Global governance

and policy space for

development

TRADE AND DEVELOPMENT REPORT, 2014

EMBARGOThe contents of this Report must not be

quoted or summarized in the print,

broadcast or electronic media before

10 September 2014, 17:00 hours GMT

U N I T E D N AT I O N S C O N F E R E N C E O N T R A D E A N D D E V E L O P M E N T

UNITED NATIONS CONFERENCE ON TRADE AND DEVELOPMENTGENEVA

TRADE AND DEVELOPMENTREPORT, 2014

Report by the secretariat of theUnited Nations Conference on Trade and Development

UNITED NATIONSNew York and Geneva, 2014

• Symbols ofUnitedNations documents arecomposed of capital letters combinedwithfigures.MentionofsuchasymbolindicatesareferencetoaUnitedNationsdocument.

• ThedesignationsemployedandthepresentationofthematerialinthispublicationdonotimplytheexpressionofanyopinionwhatsoeveronthepartoftheSecretariatoftheUnitedNationsconcerning the legal status of any country,territory,cityorarea,orofitsauthorities,orconcerningthedelimitationofitsfrontiersorboundaries.

• Material in this publicationmay be freelyquoted or reprinted, but acknowledgementisrequested,togetherwithareferencetothedocumentnumber.AcopyofthepublicationcontainingthequotationorreprintshouldbesenttotheUNCTADsecretariat.

Note

UNCTAD/TDR/2014

UNiTeDNATioNSPUbliCATioN

Sales No.e.14.ii.D.4

iSbN978-92-1-112877-2 eiSbN978-92-1-056846-3

iSSN0255-4607

Copyright©UnitedNations,2014Allrightsreserved

iii

Explanatory notes .......................................................................................................................................ix

Abbreviations ...............................................................................................................................................x

OVERVIEW ......................................................................................................................................... I–XIV

Trade and Development Report, 2014

Contents

Page

Chapter I

Recent tRends in the WoRld economy ............................................................................... 1

A. Global growth ........................................................................................................................................ 1 1. Developedcountries .......................................................................................................................... 1 2. Developingandtransitioneconomies ................................................................................................ 3

B. international trade ................................................................................................................................ 4 1. Tradeingoods ................................................................................................................................... 4 2. Services ............................................................................................................................................. 6 3. Tradeandgrowth ............................................................................................................................... 7

c. Recent developments in commodity markets ..................................................................................... 8

notes ........................................................................................................................................................... 13

References .................................................................................................................................................. 14

Chapter II

toWARds A sustAined economic RecoveRy: RevieW of Policy oPtions ......... 15

A. Policy threats to a global economic recovery ................................................................................... 16 1. Policystancesinthedevelopedworld ............................................................................................ 16 2. Policystancesindevelopingandemergingeconomiesinacontext

ofgrowingvulnerabilitytoexternalshocks ................................................................................... 23 3. Currentpoliciesandoutcomesfromaglobalperspective .............................................................. 29

b. economic policies for a sustained global recovery........................................................................... 30 1. Policiesandoutcomes ..................................................................................................................... 30 2. Summingup:Theneedforpolicyconsistencyandmacroeconomiccoherence ............................. 34

notes ........................................................................................................................................................... 37

References .................................................................................................................................................. 39

iv

Page

Chapter III

Policy sPAce And GloBAl GoveRnAnce: issues At stAke .......................................... 43

notes ........................................................................................................................................................... 49

References .................................................................................................................................................. 49

Chapter IV

Policy sPAce And the oRiGins of the multilAteRAl economic system ........ 51

A. introduction ......................................................................................................................................... 51

B. debates on the emerging international economic order in the mid-twentieth century ................ 53 1. Theriseandfalloftheinter-warliberalpolicyagenda ................................................................... 53 2. internationalizingtheNewDeal ...................................................................................................... 55

c. development voices ............................................................................................................................. 59 1. Pursuingadevelopmentagenda ...................................................................................................... 59 2. FromaninternationalNewDealtotechnocraticmultilateralism .................................................... 61

d. the unsteady rise of inclusive multilateralism ................................................................................. 64

e. Profitsandpolicies:Thedangersofamnesicglobalization ............................................................ 68

notes ........................................................................................................................................................... 71

References .................................................................................................................................................. 74

Chapter V

tRAde And industRiAl Policies in An evolvinG GloBAl GoveRnAnce ReGime .................................................................................................... 77

A. introduction ......................................................................................................................................... 77

B. the evolving global governance framework: implications for national trade and industrial policies ......................................................................................................................... 80

1. Multilateraltradeagreements:Constraintsonpolicychoicesandremainingflexibilities .............. 82 2. Regionaltradeagreements:Additionalconstraintsonpolicychoices ............................................ 86 3. Therisingrestrictivenessofpolicycommitmentsandinternationalproductionnetworks ............. 89

c. industrial policy in an era of reduced policy space ......................................................................... 92 1. Recentproactivepoliciesforreindustrializationindevelopedeconomies ..................................... 93 2. Developingcountries:Recentexperienceswithnationalpoliciesforindustrialdevelopment ....... 96

v

Page

d. current challenges to proactive trade and industrial policies ...................................................... 100 1. Apotentialdeclineindevelopingcountries’exportopportunities ................................................ 100 2. Productionnetworksandtheroleofindustrialpolicies ................................................................ 103

e. conclusions ........................................................................................................................................ 107

notes ......................................................................................................................................................... 108

References ................................................................................................................................................ 114

Chapter VI

inteRnAtionAl finAnce And Policy sPAce ...................................................................... 121

A. introduction ....................................................................................................................................... 121

B. Capitalmanagementinaneraofglobalizedfinance ..................................................................... 123 1. Capitalflowsandtheirimpactonmacroeconomicpolicyspace ................................................... 123 2. Theneedforpolicyspaceforcapitalcontrols ............................................................................... 127 3. Macroprudentialregulationandcapitalmanagement .................................................................. 130

c. Policy space with regard to foreign investment ............................................................................. 135 1. investmentprotectionrules ........................................................................................................... 136 2. Thecurrentdebateoninvestmentprotectionrulesandpolicyproposals ...................................... 141

d. summary and conclusions ............................................................................................................... 145

notes ......................................................................................................................................................... 147

References ................................................................................................................................................ 151

Annex to chapter VI

do Bilateral investment treaties Attract fdi flows to developing economies? ............................. 155

Chapter VII

fiscAl sPAce foR stABility And develoPment: contemPoRARy chAllenGes ................................................................................................... 161

A. introduction ....................................................................................................................................... 161

B. DevelopmentalStatesandtheirfiscalspace ................................................................................... 163 1. DevelopmentalStates .................................................................................................................... 163 2. long-termfiscaltrends .................................................................................................................. 164 3. Compositionofpublicrevenueandfiscalspace ........................................................................... 168

vi

Page

c. tax leakage and international governance of taxation .................................................................. 171 1. Keyconcepts .................................................................................................................................. 171 2. Cross-bordertaxdodgingmechanisms .......................................................................................... 173 3. Magnitudeandimpactofinternationaltaxabusesonmobilizationofpublicrevenue ................ 175 4. Recentattemptstotackleinternationaltaxleakages ..................................................................... 176

d. Improvingpublicrevenuemobilizationfromtheextractiveindustries ...................................... 180 1. Fiscalregimesandtaxincentivesintheextractiveindustries ....................................................... 180 2. Distributionofrentsintheextractiveindustries .......................................................................... 184 3. Recentinitiativesrelatedtotaxationintheextractiveindustries .................................................. 186

e. summary and conclusions ............................................................................................................... 192

notes ......................................................................................................................................................... 195

References ................................................................................................................................................ 200

vii

List of tables and boxes

Table Page

Box Page

5.1 Structuraltransformationindevelopingcountries:Theroleofthemanufacturingsector ........... 81

1.1 Worldoutputgrowth,2006–2014 ................................................................................................... 2

1.2 exportandimportvolumesofgoods,selectedregionsandcountries,2010–2013 ....................... 5

1.3 Worldprimarycommodityprices,2008–2014 ............................................................................. 10

2.1 exportconcentrationindex,selectedcountries,2003–2012 ........................................................ 29

2.2 Mainassumptionsofthemodelsimulationsinselectedregionsandcountries,1990–2024 ....... 32

2.3 GDPgrowthinselectedregionsandcountries,1990–2024 ......................................................... 33

2.4 Financialvariablesforselectedregionsandcountries,1990–2024 ............................................. 35

6.A.1 Regressionresults,1985–2012 ................................................................................................... 158

7.1 Shareofgovernmentrevenuesinrentsfromtheextractiveindustries,selectedcommoditiesandcountries,2004–2012 ....................................................................... 185

7.2 examplesofrevisionsintheregulatoryandfiscalregimesfortheextractiveindustries .......... 188

viii

List of charts

Chart Page

1.1 Monthlycommoditypriceindicesbycommoditygroup,Jan.2002–June2014 ............................ 9

2.1 Changeinrealgovernmentexpenditure,selecteddevelopedcountries,2010Q2–2013Q4 ........................................................................................................................ 17

2.2 Changesinrealunitlabourcostsandexports,selectedeuropeancountries,2010Q3–2013Q4 ........................................................................................................................ 18

2.3 RealGDP,realunitlabourcostandratioofimportstoexportsineurope,2009Q4–2013Q4 ........................................................................................................................ 19

2.4 labourincomeshareinGDP,selecteddevelopedcountries,1990–2013 .................................... 20

2.5 Assetprices,changeinhouseholdexpenditure,andhouseholdborrowingandnetfinancialsavingsintheUnitedStatesandtheUnitedKingdom ...................................... 22

2.6 ContributionofdomesticdemandandnetexportstorealGDPgrowth,selectedcountries,2011–2013 ...................................................................................................... 24

2.7 labourincomeshareinGDP,selecteddeveloping-countrygroups,1990–2012 ......................... 25

2.8 Totalassetsofmajorcentralbanksandglobalstockmarketindex,Jan.2009‒Dec.2013 .................................................................................................................... 26

2.9 Sovereignbondyieldspreads,selecteddevelopingandtransitioneconomies,2007Q4‒2014Q2 ........................................................................................................................ 27

2.10 Capitalinflowstotheprivatebankingsectorandstockmarketindices,selecteddevelopingandtransitioneconomies,2005Q1–2013Q4 .............................................. 28

5.1 GDPandimportvolumegrowth,developedeconomies,2001–2013 ........................................ 102

5.2 Developedeconomies’GDPgrowthanddevelopingeconomies’exportgrowth,2000–2013 .................................................................................................................................. 103

6.1 Capitalinflows,2007Q1–2013Q3 ............................................................................................ 124

7.1 RelationshipbetweengovernmentrevenuesandpercapitaGDP,2012 .................................... 165

7.2 Governmentrevenuesbysource,selectedcountrygroups,1991–2012 .................................... 167

ix

Classification by country or commodity group

The classification of countries in thisReport has been adopted solely for the purposes of statistical oranalyticalconvenienceanddoesnotnecessarilyimplyanyjudgementconcerningthestageofdevelopmentofaparticularcountryorarea.Themajor country groupings used in thisReport follow the classification by theUnitedNationsStatisticaloffice(UNSo).Theyaredistinguishedas:

» Developedorindustrial(ized)countries:thecountriesmembersoftheoeCD(otherthanMexico,theRepublicofKoreaandTurkey)plustheneweUmembercountriesandisrael.

» TransitioneconomiesreferstoSouth-easteuropeandtheCommonwealthofindependentStates(CiS).

» Developingcountries:allcountries,territoriesorareasnotspecifiedabove.

Theterms“country”/“economy”refer,asappropriate,alsototerritoriesorareas.

References to “latinAmerica” in the text or tables include theCaribbean countries unless otherwiseindicated.

Referencesto“sub-SaharanAfrica”inthetextortablesincludeSouthAfricaunlessotherwiseindicated.

Forstatisticalpurposes, regionalgroupingsandclassificationsbycommoditygroupused in thisReportfollowgenerallythoseemployedintheUNCTAD Handbook of Statistics 2013(UnitedNationspublication,salesno.b.13.ii.D.4)unlessotherwise stated.Thedata forChinadonot include those forHongKongSpecialAdministrativeRegion(HongKongSAR),MacaoSpecialAdministrativeRegion(MacaoSAR)andTaiwanProvinceofChina.

Other notes

ReferencesinthetexttoTDRaretotheTrade and Development Report(ofaparticularyear).Forexample,TDR 2013referstoTrade and Development Report, 2013(UnitedNationspublication,salesno.e.13.ii.D.3).

Theterm“dollar”($)referstoUnitedStatesdollars,unlessotherwisestated.Theterm“billion”signifies1,000million.Theterm“tons”referstometrictons.Annualratesofgrowthandchangerefertocompoundrates.exportsarevaluedFobandimportsCiF,unlessotherwisespecified.Useofadash(–)betweendatesrepresentingyears,e.g.1988–1990,signifiesthefullperiodinvolved,includingtheinitialandfinalyears.Anobliquestroke(/)betweentwoyears,e.g.2000/01,signifiesafiscalorcropyear.Adot(.)indicatesthattheitemisnotapplicable.Twodots(..)indicatethatthedataarenotavailable,orarenotseparatelyreported.Adash(-)orazero(0)indicatesthattheamountisnilornegligible.Decimalsandpercentagesdonotnecessarilyadduptototalsbecauseofrounding.

Explanatory notes

x

Abbreviations

AfDb AfricanDevelopmentbankAGP AgreementonGovernmentProcurementbePS baseerosionandprofitshiftingbiS bankforinternationalSettlementsbiT bilateralinvestmenttreatyCiS CommonwealthofindependentStatesCPi consumerpriceindexDSM disputesettlementmechanismeClAC economicCommissionforlatinAmericaandtheCaribbeaneiTi extractiveindustriesTransparencyinitiativeeU europeanUnionFATCA ForeignAccountTaxComplianceAct(oftheUnitedStates)FDi foreigndirectinvestmentFeT fairandequitabletreatmentFTA freetradeagreementGATS GeneralAgreementonTradeinServicesGATT GeneralAgreementonTariffsandTradeGDP grossdomesticproductGPM GlobalPolicyModel(oftheUnitedNations)GSP GeneralizedSystemofPreferencesGTA GlobalTradeAlertibRD internationalbankforReconstructionandDevelopmentiCSiD internationalCentreforSettlementofinvestmentDisputesiFF illicitfinancialflowsiiA internationalinvestmentagreementilo internationallabourorganizationiMF internationalMonetaryFundiP intellectualpropertyiPR intellectualpropertyright

xi

iSDS investor-StatedisputesettlementiTo internationalTradeorganizationlDC leastdevelopedcountryMDG MillenniumDevelopmentGoalMeRCoSUR CommonMarketoftheSouth(MercadoComúndelSur)MFN mostfavourednationNAFTA NorthAmericanFreeTradeAssociation(orAgreement)NAMA non-agriculturalmarketaccessoDA officialdevelopmentassistanceoeCD organisationforeconomicCo-operationandDevelopmentoFC offshorefinancialcentrePPP purchasingpowerparityPWYP PublishWhatYouPayR&D researchanddevelopmentRTA regionaltradeagreementSCM subsidiesandcountervailingmeasuresSDT specialanddifferentialtreatmentTARP TroubledAssetsReliefProgramTDR TradeandDevelopmentReportTJN TaxJusticeNetworkTNC transnationalcorporationTRiMs trade-relatedinvestmentmeasuresTRiPS trade-relatedaspectsofintellectualpropertyrightsUNCiTRAl UnitedNationsCommissiononinternationalTradelawUNCTAD UnitedNationsConferenceonTradeandDevelopmentUN-DeSA UnitedNationsDepartmentofeconomicandSocialAffairsURA UruguayRoundAgreementVAT valueaddedtaxWTo WorldTradeorganization

I

OVERVIEw

Fifty years ago this year, and twenty years after a new multilateral framework for governing the post-war global economy was agreed at Bretton Woods, a confident South gathered in Geneva to advance its demands for a more inclusive world economic order. The first United Nations Conference on Trade and Development (UNCTAD) added a permanent institutional fixture to the multilateral landscape, with the responsibility “to formulate principles and policies on international trade and related problems of economic development”. Moreover, and moving beyond the principles that framed the Bretton Woods institutions (and later the General Agreement on Tariffs and Trade (GATT)), it was agreed that “Economic development and social progress should be the common concern of the whole international community, and should, by increasing economic prosperity and well-being, help strengthen peaceful relations and cooperation among nations”.

UNCTAD’s 50th anniversary falls at a time when, once again, there are calls for changes in the way the global economy is ordered and managed. Few would doubt that, during the five intervening decades, new technologies have broken down traditional borders between nations and opened up new areas of economic opportunity, and that a less polarized political landscape has provided new possibilities for constructive international engagement. In addition, economic power has become more dispersed, mostly due to industrialization and rapid growth in East Asia, with corresponding changes in the workings of the international trading system. However the links between these technological, political and economic shifts and a more prosperous, peaceful and sustainable world are not automatic.

Indeed, growing global economic imbalances, heightened social and environmental fragilities and persistent financial instability, turning at times to outright crisis, should give pause for thought and further policy discussion. Hunger still remains a daily reality for hundreds of millions of people, particularly in rural communities, with children being the most vulnerable. At the same time, rapid urbanization in many parts of the developing world has coincided with premature deindustrialization and a degraded public sector, giving rise to poor working conditions and a growing sense of insecurity. Where these trends have collided with the ambitions of a youthful population, economic frustrations have spilled over into political unrest.

Back in 1964, the international community recognized that “If privilege, extremes of wealth and poverty, and social injustice persist, then the goal of development is lost”. Yet, almost everywhere in recent years, the spread of market liberalism has coincided with highly unequal patterns of income and wealth distribution. A world where its 85 wealthiest citizens own more than its bottom three and a half billion was not the one envisaged 50 years ago.

There is no fast or ready-paved road to sustainable and inclusive development; but the past three decades have demonstrated that delivery is unlikely with a one-size-fits-all approach to economic policy that cedes more and more space to the profitable ambitions of global firms and market forces. Countries should ultimately rely on their own efforts to mobilize productive resources and, especially, to raise their levels of domestic investment (both public and private), human capital and technological know-how. However, for this, they need to have the widest possible room for manoeuvre to discover which policies work in their particular conditions, and not be subject to a

II

constant shrinking of their policy space by the very international institutions originally established to support more balanced and inclusive outcomes.

Insisting on the importance of domestic institutions and policies does not mean adopting a closed or insular attitude to the many development challenges. On the contrary, access to external financial resources and technological know-how is still critical to unlocking the development potential of many poorer and vulnerable countries. Moreover, long-standing development issues − from sovereign debt problems to improved market access in a fairer international trading system, and from commodity price stabilization to financial markets that serve the real economy − can only be addressed through effective multilateral institutions supported by (and this is no small proviso) sufficient political will on the part of the leading economies. Added to these persistent challenges, today’s interdependent world has thrown up a variety of new ones, such as health pandemics, food insecurity, and global warming, which require even bolder multilateral leadership and collective action.

Pursuing bold international collective action to correct the deep inequities of the world, along with determined and innovative domestic policy initiatives, was what motivated the participants at Bretton Woods 70 years ago and in Geneva 50 years ago. Henry Morgenthau, the United States Secretary of the Treasury, was on the mark when he insisted at Bretton Woods that “Prosperity like peace is indivisible. We cannot afford to have it scattered here or there among the fortunate or to enjoy it at the expense of others. Poverty, wherever it exists, is menacing to us all and undermines the well-being of each of us”. As the international community frames an ambitious development agenda beyond 2015, the moment is right to propose another international “New Deal” that can realize the promise of “prosperity for all”.

The world economy in 2014 still in the doldrums

Theworldeconomyhasnotyetescapedthegrowthdoldrumsinwhichithasbeenmaroonedforthepastfouryears,andthereisagrowingdangerthatthisstateofaffairsisbecomingacceptedasthe“newnormal”.Policymakerseverywhere,butparticularlyinthesystemicallyimportanteconomies,needtoassesscurrentapproachesandpaycloserattentiontosignsofinclementeconomicweatherahead.

Growthintheworldeconomyhasbeenexperiencingamodestimprovementin2014,althoughitissettoremainsignificantlybelowitspre-crisishighs.itsgrowthrateof2.3percentin2012and2013isprojectedtoincreasemoderatelytobetween2.5and3percentin2014.Thisimprovementisessentiallyduetogrowthindevelopedcountriesacceleratingfrom1.3percentin2013toaround1.8percentin2014.Developingcountriesasawholearelikelytorepeattheirperformanceofthepreviousyears,growingatbetween4.5and5percent,whileinthetransitioneconomiesgrowthisforecasttofurtherdeceleratetoaround1percent,fromanalreadyweakperformancein2013.

Themoderategrowthaccelerationexpectedindevelopedcountriesshouldresultfromaslightpick-upintheeuropeanUnion(eU),whereatentativeeasingoffiscalausterityandamoreaccommodatingmonetarypolicystance,notablybytheeuropeanCentralbank(eCb),hashelpedpulldemandgrowthbacktopositiveterritory.insomecountries(e.g.theUnitedKingdom),householddemandisbeingsupportedbyassetappreciationandtherecoveryofconsumerandmortgagecredit,andinothersbysomeimprovementinrealwages(e.g.Germany).However,inanumberofotherlargeeuro-zoneeconomies(e.g.France,italyandSpain)highlevelsofunemployment,stagnantorsluggishrealwagegrowth,andpersistentweaknessinthebankingsectorcontinuetohindertheexpansionofdomesticcreditanddemand.intheUnitedStates,theeconomyiscontinuingitstentativerecoverythrougharelianceondomesticprivatedemand.Thenegativeimpactoffiscalausterityeasedslightlyin2014,theunemploymentratehascontinuedtofall,andassetpriceappreciationsareencouragingtherecoveryofdomesticborrowingandconsumption.However,averagerealwagesremainstagnant.GrowthinJapanhasalsobeenrelyingondomesticdemand,asprivateconsumptionandinvestmentbenefitedfromtheexpansionarymonetaryandfiscalpoliciesofAbenomics.Theeffectsof

III

publicspendingforreconstructionfollowingthe2011earthquake,whichhelpedpropeltheJapaneseeconomytohighergrowthin2012−2013havedissipated,whilerecenttaxincreasescouldhurtconsumerspending,sothatfurtherstimuluspackagesmaybeneededtomaintainpositivegrowthandpricetargets.

Themaindevelopingregionsarelikelytomoreorlessreplicatetheirgrowthperformanceof2012−2013.Asiaisprojectedtoremainthemostdynamicregion,growingataround5.5percent.Amongthemajorcountriesinthisregion,Chinacontinuestoleadwithanestimatedgrowthrateofcloseto7.5percentin2014,basedondomesticdemand,withsometentativesignsofanincreasingroleforprivateandpublicconsumption.Growthinindiaisacceleratingtoanestimated5.5percentasaresultofhigherprivateconsumptionandnetexports; investment,ontheotherhand,remainsflat.MostcountriesinSouth-eastAsiashouldkeepgrowingataroundorabove5percent,drivenbyprivateconsumptionandfixedinvestment,withlittleornocontributionfromnetexports.economicperformanceismorevariedinWestAsia,whereseveralcountrieshavebeendirectlyorindirectlyaffectedbyarmedconflicts.Turkeyhasbeenexposedtofinancialinstabilityandmaynotbeabletosustainagrowthratethatisheavilydependentondomesticcreditexpansion.

GrowthinAfricaalsoshowswidecontrasts.itremainsweakinNorthAfricaduetoongoingpoliticaluncertaintyanddisruptionsinoilproduction.ithasalsoremainedsubduedinSouthAfrica,ataround2percent,owingtoaweakeningofdomesticdemandandtostrikesintheminingsector.bycontrast,severallargesub-Saharaneconomieshavepostedhighgrowthrates,leadingtoprojectedgrowthforthesubregionofalmost6percentin2014.inseveralcases,historicallyhighcommoditypriceshavebeensupportingthisgrowththathaspersistedformorethanadecade.

Afterastrongreboundin2010,economicgrowthinlatinAmericaandtheCaribbeanhassloweddowntoanestimated2percentin2014.Thisweakperformancemainlyreflectsslowgrowthinthethreemaineconomies,Argentina,brazilandMexico,wheredomesticdemand(theirmaindriverofgrowthaftertheglobalcrisis)haslostmomentum.externalfinancialshocksinmid-2013andearly2014alsoaffectedthoseeconomies,leadingtomacroeconomicpolicytightening.FurtherfinancialinstabilitymightresultfromlegalobstaclestothenormalservicingofArgentina’ssovereigndebt.However,Argentina’ssolvencyandsoundmacroeconomicfundamentalsinmostcountriesintheregionshouldpreventthisshockfromdevelopinginto a regionalfinancial crisis. Several countries exportinghydrocarbonsorminerals have experiencedsignificantlyhighergrowthrates,pushedbystrongdomesticdemand.

Theeuropeantransitioneconomiesarelikelytoexperienceafurtherslowdownofgrowththisyear,with stagnant consumption and investment demand in theRussianFederation exacerbatedbyfinancialinstabilityandrenewedcapitaloutflows.ontheotherhand,theCentralAsiantransitioneconomies,mostofwhichareoilormineralexporters,seemsettomaintainfairlyrobustgrowthratesasaresultofhistoricallyhightermsoftrade.

Trade winds not picking up

Sixyearsaftertheonsetoftheglobalfinancialcrisis,internationaltraderemainslacklustre.Merchandisetradegrewatcloseto2percentinvolumein2012−2013andthefirstfewmonthsof2014,whichisbelowthegrowthofglobaloutput.Tradeinservicesincreasedsomewhatfaster,ataround5percentin2013,withoutsignificantlychangingtheoverallpicture.Thislackofdynamismcontrastssharplywiththetwodecadesprecedingthecrisis,whenglobaltradeingoodsandservicesexpandedmorethantwiceasfastasglobaloutput(atannualaveragesof6.8percentand3percentrespectively).Duringthatperiod,theshareofexportsandimportsofgoodsandservicesinGDP(atconstantprices)virtuallydoubled,fromaround13percentto27percentindevelopedcountries,andfrom20percenttocloseto40percentindevelopingcountries.

Giventheinsufficiencyofglobaldemand,itishighlyunlikelythatinternationaltradealonewillbeabletokick-starteconomicgrowth.Facilitatingtradeflowsbymodernizingcustomsprocedureswillbe

IV

helpfulinmakingthetradingsystemmoreefficientoverthelongerterm,butitwillnotaddressthemainconstraintsontradetoday.internationaltradehasnotsloweddownorremainedquasi-stagnantbecauseofhighertradebarriersorsupply-sidedifficulties;itsslowgrowthistheresultofweakglobaldemand.inthiscontext,alopsidedemphasisonthecostoftrade,promptingeffortstospurexportsthroughwagereductionsandan“internaldevaluation”,wouldbeself-defeatingandcounterproductive,especiallyifsuchastrategyispursuedbyseveraltradepartnerssimultaneously.Thewaytoexpandtradeatagloballevelisthrougharobustdomestic-demand-ledoutputrecoveryatthenationallevel.

Althoughthereisanoveralllackofdynamismintradeatpresent,insomecountriesandregionsimportshavebeengrowing(involume)atrelativelyhighrates:between8and9percentin2013.Thishasbeenthecaseinsub-SaharanAfricaandWestAsiathatcontinuetobenefitfromhighcommoditypricesbyhistoricalstandards,andinChina,whichremainsastrongmarketforseveralprimarycommodities.

Thatsaid,withafewbutimportantexceptions,mostcommoditypriceshavebeendecliningpersistentlysincetheirpeaksin2011,althoughtheirdownwardtrendseemstohavebeenslowingdownin2013−2014.Themainexceptionstothistrendareoil,thepriceofwhichhasremainedremarkablystableathighlevelssince2011,andtropicalbeverages(coffeeandcocoa)andsomeminerals(mostnotablynickel),whichexperiencedsharppriceincreasesin2014duetosupplyshortages.Despiteanoveralldecliningtrend,commoditypricesinthefirsthalfof2014remained,onaverage,closeto50percenthigherthanduringtheperiod2003−2008.

Whilerecentdevelopmentsincommoditypriceshavedifferedbycommoditygroupandforparticularcommodities,acommonfeatureinthephysicalmarketsisthatsupply-sidefactorshaveplayedamajorrole.Thisisreflected,forinstance,inthelowerpricesofminerals,asinvestmentsmadeduringtheperiodofrapidlyrisingpriceseventuallytranslatedintoincreasedsupplies.bycontrast,changesinphysicaldemandhadonlyaminorimpactontheevolutionofcommoditypricesin2013andearly2014.ingeneral,demandforcommoditieshascontinuedtogrowinlinewiththemoderateeconomicgrowthoftheworldeconomy.

Short-term developments in commodity prices continued to be influenced by the substantialfinancializationofcommoditymarketsduring2013andthefirsthalfof2014.However,regulatorychangesincommodityfuturestradinghaveencouragedashufflingofparticipantsfrombankstowardsotherfinancialoperatorssuchascommoditytradingcompanies,whichoftenoperateinalesstransparentandlessregulatedenvironmentthanmoretraditionalfinancialinstitutions.

Fromalongertermperspective,theconclusionoftheanalysisofTDR 2013thatcommoditypricesaresettoremainatrelativelyhighlevelsinhistoricaltermsinthecomingyears,withsomeshort-termcorrections,remainsvalid.Thisdoesnotsuggestthatproducingcountriesshouldbecomplacent;rathertheyshouldtryasfaraspossibletousetherentsgeneratedinthesemarketstofinancestructuraltransformation,particularlywithaviewtoproductionandexportdiversification.

A “new normal”?

Theapparentstabilizationofrelativelylowgrowthratesacrossdifferentgroupsofcountriesintheworldeconomymaygivetheimpressionthatithasreacheda“newnormal”.However,toassessthesustainabilityofthepresentsituation,itisnecessarytoexaminenotonlytheratesofGDPgrowth,butalsoitsdrivers.

Afterabriefexperimentin2009andthefirsthalfof2010withexpansionaryfiscalmeasuresinresponsetotheimmediatethreatofaglobalfinancialmeltdown,thepolicymixusedinthedevelopedeconomiescomprised,tovaryingdegrees,acombinationoffiscalausterity,wagecontainmentandmonetaryexpansioninthehopethatincreasedinvestorconfidence,labourmarketflexibility,greatercompetitivenessandtheexpectedrehabilitationofbanks’balancesheetswouldorchestratearapidandsustainedrecovery.However,withfiscal and labourmarket policies dampeningdomestic demand, liquidity expansion bymonetary

V

authoritieswas channelledmostly tofinancial, rather thanproductive, investments.This in turn led tosignificantincreasesinassetprices,despiteanaemiceconomicgrowth,andtolargecapitaloutflows,muchofthemtoemergingmarkets.Consequently,thispolicymixonlyindirectly(andwithasignificantdelay)supportedademandrecoveryinthosecountrieswhereassetappreciationgeneratedasufficientlystrongwealtheffectandencouragedrenewedconsumerborrowing.Assuch,thenewnormalhassomeobviousparallelswiththeconditionsthatledtotheglobalfinancialcrisis.

inthecaseofemergingeconomies,theextenttowhichtheexpansionofdomesticdemandwasbeingsupportedbygenuineincomeexpansionorbyunsustainableassetbubblesandexcessiveconsumerborrowing(with likely significant variations across countries) is still unclear.However, thepotential vulnerabilityofdevelopingandemergingeconomiesinthenewnormalisheightenedbypersistentweaknessesintheinternationalfinancialarchitecture.Underthesecircumstances,capitalflowscanhavesignificant,andnotalwayswelcome,effectsontherealeconomyandontheabilityofpolicymakerstorespondtounforeseenshocks.

Somedevelopingcountriesalsoremainexposedtonegativeshocksoriginatingfrominternationaltrade,particularlyincountriesthatrelymainlyonexportsofonlyafewprimarycommoditiesoronlow-skill,labour-intensivemanufactures.Diversificationoftheirproductiveandexportactivitiesisapendingtaskformanytransitionanddevelopingeconomies.TheUNCTADMerchandiseTradeSpecializationindexconfirmsthat,despitetherapidrateofgrowthoftradeinmanydevelopingeconomiesovertheperiod1995−2012,thedegreeofspecializationintheirexportstructureshasnotvariedsignificantly.

Thereis,infact,nothingparticularly“new”aboutthecurrentfinancialcycleaffectingdevelopingandtransitioneconomies.Theseeconomiesarenowexperiencingtheirfourthsuchcyclesincethemid-1970s;and,muchasbefore,becausethepresentcycleismainlydrivenbydevelopedcountries’economicconditionsandmonetarypolicydecisions,theresultinginternationalcapitalmovementsdonotnecessarilycoincidewiththeneedsofdevelopingcountries.onthecontrary,ifrecenthistoryisanyguide,theycouldhaveseriousdisruptivemacroeconomicandfinancialeffects.inordertocreateandmaintaindomesticmacroeconomicandfinancialconditions that supportgrowthandstructural transformation,governments shouldhaveattheirdisposalsuitablepolicyinstrumentsformanagingcapitalflows,andforpreventingorcopingwiththerecurrentshocksthesecanprovoke.MultilateralrulesintheiMF’sArticlesofAgreementandintheGeneralAgreementonTradeinServices(GATS)oftheWorldTradeorganization(WTo)doallowgovernmentstomanagetheircapitalaccounts,includingaresorttocapitalcontrols.However,theemphasishasbeenontheiruseonlyforprudentialreasonsorcrisismanagement.instead,capitalmanagementmeasuresshouldbeseenasanormalinstrumentinpolicymakers’toolkit,ratherthanasanexceptionalandtemporarydevicetobeemployedonlyincriticaltimes.

Somenewbilateralandplurilateraltradeandinvestmentagreementsthathavebeensigned,orarebeingnegotiated,introduceevenmorestringentcommitmentswithrespecttofinancialliberalizationthanthosecontainedinmultilateralagreements,whichmightfurtherreducepolicyspaceinthiscontext.Therefore,governmentsthataimtomaintainmacroeconomicstabilityandwishtore-regulatetheirfinancialsystemsshouldcarefullyconsidertherisksintakingonsuchcommitments.

The case for coordinated expansion

UNCTAD,usingitsGlobalPolicyModel,hasassessedanalternative,“balanced-growth”scenario,whichcouldofferawayofescapingfromthecurrentglobaleconomicdoldrums.Thetwoscenariosusedinthemodelhavethevaluenotofforecasting,butofdemonstratingthedirectionofchangethatcouldbeexpectedfromageneralshiftinpolicyorientation.Thebalanced-growthscenariointroducesthefollowingelements:incomespoliciestosupportgrowthofdemandonasustainablebasis;growth-enhancingfiscalpolicies; industrial policies to promote private investment and structural transformation; regulation of

VI

systemicallyimportantfinancialinstitutionsandcapitalcontrolstostabilizeglobalfinancialmarkets;anddevelopment-orientedtradeagreements.Thisiscontrastedwitha“baseline”scenario,whichbroadlycontinueswithbusiness-as-usualpolicies.

Thesimulationsforthebaselinescenarioshowthatstructuralimbalanceswillkeepongrowing,evenwithcontinuedmoderategrowth,withcountriesbecomingincreasinglyvulnerabletoshocksandfinancialinstability.Thelongersuchimbalancesremainunresolved,theharshertheconsequenceswillbe,inthefaceofanotherseriouscrisis.Thebalanced-growthscenario,ontheotherhand,showsconsiderableimprovementsingrowthrates,and,mostimportantly,agradualresolutionofglobalimbalances.Theaveragegrowthoftheworldeconomyissignificantlyfasterthanitisunderthebaselinescenario.Thefastergrowthratesforallregionsaretheresultnotonlyofindividualstimuli,butalsoofstrongsynergiceffectsfromthecoordinationofpro-growthpolicystancesamongthecountries.Finally,theresultsconfirmgreatergrowthconvergenceinthebalanced-growthscenario,aswellasimprovedfinancialstability.

Whiletheresultsofsuchexercisesneedtobeviewedwithafamiliardegreeofcautionandcare,theirunderlyingmessageisthat,inanincreasinglyinterconnectedglobaleconomy,policieshavetobeconsistentfortheworldasawhole.Takingintoaccountrealandfinancialfeedbacks,itshouldbeclearthatasustainedandstabledemand-ledgrowthpathhastostartdomestically,ratherthanhavingeachcountryindividuallypushingforcompetitivereductionsofcostsandimportsinordertogenerateanet-export-ledrecovery−aprocesstowhich,admittedly,surpluscountrieshavemuchmoretocontribute.

Theabsenceofeffectiveinstitutionsandmechanismsforinternationalpolicycoordinationcanpushpolicymakers intoadoptingstrategies thatmayappear tobeexpedient in the short term,butwhichareeffectivelyself-defeatinginthemediumterm.itisthereforeessentialtocontinuewitheffortstodeviseamoreeffectivesetofgloballyinclusiveinstitutionstoregulatemarkets,helpcorrectunsustainableimbalanceswhentheyemerge,andbetterpursuetheaimsofglobaldevelopmentandconvergence.

Challenges towards a new development agenda

ifmacroeconomicpolicyistackinguncomfortablyclosetothe“business-as-usual”strategyofthepre-crisisyears,thediscussionsnowunderwayonapost-2015developmentagendaaretendingtobreakwiththepast.Thepushforamoreuniversal,transformativeandsustainableapproachtodevelopmentwillplayakeyroleinthesettingofnewgoalsandtargetsforpolicymakers,atboththenationalandinternationallevels.The17goalsandsundrytargetsagreedtoattheUnitedNationsopenWorkingGrouponSustainableDevelopmentalreadysignalalevelofambitionwellbeyondtheMillenniumDevelopmentGoals.

Theinternationalcommunityfacesthreeprinciplechallengesinfashioningthisnewapproach.Thefirstisaligninganynewgoalsandtargetstoapolicyparadigmthatcanhelpraiseproductivityandpercapitaincomeseverywhere,generateenoughdecent jobsonascale tomeetarapidlygrowingandurbanizinggloballabourforce,establishastableinternationalfinancialsystemthatboostsproductiveinvestment,anddeliverreliablepublicservicesthatleavenoonebehind,particularlyinthemostvulnerablecommunities.Thedominanteconomicparadigmofmarketliberalismhasdisappointedinmostoftheserespects.inthiscontext,asPopeFrancishasrecentlysuggested,wecannolongersimplyputourtrustin“thesacralizedworkingsoftheprevailingsystem”.Undoubtedly,freshthinkingisneeded.

Thesecondchallenge toconsider informulatinganewdevelopmentagenda is themassiverise ininequality,whichhasaccompaniedthespreadofmarketliberalism.Thisisimportantbecause,inadditiontoitsmoralimplications,growinginequalitycanseriouslydamagesocialwell-being,threateneconomicprogressandstability,andunderminepoliticalcohesion.PreviousTrade and Development Reports(TDRs)haveinsistedontheneedtolookbeyondsomeoftheheadline-grabbingnumberssurroundingthetoponepercent,andexaminewhathasbeenhappeningtofunctionalincomedynamics,inparticular,thedivergence

VII

betweenwageandproductivitygrowthand thegrowthof rentier incomes.Heightenedcapitalmobilityhasnotonlyreducedthebargainingpoweroflabour,furtheramplifyingtheadversedistributiveimpactofunregulatedfinancialactivity;ithasalsomadeithardertotaxsomeincomesdirectly,thusincreasingtheState’srelianceonmoreregressivetaxesandonbondmarkets.Thiscan,inturn,haveaverycorrosiveimpactonthelegitimacyandeffectivenessofthepoliticalprocess.

Thethirdchallengeisensuringthateffectivepolicyinstrumentsareavailabletocountriestoenablethemtoachievetheagreedgoalsandadvancethedevelopmentagenda.Restoringadevelopmentmodelthatfavourstherealeconomyoverfinancialinterests,putssustainabilityaheadofshort-termgainsandtrulyseekstoachieveprosperityforallwillalmostcertainlyrequireaddingmoreinstrumentstothepolicytoolkitthaniscurrentlycontemplatedbyeconomicorthodoxy.

The enduring case for policy space

Anywideningandstrengtheningoftheambitionofnationaldevelopmentstrategieswillneedtobeaccompaniedbyinstitutionalchanges.Marketsrequireaframeworkofrules,restraintsandnormstooperateeffectively.Assuch,themarketeconomyisalwaysembeddedinalegal,socialandculturalsetting,andissustainedbypoliticalforces.Howandtowhatextenttheframeworkofrulesandregulationsisloosenedortightenedispartofacomplexpoliticalprocessspecifictoeachsociety,butitcannotbedispensedwithwithoutthreateningabreakdownofthewidereconomicandsocialorder.

internationalmarketsandfirms,nolessthantheirdomesticcounterparts,alsorequireaframeworkofrules,restraintsandnorms.And,asatthedomesticlevel,thelooseningandtighteningofthatframeworkisapersistentfeatureofgovernanceoftheglobaleconomy.Statesmustdecideonwhetherandhowmuchoftheirownindependencetheyarewillingtotradefortheadvantagesofhavinginternationalrules,disciplinesandsupports.inevitably,inaworldofunequalStates,thespacerequiredtopursuenationaleconomicandsocialdevelopmentaspirationsvaries,asdoesthelikelyimpactofanindividualcountry’spolicydecisionson others.The challenges ofmanaging these trade-offs are particularly pronounced at themultilaterallevel,wherethedifferencesamongStatesaresignificant.Whiletheextenttowhichanadoptedgrowthanddevelopmentpathrespondstonationalneedsandprioritiescanobviouslybelimitedorcircumscribedbymultilateralregimesandinternationalrules,itcanequallybeaffectedbyeconomicandpoliticalpressuresemanatingfromtheworkingsofglobalmarkets,dependingonthedegreeandnatureofeconomicintegrationofthecountryconcerned.

TheinterdependenceamongStatesandmarketsprovidesthemainrationaleforawell-structuredsystemofglobaleconomicgovernancecomprisingmultilateralrulesanddisciplines.Theguidingprincipleofthesearrangementsshouldbetheirabilitytogeneratefairandinclusiveoutcomesbyprovidingglobalpublicgoodsandminimizingadverseinternationalspilloversandothernegativeexternalities,regardlessofwhetherthesearecreatedbynationaleconomicpoliciesortheprofit-makingdecisionsofprivateactors.

These various tensions between national policy autonomy, policy effectiveness and internationaleconomicintegrationarecaptured,inpart,bytheideaof“policyspace”;thisreferstothefreedomandabilityofgovernmentstoidentifyandpursuethemostappropriatemixofeconomicandsocialpoliciestoachieveequitableandsustainabledevelopmentintheirownnationalcontexts,butasconstituentpartsofaninterdependentglobaleconomy.itcanbedefinedasthecombinationofdejurepolicysovereignty,whichistheformalauthorityofpolicymakersovertheirnationalpolicygoalsandinstruments,anddefactonationalpolicycontrol,whichinvolvestheabilityofnationalpolicymakerstosetpriorities,influencespecifictargetsandweighpossibletrade-offs.

Forsomecountries,signingontomultilateraldisciplinescanspurthemtoredoubletheireffortstousetheirremainingpolicyspacemoreeffectivelythanwhentheyhadgreaterpolicyspace;thisseemsto

VIII

betrue,inparticular,forcountriesemergingfromconflict,aswellasformanyformersocialisteconomies.Moreover,thesedisciplinescanoperatetoreducetheinherentbiasofinternationaleconomicrelationsinfavourofcountriesthathavegreatereconomicorpoliticalpower.Thus,suchdisciplinescansimultaneouslyrestrict(particularlydejure)andease(particularlydefacto)policyspace,sinceconstraintsononecountry’sbehaviouralsoapplytoothercountries,therebyaffectingtheexternalcontextasawhole.

buttherearealsovalidconcernsthatthevariouslegalobligationsemergingfrommultilateral,regionalandbilateral agreements have reduced national policy autonomyby affecting both the available rangeandtheefficacyofparticularpolicyinstruments.inaddition,theeffectivenessofnationalpoliciestendstobeweakened−insomeinstancesverysignificantly−byforcesofglobalization(especiallyfinancialglobalization)andbytheinternalizationofmarkets,whichaffectnationaleconomicprocesses.

Inclusive multilateralism: Back to the future

Historyhasatendencytorepeatitself,thoughnotnecessarilyastragedyorfarce.Consequently,therearealwayspositivelessonstobelearnedfromexamininghowearliergenerationsofpolicymakersdealtwithbigchallenges.Theneedforreconcilingtherequirementsofpolicysovereigntyatthenationallevelwiththeimperativesofaninterdependentworldeconomymayseemtodaytoberelativelynew.infact,itisalong-standingchallengethathasbeendiscussedextensively,andfrommanydifferentangles,foralmosttwocenturies,thoughnoneascompellingorsignificantasthosearisingfromthecrisesoftheinter-warera.

Theprincipal objective of the architects ofbrettonWoodswas to design a post-war internationaleconomicstructurethatwouldpreventarecurrenceoftheopportunisticactionsanddamagingcontagionthathadledtothebreakdownofinternationaltradeandpaymentsinthe1930s.Accordingly,suchastructurewouldneedtosupportthenewpolicygoalsofrisingincomes,fullemploymentandsocialsecurityinthedevelopedeconomies.butaprominentgroupofRoosevelt’sNewDealersalsostruggledtoplacedevelopmentissuesfirmlyonthemultilateralagendainthe1930sand1940s.ThisincludedmeasuresthatsoughttoexpandthepolicyspaceforState-ledindustrializationandtoincreasethelevelandreliabilityofthemultilateralfinancialsupportnecessarytomeettheneedsofdevelopingcountries−effortsthateventuallymetwithconsiderableresistance.

ThoseresultssetthestagefortheNorth-Southconflictsofthepost-warperiod.inthatcontext,theconstructionofamoredevelopment-friendlyinternationaleconomicorderwasamuchslowerandmoreunevenprocessafterthewarthanthebrettonWoodsarchitectshadanticipated.ittookthegrowingvoicesofnewlyindependentdevelopingcountriesinthelate1950sandearly1960stoshiftmultilateralismontoamoreinclusivefooting.ThisledtothecreationofUNCTADin1964,andtoasubsequentbroadeningofthedevelopmentagendaaroundanewinternationaleconomicorder.TheoftenforgottenbrettonWoodsdevelopmentvisionandthedetailsofitsvariousproposalscanstillprovidesomeinspirationforthoseseekingtoadvanceaninclusivedevelopmentagendatoday.

Managing creative destruction

Noneoftoday’sdevelopedcountriesdependedonmarketforcesfortheirstructuraltransformationanditsattendanthigherlevelsofemployment,productivityandpercapitaincomes.Rather,theyadoptedcountry-specificmeasurestomanagethoseforces,harnessingtheircreativesidetobuildproductivecapacitiesandprovideopportunitiesfordynamicfirmsandentrepreneurs,whileguidingtheminamoresociallydesireddirection.Theyalsouseddifferentformsofgovernmentactiontomitigatethedestructivetendenciesofthosesamemarketforces.Thisapproachofmanagingthemarket,notidolizingit,wasrepeatedbythemostrapidlygrowingemergingmarketeconomies−fromthesmallsocialdemocraticeconomiesofNortherneuropetothegianteconomiesofeastAsia−inthedecadesfollowingtheendoftheSecondWorldWar.

IX

Weak initial economic conditions and low administrative and institutional capabilities, aswell aspolicyerrorsandexternalshocksexplain,tovaryingdegrees,whyotherdevelopingcountrieshavebeenlesssuccessfulinreplicatingtheseearlierexperiences.However,internationaleconomicgovernancehasalsoincreasinglyposedgreaterconstraintsontheoptionsforindividualcountriestopursueeconomicpoliciestoachievetheirdevelopmentobjectives.

Thepost-warmultilateraltraderegimewasessentiallydesignednottocompromisethepolicyspaceofthedevelopedcountriestoachieveanappropriatelevelofeconomicsecuritythroughthepursuitoffullemploymentandextendedsocialprotection.but italsosought to limitmercantilistpracticesamong itsmembers andprovidepredictability in international tradingconditions.What emergedwasa regimeofnegotiated,bindingandenforceablerulesandcommitmentswithbuilt-inflexibilitiesandderogations.

SubsequentmultilateraltradenegotiationsundertheauspicesoftheGATTculminatedintheUruguayRoundAgreements (URAs),which entered into force in 1995.The scope of those negotiationswasconsiderablywidened,bothintermsofthecountriesparticipatingandthetarifflinesinvolved.Theyalsoextendedintotrade-relatedareasbeyondtradeingoods,withthemost-favoured-nationandnational-treatmentprinciplesbeingappliednotonlytotradeingoods,butalsototradeinawiderangeofservices,suchasfinance,tourism,educationandhealthprovision.Asaresult,allWTomemberStatesacceptedrestrictionsontheirconductofawidersetofpolicies,includingsomedesignedtopromoteanddirectthestructuraltransformationoftheireconomies.Yetsomeofthepolicyspacetheygaveuphadplayedanimportantroleinsuccessfuldevelopmentprocessesinthepast.Thefollowingaresomeexamples.

• Theuseof subsidies, circumscribedby theAgreementonSubsidies andCountervailingMeasures(SCM),hadbeenapreferredinstrumenttosupportstructuraltransformation,particularlyineastAsiancountries.

• Performancerequirementsonforeigninvestorswithrespecttoexports,domesticcontentandtechnologytransfer, restrictedunder theAgreementofTrade-related investmentMeasures (TRiMs),hadbeenfrequentlyusedtoenhancethecreationoflinkagesbetweenforeigninvestorsandlocalmanufacturers.

• Reverseengineeringandimitationthroughaccesstotechnology,curtailedundertheAgreementonTrade-relatedAspectsof intellectualPropertyRights (TRiPS),hadpreviouslybeenusedbymanycountries,includingthenowdevelopedones.

Despite greater restrictions on the use of certain policy instruments,WTomembers retain someflexibilitytosupportstructuraltransformation,includingintariffpolicywheresomelinesarestillunbound,andwherethedifferencebetweenboundandappliedtariffsprovidesroomformodulatingtheminsupportofdevelopmentgoals.WTomemberscanalsocontinuetousecertainkindsofsubsidiesandstandardstopromoteresearchanddevelopmentandinnovationactivities,aswellasexploitflexibilitiesintheuseofexportcredits.UndertheTRiMsAgreement,policymakersmaycontinuetoimposesector-specificentryconditionsonforeigninvestors,includingindustry-specificlimitations.Theagreementalsoallowssomeflexibilitythroughthemechanismofcompulsorylicensing(wherebyauthoritiescanallowcompaniesotherthanthepatentownertousetherightstoapatent)andparallelimports(i.e.importsofbrandedgoodsintoamarketwhichcanbesoldtherewithouttheconsentoftheownerofthetrademarkinthatmarket).

Weighingthelossofpolicyspaceinspecificareasagainstthepotentialgainsofamorepredictableopenmultilateraltradingsystemisnoeasytask.inanyevent,themoreimmediatequestionishowbesttousethespacethatremainstosupportmoresustainableandinclusiveoutcomesthanhavebeenachievedbymostdevelopingcountriesoverthepastthreedecades.inthisrespect,practicesandcapacitieslinkedtotheinstitutionalconstructofadevelopmentalStatearestillkey,asUNCTADhaslonginsisted.butitisalsoimportanttorecognizethatinconsistenciesandgapsacrossthemultilateralarchitecture,particularlyattheinterfaceoftradeandfinancialflows,continuetomakeitdifficultfordevelopingcountriestomakethemostofthespacethatremains.Moreover,manyofthemneedmuchbettersupportfromtheinternational

X

communitytousethecurrentarrangementsinawaythatwillhelptheirtransformationefforts.inmanyrespectsthatsupporthasbeengivenreluctantly,orhasnotbeenforthcomingatall.UNCTAD’sproposalforanindependentcommissiontoundertakeadevelopmentauditofthemultilateraltradingsystemtoexaminetheseandothertensionsthatdisturbthesmoothworkingsofthissystemcouldofferawayforward.

The steady erosion of policy space

Sincetheearly1990s,therehasbeenawaveofbilateralandregionaltradeagreements(RTAs)andinternationalinvestmentagreements(iiAs),someofwhichcontainprovisionsthataremorestringentthanthosecoveredbythemultilateraltraderegime,ortheyincludeadditionalprovisionsthatgobeyondthoseofthecurrentmultilateraltradeagreements.

