Improving the United Nations System," Journal of Development Planning, No. 17, 1987.

53: Speech to the U.S. Congress, 11 September 1990.

54: The Stockholm Initiative on Global Security and Governance, op. cit., p. 39.

55: United Nations, General Assembly, International Development Strategy for the Fourth United Nations Development Decade, A/RES/45/199, 4 April 1991. 

56: The Stockholm Initiative on Global Security and Governance, op. cit., p. 23.

57: Committee for Development Planning, Regional Trading Blocs: A Threat to the Multilateral Trading System?, United Nations, New York, 1990, p. 38.

58: In 1989 the average saving rate of the low income countries was 26 per cent of GNP. This average was however raised by the very high saving rate of China (36 per cent) and the relatively high saving rate of India (21 per cent). For the low income countries other than India and China the average saving rate was 18 per cent of GNP. Thus the investment resources of a typical low income country other than China and India would be augmented by 28 per cent by the suggested programme.

59: Richards H. Adams, Jr., The Effects of International Remittances on Poverty, Inequality and Development in Rural Egypt, Washington, International Food Policy Research Institute, 1991. World Bank, Global Economic Prospects and the Developing Countries, Washington, D.C., May 1991, p. 68.