ProvisionsinRTAshavebecomeevermorecomprehensive,andmanyofthemincluderulesthatlimittheoptionsavailableinthedesignandimplementationofcomprehensivenationaldevelopmentstrategies.eventhoughtheseagreementsremaintheproductof(oftenprotracted)negotiationsandbargainingbetweensovereignStates,thereisagrowingsensethat,duetothelargernumberofeconomicandsocialissuestheycover,thediscussionsoftenlackthetransparencyandthecoordination−includingamongallpotentiallyinterestedgovernmentministries−neededtostrikeabalancedoutcome.

Regardlessofthecountriesinvolved,bysigningthoseagreementsdeveloping-countrygovernmentsrelinquishsomeofthepolicyspacetheyhavebeenendeavouringsohardtopreserveatthemultilaterallevel.Thismayseempuzzling,but itcouldbemainlybecausesomegovernments fearexclusionwhenothercountriessigninguptosuchagreementsgainpreferentialmarketaccessandbecomepotentiallymoreattractiveasdestinationsforFDi.Theymayalsoseeparticipationinafreetradeagreementasameanstofacilitatetheentryoftheirdomesticfirmsintointernationalproductionnetworks.

However,asdiscussedinpreviousTDRs,participationininternationalproductionnetworksrunstheriskofgeneratingadverseterms-of-tradeeffectsoncountries,particularlythoseatthelowerendsofproductionchains,anditcreatesfewdomesticlinkagesandtechnologyspillovers.Moreover,developingcountriesatanearlystageofindustrializationmaybecomelockedintolow-value-addedactivitiesduetostiffcompetitionfromothersupplierstokeeplabourcostslow,andbecausethetightcontroloverintellectualpropertyandexpensivebrandingstrategiesoftheleadfirmblockthemfrommovingupthevaluechain.evenrelativelysuccessfulmiddle-incomecountriesdonotfacealevelplayingfieldinmanyofthesenetworks.Chinaisaninterestingcaseinpoint.Considerableattentionhasbeengiventoitsriseasadominantexporterofelectronicsgoods,totheextentthatitnowaccountsforasmuchasone-thirdoftotaltradeinthissector.butthereare,infact,veryfewChinesefirmsthatcontrolthedifferentpartsoftheelectronicschain.Moretellingstill,Chinesefirms,ononerecentestimate,accountforjust3percentoftotalprofitsinthissector.Thus,developingcountriesneedtocarefullyweighboththecostsandbenefitswhenconsideringanindustrializationstrategythatplacesconsiderableemphasisonparticipationininternationalproductionnetworksifthispushesthemtoaracetoconcludeevermoreandincreasinglystringentagreementswithoutafullandproperunderstandingoftheirdevelopmentpotential.

Policyspaceisnotonlyreducedbyfreetradeagreements,butalsowhencountriessignuptoiiAs.Whenmostsuchagreementswerebeingconcludedinthe1990s,anylossofpolicyspacewasseenasasmallpricetopayforanexpectedincreaseinFDiinflows.Thisperceptionbegantochangeintheearly2000s,asitbecameapparentthatinvestmentrulescouldobstructawiderangeofpublicpolicies,includingthoseaimedatimprovingtheimpactofFDiontheeconomy.besides,empiricalevidenceontheeffectivenessofbilateralinvestmenttreatiesandinvestmentchaptersinRTAsinstimulatingFDiisambiguous.Moreover,thelackoftransparencyandcoherencecharacterizingthetribunalsestablishedtoadjudicateondisputesarisingfromtheseagreements,andtheirperceivedpro-investorbias,addedtoconcernsabouttheireffectiveness.Arangeofpossibilitiesiscurrentlyunderconsiderationtorebalancethesystemandrecovertheneeded

XI

spacefordevelopmentpolicies.Theseinclude:(i)progressiveandpiecemealreformsthroughthecreationofnewagreementsbasedoninvestmentprinciplesthatfostersustainabledevelopment;(ii)thecreationofacentralized,permanentinvestmenttribunal;and(iii)aretreatfrominvestmenttreatiesandrevertingtonationallaw.

Alongwiththeproliferationoftradeagreementsandtheirexpansionintotrade-relatedareas,therehasbeenaglobalrevivalofinterestinindustrialpolicy.Reconcilingthesetwotrendsisahugechallenge.Manydevelopedcountries,especiallysincetherecentfinancialcrisis,havebeguntoexplicitlyacknowledgetheimportantrolethatindustrialpolicycanplayinmaintainingarobustmanufacturingsector.TheUnitedStates,whileoftenportrayedasacountrythattakesahands-offapproachtoindustrialpolicy,hasbeen,andremains,anaviduserofsuchapolicy.itsGovernmenthasactedasaleadingrisktakerandmarketshaperinthedevelopmentandcommercializationofnewtechnologies,adoptingawiderangeofpoliciestosupportanetworkofdomesticmanufacturingfirmsthathavethepotentialforinnovation,exportsandthecreationofwell-paidjobs.bycontrast,theexperienceoftheeUillustrateshowintergovernmentalagreementscanconstrainthepolicychoicesofnationalpolicymakers,andhowindustrialpoliciesthatarelimitedtotheadoptionofonlyhorizontalmeasuresmayhampertheachievementofstatedobjectives.

Assomedevelopingcountrieshavereassessedthemeritsofindustrialpolicyinrecentyears,theyhavealsousedsomeoftheirpolicyspacetoinducegreaterinvestmentandinnovationbydomesticfirmssoastoenhancetheirinternationalcompetitiveness.Someofthemeasuresadoptedinclude,sector-specificmodulationofappliedtariffs,usingthedifferencebetweenboundandappliedtariffrates;applyingpreferentialimportduties;offeringtaxincentives;providinglong-terminvestmentfinancingthroughnationaldevelopmentbanksorsubsidizingcommercialloans;andusinggovernmentprocurementtosupportlocalsuppliers.Variouspolicymeasurescontinuetobeusedincountriesatdifferentlevelsofdevelopment−fromVietNamtobrazil−inanefforttocreateavirtuouscirclebetweentradeandcapitalaccumulation.

Safeguarding policy space while strengthening multilateral mechanisms

UNCTADhasbeenarguingforsometimethatifdevelopingcountriesaretomaintainandimprovetheirrecentgrowthtrajectories,theyshouldwidenanddeepenthestructuraltransformationoftheireconomies.Theresultingpolicychallengeisafamiliaroneincommodityexporters,wherealackofdiversificationmakestheireconomiesvulnerabletoexogenousshocksandpolicyshifts.butalso,strongergrowthdoesnotautomaticallytranslateintoimprovedlivingstandardsforthemajorityofthepopulation.Whilestructuraltransformationisimperativeforalldevelopingcountriesforsimilarreasons,inthecomingyearstheyarelikelytofindamuchlessfavourableglobaleconomicenvironmentthanexistedintheopeningdecadeofthiscentury.Consequently,structuraltransformationwillbeextremelydifficultwithoutgreaterflexibilitiesinpolicymaking.

Thus,strengtheningthegovernanceofglobaltradeinsupportofdevelopmentgoalswillneedtobepartofamorecomprehensiveandintegratedpackagetohelppreservethepolicyspaceforproactivetradeandindustrialpolicies.Suchreformshouldcomplementmacroeconomicandfinancialreforms.itwillneedtoincludevariouselements,foremostamongthembeingthestrengtheningofmultilateralmechanisms.ThenewmomentumfromtheWTo’sbaliMinisterialConferenceinDecember2013shouldbetakenforwardtoachieveanoutcomeoftheDohaRoundnegotiationsthatjustifiesitsdescriptionasa“developmentround”.Anyrenewalofsuchacommitmentcouldincludeanemphasisonimplementationissuesandmaintainingtheprincipleofasingleundertaking,ratherthanmovingtowardsavariablegeometrywherebyarangeofmandatorycorecommitmentsissupplementedbyplurilateralagreements.Thegreatestbenefitfromthismaywellbesimplymaintainingthepublicgoodcharacterofmultilateralrules.

ArefocusingoftradenegotiationsonmultilateralagreementswouldimplyreconsideringprovisionsthatgobeyondexistingWToagreements;butitshouldalsolookintogreaterflexibilityintheapplicationof

XII

theURAsbyrespondingconstructivelytoanumberofrecentdevelopments.Forexample,theflexibilitiesintroducedintothesystemofintellectualpropertyrightsprotectionwithrespecttopublichealthcouldbeextendedtosupporttechnologyadoptionandinnovationatallstagesofstructuraltransformation.Furthernegotiationsonindustrialtariffreductionscouldalsoprovidegreaterflexibilityforsector-specificpublicsupportpolicies.Thelatterwouldimplychangingthesector-specificlevelandstructureoftariffsovertime,whilemaintainingconsiderabledispersionoftariffsacrosseconomicsectors.

Fiscal space in the global context

Fiscalspacegoeshand inhandwithpolicyspace.evenifgovernmentsareallowedtodesignandimplementthedevelopmentpoliciesoftheirchoicewithintheexistinginternationalframeworkofnegotiatedrules andacceptednorms, theywill still need tofinance the investment andothergeneral and targetedexpendituresrequiredforimplementingthosepolicies.Thus,strengtheninggovernmentrevenuesiskey.

Fiscalspaceisbothacauseandaneffectofeconomicgrowthandstructuralchange.Higheraveragelevelsofincome,expansionofthemodernsectorsoftheeconomyandashrinkingoftheinformaleconomybroaden the tax base and strengthen the governments’ capacities tomobilizefiscal revenues.This, inturn, allows for higher growth-enhancing public spending, both on the supply side (e.g. investment ininfrastructure,researchanddevelopment,andeducation)andonthedemandside(e.g.social transfers).Conversely,limited,orevenadiminished,fiscalspaceisoftenpartofaviciouscircleofunderdevelopment.Theneedforreclaimingandexpandingfiscalspacefacesparticularchallengesinanincreasinglyglobalizingeconomy.officialdevelopmentassistance(oDA)cansupporttheexpansionoffiscalspace,particularlyintheleastdevelopedcountries(lDCs),ascanforeignborrowing,andonamoresustainablebasisifitisusedforexpandingproductivecapacities.However,theunpredictabilityofoDAcanmakeitdifficultforlong-termpolicyplanning,anditcanalsodelaytheestablishmentofpoliticalmechanismsthatsupportthedevelopmentalState.Moreover,inmostcases,relyingonothers’savingstofundbasicStateactivitiesraisesquestionsaboutvoiceandlegitimacy.Also,excessiverelianceonforeignsourceshasledtooverindebtednessandchronicdeficitsincountries’fiscalandexternalbalances,therebyreducingfiscalspaceinthelongrun.Therefore,expandingfiscalspaceshouldrely,asfaraspossible,ondomesticrevenuesourcesif it is tosustainanationaldevelopmentstrategy.Foreignfinancecancomplement,butnotreplace,suchrevenues.

Amajorproblemisthatglobalizationhasaffectedtheabilityofgovernmentstomobilizedomesticrevenues.Theirloweringoftariffshasresultedinreducedrevenuesinmanydevelopingcountries,oftensignificantlyso,whiletheincreasedmobilityofcapitalanditsgreateruseoffiscalhavenshaveconsiderablyalteredtheconditionsfortaxingincome−bothpersonalandcorporate−andwealth.Thedominantagendaofmarketliberalismhasledtoaglobalizedeconomythatencouragestaxcompetitionamongcountries,attimespushingthemtoa“racetothebottom”inofferingincentivesintheformofreduceddirecttaxation.Corporatetaxrateshavebeenonadecliningtrendindevelopedanddevelopingcountriesalike,oftenaccompaniedbysubsidiesorexemptionstoattractorretainforeigninvestment.inaddition,finance-ledglobalizationhasledtotheproliferationofoff-shorefinancialcentres,taxhavensandsecrecyjurisdictionsthatprovidevariousmeansoftaxavoidanceorevasiononascalethatismeasuredinbillions,ifnottrillions,ofdollars.

Taxation problems for the international community

Trademispricing, including through transfer pricing (i.e. the valuation of intra-firm cross-bordertransactionsby internationalcompanygroups),hasbecome theevasionmechanismofchoice formanycompanies. if the intracompany or intragroup price does not reflect the price thatwould be paid in amarketwhereeachparticipantactsindependentlyinitsowninterest,profitswithinacompanygroupcanbeeffectivelyshiftedtolow-taxorno-taxjurisdictions,whilelossesanddeductionsareshiftedtohigh-taxjurisdictions.Anotherwayofshiftingprofitsandlossesamongjurisdictionsisthrough“thincapitalization”,

XIII

whichoccurswhenacompanyhasahighproportionofdebtinrelationtoitsequitycapital,andmixesandmatchesintragroupdebtsandinterestpaymentsacrossitssubsidiariestominimizetaxpaymentsandgeneratehigheroverallprofits.

Theinternationaltaxarchitecturehasfailed,sofar,toproperlyadapttothisreality,therebyallowingamassivehaemorrhagingofpublicrevenues.Theopacitysurroundingtaxhavensmaypartlyexplainthedifficultiesfacedbypolicymakersincollectingpublicrevenues,butthemainobstacleispolitical:themajorprovidersoffinancialsecrecyaretobefoundinsomeoftheworld’sbiggestandwealthiestcountries,orinspecificareaswithinthesecountries.indeed,offshorefinancialcentresandthesecrecyjurisdictionsthathostthemarefullyintegratedintotheglobalfinancialsystem,channellinglargesharesoftradeandcapitalmovements,includingFDi.

Recently,anumberofdevelopmentsaimedatimprovingtransparencyandexchangeofinformationfortaxpurposeshavetakenplace.TheyincludeadeclarationbyG20leaderstopromoteinformationsharingwithrespecttoallkindsofabusesandfraudulentactivities,anoeCDActionPlanonbaseerosionandProfitShifting(bePS),increasedmonitoringbyseveralnationaltaxauthoritiesoftaxabusesbyrichindividualsandTNCs,andnumerousbilateraltaxtreaties(bTTs)andtaxinformationexchangeagreements(TieAs).

While these initiativesare steps in the rightdirection, their implementationandenforcementhavegenerallybeenveryslow.Thisisparticularlysowithregardtotransferpricingabuses,whichareextremelyharmfulfordevelopingcountries.becausetheseinitiativesaremostlyledbythedevelopedeconomies–themainhomestoTNCsandtosomesecrecyjurisdictions–therearerisksthatthedebatewillnotfullytakeintoaccounttheneedsandviewsofdevelopingandtransitioneconomies.itwillthereforebeimportanttogiveamoreprominentroletoinstitutionsliketheUnitedNationsCommitteeofexpertsoninternationalCooperationinTaxMatters,andtoconsidertheadoptionofaninternationalconventionagainsttaxavoidanceandevasion.

Althoughtheverynatureoftheproblemsuggeststheneedforamultilateralapproach,governmentscanalsoapplymeasuresatthenationallevel.Theycan,forinstance,legislatefortheadoptionofageneralanti-avoidancerule(GAAR)sothat“aggressive”taxschemescanbedeclaredillegalwhenchallengedincourts.Theycanalsobemoreeffectiveincombatingtransfermispricingintheirinternationaltradebyusingreferencepricingforanumberofhomogeneoustradedgoods.

Natural resources for public revenue

inmanydevelopingcountries,collectinghigherpublicrevenuesthroughrentsfromnaturalresources–andparticularlyfromtheextractiveindustries–isofparticularimportanceforthefinancingofdevelopment.Themaincontributionoftheseactivitiestodevelopmentiswhattheypayingovernmentrevenues,astheyoftengenerateenclaveeconomieswithweakornolinkageswiththerestoftheeconomy.However,astheriseofcommoditypricesduringthepastdecadeorsoledtoatenfoldincreaseintheprofitsoftheworld’slargestminingcompanies, itbecameobviousthat thepublicgainsfromresourcerentswerelaggingfarbehind.Corruptionmaybepartlytoblame,butthemainreasonhasbeenoverlygeneroustaxationregimesestablishedatatimeoflowprices,andoftenontherecommendationofthebrettonWoodsinstitutions,withtheaimofattractinginternationalfirmsandinvestorstothesector.

As a result,manygovernments–both fromdevelopedanddevelopingcountries–havebegun torevisetheirpoliciesrelatingtotheextractiveindustries.Thishasincludedrenegotiationorcancellationofexistingcontracts,increasesintaxorroyaltyrates,introductionofnewtaxesandchangesinthedegreeofStateownershipoftheextractiveprojects.Hostgovernmentscanalsobenefitfromastrengtheningoftheirbargainingpositions incontractnegotiationswithTNCsinvolvedin theextractive industriesdue to theemergenceofnewmajorplayers,suchascompaniesfromemergingeconomies.However,thesechanging

XIV

marketconditionsshouldnotobscurethewiderpolicychallengesfacedbyproducingcountriesinmakingthemostofextractiveindustriesfordevelopment.

Acomprehensivepolicyaimedatimprovingrevenuesfromnaturalresourcesneedstoincorporateseveralelements.First,governmentsshouldretaintheirrighttoreviewthetaxregimesandownershipstructureswheneverdeemednecessaryfortheeconomicanddevelopmentinterestsofthecountry.Aminimumleveloftaxationcouldalsobenegotiatedattheregionalorinternationallevelstoavoidaracetothebottom.Second,theyshouldhavethemeanstoenforcetherulesandobtaintheduerevenuesbybeingabletocontrolTNCs’transferpricingmanoeuvresandunderreportingofexportvolumes.Third,theyshouldbeallowedtodosowithoutthethreatoflegalretributionthroughtheexistinginvestmentdisputemechanisms.

Mostoftheneededmeasurescanbetakenatthenationallevel,butmultilateralcooperationisstilloftheutmostimportance.TransparencyinitiativessuchastheextractiveindustriesTransparencyinitiative(eiTi)shouldbemademandatoryandextended:theyshouldnotfocusonlyongovernments,butalsoonproducingfirmsandcommoditytradingcompanies.Thereshouldalsobeagreaterfocusonmonitoring,auditingandaccountability,aswellasenforcementofthefiscalconditionsandregulationsunderwhichextractiveindustriesoperate.institutionaldevelopmentandcapacity-buildingarecrucial,inparticulartoimprovethecapacitytonegotiatecontracts,butalsotoamelioratethemonitoringofproductioncosts,importandexportprices,volumes,qualitiesandtimeofdeliveryofthenaturalresourcesextracted,aswellasfordatacollectionandprocessing.Givenitsexpertiseintheareaofcommodities,transport,customsandtrade,UNCTADcouldprovidesupportinthisdomain.Regionalcooperationincapacity-buildingcanalsoproveveryuseful.Theinternationaldonorcommunityhasanimportantroletoplayinsupportingsuchinitiatives.

Preventingtheresourcedraincausedbyillicitfinancialflowsandtaxavoidancecanhelpprovidethenecessaryrevenuestofinancetheattainmentofnewdevelopmentgoals.Thus,giventheirrelevanceformanydevelopingcountriesandtransitioneconomies,fiscalspaceandrelatedgovernanceissuesshouldbeprominentcomponentsofthepost-2015developmentagenda.

MukhisaKituyi Secretary-GeneralofUNCTAD

Recent Trends in the World Economy 1

Theworldeconomyhasseenamodestimprove-ment in growth in 2014, although itwill remainsignificantlybelowitspre-crisishighs.itsgrowthrateofaround2.3percentin2012and2013isprojectedtoriseto2.5−3percentin2014.Thismildincreaseisessentiallyduetogrowthindevelopedcountriesaccelerating from1.3 per cent in 2013 to around1.8percentin2014.Developingcountriesasawholearelikelytorepeattheirperformanceofthepreviousyears,growingatbetween4.5and5percent,whileinthetransitioneconomiesgrowthisforecasttofurtherdeceleratetoaround1percent,fromanalreadyweakperformancein2013(table1.1).

1. Developed countries

Amoderateaccelerationofgrowthisexpectedindevelopedcountriesasaresultofaslightpick-upintheeuropeanUnion(eU),sincetheperformanceof Japan and theUnitedStates is not expected toimprovein2014.ineurope,tentativeeasingoffis-calausterityandamoreaccommodatingmonetarypolicy stance, including by theeuropeanCentralbank(eCb),hasshiftedthedirectionofdomesticdemandfromnegativetopositiveterritory.insomecountries (e.g. theUnitedKingdom), householddemand is being supported by asset appreciation

andtherecoveryofconsumerandmortgagecredit,andinothersbysomeimprovement inrealwages(e.g.Germany).However,inanumberofotherlargeeuro-zoneeconomies(e.g.France,italyandSpain)highlevelsofunemployment,stagnantorsluggishrealwage growth, and persistentweakness in thebanking sector continue to dampen the expansionofdomesticcreditconditionsandrestraindemandgrowth.Netexportsshouldmakeapositive,thoughverysmall,contributiontoeurope’soverallgrowthperformancein2014.

TheUnitedStates economy is continuing itsmoderaterecoveryfromtheGreatRecessionthrougharelianceondomesticprivatedemand.Fiscalauster-ityhasbeenadragoneconomicgrowthsince2011,albeitwithaslighteasingofthenegativeimpactin2014.Unemploymentiscontinuingtofallthankstojobcreationinthecorporatesector.However,aver-agerealwagesremainstagnant.Continuedliquidityexpansion, althoughmuch less aggressive than inpreviousyears,alongwithassetpriceappreciations,hashelpedtosupporttherecoveryofdomesticbor-rowingandconsumption.

Growth in Japan has also been relying ondomesticdemand.Privateconsumptionandinvest-menthavebenefitedfromtheexpansionarymonetaryandfiscalpoliciesofthe“Abenomics”plan.Therewas an increase in public spending,mainly for

RECENT TRENDS IN ThE wORLD ECONOMy

Chapter I

A. Global growth

Trade and Development Report, 20142

Table 1.1

wORLD OUTPUT GROwTh, 2006–2014(Annual percentage change)

Region/country 2006 2007 2008 2009 2010 2011 2012 2013 2014a

world 4.1 4.0 1.5 -2.1 4.1 2.8 2.3 2.3 2.7

Developed countries 2.8 2.5 0.0 -3.7 2.6 1.4 1.1 1.3 1.8of which:

Japan 1.7 2.2 -1.0 -5.5 4.7 -0.6 1.4 1.6 1.4United States 2.7 1.8 -0.3 -2.8 2.5 1.6 2.3 2.2 2.1European Union (EU-28) 3.4 3.2 0.3 -4.6 2.1 1.7 -0.3 0.1 1.6of which:

Euro areab 3.2 2.9 0.3 -4.5 2.0 1.6 -0.6 -0.4 1.1France 2.5 2.3 -0.1 -3.1 1.7 2.0 0.0 0.2 0.7Germany 3.7 3.3 1.1 -5.1 4.0 3.3 0.7 0.4 1.9Italy 2.2 1.7 -1.2 -5.5 1.7 0.4 -2.4 -1.9 0.1

United Kingdom 2.8 3.4 -0.8 -5.2 1.7 1.1 0.3 1.7 3.1New EU member States after 2004 6.4 6.0 4.0 -3.8 2.1 3.0 0.6 1.1 2.7

South-East Europe and CIS 8.5 8.7 5.3 -6.6 4.8 4.7 3.3 2.0 1.3South-East Europec 4.6 5.9 5.0 -2.1 1.7 1.9 -0.8 2.0 2.0CIS, incl. Georgia 8.7 8.9 5.3 -6.8 4.9 4.8 3.5 2.0 1.2of which:

Russian Federation 8.2 8.5 5.2 -7.8 4.5 4.3 3.4 1.3 0.5

Developing countries 7.7 8.0 5.4 2.6 7.8 6.0 4.7 4.6 4.7Africa 5.8 6.1 5.5 2.5 4.9 0.9 5.3 3.5 3.9

North Africa, excl. Sudan 5.3 4.8 6.1 2.9 4.2 -6.8 8.7 2.0 2.4Sub-Saharan Africa, excl. South Africa 6.4 7.5 6.2 4.5 6.4 5.1 4.6 5.3 5.9South Africa 5.6 5.5 3.6 -1.5 3.1 3.6 2.5 1.9 1.8

Latin America and the Caribbean 5.5 5.5 3.7 -1.6 5.7 4.3 3.0 2.6 1.9Caribbean 9.4 5.8 3.1 -0.2 2.6 2.4 2.5 2.6 2.8Central America, excl. Mexico 6.4 7.0 4.1 -0.3 4.1 5.3 5.1 4.3 4.3Mexico 5.0 3.1 1.4 -4.7 5.1 4.0 4.0 1.1 2.0South America 5.5 6.7 4.9 -0.3 6.4 4.5 2.4 3.1 1.7of which:

Brazil 4.0 6.1 5.2 -0.3 7.5 2.7 1.0 2.5 1.3Asia 8.7 9.1 6.0 4.0 8.9 7.2 5.2 5.3 5.6

East Asia 9.9 11.1 7.0 6.0 9.6 7.7 6.0 6.3 6.4of which:

China 12.7 14.2 9.6 9.2 10.4 9.3 7.7 7.7 7.5South Asia 8.3 8.9 5.3 4.6 9.1 6.9 3.6 3.8 5.0of which:

India 9.4 10.1 6.2 5.0 11.0 7.9 4.9 4.7 5.6South-East Asia 6.1 6.6 4.3 1.2 8.1 4.7 5.6 4.9 4.4West Asia 7.5 5.5 4.7 -1.0 6.9 7.4 3.8 3.8 4.0

Oceania 2.8 3.4 2.7 2.4 3.7 4.9 4.3 2.9 3.2

Source: UNCTAD secretariat calculations, based on United Nations, Department of Economic and Social Affairs (UN-DESA), National Accounts Main Aggregates database, and World Economic Situation and Prospects (WESP): Update as of mid-2014; ECLAC, 2014; OECD, 2014; IMF, World Economic Outlook, April 2014; Economist Intelligence Unit, EIU CountryData database; JP Morgan, Global Data Watch; and national sources.

Note: Calculations for country aggregates are based on GDP at constant 2005 dollars.a Forecasts.b Excluding Latvia.c Albania, Bosnia and Herzegovina, Montenegro, Serbia and the former Yugoslav Republic of Macedonia.

Recent Trends in the World Economy 3

reconstruction, following natural catastrophes in2011,andastimuluspackagepropelledtheJapaneseeconomy to higher growth in 2012−2013.As theeffectsofthosemeasuresdissipateandtheriseintheconsumertaxrateinApril2014beginstodiscour-agehouseholdspendinginthemediumterm,anewstimuluspackagemaybeneeded tohelpmaintaingrowthtargetsforgrossdomesticproduct(GDP)anddomesticprices.indeed,sustainedgrowthofnominalGDPwouldbetheonlyviablewaytoprogressivelybringdowntheveryhighratioofpublicdebttoGDP.

Despitesomedifferencesintheirpolicystances,alldevelopedregionsareexpectedtogrowatasimilarrateofaround1.5–2percentin2014.GDPintheeUislikelytoreturntoitspre-crisislevelof2007,albeitoneyearafterJapanandthreeyearsaftertheUnitedStates.The international trade of these countriesremainsweak,buthasrecoveredsomewhatsincethelastquarterof2013.Aprogressiverelaxationoffis-calausterityintheeUandtheUnitedStates,andthetaperingoffofveryexpansionarymonetarypoliciesinthelattercountry,haveledsomeobserverstobelievethattheseeconomiesarereachinga“newnormal”,andthattheyhavemanagedtoavertmostsystemicrisks.However,inthenewsituation,growthislikelytobeslowerthanbeforethecrisis,sinceinvestmentratesremainrelativelylowandseveralcountriesstillhavealongwaytogobeforeunemploymentratesfall and overindebtedness, in both the public andprivatesectors,isaddressed.ChapteriiofthisReportdiscusses someof thepoliciesbehind thismodestgrowthregime,andwarnsofitspotentialfragility.

2. Developing and transition economies

Themaindevelopingregionslooksettorepeatmuchthesamegrowthperformanceasin2012−2013.Asiaissettoremainthemostdynamicregion,withan estimated growth rate of around 5.5 per cent.Amongthelargesteconomies,Chinashouldmaintainitsleadwithagrowthrateofcloseto7.5percentin2014,basedondomesticdemand, includinganincreasingroleofprivateandpublicconsumption.Growthinindiahasrecoveredslightlyfromthesig-nificantdecelerationofthetwopreviousyears,ledbyhigherconsumptionandnetexports,butataround5.5percentitissubstantiallylowerthanbeforethecrisis.MostcountriesinSouth-eastAsia,including

indonesia,Malaysia,thePhilippinesandVietNam,areexpectedtocontinuetogrowataroundorabove5percent,drivenbyprivateconsumptionandfixedinvestment,butwith littleornocontributionfromnetexports.ThemainexceptionisThailand,wherepoliticalcrisishascausedtheeconomytostagnate.economicperformanceismorecontrastedinWestAsia:severalcountrieshavebeendirectlyor indi-rectlyaffectedbywar,theGulfcountriesareexpectedtomaintaingrowthratesof4−5percent,andTurkey,whichhasbeenexposedtofinancialinstability,maynotbeabletosustainafairlyrapidgrowthtrajectorythatisdrivenbydomesticcreditexpansion.

Growth inAfrica also showswide contrasts:it remainsweak inNorthAfrica,withmarginalimprovementsinegyptandTunisia,butacontinuedfallinlibya,duetoarmedconflictanddisruptionsin oil production.Growthhas also remained sub-dued inSouthAfrica,ataround2percent,owingtoaweakeningofdomesticdemandandstrikesinthemining sector.by contrast, several large sub-Saharaneconomies(includingAngola,Côted’ivoire,theDemocraticRepublic of theCongo,ethiopia,Mozambique,Nigeria and theUnitedRepublic ofTanzania)postedhighgrowthrates,whichislikelyto result in 6 per cent growth in the subregion in2014.inseveralcountries,historicallyhighlevelsofcommoditypriceshavebeensupportingthisgrowthformore thanadecade,butother factors, suchasimprovements in agriculture and recovery fromcivilconflicts,havealsoplayedanimportantrole.However,therearedownsiderisksasdemonstratedbytherecentreturnofbothGhanaandZambiatotheiMF,inthefaceofsharpdeclinesintheircurrency.

Thetransitioneconomiesaresetforacontinuedeconomic slowdown in 2014.Slowgrowth in theeuropean transition economies ismainly attribut-able to stagnating consumption and investment intheRussianFederationsincemid-2013,asfinancialinstabilityhasledtoincreasedcapitaloutflows.ontheotherhand,CentralAsiantransitioneconomies,mostofwhichareoilormineralexporters,wereabletomaintainfairlyhighgrowthrates,asaresultofhistoricallyhightermsoftrade.

Followingastrongreboundin2010,economicgrowth in latinAmerica and theCaribbean hasexperienced a continuous slowdown, and is pro-jected to be about 2 per cent in 2014.Thisweakperformancemainlyreflectsslowgrowthinthethree

Trade and Development Report, 20144

main economies,Argentina,brazil andMexico,wheredomesticdemand(theirmaindriverofgrowthaftertheglobalcrisis)haslostmomentum.externalfinancial shocks inmid-2013 and early 2014 alsoaffectedthoseeconomies,leadingtoatighteningofmacroeconomic policy.However,well-capitalizedbanking systems, low external andfiscal deficits,externaldebtsathistoricallowsandsufficientlev-els of international reserves have prevented theseshocksfromdevelopingintofinancialcrises.Severalcountriesexportinghydrocarbonsorminerals(e.g.the Plurinational State ofbolivia,Colombia andecuador) are showing significantly higher growthrates,pushedbyhighlevelsofdomesticdemand,intermsofbothconsumptionandinvestment.

Generallyspeaking,developingcountrieshavemanagedtorecoverfromtheGreatRecessionfasterthandevelopedcountries.Manyofthemhaveben-efitedfromhighcommodityprices,especiallythosewhosegovernmentswereabletocaptureasignificantshareofnaturalresourcesrentsandusetheadditionalrevenues for supportingdomestic spending.othercountries,despitebeingexposedtothevagariesofinternationalfinance,wereabletotackletheconse-quencesoftheglobalfinancialcrisisbysupportingdomestic demandwith countercyclical policies.However,therearelimitstowhatcanbeachievedbybothcountercyclicalpoliciesandgainsfromthe

termsoftrade,andnewsourcesofdynamismwillneedtobefound.inadditiontodemand-sidepoli-ciesthatmayincluderedistributionpolicies,severalcountriesneedtoimprovetheirdomesticinvestmentandconductindustrialpoliciesaimedatanexpansionoftheirproductivecapacityandcompetitivenesssoas to respond to rising demandwithout excessivepressureondomesticpricesortradebalances.

Developingcountrieswillalsohavetofacethechallengeofpersistentinstabilityoftheinternationalfinancial system.This should involve prudentialmacroeconomic and regulatory policies,mainlyappliedatthedomesticlevel,butalsobetterregula-tionatthegloballevel.inthisrespect,itisevidentthat,despitethegenerallyfavourabletrendsinrecentyears, the present framework for sovereign debtrestructuringisinappropriate.ThisiswellillustratedbythelegalobstaclescurrentlyfacedbyArgentinainthenormalservicingofitsrestructuredsovereigndebt.1Argentina’sexperienceshowsthatthisframe-worknotonlydiscouragesnewdebtrestructuring,butthatitmayevenjeopardizesuccessfulpastrestructur-ings.establishingamultilateralstructurefordealingwith sovereign debt restructuring thatwould takeintoconsiderationgeneralinterests,andnotjusttheprivateones–aproposalmadebyUNCTADtwodecades ago – appearsmore pertinent and urgentthanever.

B. International trade

Sixyears after the onset of the globalfinan-cial crisis, international trade remains lacklustre.Merchandise tradegrew slightly above2per centin volume in 2012−2013 (andwas even slower ifmeasured in current dollars),which is below thegrowthofglobaloutput.Tradeinservicesincreasedsomewhat faster, at around 5.5 per cent in 2013atcurrentprices.This lackofdynamismcontrastssharplywithitsrapidexpansioninthetwodecadesprecedingthecrisis,whenglobaltradeingoodsandservicesexpandedmorethantwiceasfastasglobaloutput,atannualaveragesof6.8percentand3percent respectively.During that period, the share of

exportsandimportsofgoodsandservicesinGDPvirtuallydoubled,fromaround13percentto27percentindevelopedcountries,andfrom20percenttocloseto40percentindevelopingcountries.

1. Trade in goods

internationaltradeingoodshasremainedsub-dued.Followingitspost-crisisreboundin2010, itsloweddowntoaround2percentin2012and2013(table1.2).Thistrendisexpectedtocontinueinto

Recent Trends in the World Economy 5

2014:UNCTAD-WTo(UNCTADstat)estimatedthatinternational tradegrewat2per cent (seasonally-adjustedandannualizedrate)inthefirstquarterof2014.Allregionshaveexperiencedadecelerationintheirvolumeoftradeinvaryingdegrees,thegreat-estslowdownbeinginthedevelopedcountries,thetransitioneconomiesandlatinAmerica.

in2013,developedcountries’importsshrankby0.4percentforthesecondconsecutiveyear,owingtoacontractionof1.2percent in theeU.This isprimarily the resultofweak intra-eUtrade. Japanand theUnitedStates also experienced significantslowdowns.eUexportspickedupto1.4percentin2013duetogrowthofeUexportstocountriesout-sidetheregion,whilethosefromtheUnitedStatessloweddown to2.6percent.bycontrast, Japan’sexportscontractedfurtherto1.8percent,despitethedepreciationoftheyen.2Duringthefirstquarterof2014,estimatedtradevolumesfordevelopedecono-miesgrew2.4percent,yearonyear,albeitfromaratherlowbase.

Tradeindevelopingandtransitioneconomiesalso decelerated.The slowdownwas particularlyacute in the transition economies, owing toweakeuropeandemandfortheirexports,whilethegrowthrateoftheirimportshalved,to2.7percent,asaresultofaslowdownintheirownGDPgrowth.indevel-oping countries, the growth of exportsweakenedfurther,to3.4percentin2013,alsoreflectingweakexternaldemand,inparticularfromdevelopedecono-mies.Anotableexceptionwasdevelopingcountries’imports,whichhaveremainedresilient,growingatcloseto5.5percent,duetorobustdemandinsomeoftheirlargesteconomies.inaddition,persistentlyhigh(althoughinsomecasesdeclining)exportpricesofcommoditiesallowedsomeofthem(particularlyinAfricaandWestAsia) to increase their imports(byvolume)eventhoughthevolumeoftheirexportsgrewataslowerrate.Theirhigherimportsprovidedsomeimpetusforexportgrowthinothercountries.

Withinthegeneraltrendofaslowergrowthoftrade in developing regions, there is considerable

Table 1.2

ExPORT AND IMPORT VOLUMES OF GOODS, SELECTED REGIONS AND COUNTRIES, 2010–2013(Annual percentage change)

Volume of exports Volume of imports

Region/country 2010 2011 2012 2013 2010 2011 2012 2013

world 13.9 5.5 2.3 2.2 13.8 5.4 2.1 2.1Developed countries 12.9 4.9 0.5 1.3 10.8 3.4 -0.4 -0.4of which:

Japan 27.5 -0.6 -1.0 -1.8 10.1 4.2 3.8 0.5United States 15.4 7.2 4.0 2.6 14.8 3.8 2.8 0.9European Union 11.6 5.5 -0.1 1.4 9.4 2.8 -2.5 -1.2

Transition economies 11.4 4.1 1.3 1.0 17.6 16.8 5.0 2.7of which:

CIS, incl. Georgia 11.3 3.9 1.5 0.3 19.9 17.7 5.8 2.4

Developing countries 16.0 6.7 4.6 3.4 18.5 7.7 5.3 5.5Africa 10.3 -6.8 7.8 -1.8 6.5 3.9 11.8 5.6

Sub-Saharan Africa 11.9 0.9 1.2 2.3 6.7 9.3 7.1 8.0Latin America and the Caribbean 8.1 5.1 3.1 1.5 22.3 11.3 3.1 2.4East Asia 24.3 10.7 5.3 5.2 22.5 7.7 4.4 7.8of which:

China 29.5 13.4 7.4 4.8 25.0 10.7 6.1 8.8South Asia 11.0 9.4 -7.1 1.9 14.5 5.6 2.9 -0.6of which:

India 14.0 15.0 -1.8 7.6 13.8 9.7 5.5 0.1South-East Asia 18.6 4.7 2.2 4.9 22.0 7.0 6.1 3.8West Asia 4.2 9.1 9.8 2.2 8.6 8.2 8.7 8.6

Source: UNCTAD secretariat calculations, based on UNCTADstat.

Trade and Development Report, 20146

variation.exportsremainedweakinAfricain2013andthefirstmonthsof2014,partlyduetotheshuttingdownoftwoimportantoil-exportingportsinlibyasinceJuly2013andtofallingexportsinSouthAfrica.butduringthisperiod,exportgrowthimprovedinseveralothersub-Saharancountrieswhoseexportshavetendedtoshiftdirectiontowardsthefastergrow-ingAsiandeveloping countries. imports remainedstrong,particularlyinthesub-SaharanAfricancoun-tries,wheretheyexpandedby8percentinvolume,inlinewithrapidGDPgrowthinthesubregion.

Trade ineastAsia decelerated dramatically,fromannualgrowthratesof20percentormore(involume)duringthepre-crisisyearsto5−6percentin2012and2013.TradeintheRepublicofKoreawasvirtuallystagnantintheselatteryears,asexportswereaffectedbyarecessionindeveloped-countrymarketsandbyitsowncurrencyappreciation.However,muchoftheslowdownoftradeinthissubregionreflectsthesteepfallinthegrowthrateofChineseexportstodevelopedcountries,fromanaverageof25percentbefore theGreatRecession toamere2.5percentin2012and2013.AsChina’stradewithdevel-opingcountriesstillgrowsatdouble-digit rates,atpresenttheseaccountforasmuchas53percentofChina’sexports,comparedwith42percentin2004.Concomitantly,growthofChineseimportshavealsosloweddown,althoughmoremoderately,to8.8percentinvolumein2013.Nevertheless,Chinaremainsaveryimportantmarketformanydevelopingcountries,especiallybecauseoftherapidlyincreasingshareofcommoditiesinChineseimports,whichclimbedfrom18percentin2004to31percentin2011−2013.

inSouthAsia, thereboundinindia’sexportssupported theeconomicrecovery in theregion. inparticular,thecountryregistereddouble-digitgrowthof its exports to some of its largest developing-countrypartners,suchasChinaandtheUnitedArabemirates.exportsinthesubregionasawholegrewmuch less,owing to restrictionson tradewith theislamicRepublicofiran.

inSouth-eastAsia,growthintraderemainedwellbelowpre-crisis trends,mainlydue tovirtualstagnationinThailandandindonesia,thoughstrongdomesticdemand, including investment inexport-oriented sectors, stimulated trade growth in thePhilippines andVietNam. inWestAsia, internalinstabilitiesandstableoiloutputsignificantlyslowedexportgrowth.

inlatinAmericaandtheCaribbean,thetradevolumesloweddownsignificantlytoagrowthrateofaround2percent.SlowGDPgrowthinitsmajormarkets(includingtheUnitedStatesandthemainintraregionalpartners)andrealexchangerateappre-ciationaffectedtheregion’sexports:brazil’sexportsstagnatedin2013,andintherestofSouthAmerica,themodestgrowthinthevolumeofexportswasmorethanoffsetbythefallinexportunitprices,leadingtoanoverallreductioninthetotalvalueofexports.AmoderateincreaseinMexico’sexportssomewhattemperedthereductioninthesurplusinthebalanceof goods trade, from0.9 to 0.3 per cent ofGDP(eClAC,2014).

2. Services

Globalexportsofservicesexpandedataround5.5percentin2013(atcurrentprices),andatabout7 per cent in thefirst quarter of 2014, comparedwiththesameperiodofthepreviousyear.itreached$4.7trillionin2013,representing20percentoftotalexportsofgoodsandservices–asharethathasbeenquitestablesincetheearly1990s.

The evolution of trade in services tends tobemorestablethanthatofgoods,asitreactslessabruptlytotheeconomicsituation.itsgrowthrate,which exceeded that of goods in 2012, 2013 andthefirstmonthsof2014,partly reflects itsgreaterresilience to theslowdowninglobaloutput,but itmayalsobeevidenceofsomestructuralfactorsthatcontribute to expanding trade in services.Amongthemost dynamic services sectors between 2008and2013werecomputerandinformationservices(withanaverageannualgrowthof9.1percent),fol-lowedbypersonal,culturalandrecreationalservices(8.9percent),andthenbyotherbusinessandpro-fessionalservices(6.8percent).Thecomputerandinformationservicessectorindevelopingeconomiesrecorded the highest growth rates: 13per cent onaverageannuallysince2008,comparedwith7.5percentindevelopedcountries.Financialandinsuranceservicesareotherfast-growingareasindevelopingcountries,withanaverageannualincreaseofalmost11percent.exportsofthesemodernservicesalsogrewrapidlyintheleastdevelopedcountries(lDCs),although fromvery low levels. Since 2008, com-puter and information services, insurance services

Recent Trends in the World Economy 7

andconstructioninlDCshaverecordedanaverageannual increaseof close to30per cent.However,togethertheyrepresentedjust7percentoflDCs’totalexportsofservicesin2013.

Thetwomajorcomponentsofworldtradeinser-vicesremaintourismandtransportservices.exportsintourismgeneratedearningsof$1.4trillionin2013.Receiptsfrominternationalvisitorsgrew5percent(inconstantdollars),exceedingitslong-termtrend.Touristarrivalsalsogrewby5percentin2013,toreach1,087millionpersons.europeandAsiaandthePacificaccountedfor42percentand31percentofallinternationaltourismreceipts,respectively(WorldTourismorganization,2014).Tourismflowsappeartobeunaffectedbysloweconomicgrowth,whichmayindicateparticipationbyalargerproportionoftheworld’spopulation,particularlyfromdevelopingcountrieswithagrowingmiddleclass.ofthe$81bil-lion increase in international tourism expenditurein2013,brazil,ChinaandtheRussianFederationaccountedfor$40billion.

international transport services – the secondlargestcategoryofcommercialservices–alsopostedapositivebutdeclininggrowthin2013.Preliminarydataindicatethatworldseabornetrade–ameasureofdemandforshipping,portandlogisticsservices–increasedby3.8percentin2013,comparedwith4.7percentin2012(UNCTAD,2014).Thisgrowthresultedfroma5.5percentincreaseindrycargoship-ping(includingcontainerizedtradeandcommoditiescarriedinbulk),whichaccountsfor70percentoftotal shipping.Tanker trade,whichconstitutes theremaining30percent,wasflatcomparedwith2012(ClarksonResearchServices,2014).

Developingcountriescontinued tocontributelarger shares to international seaborne trade. intermsofglobalgoodsloaded,theirshareincreasedfrom60per cent in 2012 to 61per cent in 2013.Meanwhile, their import demand, asmeasuredbythevolumeofgoodsunloaded,increasedfrom58percent to 60per cent.Thesefigures reflect growingSouth-South/intra-Asiantrade,developingcountries’increasingparticipationintheworldtradingsystem,and their rising consumption of commodities andconsumptiongoods.

Developing countries have traditionally reg-isteredhigher loadedvolumes thanunloadedonesowingtotheirsupplyofrawmaterialstodeveloped

economies.However,thistrendhasbeenchangingovertheyearssincedevelopingcountrieshavestartedtoaccountforlargersharesofimports(unloading).Thus,inthesecountriesunloadedgoodsarestead-ilycatchingupwithloadedones,becomingalmostonaparin2013.Thismirrorsdevelopingcountries’urbanizationprocess,theirgrowingpopulationandtheir emergingmiddle class, aswell as the inter-nationalization of supply chains and productionprocesses.Nevertheless,thebalancebetweenloadedand unloaded volumes at regional levels remainsuneven,andskewedtotheloadedsideinAfrica,latinAmericaandtheCaribbeanandWestAsia.

3. Trade and growth

Slowoutputgrowthisthemainreasonforvir-tuallystagnanttrade,especiallyingoods.Subduedinternationaltrade,inturn,islikelytohamperglobaleconomicgrowthinthelongrun,totheextentthatthe lower incidence of scale economies and spe-cializationgainsholdsbacktheproductivityfrontier.expanding trade should thereforebe an importantcomponentofaprocessaimedatstrong,sustainableandbalancedgrowth.This,inpart,isthelogicbehindeffortstoconcludeadevelopment-friendlyroundofmultilateraltradenegotiationslaunchedin2001inDoha.Attheendof2013,amultilateralframeworkonTradeFacilitationwasreachedattheiXthWToMinisterialConferenceinbalitoboostthemultilat-eraltradingsystem,andasasteppingstonetoclosingthemorecomprehensiveDohapackage.However,thatagreementwasnotadoptedbythemembershipinGenevabytheproposeddeadlineof31July.Giventhe insufficiency of global demand, it is anywayunlikelythatinternationaltradealonewillbeabletokick-starteconomicgrowth.Whateverthedesirabil-ityoffacilitatingtradeflowsbymodernizingcustomsproceduresorfurtherloweringtariffs,thesewouldnot,bythemselves,beabletosignificantlychangethesituation,sincetheydonotaddresstheimmediatemainconstraintsontrade.internationaltradehasnotdeceleratedorcome toavirtualstandstillbecauseofhigher tradebarriersor supply-sidedifficulties;itsslowgrowthistheresultofweakglobaldemand.inthiscontext,alopsidedemphasisonthecostoftrade,promptingeffortstospurexportsthroughwagereductionsandan“internaldevaluation”,wouldbeself-defeating and counterproductive, especially if

Trade and Development Report, 20148

suchastrategyispursuedbyseveraltradepartnerssimultaneously.

Thewaytoexpandtradegloballyisthrougharobustdomestic-demand-ledoutputrecovery;nottheotherwayround.Moreover,ifanindividualcountryorgroupofcountrieswere to tryanexit fromthecrisisthroughnetexports,thisstrategywouldcreateafallacyofcompositioniffollowedbymanytradingpartners.Awider revivalofeconomicgrowthandtradecouldconceivablyfollowfromsurgingdemandinanumberofsystemically importanteconomies.However,demandmustalsobegeographicallydis-tributedinawaythatisconsistentwiththereductionofglobalimbalances.Thisrequiresthatsurpluscoun-triestaketheleadinexpandingdomesticdemand,soastoenableanexpansionaryadjustment,incontrast

with the recessionarybiasofbalance-of-paymentsadjustments,which,typically,placetheentireburdenondeficitcountries.

Therefore,countriescannotpassivelywaitforexternalsourcesofdemandtorevivegrowth.inthepost-crisisenvironment,wherethereislessdynamicdemand from developed economies, developingcountries need to adopt a balanced approach thatgivesalargerroletodomesticandregionaldemandandtoSouth-Southtradethaninthepast(TDR 2013).ifmanytradingpartnersencouragedomesticdemandsimultaneously,theywouldalsobesupportingeachother’s exports and the recovery of internationaltrade.Atthesametime,productioncapacitiesshouldbeexpandedandadaptedtothenewdemandpatternthroughappropriate,proactiveindustrialpolicies.

C. Recent developments in commodity markets

in 2013 and early 2014,most commodityprices continued their declining trend after theirpeaksreachedin2011,althoughthedeclinewasataslowerpacethanin2012.Thepriceofcrudeoilwasanotableexception,sinceithasbeenrelativelystablesince2011.inthesecondquarterof2014,thereappeartohavebeensignsofstabilization,andevenarecovery,inthepricesofanumberofcommodities.inthetropicalbeveragesandvegetableoilseedsandoilscommoditygroups,thepricereboundbeganafewmonthsearlier(chart1.1).Whatismore,dur-ing theperiod2012−2014mostcommoditypricesstayed,onaverage,atsubstantiallyhigherlevelsthantheaveragelevelsoftheboomperiodof2003−2008(table1.3).Pricesofmanycommoditiesarestillatlevelsclosetotheirpeaksof2008.

While recent developments in commodityprices have differed by commodity group and forparticular commodities, a common feature in thephysicalmarkets is that supply-side factors haveplayed a predominant role in those developments.Thereareindicationsthatchangesinphysicalcom-moditydemandfactorshadonlyasmallinfluenceon

theevolutionofcommoditypricesin2013andearly2014.ingeneral,demandforcommoditiescontinuedtogrow,althoughmodestlybecauseofthesluggishgrowthoftheworldeconomy.Contrarytowidespreadbelief,theslowdowninthegrowthofChina’sGDPduringthisperioddoesnotseemtohavemadeamajordentinglobaldemandgrowthformanycommodities.3indeed,Chinesedemandremained robust formostcommoditiesin2013,andthereareindicationsthatitisholdingupin2014,partlyduetoitsGovernment’sstimulusmeasures.A case in point is that of cop-per: therewas a 12.2 per cent increase in refinedcopperconsumptioninChinain2012,withonlyaslightdecelerationto11.2percentin2013,whereasworldwiderefinedcopperconsumption,increasedby4.8percentin2013,comparedwitha2.6percentrisein2012(Cochilco,2014).However,itisnotquiteclearhowmuchofthedemandforcopperinChinaisforactualconsumptionandhowmuchiskeptinbondedwarehousesascollateralforfinancingdeals.

Crudeoilpricescontinuedtooscillatewithina narrow band in continuation of the trend theyhad exhibited since 2011.betweenmid-2013 and

Recent Trends in the World Economy 9

mid-2014,thehighestpriceofthemonthlyaverageofUnitedKingdombrent(light),Dubai(medium)andTexas(heavy)equallyweightedcrudeoilwas$108.8 per barrel in September 2013,while thelowestpricewas$102.3perbarrelinJanuary2014.Nevertheless,thereweresignsofincreasedvolatil-ityduringthesecondquarterof2014asgeopoliticaltensions inWestAsia and inUkraine raised riskperceptionsinenergymarkets.4Thisvolatilityseemstoberelatedmoretomarketsentimentthantorealproductioneffects,asnosignificantdisruptioninpro-ductionassociatedwiththesetensionshadoccurredbyJuly2014.

in general, the oilmarketwaswell suppliedin 2013 and thefirst half of 2014,mainly due toincreasedproductionintheUnitedStateslinkedtotheshaleoilandgasboom.Thishascompensatedforoilsupplydisruptionsinotherproducingcountries,suchastheislamicRepublicofiran,libya,NigeriaandSouthSudan(AieCe,2014).Membersof theorganizationofthePetroleumexportingCountries(oPeC)continuetoplayanimportantroleinglobalmarkets,asreflectedintheperceivedimpactofthetensionsintheWestAsianregion.However,largernon-oPeCsupplieshavehelpedbuffertheeffectofthosepressures.indeed,onlyafewyearsagosimilareventswouldmostlikelyhaveledtosubstantialoilpricehikes,whilethistime,althoughsomevolatilityhasemerged,pricemovementshavebeencontained.After oil prices increasedwith the intensificationoftheconflictiniraq,theyfellbackinresponsetoindicationsthatlibyansupplywouldreturntothemarketsoon.However,thesupplypictureremainsuncertainanddependsverymuchontheevolutionofgeopoliticalconditionsinsomemajorproducingcountries.Asforthedemandside,growthofdemandforoilcontinuestobedrivenbynon-oeCDcoun-tries,where it remainedrobust in2013,at3.1percent,withdemandfromChinaincreasingby3.8percent.However,therewasnogrowthindemandforoilinoeCDcountries(bP,2014).

Agriculturalcommoditypriceshavecontinuedtodisplayahighdegreeofvolatility(Mayer,2014).Their evolution has been strongly determined byweatherconditionswhichhavefavouredorcurtailedproduction, dependingon the type of commodity.Forfoodcommodities,pricedevelopmentshavedif-feredsignificantlybycommoditygroup.inthecaseof cereals,bumpercropsas a resultof favourableweatherconditionsledtolowerpricesandhealthy

Chart 1.1

MONThLy COMMODITy PRICE INDICES By COMMODITy GROUP, JAN. 2002–JUNE 2014

(Index numbers, 2002 = 100)

Source: UNCTAD secretariat calculations, based on UNCTAD, Commodity Price Statistics Online database.

Note: Crude petroleum price is the average of Dubai/Brent/West Texas Intermediate, equally weighted. Index numbers are based on prices in current dollars, unless otherwise specified.

0

100

200

300

400

500

600

All commoditiesAll commodities (in euros)Minerals, ores and metalsCrude petroleum

0

100

200

300

400

FoodTropical beveragesVegetable oilseeds and oilsAgricultural raw materials

2002 2004 2006 2008 2010 2012 2014

2002 2004 2006 2008 2010 2012 2014

Trade and Development Report, 201410

Table 1.3

wORLD PRIMARy COMMODITy PRICES, 2008–2014(Percentage change over previous year, unless otherwise indicated)

Commodity groups 2008 2009 2010 2011 2012 2013 2014a

2012–2014 versus

2003–2008b

All commoditiesc 24.0 -16.9 20.4 17.9 -8.3 -6.7 -3.9 55.6All commodities (in SDRs)c 19.5 -14.5 21.7 14.1 -5.5 -6.0 -5.3 53.3All food 39.2 -8.5 7.4 17.8 -1.4 -7.4 -2.0 68.8

Food and tropical beverages 40.4 -5.4 5.6 16.5 -0.4 -6.7 -2.5 70.8Tropical beverages 20.2 1.9 17.5 26.8 -21.5 -18.3 20.5 50.9

Coffee 15.4 -6.9 27.3 42.9 -25.7 -23.6 25.5 58.5Cocoa 32.2 11.9 8.5 -4.9 -19.7 2.0 23.7 38.8Tea 27.2 16.5 -1.0 11.4 0.8 -23.9 -11.5 31.9

Food 42.5 -6.0 4.4 15.4 2.0 -5.7 -4.3 72.8Sugar 26.9 41.8 17.3 22.2 -17.1 -17.9 -1.8 86.1Beef 2.6 -1.2 27.5 20.0 2.6 -2.3 5.5 64.2Maize 34.0 -24.4 13.2 50.1 2.6 -12.1 -16.0 93.3Wheat 27.5 -31.4 3.3 35.1 -0.1 -1.9 -0.8 51.6Rice 110.7 -15.8 -11.5 5.9 5.1 -10.6 -18.1 52.2Bananas 24.6 0.7 3.7 10.8 0.9 -5.9 1.3 55.2

Vegetable oilseeds and oils 31.9 -28.4 22.7 27.2 -7.6 -12.6 2.1 55.1Soybeans 36.1 -16.6 3.1 20.2 9.4 -7.9 -1.7 66.7

Agricultural raw materials 20.5 -17.5 38.3 28.1 -23.0 -7.4 -5.4 44.5Hides and skins -11.3 -30.0 60.5 14.0 1.4 13.9 14.8 37.1Cotton 12.8 -12.2 65.3 47.5 -41.8 1.5 3.2 46.2Tobacco 8.3 18.0 1.8 3.8 -3.9 6.3 10.7 51.7Rubber 16.9 -27.0 90.3 32.0 -30.5 -16.7 -21.8 62.4Tropical logs 39.3 -20.6 1.8 13.8 -7.4 2.6 3.5 27.4

Minerals, ores and metals 6.2 -30.3 41.3 14.7 -14.1 -5.1 -6.8 38.9

Aluminium -2.5 -35.3 30.5 10.4 -15.8 -8.6 -5.0 -11.3Phosphate rock 387.2 -64.8 1.1 50.3 0.5 -20.3 -27.6 59.9Iron ore 26.8 -48.7 82.4 15.0 -23.4 5.3 -17.6 10.1Tin 27.3 -26.7 50.4 28.0 -19.2 5.7 2.7 110.4Copper -2.3 -26.3 47.0 17.1 -9.9 -7.8 -5.6 54.4Nickel -43.3 -30.6 48.9 5.0 -23.4 -14.3 10.2 -18.9Lead -19.0 -17.7 25.0 11.8 -14.2 3.9 -1.9 51.3Zinc -42.2 -11.7 30.5 1.5 -11.2 -1.9 7.4 0.6Gold 25.1 11.6 26.1 27.8 6.4 -15.4 -8.5 163.7

Crude petroleumd 36.4 -36.3 28.0 31.4 1.0 -0.9 0.9 78.1

Memo item:Manufacturese 4.9 -5.6 1.9 10.3 -2.2 1.7 .. ..

Source: UNCTAD secretariat calculations, based on UNCTAD, Commodity Price Statistics Online database; and United Nations Statistics Division (UNSD), Monthly Bulletin of Statistics, various issues.

Note: In current dollars unless otherwise specified.a Percentage change between the average for the period January to May 2014 and the average for 2013.b Percentage change between the 2003–2008 average and the 2012–2014 average.c Excluding crude petroleum. SDRs = special drawing rights.d Average of Brent, Dubai and West Texas Intermediate, equally weighted.e Unit value of exports of manufactured goods of developed countries.

Recent Trends in the World Economy 11

levelsofinventories.Thesituationinthericemar-ketishighlydependentontheevolutionoftheThaiGovernment’sricereserves.overall,amplesuppliesandweaker grain prices in 2013 helped improvetheworldfoodsecuritysituation;theUnitedStatesDepartmentofAgriculture(USDA,2014a)projectsthatin2014thenumberoffood-insecurepeoplewillfallby9percent,to490million,inthe76low-andmiddle-incomecountriesitconsiders.Thegreatestdeclineofalltheregionsisexpectedtobeinsub-SaharanAfrica,wherethenumberoffood-insecurepeople isprojectedtofallbycloseto13percent.Nevertheless, in early 2014, cerealmarketswereupsetbysomeweather-relatedsupplyconcerns,aswell as by geopolitical tensions in theblackSearegion.Thisledtoatemporaryreboundinpricesofwheatandmaize,astherewasincreasinguncertaintyabouttheimpactoftheconflictoncerealproductioninthismajorproducingandexportingregion.DryweatherinSouthAmericaalsoledtoincreasesinsoy-beanpricesinlate2013andearly2014,inacontextofsolidgrowthofsoybeanconsumptioninChina.

by contrast, themore recent price increasesin the group of tropical beverages (chart 1.1) aremainlyrelated tounfavourableweatherconditionsresulting in reducedharvests; for example, coffeepricessurgedduetodryweatherinbrazil.5Similarly,cocoaproductionwas affectedby crop conditionsinmajorproducingcountriesinWestAfrica.Asforsugar,weather-relatedproductionshortagesinbraziland increased demand contributed to the recentsurgeinprices,afterasharpdeclinein2012−2013.Regardingagriculturalrawmaterials,cottonpricesweresupportedmainlybythestockpilingpolicyofChina,whichholdsabout60percentofglobalcot-toninventories(iCAC,2014).Thepriceofnaturalrubberfellduetoplentifulsupply.

Thepriceindexofthegroupofminerals,oresandmetalsexhibitedthemostpronounceddecliningtrendin2011−2013(chart1.1).Thispricedeterio-rationwasmainlyduetomoderatedemandgrowthin a context of increasing supplies in response totheinvestmentsmadeduringtheperiodofrapidlyincreasingprices.6Asaresult,mostmetalsmarketshavebeeninasurplussituation.inparticular,abun-dantsuppliesinthecoppermarkethavecontinuedtoexertdownwardpressureonprices.Nonetheless,there have been price reversals in somemetalsin 2014. For nickel, amineral ore export ban inindonesia,amajorproducingandexportingcountry,

reducedglobalsupplies,leadingtoasharpincreaseinprices.ConcernsonnickelsuppliesfromtheRussianFederationhavealsoplayedarole.Thepriceofalu-miniumalsosoaredinthefirsthalfof2014,primarilyduetoreducedsupplyassmeltersshutdownproduc-tionfollowingthelowlevelofpricesin2012−2013.Renewedinvestorinteresthasaddedtotheseupwardpressures on prices (see below).7 in the preciousmetalsgroup,goldpricesbouncedbackslightlyinearly2014,thankstoincreaseddemandforitasasafehavenfollowinggeopoliticaltensionsindiffer-entpartsof theworld.However,physicaldemandremainedweak.Theprices of the platinum-groupmetalsalsoroseasaresultofstrikesintheminingsectorinSouthAfrica,whichisamajorproducingcountrytogetherwiththeRussianFederation.

Asinpreviousyears,short-termdevelopmentsin commodity prices continued to be influencedbythehighdegreeoffinancializationofcommod-itymarketsduring2013andthefirsthalfof2014.investmentsincommoditiesasafinancialassetcantakedifferentforms,andforsomeofthese,dataarenotreadilyavailableforprovidinganoverallindica-tionofmagnitude.Thus theevolutionoffinancialinvestments in commodities cannot be properlycapturedby a single variable.Nevertheless, as anillustration,barclays’ data8 on commodity assetsundermanagement (AUM) indicated amarkeddropin2013.Thedeclineoffinancialpositionsincommodity exchangesmayhave contributed to aweakeningof commodityprices.Still, totalAUMhaveremainedatveryhighlevels.Afterasharpfallinthesecondhalfof2008followingtheonsetoftheglobalfinancialcrisis,AUMhadstronglyrecovered,reachingapeakof$448billion inApril2011 (upfromatroughof$156billioninNovember2008).The averageAUM for January toMay2014was$321billion,whichissignificantlyhigherthantheaverageofthesameperiodin2008,at$236billion.Thelatterperiodofcommoditypricespikespromptedincreased questioning about the role of financialinvestorsincommoditymarkets.Duringthefirsthalfof2014therewassomestabilizationinthelevelofAUM,whichmayreflectarevivalofinvestorinterestincommoditiesasafinancialasset.Thisinteresthasbeenfuelledbyincreasedpricevolatility,improvingreturnsoncommoditiesandlowercorrelationswithother financial assets,which encourage portfoliodiversification.by20 June 2014,Deutschebank(2014b)notedthatcommoditieshadbeentheworld’sbestperformingassetclasssincetheendof2013.9

Trade and Development Report, 201412

inthefirsthalfof2014thereweresomeepisodeswheninvestorsmayhavecontributedtoamplifyingcommoditypricemovementsbeyondwhatwouldbewarrantedbysupplyanddemandfundamentals.Thismaypartlyexplainthepriceincreasesofcerealsearlyin the year, followinggeopolitical tensions in theblackSearegion.FinancialpositionsinwheatandmaizeontheChicagoboardofTraderosestronglyduringthefirstfourmonthsof2014(Mayer,2014).However,grainproductionwasnotaffectedbythosetensions,ashadbeenfeared,andfinancialinvestorsunwoundtheirpositions.Anotherexamplewastherapiddeclineincopperpricesasaresultofacoppersell-offinearlyMarch2014(AieCe,2014).ThiswaspromptedbyuncertaintiesaboutthepossibilityofanunwindingofinventoriesinChinaduetoprospectsof tightening credit conditionswhich could affectthe use of copper as collateral infinancingdeals.Similarly,bymid-July2014bigspeculatorsslashedtheirlongcrudeoilfuturesandoptionspositionsinwhatwasthesecondlargestdeclinesincetheUnitedStatesCommodity FuturesTradingCommissionbegan reporting these data in 2009. Changes inposition-takingmostlikelycontributedtothegyra-tionsinoilpricesinJuneandJuly2014,owingtouncertainties in oil production in connectionwithgeopoliticaltensionsinUkraineandWestAsia.10

inacontextofdiminishingreturnsoncommodi-tiesin2013,11associatedwithdecliningpricesandstricterfinancialregulations,includinglargercapitalrequirements,anumberofmajorbanksinvolvedincommodity futures tradinghave eitherwithdrawnfrom this activity or scaled it back substantially.However,thisshouldnotleadtotheprematurecon-clusion thatfinancializationof commodity futuresmarkets is no longer an influencing factor or anissueofconcernforcommoditypricedevelopments.indeed,someothermajorbankshaveintensifiedtheirfinancialactivityinthisdomain.12Moreover,tradingincommodityfuturesdoesnotstopasbanksexitit;thebanksbasicallyselltheircommodityunitstootheragents.Thereareindicationsthatcommoditytradingcompaniesareintensifyingtheirparticipationincom-modityfuturestrading.Forexample,thecommoditytradingfirmMercuriaacquiredthecommoditiesunitofJPMorganChase.13Asthesecommoditytradingfirms operate in a relatively less transparent andregulatedenvironmentthanbanks,thismaycreateadditional difficultieswhen considering possibleregulation of thefinancialized commodity futuresmarkets.inaddition,mediareportsnotethatsome

Chinesebanksarealsomovinginto thisactivity.14According toFutures industry (2014) theChinesecommodityfuturesmarketsshowedexplosivegrowthin 2013,with the number of contracts traded onexchangesup38.9percentfrom2012.Furthermore,itisnotonlyfinancialagentsapartfrombanks,butalsootheractors,suchasmajorcommodityproduc-ingcompanies, that areentering thisbusiness; forexample,Rosneft,theState-controlledoilenterpriseoftheRussianFederation,acquiredtheoiltradingunitofMorganStanleyinDecember2013.

Theprogressivelymoreentangledenvironmentforcommodityfuturestradingsuggeststhatregulat-ingthefinancializedcommoditymarketsremainsasrelevantasever.inconsideringregulation,thisactiv-ityshouldbelookedatinabroadsense,examiningnotjusttheagentsthatrunthebusiness,butalsothekindsoffinancialactivities.Furthermore,inordertopreventthecommodityfuturestradingfrommovingto different locationswhere regulationsmight beweaker or absent, regulations should be global inscopeandcoverage.

Short-term prospects for commodity pricesremainhighlyuncertaininviewoftheerraticglobaleconomic recovery and geopolitical tensions indifferent commodity-producing regions. Supplyconditions,involvingtheemergenceofnewsupplies,maycontinuetoexertdownwardpressureonprices.inparticular,thereareexpectationsofanotheryearofgoodcropconditionsformaizeandsoybeansasaresultofasuccessfulplantingseasonandhigheryields in theUnitedStates.15However, the supplyofagriculturalcommoditiesrisksbeingnegativelyaffectedbyunfavourableweatherconditionsassoci-atedwiththe“elNiño”phenomenoninthesecondhalfof2014.16onthedemandside,muchdependsontheevolutionoftheemergingmarketeconomies–particularlyChina–wherecommoditydemandismoredynamic.

Fromalongertermperspective,theconclusionoftheanalysisofTDR 2013thatcommoditypricesaresettoremainhighinhistoricalterms,aftersomeshort-termcorrections,remainsvalid.ThisissupportedbyrecentstudiesbytheWorldbankandtheiMF.AccordingtoCanuto(2014:1),“itmaybetoosoontosaythatthecommodities super-cyclephenomenon is a thingofthepast”;andtheiMF(2014b:36)findsthat“China’scommodityconsumptionisunlikelytohavepeakedatcurrentlevelsofincomepercapita”.

Recent Trends in the World Economy 13

Notes

1 After defaulting on part of its external debt inDecember2001,Argentinarestructured92.4percentofitwithtwodebtswaps(2005and2010).ithas,since,regularlyservicedthenewbonds.PartoftherestructureddebtwasissuedunderthejurisdictionoftheStateofNewYork.Asmallnumberofinstitu-tionalinvestors–so-called“vulturefunds”–acquiredpartoftheremainingbondswithdeepdiscountandsoughttoobtainitsfullfacevaluebyfillingasuitattheSouthernDistrictCourtofNewYork.basedonanunprecedentedinterpretationofthepari passuclauseof thedebtcontracts,a federal judgerulednotonlythatArgentinahadtopaythefullamountclaimedbythevulturefundsbuthealsoforbadeanynewpaymentsontherestructured92.4percentofthedebtunlessthevulturefundswerepaidconcurrentlyorinadvance.TherulingwasupheldbytheAppealsCourtofNewYork,andtheSupremeCourtdeclinedtohearArgentina’srequest toreviewthecase.on30 June 2014,Argentinamade a due payment of$539millionthroughtheusualchannel,thebankofNewYorkMellon.butundertheorderoftheNewYorkDistrictCourtjudge,thatbankdidnottransferthemoney to their owners, the exchange holders.Thejudgedidnotagreeeithertoextendthe“stay”that allowedbondholders to receive thepaymentswhileArgentina negotiated themeans for payingthe $1,350million claimed by the vulture funds.Argentinaneededtodelayanyagreementthatwouldofferbetterconditionstothevulturefunds,becausetherestructureddebthasaclause(“rightsuponfutureoffers”–RUFo)whichstipulatesthatifArgentinaofferedbetterconditionstoanycreditorinthefuture,thoseconditionswouldextendtoallcreditorsagree-ing to restructure their claims in 2005 and 2010.ThisRUFoclauseisduetoendon31December2014,buttheNewYorkcourthassofarrefusedtoallowanydelayintheimplementationofitsruling.Thiscouldcancelthesuccessfuldebtrestructuringsof2005and2010andobligeArgentinatodisbursemorethan$120billion.SeeUNCTADNewsitemon“Argentina’s‘vulturefund’crisisthreatensprofoundconsequences for international financial system”(25 June2014), available at: http://unctad.org/en/

pages/newsdetails.aspx?originalVersioniD=783&Sitemap_x0020_Taxonomy=UNCTADHome.

2 one explanation for the lack of exchange rateelasticity of Japanese exports is that the share ofconsumerdurables(whosedemandisprice-elastic)in its exports has halved since the late 1980s, toabout15percentatpresent,whilecapitalgoodsandindustrialmaterialsnowaccount forabout80percent of Japan’s export volumes. itmightwell bethatJapan’sexportswillonlyincreasewhenglobalinvestmentrecovers.

3 SeeiMF,2014b,chart1.2.2. 4 Thepotentialimpactoncommoditymarketsofgeo-

politicaltensionsoverUkraineisanalysedinmoredetailiniMF,2014a;AieCe,2014;andDeutschebank,2014a.

5 CoffeecropsinCentralAmericawerealsodamagedbydisease(iMF,2014a).

6 DatafromSNlMetals&Mining(2014)showthatworldwidemetalsandminingexplorationbudgetstotalled$13.75billionin2008,up677percentfromthebottomofthecyclein2002.Whiletheydroppedconsiderablyaftertheglobalfinancialcrisisin2008,theyquicklyrecoveredtoreacharecord$20.53bil-lionin2012.However,in2013theyfellby30percent.Thismaypointtotightermetalsuppliesintheyearstocome.

7 Seealso,Financial Times,“Copperconfoundsbearswithstronggains”,3July2014.

8 Dataprovidedbybarclays(personalcommunication). 9 See alsoFinancial Times, “basemetals return to

investors’radar”,9July2014;Reuters,“Commodityinvestor inflows rebound as sector outperformsshares”,17April2014;Financial Times,“Sunfinallyshines on commodities”, 30 June 2014;Reuters,“Ralliesinenergy,metalsboostcommodityfundsinQ2-lipper”,11July2014;andReuters,“investorsswapgrainsformetalsasflowstrickletocommodi-ties”,21July2014.

10 SeeReuters,“bigfundsslashoilbetsbynearly$6blnin biggest exodus-CFTC”, 21 July 2014;Futures Magazine,“Crudespecscutoffguard”,21July2014;andFinancial Times,“Speculatorscutbetsonhigheroilprices”,21July2014.

Trade and Development Report, 201414

11 According to data from the business intelligenceprovider,Coalition, quoted inmedia reports, therevenues of the top 10 banks from commoditiesdroppedby18percentin2013to$4.5billion,downfromtherecordofover$14billiontheyhadreachedin2008,attheheightofthecommoditypricesboom.SeeReuters, “Majorbanks’ commodities revenueslid18percent in2013”,18February2014;andReuters, “Major banks’Q1 commodities revenueup1sttimesince2011”,19May2014.

12 SeeReuters,“AmidfrigidWinter,Goldman,MorganStanley see commodity gains”, 17April 2014;bloomberg,“GoldmanSachsstandsfirmasbanksexitcommoditytrading”,23April,2014;andFinancial

Times,“Goldmanseekscommoditiesedgeasrivalsretreat”,15July2014.

13 SeeFinancialConductAuthority(2014);andFinancial Times,“banks’retreatempowerscommoditytradinghouses”,31March2014.

14 SeeBusiness Insider,“ChinesebanksarejumpingintoabusinessthatWesternbanksaredroppingleftandright”,21January2014.

15 Forprojectionsonagricultural supply, seeUSDA(2014b).FAo(2014)alsolooksatshort-termpros-pectsoftheworldfoodsituation.

16 TheUnitedStatesNationaloceanicandAtmosphericAdministrationgivesa70percentprobabilityforittohappen(Worldbank,2014).

References

AieCe (2014).World Trade and Commodity Prices in 2014-2015.Associations d’instituts européens deconjonctureéconomique.louvain-la-Neuve.WorkingGrouponCommodityPricesandForeignTrade.

bP (2014).Statistical Review of World Energy 2014.london.

Canutoo (2014).The commodity super cycle: is thistimedifferent?WorldbankeconomicPremise150,Washington,DC.

ClarksonResearchServices(2014).DrybulkTradeoutlook.london,ClarksonResearchServiceslimited,June.

Cochilco(2014).Anuario de Estadísticas del Cobre 1994-2013.ComisiónChilenadelCobre.Santiago,Chile.

Deutschebank(2014a).Ukraine&GlobalCommodities.SpecialReport.DeutschebankMarketsResearch,FrankfurtamMain,3March.

Deutschebank(2014b).Commodities Weekly.DeutschebankMarketsResearch,FrankfurtamMain,20June.

eClAC(2014).balanceeconómicoActualizadodeAméricalatinayelCaribe2013.Santiago,Chile,April.

FAo(2014).CropProspectsandFoodSituation.Rome,July.FinancialConductAuthority(2014).Commodity Markets

Update,london,February.Futures industry (2014).FIA Annual Volume Survey.

FuturesindustryAssociation.Washington,DC,June.iCAC(2014).Worldpriceshighdespiteexcessproduction.

internationalCottonAdvisoryCommittee, PressRelease,13February;availableat:https://www.icac.org/Press-Release/2014/PR-3.

iMF(2014a).Quarterly Review of Commodity Markets,2014Q2.Washington,DC.

iMF(2014b).SpecialFeature:Commoditypricesandfore-casts.in:World Economic Outlook 2014.Washington,DC,April.

MayerJ(2014).Foodsecurityandfoodpricevolatility.in:KathuriaRandNagpalNK,eds.Global Economic Cooperation - Views from G20 Countries.NewDelhi,Springer(india),forthcoming.

oeCD(2014).Economic OutlookNo95,May.SNlMetals&Mining(2014).WorldexplorationTrends

2014.ASpecialReportfromSNlMetals&Mining,for the PDAC international Convention, avail-able at: http://go.snl.com/rs/snlfinanciallc/images/WeTReport_0114.pdf.

UNCTAD(2014).Review of Maritime Transport 2014.UnitedNationspublication,Geneva,forthcoming.

UNCTAD(TDR 2013).Trade and Development Report, 2013. Adjusting to the changing dynamics of the world economy.UnitedNationspublication,salesno.e.13.ii.D.3,NewYorkandGeneva.

USDA (2014a). international food security assess-ment, 2014-2024.Washington,DC,UnitedStatesDepartmentofAgriculture,June.

USDA (2014b).World agricultural supply anddemandestimates.Washington,DC,11July.

World bank (2014). CommodityMarkets outlook.Global economic Prospects. July, available at:http://www.worldbank.org/content/dam/Worldbank/GeP/GePcommodities/commodity_markets_out-look_2014_july.pdf.

WorldTourismorganization (2014).UNWTO World Tourism Barometer,vol.12.Madrid,April.

Towards a Sustained Economic Recovery: Review of Policy Options 15

Thischapterexaminessomeofthemainmacro-economicpolicystancesindevelopedanddevelopingcountries and their policy options. it shows thatnotonlyistherecoveryofglobalgrowthsincethefinancialcrisisratherweak,butalsoitsdriversareinadequate. indeed, in severalmajor economies,policiesintendedtospurtherecoveryaresimilartothose that led to the latestglobalcrisis in thefirstplace,whichraisesjustifiabledoubtsaboutthesus-tainabilityofthemodestGDPgrowthattainedsofar.Thechapterthenundertakesanempiricalmodellingexercise tohighlight thepossibleconsequencesofcurrentpolicies,andoffersanalternativesetofpolicyoptions.Thismethodologyhelpstohighlightissuesof consistency (or the lack of it) betweendiversepoliciesappliedatthenationallevel,aswellastheinterrelationships between the outcomes of thosepoliciesindifferentcountriesandregions.

SectionAanalysesthepolicyapproachesadopt-ed bydeveloped anddeveloping countries.Thesepoliciesconsistofavariedmixofwagecompression,reducedpublicsectorspending,andaheavyrelianceonliquidityexpansionthatcausesassetappreciationsanddebtbubbles,especiallyindevelopedcountries.Whilesuchpoliciesmaycontributetofastergrowthinasubsetofcountriesintheshortrun,suchapat-ternofexpansionsowstheseedsofafuturecrisis.Totheextentthatlabourincomesdonotincreaseandpublicsectorservicesandsocialprotectionarecut

back,therecanbenosolidgrowthofrealdemandto fully absorb the additional liquidity created byexpansionarymonetary policies.Todate,most oftheextraliquidityhasflowedinsteadintospeculativeactivityormovedabroad.Policymakingindevelop-ingcountriesisfurtherchallengedbythesetrends,whichhaveeitherdistortedpricesorshiftedresourceallocationsawayfromprimarydevelopmentgoals.Altogether,risksofahard-landingareincreasing,andifthisoccurs,itcouldhavestrongnegativeeffectsonglobaldemandandfinancialstability.

Sectionbassessesthisconfigurationofpolicieswiththehelpof theUnitedNationsGlobalPolicyModel (GPM), and evaluates themacroeconomicimplications for themedium term. itmeasurestheimpactofcurrentpoliciesongrowth,demand,financialstabilityofthepublicandprivatesectors,andexternalbalances.Themodellingframeworkisthenusedtoexaminetheimpactofadifferentsetofpolicychoicesthatreplicatesomeofthemorefavour-ableconditionsthatprevailednotsolongago.Thishypotheticalexercisedemonstratesthatcoordinatedincomespolicieswhichwould restore thepatternsof distribution of themid-1990s, combinedwithsupportivefiscalpoliciesandinvestmentpromotionpolicies,coulddeliverarobust,sustainedandmorebalancedgrowthperformancethanabaselinewhichassumesaprolongationofcurrentpolicystances.

Chapter II

TOwARDS A SUSTAINED ECONOMIC RECOVERy: REVIEw OF POLICy OPTIONS

Trade and Development Report, 201416

Tomany observers, the improvement, albeitsmall, of the growth performance of someof themajoreconomiesin2013cameasapleasantsurprise.Thatmomentum is expected to continue through2014.Meanwhile,projectionsforsomedevelopingandtransitioneconomiessuggestthatgrowthislikelyto be slower than expected, but nevertheless con-siderablyfasterthaninmostdevelopedeconomies.overall,thereislikelytobesomeimprovementinglobal growth performance in 2014.At an initialglance,thiswouldappeartobeawelcometrend,butadeeperlookatthenatureofthisgrowthrevivalraisesconcerns.Theanalysisthatfollowssuggeststhattherecentgrowthinanumberofimportanteconomiesmaynotbebasedonsoundpolicies.Thus,evenifthecurrentpaceismaintainedforsometime,vulner-abilitytofinancialshockspersists,duetoarepeatofthepolicyfailingsthatledtothe2008globalcrisis.

1. Policy stances in the developed world

(a) Synchronizedprematurefiscalcontractions

inmostdevelopedeconomies,therewasasharpturnaroundoffiscalpolicyin2010,withtheapparentwithdrawaloffiscalstimuli,butwhichwaseffective-lyacontractionofgovernmentspending(chart2.1).Thechartshowsthedifferencesinrealgovernmentspendingongoodsandservicesbetweenthesecondquarterof2010and the last quarterof2013, as apercentof real2010Q2GDP(thus reflecting thecumulativecontributionofgovernmentspendingtoGDPgrowth).However, thismaynotbe the idealmeasure,sinceitassumesthatzerogrowthofgov-ernmentspendingisaneutralstance.infact,afterextraordinarymeasures,suchasafiscalstimulus,are

removed,atrulyneutralstancewouldbetoreturntoa“normal”growthpathofrealspending,whichcanbeestimatedintheformofalong-termtrend.1Hence,chart2.1alsocomparestheactualvalueofrealgov-ernmentspendingwithwhatcouldhaveresultedifgovernmentspendinghadfolloweditslong-termpaceofgrowth,whichisamoremeaningfulindicationofthedegreeofthefiscaladjustmentfrommid-2010.

Chart2.1confirms that themostpronouncedcasesoffiscalausterityhavebeenintheperipheralcountriesoftheeuroarea.ThenegligiblesizeoftheeuropeanbudgetandthereluctanceoftheeuropeanCentralbank(eCb)toassumetheroleoflenderoflast resortaffected thedegreeand timingoffiscaladjustments in these countries.Due to such insti-tutionalflaws,nationalgovernmentshadtoabsorbthecostsofthecrisis,inmanycasesleavingthemlittlealternativebuttosubsequentlysqueezepublicspending.bythelastquarterof2013,realgovern-ment spending on goods and services inGreece,ireland, italy, Portugal, Slovakia and Spainwasbelowthe levelof2010,showingshortfalls in therangeofroughly1percentto2.5percentofGDPover this period (2010Q2−2013Q4).Comparingtheseobservedpatternswiththelong-termtrendofgovernmentspending,theimpliedadjustmentturnsouttobemorethantwicethosefigures.otherecono-miesintheeuroareaalsochangedtheirfiscalstance.evenifgovernmentspendinginrealtermsremainedclosetothelevelsof2010,whencomparedwiththelong-term trend, almost all these other economieseffectively adopted a contractionary fiscal stancefrom2010Q2totheendof2013.

Severaldevelopedeconomiesoutsidetheeuroareafollowedasimilarpath,promptedbythethreatthat fiscal deficits,whatever their cause,may beviewed as a sign of economic “indiscipline” andresultincreditdowngrades.itwasfearedthatsuch

A. Policy threats to a global economic recovery

Towards a Sustained Economic Recovery: Review of Policy Options 17

downgradesmight cause stampedesby concernedinvestors.Amongtheseeconomies,acloserexamina-tionoftheUnitedKingdomandtheUnitedStatescanoffersomeusefulpointers.intheformer,thefiscalstimulusadoptedtoavertadeeperrecessionafterthefinancial crisiswas reversedprematurely, causingasecondrecession.initially,arecoveryinexportshelpedweathertherecession,butthatrecoveryturnedouttobeshort-lived.Amoderaterelaxationofthefiscalstanceeventuallyfollowedinresponsetotheweak growth performance.The cumulative effectofgovernmentspendingfrom2010Q2to2013Q4accountedforamere0.6percentofGDP,andbytheendofthatperiod,realGDPintheUnitedKingdomremainedbelowthelevelof2007.2

intheUnitedStates,adjustmentsimposeduponfinancially stretched state and local governmentsstarted in 2009Q4,3 followed in 2010 by cuts infederalspendinginthewakeofdiscussionsonthedebtceiling.ContributionsofrealspendingtoGDPgrowthby thegovernmentsectorasawholehavebeenconsistentlynegativesince2010Q3,amount-ingtoacumulativenegativecontributionof1.6percent by 2013Q4.Comparedwith the long-termtrend,therewasacumulativegapinrealgovernmentspendingofmorethan3percentofrealGDPfrom2010Q2to2013Q4.

on the whole, governments in developedcountriesadoptedcontractionaryfiscalstancesfrommid-2010totheendof2013,whencomparedwiththelong-termtrend.onlyJapanandFrancemain-tainedthetrendgrowthofspendingoverthisperiod.ThecaseofJapanisrevealing.itexperiencedalongdeflationaryperiodbeforebeingadverselyaffectedfirst by the global crisis and subsequently by theearthquakeof2011.TheGovernment’sadoptionofstrongmonetaryandfiscalstimulioverthepasttwoyears (referred to as “Abenomics”) hasmetwithsomesuccesssofar.DomesticdemandhasbeenamoreimportantdriverofJapan’sGDPgrowththanitsnetexports,whichinturnimpliesapositiveeffectonglobaldemand.Thisisthekindofadjustmentthatshouldbeexpectedfromasurpluscountrytohelpavoidaglobaldeflationarytrap.

Finally, in Sweden and Switzerland publicspendingincreasedabovethetrendafter2010,whichisconsistentwiththeirslightlybettergrowthperfor-mancecomparedwithmosteUcountries.

(b) Mercantilist race to increase exports

intheaftermathofthefinancialcrisisitisnormalto expect subdued spendingbyhouseholds,whichwere affected by a fall in asset values and heavydebtburdens.Thisnarrows theoptions forpolicy-makers inattempting toreviveaggregatedemand.butifpublicsectordemandisalsosuppressed,theonlyremainingalternativesarenetexportrecoveryora revivalof“animalspirits” that triggerapushinprivateinvestment.4Unlesshouseholds’balance

Chart 2.1

ChANGE IN REAL GOVERNMENT ExPENDITURE, SELECTED DEVELOPED

COUNTRIES, 2010 Q2–2013 Q4(Per cent of real 2010 Q2 GDP)

Source: UNCTAD secretariat calculations, based on Economist Intelligence Unit (EIU), CountryData database.

Note: Long-term trend is estimated by applying from 2010 Q2 onwards the average expenditure growth of the period 1997 Q1–2010 Q2.

-6 -4 -2 0 2

SwedenSwitzerland

FranceJapan

AustraliaGermany

NorwayFinland

RomaniaBelgiumCanadaBulgariaPoland

United KingdomNew Zealand

DenmarkHungary

Czech RepublicSlovakia

ItalyNetherlands

United StatesIrelandGreece

PortugalSpain

Compared with 2010 Q2Compared with long-term trend

Trade and Development Report, 201418

sheets regain strength and consumer confidencerecovers,especiallywhenemploymentlevelsarelow,aresumptionofproductiveinvestmentforthedomes-ticmarketseemsunlikely.Giventheseconstraints,anypossiblechanceofsuccessforthisstrategyrestsonstimulatingprivateinvestmentinexportsectors.

over theyears,TDRsandother studieshavearguedthatrelyingonanexport-ledrecoverycan-notbeasolutionforallatthesametime.Yet,inthecurrentcircumstancesofminimalglobalcoordina-tion,aggregation issuesarenotaprimaryconcernofpolicymakers;eachcountry,individually,expectsto becomeawinner.Accordingly, compressionofwageincomeshasbecomeakeycomponentoftheprevailing“structuralpolicies”aimedatincreasingcompetitiveness.itisbelievedthatsuchpolicieswillinduceinvestment,whileadepreciationintherealexchangerate,derivedfromrelativelylowerwages,willhelptogainmarketshares.Theseemingsuccess

ofahandfulofcountriesintranslatingimprovedcostcompetitivenessintoexportgrowthtendstoreinforcesuchbeliefs.Thereisalsotheaddedfearthatcoun-triesthatdonotjointhisraceriskbeingleftbehind.

Suchbeliefscallforadeeperexaminationoftheempiricalevidence.Thiscanbedonebytakingtheeuropean countries as a sample.This choiceofferstheadvantageofconcentratingontherecentperiodinwhichtherehasbeenconcurrentpressureinthesecountriestoreducelabourcostsinordertogainexportshares.Theadditionaladvantageoftak-ingeuropeasasampleisthatfeedbackssimilartothosefoundwithglobalaggregationcanbecapturedto a significant degree, since a fairly substantialproportionof tradeintheregionis internal tothismarket.Thecorrelationbetweenwagecompressionandexportgrowthintheshortruncannotbefullyignored,asreflectedinchart2.2A.Takingatwo-yearperiodstartingin2010,whenpoliciesshiftedaway

Chart 2.2

ChANGES IN REAL UNIT LABOUR COSTS AND ExPORTS, SELECTED EUROPEAN COUNTRIES, 2010 Q3–2013 Q4

(Per cent)

Source: UNCTAD secretariat calculations, based on Eurostat; OECD.StatExtracts; and UNCTADstat.Note: Countries included are Austria, Belgium, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary,

Ireland, Italy, Luxembourg, the Netherlands, Norway, Poland, Portugal, Slovakia, Slovenia, Spain, Sweden and the United Kingdom. In the first phase, data for real unit labour costs refer to the change between 2010 Q3 and 2012 Q1, while data for exports refer to the change between 2011 Q1 and 2012 Q3. In the second phase, data for real unit labour costs refer to the change between 2012 Q1 and 2013 Q2, while data for exports refer to the change between 2012 Q3 and 2013 Q4.

Exp

orts

Unit labour costs

A. First phase B. Second phase

y = -2.2539x - 3.6948 -30

-20

-10

0

10

20

30

-10 -8 -6 -4 -2 0 2 4 6

Exp

orts

Unit labour costs

-30

-20

-10

10

20

30

-10 -8 -6 -4 -2 0 2 4 6

0

y = -0.1066x + 1.2719

Towards a Sustained Economic Recovery: Review of Policy Options 19

fromfiscalstimuliandtowardsacompetitiveracetogainexportmarketshares,thescatterplotshowsthat, despite great diversity of outcomes, exportsseemtohavebeeninverselycorrelatedwithchangesinrealunitlabourcostsamongtheselectedsampleof developed economies.However, inmost casessuchaneffectfadesovertime(chart2.2b).effortstowards achieving greater cost competitivenessthroughlabourmarketflexibilityandwagecompres-sionfaceknownconstraints:competitionbecomesharder,asthereisalimittohowmuchlabourcostscanbecutwithoutseriouslyaffectingsocialstabil-ityandproductivity.Whatismore,declininglabourincomesaffectrevenuesofhouseholdsthathaveahigherpropensity tospend, furthereroding, in theaggregate, consumption and investment demand.Thiseventuallyhasanadverseimpactonimports,andthusontheexportsofthewholesetofcountries.

Thesedynamicsarecapturedinchart2.3.Undernormalconditionsthatwouldallowsustaineddemandexpansion,realunit labourcostsshouldat leastbestableorrise,butstartingin2010,theindexofrealunitlabourcosts(weighted)contracted.Threeorfourquarterslater,realGDPintheseeconomiesstoppedgrowing, and as a result, import volumes deceler-ated sharply. in the aggregate, imports remainedflatthroughout2013,withasmallupturninthelasttwo quarters, largely in response to asset appre-ciations fuelling demand in themajor economies(seebelow).Therelevantpoint is that theratioofimportstoexportsdeclinedconsiderably.Hence,theapparent success of a net-export-oriented strategymostlyreflects,intheaggregate,anadjustmentontheimportside.inotherwords,astrategybasedonacompressionoflabourincomesalone,ifcarriedoutbyasignificantnumberofcountries, runs theriskofexacerbatingadeflationarytrapforallofthem.

(c) Declining labour-income shares and global imbalances

Further clarifications can be provided fromlongertermanalyses,as themostrecentevolutionofrealunitlabourcostsandGDPgrowthineuropesuggests some ambiguity about the relationshipbetweenthesevariables(chart2.3).Despiteaseem-ingpause inwagecompression ineurope, thoughnorealgrowthinwages,GDPseemstobegainingtraction.likewise, therewere periods in the pastwhenGDPgrowthindevelopedcountriesremained

relativelystrongeventhoughlabourincomesharesinGDPwerefalling,oronlymarginallyrising.Atleastfromtheearly1990s,therewasamarkedlong-termtendencyforwagesharestofall inanumberofdevelopedeconomies(seechart2.4,wherewagesharesare thenationalaccountsequivalentof realunit labour costs), though in a fewof them somestabilizationhastakenplaceinrecentyears.

Thesedatacanbecomplementedwiththehis-toricalinvestigationofPiketty(2014).Hisdetailedanalysisoftaxreturnsandotherdatasetsinanumberofcountriesandacrossdecades(and,inafewcases,centuries)hastheadvantageofshowingtheevolutionofincomenotonlyamongwageandprofit-earners,butalsoacrossthedistributionofhouseholds.Theresultspointtothecontinuingstagnationinearningoflow-andmiddle-incomegroupsinanumberofdevel-opedcountriesovertime,togetherwithadramatic

Chart 2.3

REAL GDP, REAL UNIT LABOUR COST AND RATIO OF IMPORTS TO ExPORTS

IN EUROPE, 2009 Q4–2013 Q4(Index numbers, 2009 Q4 = 100)

Source: UNCTAD secretariat calculations, based on Eurostat; OECD.StatExtracts; and UNCTADstat.

Note: Europe includes Belgium, Czech Republic, Denmark, Finland, France, Germany, Hungary, Ireland, Italy, the Netherlands, Poland, Portugal, Slovakia, Spain and the United Kingdom. Unit labour cost is weighted by imports.

92

94

96

98

100

102

104

106

Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

2009 2010 2011 2012 2013

Unit labour cost

Ratio of imports to exports

GDP

Trade and Development Report, 201420

riseintheearningsofthetopdecile,andofthetoppercentileintheUnitedStates,butalsoinAustralia,Canada,France,Japan,theUnitedKingdomandmorethan20othercountries.5Theriseattheverytopofthedistributionofearnedincomesissostaggeringthat it is reasonable to suggest that such earningsshould actuallybe conceptualized as “rents” fromaccumulatedwealth.

Variousimplicationsofrelevancetothepolicydiagnosis of this chapter can be extracted fromPiketty’swork.First,aggregatestatisticsoflabourincomesharesbasedonnationalaccountsdonotfullycapturethetrueextentofdeteriorationoftheincomesofmiddle-andlow-incomewageearners.Removingtherisingproportionsofearnedincomeof thetopdecile,andespeciallythetoppercentileinmost,ifnotall,thedevelopedeconomies,andcharacterizingtheminsteadasprofitearnings,wouldsignificantlyaccentuate the declining trends of labour incomenoted above.6 Second, Piketty observes relativelyconstant patterns ofworsening distribution overconsiderably longperiods,measurable indecades,interruptedonlybywarsorseriouscrises.Theauthorargues that returnsoncapital tend to increaseatafasterratethanthegrowthofincomeandwages,par-ticularlyasGDPgrowthdeceleratesintheprocessofdevelopment.7Themorethatcapitalisaccumulatedatthetop,themoretheeconomicstructureislikelytobeshapedtofavourrentsandprofitsoverwageincome,whichthenreducestherelianceoftheown-ersofcapitalonfasterGDPgrowth.Policy-driveneffortstobringaboutwagecompetitivenesswiththeaimoftriggeringfastergrowthofGDPwouldexac-erbate,ratherthanreverse,thistrend.Third,Pikettyadvances a possible interpretation of the globalfinancial crisis of 2008-2009on this basis. in hisopinion,thelong-runtendencytowardsanincreaseinthewealth-to-incomeratio,togetherwiththeriseof cross-border capital, which presumably tookplaceaswealth-holderssoughthigherrentsthroughareallocationoftheirportfoliosinglobalmarkets,contributedtogreaterglobalfinancialvulnerabilityand,eventually,totheglobalcrisis.

Agrowingbodyofresearchhasshedlightonthe global implications ofworsening income andwealthdistributionongrowthandstability(baker,2009;Crippsetal.,2011;Galbraith,2012).basedonthis,itwouldseemthatthetendencytowardsdeclin-ingwagesharesmaynotrequireanexportboosttogeneratefastergrowtheverywhere;aslongasglobal

Chart 2.4

LABOUR INCOME ShARE IN GDP, SELECTED DEVELOPED COUNTRIES, 1990–2013

(Per cent)

Source: UNCTAD secretariat estimates, based on UN-DESA, National Accounts Main Aggregates database; European Commission, AMECO database; Eurostat, Annual National Accounts database; University of California at Davis and University of Groningen, Penn World Tables version 8.0; United States Bureau of Economic Analysis, National Income and Production Accounts; and United Kingdom Office for National Statistics, United Kingdom Economic Accounts.

1990 1995 2000 2005 2010

A. Core EU countries

United KingdomGermany

ItalyFrance

2013

1990 1995 2000 2005 2010

B. Periphery EU countries

SpainPortugalGreece Hungary

2013

20131990 1995 2000 2005 2010

C. Other developed countries

United StatesJapanCanadaAustralia

45

50

55

60

65

70

45

50

55

60

65

70

45

50

55

60

65

70

Towards a Sustained Economic Recovery: Review of Policy Options 21

imbalancesareallowedtorise,adecliningwagesharecancoexistwithrisingdomesticdemandinanumberofeconomieswherecreditexpansioncancompensateforlowerhouseholdincomes.Thisisconfirmedbydevelopmentsinthe1990sand2000s,whichweredecadesoffairlystrongglobalgrowthinwhichwagesharesconsistentlydeclined(chart2.4).itisthecom-binationofthesepatternswhichbroughtaboutthelargemacro-financialimbalancesandthesubsequentcollapseintheformoftheglobalfinancialcrisis.8

Someauthorsstressamoredirectcausallinkbetweenwage compression and the formation ofcredit bubbles: as the relative erosion of labourincomescreatesinsufficientrealdemand,capitalismostlydivertedtowardsfinancialoperations,whichgenerate asset bubbles andvolatility.This in turnbecomes the source of temporary real economicexpansion(Foster,2010;Patnaik,2010).Thegrowingfinancialization of developed countries and “sub-ordinate”financialization in developing countries(epstein,2005;lapavitsas,2013)canbeexplainedintheseterms.Asaresult,economiesbecomemorepronetocrises,whichadverselyaffectemploymentandproductiveactivities,andalsoleadtogreatercon-centrationsofwealthandincome.TheresultingdragonGDPgrowthisamelioratedonlybyunsustainableepisodesofdebt-drivenconsumptionbooms.9

(d) Asset appreciations and real balance effects

From the above arguments, it seems clearthat the synchronizedfiscal contraction and slowgrowth of labour income acrossmany developedcountrieswilllikelyleadtoeitheroftwooutcomes:a protracted slowdown (secular stagnation), or atemporarygrowthspurtdrivenbyanunsustainableexpansionofdemandthroughgreaterindebtednessinafewmajoreconomies.Thelattersituationchar-acterizedthepre-crisisyears,and,toalesserdegree,ithasbeenrepeatedintherecentpast.Moreover,ithasbeenexacerbatedbythecreationofliquiditybycentralbanks,withadirectimpactonassetmarketsacrosstheworld.

elements of this situation appear to bemostprominentinAustralia,Canada,theUnitedKingdomand the United States. in these economies themechanismsatworkhavestrongcommonalities:theexpansionofliquidityhasgeneratedrecordhighsin

stockmarkets,andrapidpriceincreasesinrealestatemarkets,particularlyintheUnitedKingdomand,tosomeextent,inCanada.Asaresult,householdsarecontinuingtoexperienceapositiveshockontheassetsideof theirbalancesheetsandfeelmoreencour-agedtoreducetheirsavings.ifpreviouscyclesareanyguide,householdlendingcapacity(totalincomeminustotalexpenditure,includinginvestment)mayeventurnnegative,sothattheadditionalspendingwillbefullyfinancedbydebt.Theprocesscangoonforaslongasassetpriceskeeprisingandliquidityismadeavailableforthepurchaseofassets.

ThesemechanismsareillustratedempiricallyfortheUnitedStatesandtheUnitedKingdom(chart2.5).10Chart2.5AshowstheindicesofstockmarketandhousepricesintheUnitedStatessincetheearly1990s,andtracksthedot-comboom,therecessionof2001andthesubsequentexpansionleadinguptothefinancialcrisisof2008.Sincethen,inthewakeofanultraeasymonetarypolicy,stockmarketpriceshaveclimbedsignificantly, reaching unprecedented levels.Thespeculativenature of these patterns is highlightedinthechartbytheinclusionoftheNewYorkStockexchange(NYSe)“margindebt”series(margindebtbeing the dollar value of the securities purchasedwith funds borrowed from investors’ accounts attheNYSe),whichhavealsorisentounprecedentedlevels.ThehousingmarketintheUnitedStateshasstartedtorecover,buthasnotyetdisplayedtheexu-beranceofthemid-2000s.

Real holding gains11 of the household sectorhavefluctuatedconsiderablyoverthepastfewyears(chart2.5b).intheUnitedStates,balancesheetsofhouseholdsweresubjecttopositiveshocksequivalenttoabout25percentofrealGDPduringthefinancialboomyears,followedbynegativeshocksequivalenttoalmost100percentofrealGDPduringthecrisis.Assetpricesrecoveredquicklyinthewakeofpolicystimuliin2009−2010,butfellonceagainin2011inresponseto“risk-on,risk-off”fluctuationsinspecu-lativemarkets,presumablyreflectingchangesinthelevelofconfidenceinthefinancialsustainabilityofthepublicsectorandthebankingsectorintheUnitedStatesandelsewhere.Sincethen,therehasbeenacontinuous recovery of asset prices and, to someextent,realestatepricesfollowingquantitativeeasingprogrammes.Realholdinggainstowardstheendof2013canbeestimatedtoequalabout50percentofrealGDP,anon-negligibleincreaseinthenetworthofthehouseholdsectorasawhole.eventhoughthese

Trade and Development Report, 201422

Chart 2.5

Asset prices, chAnge in household expenditure, And household borrowing And net finAnciAl sAvings in the united stAtes And the united Kingdom

Source: UNCTAD secretariat calculations, based on BIS, Residential property price statistics database; Bloomberg; United States Federal Reserve, Financial Accounts database; United Kingdom Office of National Statistics and Bank of England databases.

Note: Real holding gains refers to capital gains due to changes in asset values, after discounting CPI inflation (3-quarter centred moving average). Net savings refers to total disposable income less total spending (including investment) of the household sector.

0

100

200

300

400

500

1990 1995 2000 2005 2010

United States

House price index (Index numbers, 1990 Q2 = 100)Stock market index (Index numbers, 1990 Q2 = 100)NYSE margin debt (Billions of current dollars)

20130

50

100

150

200

250

300

350

1990 1995 2000 2005 2010

United Kingdom

House price index (Index numbers, 1990 Q1 = 100)Stock market index (Index numbers, 1990 Q1 = 100)

2013

A. House price and stock market indices, 1990–2013

-6

-3

0

3

-200

-150

-100

-50

0

50

100

2006 2007 2008 2009 2010 2011 2012 2013

United Kingdom

Real holding gains

Real household expenditure (right scale)

-4

-3

-2

-1

0

1

2

3

-100

-75

-50

-25

0

25

50

75

2006 2007 2008 2009 2010 2011 2012 2013

United States

Real holding gains

Real household expenditures (right scale)

B. Holding gains and change in household expenditure, 2006–2013(Per cent of GDP)

-6

-3

0

3

0

1

2

3

4

5

6

7

2006 2007 2008 2009 2010 2011 2012 2013

United Kingdom

-3

0

3

6

-10

-5

0

5

10

15

20

2006 2007 2008 2009 2010 2011 2012 2013

United States

Net borrowing from the financial sector

Net financial savings (right scale)

C. Net household borrowing from the financial sector and net financial savings, 2006–2013(Per cent of GDP)

Net financial savings (right scale)

Net borrowing from the financial sector

Towards a Sustained Economic Recovery: Review of Policy Options 23

holdinggainsarenotcash-flowincome,theriseinthe value of networthmay induce a proportionalincreaseinspendingthroughwealtheffects.Withamoderatelagofonetotwoquarters,thereisafairlystrong correlationbetweenholdinggains and realspending (chart 2.5b). in turn, the increments ofrealhouseholdspendingrepresentedacontributiontoGDPgrowthofabout1.6percentin2013,whichisabout60percentoftotalgrowth.

Assetappreciationsdrivenbyliquidityexpan-sions help to explain the recent recovery in theUnitedStates,despitethefallinfiscalspendingandlabour-incomeshares.However,thesepatternsalsojustifyconcernsaboutgrowthundersuchconditions.in theUnitedStates, net financial savings of thehouseholdsector,definedastotaldisposableincomeminustotalexpenditure(includingconsumptionandinvestment spending),12 peaked at 5.5 per cent ofGDP inmid-2009,but then fell sharply followingdrastic deleveraging after the crisis (chart 2.5C).Subsequently,netfinancialsavingsmovedbacktocloseto3percentofGDP,approachingwhatcouldbeconsidered the long-termnorm.However,overthelasttwoyears,ithasdroppedbelow2percentofGDP,withthetrendpointingdownwards.Atthesametime,householdnetborrowingfromthefinancialsec-torhasstartedtoclimbfromitsunusuallynegativelevelsatthetroughofthecrisis(chart2.5C).bytheendof2013,netborrowingbythehouseholdsectorhadnotreachedtheextremesexperiencedattheonsetofthecrisis,butthedirectionwasstillupwards.ApartfromtheNYSemargindebtplottedinchart2.5A,complementarydata(notshownhere)suggestthatconsumercreditaccountedforthelargerproportionof the increases in net borrowingsof households.Mortgagedebthasonlyrecentlystabilized,inaggre-gateterms,afteryearsofadjustmentsinthehousingmarket,butitislikelythatrisinghousepriceswilltriggeranotherdebtexpansion.

Asset appreciations, holding gains and debtdynamicsof theUnitedKingdomcanbeassessedusing the samemethodology (chart 2.5).Amoststrikingfeatureisthepatternofrealestateapprecia-tion,whichwashigherthanintheUnitedStatesandsteeperthantheappreciationinthestockmarket.butthecombinationofthesepriceswingscausedexcep-tionally high holding gains and losses during theboomsandcrises,respectively,showingasimilarpat-terntothatoftheUnitedStates.From2011onwardstherealnetgainsofthehouseholdsectoronaccount

ofassetpricesclimbedcontinuouslytoreachabout40percentofrealGDPby2013.Afteralag,thereseemstohavebeenaclearcorrelationbetweenrealholdinggainsofhouseholdsintheUnitedKingdomandtheirpatternofspending(chart2.5b).Despitethefactthatlabourincomesharesremainedbarelyflat,assetappreciationsappeartohaveledtoariseinhouseholdspendingamountingtoacontributiontoGDPgrowthofabout1.5percentperannumin2013.Further,theriseinhouseholdspending,totheextentthatitwaspartlyduetoholdinggains,wasmatchedbyafallinnetfinancialsavings(chart2.5C).Startinginthefirstquarterof2013,thehouseholdsectorintheUnitedKingdomshiftedtoanetdeficitposition:borrowing from thefinancial sector started to riseagain,thoughnottothesamedegreeasitdiddur-ingthepre-crisisboom.AsintheUnitedStates,theunderlyinggrowthdynamicsintheUnitedKingdompointtopatternssimilartothosethatprecededthefinancialcrisis.experienceindicatesthattheseareunsustainableprocesses,butitalsoshowsthattheycancontinueforafairlylongtime.Preliminaryinves-tigationofgrowthdynamicsinsomeothercountries,suchasAustraliaandCanada,suggeststhattheysharesomeofthesecharacteristics.

Therapidgrowthofhouseholddemandinthissubgroupofdevelopedcountriesprovides aboostfor the exports of other economies, particularlythose seeking recovery based on net exports.Atthisjuncture,theimpliedglobalmacro-imbalancesbetweensurplusanddeficitcountries,aswellastheinternalimbalancesbetweentheassetandliabilitysidesofhouseholdbudgetsindeficitcountries,maynotbealarming.butrelyingonthesepatternsisnota sustainable policy strategy, and a strategy fromwhich it is not easy to exitwithout an alternativegrowthagenda.

2. Policy stances in developing and emerging economies in a context of growing vulnerability to external shocks

(a) The role of domestic demand and incomes policies

Many developing and emerging economiescontinuedtosupportdomesticdemandafter2010,evenasdevelopedcountries’policystancesshifted

Trade and Development Report, 201424

towardsfiscaltightening.inthecontextofaglobaleconomy thatwas struggling to recover from thefinancialcrisis,suchsupporthelpedtomaintaintheirpaceofgrowth,whichturnedouttobesignificantlyhigherthanthatofdevelopedeconomiesdespitearecentdeceleration.Totheextentthatthesecountriesasagrouparebecomingincreasinglyimportantinglobaltrade,theirperformancecontributedtoglobaldemandaswell,providinggrowthopportunitiesfortheirtradingpartners.

UNCTADhas often insisted on the need forsurpluscountriestonarrowtheirexternalbalancesbyboostingdomesticdemandandincreasingtheirimportsatafasterpacethantheirexports,insteadofforcingdeficitcountriestoadjustandtorelyonthecompressionoflabourcostsinthehopethatthiswillleadtoanexport-ledrecovery.Netimportdemandfromsurpluscountrieswouldnotnecessarilymakethemmorevulnerable,particularlyiftheircontribu-tionsucceedsingeneratingnewsourcesofincome

indeficitcountries,therebyeventuallyliftingglobaldemand.

examiningmacroeconomic indicators of thedevelopingandemergingcountrymembersof theG20isilluminatinginthisrespect.Chart2.6AshowsthecumulativecontributionstorealGDPgrowthofcountrieswhichwereincurrentaccountsurplusin2010.Cumulativecontributionswerecalculatedforathree-yearperiod,fromend-2010toend-2013.inallthesecases,GDPgrowthwassignificant,andthemajordriverwasdomesticdemand,notnetexports.exceptfortheRepublicofKorea,whichcontinuedtorelyonexternaldemandasasignificantsourceofitsGDPgrowth,thissubsetofdevelopingcountriesmanagedtosustainthegrowthofglobaldemanddur-ingtheprocessofrecoveryfromthecrisis.Chart2.6bgroupscountriesthatwereincurrentaccountdeficitin2010. in thesecountries, thestandardapproachwouldbeto“adjust”byreducingspendinguntilbal-anceisachieved.but,exceptforTurkeyandMexico

Chart 2.6

CONTRIBUTION OF DOMESTIC DEMAND AND NET ExPORTS TO REAL GDP GROwTh, SELECTED COUNTRIES, 2011–2013

(Percentage points)

Source: UNCTAD secretariat calculations, based on UN-DESA, National Accounts Main Aggregates database and World Economic Situation and Prospects: Update as of mid-2014; OECD.StatExtracts; and EIU, CountryData database.

Note: Data refer to the 3-year cumulative contribution. The classification of the two groups of countries as surplus and deficit is based on their current account balance in 2010.

-10

-5

0

5

10

15

20

25

30

China SaudiArabia

Indonesia RussianFederation

Argentina Republic ofKorea

A. Selected current account surplus countries

-5

0

5

10

15

20

India South Africa Turkey Mexico Brazil

B. Selected current account deficit countries

Domestic demand Net exports

Towards a Sustained Economic Recovery: Review of Policy Options 25

(whichshowedarelativeimprovementintheirnettrade balances), the other countries’ trade deficitsincreasedbeyond2010.inmostofthesecountries,thestandardapproachwasnot followed,and theireconomiescontinued tobesupportedbydomesticdemand.butadditionalriskswereinvolved,asdis-cussedbelow.

onthebasisofthisdecompositionaloneitisdifficulttoassesswhetherthecountriesgroupedinchart2.6bwerefollowingsustainablegrowthstrate-gies.Asnotedearlier,insomecasesnettradegainsmaybetheconsequenceofcompetitivenessachievedbywagecompression,butthiscouldeventuallyleadtodemandandproductivitybottlenecks.Conversely,trade deficitsmaybe the result of an investment-driven strategyaimedat structural transformation,and,totheextentthatsuchdeficitsaremanageableinthemediumterm,theycouldresultinconsider-ableadvantages in termsof long-termgrowthanddevelopment.However,ifthetradedeficitsaretheconsequence of asset bubbles and excessive con-sumerborrowing,oftenaccompaniedorpromotedbyabonanzaofforeigncapitalinflows,theycouldhavehazardouseffectsandcreatetheneedforharshadjustmentmeasuresdowntheroad.

overthepastfewdecades,intheprocessofinte-grationintotheworldeconomy,manydevelopingandtransitioneconomieshaveadoptedpoliciestoattractinvestors and/or gainmarket shares by reducinglabour incomeshares(insomecasesfromalreadylow levels).However, inmore recent years theseprocessesseemtohavebeencontained,andinsomecasesreversed.basedonstatisticalinformationavail-able,thoughincomplete,13itisfoundthatherehasbeenvariedevolutioninthesharesoflabourincome(includingmixed income)14 inGDP (chart 2.7) indifferentgroupsofdevelopingcountries.TheaverageforSouthAmericapointstoasustainedincreaseinlabourincomesharesinGDPfromthemid-2000s,which reflects an improvement in labourmarketconditions and deliberate income redistributionpolicies.TheaverageforcountriesinAfricashowsasimilarpattern,albeitstartingmorerecentlyandfromalowerlevel,anditislesspronounced.evenso, in both regions, this has been insufficient toreachthelabourincomesharesachievedinthepast.Meanwhile,other regions in thedevelopingworldhavemanagedtocontainthedeteriorationoflabourincome shares.However, in some cases, such asWestAsia,afterasharpdeclineinthoseshares,the

trendhasnotsignificantlyreversed.Hence,despitesignificantprogressinseveralcountries,theshareoflabourincomeneedstoexpandsignificantlyifitistoprovidethebasisforaself-sustainingpathofgrowthanddevelopment.

(b) Challengesfromtheexternalfinancialand trade environment

Thevulnerabilitiesofdevelopingandemergingeconomieshavebeenheightenedbyweaknessesintheinternationalfinancialarchitecture.15itwashopedthattheglobalfinancialcrisiswouldgiverisetosuf-ficientpoliticalmotivationandintellectualstrengthtoaddresstheseweaknessesinamoredeterminedmanner.buteffortsinthisdirection,suchasthosepromoted by theUnitedNationsCommission ofexperts of the President of theUnitedNationsGeneralAssembly(UnitedNations,2009),havebeenstymiedbypressuresfromglobalfinancialinterests

Chart 2.7

LABOUR INCOME ShARE IN GDP, SELECTED DEVELOPING-COUNTRy GROUPS, 1990–2012

(Per cent)

Source: UNCTAD Secretariat estimates based on UN-DESA, National Accounts Main Aggregates database; Euro-pean Commission, AMECO database; and University of California at Davis and University of Groningen, Penn World Tables version 8.0.

40

42

44

46

48

50

52

54

56

58

60

1990 1995 2000 2005 2010

Africa East and South AsiaMexico and Central AmericaSouth America West Asia

2012

Trade and Development Report, 201426

seekingnewinvestmentopportunities,particularlyinemergingmarkets.Justificationsforresistingasys-tematicreformagendahavebeenwidespread.Theyinclude the view that adversefinancial conditionsinmajoreconomiesarenotnecessarilytransmittedto developing and emerging economieswhich arevirtually“decoupling”fromtherest(see,forexam-ple,iMF,2007;blanchardetal.,2010;leducandSpiegel,2013).

AsnotedinchapterViofthisReport,16devel-oping and transition economies have remainedsusceptibletothekindofboomandbustcyclesofcapi-talflowswhichwerecommonplaceduringtheperiodoffinance-drivenglobalization.intheperiodpriortothecrisismostcapitalflowsweretriggeredbycyclesofleveraginganddeleveragingbyprivatefinancialinsti-tutionsinthedevelopedeconomies.Thelastcyclethatstartedin2010beganwithanextraordinaryamountofliquiditycreationbythecentralbanksofthemajor

economies.SuchmonetaryinjectionsfuelledassetappreciationsnotonlyintheUnitedStatesandtheUnitedKingdom, as discussed above, but also inmanyotherstockmarkets,asmeasuredbytheMSCiglobalindex(seechart2.8).betweenmid-2010andthelastquarterof2013,thatglobalindexmorethandoubled,whilerealeconomicactivityremainedsub-dued.butinsomecases,ascanbeobservedbystockmarketreactionstoreleasesofemploymentdataintheUnitedStatesandelsewhere,goodnewsoneco-nomicactivitytriggeredafallinthestockmarket,reflectingtheanxietyofspeculatorsaboutreversalsoftheliquidityexpansionifeconomicactivityandfavourableemploymentconditionsweretoresume.

Unprecedentedly large volumes of liquidityare currently coursing through highly liberalizedcapitalmarkets.intheabsenceofacorrespondingincreaseofdemandforcreditforproductiveactivi-ties inmost developed economies,financialflowsarebeingdivertedtoportfoliooperationswithinandbeyondtheissuingeconomies.inafewexceptionalcases,policymakerswhoareawareofthepotentiallydevastatingeffectsofunfetteredcapitalmarketshavetriedtoputinplaceregulatorymeasurestoprotecttheirmacroeconomicenvironment.inmostemerg-ingand transition economies, however, thepolicyresponse has resembledmore of a revival of the“lawsondoctrine”,whichwas highly permissiveofprivatecapitalflowsandcurrentaccountimbal-ances.17 Provided that fiscal balances are kept incheck,thisdoctrinerecommendsagainstinterferingintheportfoliodecisionsofprivateagents.lendersandborrowers,theargumentgoes,arefullycapableofassessingthebenefitsandrisksoftheirfinancialdecisions.However,suchabeliefisatoddswiththeobservedhighlyhomogeneousandsynchronizedriskperceptionsofinternationalinvestorsaboutaquitevaried set of developing countries, as evidencedbythestrongco-movementsofeMbiGindicesinchart2.9.Thissuggeststhatinvestorsdonotunder-takesophisticatedanalysisspecifictoverydifferentcountries, including the performanceof their realeconomiesandtheirfinancialstructures.

Theevidenceconfirms thatmanydevelopingandtransitioneconomieshavebeensubjecttocon-siderablecyclicalfluctuationsofcapitalflows,beforeandafterthecrisis(chart2.10).Theseflowshaveinturninfluencedspeculativebehaviour,reflectedintherisesandfallsofstockmarketindices.Theflowseriesinthechartencompassportfolioflowstotheprivate

Chart 2.8

TOTAL ASSETS OF MAJOR CENTRAL BANKS AND GLOBAL STOCK MARKET INDEx,

Jan. 2009‒Dec. 2013

Source: UNCTAD secretariat calculations, based on United States Federal Reserve database; European Central Bank database; Bank of Japan Accounts database; IMF, International Financial Statistics and World Economic Outlook databases; and Bloomberg.

Note: Major central banks includes the Bank of England, Bank of Japan, European Central Bank, People's Bank of China and United States Federal Reserve.

12

14

16

18

20

22

80

100

120

140

160

180

200

2009 2010 2011 2012 2013

Per

cen

t of w

orld

gro

ss p

rodu

ct

Inde

x nu

mbe

rs, J

anua

ry 2

009

= 10

0 MSCI all countries world index

Total assets of major central banks (right scale)

Towards a Sustained Economic Recovery: Review of Policy Options 27

bankingsectors,includingFDiintheformofprivateequitychannelledthroughdomesticfinancialinstitu-tions.Theydonotincludecredittothepublicsectorsofthesecountries,whichwasrelativelyminorduringtheperiodunderobservation.Withvariations,inflowsreachedapeakbeforethecrisisandcollapsedatitsonsetin2008.Theyresumedsharplyafter2009,insomecasesreachingnewhighs,18presumablyreflect-ingthevastincreaseingloballiquidityincomparisonwithpreviouscycles.Aroundthesecondquarterof2013,with thefirstannouncementsof taperingbytheFederalReserve,andbeforeanytaperingactu-allytookplace,investorsbegantopulloutfunds,tovaryingdegrees,fromthesecountries.

Thespecificsofcountryexperienceshavebeenwelldocumentedandanalysedelsewhere.19Generalpatternscanbeidentifiedthroughboththeupswingsanddownswingsofthecycles.Thoughtheinflowspersearenotmotivatedmainlybytheperformanceoftherealeconomy,itisknownthattheycanhavetheeffectofalteringexchangerates,priceformation,spendingbehaviour,financialbalancesofinstitutionsandpolicymakers’ room formanoeuvre. it is alsoknownthatdrasticcapitalreversalscantakeplaceforreasonsthat,again,havemostlytodowithchangesinthefinancialconditionsofthecreditorcountries.buttheseoutflowsleavebehindseriousdislocations.Usually,capitalreversalshaveanimmediateeffectontheexchangerate,makingtheservicingofthedebtor repayment ina foreigncurrencymoredifficult.They also have knock-on effects on asset prices,significantlyerodingbalancesheets.Manyofthesecasesmaywellrepresentsystemiccrisestotheextentthatthesectorsmostaffectedarecorporationsandfinancialinstitutions,withbalancesheetswhichcanbegreater thanacountry’sGDP.Forexample,by2013,thevalueofassetsofthebankingsectorsintheRepublicofKorea,SouthAfricaandThailandwereestimatedtobeclosetothreetimesthesizeoftheirrespectiveGDPs,whileinbrazil,ChileandMalaysia,bankassetsrepresentedabouttwotimestheirGDP.Underthesecircumstances,publicsectorinstitutionsareoftenforcedtocometotherescue.eventually,publicsectorswhicharenotthemselvesbeneficiariesoftheinflowbonanza,tendtoassumetheburdenofbaddebtsoncecrisisconditionsemerge,oftenleadingthemtoadoptdamagingfiscalausterityprescriptions.

Finally,policymakersshouldbeawareofpos-siblenegativeshocksoriginatingfrominternationaltrade,particularlyincountriesthatrelyonexports

of only a few primary commodities or low-skill,labour-intensivemanufactures.AsfurtherdiscussedinthisReport(seeparticularlychapterV),proactiveindustrialpoliciesneedtoaimatdiversificationandupgradingofexports.indeed,diversificationoftheirproductiveandexportactivitiesremainsapendingtaskformanytransitionanddevelopingeconomies.inasampleofrelativelyopendevelopingeconomiestheindexofexportconcentrationincreasedfromtheearly2000s(beforethecommodityboom)to2012(table 2.1).Admittedly, inArgentina,China andMexicotheincreaseintheconcentrationindexwasminorandthelowvalueoftheirrespectiveindicesby2012suggeststhattheseeconomiesremainquitediversified, though the basket of their export rev-enuesisslightlymoredependentonfewerproducts.Meanwhile,dependenceonasmallersetofexportproductshasclearlyincreasedincommodityexport-erssuchasColombia,Chile,ecuador,thebolivarianRepublicofVenezuelaand thegroupof transitioneconomiesasawhole.

Chart 2.9

SOVEREIGN BOND yIELD SPREADS, SELECTED DEVELOPING AND TRANSITION

economies, 2007 Q4‒2014 Q2(Basis points)

Source: Bloomberg; JP Morgan Emerging Markets Bond Index Global of sovereign dollar denominated bonds (EMBIG).

Note: Data refer to the last value of the quarter and reflect the spread to comparable United States Treasuries.

0

100

200

300

400

500

600

700

800

900

Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2

2007 2008 2009 2010 2011 2012 2013 2014

Brazil ChinaIndonesia Russian FederationSouth Africa Turkey

Trade and Development Report, 201428

Chart 2.10

CAPITAL INFLOwS TO ThE PRIVATE BANKING SECTOR AND STOCK MARKET INDICES, SELECTED DEVELOPING AND TRANSITION ECONOMIES, 2005 Q1–2013 Q4

Source: UNCTAD secretariat calculations, based on IMF and World Bank, Quarterly External Debt Statistics database; and Bloomberg.Note: The stock market index refers to the end-of-period price of the dollar-denominated MSCI index, except for the Republic of

Korea, where it refers to the dollar-denominated KOSPI index. Capital inflows refer to 3-quarter centred moving average of the changes in the gross external debt position of the banking sector (except for India and Mexico where they refer to the sum of the banking and “other [private] sectors”).

-10

-5

0

5

10

15

0

50

100

150

2005 2007 2009 2011 2013

Brazil

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

0

50

100

150

200

2005 2007 2009 2011 2013

Chile

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

0

50

100

150

200

250

2005 2007 2009 2011 2013

Colombia

-15

-10

-5

0

5

10

0

50

100

150

2005 2007 2009 2011 2013

Mexico

0

3

6

9

12

15

18

0

50

100

150

2005 2007 2009 2011 2013

India

-2

-1

0

1

2

3

0

50

100

150

200

2005 2007 2009 2011 2013

Indonesia

-20

-10

0

10

20

0

50

100

150

2005 2007 2009 2011 2013

Republic of Korea

-50

-25

0

25

50

75

0

50

100

150

2005 2007 2009 2011 2013

Singapore

-2

-1

0

1

2

3

4

0

50

100

150

200

2005 2007 2009 2011 2013

Thailand

-20

-10

0

10

20

0

50

100

150

2005 2007 2009 2011 2013

Russian Federation

-3

0

3

6

0

50

100

150

2005 2007 2009 2011 2013

Ukraine

-6

-3

0

3

6

9

12

0

50

100

150

200

2005 2007 2009 2011 2013

Turkey

Stock market (Index numbers, average 2007 = 100) Capital inflows to private banking sector ($ billion) (right scale)

Towards a Sustained Economic Recovery: Review of Policy Options 29

A complementarymeasure of the degree towhich countries are better prepared towithstandtradeshocks,usingtheUNCTADMerchandiseTradeSpecializationindex,producessimilarresults.20Thedetailed examination of the indices acrossmaincategoriesofproductsover theperiod1995−2012confirms that, despite the rapid rate of growth oftradeinmanydevelopingeconomiesoverthepasttwodecades,thedegreeofspecializationintheexportstructureofmostdevelopingeconomieshasnotvar-iedsignificantly.onlyinafewcountries,mostlyineastAsia,includingChina,Malaysia,theRepublicofKoreaandSingapore,hasthisstructureprogressedinthesensethattradebalancesofmanufactures,andparticularly of productswith higher skill content,improvedduringthisperiod.elsewhere,inWestAsia,AfricaandlatinAmerica,therehavebeenfew,ifany,improvements,andinsomeevenacleardeteriora-tion,particularlyinAfricaandamongoilexporters.

3. Current policies and outcomes from a global perspective

The review of economic policies proposedabovesuggeststhatthereisneedforcautionininter-pretingcurrentdevelopments.Contrarytotheviewsofsomeobservers,thereisnoconvincingevidencethattheworldeconomyisinfactbeginningasus-tainedrecovery.Thebeliefthatgrowthindevelopedeconomieshasfinallypickedupisoverlyoptimistic;itonlyservestoclaimsuccessforpro-marketreformsand to support arguments for awithdrawal of theprecautionarymeasuresandstimulithatstillremain.Thiscouldhavegraverepercussions.Forexample,the recommendation that developing countriesshouldpursuefiscalandlabourmarketadjustmentssimilartothosepursuedindevelopedcountriesisofparticularconcern.inthelightofthediscussionintheprevioussubsection,developingcountriescouldinsteadconsiderstrengtheningincomespoliciesthatstillhaveconsiderablepossibilities todeliver, andcould also introducemore effective precautionarymeasurestomitigatetheeffectsofglobalfinanciali-zation and enhancepolicies aimed at diversifyingtheireconomies.

leadersfromdevelopedanddevelopingcoun-triesdeservecredit for thepolicies theypromotedin2009−2010.However,changesofpolicystances

after2010,particularlyindevelopedcountries,whichprimarily includeflexibilizationof labourmarketsandrestrainedpublicspending,arefactorsthathavedelayedrecovery.if,atpresent,thereisasenseofagrowthrevivalinsomeofthesecountries,thenewgrowthpatternsshouldratherbeinterpretedasreflect-ingstructuralproblemsofthekindalreadyapparentin theyears thatpreceded theglobalcrisis.Undertheseconditions,economicgrowthseemstohingeagainonexcessiveliquidityinthecontextofassetappreciations,whichmaydriveupprivateexpendi-tureforawhile.Aslongasthiscanlast,growthofconsumerdebtindeficitcountriescouldfuelexportdemandincountriesthatareeitherleadingexport-ersoroptedmorerecentlyforpromotingexportstoexitfromthecrisis.However,bynowit isknownthat such processes are unsustainable.Continuingonsuchapath,inthehopethatthingswillworkoutdifferentlythistimeappeartobeshort-sightedatbest.itseemsworthwhileaiming,instead,foradifferentstrategy,asubjecttowhichthenextsectionturns.

Table 2.1

ExPORT CONCENTRATION INDEx, SELECTED COUNTRIES, 2003–2012

Change between 2003–2008

average and 2012 (Per cent)

Index average for 2011–2012

Colombia 18.7 42.0Chile 10.0 37.1Ecuador 9.1 50.0Hong Kong, China 8.3 20.0Brazil 7.1 15.8South Africa 5.2 16.9Indonesia 4.8 17.1India 4.4 17.8Bolivarian Republic of Venezuela 3.9 67.4Peru 2.1 25.2Mexico 1.7 15.0China 1.3 10.0Argentina 1.1 15.4

Memo item:Transition economies 10.2 33.0Major oil and gas exporters 2.2 55.6

Source: UNCTAD secretariat calculations, based on UNCTADstat.Note: The index ranges from 0 to 100 (maximum concentra-

tion).

Trade and Development Report, 201430

Theprevioussectionexaminedthemainpolicystanceswhichhavehelpedshapethecurrentworldeconomic situation. in somecountries policymak-ershaveaimedatboostingglobaldemand;but,forthemostpart,macroeconomicpolicieshaveeitherexhibiteddeflationarytendenciesorfavouredshort-termgainsthatleadtoheightenedrisksinthelongterm.Therearevariousreasonswhytheeconomicpolicylandscaperemainsdisappointing,includingageneralmistrustinthefeasibilityofmoreproactiveandinclusivepolicyapproaches.Theaimofthissec-tionistoshowthatadifferentsetofpoliciescoulddeliver better results, taking into account possibleconstraintsandfeedbacks,bothdomesticandinter-national.Alternativepolicyscenariosfortheglobaleconomy are examined using theUnitedNationsGlobalPolicyModel(GPM).21

1. Policies and outcomes

ThescenariosproducedwiththeGPMconsidera“baseline”,representingacontinuationofthepolicystances described in sectionA, and an alternative“balanced-growth”simulation.Thebaseline isnotintended tobea forecastand thebalanced-growthsimulationisnottheonlymeasurablecombinationofpoliciesandoutcomesthatcouldbringaboutthedesiredresults.Moreimportantly,thescenariosarehighly stylized and contingent, for reasons givenbelow.Their value resides in demonstrating,withrigorousempiricalbacking,thedirectionofchangethatcouldbeexpectedfromthetwosetsofpolicyassumptions.As such, their aim is to encouragepolicymakerstoconsideradifferentcourseofaction.

(a) The baseline scenario

Thebaseline,whichisaprojectionoverthenext10years,assumesacontinuationofexistingpolicies

andnoexogenousshocks.inparticular,itdoesnotinclude a financial crisiswhich, as the previoussectionargues,couldresultfromthecurrentpolicystances.Admittedly, from thecurrentcombinationofpolicies it ispossible tohighlight thestructuralflawsthatcouldeventuallycauseacrisis.butitisnotpossibletodetermineinadvancethetimingofacrisisofthisnature,theconcretemeasurementofitsmacroandglobalimplications,andthenatureoftherecoverythatmayfollow.Thisisbecausesuchacrisisisusuallytriggeredbyasuddenshiftinmarketconfidence,resultingfromnews,orevenrumours,aboutsignsofheightenedfinancialfragilityorlossesof a relatively important institution. likewise, arecoveryfromsuchacrisisistriggeredbyanevenmorecomplexcombinationofchangesinthe“stateofconfidence”.22

Therefore,thebaselineisaprojectionofcurrentpoliciesandtheirimpliedoutcomes,assumingawaytheoccurrenceofacrisis,thetimingandproportionsofwhich are unknown.Accordingly, the baselinealsoassumesawaythepossibilitythatpolicymakerswilldecidetochangecourseinordertoavertacrashbeforeitistoolate.Theconcretequantificationoftheoutcomesofthebaselineandhowtheyarerelatedtotheassumedpolicystancesarediscussedbelowin conjunctionwith those of the balanced-growthscenario.

(b) The balanced-growth scenario: Policy assumptions compared with the baseline

Thebalanced-growthscenario isproposedasadeparturefromthepoliciesdiscussedinsectionAofthischapter.itfocusesonthefollowingaspects:

• incomespoliciestosupportgrowthofdemandonasustainablebasis,

• Growth-enhancingfiscalpolicies,

B. Economic policies for a sustained global recovery

Towards a Sustained Economic Recovery: Review of Policy Options 31

• industrialpoliciestopromoteprivateinvestmentandstructuraltransformation,

• Regulationoffinance and capital controls tostabilizeglobalfinancialmarkets,and

• Development-orientedtradeagreements.

The latter two aspects aremostly qualitativeinnatureandcontemplatevariedmodalities.inthemodel, regulation of finance and capital flows isimputed as exogenous conditions (usually called‘add-factors’) to allow smooth adjustments ofexchange rates and international prices of tradedgoodsandservices.23likewise,development-orient-edtradeagreementsareimputedasadd-factorsthatreplicateanexpansionoftheGeneralizedSystemofPreferences(GSP)betweenhigherincomeeconomiesontheonehand,andlowerincomeeconomiesontheother.24Amongdevelopingcountries,thesimulationsimputeanexpansionofexistingSouth-Southtradeagreements.Togetherwiththeothersetsofpoliciesproposedinthescenario,theresultisanincreaseinexportsofmanufacturesinlow-andmiddle-incomecountriesby50−75percentin10yearscomparedwiththebaseline.bycontrast,trade-relatedaspectsin the baseline aremodelled as a continuation ofexistingconditions,mostlydeterminedbybilateraltradeagreementsandprevailinginvestmentpatterns.AsshowninsectionA,undertheseconditions,tradespecialization does not improve, and the exportconcentrationofveryopeneconomiesindevelopingcountriesincreases.

Theotherthreesetsofpolicyassumptionsaresummarizedintable2.2.Thefirstcolumnsshowtheevolutionofthelabour-incomeshareasapercentageofGDP(labourshare,forshort)forbothscenarios(baselineandbalanced-growth).Thesimulationperi-odisrepresentedbyfive-yearaverages(2015−2019and2020−2024),whilethehistoricperiodisrepre-sentedbytwopointsintime:1990and2012.25Asnotedearlier,therewasacontinuousfallinthelabourshareformostregionsuntilrecently,withsomeindi-cation that the trendwasbottomingout inseveralregions.Fortheworldasawhole,thelaboursharefellfromabout59percentofGDPin1990toabout52percentin2012.Thebaselineassumesthatinallthe25countriesandcountrygroupsconsideredinthemodel,incomesofemployeesandself-employedinformalworkerswillcontinuetoremaindepressedataroundtheirprevailinglowlevels.bycontrast,the

balanced-growthscenarioassumesthatpolicymakersinallcountrieswillintroduceincomespoliciesaimedat improvingthefunctionaldistributionof incomeclosertothelevelsoftheearlyormid-1990s.26Thisdegreeofimprovementseemsessentialforbringingaboutarobustgrowthofconsumption,and,conse-quently, of private investment. it should be notedfromtheoutsetthattheassumptionthatallcountriesproceedatasimilarpaceofimprovementprecludesunfair gains in competitiveness in exportmarketsbasedonseekingadvantageoflabourcostsbyafewfree-riders.27

The other sets of columns in table 2.2 showthegrowthpatternsofgovernmentexpenditureongoodsandservicesandofprivateinvestment.Thehistoricperiodissummarizedbyanaveragefortheperiod1990−2014,andtheprojectionsbyaveragesfor twofive-year periods.Regarding governmentexpenditure,theprojectedbaselineshowsagrowthpatternsimilartotheaverageforthepast25years.Thismeansthat inmostdevelopedcountries,pro-tractedfiscalausterityisassumedtoimplyaweakornegligiblegrowthofexpenditure,whileinmostdevelopingcountriesthefiscalstanceisassumedtobemoderatelyexpansionary.bycontrast,thebalanced-growth scenario assumes amore proactive fiscalpolicyinallcountries,withamoremarkedincrease,comparedwiththebaseline,indevelopedcountries.The assumed patterns of growth of governmentexpenditureofmostcountriesturnouttobecloselyalignedwiththepatternsofgrowthofGDP(discussedbelow).28itisalsoshownthattheseassumptionsdonotimplygreaterfinancialvulnerability.

Thelastcolumnsoftable2.2showthatprivateinvestmentisassumedtotakeonagreaterrolethanpublicspending indevelopedcountriesduring theprojected baseline, leading to growing financialimbalancesintheprivatesector.Privateinvestmentin developing countries, on the other hand, is notexpectedtogrowatasimilarlyfastpaceasthehis-toricperiod.Thisispartlybecausedemandstimulusremainssubdued,butalsobecausealargeproportionofinvestmentisrelatedtoexportstodevelopedcoun-tries,whichareexpectedtoremainrathersluggish.AnothermajorreasonfortheslowdowninprivateinvestmentistheassumedcontinuationofChina’spolicy shift, aimed at strengtheningother sourcesofgrowththanprivate investment(whichrecentlyaccountedforabout40percentofGDP).bycontrast,the combined assumptions of proactivefiscal and

Trade and Development Report, 201432

industrialpoliciesinthebalanced-growthscenarioforallcountriesareconsistentwithafastergrowthofprivateinvestmentthanthatofthebaselineinallregions.29Suchanaccelerationofprivateinvestmentindeveloping countries is an essential componentofastrategyofstructuraltransformation,whichisrequired both for sustainedwelfare aswell as forfullerintegrationintotheglobaltradingsystem.

(c) Main outcomes of the simulations

Table2.3showsasummaryofeconomicgrowthoutcomes under both scenarios. in the baselinescenario,GDPgrowth, both globally and inmostcountriesindividually,ismarginallyfasterthanthehistoric average.30 Since crises in the projectionperiodareruledoutbyassumption,asnotedearlier,

Table 2.2

MAIN ASSUMPTIONS OF ThE MODEL SIMULATIONS IN SELECTED REGIONS AND COUNTRIES, 1990–2024

Labour-income share in GDPGovernment spending on goods and services Private investment

(Per cent) (Average annual percentage growth)

Scenario 1990 2012

Average 2015– 2019

Average 2020– 2024

1990–2014

2015–2019

2020–2024

1990–2014

2015–2019

2020–2024

Developed economies Baseline 60.5 56.1 55.5 55.2 2.0 1.1 1.1 1.1 3.0 3.2Balanced growth . . 57.9 60.1 . 2.8 3.5 . 3.7 4.8

of which:United States Baseline 56.1 53.2 53.3 53.5 2.4 1.8 2.2 2.0 3.6 4.0

Balanced growth . . 55.4 58.2 . 4.9 3.9 . 3.8 4.4

CIS Baseline 71.5 57.3 55.9 54.6 1.8 0.9 1.5 4.6 -0.7 1.7Balanced growth . . 61.1 63.4 . 2.8 4.8 . 0.3 6.6

Developing Asia Baseline 55.2 48.8 50.6 50.8 6.7 6.3 6.1 7.7 3.9 4.6Balanced growth . . 53.2 55.9 . 7.9 7.2 . 4.3 5.7

of which:China Baseline 61.0 49.7 52.6 53.4 10.3 7.7 7.0 12.4 4.2 4.8

Balanced growth . . 55.1 58.1 . 9.0 8.1 . 3.7 5.0

India Baseline 51.0 44.7 46.2 46.0 6.7 5.7 6.5 7.2 5.1 5.6Balanced growth . . 50.0 53.4 . 8.4 7.8 . 6.1 7.4

Africa Baseline 47.5 43.8 44.6 44.7 4.3 4.5 4.8 4.8 2.0 3.1Balanced growth . . 46.4 47.0 . 6.4 7.0 . 5.2 7.7

Latin America and the Caribbean Baseline 51.8 49.6 49.8 49.1 4.3 2.3 2.5 3.2 1.7 2.9

Balanced growth . . 51.8 53.1 . 4.7 5.6 . 3.4 7.0

Source: UNCTAD secretariat calculations, based on GPM.Note: CIS includes Georgia.

Towards a Sustained Economic Recovery: Review of Policy Options 33

theimplicationisthatstructuralimbalanceswillkeepgrowing.Therefore, the baseline scenario, even ifshowingamoderaterateofgrowth,isincreasinglyvulnerabletoshocksandfinancialinstability.Giventhatfinancial institutions, households andgovern-mentsinmanycountrieshavenotyetsucceededinregainingfinancialstrength,suchabaselinesuggestsintolerable risks forweak institutions.The longersuchimbalancesremainunresolved,theharshertheconsequenceswillbefortheworldeconomy.

The balanced-growth scenario, on the otherhand,showsconsiderableimprovementsingrowthrates.The averagegrowth for theworld economy(estimatedinPPPterms)issignificantlyfasterthan

itisunderthebaselinescenario.ThispartlyreflectsaneffectofthePPPadjustments,sincedevelopingandemergingeconomiesshowagrowthdifferencecomparedwiththebaselinewhichisnearlydoublethatofdevelopedeconomies.31Moreimportantly,thefastergrowthratesforallregionsaretheresultnotonlyofpolicystimuliineachcountryindividually,but also of the strong synergy emerging from thecoordinationofpro-growthpolicystancesamongallregions.Finally, improvementsingrowthratesfordevelopingcountries,especiallyinAfrica,comparedwiththoseofdevelopedcountries,confirmthestronggrowth-convergencecharacteristicofthebalanced-growthscenario.Thisisamostdesirableobjectivetosupportdevelopmentandwelfareobjectives.

Table 2.3

GDP GROwTh IN SELECTED REGIONS AND COUNTRIES, 1990–2024

AverageannualgrowthofGDP a(Per cent)

Scenario 1990–2014 2015–2019 2020–2024

world Baseline 3.3 3.4 3.6Balanced growth . 4.7 5.5

Developed economies Baseline 1.9 1.8 2.0Balanced growth . 2.8 3.5

of which:United States Baseline 2.5 2.3 2.6

Balanced growth . 3.3 3.7

CIS Baseline 2.7 2.0 2.1Balanced growth . 3.3 4.9

Developing Asia Baseline 6.3 5.5 5.4Balanced growth . 6.7 7.2

of which:China Baseline 9.8 7.1 6.7

Balanced growth . 8.1 8.3India Baseline 6.3 5.8 6.0

Balanced growth . 7.5 7.9

Africa Baseline 3.8 3.9 3.9Balanced growth . 6.1 7.0

Latin America and the Caribbean Baseline 3.1 2.9 3.0Balanced growth . 4.5 5.7

Memo item:World (based on market exchange rates) Baseline 2.7 2.8 3.0

Balanced growth . 3.9 4.7

Source: UNCTAD secretariat calculations, based on GPM.Note: CIS includes Georgia.

a Data refer to PPP in constant 2005 international dollars, except in the memo item.

Trade and Development Report, 201434

Table2.4shows themost relevantaspectsoffinancialstabilityresultingfromthebalanced-growthscenario,comparedwiththebaseline.Thefirsttwosetsofcolumnsconcentrateonfinancialconditionsinthepublicsectorandtheothersetsonprivatesec-torfinancialbalancesandthecurrentaccount.itwasarguedinsectionAofthischapterthatmanycoun-tries,especiallydevelopedcountries,havetightenedtheirfiscalstanceinordertoimprovefinancialsta-bility.However,baselineresultsshowthatreducingfiscaldeficitsbycuttingspendingisatortuouspathwithlikelyunsatisfactoryresults.Unlesspoliciesareeffectiveinenhancinggrowth,andthuspublicrev-enues,fiscaldeficitswillremainhighandreductionsinpublicdebtwillbeslow.indevelopingcountries,the relativelymoderategrowthofpublicspendingassumedinthebaselineforindiaandlatinAmericadoesnotleadtoanimprovementinthegovernment’sfinancialpositioneither.inAfrica,aslightlyfastergrowth of public spending in the projected base-linethaninthehistoricperiodleadstolargerfiscaldeficitsandpublicdebtratios.Thisillustratesthat,particularlyforcountrieswherefiscalpolicyspaceislimited,fiscalpoliciesaimedatimprovinggrowthandstabilitycouldbemoreeffectivewhenaccompaniedbyother,complementarypolicies.

ontheotherhand,fiscaldeficitsanddebtratiosinthebalancedgrowthscenarioaresmallerthaninthebaselinescenario.32Thisisnotsurprising,evenifacriticalingredientofthepolicymixisassumedtobefastergrowthofpublicspendingongoodsandservices.Fiscalsustainabilityistheresultofvariousconvergingpolicies,suchasthoseproposedabove.Totheextentthatfiscalsupportintheformofspendingonsocialprotectionandinfrastructuredevelopmentiscomplementedbyindustrialpromotionpoliciesandbyincomespolicies,positivesynergiesarecreated.Asaresultofsuchsynergies,consumption,privateinvestment,andamorebalancedgrowthoftradehelptogeneratemoregovernmentrevenues.inaddition,inordertoensurethattheassumedimprovementsinthefunctionaldistributionofincomearenet(i.e.aftertaxes),greaterprogressivenessindirecttaxcollectionispursued,thusimprovingdomesticresourcemobi-lization.This in turnwouldcontributetoreducingfiscaldeficitsandalleviatingdebtburdens.

The baseline results shown in the last twocolumnsoftable2.4confirmthatprivatesectorbal-ances, aswell as external balances of the variousregionsmove in diverging directions.Developed

countries as awhole, and particularly theUnitedStates(butalsotheUnitedKingdomandafewothermajoreconomies)tendtopursuepoliciesthatresultinacontinuingdeclineofnetfinancial savingsoftheprivatesector(whichalsoleadtoheavierdebtburdens).33This in turn translates intoworseningexternaldeficits,which,bytheendofthesimulationperiod,showsimilarmagnitudesasthoseoftheprevi-ouspeakjustbeforetheonsetofthefinancialcrisis.Meanwhile,anumberofothercountries, typicallythosewhich accumulated large external surplusesduringthepre-crisisperiod,showsimilarpatternsintheprojectedbaseline,astheywillcontinuetorelyonarecoveryoftheirnetexportsandarelativeincreaseinnetfinancialsavings,mostlybytheprivatesector.bycontrast,thebalanced-growthscenarioshowsasignificantreductionofexternal imbalances.Moreprecisely,thereareincreasesinthenetfinancialsav-ingsoftheprivatesectorwhereoriginallythereweredeficits,andreductionsofprivatesurpluseswherethesewere too large. indeed, the proposedpolicystimulitriggerrobustgrowthofpublicandprivatespending,madepossiblebyincreasedincomesandenhancedbyimprovementsintheregulationofthefinancialsystemandofinternationaltransactions.inaddition,tradeimbalancesoflow-andlower-middle-incomecountriesimproveasaresultoftheassumedpro-developmenttradeagreements.

2. Summing up: The need for policy consistency and macroeconomic coherence

The globalmodelling exercise synthesizedabove offers an evaluation of the favourable out-comesthatcanbebroadlyexpectedfromabreakwithcurrentpolicystances.Clearly,theseresultscannotbeachievedbymeansofmarket-drivenadjustments.Theyrevealtheneedforexplicitpolicytriggersthat,estimatedonahistoricalbasis,areshowntoyieldmorerobustandstablegrowthpatterns,particularlyifpoliciesworldwidearecombinedinacoordinatedfashion.However,theuseofthismodellingtooldoesnotmeanthatsuchpolicychoiceswillactuallybeundertaken.itrequiresacarefulexaminationofwhatpolicy space is available, thepossible constraints,andthepoliticalwillofcountries’leaderstobreakwithmostofthecurrentapproaches,allofwhichisdiscussedmorethoroughlyinthechaptersthatfollow.

Towards a Sustained Economic Recovery: Review of Policy Options 35

Tabl

e 2.

4

FIN

AN

CIA

L VA

RIA

BLE

S FO

R S

ELEC

TED

REG

ION

S A

ND

CO

UN

TRIE

S, 1

990–

2024

(Ave

rage

in p

er c

ent o

f GD

P)

Pub

lic s

ecto

r bal

ance

Pub

lic d

ebt

Priv

ate

sect

or b

alan

ceC

urre

nt a

ccou

nt b

alan

ce

Sce

nario

1990

–20

1420

15–

2019

2020

–20

2419

90–

2014

2015

–20

1920

20–

2024

1990

–20

1420

15–

2019

2020

–20

2419

90–

2014

2015

–20

1920

20–

2024

Dev

elop

ed e

cono

mie

sB

asel

ine

-4.0

-4.0

-2.7

79.2

96.2

89.8

3.2

2.5

0.2

-0.5

-1.2

-2.1

Bal

ance

d gr

owth

.-3

.3-2

.8.

91.2

79.7

.2.

31.

7.

-0.7

-0.8

of w

hich

:U

nite

d S

tate

sB

asel

ine

-4.3

-4.5

-3.1

71.1

87.1

78.7

1.4

0.3

-3.1

-2.9

-4.2

-6.2

Bal

ance

d gr

owth

.-3

.6-3

.0.

83.1

72.5

.0.

80.

7.

-2.8

-2.3

CIS

Bas

elin

e-0

.61.

93.

057

.722

.722

.24.

32.

54.

33.

84.

47.

3B

alan

ced

grow

th.

1.3

2.0

.26

.627

.2.

1.5

0.9

.2.

72.

9

Dev

elop

ing

Asi

aB

asel

ine

-2.2

-1.3

-1.2

40.1

44.5

48.7

4.2

3.6

4.3

2.0

2.8

3.5

Bal

ance

d gr

owth

.-1

.2-1

.2.

43.6

43.9

.2.

52.

3.

1.7

1.3

of w

hich

:C

hina

Bas

elin

e-1

.80.

71.

916

.329

.032

.45.

12.

73.

83.

33.

45.

8B

alan

ced

grow

th.

-0.2

-0.0

.28

.829

.3.

1.7

1.5

.1.

51.

5

Indi

aB

asel

ine

-7.7

-7.0

-6.5

76.0

77.6

80.3

7.2

5.1

5.4

-0.5

-2.0

-1.1

Bal

ance

d gr

owth

.-3

.9-3

.0.

69.4

62.2

.2.

42.

9.

-1.4

-0.1

Afr

ica

Bas

elin

e-2

.1-3

.8-4

.059

.159

.664

.32.

60.

30.

40.

3-3

.6-3

.6B

alan

ced

grow

th.

-2.8

-1.9

.57

.855

.9.

-0.0

0.4

.-2

.8-1

.5

Latin

Am

eric

a an

d th

e C

arib

bean

Bas

elin

e-3

.0-4

.3-3

.551

.454

.553

.51.

11.

71.

9-1

.9-2

.6-1

.6B

alan

ced

grow

th.

-3.0

-2.4

.51

.048

.2.

0.7

1.5

.-2

.4-0

.9

Sour

ce:

UN

CTA

D s

ecre

taria

t cal

cula

tions

, bas

ed o

n G

PM

.N

ote:

C

IS in

clud

es G

eorg

ia.

Trade and Development Report, 201436

intherealmofpolicymaking,whatthesemodelsimulationsunderscoreistheneedtoensurepolicyconsistencyandmacroeconomiccoherenceinordertoobtainoutcomessimilartothosepresentedabove.Policyconsistencyreferstopreventingpolicyinstru-ments fromoperating at cross purposes.Currentinconsistencies in the configuration of fiscal andmonetarypoliciesofmanyeconomiesafter2010hasbeencolourfullydescribedas“drivingtheeconomiccarwithonefootonthebrakeandonefootonthepedal”(White,2013:1).instead,monetaryexpansionshouldbeaccompaniedbyfiscalexpansiontopreventliquiditybeinghoardedorchannelledtospeculativeuses;employmentpromotionprogrammesshouldbeaccompaniedbyincomedistributionpoliciessothataggregatedemandissustainedbyrisinghouseholdincomesratherthandebt;andpoliciestargetinginfla-tionshouldbeaccompaniedbypoliciesthataddressthecausesofinflation,whichinturndrawsattentionto incentives todomesticproductionanddemand.Thesearebutafewexamplesofpolicyconsistency.

Pro-growth and rebalancing policies need toensuremacroeconomic coherence by addressingprimarilytherootproblemsthatimpedeasolidandsustainedglobalrecovery.Untilveryrecently,andevennowinmanydevelopedeconomies,policymak-ershaveseemedtobeexcessivelyconcernedwithfightingthethreatofinflationandhavebeenignoringthe realityofdeflation.likewise,policymakers inmanycountrieshavebeenadvocatingharshadjust-mentsintheirgovernments’fiscalbalancesbuthavebeenneglectingtoconsiderthepotentialeffectsonhouseholdsandenterpriseswhichwouldfinditmoredifficulttorebuildtheirbalancesheetswhenaggre-gatedemandandincomearedepressed.

ifthemainproblemsofthepost-crisisperiodhavetodowithinsufficientaggregatedemandandfinancialinstability,theappropriatepolicyresponseshouldbenottoinjectmoreliquidityperse,buttoencouragecreditflowsthatgenerateproductiveactiv-ity,whileboostingaggregatedemandanddesigning

incomepoliciestomakeuseofsuchcreditflowsinasustainablemanner.

Thereisanotheraspectofmacroeconomiccoher-encethatmayeasilybeoverlookedbypolicymakerswhen considering their options. in an increasinglyinterconnectedglobaleconomy,policieshave tobeconsistentfortheworldasawhole.Thereareseveralexamplesofwhythismatters,buttwoarediscussedhere.First,aftertakingintoaccountrealandfinancialfeedbacks, it should be clear that a sustained andstabledemand-ledgrowthpathhastostartdomesti-cally,ratherthaneachcountryindividuallypushingfor competitive reductions of costs and imports inorder togenerateanet-export-led recovery.Robustdomesticactivityinasufficientnumberofcountries−aprocessinwhich,admittedly,surpluscountrieshavemuchmoretocontribute−istheonlytrulysustainablebasisfortherecoveryofglobaltrade.Second,intheabsenceofatrulygloballyinclusivefinancialarchi-tecture,unfetteredglobalfinancialmarketswithoutadequateregulatorycontrolcanbepernicious,asthe2008financialcrisishasamplydemonstrated.Thecontinuing inadequacy of institutions andmecha-nismsforinternationalcoordinationofpolicyactionsaffectstherulesofthegameinfundamentalways,forcingpolicymakers to adopt strategies thatmayappeartobeconvenientforthemoment,butwhichareeffectivelyself-defeatinginthemediumterm.itisessentialtocontinuewitheffortstodeviseamoreeffective set of globally inclusive institutions toregulatemarkets,helpcorrectunsustainableimbal-anceswhentheyemerge,andbetterpursuetheaimsofglobaldevelopmentandconvergence.Thismaybeanambitiousundertaking,forwhichagreatdegreeofperseveranceandvisionisrequired.butaschap-ter iVhighlights,historyshows thatdeep reformsofglobal scopesimilar to theonesmentionedherewereseriouslycontemplatedinthepast.Meanwhile,farmoremeaningfuleffortsareneededtocoordinatenationalpolicystrategies,toconsidertheimplicationsoftheirinteractionsinaglobalsetting,andtomanageinternationaltransactionsandflowsaccordingly.

Towards a Sustained Economic Recovery: Review of Policy Options 37

1 Thetrendisestimatedfromthemid-1990sonwardstoavoidgivingexcessiveweighttotheboomyearsprecedingthecrisis,whichweredeemedunsustain-able,aswellastotheimmediatepolicyresponsesduring theglobal crisis,whichwereclearlymoreexpansionarythanthenorm.

2 Atthetimeofwriting,theUnitedKingdom’sofficeforNationalStatisticswasintheprocessofrevis-ing its annualGDP statistics (inUnited Kingdom National Accounts − The Blue Book, 2014 edition),andpreliminary reports suggest that by 2013 thelevelofrealGDPmaybemarginallyabovethepre-crisislevel.

3 StateandlocalgovernmentsintheUnitedStatesarerequiredbystatutorylawtobalancetheirprimarybudgets,which in practice imposes expenditureadjustments relative to tax collection and otherrevenues.

4 Thisterm,whichwasusedbyKeynesinhisGeneralTheory,referstoaburstofoptimismthataffectsthemoodofprivateinvestors.

5 This confirms earlierwork on theUnited States(PikettyandSaez,2003)andacrossalargepoolofcountriesinbothdevelopedanddevelopingregions(see, for example,Cornia, 2004; andMilanovic,2005).

6 Fromadifferentmethodological perspective, andusingindustry-leveldatasets,otherempiricalstudiessuggestthatagreaterproportionofcapitalaccumula-tionvis-à-viswage-earnersandtheself-employedimplies, when properly estimated, a tendencytowards a sharper deterioration of labour income(Arpaiaetal.,2009).

7 WhilethereisbroadagreementontheimportanceofPiketty’sempiricalfindingsaboutlong-termtrendsofinequality,histheoreticalexplanation,whichvali-datesneoclassicalgrowththeory,hasbeensubjectedtorigorouscritiques(Patnaik,2014;Taylor,2014).

8 Similarconclusionswithvariations,dependingonunderlyingeconomicstructuresofdifferentcoun-tries,havebeenprovidedbyanalyticalandempiricalevaluations of the “wage-led” versus “profit-led”debate (Storm andNaastepad, 2012;lavoie andStockhammer,2012).

9 See earlierTrade and Development Reports; alsoTurner,2008.

10 Thesetwocasestogetheraccountforasignificantshare of global consumption, and could thereforehave at least some influence in reigniting globalimbalances.Whileotherrelativelylargeeconomiesseemtoshowsimilarpatterns,theinvestigationonthesetwocountriesisfacilitatedbytheavailabilityofdetailedbalancesheetsandassetcompositionsoftheirhouseholdsectors.

11 Thisisanaccountingtermthatreferstoapositiveshocktothenetwealthofassetownerswhenassetpricesrise.Theshockcanbeestimatedbyimput-ingthepricechangesofthedifferentassetstotheunderlyingstructureofthebalancesheet.byfurtherdiscountingconsumerpriceinflation,ameasureofrealholdinggainsisobtained.Seeizurieta(2005)foraformalmethodologicaljustificationandearlierempiricalestimates.TheFinancialAccountsoftheFederalReserveoftheUnitedStatespublishestheseriesofholdinggainsinnominalterms(seetableR.100)beforediscountedbyinflation.ThenominalseriesgeneratedhereshowaveryclosematchwiththoseoftheFederalReserve,withonlynegligibleerrorsduetotheaggregativenatureoftheassetpricesused.Thisallowscheckingagainstsuchexistingdatatheestimationmethodologyappliedfurtherbelowto the case of theUnitedKingdom,which doesnotpublishholdinggainsofthehouseholdsector.itshouldbeemphasizedthattheseareaccountinggains,ratherthanthegainsactuallyrealizedthroughassettransactions.

12 “Netfinancialsavings”,attributedtoTobin(1982),istheequivalentofthemoreknownconceptofsurplusordeficit,commonlyusedinreferencetothepublicsectorandtheexternalsector(thecurrentaccount).itsformalnameinnationalaccountsis“netlending”(or“netborrowing”whennegative),butthistermisnotusedinthetexttoavoidconfusionwiththealsocommonlyused“lending”or“borrowing”inrelationtothebankingsector.

13 Theseries,whichonlyrunupto2012,werecompiledbycombiningnationalaccountsstatisticswithsurveydataandimputedtrendsfromtheevolutionofwage

Notes

Trade and Development Report, 201438

oragricultural incomeswhenavailable.However,alargemarginoferrorispossible,particularlyforcountrieswhere theproportionof informal/mixedincomesislarge.

14 Mixedincomein thenationalaccountscomprisesincomesearnedfromtheself-employedaswellasall incomes earnedby unincorporated enterprisesandthoseclassifiedas“non-marketoutput”.

15 SeealsoTDR 2001;Akyüz,2002;D’Arista,2007;Ghosh andChandrasekhar, 2001; Singh, 2003;Stiglitz,1999.

16 SeealsoAkyüz,2013and2014;Ghosh,2014;TDR 2013;UNCTAD,2011.

17 Seelawson(2011),andalsoobstfeld(2012)foramoregeneralappraisalofsimilarviews.

18 Ukraine,wherecapitalinflowsroseonlymarginallyafter2009,isanexampleofhowashocklikethefinancial crisis can hit vulnerable sectors causingsystemic threats that requiremore lasting adjust-ments,oftenexacerbatedbysocialtensions.

19 See,forexampleChandrasekharandGhosh,2013and2014;lee,2013;McKenzieandPons-Vignon,2012;Chang, 2013;Kang et al., 2011; Ffrench-Davis,2012.

20 Thisindexisavailableat:http://unctadstat.unctad.org/wds/TableViewer/tableView.aspx?Reportid=30953.itmeasures, product byproduct, the evolutionof(normalized)balancesovertime,whilecontrollingforre-exportingactivities.Thedatasetisverydis-aggregated anddetailed, allowing a fullmappingacross thestandardindustrialclassification,anditalso specifies categories by the degree of labourskillswithinthemanufacturingsector.

21 TheGPMisafullyendogenousmodellingframe-work based onwater-tight accountingwithout“black-holes” andwithout unexplained residuals.behaviouralrelationsthatdeterminethemacroeco-nomic adjustments are estimated econometricallyusingpanel(124countries)andtimeseries(period1980to2012).Themodelcovers25countriesandcountrygroups,andconsidersGDPinmainsectors;public, private andfinancial institutions; employ-ment; international trade (fivemain categories)andfinance; andfiscal,monetary and industrial/tradepolicy (seeTDR2013, annex to chapter i).Foramoretechnicaldiscussion,seewebsite:http://unctad.org/en/Publicationslibrary/tdr2014_GPM_TechnicalDescription.pdf.

22 As stated byKeynes (1936: 149), “The state ofconfidenceisrelevantbecauseitisoneofthemajorfactorsdeterminingtheformer[therateofinvest-ment],which is the same thingas the investmentdemand-schedule.Thereis,however,notmuchtobesaidaboutthestateofconfidenceapriori.ourconclusionsmustmainly dependupon the actualobservationofmarketsandbusinesspsychology.”

Keynesfurthermadeacrucialobservationtostresshowmuchmoredifficultitistoknow,apriori,abouttheconditionsthatenablearecoveryafteracrisis(1936:158), “Thuswemust also takeaccountoftheotherfacetof thestateofconfidence,namely,theconfidenceof the lending institutions towardsthosewho seek to borrow from them, sometimesdescribedasthestateofcredit.Acollapseinthepriceofequities,whichhashaddisastrousreactionsonthemarginalefficiencyofcapital,mayhavebeendueto theweakeningeitherof speculativeconfidenceorofthestateofcredit.butwhereastheweakeningof either is enough to cause a collapse, recoveryrequirestherevivalofboth.”

23 inthisparticularcasethereareonlysmalldifferencesofdegreewiththebaseline.initsconstruction,inordertoavoidcrisisconditions,asexplainedabove,thebaselineimposesceilingsandfloorsonexchangerates and commodity priceswhichwould haveresultedfromtheimbalancesdiscussedinsectionA.

24 in theGPM, thesepreferences apply to countrieswithapercapitaincomelowerthan$2,000dollarsin2012.

25 Thehistoricperiodrunsupto2014,butthelatestverifiablefiguresfortheshareoflabourincomearenotavailablebeyond2012formostcountries.

26 incomespoliciesareassumedtobecomparativelystronger in theUnitedStates, bringing its labourshareclosertopre-1990levelsandclosertothelev-elsofotherdevelopedeconomies.Moreimportantly,householdsintheUnitedStateshaveaccumulatedserious financial imbalances over time, and theassumedimprovementinthefunctionaldistributionofincomeisrequiredinordertogenerateasustainedgrowthofprivateconsumptionwithoutincreasinghouseholds’financialvulnerabilities.

27 TDR 2013proposedanalternativesimulationthatassumedthatalldevelopingandemergingeconomieswouldengageinproactiveincomespolicieswhiledeveloped countrieswould continue to seek netexportadvantagesbycompressingwageshares.Themodelshowedthatthiswouldresultinanetbenefitfordevelopedcountriesattheexpenseofdevelopingandemergingeconomies.inthissituation,thelattersetofcountrieswouldnaturallyexerciseconsider-ablecautioninadoptingsimilar incomespolicies,which,consequently,wouldresultinaweakerimpactongrowthanddistribution.

28 intheUnitedStates,andtoalesserdegreeinindia,growthofgovernment spending isassumed toberelativelystronger thaninthehistoricperiod,anditalsoturnsouttobemarginallystrongerthanthegrowthofGDPinthefirstfiveyearsoftheprojec-tions.This is because, as discussed earlier, debt-drivenspendingoftheprivatesectorwasgrowingatafastrate,andtoachieveafinanciallystablepath

Towards a Sustained Economic Recovery: Review of Policy Options 39

offastGDPgrowththepublicsectorhadtomakealargercontributionthantheprivatesector.

29 AnexceptionisChina,wherethepolicyshiftawayfrom investmentgrowth towards fastergrowthofhousehold incomes and consumption is assumedtobestrengthenedduringthefirstfewyearsofthesimulation.Undertheseassumptionsprivateinvest-ment inChinawould tend to stabilize at around25percentofGDPtowardstheendofthesimulationperiod.

30 An exception isChina,where a deceleration ofgrowthisexpectedbypolicydesign,andformanyoftheperipherycountriesofeuropewhichcontinuetobeunderpressurebydeflationarypolicies,aswellasformanyoftheoil-exportingcountrieswhichwillnotbenefitfromacontinuingriseinoilpricesofthemagnitudeexperiencedoverthepasttwodecades.

31 Thebalanced-growth scenariohas apro-develop-mentbias(withoutdisregardinggrowthindevelopedcountries), and it is also known that the growth

potentialofdevelopingandemergingeconomiesisgreaterthanthatofdevelopedeconomies.Regardingmeasurement,thePPPweights(base2005inthesesimulations)arenotre-scaledeachyear,resultinginagreaterweightofdevelopingeconomiesinglobalGDPalongtheentireperiodoftheprojection.

32 exceptionsincludemembersoftheCommonwealthof independentStates (CiS) andChina.TheCiSeconomies, instead of accumulating larger fiscalsurplusesover time,wouldbenefit from reducingsurplusesinordertoenhancetheprocessofstruc-turaltransformation.AndinChina,moreemphasisisplacedonstrengtheningsocialprotectioninordertopromotethegrowthofhouseholdconsumption.

33 Notalldevelopedcountriesencouragedebt-drivenprivatesectorspending.ForexampleGermanyandJapansignificantlyincreasetheirexternalsurplusesinthebaseline.Thus,thegroupofdevelopedcoun-triesasawholedoesnotshowastrongpatterninonedirection.

AkyüzY(2002).Towardsreformoftheinternationalfinan-cialarchitecture:Whichwayforward?in:AkyüzY,ed.Reforming the Global Financial Architecture, Issues and Proposals.Geneva,Penangandlondon:UNCTAD,ThirdWorldNetworkandZedbooks:1−27.

AkyüzY(2013).Wavingordrowning:Developingcoun-triesafterthefinancialcrisis.ResearchPaperNo.48,SouthCentre,Geneva.

AkyüzY(2014).CrisisManagementintheUnitedStatesandeurope:impactonDevelopingCountriesandlonger-termConsequences.ResearchPaperNo.50,SouthCentre,Geneva.

ArpaiaA,PérezeandPichelmanK(2009).Understandinglabourincomesharedynamicsineurope.economicPapers379,europeanCommission,brussels.

bakerD(2009).Plunder and Blunder: The Rise and Fall of the Bubble Economy.Sausalito,CA,PoliPointPress.

blanchardo,FaruqeeH,DasM,ForbesJandTesarl(2010).Theinitialimpactofthecrisisonemergingmarkets.Brookings Papers on Economic Activity,Spring:263−323

ChandrasekharCP andGhosh J (2013).The loomingbankingcrisis.Business Line,2September;availableat: http://www.thehindubusinessline.com/opinion/columns/c-p-chandrasekhar/the-looming-banking-crisis/article5086242.ece.

ChandrasekharCPandGhoshJ(2014).Howvulnerableareemergingeconomies?Business Line,3March;availableat:http://www.thehindubusinessline.com/opinion/columns/c-p-chandrasekhar/emerging-econ-omies-in-a-vulnerable-phase/article5746927.ece.

ChangKS(2013).South Korea in Transition.NewYork,NY,Routledge.

CorniaGA(2004).Inequality, Growth and Poverty in an Era of Liberalisation and Globalisation.oxford,oxfordUniversityPress.

CrippsF,izurietaAandSinghA(2011).Globalimbal-ances, under-consumption and over-borrowing:Thestateoftheworldeconomyandfuturepolicies.Development and Change,42(1):228−261.

D’Arista J (2007).U.S. debt and global imbalances.International Journal of Political Economy,36(4):12−35.

References

Trade and Development Report, 201440

epsteinG, ed. (2005).Financialization and the World Economy.CheltenhamandNorthampton:edwardelgar.

Ffrench-DavisR (2012).employment and realmacro-economicstability:Theregressiveroleoffinancialflows in latinAmerica. International Labour Review, 151(1-2): 21−41. international labouroffice,Geneva.

FosterJb(2010).Thefinancializationofaccumulation.Monthly Review,62(5):1−17.

GalbraithJ(2012).Inequality and Instability.oxfordandNewYork,oxfordUniversityPress.

GhoshJ(2014).emergingmarkets:Déjàvualloveragain?Triple Crisis Blog,3February;availableat:http://triplecrisis.com/emerging-markets-deja-vu-all-over-again/.

Ghosh J and Chandrasekhar CP (2001).Crisis as Conquest: Learning from East Asia. NewDelhi,orientlongmanlimited.

iMF(2007).World Economic Outlook,Washington,DC.october.

izurietaA(2005).HazardousinertiaofimbalancesintheUS andworld economy. Economic and Political Weekly,40(34):3739−3750.

KangJ,leeCandleeD(2011).equityfundperformancepersistencewith investment style:evidence fromKorea.Emerging Markets Finance and Trade,47(3):111−135.

Keynes JM ([1936], 1997).The General Theory of Employment, Interest and Money.Amherst,NY,Prometheusbooks.

lapavitsasC(2013).Profiting without Producing: How Finance Exploits Us All.london andNewYork,Verso.

lavoieMandStockhammere(2012).Wage-ledgrowth:Concept,theoriesandpolicies.ConditionsofWorkandemploymentSeriesNo.41,internationallabouroffice,Geneva.

lawsonN(2011).Fivemythsandamenace.Standpoint,January/February2011; available at: http://stand-pointmag.co.uk/node/3644/full.

leducSandSpiegelM(2013).isAsiaDecouplingfromtheUnitedStates(Again)?Federal Reserve Bank of San Francisco Working Paper Series2013-10,SanFrancisco,CA.

leeKK(2013).TheendofegalitariangrowthinKorea:Risinginequalityandstagnantgrowthafterthe1997crisis. Paper presented at theWorld economicsAssociationConferences on inequalities inAsia:The interactionwithGrowth, StructuralChange,economic openness and Social and PoliticalStructures,12May−8June;availableat:http://iiaco-nference2013.worldeconomicsassociation.org/wp-content/uploads/WeA-iiAConference2013-3_lee.pdf.

McKenzieRandPons-VignonN(2012).VolatilecapitalflowsandaroutetofinancialcrisisinSouthAfrica.

MPRApaper40119,UniversitylibraryofMunich,Munich.

Milanovicb(2005).Worlds Apart: Measuring International and Global Inequality. Princeton,NJ, PrincetonUniversityPress.

obstfeldM(2012).DoestheCurrentAccountStillMatter?American Economic Review: Papers & Proceedings:102(3):1−23.

PatnaikP(2010).Themythsof thesubprimecrisis.Net-workideas.org,13August;availableat:http://www.networkideas.org/news/aug2010/print/prnt13082010_Crisis.htm.

PatnaikP (2014).Capitalism, inequality andglobaliza-tion:ThomasPiketty’s“CapitalintheTwenty-FirstCentury”.Networkideas.org;availableat:http://www.networkideas.org/featart/jul2014/fa18_Thomas_Piketty.htm.

PikettyT (2014).Capital in the Twenty-First Century.Cambridge,MA,HarvardUniversityPress.

PikettyT andSaeze (2003). income inequality in theUnited States, 1913−1998.Quarterly Journal of Economics,118(1):1−39.

SinghA(2003).Capitalaccountliberalization,freelong-term capital flows, financial crises and economicdevelopment.Eastern Economic Journal, 29(2):191−216.

StiglitzJ(1999).Reformingtheglobaleconomicarchitec-ture:lessonsfromrecentcrises.Journal of Finance,54(4):1508−1521.

StormSandNaastepadCWM(2012).Macroeconomics Beyond the NAIRU. Cambridge,MA,HarvardUniversityPress.

Taylorl (2014).The triumph of the rentier?ThomasPikettyvs.luigiPasinettiandJohnMaynardKeynes.instituteforNeweconomicThinkingblog;availableat:http://ineteconomics.org/blog/institute/triumph-rentier-thomas-piketty-vs-luigi-pasinetti-and-john-maynard-keynes.

TobinA(1982).Moneyandfinanceinthemacroeconomicprocess. Journal of Money, Credit and Banking,14(2),May:171−204.

TurnerG(2008).The Credit Crunch.london,PlutoPress.UNCTAD (2011).Report of the Secretary-General of

UNCTAD to UNCTAD XIII. Development-led Globalization: Towards Sustainable and Inclusive Development Paths.NewYorkandGeneva.

UNCTAD(TDR 2001).Trade and Development Report, 2001. Global Trends and Prospects, Financial Architecture.UnitedNationspublication,salesno.e.01.ii.D.10,NewYorkandGeneva.

UNCTAD(TDR 2013).Trade and Development Report, 2013. Adjusting to the Changing Dynamics of the World Economy.UnitedNationspublication,salesno.e.13.ii.D.3,NewYorkandGeneva.

UnitedKingdomoffice forNational Statistics (2014).United Kingdom National Accounts: The Blue Book: 2014 edition.london.

Towards a Sustained Economic Recovery: Review of Policy Options 41

UnitedNations (2009).Report of the Commission of Experts of the President of the United Nations General Assembly on Reforms of the International Monetary and Financial System.NewYork.

WhiteW(2013).overtmonetaryfinancing(oMF)andcrisismanagement.Project Syndicate,June12;availableat:http://www.project-syndicate.org/commentary/overt-monetary-financing--omf--and-crisismanagement.

Policy Space and Global Governance: Issues at Stake 43

Thediscussionsnowunderwayonapost-2015development agenda are aiming for an ambitiousnarrative that goes beyond “business as usual” toestablishamoreuniversal,transformativeandsus-tainableapproachthantheoneadvancedthroughtheMillenniumDevelopmentGoals (MDGs) (UnitedNations,2012).Assuch, itwillplayakeyrole insettingnewgoalsandtargetsforpolicymakers,bothatthenationalandinternationallevels.The17goals(andrelatedtargets)agreedtoattheUnitedNationsopenWorkingGrouponSustainableDevelopmentpoint to a level of ambition and complexitywellbeyondtheMDGs(UnitedNations,2014).Theinter-nationalcommunityfacesthreeprincipalchallengesinfashioningthisnewapproach.

Thefirstchallengeisaligninggoalsandtargetstoapolicyparadigmthatcanhelpraiseproductivityandpercapitaincomeseverywhere,generatedecentjobsonascaleneededtomeetarapidlygrowingandurbanizing global labour force, establish a stableinternational financial system that boosts produc-tiveinvestment,anddeliverreliablepublicservicesthat leavenoonebehind, particularly in themostvulnerablecommunities.Theeconomicparadigmofmarketliberalismthathasbeenintheascendencyforthepastthreedecadeshasdisappointedinmostoftheserespects(UNCTAD,2011;CaritasinVeritateFoundation,2014).

Thesecondchallengefacinganynewdevelop-mentagendaisthemassiveriseininequality,whichhas accompanied the spreadofmarket liberalism.Thisisimportantbecause,inadditiontoethicalcon-siderations,andunlikethesimpletextbooktrade-off

betweengrowthandequality,growinginequalitycanthreateneconomicprogressandsocialstability,andunderminepoliticalcohesion(TDRs 1997 and2012;WilkinsonandPickett,2009;Piketty,2014).Theris-ingincomeshare(andpoliticalinfluence)ofthetoponepercenthasalreadyhelpedrevivethisdiscussion;andfiguressuchasthewealthofthe85wealthiestindividualssurpassingthatofthebottomhalfoftheworld’spopulationprovidethedesiredshockeffect.but for a full understanding of the recent rise ofinequality,itisnecessarytolookmorecarefullyatfunctionalincomedynamicsand,inparticular,atthedivergencebetweenwageandproductivitygrowth,theimperativesofshareholdervalueandexecutivecompensation inshapingcorporatebehaviour,andtheregressiveturnintaxation.Greatercapitalmobil-ityhasmadeithardertotaxsome,oftenthelargest,firms.inaddition,ithasreducedthebargainingpoweroflabourandincreasedtheState’srelianceonregres-sivetaxesandbondmarkets,andfurtheramplifiedtheadversedistributiveimpactofunregulatedfinancialactivity.Agrowingbodyofresearchhasbeguntotiethescaleoftherecentcrisistotheseinequalities,pointingtotheirskewedimpactonthecompositionofdemandandtheirlinkstoanincreasinglyfragile,debt-drivengrowthmodel (KumhofandRancière,2010;Stiglitz,2012;MianandSufi,2014).

Thethirdchallengeistoensurethateffectivepolicyinstruments,andthespacetousethem,areavailabletocountriestoenablethemtoachievetheagreedgoalsandadvancethedevelopmentagenda.ThisisverymuchthefocusofthisReport.TheappealbutalsotheweaknessesoftheMDGs1stem,inpart,fromtheirsingularemphasisonclearlydefinedsocial

Chapter III

POLICy SPACE AND GLOBAL GOVERNANCE: ISSUES AT STAKE

Trade and Development Report, 201444

outcomes,whilegivingvirtuallynoconsiderationtoeithereconomicoutcomesorthepolicyinstrumentsrequired for achieving anyof the set goals at thenationaland international levels.onlyMDG8ona global partnership for development allowed foradiscussionofthosepolicyinstruments,butithasprovedmuchweakerandlessspecificthananyoftheothergoals(UNCTAD,2013).2

Addressingthesethreechallengeswouldbeaformidabletaskevenunderidealcircumstances,butitisallthemoredauntingnowbecauseofchangestotheglobaleconomicenvironmentresultingfromthefinancial crisis in2008–2009. initial efforts tomeettheMDGstookplaceinagenerallysupportiveexternaleconomicenvironment:notonlywereaidflows growing, but therewas also strongmarketdemandinbothdevelopedandemergingeconomies,commoditypriceswererisingandaccesstoexternalcapitalprovedeasierthanbeforeformanydevelopingcountries.Thesefactorshavecontributedtostronggrowth across the developingworld since 2002,where growth rates havebeen consistently higherthanthoseinthedevelopedworld.

Thesetrendswereinterpretedaspartofanewerafortheworldeconomy,combininga“greatmoder-ation”inmacroeconomiccircumstanceswitha“greatconvergence”inglobalincomes,withexpectationsforsustainedfuturegrowthlinkedtotherapidemergenceofa“globalmiddleclass”.Concomitantly,callsforstrongerglobalgovernanceofanincreasinglyinter-connectedworldeconomy,diminished.Foratime,italsoencouragedabeliefthatgrowthinthepoorercountrieshaddecoupledfromtrendsinthedevelopedworld(Canuto,2012).However,recenteventssuggestthatthisisaprematureconclusion(Akyüz,2013).

Thenewdevelopmentagendaislikelytofaceaharsherexternalenvironmentintheyearsahead.Some of the potential difficulties are outlined inchapteriiofthisReport,andtheyconfirmthepro-longedandfragilenatureofthepost-crisisrecovery,particularlyifa“business-as-usual”macroeconomicscenariocontinues.Thefinancialcrisisalsorevealedasetofpersistentandhighlyinterrelatedeconomicand social imbalances thatwill inevitably have astrong bearing on efforts to design newdevelop-mentstrategiesaimedattacklingissuesrelatingtoagrowingurban-ruraldivide,formalandinformallivelihoods, access to affordable energy sourcesthatminimizeenvironmentaldamage,andfoodand

water security.Thesewill need to be resolvedbybothdevelopedanddevelopingcountriesifamoreinclusiveand sustainableglobal economy is tobeachievedby2030.

Rebalancingonthesemanyfrontswillrequireanintegratedpolicyframeworkencompassingmoreviableandinclusivenationaldevelopmentstrategies,alongwithchangesinthegovernanceoftheglobaleconomicsystemtoaccommodateandsupportthem.ifprogressonsocialandeconomicgoalsisnotunder-pinnedbyeffectivenationalstrategiesforsustainableandinclusivedevelopment,oriftheglobaleconomyisincompatiblewithsuchstrategies,progresstowardsachievingmoreambitiousdevelopmentgoalswill,in all likelihood, be frustrated.last year’sTrade and Development Report argued thatmobilizinggreaterdomesticresourcesandbuildingmarketsatthenationalandregionallevelswerelikelytobekeyto sustainedgrowth inmanydevelopingcountriesintheyearsahead.Maximizingthecontributionofnationalresourcesforachievingtheeconomicandsocialgoalsenvisagedinthepost-2015agendawillcertainly require amore assertivemacroeconomicpolicyagenda.Suchanagendawouldneedtoincludetheuseofabroadarrayoffiscal,financialandregula-toryinstrumentsinsupportofcapitalaccumulation,proactive labourmarket and incomes policies togeneratemoredecentjobs,andeffectivecontrolofthecapitalaccount to limitpotentialdamagefromexternal shocks and crises.but economic sustain-abilitywillalsorequirediversificationandupgradingof the productive structures and capabilities fromwhichwealth is created and distributed (Salazar-Xirinachesetal.,2014).buildingmorecompetitivefirms,moving resources into higher value-addedsectors and strengthening national technologicalcapabilities cannot rely onmarket forces alone;effectiveindustrialpoliciesanddedicatedeffortstosupport and coordinate private- and public-sectoractivitieswillalsobecrucial.

Any such broadening and strengthening ofnational development strategieswill need to beaccompaniedbyinstitutionalchanges.Marketsarerarely “free”, andnever operate in isolation; theyrequireaframeworkofrules,restraintsandnormstooperateeffectively(Polanyi,1944).Assuch,themarket economy is always embedded in awiderlegal,socialandculturalsetting,andissustainedbyapanoplyofpoliticalforces.Thesearchforprofitsbyprivatefirmsimpliesthatindividualbusinessesare

Policy Space and Global Governance: Issues at Stake 45

constantlytestingthelimitsofthesewiderrulesandrestraints,andmobilizingforchangesthatgivethemmorespacetoundertakethatsearch,suchasexertingpressuretoreducewhattheyseeasthe“burden”ofredtape,“excessive”taxes,the“strictures”ofbank-ingandaccountingrules,the“biases”inlabourandconsumer laws, and the “constraints” onmovingmoneyinandoutofacountry.Mostgovernmentsunderstandthattheprofitmotivebringsbenefitsbutalsoentailscosts.Accordingly, theystrive to seekabalancebetweencorporateinterestsandthoseoftheirotherconstituencies.Howandtowhatextenttheframeworkofrulesandregulationsformarketstooperateisstrengthenedorweakenedispartofacomplexpoliticalprocess specific to each society,but it cannot be entirely dispensedwithwithoutthreateningabreakdownofthewidereconomicandsocialorder.Abasicanddangerousflawinmarketfundamentalism,asrecentlyarguedbyMarkCarney,Governorof thebankofengland, is itsdenialofthesecomplexitiesinthedesignandimplementationofeconomicpolicies(Carney,2014).

Historically,theevolutionoftoday’ssuccess-fuleconomieshas,aboveall,beenmarkedbywhathasbeendescribedas“adaptiveefficiency”(North,2005); that is, the capacity to develop institutionsthatprovideastableframeworkforeconomicactiv-ity,butwhicharealsoflexibleenoughtoprovidethemaximumleewayfortheadoptionandtailoringofstrategiesandchoicestomeetthespecificchallengesofagiventimeandsituation.intheparticularcaseofStateinstitutions,thenotionofadaptiveefficiencyimplies that policymakersmust have the requisitespacetoarticulatepriorities,choosetheirpreferredpolicyinstrumentsandimplementwhattheyconsidertobe themostappropriatepolicymix.Some timeago, theeminentDutcheconomist,JanTinbergen,establishedthatforthemixtoworkatanaggregateleveltherehavetobeatleastasmanypolicyinstru-mentsas therearegoals. ifaprogrammeincludes

moregoalsthaninstruments,atleastonegoalwillnotbemet;whereasifitcontainsmoreinstrumentsthangoals,therewillbemorethanonewayofachievingthecombinationofgoals.

Arguably,andasiscertainlythecasewithmostdevelopmentstrategieswhereavarietyofmicroeco-nomic,macroeconomic,structuralandstrategicgoalsarepursuedsimultaneously,maximizingthenumberofinstrumentswouldseemtobethesensibleoption.However,simplyreducingtheissueofpolicyspacetothenumberofinstrumentsandgoalsisnotsufficientforanunderstandingofthecomplexitiesinvolved.Different instruments are likely to have differentdegreesofeffectivenessinmeetingaparticulargoal;butalso,becausegoalsareinterdependent,aparticu-larinstrumentcanpotentiallyinfluencemanygoalsatthesametime,andnotalwaysintheexpectedordesireddirection.Moreover,thedistinctionbetweengoalsandinstrumentsisneitherentirelyunambiguousnorobvious.Whatisatargetforonesetofpolicy-makers(orinonesetofcircumstances)maywellbeaninstrumentforanothersetofpolicymakers(orinanothersetofcircumstances).

Policyspaceessentiallyreferstothefreedomandabilityofagovernmenttoidentifyandpursuethemostappropriatemixofeconomicandsocialpoliciesto achieve equitable and sustainable developmentthatisbestsuitedtoitsparticularnationalcontext.itcanbedefinedasthecombinationofdejurepolicysovereignty,whichistheformalauthorityofnationalpolicymakers over policy goals and instruments,anddefactonationalpolicycontrol,whichinvolvestheabilityofnationalpolicymakerstosetpriorities,influencespecifictargets,andweighpossibletrade-offs(Mayer,2008).bothareaffectedbytheexternalenvironment,albeit indifferentways,and there iswell-recognizedtensionbetweentheconsequencesofexternaleconomicintegrationandnationalpolicyflexibility(Panic,1995).

contemplated by economic orthodoxy.However,broadeningdevelopmentstrategiesinthiswaymuststillrecognizethecontingentanduncertaineffectsofparticularpolicyinstruments,aswellasthepotentialtrade-offsandadjustmentcostsofchoosingoneset

Restoringadevelopmentmodelthatfavourstherealeconomy−andtheconstituenciesthatdependonitfortheirlivelihoodsandsecurity−overfinancialinterests,willalmostcertainlyrequireaddingmoreinstruments to the policy toolkit than is currently

****

Trade and Development Report, 201446

ofpoliciesoveranother.Typically,policygoalsarerarelyof the “either-or” type (e.g. employmentorinflation,openorclosedeconomies,Stateorprivateownership,fixedorflexibleexchangerates),butofvariousshadesin-between.Thiswouldalreadysug-gestthatlearningtomixobjectivesandinstrumentsisanunavoidablecomponentofpolicymaking,andthatexperimentationbecomesall themore impor-tant,giventhattherearedifferentwaysofachievingfaster growth,macroeconomic stability, opennessandamoreequitabledistributionofincome(Worldbank,2005).

Moreover, at any particular time, there is anunwrittensocialcontractabouttherulesthatmakeaneconomyworkandwhichsetboundariestotheState’seconomicrole.Theprocesswherebyacon-sensusisforged,prioritiesaresetandattitudesareshapedisjustasimportantapartofdefiningpolicyspaceastechnocraticcompetence.Decidingontheappropriatepolicymixwillalsoinvolvejudgementsandquantitativeestimatesaboutthelikelymagnitudeof the adjustments arising from a particular pro-gramme.inanyevent,thecombinationofleadership,judgementandexperimentationiscertaintomakeforanopen-endedpolicymakingprocess.

The State’s capacity to coordinate differentinterestgroups,generateconfidenceinitsactionsandbehaviour,andestablishnationaldevelopmentasanurgent,overarchingprojectcontinuestodistinguishthosecountriesthathavepromotedcatch-upgrowthandsustainedstructural transformationfromthosethathavenot.SuccessfulStateshaveenhancedtheircompetenciesthroughthedevelopmentofstructuresofaccountability;throughcontinuousimprovementsto staff recruitment,promotion,compensationandtraining;andthroughthecreationof(semi-)publicinstitutionsandothertypesofpartnerships,particu-larlywithindustryassociations,butalsowithtradeunions,universitiesandresearchbodies.Theyhavealsoestablishedregulatoryandsupervisorybodies,oftenwithsignificantdegreesofindependencefromthepoliticalprocess,toprovidetherules,disciplines,incentives and surveillance that helpmarkets tooperate,whileseekingtominimizepossiblemicro-economic andmacroeconomic distortions. in thecontext of the structural, technological and socialdeficitsthatneedtobecorrectedinalldevelopingcountries,albeittovaryingdegrees,UNCTADhasassociatedthesevariousinstitutionalelementswiththe efforts of a “developmental State” to overseesuccessfultransformation.

in an increasingly globalizingworld, no lessthan at the domestic level,market activity alsorequiresaframeworkofrules,restraintsandnorms.And, no different from the domestic level, theweakeningandstrengtheningofthatframeworkisapersistentfeature.However,therearetwoimportantdifferences.Thefirstisthattheinternationalinstitu-tions designed to support that framework dependprincipallyonnegotiationsamongStateswithregardto their operation. essentially these Statesmustdecideonwhetherandhowmuchoftheirownpolicyspacetheyarewillingtotradefortheadvantagesofhavinginternationalrules,disciplinesandsupport.inevitably, inaworldofunequalStates, thespacerequired to pursue their own national economicandsocialdevelopmentaspirationsvaries,asdoesthelikelyimpactofanindividualcountry’spolicydecisionsonothers.Managingthistrade-offispar-ticularlydifficultatthemultilaterallevel,wherethedifferencesamongStatesarethemostpronounced.Second, theextent towhichdifferent international

economicforcescanintrudeonacountry’spolicyspacealsovaries.inparticular,cross-borderfinancialactivities,asKindleberger(1986)notedinhissemi-naldiscussionofinternationalpublicgoods,appeartobeaparticularlyintrusivefactor.butintoday’sworldofdiminishedpoliticalandlegalrestraintsoncross-bordereconomictransactions,financeisnottheonlysuchsource;aschapterVnotes,therearealsoverylargeasymmetriesininternationalproduction,inparticularwiththeleadfirmsininternationalpro-ductionnetworks,whicharealsoalteringthespaceavailabletopolicymakers.

ThegrowinginterdependenceamongStatesandmarketsprovidesthemainrationaleforawell-struc-tured systemofglobaleconomicgovernancewithmultilateralrulesanddisciplines.inprinciple,suchasystemshouldensuretheprovisionofglobalpublicgoodssuchasinternationaleconomicandfinancialstabilityandamoreopentradingsystem.inaddition,it should be represented by coherentmultilateral

****

Policy Space and Global Governance: Issues at Stake 47

institutional arrangements createdby intergovern-mentalagreementstovoluntarilyreducesovereigntyonareciprocalbasis.Theguidingprincipleofsucharrangementsshouldbetheirabilitytogeneratefairandinclusiveoutcomes.Thisprincipleshouldinformthedesign,implementationandenforcementofmul-tilateralrules,disciplinesandsupportmechanisms.Thesewouldcontributesignificantlytominimizingadverse internationalspilloversandothernegativeexternalitiescreatedbynationaleconomicpoliciesthat focus onmaximizingnational benefits. Fromthisperspective,howthesearrangementsmanagetheinterfacebetweendifferentnationalsystems(fromwhichtheyultimatelydrawtheirlegitimacy),ratherthanerasingnationaldifferencesandestablishingasingularandomnipotenteconomicandlegalstruc-ture,bestdescribestheobjectivesofmultilateralism.

The extent towhich national developmentstrategiesrespondtonationalneedsandprioritiescanbelimitedorcircumscribedbymultilateralregimesandinternationalrules,butequally,theycanbeinflu-encedbyeconomicandpoliticalpressuresemanatingfromtheworkingsofglobalmarkets,dependingonthedegreeofintegrationofthecountryconcerned.Whiletheextentanddepthofengagementwiththeglobaleconomymayresultfromdomesticeconomicpolicychoices,subsequentpoliciesarelikelytobeaffectedbythatengagement,sometimesinawayandtoanextentnotanticipated.AsnotedinTDR 2006,itisnotonlyinternationaltreatiesandrules,butalsoglobalmarketconditionsandpolicydecisionsinothercountriesthathaveanimpactonpolicyspace.Globalimbalancesofpower(botheconomicandpolitical)alsoremainundeniablysignificant inaffecting thecapacitiesofgovernmentsofdifferentcountriestoengageinthedesignandimplementationofautono-mouspolicies.

Therearevalidconcernsthatthevariouslegalobligationsemergingfrommultilateral,regionalandbilateral agreements have reducednational policyautonomy by restricting both the available rangeandtheefficacyofparticularpolicyinstruments.Atthesametime,multilateraldisciplinescanoperatetoreducethe inherentbiasof internationaleconomicrelations in favour of countries that have greatereconomicorpoliticalpower(Akyüz,2007).Thosedisciplinescansimultaneouslyrestrict(particularlydejure)andease(particularlydefacto)policyspace.in addition, the effectiveness of national policiestends to be weakened, in some instances very

significantly,bytheglobalspreadofmarketforces(especiallyfinancialmarkets)aswellasbytheinter-nalizationofmarketswithintheoperationsoflargeinternationalfirms.

itisimportanttoconsiderwhether,howandtowhatextentpolicyspaceisreducedandreconfigured.limitsonpolicyspaceresultingfromobligationsorpressurestoderegulatemarketstendtocircumscribetheabilityofgovernmentstoalterpatternsofmarketfunctioningtomeettheirbroadersocialanddevelop-mentalobjectives.Yetunfetteredmarketprocessesareunlikelytodelivermacroeconomicandfinancialstability,fullemployment,economicdiversificationtowardshighervalueaddedactivities,povertyreduc-tionandothersociallydesirableoutcomes.

butwhilenationalpoliciesareobviouslyaffectedbytheextentofpolicyspaceavailable,asdeterminedbytheexternalcontext,theyarealso−andstillfun-damentally− the result of domestic forces.Theseinclude, among others, politics and the politicaleconomy that determine the power and voice ofdifferentgroupsinsociety,domesticexpertiseandcapacities,thenatureofinstitutionsandenforcementagencies,thestructureofthepolity(e.g.degreeoffederalism),andprevailingmacroeconomiccondi-tions.evenwhenpolicymakershavefullsovereigncommandoverpolicyinstruments,theymaynotbeabletocontrolspecificpolicytargetseffectively.

Furthermore, the interplay between theseinternal and external forces in determining bothpolicymakingandimplementationwithincountriesintoday’sglobalizedworldisanincreasinglycomplexprocess.Theemergenceinthe1980sand1990s,andthegrowingacceptancebypolicymakersthroughouttheworld,ofwhatcouldbecalledastandardtemplatefornationaleconomicpolicies–irrespectiveofthesize,contextandnatureoftheeconomyconcerned–wascertainlyinfluential(evenifnotalwaysdecisive)indeterminingpatternsofmarketliberalization.butevenaswavesof tradeliberalizationandfinancialderegulationsweptacrosstheworld,culminatinginwhatweexperienceasglobalizationtoday,variationsacross individual countries suggest that theyhaveretainedsomedegreeofpolicyautonomy,alongwithrelativelyindependentthinking.

Certainly, for themore developed countries,globalizationà la cartehasbeenthepracticetodate,as it has been for themore successful developing

Trade and Development Report, 201448

countriesoverthepast20years. bycontrast,manydevelopingcountrieshavehadtocontendwithamorerigidandstructuredapproachtoeconomicliberaliza-tion.Thisonesize-fits-allapproachtodevelopmentpolicyhas,forthemostpart,beenconductedbyorthroughthebrettonWoodsinstitutions–theWorldbank and the internationalMonetaryFund (iMF)–whose surveillance and influenceoverdomesticpolicymakersfollowingthedebtcrisesofthe1980swere considerably extended giving them greaterauthoritytodemandchangestowhattheydeemedtobe“unsound”policies.CountriesseekingfinancialassistanceordebtreschedulingfromthebankortheiMFhadtoadoptapprovedmacroeconomicstabilityprogrammesandagreeto“structural”andpoliticalreforms,which extended the influence ofmarkets–via liberalization,privatizationandderegulation,amongothers–and substantially reduced theeco-nomicanddevelopmentalrolesoftheState.Similarly,andasdiscussedingreaterdetailinthenextchapter,theUruguayRoundof tradenegotiationsextendedtheauthorityoftheWorldTradeorganization(WTo)to embrace services, agriculture, intellectual prop-ertyandtrade-relatedinvestmentmeasures,therebyrestricting, to varying degrees, the policy spaceavailable to developing countries tomanage theirintegrationintotheglobaleconomy.

emphasizingtheroleofpolicy,andoftheinter-nationaleconomicinstitutionsinpromotingonesetofpoliciesoveranother,isanimportantcorrectionto the view that globalization is an autonomous,irresistibleandirreversibleprocessdrivenbyimper-sonalmarketandtechnologicalforces.Suchforcesareundoubtedlyimportant,butessentiallytheyareinstigatedbyspecificpolicychoicesandshapedbyexistinginstitutions.itisalsomisleadingtothinkoftheglobaleconomyassomesortof“natural”systemwithalogicofitsown.itis,andalwayshasbeen,the evolvingoutcomeof a complex interactionofeconomic and political relations. in this environ-ment,multilateralrulesandinstitutionscanprovide

incentivesandsanctionsthatencouragecountriestocooperateratherthangotheirownway.Andastheworldhasbecomeincreasinglyinterdependent,itismorechallengingforcountriestobuildinstitutionalstructures and safeguard remainingflexibilities insupport of inclusive development.To the extentthatmarkets andfirmsoperate globally, there aregrounds for having global rules and regulations.Moreover,internationalcollectiveactionisneededtohelpprovideandmanageglobalpublicgoodsthatmarketsareunableorunwillingtoprovide.Dealingeffectivelywith emerging threats, such as climatechange, also requires appropriate global rules,regulationsandresources.However,itgoeswithoutsayingthatgovernanceattheinternationallevelisverydifferentfromgovernanceatthenationallevel,giventhatgovernmentsarebeingaskedtosurrendersomemeasureoftheirsovereigntyandresponsibilitytosupportcollectiveactionsandgoals.itisimpera-tive, therefore, and all themore so in aworld ofinterdependent but unequalStates and economies,forinternationalmeasurestobedesignedinsuchawaythattheycomplementorstrengthencapacitiestoachievenationalobjectivesandmeettheneedsoftheirconstituencies.

Thesystemthathasevolvedunderfinance-ledglobalizationhasledtoamultiplicityofrulesandregulationsoninternationaltradeandinvestmentthattendtoexcessivelyconstrainnationalpolicyoptions.At the same time it lacksaneffectivemultilateralframework of rules and institutions for ensuringinternationalfinancial stability and for overseeingextra-territorialfiscalmatters.Withinthisimperfectsystem,policymakersindevelopedcountriesareaim-ingtotackleaseriesofinterrelatedmacroeconomicandstructuralchallenges,whilethosefromdevelop-ingcountriesaretryingtoconsolidaterecentgainsandenteranewphaseofinclusivedevelopment.itisthereforemoreimportantthaneverbeforefornationalpolicyspacetobemadeacentralissueontheglobaldevelopmentagenda.

****

Subsequent chapters of thisReport address anumberoftheseissuesindetail.ChapteriVlooksattheoriginsofthepost-SecondWorldWarmultilateralsystemand,inparticular,ateffortstoensurethatthe

spaceforanewState-ledpolicyconsensusthatavoidedthemistakesoftheinter-waryearswouldbeconsist-entwithmultilateralarrangementsanddisciplinesinsupport of amore open, stable and interdependent

Policy Space and Global Governance: Issues at Stake 49

world economy. It contends that the partial efforts to internationalize the New Deal in the 1940s eventually gave rise to a more inclusive multilateral agenda that was championed by the developing world. Chapter V reviews the mostly de jure policy constraints on devel-oping countries, associated with multilateral, regional and bilateral agreements on trade and investment, which hamper their efforts to advance and direct the structural transformation of their economies. It pre-sents some of the options that are still available to these countries in the areas of trade and industrial policy, and discusses how a further shrinking of their policy space can be avoided. It also highlights the importance of policy space in relation to the spread of global value chains. Chapter VI discusses the mostly de facto con-straints on policies aimed at securing macroeconomic and financial stability in developing countries. Such stability is a prerequisite for achieving a high level of productive capital formation and productivity gains, which can benefit entire populations of these countries.

In addition, the chapter examines efforts to strengthen capital account management, and considers various options to avoid the destabilizing effects of short-term flows. Further, it considers the impact of international investment agreements on policy space, particularly through dispute settlement mechanisms that favour private over public law and interests, and examines the possible options to redress that anomaly without foregoing the potential benefits accruing from hosting foreign direct investment (FDI). Chapter VII deals with the factors that are limiting the scope of gov-ernments to use fiscal instruments for pursuing their development objectives, and provides some ideas on how fiscal space could be enlarged through national and global reforms. In particular, it looks at the eco-nomic costs resulting from the surge in tax evasion by individuals and corporations that use secrecy jurisdictions, as well as the specific challenges facing commodity-dependent economies in bargaining over the distribution of resource rents.

1 For a discussion on whether and which of the Mil­len nium Development Goals has been attained, see UNCTAD, 2014.

Notes

2 Employment targets, which were added somewhat later to Goal 1, have contributed to opening up the discussion to wider policy issues.

Akyüz Y (2007). Global rules and markets: Constraints over policy autonomy in developing countries. Penang, Third World Network.

Akyüz Y (2013). Drowning or waving? Developing coun-tries after the financial crisis. South Centre Research Paper, no. 48. Geneva, South Centre.

Canuto O (2012). Recoupling or switchover: Developing countries in the global economy. In: Canuto O and Giugale M, eds. The Day After Tomorrow: A

Handbook on the Future of Economic Policy in the Developing World. Washington, DC, World Bank.

Caritas in Veritate Foundation (2014). Beyond the financial crisis: Towards a Christian perspective for action. Working paper, Geneva.

Carney M (2014). Inclusive capitalism: Creating a sense of the systemic. Speech delivered at the Conference on Inclusive Capitalism, London, May.

References

Trade and Development Report, 201450

KindlebergerC(1986).internationalpublicgoodswithoutinternationalgovernment.The American Economic Review,76(1):1–13.

KumhofMandRancièreR(2010).inequality,leverageandcrises. iMFworkingpaperWP/10/268,November,Washington,DC,internationalMonetaryFund.

MayerJ(2008).Policyspace:What,forwhatandwhere?UNCTADDiscussionPaperno.191,Geneva.

MianA andSufiA (2014).House of Debt: How They (and You) Caused the Great Recession, and How We Can Prevent It from Happening Again.Chicago,il,UniversityofChicagoPress.

NorthD(2005).Understanding the Process of Economic Change.Princeton,NJ,PrincetonUniversityPress.

PanicM(1995).internationaleconomicintegrationandthechangingroleofnationalgovernments.in:ChangH-JandRowthornR,eds.The Role of the State in Economic Change.oxford,ClarendonPress:51−80.

PikettyT (2014).Capital in the Twenty-First Century.Cambridge,MA,HarvardUniversityPress.

PolanyiK(1944).The Great Transformation: The Political and Economic Origins of Our Time.NewYork,NY,FarrarandRinehart.

Salazar-XirinachsJ,NübleriandKozul-WrightR,eds.(2014).Transforming Economies: Making Industrial Policy Work for Growth, Jobs and Development.Geneva,internationallabouroffice.

StiglitzJ(2012).ThePriceofinequality:HowToday’sDividedSocietyendangersourFuture.NewYork,NY,W.W.NortonandCo.

UnitedNations(2012).Realizing the Future We Want for All.UnitedNationspublications,NewYork.

UnitedNations(2014).outcomedocument.openWorkingGrouponSustainableDevelopmentGoals,UnitedNations,NewYork.

UNCTAD (2011).Report of the Secretary-General ofUNCTAD toUNCTADXiii, Development-ledGlobalization:TowardsSustainable and inclusiveDevelopmentPaths.UnitedNations,NewYorkandGeneva.

UNCTAD(2013).UNCTADandthepost-2015DevelopmentAgenda.Post-2015Policybrief1,Geneva.

UNCTAD (2014).Least Developed Countries Report 2014.UnitedNationspublications,NewYorkandGeneva,forthcoming.

UNCTAD(TDR 1997).Trade and Development Report, 1997. Globalization, Distribution and Growth.UnitedNationspublication,salesno.e.97.ii.D.8,NewYorkandGeneva.

UNCTAD(TDR 2006).Trade and Development Report, 2006. Global Partnership and National Policies for Development.UnitedNationspublication,salesno.e.06.ii.D.6,NewYorkandGeneva.

UNCTAD(TDR 2012).Trade and Development Report, 2012. Policies for Inclusive and Balanced Growth.UnitedNations publication, sales no.e.12.ii.D.6,NewYorkandGeneva.

UNCTAD(TDR 2013).Trade and Development Report, 2013. Adjusting to the changing dynamics of the world economy.UnitedNationspublication,salesno.e.13.ii.D.3,NewYorkandGeneva.

WilkinsonRandPickettK(2009).The Spirit Level: Why Equality is Better for Everyone.london,Penguin.

World bank (2005).Economic Growth in the 1990s: Learning From a Decade of Reform.Washington,DC.

Policy Space and the Origins of the Multilateral Economic System 51

Thechallengeofreconcilingtherequirementsofnationalpolicysovereigntywiththeimperativesof an interdependentworld economymay seemtodaytoberelativelynew−anoutcomeofadvancesin information and communications technologies(iCTs) and the spread of globalmarket forces. infact, it is a long-standing challenge that has beendiscussed extensively, and frommany differentangles,foralmosttwocenturies(Mazower,2012).Thischaptertakesahistoricallookatsomeofthedebatesaroundthisissuein themid-twentieth century,whenmuchofthecurrentmul-tilateral economic architecturewasbeingconstructed.

Thearchitectsofthepost-SecondWorldWarmultilateralsystemwereprincipallyconcernedwiththeeconomicchallengesfacingtheleadingindustrializedcountries.butinaprofoundbreakwiththeactionsofpolicy-makers after the endof theFirstWorldWar, theyrecognized that themodernStatewas “splendidlyequipped”toundertakethechallengesofattaininghigher standards of living, full employment andeconomic and social security.1Moreover, in lightof the changing contours of the global economy,

developmentchallengesfacingpoorercountrieswerealsopartofthediscussionsofState-driveninterna-tionalcooperation.indeed,notonlydidthoseissueshaveamoreimportantplaceinnegotiationsoverthefuturedirectionofinternationalcooperationthanisgenerallyrecognized,theyalsofocusedattentiononthequestionofpolicyspaceinachievingthegoalsandobjectivesofthenewmultilateralorder.

Theoutcomesofthenego-tiations,intermsofinstitutions,rules anddisciplines, reflectedbothdecisionstakenbynationStatesandthelobbyingeffortsofvariousinterestgroupswithinthemajoreconomicpowers.inparticular,theshiftingcoalitionofintereststhatunderpinnedtheNewDealintheUnitedStates

hadaverystrongbearingonmultilateraldiscussionsthatbeganevenbeforethestartoftheSecondWorldWar.ThosewhosupportedeffortstointernationalizetheNewDealprovidedaninitialopeningforamoreinclusivemultilateralism that could accommodatethe needs and concerns of developing countries.However,severalpromisinginitiativesinthisdirec-tionweredroppedfromthebrettonWoodsnegotia-tionsandtheirinfluencediminishedfurtherfollowing

Chapter IV

POLICy SPACE AND ThE ORIGINS OF ThE MULTILATERAL ECONOMIC SySTEM

A. Introduction

Controlling potentially destructive financial forces was central to the discussions of the architects of the post-Second World War multilateral system.

Trade and Development Report, 201452

thedeathofUnitedStatesPresidentRoosevelt,givingway to amore technocraticmultilateralismwhichprovedlessaccommodatingtothoseneeds.

one central feature of the discussions of thetime,whichwas relevant for both developed anddeveloping countries,was the imperative of con-trolling potentially destructive financial forces.Politiciansandpolicymakersfromacrossthedevel-opedcountries (and thepolitical spectrum) recog-nized the importanceofmakingfinanceaservant,ratherthanthemaster,oftheireconomicdestiny.Atthe endof theFirstWorldWar,financial interestshadbeenquicktoreasserttheirinfluenceovereconomicpolicy-making,callingforarestorationofmarketconfidenceastheonlyassuredway to“return tonor-malcy”(James,2001:25).Thiseffectivelymeantnotjustarapiddismantlingofwartimecontrols,butanunqualifiedcommitmenttothegoldstandard,theestab-lishmentofindependentcentralbanksandtheadoptionofausteritypolicies,allofwhichreducedthepossibilitiesofmovingtowardsamoremanagedeconomythatwouldsupportnewsocialandpoliticaldemands.Financialinterestswereinastrongpositiontodefinewhatwasacceptablepolicy; and theywere also the bigwinners fromtheresultingsurgeofshort-termcapitalflows(andaccompanying toxicfinancial instruments),whichpickeduprapidlyfromthemid-1920s,leadingtoanincreasinglyskewedpatternofincomedistributioninmanycountries(Kumhofetal.,2013;Piketty,2014).These trends, in combinationwith highly fragilebankingsystems,culminatedintheGreatDepressionand the international economicdisintegration thatfollowed.Againstthisbackdrop,expandingpolicyspace tomeet the new post-war challenges andreducing theprofit spaceof the“rentier”financialclasswasuppermostinthemindsofnegotiatorsatbrettonWoods.2

Therulesandmeasureseventuallyadoptedtolimitthedestructivetendenciesofunregulatedfinancecertainlyhelpedopenuppolicyspacefordevelop-ingcountriestoestablishindependentgrowthpaths.However,thescaleoffinancialresourcesmadeavail-abletodevelopingcountriesthroughnewmultilateralmechanismsnevermatchedtheiraimsofradicallytransforming the economic structures inherited

from their previous colonial or peripheral status.Thismeantthatinternationaltradeassumedgreaterimportanceinthedesignofpost-wardevelopmentstrategies,butatthesametimetechnologicalgapsand structural asymmetries in productionbetweendevelopedanddevelopingcountriesmadethetradingsystemamorecontestedterrain.Moreover,incon-trasttothediscussionsaroundinternationalfinance,strong corporate interests linked to an export-ledgrowthagenda,particularlyintheUnitedStates,werebetterpositionedtoinfluencetheoutcomesofmulti-lateraltradediscussionsinamoreliberaldirection.Theresultingunwillingnessofdevelopedcountries

to address the pervasive gapsandasymmetriesinproductioneventuallygalvanizeddevelop-ing countries into promotinga development agendamorein line with their needs anddemanding sufficient policyspace to pursue that agenda.Fromtheearly1960s,UNCTADwasatthecentreofthoseefforts,oftenpursuingamixofmultilat-

eralsupportmeasuresandpolicyspaceinitiativesthathadpreviouslybeenproposedby the internationalNewDealers.Despitemajortransformationsintheglobaleconomyandindifferentdevelopingregionssincethen,theargumentsmadeduringthesedecadesstillhavepowerfulcontemporaryresonance,aswillbeevidentinthesubsequentchaptersofthisReport.

Thisopeningchapterisstructuredasfollows.Sectionbexaminesthewiderhistoricalcontextthatinfluencedthedebatesoninternationalcooperationinthe1940s.itnotesthatthesedebateswereheavi-lyinformedbythefailureoftheneo-liberalagendathat had dominated policy thinking in the 1920s.ThisagendaiscontrastedwiththatoftheRooseveltAdministration,which tried to internationalize theNewDealduring thebrettonWoodsnegotiations.SectionCexaminestheneglectedroleofdevelop-ment issues insubsequentaccountsof thebrettonWoods discussions, recalling the importance ofNewDeal andKeynesian thinking in taming theroleofinternationalfinanceanditsstronglinkstodevelopmentpolicydebatesinlatinAmericaunderRoosevelt’s“GoodNeighborPolicy”.itthenlooksatthewayinwhichdiscussionsofanewinternationaltradearchitecturewereconstrainedbythepoliticalalliancesthatunderpinnedtheNewDeal,withverydifferentoutcomesforthedirectionoftradepolicy

UNCTAD played a pivotal role in promoting a development agenda in line with the needs of developing countries, and in pushing for sufficient policy space to pursue it.

Policy Space and the Origins of the Multilateral Economic System 53

ineurope and the developingworld respectively.SectionDdescribessubsequenteffortsbydevelop-ingcountriestomakemultilateralismmoreinclusive,includingtheirrevivalofelementsoftheNewDeal’sinternationalagendainsupportofState-ledindus-trializationand theirpush forstronger recognition

oftheinterdependenceoftradeandfinancialissues,whichwasattheheartofUNCTAD’smandate.Thefinal section concludeswith a discussion on there-emergence of international finance, the associ-ated“softening”ofmultilateralismandtheresultingimpactoncontemporarypolicyspace.

1. The rise and fall of the inter-war liberal policy agenda

Theinter-warperiodwasatimeofsharpeco-nomic contrasts across countries,with prolongedeconomicstagnationinsomecontrastingwithboom-bustcyclesinothers.However,inalmostallcases,severeandhighlycontagiousshocksandcrises inthelate1920sandearly1930susheredinaperiodof deep global economic distress and uncertaintywhichhadaprofoundeffectonpoliticiansandpoli-cymakers.Theeconomicproblemsoftheinter-warperiodareoftenascribedtothepervasiveinfluenceofisolationistandprotectionistideologies,particularlyintheUnitedStates,whicharedeemedtohavebeenresponsibleforblockingareturntotheliberalinter-nationalismthathadsupportedgrowthandstabilitybefore1914(Wolf,2003;eichengreenandKenen,1994).Suchaninterpretationismisleading.infact,tariffshadbeen steadily risingalmost everywhereinthe“highgrowth”decadespriorto1914,insomecasesreachingveryhighlevels(bairoch,1995).Andwhiletariffbarriersincreasedimmediatelyafterthewar,thiswasfollowedbyamixtureofprotectionistandliberalizingmeasures,whichincludedtheuseofsurtaxesandanti-dumpinglegislation,butalsotheremovalofquantitativetradecontrols,promotionofthemost-favoured-nation(MFN)principle,theliftingofrestrictionsoncapitalexportsandareturntothe

goldstandard.itistruethatwiththeadoptionoftheSmootHawleyActinJune1930UnitedStatestariffsrose to unprecedented levels, triggering reprisalsfrom25countriesoverthesubsequent18months,withdamagingconsequencesforexports(bairoch,1995).However,intermsofbothtimingandscale,thecollapse inoutputandemploymentduring theearly1930scannotbeattributedtothispolicyshift.besides,growthinmanycountriesrecoveredrapidlyunder thesesametariffstructures,albeitunder thestewardshipofverydifferentmacroeconomicpolicyregimes.3

Contrary to a good deal of narrative on thisperiod,liberalismwasthedominanteconomicideol-ogyofthe1920s.Therefore,examiningitsinfluence,inparticularthroughitspromotionofconservativemacroeconomic policies, is key to understandingthe decade that followed (Polanyi, 1944: 231−36;boyce, 2009: 6−7). Following the sharp globaldownturn of 1920-1921, official support for inde-pendentcentralbanks,flexiblelabourmarkets,lightlyregulatedcapitalmarketsandthegoldstandardwasinfullascendancyinalltheleadingeconomies.AseichengreenandTemin(1997:38)haveobserved,thegoldstandardrhetoricnotonly“dominateddis-cussionsofpublicpolicy…andsustainedcentralbankersandpoliticalleadersastheyimposedevergreatercostsonordinarypeople”, italsoprovideda“one-sizefitsall”policyagenda,towhich,those

B. Debates on the emerging international economic order in the mid-twentieth century

Trade and Development Report, 201454

samevoicesinsisted,therewasnoalternative.Fromthisperspective,adoptingthegoldstandardwasseenbothasacommitmentto“responsible”policymaking,by limiting thescopefor independentgovernmentmonetaryandfiscalactions,andasawayofattract-ingforeigncapitalinflowsbystrengtheninginvestorconfidence.The resultwasnotonlya recoveryofpre-warglobalizationtrends,butaconcomitantlossofpolicyautonomyand increasedvulnerability toeventselsewhereintheworld.

Tradeandcapitalflowspickeduprapidlyfromthemid-1920s,reaching(and,incertaininstances,surpassing)pre-warlevelstowardstheendofthedec-ade.4Moreover,andagaincontrarytoconventionalopinion,discussionsoninternationaleconomiccoop-erationwerewidespread (but relativelyunfruitful)during the1920s(boyce,2009). indeed,asJames(2001: 25) notes, “Rarely hadtherebeensomuchenthusiasmfor internationalismand inter-national institutions as in the1920s”.TheUnitedStateswasactivelyengaged indebt rene-gotiations through theDawesandYoung Plans, which ledtothecreationofthebankforinternationalSettlements(biS).ThebiSwasatleastpartlycre-atedtodepoliticizethosenego-tiations,butitwasalsoseenasan instrumentofcentralbankcooperation (James,2001:41).inaddition,aseriesofinternationalcon-ferenceswereorganizedtopromotetradeliberaliza-tionandtheprotectionofintellectualproperty,mostnotablytheWorldeconomicConferencesof1927and1933(Kindleberger,1986).Towardstheendofthe1920s,therewasalsoastrongpushforgreaterregionalcooperation(boyce,2009).

With investorconfidenceservingas thepoli-cy lodestone,fiscalausteritywasseenas therightapproachforreturningtonormalcyintheearly1920s,andalsoforcorrectingtheimbalancesthathadbeguntoemergetowardstheendofthedecade.5inreality,theturntoausterityandtheinstabilitysurroundingtheflowsofshort-termcapital(encouragedbydis-paritiesbetweennationalinflationandinterestrates)gaverisetomutuallyinconsistentstabilizationplans,misaligned exchange rates andpersistent frictionsinthetradingsystem.Theassociatedimbalancesinrealeconomies(includingthose inagricultureand

industry), combinedwith the debt overhang fromthewarandhighly fragilebankingsystems, inter-actedwith these trends, eventually culminating intheGreatDepression.6Thisinturngeneratedfurtherpressureforgovernmentstoadoptmeasurestocopewith severebalance-of-paymentsproblems,whicheventually led to beggar-thy-neighbour exchangeratepoliciesandtradeandpaymentsrestrictionsonaquidproquobasis.Acrucialaggravatingfactorwasthe absenceof adequate public policy at national,regionalandinternationallevelstocorrectinternalandexternalimbalancesinanorderlyandequitablemanner.

The lack of either a “benevolent” hegemonor viable international cooperationwas certainlycriticaltotheinternationaltransmissionofadverseshocksandeventualglobaldepression(Kindleberger,

1986).7However, the absenceofahegemonthatcoulddefendtheglobalpublicinterestshouldnotbeconsideredindependentlyof the policy choices taken atthetime.Thereturntothegoldstandardwas itself a de factocommitmenttoacertaintypeofinternational coordination thatwasinlinewithliberalprinci-ples aswell aswith theneedsoffinance.indeed,thefinanciallobbywasthemostambitiousof

theinternationalistinterestgroupswithintheleadingpowers,andprevailedagainstothergroups,includ-ingmoredynamic segmentsof themanufacturingsectors(boyce,2009).

Thelinksbetweeneconomicinstability,interna-tionaldisintegrationandpoliticalpolarizationwerecertainly apparent to someobservers at the time.Keynes,inhisEconomic Consequences of the Peace,hadalreadywarnedthattheonerousdebtpaymentsimposedbytheTreatyofVersailles(aswellasout-standingdebtsbetweenthevictoriousalliedpowers),inacontextofexcessivelyvolatileshort-termcapitalflows,wouldmakeitimpossibleforeachcountrytoputitsownhouseinorderwithoutdamagingothers.Moreover,anddespitethenarrownessandconserva-tivenatureofeconomicthinking,alternativepolicyapproachesbegantoemergetowardstheendofthedecade,asthescaleofthedamageresultingfromtheliberaleconomicagendabecameimpossibletoignore(Kozul-Wright,1999;Crotty,1999).

The absence of adequate public policy to correct internal and external imbalances in an orderly and equitable manner was a strong aggravating factor in the Great Depression.

Policy Space and the Origins of the Multilateral Economic System 55

This context necessarily shaped economicperceptionsattheinternationallevelaswell.biltoft(2014) has noted that after theGreatDepression,eventheeconomistsattheleagueofNations,whoessentially favoured the creation of a relativelyliberal and openworld order, began to questionthemonetary orthodoxyof adherence to the goldstandardandrecognizedtheneedforselectivetradeinterventions,suchasforcommoditypricestabiliza-tion.evenasohlinandothersdeveloped theoriestoshowhowinternationalgainsfromspecializationcould address the problemof global imbalances,othereconomistsassociatedwiththeleague,suchasMikhailManoilescuandRagnarNurkse,highlightedpotential problems of unequal exchange and theneed to increasedomestic savings and investment“to expand domesticmarkets and decouple themfromforeigncapitalandtightandinequitableglobalmarketstructures”(biltoft,2014).

However,itwaspoliticalchangesintheUnitedStates,associatedwithRoosevelt’sNewDeal,thatsignalledadramaticbreakwith theorthodoxwayof looking at economic policy choices and trade-offs.8TheNewDeal involvedarejectionoftheideasthatthefreemarketisintrinsicallyself-correcting and geared to gen-erating themost economicallyandsociallyoptimaloutcomes,thatfiscalausterityandbudgetcuts provide the only reliablewayoutofacrisis,andthatgovernmentinterventiondistortsanddamagesfutureeconomicprospects.byadoptinganexpansionaryeconomicagendathroughtargetedsupportfordifferentregionsandsectorsoftheeconomy(mostnotablythroughthecreationoftheTennesseeValleyAuthority),redistributionmeas-ures,strengthenedregulationofmarkets(particular-lyfinancialmarkets)andbelatedbutexpansivefiscalmeasures,theNewDealdemonstratedawillingnesstomakejobcreationandsocialsecuritytherespon-sibilityofgovernmentpolicy.italsosetouttopro-moteapublicspherethatdidnotrespondsimplytomarketforces,butcouldalsoactasacountervailingpowertoprivateinterests,particularlyinthefinancialsector,whosebehaviourandactionswereseenastherealcausesofthecrisis.9Similarmovesinthedirec-tionofwhatsubsequentlybecameknownas“welfareKeynesianism”weretakingplaceinothercountries,albeitdrawingontheirownintellectualandpoliticaltraditions(Hall,1989;Temin,1991;blyth,2002).

2. Internationalizing the New Deal

Giventhebroadagreementamongstthedemo-cratic powers that economic crises and contagioncouldnotbemanagedbycountriesinisolation,thesearchforaformofdomesticeconomicgovernance“betweentheanarchyofirresponsibleindividualismandthetyrannyofstatesocialism”10wasboundtohaveaprofoundimpactonthediscussionsaroundanewinternationaleconomicorderwhichbegansoonaftertheoutbreakoftheSecondWorldWar.

The principle objective of the architects ofbrettonWoodswastodesignapost-warinternationaleconomicstructurethatwouldpreventtherecurrenceof the opportunistic actions and damaging conta-gionthathadledtothebreakdownofinternationaltradeandpaymentsinthe1930sanditsdestructiveaftermath.11ThisinvolvedaradicalbreakwiththeapproachthathadfollowedtheFirstWorldWarandthemisguidedandunsuccessfuleffortstoreturntonormalcy at that time.The twomostwell-knownprotagonistsinthediscussionswereJohnMaynard

Keynes, representing thewan-ing (but still imperial) poweroftheheavily-indebtedUnitedKingdom, andHarry DexterWhite, negotiating on behalfof thedominant industrial andcreditoreconomyoftheUnitedStates. They recognized that

establishing conditions both for global economicstabilityandsecurity,andforsustainedandbroad-basedgrowthinincomesandemployment,requiredanumberofmeasures.Theseincludeddismantlingthe ad hoc exchange controls and discriminatorytradebarriersintroducedaftertheGreatDepression,“conferring autonomyonnationalpolicies” to theextentneededtopursuefullemployment,andbuild-inginadditionalsupportsandsafeguardstoensuretheefficientoperationoftheinternationaleconomicsystem(eichengreenandKenen,1994:34).

Mindfulthattheinter-wareconomicdisintegra-tionwasduetouncorrectedmarketfailures,excessivecompetitionanduncheckedcontagion,therestorationofastableglobaleconomicsystemwasunderstoodtorequireashiftfrompurelynationalpolicyformula-tionstoamultilateralsystembasedontherecognitionofeconomicinterdependence,enhancedcooperationand supportivemultilateral institutions.exchange

Economic crises and contagion could not be managed in isolation.

Trade and Development Report, 201456

ratestabilityandsustainedexpansionofoutputandemploymentwereseenasessentialforavoidingten-sionsanddisruptionsininternationaltrade.This,inturn, requiredglobal arrangements basedon threeingredients:multilateral discipline over exchangeratepolicies,mechanismsfortheprovisionofinter-national liquidity, and restrictionsondestabilizingcapital flows.Controllingfinance at homehad itsinternational analogue in restricting the ability offinancialmarkets tomake profits abroad throughshort-termspeculativecapitalflows.Keynes(1944),in defending thefinal arrangements negotiated atbrettonWoods,wasclear that tamingfinancewasattheheartofanystablepost-warmultilateralorder:

Whilstotherschemesarenotessentialaspriorproposalstothemonetaryscheme,itmaywellbe argued, i think, that amonetary schemegivesafirmfoundationonwhich theotherscanbebuilt.itisverydifficultwhileyouhavemonetarychaostohaveorderofanykindinotherdirections…[i]fwearelesssuccessfulthanwehopeforinotherdirections,monetaryproposalsinsteadofbeinglessnecessarywillbeallthemorenecessary.ifthereisgoingtobe great difficulty in planning trade owingtotariffobstacles,thatmakesitallthemoreimportantthatthereshouldbeanagreedorderlyprocedure for altering exchanges… [S]o farfrommonetaryproposalsdependingontherestof theprogramme, they shouldbe themorenecessaryifthatprogrammeislesssuccessfulthanweallhopeitisgoingtobe.

Thus, controls on financewere seen as theessentialbasisforenlargingpolicyspaceathometomeet thenewlydefinedgoalsof fullemployment,economic and social security, and higher livingstandardsforthemajorityofthepopulation,aswellasforbuildingaformof“constructiveinternation-alism”thatcouldunderpinamorestableeconomicenvironmentinsupportofthissharedpolicyagenda.However,fromtheoutset,UnitedStatespolicymak-ers(moresothanKeynes)madeitveryclearthatthedevelopmentimplicationsoftamingfinancialinter-estsathomeandabroadshouldalsobeaddressedattheinternationallevel.Accordingtooliver(1975:4),

Whitewas convinced that private investorscouldnotbereliedupontoprovidethecapitalthatwouldbeneededforpostwarreconstruc-tion.Healsofeltthatevenafterthepostwartransitionperiod, thenormalflowof capitalfromrichtopoorcouldnotbeleftsolelytothe

privateinvestmentmarketsoftheworld.Thelessonsofthetwentieshadbeenthatlong-termprivatecapitalmovementstendedtoenforce,ratherthanmitigate,thespreadofinternationalbusinessfluctuationsandthatthehighinterestratesandtherelativelyshort-termmaturitiesofprivateportfolioinvestmentstendedtomakeunproductivewhatmightotherwisebeproduc-tiveinternationalventures.

Also from the very start,Roosevelt and hisadministrationofficialsfavouredtheestablishmentofpublic internationalfinancial institutionswhosemembershipwouldbeopentoall“theUnitedandAssociatedNations”.12TheNewYork financialcommunity opposed this idea, preferring a “keycurrency”planthatwouldre-establishinternationalfinancial stability through a bilateral loan to theUnitedKingdom.inrejectingthatplan,UnitedStatesTreasurySecretaryMorgenthauhighlightedtheneedtoavoida“dictatorshipoftheworld’sfinancesbytwocountries”,insistinginsteadthat“theproblemsconsideredatbrettonWoodsareinternationalprob-lems, common to all countries, that can be dealtwithonlythroughbroadinternationalcooperation”(Morgenthau, 1945: 192).Moreover,Morgenthaustressed that thebrettonWoods frameworkwasdesignednotjusttomeetdevelopedcountries’goalsoffullemployment,butalsotoaddresslessdevelopedcountries’objectivesofraisinglevelsofindustrializa-tionandstandardsofliving:

Unlesssomeframeworkwhichwillmakethedesiresofbothsetsofcountriesmutuallycom-patibleisestablished,economicandmonetaryconflictsbetweenthelessandmoredevelopedcountrieswillalmostcertainlyensue.Nothingwouldbemoremenacingtohavethantohavethelessdevelopedcountries,comprisingmorethanhalfthepopulationoftheworld,rangedineconomicbattleagainstthelesspopulousbutindustriallymoreadvancednationsofthewest.ThebrettonWoodsapproachisbasedontherealizationthatitistotheeconomicandpoliti-caladvantageofcountriessuchasindiaandChina,andalsoofcountriessuchasenglandand theUnitedStates, that the industrializa-tionandbettermentoflivingconditionsintheformerbeachievedwiththeaidandencourage-mentofthelatter(Morgenthau,1945:190).13

butevenbeforethisapproachbegantoinformthebrettonWoods negotiations, it had helped toreshapeUnitedStatesengagementwithdeveloping

Policy Space and the Origins of the Multilateral Economic System 57

countries,inparticularthroughRoosevelt’s“GoodNeighborPolicy”withlatinAmerica.Thispolicyaimedtopromotedevelopmentinpoorercountriesin away thatwas not just consistentwithUnitedStates geopolitical interests atthetime,butalsowiththeaimsandvaluesoftheNewDeal.Assuch,thisimpliedaclearbreakwith the conventional policyadvice that had been promot-ed byUnitedStates academicadviserstolatinAmericangov-ernments in the 1920s (ofteninformallybackedintheUnitedStatesbytheStateDepartment,theFederalReservebankofNewYorkandbank-inginterests).Thoseearlieradvisershadadvocatedadherence to the gold standard, the establishmentof independent central banks, openmarkets forgoodsandcapital,andaminimalrolefortheState(Helleiner,2014).

bycontrast,manyNewDealeconomistssawlatinAmerican countries as victims of the samefinancialelite thathadpushed theirowneconomyintocrisisanddepression.Theregionhadbeentherecipientofverylargecapitalinflowsinthe1920s,resultingfromaggressivelymarketedbondsissuedmainlyinNewYork,aswellasshort-termloanstobothgovernmentsandcorporations.Withthesharpdrop in commodity prices in the late 1920s, analreadydeterioratingdebt-to-exportratio–reachingtripledigitsinsomecountries−wasmadeconsider-ablyworse.Asnewinflowsdriedup,servicingthedebtbecameahugeburdenformanygovernments.At the same time, deteriorat-ing, and ultimately unsustain-able,currentaccountpositionsforcedcountriestoabandonthegoldstandard,addingfurthertotheir debt burden (in terms ofnationalcurrency).Thecombi-nationofgrowinggovernmentdeficits and a fragile bankingsystem,which lackeda lenderoflastresort,meantthattheriskof a financial panic increasedsignificantly.ThefirstdefaultoccurredinboliviainJanuary1931,andwiththeUnitedStatesGovernmentrefusing to lend support to the region, contagionquickly spread acrosslatinAmerica.A combina-tionofdefaultsanddevaluationsinducedastrategy

ofexport-ledrecoverywhilealsoforcingcountriestosubstituteimportedgoodswithdomesticallypro-duced goods (Fishlow, 1985).Argentinawas theonlymajorcountryintheregionnottodefault,but

itenduredaveryslowrecovery(James,2001).

in a series of economicpolicymissions to the regionin the late 1930s and early1940s,most notably toCubaandParaguay,NewDealecon-omists from theUnitedStatessupported thecreationofpub-licly controlled central banks

thatwouldhaveamuchmoreactivemonetarypolicyagenda.Theyalsorecommendedthecreationofmorespecializeddevelopmentbanks,managedexchangeratesandtheuseofexchangecontrolsaspartofadevelopmentagendainsupportofstructuraltrans-formationandcatch-upgrowth(Helleiner,2014).14in addition, these same economists supported theextensionofloanstovariouslatinAmericangov-ernments for development projects, aswell as forcurrencystability,throughthenewlycreatedexport-importbank.Furthermore, theyexploredpossiblefinancingmechanismsthatcouldsupportcommod-itypricestabilization,andengagedinlengthydiscus-sionstopromoteaninter-Americanbank(iAb)astheworld’sfirstmultilateralfinancialinstitution.Thelatterprojectdidnottakeoffatthetime,butithadclearlyinnovativefeatures,inmarkedcontrasttothemuchlessambitiousbiSestablishedin1930.Theseincludedamandate toprovidepublic internationalloanstoachievedevelopmentobjectives,provisions

to address capital flight frompoorer countries, and controlandownershipoftheinstitutionby the concernedgovernments(Helleiner,2014).Togethertheseinitiatives defined a distinctlynewandengagedformofinter-nationaleconomiccooperation.

even before the UnitedStatesenteredtheSecondWorldWar,Roosevelt, in his famous

“four freedoms” speechof January1941,made itclearthat“freedomfromwant”wasagoalforpeople“everywhereintheworld”.JustashisNewDealhadpromisedgreatereconomicsecurity toAmericans,Rooseveltnowsaw the improvementof standards

There was broad agreement that private capital on its own could not be relied upon to achieve national or global goals…

… and that there should be sufficient policy space for countries to achieve an appropriate level of economic security by aiming at full employment and extended social protection.

Trade and Development Report, 201458

of living in poorer regions of theworld as a cru-cialfoundationforpost-warinternationalpeaceandpoliticalstability(borgwardt,2005).Thiswascom-binedwithrecognitionofthepositiverolesuchanapproachcouldplayinsustainingeconomicprosper-ityindevelopedcountriesaswell.TreasurySecretaryHenryMorgenthauprovidedanearlystatementofglobalKeynesianismwhenpresentingaproposalforwhateventuallybecametheWorldbank,arguingthat“theinvestmentofproductivecapitalinundevelopedandcapital-needycountriesmeansnotonlythatthosecountrieswillbeabletosupplyatlowercostsmoreofthegoodstheworldneedsbutthattheywillatthesame timebecomebettermarkets for theworld’sgoods”(quotedinHelleiner,2014:117).

TheemphasisbytheRooseveltAdministrationon a strongpublic dimension in themanagementof financial institutionswasevident in thebrettonWoodsagreement.TheiMFwascreatedtoensureanorderlysystemofinternationalpaymentsatstable,butmultilaterally negotiated, adjustable exchangerates under conditions of strictly limited interna-tionalcapitalflows.itsmostimportantfunctionwastoprovideinternationalliquidity,notonlytoavoiddeflationary adjustments and trade and exchangerestrictions in deficit countries, but also to helpmaintain stable exchange rates during temporarypaymentsdisturbances.

Modalitiesofliquidityprovisioningwereoneofthemostcontroversialissuesinthenegotiationslead-inguptothebrettonWoodsConferencein1944.TheplansindependentlypreparedbyWhiteandKeynesbothprovided for international liquidity to enablecountries to stabilize their currencies.Keynes’splan for an international clearing union, basedon

the “bancor” as international liquidity, effectivelyproposedthatthereservesofsurpluscountriesshouldbe automatically available to deficit countries formeetingtheircurrentaccountneeds(Mikesell,1994;Dam,1982;oliver,1975).However,itwasWhite’sscheme that eventually prevailed, reflecting thegreatereconomicandpoliticalpoweroftheUnitedStates.Thisledtotheestablishmentofafund,withcontributionsfromcountriespartlyingoldandpartlyintheirowncurrencies,whichwouldbeavailablefordrawingbythoseinneedofinternationalreserves.

Despite thedifferences in institutionaldetail,therewas broad agreement that private capital onitsowncouldnotbereliedupontoachievenationalorglobalgoals,andthatthereshouldbesufficientpolicy space for countries to achieveanappropri-ate levelofeconomicsecurity through thepursuitof a full-employment agenda and extended socialprotection (Martin, 2013).Thus a key assumptionbehindthebrettonWoodsConferencewasthattheleadingcountries,inparticulartheUnitedStatesandtheUnitedKingdomwhosefinancialcentreswouldcontinuetodominateoncethewarended,wouldbewillingtoforego,orattenuate,thepursuitofimmedi-ateeconomicinterestsinfavourofalargerconcernfor systemic stability. The original institutionalcontoursof the iMFwereverymuch in linewiththosegoalsandassumptions.inaparticularlytell-ingremark,Whiteinsistedthat“Touseinternationalmonetaryarrangementsasacloakfortheenforce-mentofunpopularpolicies,whosemeritsordemeritsrestnotoninternationalmonetaryconsiderationsassuch but on thewhole economic programme andphilosophyofthecountryconcerned,wouldpoisontheatmosphereof internationalfinancial stability”(citedinFelix,1996:64).

Policy Space and the Origins of the Multilateral Economic System 59

1. Pursuing a development agenda

ThebrettonWoodsnegotiationsaregenerallydescribedasan“Anglo-American”affairinwhichtheleadingofficials–KeynesandWhite−showedlittleinterestininternationaldevelopmentissuesandtheconcernsofpoorercountries.eventhesignificanceof theirendorsementof theinternationalbankforReconstructionandDevelopment(ibRD)isdown-played.YetwelloverhalfofthegovernmentsinvitedtobrettonWoodswerefromthepoorerregionsoftheworld.15Moreover,whateverthestrategicrealpolitikthatultimatelydrovetheagenda,theUnitedStateswascommittedtoaformofproceduralmultilateral-ismwhich recognized a placeforalltheparticipatingcountriesinthediscussions.16

Particularly active in theconferencediscussionswereoffi-cialsfromlatinAmerica,China(which had the second largestdelegation to the conference)andindia(whosedelegationwasdividedequallybetweenbritishandindianofficialsbecauseofitscolonialstatusatthetime).ManyofthemexpressedtheirviewofthebrettonWoodsnegotiationsasanopportunitytoconstructadevelopment-friendlyinternationalfinan-cialregimethatwouldbesupportiveoftheirState-ledeffortstoraisestandardsoflivingandbegintoindustrialize.ThedevelopingcountrieswerealsoinagreementwiththebroadaimsoftheiMFtosupportmanagedcurrencyregimesandprovideshort-termloans tomanage balance-of-payments difficulties.However,theycalledforamoreflexibleuseofitsresourcestodealwiththespecialneedsofprimary

commodityexporters.indeed,theirsupportwaskeytoincludinga“waiverclause”thatwouldallowtheFund,underspecifiedcircumstances,tooverruleitsregularlendinglimits(Helleiner,2014:166−168).

ThebirthoftheibRD(nowtheWorldbank)isgenerallythoughttohavebeeneasierandlesscon-troversialthanthatoftheiMF.butittoowascon-testedalongtwoimportantaxes:whetherlong-termfinancingshouldbeprivateorpublic,andtherela-tiveimportancegiventoreconstructionversusdevel-opment.17Theeuropeans,whofocusedonthelatter,sawatrade-offbetweenfinancingforreconstructionandthatfordevelopment,andemphasizedtheurgen-cyofprojectsinwar-tornareas.However,post-war

reconstructionwas a transito-ry requirement, and given thenecessaryfinancing,itcouldbecompleted ina relatively shortperiodoftime,sincetherequiredcomplementary skills, know-how, infrastructureand institu-tionswerelargelyinplace.Thiswasnotthecaseinmuchofthedevelopingworld,whichthere-fore haddifferent but equally,ifnotmore,pressingfinancingrequirements.Thecompromisewasthatthere“shouldbeequi-

tableconsiderationtoprojectsfordevelopmentandprojectsforreconstructionalike”(oliver1975).inanycase,after1947,thedramaticincreaseinUnitedStatesfinancingtoeuropeundertheMarshallPlaneffectivelyeliminatedthetrade-off.

itwasrecognizedthatthetermsandconditionsofprivatefinancing,notablymarket interest rates,wouldnotbeappropriatefortheconditionsprevail-ingintheborrowingcountries.Consequently,even

C. Development voices

Developing countries saw the Bretton Woods negotiations as an opportunity to construct a development-friendly international financial regime that would be supportive of their State-led efforts to raise standards of living and industrialize.

Trade and Development Report, 201460

thoughsuchprovisionswerenotexplicitlyincludedintheArticlesofAgreementoftheibRD,theoriginalintentionwasforthebanktofinanceprojectsthat,whilenotconsideredprofitablebyfinancialmarkets,wouldbe beneficial to theworld as awhole.TheinitialdraftsoftheArticlesofAgreementpreparedbyWhiteincludedanexplicitmandatetopromote“development”, and one of its core purposeswasto “raise the productivity and hence the standardoflivingofthepeoplesoftheUnitedNations”,aswellastoencouragethemovementofcapitalfrom“capital-rich to capital-poor countries” (Helleiner,2014:121,102−105).

itwasbelievedthatthiscapitalwouldaidstruc-tural transformation, just as public investment intheUnitedStateshaddoneinitsownpoorregions.Domestically,theNewDealhadexperimentedwithgovernmentinitiativeswhichcombinedlong-termfinancingwith structuraltransformation.one such ini-tiativewastheTennesseeValleyAuthority(TVA),whoseappar-ent successencouragedUnitedStatespolicymakerstoconsider“internationalTVA” initiativestoraiselivingstandardsabroadthrough amore active publicsector, including through industrial supportmeas-ures.18Thisapproachalsoreflectedsomeoftheles-sons of theUnitedStates’GoodNeighbor policy,whichhadencouragedmanylatinAmericangovern-mentstobecomeincreasinglycommittedtoState-leddevelopmentandindustrializationstrategiestoraiseliving standards, address high levels of indebted-nessandreducedependenceoncommodityexports(bertolaandocampo,2012).

TheresultingmultilateraldevelopmentvisionincludedtheibRD’scommitmenttomobilizelong-termdevelopmentlending.Thisfeaturewashighlynovel:nointernationalfinancialinstitutionhadeverbeencreatedwith thepurposeofsupporting long-termdevelopmentloanstopoorercountries,althoughthisideabuiltdirectlyonthepreviouslynoted,butultimatelyunsuccessful, initiativeof1939-1940tocreate an inter-Americanbank (iAb).The iMF’sshort-term lending for balance-of-payments pur-posesalsoeffectivelyborrowedfromtheexperienceofUnitedStatesbilateral loans tolatinAmericancountries,whosedependenceoncommodityexports

– andunstable capital inflows– left themvulner-able tounexpectedseasonalfluctuationsandpriceswingsandboom-bustfinancialcycles.19effortstocurtailcapitalflightfrompoorercountrieswerehigh-lightedinearlydraftproposalsandweresupportedbydeveloping-countryrepresentatives.intheFund’sproposedcharter,Whiteincludedaprovisionthatallmember countrieswould undertake commitmentsto help enforce each other’s controls by agreeing“(a)nottoacceptorpermitdepositsorinvestmentsfromanymembercountryexceptwiththepermis-sionofthatcountry,and(b)tomakeavailabletothegovernmentofanymembercountryatitsrequestallproperty in formof deposits, investments, securi-ties,safetydepositvaultcontents,of thenationalsofmember countries” (cited inHelleiner, 2014:111). in subsequentdrafts, he also added the idea

thatcountriesreceivingcapitalflowswouldcommittosharinginformation about thoseflowswith the sending countries.Whiteargued–asdidKeynesatthetime−thatcountriesexperi-encingillegaloutflowsofcapitalwouldhaveagreaterchanceofmakingtheircontrolseffectivewiththesekindsofinternationalassistance.AsWhiteputitlater,“Without the cooperation of

othercountriessuchcontrolisdifficult,expensiveandsubjecttoconsiderableevasion”(citedinHelleiner,1994:38).

Twotradeissuesofsignificanceforinternationaldevelopmentwere also addressed in initial drafts.onewas a proposal that thebank “organize andfinance an internationalCommodity StabilizationCorporationforthepurposeofstabilizingthepriceofimportantcommodities”(Helleiner,2014:112−113).Thesecondwasexplicitsupportforpoorercountries’useoftariffprotectionforinfantindustries.Whitearguedthatthebeliefthattradeliberalizationwouldgeneratehigherstandardsoflivinginpoorcountriesmadethemistakeofassuming“thatacountrychieflyagriculturalinitseconomyhasasmanyeconomic,politicalandsocialadvantagesasacountrywhoseeconomyischieflyindustrial,oracountrywhichhasabalancedeconomy”.Headded, “it assumes thattherearenogainstobeachievedbydiversificationofoutput.itgrosslyunderestimatestheextenttowhichacountrycanvirtuallyliftitselfbyitsbootstrapsinonegenerationifitiswillingtopaytheprice.The

Before the IBRD’s inception, no international financial institution had ever been created with the purpose of supporting long-term development loans to poorer countries.

Policy Space and the Origins of the Multilateral Economic System 61

viewfurtheroverlookstheveryimportantfactthatpoliticalrelationshipsamongcountriesbeingwhattheyarevitalconsiderationsexistintheshapingoftheeconomicstructureofacountryotherthanthatofproducinggoodswith the least labor” (cited inHelleiner,2014:113).

Taken together, these provisions outlined ahighlyinnovativevisionforinternationalpolicycoor-dinationthatwassupportiveofdevelopment.Neverbeforehadthiskindofmultilateralframeworkbeenproposedwiththeexplicitpurposeofsupportingthedevelopmentofpoorercountries.

2. From an international New Deal to technocratic multilateralism

Given thishistory, it is striking thatsomanyscholars have overlooked the international devel-opmentcontentofbrettonWoods.Theneglect is,however,understandableconsideringthatthiscontentwasdramaticallywatereddown,andsomeofiteveneliminated,duringthenegotiationsandinsubsequentdiscussions on other aspectsof the international economicsystemsoonafterthewarended.

Within theUnited States,political support for the inter-national development goals ofbrettonWoods unravelled inthewake ofRoosevelt’s deathinApril1945.inthenew,moreconservativeTrumanAdministration,manyof thekeyarchitectsof thosegoalsweremarginalized,includingbothMorgenthau(whoresignedinJuly)andWhite(wholeftgovern-mentserviceinMarch1947anddiedshortlyafter-wards),whilefiguresclosetotheNewYorkfinancialcommunity assumedmore prominent positionsinUnitedStates foreign economic policy-making(Helleiner, 2014).Sincemembers of this commu-nityhadbeenscepticalofthebrettonWoodsplansandinstitutions–andoftheNewDealmoregener-ally− theynowlobbied toreduce thepowersanddegreeofambitionofthoseplansandinstitutions.20TheleadershipoftheibRD,withincreasinglinkstoWallStreet,becamereluctantfor the institutiontoextendlarge-scaledevelopmentloans,particularlytocountriesthathadnotreacheddebtsettlementswith

foreigncreditors.AslatinAmerica’sstrategicsig-nificancedeclinedwiththewar’send,UnitedStatespolicymakersalsoendedtheGoodNeighborpolicyofbilateralpubliclendingthathadsupportedlatinAmericandevelopmentsincethelate1930s.indeed,officials in the new administrationwere general-lymorecriticalofState-leddevelopmentpolicies,arguingthatprivateinvestmentflowsandfreetradeshouldserveasthemainenginesofdevelopment.

TheinternationalistspiritoftheNewDealdidenjoyafinalflourishintheMarshallPlanlaunchedinJune1947.ThePlanwasrestrictedingeographi-calcoverage,butremarkablygenerousintermsofbothmoney and policy space, providingWesterneuropewith some $12.4 billion over a four-yearperiod.Mostofitwasintheformofgrantsratherthanloans,amountingtojustover1percentoftheGDPoftheUnitedStatesandover2percentoftheGDPoftherecipients.However,theMarshallPlandidmuchmorethansupplyeuropewithscarcedol-lars; in linewith thebrettonWoodsConsensus, italsointroducedaframeworkoforganizingprinciplesintendedtoensurethattheaidwasusedtoforgeanewkindof“socialcontract”thatwouldberadicallydifferentfromthedeflationaryanddivisiveactionsof

theinter-warperiod(Mazower,1998).Marshallinsistedthattherequiredpolicies,togetherwithestimatesoftheneedforassis-tance,bedrawnupbytheWesteuropeansthemselves,therebyacknowledgingnational sensi-bilitiesandrecognizingthattherecipient countrieswere bet-

ter informedabout thefactsof theirsituationthanoutsiders,andgenerallyshowingdeferencetowardseuropeantraditionsandpreferences.

Crucially,theprovisionoffinancialassistancetodealwithlong-termimbalanceswasnotseenascon-doningweakcommitmenttoreformorencouragingloss of disciplinebypostponingnecessary adjust-ments.Rather, the architects of theMarshallPlanregardedsuchassistanceasalong-terminvestmentinstructuraltransformation,andasbeingnecessaryforprovidinggovernmentswiththebreathingspacerequiredtobringdifficultandoftenpainfulpolicyobjectives to fruition. indeed,when such policiesthreatenedtocausesocialupheavalonascalethatmightupsettheadjustmentprocess,aswasthecasein post-war italy at one point,MarshallAidwas

The architects of the Marshall Plan regarded it as a long-term investment in structural transformation.

Trade and Development Report, 201462

availabletosupportgovernmentbudgetsinordertocushionthesocialcosts.

The scale of assistancemobilized under theMarshall Planmeant that therewas little needfor ibRD assistance ineuropean reconstruction.However,anddespiteitsclearlystatedmandatetoencourage“internationalinvestmentforthedevelop-mentoftheproductiveresourcesofmembers,therebyassistinginraisingproductivity, thestand-ardoflivingandconditionsoflabour in their territories”, thenewleadershipoftheibRDwasreluctanttofundthekindofbiginvestment pushwhichNewDealeconomistshadenvisaged.Rather, because it was not a“bank”,inthesensethatitcouldindependentlycreatefinance,itsattentionturnedtothechallengesofsafeguardingitsowncreditworthinessbysecuringtriple-Astatusforitsbondsandrevivinginternationalprivatefinance.This included promoting amoremarket-friendlybusinessclimateinhostcountries(ToyeandToye,2004:76).inbothrespects,itsfledglingleadershipsoughttowinovertheconfidenceoffinancialmarketsas a priority.Thus,latinAmericanpolicymakers’proposal for aMarshall-type plan at thebogotaconferencethatcreatedtheorganizationofAmericanStatesin1948wasrejected;instead,emphasiswasgiventotheimportanceofaliberalizedregimeforforeigninvestments.

inmany respects, however, the retreat frominclusivemultilateralismwasmore visible in theevolutionofthepost-warinternationaltradearchi-tecture.Trade issueswere under discussion quiteearlyinthealliedwartimealliance.However,whileboththeFundandthebankrecognizedtheirroleinsupporting the trading system, trade policy issuesweredeemedtoocontroversialforthebrettonWoodsnegotiations.eventually,thisrolewashandedovertotheUnitedNationsintheformofaproposalforaninternationalTradeorganization(iTo).21

Thenegotiationsontheshapeofthepost-wartradingsystemgotunderwayintheearly1940s,andwereintendedtocreateathirdinstitutionalongsidetheiMFandtheWorldbank,thoughthiswasnottoemergeuntilmorethanhalfacenturylater.AUnitedNationsConferenceonTradewasfirstproposedin

1946bytheUnitedStates,inparttojustifynegotia-tions thatwerealreadyunderwayamonga selectgroupofcountriestoreducetradebarriers.However,theUnitedStatesdelegation’sattributionofthe“eco-nomic anarchy” of the inter-war years to protec-tionistmeasures,andthebreakdownofthetradingsystemtoblindnationalism,provokedanimmediateresponsefromdevelopingcountries.TheColombian

delegate, picking up a themehe had previously raised dur-ingthebrettonWoodsnegotia-tions,immediatelyassertedthatemploymentgoalsindevelopingcountrieswouldhingeonaState-ledindustrializationstrategythatwould requiremanaged trade.Hepointedoutthatthiswaspre-cisely how themore advancedcountrieshadbuilttheirownpro-ductivecapacitiesovertheprevi-

ousdecades.Withsupportfromothercountries,theissueofState-ledindustrialization(whichhadbeenleftoutofbrettonWoodsdiscussions)wastabledattheConference(ToyeandToye,2004).22

TheUnited States agreed to the addition ofeconomicdevelopmentandindustrializationontheagenda,whichalreadyincludedinfantindustrypro-tection.italsoagreedthattheproposediToshouldbe responsible for judging thedistinctionbetween“wise”and“unwise”protection.With this, andastheUnitedKingdom’s representative (and futurePrimeMinister), HaroldWilson, acknowledgedin his closing speech, policy space became a keyelement in the discussions on the iTo.The headof theUnitedStates delegation noted, “Themostviolentcontroversiesattheconferenceandthemostprotractedoneswerethoseevokedbyissuesraisedin the nameof economic development” (Wilcox,1949:46).However,itwouldbewrongtosuggestthatpolicyspaceinthecontextofthegovernanceofinternational tradewas only a developing-countryconcern.Anticipatedbalance-of-paymentsproblemsandissuesofStatetradingwerealsoonthemindsofmanyeuropeanpolicymakersasthewarwasdrawingtoanend,andthesewerecertainlyfamiliarchallengestothebritishdraftersoftheiToCharter(ToyeandToye,2004).indeed,asGardner(1995)hasnoted,theinitialreactiontotheemergingmultilateralorderwasparticularlynegativeintheUnitedKingdom,notonlybecauseoflingeringconcernsabouthavingtogiveupcolonialpreferences,butalsobecauseofamore

They also saw the Plan as providing governments with the necessary breathing space for achieving difficult and often painful policy objectives.

Policy Space and the Origins of the Multilateral Economic System 63

generalworry thatanycommitment to rapid tradeliberalizationwouldunderminethecompetitivenessofitsindustries.AsThe Times oflondonputitatthe time, “Wemust reconcile ourselves once andforalltotheviewthatthedaysoflaissez-faire andtheunlimiteddivisionoflabourareover;thateverycountry−includingGreatbritain−plansandorgan-izesitsproductioninthelightofsocialandmilitaryneeds;andthattheregulationofthisproductionbysuch‘tradebarriers’astariffs,quotas,andsubsidiesisanecessaryandintegralpartofthispolicy”.

intheend,theHavanaCharterthatwassignedin 1948 represented a compromise between thedemands of economic liberalism, especiallywithregardtofreetrade,andtherequirementsofdomesticpolicy autonomy, including forindustrialization and develop-ment.Article2ofthatcharter,thefirst substantive article, explic-itlystatesthat“theavoidanceofunemploymentorunderemploy-ment, through the achievementandmaintenanceineachcountryofusefulemploymentopportuni-tiesforthoseableandwillingtoworkandofalargeandsteadilygrowingvolumeof productionandeffectivedemandforgoodsandservices,isnotofdomesticconcernalone,butisalsoanecessaryconditionfortheachievementofthegeneralpurposeandtheobjec-tives…includingtheexpansionofinternationaltrade,andthusforthewell-beingofallothercountries”.

While theHavanaCharter did notmeet themoreambitiousrequirementsmootedbydevelopingcountries,itneverthelessdidincorporatesomecrucialconcerns.Thus,whileimportquotaswerethesubjectofbittercontroversy,theywereeventuallyapprovedfor a range of purposes, including the protectionofindustriesestablishedduringthewar, industriesdevoted to processing primary commodities andinfantindustries.Similarly,itincludedprovisionstofacilitatetheestablishingofcommodityagreementstostabilizeprimarycommodityprices.Significantly,theCharterimplicitlyrecognizedtherightofexpro-priationofforeigninvestmentbyhostcountries,withduecompensation,andentitledthemtoimposespe-cificrequirementsonanyforeigninvestment.Hostcountrieswouldalsobeabletouse“anyappropriatesafeguards” to prevent foreign direct investment

frominterferingintheirdomesticpolicies,andcoulddecidewhethertoapproveordenyaccesstofutureinvestments(Graz,2014).

intheevent,theiToprojectdidnotendure,astheTrumanAdministrationlostinterestinitinthefaceofaggressiveoppositionbyUnitedStatesbusi-nessinterests.Graz(2014)notesthattheiTo“didnotsurviveAmericantradepoliticsbecauseitfaceduptotheimpossibilityofreachingabroadinternationalunderstandingontheproperbalancebetweenmar-ketrulesandStateintervention”.itwasnotratifiedbytheUnitedStatesCongress,andothercountriesthereforeabandonedtheidea.oneoftheearlychap-terssurvivedintheformoftheGeneralAgreementonTariffsandTrade(GATT),amuchmorelimitedtrea-

ty.ThecriticalfactorappearstohavebeentheshiftingNewDealalliancewhichaccompaniedtherecoveryofbusinessconfidencefollowing the end of thewar,andashifttowardsgrowthasapolicypriorityandasawaytodeflectattentionfromtheearlierfocusonredistribution.Thiswasconsistentwithagreaterempha-sisonbuildingoverseasmarketsforarangeofproductsinwhichUnitedStatesfirmshadasignifi-cant advantage− an emphasis

thatconvergedwiththetraditionalfreetradeagen-daoftheDemocraticParty,particularlyasdrivenbyrepresentatives from the country’s southernStates(Katznelson,2013).23

Asthethreatofapost-wardepressionreceded,givingwaytoaperiodofunprecedentedgrowth,theinstitutionalframeworkestablishedatbrettonWoodsproved sufficiently adaptable to guarantee enoughpolicyspacefordevelopedcountriestopursuetheirpost-war economic goals.Amore expansionarypolicyorientationcombinedwithastablefinancialsystem to support the recovery of trade.A rapidpace of capital formationwas key to this, alongwiththewidespreadadoptionofindustrialpolicies(eichengreenandKenen,1994).

Global trade grew, on average,more quicklythanglobaloutput,muchofitintheformofintra-industrytradeamongstrichcountries,andparticularlywithinWesterneurope.24intheprocess,theproce-duralmultilateralismthathadhelpedshapetheearly

The Havana Charter was a compromise between the demands of economic liberalism, especially in terms of free trade, and the requirements of domestic policy autonomy, including for industrialization and development.

Trade and Development Report, 201464

discussions about the international economygavewaytoamoretechnocraticmultilateralisminwhichroutineproblemsandmarginalchangeswerelefttoexperts from thevarious international secretariats.This also applied to development issues.UnitedStatespolicymakerswerestillwillingtopursuetheMarshall Planmodel (which provided aid in thecontextoflocallyformulatednationaldevelopmentplans)forsomedevelopmentchallenges,notablyineastAsiancountrieswhereacombinationoflargeaidflowsandgenerouspolicyspaceallowedthose

countriestoundertakeamoresustainedtransformationof theireconomicandsocialstructures.25However,itremaineduncertainwhetherthemultilateralarchi-tecturewassufficientlyadaptabletosupportthenewaimsandambitionsofdevelopingcountries.inpar-ticular,thereweredoubtswhetheritwouldsupportadevelopmentpolicyagendathatrecognizedthelimitsofpurelymarket-basedincentivesforbringingaboutstructural transformation, andwhichacknowledgedtheneedformoreactivistStates,albeitfunctioningindifferentwaysaccordingtovaryingnationalcontexts.

Theonset of theColdWar in the late 1940srenewedUnited States interest in internationaldevelopment, asevidencedbyPresidentTruman’swell-publicized commitment in January 1949 tosupport“underdevelopedareas”aspartofthestrug-gleagainstcommunism.However,his“PointFour”programmewasfocusedprimarilyontheprovisionoflarge-scaletechnicalassistance,withaparticularemphasis on scientific knowl-edgeandexpertise,incontrasttothebroadervisionofthebrettonWoods architects.Multilateraldevelopmentassistance,aswellasotherbilateralprogrammes,moved in a similar direction,particularlyaseuropeancoun-triesprogressedfromrecoverytomore sustained economicgrowth.Togetherwiththeshiftfromthebiggerissuesofdesign-ing and negotiating rules and institutions to theirmoreday-to-dayoperation,thismarkedthearrivalofamoretechnocraticandmarket-friendlyformofmultilateralism.26

The1950switnessedaseriesoffurtherretreatsfromtheinclusivemultilateraldevelopmentagenda.Truman’sinauguralspeechhadstressedthecentral

roleofprivateinvestmentindevelopmentfinance,whichwas at oddswith the earlier ideaof a “biginvestmentpush”withaprominentpubliccompo-nent to galvanizemore transformative changes intheeconomiesoftheemergingSouth.inparticular,theWorldbank’s re-engagementwith developingcountrieswasmade subordinate to its desire tofendoffeffortsbytheUnitedNationstoexpandits

reachintodevelopmentfinance(Mazower,2012).Thisincludedstrong opposition fromdevel-opedcountriestoaproposalforaSpecialUnitedNationsFundon economic Development(SUNFeD) to offer long-termconcessionalloanstodevelop-ingcountries.Suchafundhadbeen proposed by the indianeconomistVKRVRaoin1949,further developed byUnited

NationseconomistsledbyHansSinger,andcham-pioned by india and other developing countriesfrom1951.Aformalvoteontheproposalonlytookplaceseveralyearslater,splittingalongNorth-Southlines,with theGeneralAssemblyvotingbya2 to1majoritytoestablishit.However,itwaseffectivelyblocked,withafinalcompromiseintheshapeoftheinternationalDevelopmentAssociation(iDA),asoft

D. The unsteady rise of inclusive multilateralism

Closing the gaps between developed and underdeveloped regions was in the interests of the former, and would re-quire dedicated international coopera tion through large-scale international public investment.

Policy Space and the Origins of the Multilateral Economic System 65

loanwindowof theWorldbank.Meanwhile, theUnitedNationswaslefttofundmuchlessambitious“pre-investmentactivities”(ToyeandToye,2004).

Fromthelate1950s,iMFlendingconditions,notablyinloanstolatinAmerica,tookamoreortho-doxturn;theyprescribedtightercreditconstraints,cuts in public expenditure, partialwage freezesandrepealofsubsidiesasameanstocombatinfla-tion (Felix, 1961).Finally, theGATT commissioned a groupofeminenteconomiststoexam-inethewaytheinstitutiondealtwith development issues.TheresultingHaberlerReport,pub-lishedin1958,criticizedsomeofthetariffandnon-tariffbar-rierserectedbyrichcountries,butrejectedtheideathatstruc-turaldifferencesbetweendevelopedanddevelopingcountriesrequireddifferentrule-making(UNCTAD,1964;Arndt, 1987).At the same time,while theGATTsecretariatrebuffedlatinAmericaneffortstoadvanceregionaltradeties,itadoptedanaccommo-datingstanceontheeuropeaneconomicCommunity(eeC).

Asthe1950sdrewtoaclose,thewideninggapbetween the ambitions of the growingnumber ofindependentdevelopingcountriesandthereluctanceof technocraticmultilateralism to embrace theirdemandsbecameagrowingsourceoftensionsinaworldalreadysplitalongeast-Westlines.inaseriesof high-profile gatherings, developing countriesbegantohighlightgapsandbiasesintheworkingsof the international economywhich they saw asimpedingtheirdevelopmentefforts.AndwithUnitedNationsmembershipapproachingthe100mark,the“ThirdWorld”wasfastbecomingapivotalforceforchangeatthemultilaterallevel.

Concomitantly,aremarkablebodyofeconomicresearch emerged during the 1940s and 1950s insupport of industrialization in “backward areas”(Rosenstein-Rodan, 1944). it provided analyticaldepthtowhatmanypolicymakerssawastheobvi-ous(andmutuallyreinforcing)connectionsbetweenthe rise ofmanufacturing, the spread ofmarkets,technological progress and rapid capital forma-tion.Rosenstein-Rodan’s theoryof the“bigpush”hadaprofoundinfluenceondevelopmentthinkingalongwithotherimportantwork,byHirschmanon

unbalancedgrowthandbyKaleckiandGerschenkrononfinancingfordevelopment.Theseeconomistsalsoarguedthatclosingthegapsbetweendevelopedandunderdevelopedregionswasintheinterestsoftheformer, andwould require dedicated internationalcooperationthroughlarge-scaleinternationalpublicinvestmentprogrammes.Theconceptsofbalancedandunbalancedgrowth,increasingreturns,linkages,learningbydoing,andcomplementaritiesinproduc-

tion and consumption,whichhelpedframetheemergenceofanewdisciplineofdevelopmenteconomics,were basedon theideathatindustrialdevelopmentwasthemostreliableengineofsustainableandinclusivegrowth.Moreover,thisresearchmadetheverystrongcasethateconomicdevelopment could not be left

tomarketforcesalone,andthatanactivistStatewascrucialforescapinglow-incometraps.27

Practicaleffortstobuildindustrialcapacitywerealsobeginningtoprovideusefullessons.Asnotedinsectionbabove,theeconomiccrisisofthe1930shadproveddeeplydamagingforprimarycommodityexportersduetothecollapseoftraditionalmarketsandunfavourableterms-of-trademovements,lead-ingtodeterioratingbalance-of-paymentspositions.Under these circumstances, andwith protectionistpolicies spreading across thedeveloped countries,somedevelopingcountrieshad littleoptionbut toraisetariffsandtoswitchexpendituretowardsdomes-tic substitutes.The resulting pattern of economictransformationwasasmuchaspontaneousresponsetoexternalshocksastheproductofwellthoughtoutpolicyefforts.However,bythelate1940s,thisexpe-riencehadbeguntostimulateanalysisbyacademicsfromwithinandoutsidedevelopingregions,aswellasbythefledglingmultilateraldevelopmentagencies.

Furtherresearch,someconductedwithinUnitedNationsagencies,onthetermsoftradeofdevelopingcountrieswasoneoutcomeof thesedevelopments(ToyeandToye,2004).butthebigideathatgalva-nizedsubsequentdevelopmentpolicydebateswas“importsubstitutionindustrialization”.Whileinsomewaysthiswasaresponsetothemodelofdevelop-mentthatcountrieshadfeltforcedtoadoptfollowingtheshocksoftheearly1930sandtheexigenciesofthewartime economies from the late 1930s, thisideaalsoprovidedamoresystematicframeworkfor

Economic development could not be left to market forces alone; an activist State was considered crucial for escaping low-income traps.

Trade and Development Report, 201466

promotingpoliciesaimedatstructuraltransformationandeconomicdiversification.

Themostprominentfigurelinkingthedebatesofthe1930swiththeemergingdeveloping-countryconcernsofthelate1950swastheArgentineecono-mist,RaulPrebisch.HisworkintheCentralbankofArgentinaandindevelopinganeconomicrecov-eryplan for his countryhad required engagementwithnewmacroeconomicthinkingaswellaswiththeasymmetriesoftheglobaltradingsystem.28Thiswasreinforcedbyhisexperiencein theeconomicCommission for latinAmerica (eClA), one ofthefledglingregionalbodiescreatedbytheUnitedNations system (alongwith other economic com-missionsforeuropeandAsia)asglobalinterestindevelopmentissuesflaggedwiththedeclineofNewDealinternationalismandthelingeringdeathoftheiTo.Tosomeextent,theseregionalbodiesadoptedthedevelopmentdiscoursethathadfailedtocapturethemultilateral imagination, especially the policychallengesraisedbyeconomicdiversification and industriali-zation(berthelot,2004).

importsubstitutionindus-trialization(iSi)hasoftenbeenrathersimplisticallyportrayedasafailedstrategyofself-reliance.inactualfact,industrialgrowthratesduringtheperiodfromtheendoftheSecondWorldWartotheearly1970s,wheniSiwasintheascendency,havenotbeenmatchedbeforeorsince(bénétrixetal.,2012).Moreover, itenabledseveraldevelopingcountriestoachievesignificantdegrees of economic diversification. in practice,iSicoveredabroadrangeofstrategiesandpolicymeasures,andthecountriesthatimplementeditmostsuccessfullyweresimultaneouslyactivelyengagedinexportpromotion.However,evenbythelate1950sitwasapparenttoeconomistsinthedifferentdevel-opingregionsthattherewerelimitstothesestrate-gies, particularly to the extent that theyproducedunbalanceddevelopmentpatternswhichcontinuedtorelyheavilyonessentialimportsthatcouldonlybefundedthroughincreasedexports.Therewerealsoconcernsaboutthedangersofexcessiveorprolongedprotectionism,aswellasgrowingrecognition thatState-ledindustrializationwasconstrainedbybothweakdemandandbyinsufficientlevelsofproductiveinvestment(ocampo,2014;ToyeandToye,2004).

As a result, therewas growingmomentumfor developing countries to re-engage actively atthemultilaterallevel,withagrowingemphasisonpromotingexportsofmanufactureswithinregionaltradingarrangementsaswellasthroughtheprovi-sionoffavourabletreatmentfordeveloping-countrymanufacturedexportsintheexpandingmarketsofdeveloped economies.However,much as in the1940s, therulesof thetradingsystem,whichnowincludedoveradecadeofexperiencewiththeGATT,wereseenasanobstaclebecauseofthereluctanceoftherulemakerstoaccommodatetheambitionsofdevelopingcountries.Thiscontrastedsharplywiththeir continuedwillingness tomake exceptions toallowadequatepolicyspacefordevelopedcountries(Dosman,2008).

in 1962, 36 developing countries from allregionsoftheworldorganizedaconferenceinCairotodiscusstheeconomicchallengesfacingdevelop-ingcountries, includingininternationaltrade.The

conference endedwith a callto convene aUnitedNationsconferenceontradeanddevel-opment.29Thiswassubsequent-ly endorsed by the GeneralAssembly.ThefirstUNCTADconferenceheldin1964,ledbyRaulPrebisch, provided somekey elements of the demandsthatdevelopingcountrieswouldseeasimportantinsubsequentdecades. Some of themajor

issuesincludedhowtoaddressterms-of-tradelossesofprimaryexportersthroughcommodityagreementsorcompensatoryfinancing;howtoensuretheneces-saryfinancingfordevelopment;andhowtoenableasustainableexport-orientedstrategyfordevelopingcountriesthatincludedmanufacturedgoodsaimedatdeveloped-countrymarkets.Prebisch’sreport totheConferenceaddressedalltheseissuesbasedonthreeessentialpremises:thenecessityofindustriali-zation,theneedtocounterexternalimbalancesandtheforcesthatgeneratethem,andtheneedfordif-ferenttreatmentforstructurallydifferenteconomies(UNCTAD,1964).

Accordingly,Prebischre-emphasizedthelimita-tionsoftheGATTprinciplesfordevelopingcountries“basedontheabstractnotionofeconomichomoge-neitywhichconcealsthegreatstructuraldifferencesbetweenindustrialcentresandperipheralcountries

By the early 1960s, the rules of the trading system were seen as obstacles due to the reluctance of the rule makers to accommodate the ambitions of developing countries.

Policy Space and the Origins of the Multilateral Economic System 67

with all their important implications” (UNCTAD,1964: 6).but he also highlighted the close inter-dependenceoftradeandfinanceinrebalancingtheagendafor internationalcooperation.Hisreport tothe conference highlighted themutually reinforc-ing nature of savings and for-eignexchangeconstraintsonthedesiredgrowthtargetformanydevelopingcountries.basedonthe then recently establishedgrowthtargetof5percentperannumandapopulationgrowthrateof2.5percent,UNCTADeconomistsarguedthatdevelop-ingcountrieswouldneedinvest-mentrateswellabovewhatmostofthemhadreachedandsavingswellabovetheircurrentsavingsrates.Moreover,a5percentgrowthratecouldnotbesus-tainedunlessimportsbydevelopingcountries(princi-pallycapitalgoods)grewat6percent.Withprojectedexportsfromdevelopingcountriesgrowingat4percentperannum,theestimatedtradegapwouldreachsome $20 billion by 1970. if the resourceswerenotfoundtofillthisgap,growthwouldhavetobereduced.Thismeantthatdevelopingcountrieswouldneeddeterminedpoliticalefforts,domesticallyandinternationally,toremovetheobstaclestomoresus-tainedandinclusivegrowth.

ThecreationofUNCTADasapermanentbodyfollowingtheendofthefirstconferencesetthestagefordevelopingamoreinclusivetradeanddevelopmentagenda.Thepurposewas tomovebeyondnegativepoliciesaimedsimplyatremovingtradebarrierstoamorepositiveagenda.Suchanagendawouldincludeassisting the trade of developing countries throughmeasurestostabilizeandboosttherevenuesofprimaryexporters(includingthroughcompensatoryfinancingfor terms-of-tradelosses),mobilizingmorereliableresourcesforproductiveinvestment,andenhancingpolicyspacetosupportexportsofmanufacturesfromdeveloping countries aimedmore broadly at theirstructural transformation. in the decade followingthe conference,UNCTAD advanced this agendathroughitseffortstoextendsupplementaryfinancing,improvethemechanismsofinternationalliquidity,help create commodity agreements, and advocatetariffpreferences,increasedflowsofofficialdevelop-mentassistance(oDA)anddebtrelief(Toye,2014).

Despite these efforts and the fact that devel-opment issuesweremore vociferously raised at

internationalmeetingsanddiscussions,theinstitu-tional andother arrangements that determined thefunctioningofglobalmarketsdidnotfundamentallychange.Fromthelate1960s,aseconomictensionswithinandbetweenthedevelopedeconomiesbegan

to growand spread across theglobal economy, the calls fora new international economicorder(atermreminiscentofthecallbytheGroupof77(G77)for“anewandjustworldeco-nomic order” atUNCTAD i)became steadily louder. ThegrowingstrainsonthebrettonWoods system, the oil price

shocksandtheirstagflationaryimpactonthedevel-oped countries, provided further opportunities fordevelopingcountries topush for amore inclusivemultilateralism.NegotiationsonaNewinternationaleconomicorder(Nieo)werelaunchedataspecialsessionoftheUnitedNationsin1974.Thethrustoftheinitiative,tobreaktheinternationalconstraintson growth in developing countries, hadmuch incommonwiththeearliereffortsoftheinternationalNewDealersandwith reformproposalsadvancedbyUNCTAD.30However,thepoliticalcontextofthetimeencouragedabroaderagendawhichincludedregulationandsupervisionoftransnationalcorpora-tions(TNCs)−andthepossibilityofnationalizationwhen required (Helleiner, 2014)− the promotionof greater economic cooperation amongdevelop-ingcountries,and,veryexplicitly,theprotectionofpolicyautonomy.ManyofthemeasuresthatformedanintegralpartoftheNieodiscussionshadalreadybeenproposedindebatesinthe1930sand1940s,asnotedintheprevioussection.

TheNieonegotiationswereseenatthetimeas a further substantial challenge to the economicordercreatedbythebrettonWoodssystem,whichhad already beenweakened by the collapse ofdollar convertibility and the fixed exchange ratesystemin1971.However,thegeopoliticalandglobaleconomic situationwasonlybriefly favourable tosuchdemands.Theyquicklycameupagainstmoreinward-lookingpoliciesand“aidweariness”inthedevelopedcountries.indeed,asfirmsintheUnitedStatesandeuropesawtheirprofitssqueezedathome,theysoughtgreatersupportfromtheirgovernmentstofindnewprofitopportunitiesabroad.Moreover,arecoveryofgrowthinsomedevelopingcountriesgen-eratedtendenciestodownplaytheirsharedstructural

The creation of UNCTAD as a permanent body set the stage for developing a more inclusive trade and development agenda.

Trade and Development Report, 201468

asymmetriesattheinternationallevelevenasgrow-ingeconomicdivergencesintheSouthunderminedtheir political solidarity built around a commonagenda(Arndt,1987).

infact,beginninginthelate1970s,internationaleconomicrelationstookaverydifferentturnfromwhathadbeenenvisagedintheNieo,withapolicybacklashintheindustrializedcountriesagainstthepost-warKeynesian policy consensus.The initialresponseofpolicymakers in thesecountries to thebreakdownof thebrettonWoods system, twooilshocks,risinglabourmilitancy,alossofcontroloverinflation and, to some extent, government budgetdeficits,hadbeenaseriesofadhocadjustmentsthataimedtocontainthethreatof“stagflation”(bruno

andSachs, 1985).However, as governments andbusinessgroupsincreasinglyviewedredistributionmeasuresandmonetarydisorderastherootofawidersocio-politicalmalaise,movestocutwelfareprovi-sion,controlthemoneysupply,liberalizefinancialflowsanduseunemploymentasatoolofadjustmentcrystallizedintoanalternativepolicyparadigm.Thatparadigmsoughttoshiftthedistributionofincomeback towards profits through awithdrawal of theState from the economyand a dismantling of thepost-warpoliticalandsocialcompromise(Mazower,1998).PresidentReagan’srefusalin1981togiveanycredencetotheReportofthebrandtCommissionatameeting inCancuneffectively ended theNorth-Southdialogueand,withit,anylingeringhopesofnegotiatinganNieo(ToyeandToye,2004).

e. Profits and policies: The dangers of amnesic globalization

Asnotedintheprevioussection,theweaknessesof thepost-wargrowthmodel thatemerged in thelate1960swerereflectedindistributionalstruggles,energy crises, inflationary pressures and balance-of-paymentsdifficulties.Thisultimatelyledto thecollapseof thebrettonWoodssystemin theearly1970sandtoaseriesofpolicyresponsesandadjust-mentsindevelopedcountriesthateventuallycametobeassociatedwiththeemergenceoffinance-drivenglobalization(UNCTAD,2011).

italsoanticipatedaverydifferentapproachtointernationaleconomicrelationsfromtheonethathadunderpinnedthepost-warconsensus.Theinternation-alsystemthatemergedafter1945was,inevitably,acompromisedominantlyamongdevelopedcountrieswithsharedhistoriesandsimilarlevelsofeconomicdevelopment.itwasbasedonacommonviewofwhatneededtobeavoided,namelytheincoherenceandturmoilofthe1930s,anditwascharacterizedbyabroadtoleranceofdifferentnationalpolicychoices(andtherequisitepolicyspace)solongastheydidnotriskdamagingtheeconomiesoftheothermembers

ofthesystem.itssubsequentevolution,toincludecountries at very different levels of development,wasmorepunctuatedandadhoc.

Theemergingmultilateralarrangementswerepremisedonabroadpoliticalconsensusthatconsid-eredgrowthandemploymentaspriorities,forwhichahighrateofinvestmentwasseenaskey,andarangeofmacroeconomic and structural policymeasureswereacceptedasnecessary.Thosemeasuresincludedthe effective regulation of finance and proactiveindustrialpolicies,whichweredeemedessentialtoensurethatprofitswerechannelledintoproductiveactivities.ThesepremiseswerewellacceptedbyboththeNorthandtheSouth.itwasalsoacceptedthatthedifficultiesfacingmostdevelopingcountriesseek-ingtointegrateintotheglobaleconomycouldbestbemanagedbyallowingsomederogationfromtherulesthatessentiallyhadbeenagreeduponby,andintheinterestsof,therichestcountries.However,incontrasttothegenerosityoftheMarshallPlanthathadhelpedeuropeaneconomiesmakeaswiftpost-war recovery, the resourcesneeded for effectively

Policy Space and the Origins of the Multilateral Economic System 69

tacklingthedeep-seatedstructuralproblemsfacingmostofthedevelopingcountrieswerenevermadeavailable.

initially, itwas believed that the breakdownofthebrettonWoodssystemandtheshifttofloat-ingexchangeratesallowedamuchlooserformofmonetary cooperation that gave policymakers indevelopedcountriesmoreroomtotakeindependentpolicyaction.Thebritisheconomist,FredHirsch,welcomedthis,hopingthata“controlleddisintegra-tion of theworld economy”would providemorepolicyspacetoaddressthevariedchallengesposedby aworldof economic stagflation.but themorelikely alternative, as noted by theUnited Statescentralbanker,PaulVolcker,wasadifferentkindofmarket-ledintegrationinamul-ti-polarworld.Volcker’s solu-tionwastobuildintothesystemofflexibleexchangeratesmoreinformal coordination amongcentralbankers,andtoprovidetheiMFwiththedisciplinestoensure that the “right” kindsofpoliciescouldbepursuedathome.Anunspokencorollaryofthiswasthat“theguardiansoftheworld’smoneywouldinthefuturehaveagreaterroletoplayinternationally,andnationallegislaturesandelectoratesasmallerone”(Mazower,2012:317).

Theinternationaltradeandfinancesystemthathasevolvedsincethedebtcrisisoftheearly1980shasbrokenwiththeworkingprinciplesofthepost-warsystem.indeed,underpresentarrangementsandpolicies,developingcountriesalmostinvariablyhavefoundthemselvesobligedtoadjusttointernationalimbalancesthroughcutsindomesticspending.TheiMF, having abandoned the objective of ensuringstable exchange rates in an orderly internationalfinancial system, has, instead, actively promotedthespreadof“anopenandliberalsystemofcapitalmovements” (Camdessus, 1997: 4). internationalfinancialflowshavebeenallowed to return to thekinds of levels that had caused instability duringtheinter-warperiod.Theresulthasbeenexchangerateinstabilityandmisalignmentsleadingtosuddendisruptionsinthepatternofinternationalcompeti-tiveness.incontrasttoitsearlyhistory,theiMFhasshifteditslendingportfoliosubstantiallytodevelop-ingcountries,blurring thedistinctionbetween theshort-termliquidityrequirementsofastablefinancial

system and the long-termfinancing requirementsfor the development of lower income countries.31TheWorldbankhasalsoshifteditsemphasisawayfrom longer term infrastructure projects, andnowconcentrateson“structuraladjustment”lendingandpovertyreduction.

Thegovernanceofinternationaltradehasmovedtowardsasingle-tiersystemofrightsandobligations,inwhichdevelopingcountriesareexpected,gener-ally,tocommittoalevelofobligationsmuchclosertothoseofdevelopedcountries.Theformerhaveman-agedtoretaincertainflexibilities(asdiscussedinlaterchapters)withinthesystemandhavebenefitedfromthepredictabilityofarules-basedsystem.However,therecognitionthatemploymentcreationandstruc-

tural diversification should bekeymeasuresofthesuccessofanincreasinglyfreetradesystemhasbeenweakened.Tradeliber-alizationhasbeengivenpriorityovereconomicgrowthandfullemployment,therebyrekindlingmercantilistagendas,notleastindevelopedcountries.Arangeofissuesofinteresttodevelopingcountries,includingchangesin

theirtermsoftrade,technologytransfer,non-tariffbarriersandrestrictivebusinesspractices,havefallendownthenegotiatingagendaattheinternationallevelordisappearedaltogether(UNCTAD,2011).Tradeagreements,particularlyattheregionalandbilaterallevels,have increasinglyextended their reach intoareasofpolicyearlierconfinedtonationalborders.Muchofnational andglobal economicpolicyhasprogressivelybeendrivenbyanaggressiveagendaof“deep”integration, includingtheeliminationofbarrierstotradeandcapitalflows,andenlargementofthespaceinwhichcorporationscanmakeprofitsthroughprivatization,deregulationandflexibiliza-tionoflabourmarkets.

in effect, the collapse of thebrettonWoodssystempavedthewayfortheglobaldominanceoffinancialmarkets.Theearliercompromisebetweenprivateprofitsandnationalpoliciesthathaddeter-minedthemultilateralismofthefirsttwopost-wardecadeswasdeemednolongervalidfromthe1980s.Whatemergedwasanewinternationalfinancialandeconomicorderbuiltonastrongideologicalfaithintheinherentefficiencyandstabilityofmarkets,whichopenedupnewprofit-makingopportunities foran

Trade liberalization has been given priority over economic growth and full employment, thereby rekindling mercan-tilist agendas, not least in developed countries.

Trade and Development Report, 201470

increasinglyunregulatedfinancialsector.Thepolicyspaceforcountrieswithdifferenthistories,contextsandinstitutionalstructuresthatwasattheheartofthebrettonWoodsarrangementswasreplacedwithaone-size-fits-allpolicyagendaofso-called“sensibleeconomicpolicies”whichboreacloseresemblanceto the policy agenda of the 1920s (Temin, 2010,blyth,2013).likethen,thisagendawaspremisedontheassumptionoftheinher-ent efficiency and stability ofmarket forces,andwas,aboveall,drivenbytherapidderegula-tionoffinance.

Theextensivederegulationofthefinancialsectorindevel-opedcountries,alongwith thedismantlingofcontrolsoncross-borderfinancialactivities,whichled toa surge incapitalflows,markedaradicalbreakwiththepost-warinternationalpolicyframework.Therapidascentoffinancialinterestserodedthechecksandbal-ancesthathadpreviouslyhelpedtochannelmarketforcesintothekindofcreativeandproductiveactiv-itiesneededforlong-termgrowth.instead,itencour-agedshort-term,andattimesdestructive,behaviourby banks, businesses and households. ideologicalsupportforall thiscamefromtheefficientmarkethypothesis,whichmakes the case for a hands-offpolicy agenda applicable to all economic circum-stancesandchallenges.

insomecasesthatagendawaspushedbythepolicyconditionalitiesofiMFlendingtodevelopingcountries,butitsreachwasmuchwider,extendingtomany countries that hadnoneed for iMF sup-port.Thus,theiMF’soriginalroleasaguarantorofinternational financial stability became secondarytothepromotionoffinancialization,definedastheincreasingimportanceoffinancialmarkets,financialmotives,financialinstitutionsandfinancialelitesintheoperationoftheeconomyanditsgoverninginsti-tutions,bothatthenationalandinternationallevels(epstein,2006).Thishasbeenassociatedwiththeunderminingofthecountervailingpowerofthepub-licsector,andhasconvertedever-increasingareasofpublic life intopotentialsourcesofprofit(Sandel,2010).itisworthnotingthattheone-size-fits-allmes-sagewasinsomewaysareturntothepoliciesthatweredominantindevelopedcountriesinthe1920s,andresulted–justasitdidthen–inasteadyerosion

oftheabilitiesofStatestotakeindependentpolicyaction(Temin,2010).

Asobserved inSectionb above, the “returntonormalcy” in the1920s led toglobaleconomicvolatility, crisis and depression; and the post-warrecoveryrequiredareorientationofpoliciesatbothnationalandinternationallevels.Thefinancialization

trendsthathadbeenbuildingupafterthecollapseofthebrettonWoodssystemcoincidedwithaperiodofgrowingimbalances,instability and inequality.Asdiscussed extensively in pre-viousTrade and Development Reports, developing countrieswere often thefirst to experi-encetheseproblems.However,themostdestructive impactofthefinancialarrangementslink-ing uneven demand growth,

debtandunstablecapitalflowswasfeltindevelopedcountries,asongoingconcernsoversubprimelend-ingintheUnitedStates,combinedwiththecollapseoftheinvestmentbank,lehmanbrothers,ledtoafreezingofcreditmarketsinSeptember2008andtoaslumpinequityprices.Withcontagionandpanicspreadingthroughmarkets,leadingfinancialinstitu-tionsbegantofail,whileothersturnedtotheirgov-ernmentsforsupport.

Themultilateral arrangements designed atbrettonWoodsdidnotincludeaglobalregimeforregulating capitalmovements, as capitalmobilitywasassumedtobelimitedbythewiderworkingsoftheinternationalsystem.Neitherdidsucharegimeemergeafterthebreakdownofthesearrangements,despite the growing importance of private capitalflows.Andeven thegrave economic andpoliticalimpactsofthelatestfinancialcrisishavefailedtopro-ducesucharegulatoryregime.Thisfailurepointstoalargerdeficitinglobalgovernance.TheDohaRoundisfastapproachingitsfifteenthanniversary,withfewsignsofimminentcompletion,despitethepositivesteps taken in thebaliMinisterialConference in2013.Progressonreducinggreenhousegasemissionshasstalledfollowingthefailuretoreachacompre-hensivedealinCopenhagen.Finally,evenbeforethelatestcrisis,keepingtheMillenniumDevelopmentGoalsontrackwasastruggle:theirachievementby2015nowseemsincreasinglyunlikely.itistellingthatevenasmallproportionoftheresourcesusedto

Policy space for countries with different histories, contexts and institutional structures that was at the heart of the Bretton Woods arrangements was replaced with a one-size-fits-all policy agenda.

Policy Space and the Origins of the Multilateral Economic System 71

savefinancialinstitutionsdeemed“toobigtofail”couldneverbefoundinbettereconomictimesforsocial and economic development, infrastructurebuildingandsocialwelfare,ortoaddressenviron-mentalchallenges.

Pointing to the “trilemma” of policy choiceunder globalization,Dani Rodrik (2002: 2) hasarguedthat“ ‘deep’economicintegrationisunattain-able inacontextwherenationstates and democratic politicsstill exert considerable force”.evenifhiscontentionwere tobe accepted, it can certainlybe argued that there arewaysto forge international arrange-ments that encourage morecross-bordereconomicactivityingeneral(includingthemove-ment of goods, services andpeople)without necessarily sacrificing the policyautonomythatenablesanationStatetorespondtothedevelopmentalandsocialneedsofitsowncitizenryinaflexiblemanner.indeed,theexperienceofrapidly

growingand“globalizing”economiesineastAsia,andthemorevariedandinclusivepoliciesadoptedbyseveralcountriesinlatinAmericaandsomeinAfricaoverthepastdecade,alldemonstratethatsuc-cessfulexternaleconomicintegrationcantakemanydifferentformsandneednotalwaysbeassociatedwiththestandardpolicypackage.AcriticalelementofthesemoreinclusivegrowthstrategieshasbeentheprioritygiventotheneedsandrightsofStatesand

citizens,ratherthantostrategiesthatprivilegeprofitability.

it is therefore necessarytoexaminetheextenttowhichvarious forces have reshapedpolicyspaceintheeraoffinance-drivenglobalization.Subsequentchaptersof thisReport exploredifferent aspects of this in theareasoftrade,capitalflowsand

macroeconomicpolicies.Thisinturnenablesacon-siderationofelementsofanewdevelopmentstrategyforrevivingamoreinclusiveformofmultilateralismthatcantacklecontemporarychallenges.

The growing financialization trends following the collapse of the Bretton Woods system coincided with a period of greater imbalances, instability and inequality.

Notes

1 SeeMazower(2012:202),quotingGilbertMurray,anoxfordscholar,who,asanearlysupporteroftheleagueofNations,hadhelpedtofounditandhadparticipatedintheleagueasadelegateforSouthAfrica.

2 Most famouslyKeynes, inhisGeneral Theory of Employment, Interest and Money (chap. 24), hadcalledforthe“euthanasiaoftherentier”.inequallystrident language, PresidentRoosevelt variouslycomparedWallStreetfinancierstoeconomicroyal-istsandtoaplagueoflocusts,andinsistedthatsocialvaluesneeded tobegivenpriorityovermonetaryprofits.United States Secretary of theTreasury,HenryMorgenthau,was just as clear in his clos-ingremarksatthebrettonWoodsConference,that“The institution proposed by thebrettonWoods

Conferencewouldindeedlimitthecontrolwhichcer-tainprivatebankershaveinthepastexercisedoverinternationalfinance”(Morgenthau,1945),andhisinsistenceonlocatingtheinstitutioninWashingtonratherthaninNewYorkreflectedhisconcerntobringitclosertodemocraticpoliticsandfurtherfromtheinfluenceofWallStreetbankers.

3 Pricerisesduringandimmediatelyafterthewardid,ofcourse,meanthatspecificdutieshad,by1920,lostmuchoftheireffectivenessasmeasuresofprotec-tion,andthiswasnotreversedsignificantlybytheworldwidepricedeflationin1920-1921.ontradepolicyduringtheinter-waryears,seeGordon,1941;bairoch,1995,chap.1;andJames,2001,chap.3.onthelinksbetweentradepolicyandeconomicgrowth,seebairoch,1995.

Trade and Development Report, 201472

4 Themovementofpeoplewas theexception,withimmigrationsharplycurtailedincomparisontothepre-1914world(seeJames,2001,chap.4).

5 Thisrestrictivemonetarypolicyandfiscalausterityofthe1920s,resultingfromwhatKeynesreferredas the“TreasuryView”,wasaccompaniedby thepoliticalmessagethatgovernmentpolicycoulddonothingtoalterthestateofaneconomyforthebetter.onthedebatebetweenKeynesandtheTreasury,seeClarke,1988.

6 Thecyclewasdominatedbyshort-termcapitalflowsfromandbackto theUnitedStates.James(2001,30−31)clearlydescribesthesettinginofaviciouscircle thus:“Fiscalandfinancialcrises reinforcedeach other: fiscal difficulties led to capital flight,andthewithdrawalofcapitalweakenedbanksandcreatedapotentialoractualfiscalburden.bankingproblems thus led tofiscalproblems,because thecostoftakingoverbadbanksstrainedthebudget.butbudgetimbalanceswereinterpretedbyinves-tors, foreign anddomestic, asmeaning that therewerelimitstothegovernment’sabilityrealisticallytooffersupportforbanks,andthatitwasthereforetimetogetout”.

7 Kindelberger (1986: 11) defines an economichegemonas“acountrythatisprepared,consciouslyorunconsciously,undersomesystemofrulesthatithasinternalized, tosetstandardsofconductforothercountriesandtoseektogetotherstofollow,andinparticulartotakeonanundueshareoftheburdensofthesystem,andinparticulartotakeonitssupportinadversitybyacceptingitsredundantcommodities,maintaining a flow of investmentcapital,anddiscountingitspaper”.Kindelberger’sanalysisof the inter-waryearshingeson the ideathattheUnitedKingdomwasnolongerabletoplaytheroleofeconomichegemonaftertheFirstWorldWar,whiletheUnitedStateswasreluctanttodosountilthemid-1930s.

8 intheUnitedStates,thosepolicychoicesandtrade-offswereessentiallybasedon“acommitmenttofreemarketsthatlimitedtheroleofgovernmenttotheprotection and enforcementof contracts; antitrustlawsthatsoughttomaintainefficientmarketcom-petition;andguidelinesforwhatPresidentHooverhadcalled‘associationalism’,apolicythatusedthefederalgovernmenttocollectanddisseminateinfor-mationtofirmsandeconomicleadersinordertocon-fronttheworrythatinsufficientinformationcouldleadtomarketfailure”(Katznelson,2013:234).

9 ontheconstructionoftheNewDealalliance,seebadger,1989and2008;andKatznelson,2013.

10 “Quoting”DonaldRichberg,thegeneralcounseloftheNationalRecoveryAdministrationintheUnitedStates (seeKatznelson, 2013: 237).TheAtlanticCharterissuedinAugust1941wasamongthefirstattemptstosetoutsomeoftheaimsandprinciples

oftheAlliedpowersforapost-warworld.itemergedout of discussions between theUnitedStates andtheUnitedKingdomover funding for the latter’swarefforts.Threeofitseightpointsdealtwiththefollowingeconomicissues:loweringtradebarriers,theneedforglobaleconomiccooperationtoadvancesocialwelfareandaworld freeof fear andwant,in thecontextof theAnglo-Americandiscussions(seeMazower, 2012: 194−200).The discussionsalsorevealedareasoflikelycontention,particularlyinternationaltrade.

11 Forabriefaccountoftheseproblems,seeoliver,1975,chap.i;andDam,1982,chap.iii.

12 “Associated”nationsreferredtocountriesthathadbrokendiplomatic relationswith theAxispowersbuthadnotjoinedtheUnitedNations.

13 SeealsoHelleiner,2014:117−132.14 ThefirstmissiontoCuba,underDexterWhite,took

placeinthelatterhalfof1939,althoughinformaldiscussionswithCuban,Paraguayanandbrazilianofficialshadtakenplaceearlier.AsimilarmissiontoHondurastookplacein1943andtoParaguayinthesameyear(thelatterunderthebelgianeconomist,RobertTriffin,whichalsoincludedRaulPrebisch−whohadbeenconstrainedtoleavehispositionattheArgentinecentralbank,followingamilitarycoup−inthefollow-upmissionin1944).Subsequently,thereweresimilarmissionstoCostaRica,bolivia,theDominicanRepublic(againinvolvingPrebisch),Guatemala andecuador (also led byTriffinwhowasbythenworkingattheinternationalMonetaryFund)(Helleiner,2014).Theaimofallthesemis-sionswas to help domestic policymakers fashionmonetarypolicyinlinewiththedomesticneedsoftheircountries.

15 AllcountriesfromlatinAmerica,exceptArgentina,were invited and attended.others includedwererepresentativesfromfourAfricancountries(egypt,ethiopia,liberia andSouthAfrica) andfive del-egationsfromAsia(China,india,iran,iraqandthePhilippines).Alsorepresentedwerefourcountriesfromeastern europe (Czechoslovakia, Greece,PolandandYugoslavia),aregionthatmany(includ-ing its representatives) saw at the time as facingsimilareconomicproblemsasthoseofotherpoorregions.Altogether,therewere32delegationsfromtheseregionscomprising173people,comparedwiththe140fromdelegationsoftheother12countries(Australia, belgium, Canada, France, iceland,luxembourg, the Netherlands, New Zealand,NorwaytheUnitedKingdom,theUnitedStatesandtheUnionofSovietSocialistRepublics) (SchulerandRosenberg,2012,appendixA).

16 ThenumericaldominanceoflatinAmericancoun-trieswasaparticularworrytothedelegationfromtheUnitedKingdomatbrettonWoods.onKeynes’sandthewiderbritishattitudetowardsdevelopment

Policy Space and the Origins of the Multilateral Economic System 73

issuesintherun-uptoandduringthebrettonWoodsconference,seeHelleiner,2014,chap.8.

17 Anearlydilemmawasoneofreconcilingthemeanswiththeobjectivesofthebank;thatis,itscapitalbasewouldneedtobeprovidedbytheverysamecountrieswhose reconstruction and developmentitwasdesigned tohelp.Thiswas resolvedby anagreementwhichprovidedthateachmembercoun-trywouldpayonly20percentofitssubscriptiontothebank’scapital,withtherestbeingcallableasthebankranoutofresources(paidincapitalplusreserves)tomeetitsobligationsonfundsborrowedfrominternationalmarkets.Thisguaranteeprovidedbyitsshareholdersgreatlyhelpedthebankinsub-sequentdecadestoraisefundsathighlyfavourableterms, thereby introducing an additional subsidyelement to its loans and reducing the cost to itsborrowers.

18 SeeHelleiner2014a,chaps.1−3.SuchthinkingcanbeclearlydetectedinMorgenthau’sclosingspeechatbrettonWoods.Hearguedthat“long-termfundsmustbemadeavailablealsotopromotesoundindus-tryandincreaseindustrialandagriculturalproduc-tioninnationswhoseeconomicpotentialitieshavenotyetbeendeveloped.itisessentialtousallthatthesenationsplaytheirfullpartintheexchangeofgoodsthroughouttheworld.Theymustbeenabledtoproduceandtoselliftheyaretobeabletopur-chase and consume.Thebank for internationalReconstruction andDevelopment is designed tomeetthisneed”.onthesignificanceoftheTVAtotheNewDealagenda,seebadger,2008,chap.5;andbatemanetal.,2009.

19 See: black, 1991: 35; Gold, 1988; bordo andSchwartz,2001.

20 Strong opposition from financial interests hadalready ledWhite to drop the idea ofmandatoryinternationalcooperationtoenforcecapitalcontrolsfromthebrettonWoodsdiscussions,andreplaceitwithaprovisionsimplypermittingsuchcooperationamongcountries.

21 Theimportanceattachedtofavourabletradingcondi-tionsforattainingrapidgrowthandfullemploymentisreflectedinthestatementoftheobjectivesoftheiMF: “To facilitate the expansion and balancedgrowth of international trade, and to contributetherebytothepromotionandmaintenanceofhighlevelsof employmentand real incomeand to thedevelopmentoftheproductiveresourcesofallmem-bersastheprimaryobjectivesofeconomicpolicy”.

22 AtbrettonWoods, thesameColombiandelegate,CarlosRestrepo,hadinsistedthat thecommercialagreementsshouldallow“thenecessaryprotectionwhichmustbegiveninthenewcountriestotheirinfantindustriesduringtheirfirststepsinindustrialdevelopment”(citedinHelleiner,2014:170).ThepreparatorycommitteefortheConferencefirstmetin

londoninoctober1946todiscussthecharterofaninternationaltradeorganizationpreviouslyproposedduringloannegotiationsbetweentheUnitedStatesandtheUnitedKingdom.FollowingbrettonWoods,fullemploymentandthestabilityofglobaldemandwerehighonthecommittee’sagenda,buttheissueof industrializationwas pushedby theAustraliandelegation, backedbybrazil,Chile,China, indiaandlebanon.

23 Tensions in the RooseveltAdministration overtrade issueswere already apparent at theWorldeconomicConference in london in 1933 (seeKindleberger,1986).Advocatesoffreeandnon-dis-criminatorytrade,underCordellHull,successfullypushed through legislation on “ReciprocalTradeAgreements” in 1934,which gave the Presidentmuchgreaterauthorityforbilateraltariffbargaining.Some21agreementswerestruckbetween1934and1940.However,itsimpactwasquitelimitedintermsofoveralltariffreductions,whileotherpartsoftheNewDealconstituencyandlegislationwerepushinginadifferentdirection(seeirwin,1997).

24 inWesterneurope,theshareofintraregionaltradeinworld traderosefrom18.3percent in1953to31.2percentin1973(WTo,2008:15).

25 onthelinksbetweentheMarshallPlan,policyspaceanddevelopmentchallenges,seeKozul-WrightandRayment,2007:283−294.

26 SeeArndt(1987)forafurtherdiscussion.oneofthelastingconsequencesofthisshiftwasastrongerfocusonhumancapitalandeducationasanintegralpartofthedevelopmentagenda.AsMazower(2012)notes,Truman’sinauguraladdresssignalledthattheUnitedStateswouldworkwitharangeofUnitedNationsagencies,suchastheFoodandAgricultureorganization(FAo),theWorldHealthorganization(WHo)andtheinternationallabourorganization(ilo),providingbothresourcesandstaff.Moreover,thismoretechnocraticmultilateralismharkedbacktotheleagueofNationswhosetechnicalserviceshadbeentransferredfromGenevatotheUnitedStatesin1940.Truman’s1949proposaltomaketechnicalassistancethecentre-pieceofUnitedStatesdevel-opmentassistance,andtoencouragetheuseoftheUnitedNations for this purpose, offered agenciessuchastheWHoandtheFAo“apracticalandmod-estalternativetomoreambitiousandmoresocializedapproachestoaidthathadrunafoulofCongress”(Mazower,2012:277).

27 Forahistoryoftheseideas,seeToner,1999;TaftandAdelman,1988;Kohli,2004;andJomo,2005.

28 RaulPrebisch’sentryontothepolicystagebeganasheadofresearchattheNationalbankofArgentina,inwhichcapacityhealsoparticipatedinthelondonWorldeconomicConference of 1933.There, hebecamefamiliarwiththenewpolicyideasofKeynes,andwas also exposed to the asymmetries of the

Trade and Development Report, 201474

tradingsystemthroughnegotiationsonthebilateraltradeagreementbetweenArgentinaandtheUnitedKingdom.on his return toArgentina he helpeddesignthegovernment’seconomicRecoveryPlanwhichsignalledanewandlessorthodoxshiftinthecountry’spolicydirection.itcombinedpublicdebtrestructuring,currencydevaluation,tariffmeasuresandpublicwork schemes in an effort to turn theeconomyround.Subsequently,hepreparedtheleg-islationtoestablishacentralbank,withpowerstomanagethebusinesscycleandoverseethestabilityoftheentirefinancialsystemratherthanmerelyfightinflationarypressures.AsitsfirstGeneralManagerin1935,Prebischpursuedacountercyclicalmonetarypolicy, reinforced exchange controls and adoptedasupportivecreditpolicy(Prebisch,1972,vol.2,chap.XiV).WhileArgentina’sgrowthratesdidnotreturntotheirlevelsofthe1920s,itsGDPin1930

wasnevertheless17percenthigher thanits1929level.Moreover, itwaswidelyviewedasastableinternational financial centre, andPrebisch’s ownprofessional standing, at home and abroad, rosesignificantlyduringthisperiod(seeDosman,2008,chap.5).

29 Foramoredetailedhistoryoftherisingvoicesofdevelopingcountriesontheinternationalstagedur-ingthe1950sand1960s,seePrashad,2007.

30 Arndt(1987:140)ratherdramaticallydescribestheNieoasaninternationalisationofthewelfarestate,aninternationalisationofprotectionandaninterna-tionalisationofclassconflict.ForamoremeasuredaccountofthelinksbetweenUNCTADandtheNieodiscussions,seeToyeandToye,2004,chap.10.

31 Thispatternchangedfollowingthe2008crisis,whenanumberofdevelopedcountriesonceagainturnedtotheiMFforfunding.

References

ArndtH(1987).Economic Development: The History of an Idea.Chicago,il,UniversityofChicagoPress.

badgerA (1989).The New Deal, the Depression Year, 1933−1940.Chicago,il,ivanRDee.

badgerA (2008).FDR, the First Hundred Days.NewYork,NY,HillandWang.

bairochP(1995).Economics and World History.Chicago,il,UniversityofChicagoPress.

batemanF,RosRandTaylorJ(2009).DidNewDealandWorldWar iipublic capital investments facilitatea “big push” in theAmericanSouth?Journal of Institutional and Theoretical Economics, 165(2):307–341.

bénétrixA,o’RourkeKandWilliamsonJ(2012).Thespreadofmanufacturingtothepoorperiphery,1870-2007.NbeRWorking Paper no. 18221,NbeR,Cambridge,MA.

berthelotY(2004).Unityanddiversityofdevelopment:Theregional commissions’ experience. in:berthelotY,ed.Unity and Diversity in Development Ideas: Perspectives from the UN Regional Commissions.bloomington,iN,indianaUniversityPress:1–50.

bertolalandocampoJA(2012).Economic Development of Latin America since Independence. oxford,oxfordUniversityPress.

biltoftCN(2014).TheleagueofNationsandalternativeeconomicperspectives.in:Reinerte,KattelRandGhoshJ,eds.Handbook of Alternative Theories of Economic Development.Cheltenham,edwardelgarPublishing,forthcoming.

blackS (1991).A Levite Amongst Priests: Edward M Bernstein and the Origins of the Bretton Woods System.boulder.Co,WestviewPress.

blythM(2002).Great Transformations: Economic Ideas and Institutional Change in the Twentieth Century.Cambridge,CambridgeUniversityPress.

blythM(2013).Austerity: The History of a Dangerous Idea.oxford,oxfordUniversityPress.

bordoMandSchwartzA (2001). From theexchangeStabilizationFund to the internationalMonetaryFund.NbeRWorking Paper no. 8100,NbeR,Cambridge,MA.

borgwardte(2005).A New Deal for the World: America’s Vision for Human Rights.Cambridge,MA,HarvardUniversityPress.

boyceR(2009).The Great Interwar Crisis and the Collapse of Globalization.NewYork,NY,Macmillan.

brunoMandSachsJ(1985).The Economics of Worldwide Stagflation.Cambridge,MA,HarvardUniversityPress.

Policy Space and the Origins of the Multilateral Economic System 75

CamdessusM(1997).Globalcapitalflows:Raisingthereturnsandreducingtherisks.SpeechtolosAngelesWorldAffairsCouncil,17June.

ClarkeP(1988).The Keynesian Revolution in the Making, 1924−36.oxford,oxfordUniversityPress.

Crotty J (1999).WasKeynes a corporatist?Keynes’sradicalviewsonindustrialpolicyandmacropolicyin the 1920s.Journal of Economic Ideas, 33(3):555−578.

DamK (1982).The Rules of the Game. Reform and Evolution in the International Monetary System.Chicago,il,UniversityofChicagoPress.

Dosmane(2008).The Life and Times of Raul Prebisch, 1901−1986.Montreal,McGill-Queen’sUniversityPress.

eichengreenbandKenenPb(1994).ManagingtheworldeconomyunderthebrettonWoodsSystem:Anover-view.in:KenenPb,ed.Managing the World Economy: Fifty Years After Bretton Woods. Washington,DC, instituteforinternationaleconomics:3–57.

eichengreenbandTeminP (1997).Thegold standardand theGreatDepression.NbeRWorkingPaperno.6060,NbeR,Cambridge,MA.

epsteinG(2006).introduction:FinancializationandtheWorldeconomy.in:epsteinG,ed.Financialization and the World Economy.Cheltenham,edwardelgar.

FelixD (1961).An alternativeviewof themonetarist-structuralistcontroversy.in:HirschmanA,ed.Latin American Issues: Essays and Comments.NewYork,NY,TheTwentiethCenturyFund.

FelixD(1996).Financialglobalizationversusfreetrade:The case for theTobinTax.UNCTAD Review (UNCTAD/SGo/10),Geneva.

FishlowA(1985).lessonsfromthepast,capitalmarketsandinternationallendinginthe19thcenturyandtheinterwar years. in:KahlerM, ed.The Politics of International Debt.ithaca,NY,CornellUniversityPress:37–94.

Gardner(1995).establishingavisionforpromotingeco-nomicdevelopment. in:boughtonJandlatefK,eds.Fifty Years After Bretton Woods: The Future of the IMF and the World Bank.Washington,DC,iMF/Worldbank.

GoldJ(1988).Mexicoandthedevelopmentoftheprac-tice of the internationalMonetary Fund.World Development,16(10):1127−1142.

GordonM(1941).Barriers to World Trade: A Study of Recent Commercial Policy.NewYork,NY,TheMacmillanCompany.

Graz JC (2014).TheHavanaCharter:When state andmarket shake hands. in:Reinerte,KattelR andGhoshJ,eds.Handbook of Alternative Theories of Economic Development.Cheltenham,edwardelgarPublishing,forthcoming.

Hall P, ed. (1989).The Political Power of Economic Ideas: Keynesianism Across Nations.Princeton,NJ,PrincetonUniversityPress.

Helleinere(1994).States and the Reemergence of Global Finance.ithaca,NY,CornellUniversityPress.

Helleinere (2014).Forgotten Foundations of Bretton Woods International Development and the Making of the Postwar Order.ithaca,NY,CornellUniversityPress.

irwinD(1997).FromSmootHawleytoreciprocaltradeagreements:ChangingthecourseofUStradepolicyinthe1930s.NbeRWorkingPaperno.5895,NbeR,Cambridge,MA.

JamesH(2001).The End of Globalization: Lessons from the Great Depression.Cambridge,MA,HarvardUniversityPress.

JomoKS,ed.(2005).Pioneers of Development Economics,london,ZedPress.

Katznelsoni(2013).Fear Itself: The New Deal and the Origins of Our Times.NewYork,NY,WWNortonandCo.

KeynesJM(1944).lettertolordAddison,May1944.in:MoggridgeD,ed.(1980).The Collected Writings of John Maynard Keynes,VolumeXXVi:Activities1941-1946,Shaping thePost-WarWorld,brettonWoodsandReparations.london,TheMacMillanPressltd.

KindlebergerC(1986).The World in Depression 1929-1939.Harmondsworth,Penguinbooks.

KohliA (2004).State-Directed Development: Political Power and Industrialization in the Global Periphery.Cambridge,CambridgeUniversityPress.

Kozul-WrightR(1999).ondentists,dreamersanddefuncteconomists. in: Sardoni C andKriesler P, eds. Keynes, Post-Keynesianism and Political Economy: Essays in honour of Geoff Harcourt,Vol.3.londonandNewYork,NY,Routledge:131–150.

Kozul-WrightRandRaymentP (2007).The Resistible Rise of Market Fundamentalism: Rethinking Development Policy in an Unbalanced World.london,ZedPress.

KumhofM,RancièreRandWinantP(2013).inequality,leverageandcrisis:Thecaseofendogenousdefault.iMFWorkingPaper 249. internationalMonetaryFund,Washington,DC.

Martin J (2013).Werewe bullied? London Review of Books,21November.

MazowerM(1998).Dark Continent. Europe’s Twentieth Century. london,ThePenguinPress.

MazowerM(2012). Governing the World: The History of an Idea.london,Penguinbooks.

MikesellR(1994).ThebrettonWoodsdebates:Amemoir.Essays in International FinanceNo.192.PrincetonUniversity,Departmentofeconomics,PrincetonNJ.

MorgenthauH(1945).brettonWoodsandinternationalCooperation.Foreign Affairs,23(2):182–194.

ocampo JA (2014).latinAmerican structuralism andproductive development strategies. in: Salazar-Xirinachs J,Nübler i andKozul-WrightR, eds.Transforming Economies: Making Industrial Policy

Trade and Development Report, 201476

Work for Growth, Jobs and Development.Geneva,UNCTADandilo:41−64.

oliverR(1975).International Economic Cooperation and the World Bank.london,Macmillan.

PikettyT (2014).Capital in the Twenty-First Century.Cambridge,MA,HarvardUniversityPress.

Polanyi K (1944).The Great Transformation: The Economic and Political Origins of Our Time.NewYork,NY,FarrarandRinehart.

PrashadV(2007).The Darker Nations: A People’s History of the Third World.NewYork,NY,TheNewPress.

Prebisch R (1972).La creación del Banco Central y la experiencia monetaria argentina entre los años 1935-1943.buenosAires,Centralbank ofArgentina.

RodrikD(2002).FeasibleGlobalizations.NbeRWorkingPaperno.9129,NbeR,Cambridge,MA.

Rosenstein-RodanP (1944).The internationaldevelop-mentofeconomicallybackwardareas.International Affairs,20(2):157−165.

SandelM (2010).What Money Can’t Buy: The Moral Limits of the Market.london,Penguin.

SchulerKandRosenbergA(2012).The Bretton Woods Transcripts.NewYork,NY,Center forFinancialStability.

TaftCandAdelmani(1988).Comparative Patterns of Economic Development, 1850-1914.baltimore,MD,JohnsHopkinsUniversityPress.

Temin P (1991).Lessons from the Great Depression.boston,MA,MiTPress.

Temin P (2010).TheGreatRecession and theGreatDepression. NbeRWorking Paper no. 15645,NbeR,Cambridge,MA.

TonerP(1999).Main Currents in Cumulative Causation: The Dynamics of Growth and Development.london,Macmillan.

ToyeJandToyeR(2004).The UN and Global Political Economy: Trade, Finance, and Development.bloomington,iN,indianaUniversityPress.

ToyeJ(2014).UNCTAD at 50: A Short History.NewYorkandGeneva,UnitedNations.

UNCTAD (1964).Towards a New Trade Policy for Develop ment.Geneva.

UNCTAD (2011).Report of the Secretary-General of UNCTAD to UNCTAD XIII, Development-led Globalization: Towards Sustainable and Inclusive Development Paths.NewYorkandGeneva,UnitedNations.

Van DormealA (1978).Bretton Woods: Birth of a Monetary System.london,Macmillan.

WilcoxC(1949).A Charter for World Trade.NewYork,NY,Macmillan.

WolfM (2003). is globalisation in danger?World Economy,26(4):393–411.

WTo (2008).The World Trade Report 2008.Geneva,WorldTradeorganization.

Trade and Industrial Policies in an Evolving Global Governance Regime 77

As the international community rethinks itsgoalsforapost-2015developmentagendatosucceedtheMillenniumDevelopmentGoals, it is impera-tivetoensurethateffectivepolicyinstrumentsareavailabletocountriestoenablethemtoachievetheagreedgoalsandadvancetheagenda.Thischapterarguesthatrecentexperience,historicalevidenceandtheoreticalinsightsallpointtotherolethatproactivetradeandindustrialpoliciesmustplayinthatagenda.

Theroleofsuchpoliciesindevelopmentstrat-egieshasbeenextensivelydiscussedanddebated.Developed countries adopted a variety of indus-trialpoliciesduringtheirperiodof industrialization, and con-tinuedtodosoaftertheSecondWorldWar in their pursuit ofsustained economic growth,full employment and acceler-ated technological progress.Subsequently,industrialpolicywas also high on the agendaofmany developing-countrygovernmentsthatsawindustri-alizationaskeytounlockingunderutilizedresources,addressinglong-standingstructuralweaknessesandsocialdeficits,andclosingthetechnologicalgapwiththedevelopedeconomies.Thispost-warpolicycon-sensusontheutilityofproactivetradeandindustrial

policiesalsoinformedthedebatesaboutreformingthemultilateraltradeandfinancialsystemsinawaythatwould allowdeveloping countries the policyspace1toadoptthemeasuresandinstrumentstheydeemednecessarytofosterrapidproductivitygrowthandindustrialdevelopment(seechapteriV).

Fromtheearly1980s,industrialpolicylargelydisappearedfromthedevelopmentagendaofmanycountries,particularlyinAfricaandlatinAmerica.Thiswaspartly a reaction to evidence of specificpolicymistakesandabuses,butitwasalsoduetoamoreideologicallydrivendebatethatblamedgov-

ernment failuresmuchmorethanmarket failures for sloweconomic development andemphasizedtheneedformarketliberalization.Justasimportant,in several developing econo-miesthedebtcrisiserodedtheabilityofStatestopursueproac-tivepolicies.Notonlydidtheysufferfrommacroeconomicandfiscalconstraints,butalsothey

hadtosubmittothegrowingpolicyconditionalityattached to loansextended to themby thebrettonWoods institutions. Furthermore,many observerssawtheperiodofeconomicstagnationfollowingthedebtcrisisastheinevitableoutcomeofdistortions

Chapter V

TRADE AND INDUSTRIAL POLICIES IN AN EVOLVING GLOBAL GOVERNANCE REGIME

A. Introduction

The availability of effective policy instruments is imperative to advance a post-2015 development agenda and achieve its goals.

Trade and Development Report, 201478

associatedwith State-led industrialization, ratherthan as a consequence of deflationarymacroeco-nomicpolicies,andsupply-sideshocksduetobadlydesignedadjustmentprogrammes.Asaconsequence,manycountriesreducedorabandonedproactivetradeandindustrialpoliciesandbegantofavourunfetteredmarketsandtransnationalfirms,asendorsedbytheso-called“WashingtonConsensus”.

interestinproactivetradeandindustrialpolicieshasrevivedsincearoundtheturnofthemillennium,for a variety of reasons. First, and probablymostimportant,wastheaccumulationofoverwhelmingevidencethatthemostsuccessfuldevelopingcoun-tries–notablythenewlyindustrializingeconomiesineastAsiafollowedbyChina–weretheonesthathadsystematically followedapragmaticapproachtopromotingindustrialdevelopmentthroughacom-binationofmacroeconomicandstructuralpolicies,measuredprotectionismwhilegraduallyopeninguptotradeandinvestment,andeffectivecollaborationbetweentheprivateandpublicsectors.2Second,itwasincreasinglyrecognizedthatthepoliciesassoci-atedwiththeWashingtonConsensusweredoinglittletosupporteconomicupgradinganddiversification,whichmeantthatcountrieswouldriskfallingintoa“middle-incometrap”(see,forexample,Felipeetal.,2012).Third,mainstreameconomistsstartedtoacceptsomeoftheinsightsintoeconomicdevelopmentfromclassicaleconomics,suchastherecognitionthateco-nomicdevelopmenthasa“structural”dimension,theimportanceoflinkagesandlearningforacceleratingproductivitygrowth,andthekeyroleofdemand.Thisgreateracceptancewashelpedbytranslatingclassicaleconomists’“intuitiveinsightsintoclear-cutmodelsthatcouldserveasthecoreofanenduringdiscipline”(Krugman,1993:26).3Forthesereasons,thereisnowwiderinterestinindustrialpolicy(Naudé,2010).Thishasmoved the debate to amore pragmatic level,withdiscussionsfocusingnotsomuchonwhetherindustrialpoliciesareneededasonhowbesttopursuesuchpolicies(e.g.Rodrik,2008;Salazar-Xirinachs,etal.,2014),andwhatlessonscanbelearned(andtransferred)fromtheexperiencesofthesuccessfulindustrializers.

itisclearthatspecificpolicymeasuresadoptedbysomeofthesuccessfulindustrializingcountriescannoteasilybereplicatedbyothercountries.Thisisnotonlybecauseindividualcountries’successstoriesareinvariablylinkedtospecialeconomicandinsti-tutionalconditionsthatareunlikelytoexistinother

countries;itisalsobecausechangesintheexternaleconomic environment affect both the availabil-ityandeffectivenessofspecificpolicyinstruments(Akyüzet al., 1998).Atpresent, four elementsofthe changingdynamicsof theworld economyarecrucial for theway inwhich proactive trade andindustrialpoliciescanspureconomicdevelopment,asdiscussedbelow.

(i) internationaleconomicgovernancehasincreas-inglyrestrictedtheoptionsavailableforcon-ductingthekindsoftradeandindustrialpoliciesthatindividualcountriesarelegallyallowedtopursue.

Thisisincontrasttoconditionsprevailingatthetimeoftheexport-orientedrevivalofJapan’smanufacturing base after the SecondWorldWarandtherapideconomiccatch-upoftheso-called“Asiantigers”(HongKong,theRepublicofKorea,Singapore andTaiwanProvinceofChina)betweenthe1960sand1980s.Althoughthese economies periodically encounteredprotectionist barriers on developed-countrymarkets,suchashightariffsandtariffescala-tion, aswell as so-called “voluntary” exportrestraints, theMulti-FibreArrangement andothernon-tariffbarriers,theyenjoyedsignifi-cantflexibilityinpursuingtheirowntradeandindustrial policies that helped them achieverapidstructuraltransformation.

ThissituationchangedwiththeUruguayRoundAgreements (URAs), resulting frommultilat-eraltradenegotiations,andthecreationoftheWorldTradeorganization(WTo)in1995.Asdiscussed in somedetail inTDR 2006, theseagreementscamewithsomesignificantrestric-tions on the conduct of trade and industrialpolicies of allWTomemberStates. Furtherrestrictionsfollowedwith theproliferationofregional trade agreements (RTAs) and inter-national investment agreements (iiAs),manyofwhichcontainrulesandregulationsthatgobeyondtheURAs.

(ii) Under the increasing influence of financialmarkets and interests,many countries havebeen experiencing unbalanced economicgrowth,bothinternallyandexternally,andmanypolicymakershaverecognizedalinkbetweenstructural problems in their economies and a

Trade and Industrial Policies in an Evolving Global Governance Regime 79

heightenedvulnerability to shocksandcrises(UNCTAD, 2011a). in this environment, thechallengeforpolicymakersistomakeeconomicgrowth and developmentmore inclusive −ensuringthatallsocialgroupsenjoythebenefitsofeconomicgrowth−bycomplementingthemarketmechanismwithpolicymeasuresandinstitutional support aimed at the creationofdecentjobs,andatachievingmoreequalincomedistributionandpovertyreduction.Thereisanongoing search for policymeasures that canbring about suchoutcomeswithoutputting alargeadditionalburdenongovernmentbudgets.

(iii)Developmentsintheglobaleconomysincetheonset of the economic andfinancial crisis in2008–2009havethrownnewlightonprevail-ing challenges to export-led industrializationmodels.

itiswellknownthatexport-ledindustrializationstrategiesmustsoonerorlaterreachtheirlimitswhenmany countries pursue them simulta-neously,ascompetitionamongeconomiesbasedonlowunitlabourcostsandtaxesfacesafallacyof composition that leadstoaracetothebottom(e.g.TDR 2002).Atthepresentjuncture,when develop-ing countries’ opportuni-ties to increase exportsofmanufacturestodevel-oped countries are likelyto remainweak for sometime, the limitations ofsuchagrowthstrategyarebecomingevenmoreobvious.Arebalancingofdevelopingcountries’growthstrategiestowardsa greater emphasis ondomestic and regionaldemandcouldreducethisrisk(e.g.TDR 2013).itistruethatthecombinationoffastergrowthofdomesticdemandandslowergrowthofexternaldemandcouldleadtoadeteriorationofthetradeaccount.Thismeans that such a shiftwouldrequireproactivetradeandindustrialpoliciesthat strengthendomestic supply capacities inordertocontaintradedeficits,whichotherwisewould have to be redressed through foreigncapitalinflows.

(iv)insomedevelopingcountries,thefearthatthestrong increase in primary commodity prices

since2002maycauseoracceleratedeindustrial-izationhasgivengreaterurgencytothequestionofhowtofosterindustrialization.Severaldevel-oping countries have,moreover, found thattheirapparentlysuccessfulstructuraltransfor-mation by promotingmanufacturing throughparticipation in international production net-worksislinkedtoonly“thin”industrialization.Thatis,theyhavesucceededinparticipatinginmanufacturingnetworks,butonlyinlow-skillactivitieswithouttheabilitytoupgrade.inmanycases,thishasyieldedlowerthanexpectedeco-nomicbenefits,besideshamperingbothsocialupgrading and inclusive industrialization. inmanysucheconomies,asinotherswherestruc-tural transformation is even less developed,therearegrowingdemandsbytheirsocieties,andespeciallybytheincreasinglymoreeducat-edyouth,forpoliciesandeconomicoutcomesthatmeettheiraspirationsforgreatereconomicopportunitiesandbetterlives.

Againstthisbackground,thischapterexamineshowsystemsofglobaleconomicgovernance(bothprivateandpublic)haveconstrainedproactivetrade

andindustrialpolicies,andhigh-lightshowsomecountrieshavemanagedtoimplementpoliciestofosterstructuraltransforma-tiondespitetheseconstraints.italso considerswhat additionalchallenges could impede theeffectivepursuitofsuchpoliciesintheyearsahead.itconcludesthat, in order to pursue rapidandinclusiveeconomicgrowth

andmeetfutureglobaldevelopmentgoals,develop-ingcountrieswillneedsufficientpolicyspaceatthenationalleveltoundertakethenecessarystructuraltransformationof their economies.At the interna-tionallevel,themultilateralgovernanceframeworkwillneedtobemorepermissiveandcoherentifitistofacilitatesuchstructuraltransformation.

Thechapterisstructuredasfollows.Sectionbdiscussestheimpactsofthevarioustrade,investmentand comprehensive economic partnership agree-mentsonnationaltradeandindustrialpolicyspace.it highlights areaswhereprovisions inURAs andRTAshaveconstrainedsuchpolicyspacefordevel-opingcountries,aswellasareaswhereflexibilitiesremain intact.The factors that prompt developing

Trade negotiations need to refocus on multilateral agreements which recognize the legitimate concerns of developing countries.

Trade and Development Report, 201480

countriestoengageinRTAsandeffectivelyrenouncepolicy space are also considered. Such engage-ment is paradoxical, especially as it is evidentthatmanyof these countries have been investingconsiderableeffortsatthemul-tilateral level to preserve suchspace,forexamplebyrejectingdeveloped-countryproposalstodeepen rules concerning inter-nationalinvestment,intellectualpropertyrights(iPRs),govern-mentprocurementandfinancialservices.Thesectionconcludesbyaddressingrecenttendenciestowardsbroadening thenotionof “protectionism” and denouncing as “murky”thosebehind-the-bordermeasuresthataredesignedtoadvanceanddirectstructuraltransformationbutwhich could hamper the opportunities for profit-makingbytransnationalcorporations(TNCs).

SectionC beginswith a brief discussion ofthemeaning of industrial policy. it then providessome recent country-specific examples of indus-trial policies, especially those aimed at creatingand strengthening domestic linkages and foster-inginnovationwithinthecontextofwhatremainslegallypossible.SectionDdiscussestwoelementsof the changing dynamics of theworld economythatposeadditionalchallengestotheeffectivenessofproactivetradeandindustrialpoliciesinspurringeconomicdevelopment.Thefirstisapotentialdeclinein export opportunities for developing countries.

While exporting canbe a powerful driver of pro-ductivitygrowthinmanufacturing,slowgrowthindevelopedcountriesiscausingthemtoreducetheirimports fromdeveloping countries.This suggests

that export-oriented industrialpoliciesarebecominglesseffec-tive,andreinforcestheneedfordeveloping-country govern-ments to strengthen industrialpolicies directed at fosteringdomestic and regional link-agesandinnovation.Thesecondchallengerelates to tendenciestomoveawayfromacoherentmultilateralgovernancesystem

towardsamultitudeofinitiativesthatareintroducingever-growingconstraintsontheabilitytousenationalpolicyinstruments.

Theconcludingsectionearguesthatdevelopingcountriesrequiregreaterpolicyspacetoenablethemtocontinuetheirrapidgrowthtrajectoryofthepast15yearsandmakesuchgrowthmoreequitableandsustainable.Strengthenedglobaleconomicgovern-ancethatrefocusestradenegotiationsonmultilateralagreementswhichrecognizethelegitimateconcernsof developing countries, abandonsWTo-plus andWTo-extraprovisionsandfostersthedevelopmentalcharacteroftheDohaRoundwouldbeanimportantstepinthisdirection.leveragingthegreatereconom-icandpoliticalpowerthatdevelopingcountrieshaveachievedoverthepasttwodecadescouldstronglysupportthisprocess.

WTO-plus and WTO-extra provisions should be abandoned, while fostering the developmental aspects of the Doha Round.

B. The evolving global governance framework: Implications for national trade and industrial policies

Successfuldevelopmentexperienceshavegen-erallybeenassociatedwithstructuraltransformation(seebox4.1).Thissectionexaminestheconstraintsfacedbydevelopingcountriesinadoptingthetradeand investmentpolicies theydeem tobe themostsuitableforstructuraltransformation.inparticular,it focuses on themultiplicity of trade agreements

(multilateral, bilateral and regional) andhow theyrestrict national policy space.Multilateral agree-mentsmaintain someflexibilities and incorporatesome special anddifferential treatment (SDT) forleast developed countries (lDCs); however, theytypically limit or forbid the kinds of policies thatplayedanimportantroleinsuccessfulprocessesof

Trade and Industrial Policies in an Evolving Global Governance Regime 81

Box 5.1

STRUCTURAL TRANSFORMATION IN DEVELOPING COUNTRIES: ThE ROLE OF ThE MANUFACTURING SECTOR

At relatively early stages of economic development, per capita incomegrowth results fromcapitalaccumulationthatallowsafulleruseofunderutilizedlabourandnaturalresourceswithoutnecessarilyalteringtheefficiencyofuseofthesefactorsofproduction.Aseconomicdevelopmentproceeds,furthergrowthofpercapitaincomehasgenerallybeenassociatedwithsustainedproductivitygainsbasedonstructuraltransformation,i.e.movinglabourandotherresourcesfromrelativelylessproductiveactivities,suchasinagriculture,tomoreproductiveactivitiesintheformalmanufacturingandservicessectors.a

Manufacturingplaysacentralroleinthisstructuraltransformation.Activitiesinthissectoraremoreconducivetospecializationandthedivisionoflabour,andoffergreaterpotentialforinnovationandincreasing returns to scale than other sectors (Kaldor, 1968).Moreover, in contrast to the primarysector,andespeciallytheextractiveindustries,mostmanufacturingactivitiesarelabour-intensive,sothat,giventherightwageandlabourmarketpolicies,productivitygrowthhasthepotentialtobenefitalargeproportionofthepopulation.Theensuing,relativelymoreequaldistributionofincomegrowth,combinedwiththehighincomeelasticityofdemandformanufacturedgoods,ignitesavirtuousprocessofcumulativecausationbetweensupplyanddemandeffectsthatfurthersupportsstructuraltransformation.Thecentraldevelopmentchallengeforpolicymakers,therefore,istoachieveanintersectoralshiftofproductiveemploymenttowardshigh-productivityactivitiescombinedwithproductivitygrowthwithineacheconomicsector,particularlymanufacturing,whileensuringabroaddistributionofthebenefitsofproductivitygrowth.

oncedevelopingcountrieshavesucceededinestablishingamanufacturingbase,andtheintersectoralproductivitygapshavenarrowed, theirabilityforfurthercatch-upwithrichercountries increasinglydependsonsustainedimprovementsinproductivitywithinthemanufacturingsector,suchasthroughtechnologicaladvancesandthecreationofnewproductsandprocesses,alongwiththedevelopmentofrelatedtechnologicalandsocialcapabilities.b

Successinachievingstructuraltransformationandthepolicystrategiescontributingtothatsuccesshavevariedsignificantlyacrosscountries.AsdiscussedinpreviousTDRs (inparticularTDRs 1996,2003and2006),thepaceofstructuraltransformationindevelopingeconomiesineastAsia–especiallytheRepublicofKoreaandTaiwanProvinceofChinabetweenthe1960sandthe1990s,andChinasincethe1990s–hasoutperformedthatinotherdevelopingcountries.Proactivetradeandindustrialpolicies,ratherthanarelianceonunfetteredmarketforces,havegenerallyplayedakeyroleintheirsuccess,justastheydidduringtheprocessofindustrializationinthenowdevelopedcountries.c

Country-specificfactors,includingnotonlydifferentinitialeconomicconditionsbutalsolessdevelopedadministrativeandinstitutionalcapabilities,partlyexplainthelimitedabilityofotherdevelopingcountriestoemulatethesuccessfulstructuraltransformationexperiencesofsomeeastAsianeconomiesandChina.butalso,andequallyimportantinthiscontext,theotherdevelopingcountriesarelikelytohavebeenconstrainedbylessroomformanoeuvreintheirtradeandinvestmentpolicies.

a Theclassicreferencesforthisso-called“dualeconomy”approachincludelewis(1954),andRanisandFei(1961),whilethemorerecentliterature,reviewedbyRoncolatoandKucera(2014),alsoincludesMcMillanetal.(2014).Foramoredetaileddiscussionandevidenceuptotheturnofthemillennium,seealsoTDR 2003,chap.V.Thisdistinctionbetweentraditionalandmoderneconomicsectorscontrastswithgrowthmodelsintheneoclassicaltradition,whichconsidersuchstructuraldifferencessufficientlysmalltoallowalleconomicactivitiestobeaggregatedintojustonesector.

b While thischapteremphasizes theroleofmanufacturing,successfulstructural transformationinAsia(suchasobservedfirstin,Japan,thenintheRepublicofKoreaandTaiwanProvinceofChina,andmostrecentlyinChina)suggeststheimportanceoftwootherelements.Thefirstrelatestothemaximizationofagriculturaloutput,whiletheotherrelatestothegovernment’sroleindirectinginvestmenttowardsactivitiesthathavethefastestpossibleproductivitygrowthpotential,andhencepromiselargefutureprofits.ThefirstofthesetwoelementswasdiscussedindetailinTDRs 1995,1996and1998,whileTDRs 2003and2013addressedthesecondone.onbothelements,seealsoStudwell,2013.

c Fordetailedempiricalevidenceonstructuraltransformationoverthepastfourdecades,seeUNiDo,2013,andforamoregeneraldiscussionofdevelopmentalsuccessstoriessee,forexample,Fosu,2013.

Trade and Development Report, 201482

structural transformation in the past.This processof limiting national policy space beganwith theURAs,which includedseveral rules thatwerenotdirectlyrelatedtotradeflows.Subsequentbilateraland regional trade agreements have increasinglyincludedrulesthatcanbeimportantforthedesignofcomprehensivenationaldevelopmentstrategies,suchasgovernmentprocurement,capitalflows,tradein services, and environmental and labour issues.Manyof themhavealso includeddisciplinescon-cerningiPRsandinvestment-relatedmeasuresthataremorestringentthanthosealreadyincorporatedinmultilateralagreements.inasense,thesebilateralandregionalagreementsarenolonger“tradeagree-ments”; they aremore comprehensive economicintegration treaties, often referred to as economicpartnershipagreements.

1. Multilateral trade agreements: Constraints on policy choices and remaining flexibilities

Themultilateraltraderegimecomprisesasetof negotiated, binding and enforceable rules andcommitmentsthatarebuiltonthecoreprinciplesofreciprocity andnon-discrimination, as reflected inthemost-favoured-nation(MFN)treatmentandthecommitmenttonationaltreatment(i.e.equaltreat-mentfordomesticandforeigngoodsandenterprisesindomesticmarkets)requirements.Together,theserulesandcommitmentsmaybeconsideredaglobalpublicgood,astheyinjectcertaintyandpredictabilityininternationaltradeandlimitadverseinternationalspilloversthatmayresultfrombeggar-thy-neighbourpolicies (i.e. discriminatory ormercantilist tradepolicieswherebyeconomicallyorpoliticallypower-fulcountriesseektoobtainbenefitsattheexpenseof less influential countries).This trade regimehas granted developing countries some importantexceptions. For example, exceptions to theMFNrule accord developing countries preferential andmore favourablemarket access, andexceptions tothereciprocityprincipleallowdevelopedcountriestogranttheirdeveloping-countrypartnerslessthanfullreciprocityinmultilateraltradeagreements.PriortotheURAs,theseexceptions,whicharegenerallyknownasspecialanddifferential treatment(SDT)provisions,werecouched indevelopmental terms;theywereseenas recognitionby the international

community of the differences betweendevelopedandalldevelopingcountriesintermsofeconomicstructuresandlevelsofdevelopment.

WhilemaintainingsomeexemptionsforlDCs(and, in some cases, other low-income countries),theURAs representeda step towardsa single-tiersystem of rights and obligations.The SDTwasmodifiedtoaccorddevelopingcountriestime-limitedderogationsandlongertransitionperiods,aswellastechnicalassistancefortheimplementationofmul-tilateralagreements(suchasthroughtheWTo-ledAidforTradeinitiative).However,eventuallythesecountrieswillneedtofullycomplywithalltherulesand commitments embodied in theURAs.4ThisreinterpretationofSDTwaspartofthegrandbargainbehindtheURAsandtheestablishmentoftheWTowhich,moregenerally,aimedatprovidingdevelop-ingcountriesimprovedaccesstodeveloped-countrymarkets,particularlyinagricultureandtextilesandclothing,inexchangeforsomeimportantconcessionsbydevelopingcountriesintermsofmarketopeningand,inparticular,theiracceptanceofawiderangeofrulesandcommitments(TDRs 1994and2006).

Forexample,theAgreementonTrade-relatedinvestmentMeasures (TRiMs)5 prohibits the dis-criminatory impositionofrequirementsonforeigninvestorssuchaslocal-contentandtrade-balancingrequirements, aswell as foreign-exchange restric-tions.These instruments had often been used bypolicymakers in the past to increase the linkagesbetweenforeigninvestorsandlocalmanufacturersin thecontextof structural transformation.6Underthis agreement, it is also difficult for countries tomakesupportconditionalonreachingcertainexporttargets.Thismeansthatpolicymeasuresthatwereimportantforcontrollingperformance,suchaswith-drawingsupportfromproducersthatfailtoachieveinternational competitivenesswithin a predefinedperiodof time, are no longer possible.7However,measuresthatdonotimposequantitativerestrictionsanddo not treat foreign investors less favourablythandomestic ones donot violate the agreement;nordoesapotentialracetothebottominaccordingforeign investorsever largerconcessions thatmaywellharmdomesticinvestors,andevendrivethemoutofthemarket,especiallyastherearenoeffectivemultilateralcodesofconductforforeigninvestors.Furthermore,policymakersmaycontinuetoimposesector-specificentryconditionsonforeigninvestors,including industry-specific limitations.8Theymay

Trade and Industrial Policies in an Evolving Global Governance Regime 83

also apply local-content requirements for thepro-curementofservices,includingtechnologyanddataflows, unless suchmeasures havebeenprohibitedthroughcommitmentsintheGeneralAgreementonTradeinServices(GATS).

A second set of obligations results from theAgreementonTrade-relatedAspectsofintellectualPropertyRights(TRiPS),whichestablishesmultilat-eralminimumstandardsforgrantingandprotectingtheuseofintellectualproperty(iP)(e.g.copyrights,patents and trademarks) in foreignmarkets.Theagreementseverelyrestrictsreverseengineeringandotherformsofimitativeinnovationwhichpreviouslywere used bymany countries, including the nowdevelopedones, for theirstructural transformationprocesses.Thishasalsoadverselyaffectedcompeti-tiveconditionsinallcountries,asithasbeenfoundthatpatents“are increasinglyused as stra-tegic assets to influence theconditionsofcompetitionratherthanasadefensivemeanstopro-tect research and developmentoutcomes”(MaxPlanckinstituteforinnovationandCompetition,2014:2).Moreover, therecentrapidriseinthenumberofpatentfilingsandgrantshasledtoanincreaseincoststhatdisproportionallybenefitsTNCsattheexpenseofsmallerenterprisesandindividualinventors.

ThereissomeflexibilityintheTRiPSAgreementthroughitsmechanismsofcompulsorylicensingandparallelimports.9inaddition,varyingpatentabilitystandards, such as the granting of narrowpatentsforincrementalinnovationsthatbuildonmorefun-damental discoveries,maybe useful for adaptingimportedtechnologiestolocalconditions.10

TheDohaDeclarationontheTRiPSAgreementandPublicHealth,whichwasadoptedattheWToMinisterialMeetingin2001,clarifiedsomeoftheseflexibilities.eventhoughtheDeclarationfocusedonpublichealthissues,manyofitsclauseshavebroaderimplicationsandconcerniPinanyfieldoftechnol-ogy.Therefore, theymayalsobeused topromotedomesticproduction(Correa,2014).However,thereis little evidence to suggest that theseflexibilitieshavebeenincorporatedintonationallawsandregu-lationsandputtoeffectiveuse(Deere,2009).ThismaybebecauseoftheproliferationofRTAs,many

ofwhichincorporatemorestringentprovisionsthantheTRiPSAgreement.butitcouldalsobebecauseitisnotalwaysclearwhichiPRregimeisappropriateatagivenstageofdevelopment.Thislackofclaritymakesitdifficultforpolicymakerstodeterminehowtheflexibilitiesavailablecouldbeusedinindustrialpolicyinstrumentstosuittherequirementsofnationaltechnologicalcapabilitiesandsocialpriorities.

in this context, itmay be useful to identifythree stages of industrial development: initiation,internalization and generation.At the early orinitiation stage,mostlymature technologies areincorporated into domestic production throughinformal channels of technology transfer (suchas the acquisition ofmachinery and equipment,reverseengineeringandsubcontracting)aswellas

throughformalmodesoftrans-fer(suchasturnkeyagreementsand foreign-direct investment(FDi)).At this stage, the iPRregimehaslittleornopositiveimpact on local innovation,althoughitmayaffectaccesstogoodsby the localpopulation.Thus, the iPR regime shouldallowasmuchmargin aspos-

sible for the absorption anddiffusionof acquiredtechnologies.Thisis thesituationinlDCs,wheretechnology efforts typically focus onmastery ofoperationandlow-leveldesigntechnology.Similarly,inotherdevelopingcountriesstrongiPRprotectionmostprobablywillnotallowformoretechnologytransferor local innovation.At the internalizationstage,somelow-intensityresearchanddevelopment(R&D) industriesemerge, and localproducersareable todevelop “minor”or “incremental” innova-tions,mostly fromroutineexploitationofexistingtechnologiesratherthanfromdeliberateR&Defforts.StrongiPprotectionmayhavelittleornoimpactoninnovation,whilereducingthediffusionofforeigninputsandtechnologiesandincreasingtheircosts.Aflexiblesystemisidealatthisstage,butattheveryleast the design of iPR legislation should aim toallowreverseengineeringandtechnologydiffusionbymakingfulluseoftheremainingflexibilitiesintheTRiPSAgreementandinvariousRTAs.Finally,atthegenerationstage,someindustriesmaybenefitfrom iPprotection to consolidate their innovationstrategiesdomesticallyor internationally,as is thecaseinsomeofthemoreadvanceddevelopingcoun-triessuchasbrazilandindia.However,therewill

The URAs have reduced the policy space available to WTO members while leaving some flexibilities intact.

Trade and Development Report, 201484

stillbesometensionbetweentheinterestsoflocalinnovatorsandthesocietyatlarge,sinceincreasedlevelsofiPprotectionmayreducetechnologydiffu-sionbyrestrictingtheaccessofotherlocalproducers,aswellasaccessbylocalconsumerstotheproductsofinnovationbecauseofconsequentlyhigherprices.

A third example of additional commitmentsthroughtheURAsrelatestotheGATS,whichhasextendedthemost-favoured-nationandnationaltreat-mentprinciplesfromtradeingoodstotradeinawiderangeofservices,suchasfinance,tourism,educa-tionandhealthprovision.TheGATSprovisionsarebasedona“positive-list”approach,i.e.countrieslisttheirliberalizationcommitmentsintermsofmodeandsequencing,but retainautonomyoveralloth-ersectors.inprinciple,thisshouldallowcountriesto retain some of their policyspace.However,someobservershave expressed concern aboutthefullreachofGATSregula-tionsandarguethat theGATSeffectivelycoversregulationsaswide-rangingasdomesticlaws,guidelines,unwrittenpractices,subsidiesandgrants, licensingstandards and qualifications,andeconomicneedstest(Chanda,2002),makingitapplicabletoallregulationsandmeasuresbygovern-mentsatalllevels(central,state,provincial,localandmunicipal),evenwhentheyareforthepurposesofenvironmentalandconsumerprotectionoruniversalserviceobligations.Therearealsopersistentambi-guitiesabouttheextenttowhich“non-commercial”governmentservicesareexcludedfromtheGATS,sincemostsuchservicedeliverytodaycontainsamixofpublicandprivateinvolvement(Chanda,2002).

A fourth set of obligations can be found intheAgreement on Subsidies andCountervailingMeasures(SCM),whichsignificantlystrengthensdis-ciplinesrelatingtosubsidies.11Theagreementcoverstwocategoriesofsubsidies,andregulatestheuseofcountervailingmeasuresonsubsidizedimportsthatarefoundtohurtdomesticproducers.“Prohibited”subsidiesarethosethatarecontingentupontheuseofdomesticoverimportedgoodsorexportperfor-mance.12Yet,makingsubsidiesconditionalonexportperformancewasacrucialmonitoringdeviceineastAsiancountries’outward-orientedstrategiestoensurethatsupportwasgivenonlytothoseenterprisesthatwereabletocompeteininternationalmarkets.

UndertheSCMAgreement,allothersubsidies,including those for production, are “actionable”.Theyarenotprohibited,butaresubjecttochallengethroughtheDisputeSettlementMechanism(DSM)ortocountervailingaction.SuchachallengewouldneedtobebasedonthefindingthatasubsidycausesanyofthefollowingthreeadverseeffectsforamemberState:first,nullificationorimpairmentoftariffcon-cessionsorotherbenefitsaccruingundertheGATT1994;second,injurytoadomesticindustrycausedbysubsidizedimportsintheterritoryofthecomplainingmember,wheresuchinjurycanbethebasisforcoun-tervailingaction;andthird,seriousprejudice,whichconstitutesthebroadestformofadverseeffect(e.g.exportdisplacement)inthemarketofthesubsidizingmemberorinathird-countrymarket.Untiltheexpira-tionofarticle6.1oftheSCMAgreementattheendof

1999,aseriousprejudiceclaimcould be related to four situa-tions,butwhethersuchclaimsstill apply remains unresolved(Coppens,2013:91).13

Amajorflexibilityretainedby the SCMAgreement con-cerns the granting of exportcredits.14WhileAnnexiexplic-

itlyidentifiesexportcreditsasprohibitedsubsidies,itsitem(k)includesasafe-havenclausestipulatingthat“anexportcreditpracticewhichisinconform-itywith… [the interest rate] provisions…of aninternationalundertaking…towhichatleasttwelveoriginalMemberstothisAgreementarepartiesasof1January1979…shallnotbeconsideredanexportsubsidyprohibitedbythisAgreement.”15Whilenotexplicitlynamingit,thisclauserefersdirectlytotheArrangementonofficiallySupportedexportCreditsof theorganisation for economicCo-operationandDevelopment (oeCD).The purpose of thatArrangementistoprovideaninstitutionalframeworkfortheorderlyuseofpubliclysupportedexportcred-itsrelatingtoexportsofgoodsand/orservicesandtofinancialleaseswitharepaymenttermoftwoormoreyears.ThroughitsimplicitinclusionintheSCMAgreement,thisframeworkhasbecomeabenchmarkforallWTomembersapplyingtheinterestratepro-visions of theArrangement (Coppens, 2009).16Areflectionofthisisthecomplaint“brazil-Aircraft”(1996−2001)broughttotheWTodisputesettlementpanel byCanada,wherebrazil, as a non-signato-ry to theoeCDagreement, successfully claimedthatitsrevisedfinancingprogramme(PRoeXiii)

WTO members can still use tariffs to protect certain sectors, and they have some flexibility in the use of both IP and FDI regulatory measures.

Trade and Industrial Policies in an Evolving Global Governance Regime 85

supporting its aircraft industrywas in accordancewiththeSCM’ssafe-havenprovision(WTo,2013b).

Country-specific schedules annexed to theMarrakeshProtocoloftheGATT1994havegovernedthecommitmentsrelatingtotariffreductionsresult-ing from theUruguayRoundnegotiations.Thesescheduleshavecommitteddevelopingcountriestoalargercoverageoftariffbindings(e.g.alltariffsonagriculturalproductshavebeenbound)aswellastosignificantreductionsintheirpreviousboundratesofindustrialtariffs.Nevertheless,developingcountrieshavepreservedsomedegreeofflexibilitywithregardtotariffpolicy,astheyhaveleftpartoftheirtariffsunbound,andboundothertariffsatsometimesrela-tively high levels.As a result,therearesometimesratherwidedifferencesbetweenboundandappliedrates(oftenreferredtoas “tariff binding overhang”),and between those tariff ratesacross individual tariff lines.17However, those large differ-encesarealsoindicativeoftheconsiderable trade liberaliza-tionthathasoccurredonaunilateralbasisoutsidethemultilateraltraderegime,includingthroughcon-ditionalitiesassociatedwith loansextendedbytheinternationalMonetaryFund(iMF)andtheWorldbanktodevelopingcountries.

Theremainingflexibilityfordevelopingcoun-tries’ tariff policiesmaywell be reduced, or eveneliminated, by theDohaRound negotiations onnon-agriculturalmarketaccess(NAMA).itmaybearguedthatfurtherconstraintsontariffpolicywoulddo little harm, because it is generally recognizedthatinmanyrespectstariffsarenotthebesttooltopromotestructural transformation, thatdevelopingcountrieshaverarelyusedthisremainingflexibility,andthatthe“tariffwars”ofthe1930samplydemon-stratetheirpotentialharm.However,tariffsremainan important source of fiscal revenues formanydevelopingcountries.Moreover,modulatingthelevelofappliedtariffsmaybeanimportanttoolforsector-specificsupportpolicies,especiallybecausetheSCMAgreementhascircumscribedtheuseofsubsidies,which, inmany instances, have been a preferredinstrumenttosupportstructuraltransformation.

inthiscontext,itisimportanttobearinmindthatstructuraltransformationisacumulativeprocess

inthecourseofwhichaneconomymovesfromonestage of industrialization to another through theestablishmentofnewandmoreproductivemanufac-turingactivities.Successfulexperiencesofstructuraltransformation,asintheRepublicofKorea,pointtotheimportanceofflexibilityinsector-specificpublicsupportpolicies.18Appliedtotariffs,thiswouldimplychanging the sector-specific level and structure oftariffs over time,whilemaintaining considerabledispersionoftariffsacrosseconomicsectors.19

Yet,inadditiontoaimingatfullbindingcover-age,theNAMAnegotiationshavebeenpursuedonaline-by-linebasis,whichimpliestariffcutsinallproductcategories,subjecttosomecountry-specific

provisions, someofwhicharestill under negotiation, and aconsiderable decline in tariffdispersionacrossproducts.Thiscontrasts with the approachadopted during the UruguayRound “when commitmentsby developing countrieswerefor an average level of tariffswithoutanyobligationtoapply

reductions to all tariff lines” (Akyüz, 2005: 6).equallyimportant,thenegotiationshavebeenbasedonusingaformulafortariffreductions,ratherthanthepreviouslyusedrequest-and-offerapproach,withaviewtoreducingmorethanproportionallyhighertariffsandthereforeachievinggreaterharmonizationof industrial tariffs across countries.Attaining thelatterobjectivewouldimplydeepercutsbydevel-opingthanbydevelopedcountries,sincetariffs indevelopingcountriesaretypicallyhigher.indeed,theapproachadoptedformodalitiesofindustrialtariffreductions,ascontainedinthelatestnegotiatedtextofDecember2008, stipulatesan increase inbind-ingcoverageandareductionintariffsaccordingtoasimpleSwiss formula,withseparatecoefficientsfor developed- and developing-countrymembers(WTo,2008).20

This section has shown that theURAshavereducedthepolicyspaceavailabletoWTomemberStates, but also that themultilateral trade regimehaspreservedpolicyspaceinsomeareas.intermsofconstraints,theURAshaveplacedrestrictionsontheimpositiononforeigninvestorsofperformancerequirementsonexports, ondomestic content andon technology transfer, all of which have his-torically been very important in promoting late

WTO members can also continue to use certain subsidies and standards to promote R&D and innovation activities.

Trade and Development Report, 201486

industrialization.Theyalsomakeitmoredifficultorcostlyfordomesticproducerstoundertakereverseengineeringandimitationthroughaccesstotechnol-ogythatiscoveredbypatentorcopyrightprotection.

However,WTomembersretainthepossibilityofusingtariffstoprotectcertainsectors,andhavesomeflexibilityintheuseofbothiPandregulatorymeasuresconcerningFDi.Perhapsmostimportantly,WTomemberscancontinuetousecertainkindsofsubsidiesandstandardsaimedatfosteringstructuraltransformationthatinvolvesthegenerationofnewproductive capacity by helping to promoteR&Dand innovation activities. Some examples of howcountrieshaveusedsuchflexibilitiesarediscussedinsectionC.

2. Regional trade agreements: Additional constraints on policy choices

Since the early 1990s, awave ofRTAs (i.e.regionaltradeagreementswithreciprocalcommit-mentsbetweentwoormorepartners)haserodedaconsiderable degree of policy space thatwas pre-served under themultilateral trade regime.21Thishashappenedbystrengtheningenforcement,elimi-natingexceptionsordemandingcommitmentsnotincludedintheURAs.RTAsalsohaveincreasinglyincorporatedinvestmentprovisions,which,tradition-ally,weredealtwithinseparatebilateralinvestmenttreaties(biTs).Thistrendisreflectedinthedeclin-ing number of new investment treaties concludedsincethemid-1990s,andespeciallytheearly2000s(UNCTAD,2014:115),andagrowingnumberofRTAswith investment provi-sions (Miroudot, 2011).RTAsmay be considered as consti-tutingsteps in thedirectionofso-called “deep integration”− economic integration thatgoeswellbeyondthereductionoreliminationoftariffs,quotasandotherbarrierstotradeattheborder, and coversmeasures such as governmentprocurement,investment,competitionpolicyandthemutualrecognitionorharmonizationofstandards.22

by15 June2014, theGATT/WTohadbeennotifiedofsome585RTAs,ofwhich379were in

force.23ArticleXXiVoftheGATT1994andarticleVoftheGATSpermitRTAsbetweendeveloped-anddeveloping-country partners (North-South agree-ments)withinthemultilateraltraderegime,providedtheydonotraisetheoveralllevelofprotectionagainstnon-participants,liberalize“substantiallyall”tradeingoodsandattainsubstantialsectoralcoverageintradeinservices.TheenablingClauseoftheGATT1979(inparticular,itsparagraph2(c))permitspreferentialarrangementsamongdevelopingcountries (South-Southagreements)ingoodstrade,evenintheabsenceofsuchliberalizationcommitments.ThenumberofSouth-South agreements has grown significantlyoverthepasttwodecades,withaparticularlysharpincreaseduringthe1990s.AccordingtoWToesti-mates,roughly200suchagreementswereinforceworldwidein2010comparedwithonlyabout30in1990(WTo2011:55).

Themeasures included in RTAs are oftenanalysed in terms of whether they are “WTo-plus” (i.e.more stringent than provisions alreadycoveredbythemultilateraltraderegime)or“WTo-extra”(i.e.dealwithprovisionsthatgobeyondcurrentmultilateral trade agreements) (see, for example,Hornetal.,2010;WTo,2011;Düretal.,2013;Kohletal.,2013).24AlargeproportionoftheseagreementsincludeeithertheeUortheUnitedStatesasapartner,andbothhavecometobeidentifiedasthetwomain“hubs” in the pattern ofRTAs,with their variouspartnercountriesbeingthe“spokes”.

Regarding the scope ofRTAprovisions, theevidenceshowsthattheyhavebecomemorecom-prehensiveoverthepast20years(Düretal.,2013),andmanyarenow formallydescribedas compre-hensive economic partnership agreements. it also

seems thatNorth-Southagree-mentsgenerallycontainalargernumberofbothWTo-plusandWTo-extra provisions thaneitherNorth-North or South-Southagreements(WTo,2011).For the inclusion ofWTo-extraprovisionsinSouth-Southagreements,WTo(2011:133)

notes thatsomedevelopingcountriesmayattemptto export their regulatory regimes just as devel-opedcountriesdo.ThismayraiseconcernastotheextenttowhichSouth-Southagreementsfollowanapproachthatprioritizesdevelopment-orientedtradeand investmentpromotion.on theotherhand, the

RTAs have eroded considerable policy space that was preserved under the multilateral trade regime.

Trade and Industrial Policies in an Evolving Global Governance Regime 87

detailedcomparisonofWTo-plusandWTo-extraprovisions inNorth-SouthandSouth-Southagree-mentsinThrasherandGallagher(2008)suggeststhatSouth-Southagreementsmaintainamplepolicyspaceforindustrialdevelopment.However,theseauthorsalsonotethatthegreaterflexibilitiesinSouth-Southagreementsdonotderivefromalackofaffirmativetradedisciplinesbutfromtheattemptoftheseagree-mentstocombinesubstantialtradeliberalizationwithregionalprotectiontopromoteregionalgrowth.

evidence forNorth-South agreements showsthat agreementswith theeU include substantiallymoreWTo-extraprovisionsthanagreementswiththeUnitedStates.However,manyprovisionsinRTAswiththeeUarenotlegallyenforceable,sothat,over-all,provisionsinagreementswiththeUnitedStateswouldappeartobestricter(WTo,2011).25

TariffregulationsarebutoneexampleofWTo-plusprovisions.RTAstypicallydemandreductionsofappliedtariffs,ratherthanrefer-ring to the oftenmuch higherbound rates as in theNAMAnegotiations.Regulatingappliedtariffs results in significantlylower flexibilities in develop-ingcountries’tariffpolicies,inparticularwhenreductionsleadtofreetradeagreements(FTAs)orevencustomsunions.Asec-ondexampleconcernstradeinservices.GATS-plus commit-mentsmaytaketheformofeitherstricterbindingsinsectorsalreadycommittedundertheGATSwithaviewtoguaranteeingaminimumleveloftreatment,or newbindings or commitments.The lattermayresultfromtheadoptionofanegative-listapproach,asusedintheNorthAmericanFreeTradeAgreement(NAFTA),meaningthatobligationsintherespectiveRTAfullyapplytoallsectors,subjectonlytoexplic-itlylistedreservations.bycontrast,someRTAs,suchastheCommonMarketoftheSouth(MeRCoSUR)and theFrameworkAgreementonServicesof theAssociationofSoutheastAsianNations(ASeAN),maintainthepositive-listapproachoftheGATS.

Third, regardingTRiPS-plus commitments,RTAsgenerallyincludemorestringentenforcementrequirementsorprovidefewerexemptions(suchasallowingcompulsorylicensingonlyforemergencysituations).Theyalsoprohibitparallelimports,and

extendobligationstocoveradditionaliPissues(suchaslifeforms,counterfeitingandpiracy)orexclusiverightstotestdata(suchasthoserelatingtopharma-ceuticals).26 Furthermore, theymay containmoredetailedandprescriptiveiPprovisions,andreducethe possibility forStates to tailor their iP laws totheirspecificdomesticenvironmentsoradaptthemtochangingcircumstances.

AfourthexampleisTRiMs-pluscommitments.SomeRTAshavebroadenedthedefinitionofinvest-mentsuchthat theprincipleofnon-discriminationextends to forbiddingexport-performance require-ments, demands for technology and knowledgetransfer, aswell as preconditions concerning thenationalitiesofseniormanagementandpersonnel.RTAsmayalsoextendTRiMsprovisionstocovertaxesandchargesordistributionactivities(suchaswarehousing, unloading, storage and shipment ofgoods).indeed,giventhattheinvestmentchaptersinRTAsoftendrawonpre-existingbiTs,ratherthan

ontheTRiMsAgreement,theirprovisionsmay be consideredWTo-extracommitments(dis-cussedingreaterdetailbelow).27

AfinalexampleofWTo-plusprovisionsinRTAsrelatesto technical barriers to trade(TbTs),whichconcernthecostofadaptingforeigngoodstotheimporting countries’ standardsandtechnicalregulations.While

thelatterinvolvebarrierssuchastestingandcerti-fication,standardsmaybebroadlydistinguishedasapplyingtoproducts,processesormanagementsys-tems,allofwhichhavetheeffectofdiscriminatingbetween thosefirms that respect certain standardsand those that do not. in the context of fosteringstructuraltransformationofthedomesticeconomy,such discriminationmay be considered a benefitfordomesticfirms,asitwouldincreasethecostforforeignfirmstoadapttheiroperationsanddemon-strateconformitywithaviewtopenetratingdomes-ticmarkets.WhileWToagreementsproviderulesforthedesignandimplementationofstandards,aswellasguidelinesandrecommendationsforWTomembers to base theirmeasures on internationalstandards,severalRTAsrefertothemaininstrumentsofliberalizationinthisarea,namelyharmonizationandmutualrecognition(MaurandShepherd,2011).TbTprovisions in existingRTAswith theUnited

North-South agreements contain a larger number of both WTO-plus and WTO-extra provisions than either North-North or South-South agreements.

Trade and Development Report, 201488

Statestendtoincludemutualrecognition,meaningthatcountriesagreetorecognizeeachother’sregula-tions,standardsorconformityassessmentproceduresasequivalent,thusfacilitatingtheunimpededflowofgoodsintopartnermarketseventhoughstandardsmaycontinuetodiffer.

RTAs involving theeU typically prefer har-monization,whichenhancescompatibilitybetweenimported and domestically produced goods, andfacilitatessubstitution(Disdieretal.,2013).TotheextentthatharmonizationrequiresconformitywitheUstandards,thisregion’sfirmswillrealizeecono-miesofscalebygainingaccesstoalargermarketwiththesamestandards.Moregenerally,mutualrecogni-tionandharmonizationmayintroducedefactodis-criminationagainstdevelopingcountries,whichmaylackthecapacityandresourcesrequiredtoachieveconformitywith given technical standards. itwasobserved,forexample,thattheharmonizationoftheeU’selectronicsstandardswithinternationalonesinthe1990sinducedentrybynewUnitedStatesexport-ersbutresultedinawithdrawalof some developing-countryexporters from eUmarkets(Reyes, 2012).Theremay beanadditionaladverseeffectonbothSouth-South exports andon production for a country’shomemarkets,giventhat“oncetheSouthern-basedproducerhasbeenforcedtoadaptitsproduc-tionprocessestoNorthernregu-lations for products bound tothatmarket,itislikelytoadoptthesameprocessesforallofitsproductiontoavoidseparateproductionchains andhigherfixedcosts.WhenthoseprocessesaremorecostlyduetostringentNorthernregulations,onecanexpect theSoutherncountry’stradeflowstobeaffectedwithallpartners”(Disdieretal.,2013:11).

TurningtoWTo-extraprovisions,thesecom-mitmentslargelyconcerncompetitionpolicy,invest-mentandthemovementofcapital.Asmallernum-berofRTAshavealsoextended their coverage toinclude issues such as government procurement,labourmobility28andenvironmentalstandards(Kohletal.,2013).Provisionsrelatingtocompetitionpoli-cyattempttodiluteorpreventtheabuseofmarketpower by requiring commitments to the adoptionand/or application of competition law and closer

cooperation among the competition authorities ofRTApartners.Theareasmostoftenaffectedincludeconcertedactions,abuseofadominantpositionandState aid, but theymay also relate tomonopoliesandState-owned enterprises. For example, provi-sionsmayrequiretheprogressivedismantlingofanyState-ownedcommercialmonopoly,soastoensurethatthereisnodiscriminationbetweennationalsofRTAmembersintermsoftheconditionsunderwhichgoodsorservicesareproducedandmarketed.29Thismayhave asymmetric effects because developingcountriestendtohavemoreState-ownedenterprises,partlyowingtotheabsenceofprivateentrepreneurswilling and capableof providing certaingoodsoressentialservices.

The investment chapters inRTAs generallycombineprovisionsontheprotectionandpromotionofinvestmentwithprovisionsontheliberalizationofforeigninvestment(suchastheprohibitionoflocal-contentandtrade-balancingrequirements),aswellascomprehensivedisciplinesontradeinservices.They

thereby cover rules and com-mitmentsincludedinbiTsand,multilaterally, in theTRiMsAgreement and in theGATS.They serve to facilitate com-pany strategies that combineFDi and trade in internationalproduction networks and lib-eralizetradeandinvestmenttoagreaterextentthanisdoneatthemultilaterallevel(Miroudot,2011).Animportantreasonforthe wider coverage of these

commitmentsistheirapplicationoftheprincipleofnon-discrimination to foreign investors, combinedwithabroad,asset-baseddefinitionofinvestment.inadditiontoFDi,thelatteralsocoverssometypesof portfolio investment, such as equities and realestate,andinsomeinstancesevenextendstoiPRs(Fink,2011).30

Moreover, severalRTAs include investmentprovisions that cover both the pre-establishmentphase(i.e.marketaccess)andthepost-establishmentphase (i.e. protection of investment, including inthe event of nationalization or expropriation, andthe rightof temporary entryofmanagers andkeypersonnelofaforeigninvestor).Therulesalsopro-videforastandardoffairandequitabletreatment,which,contrarytotherelativestandardsofnational

WTO-extra provisions largely cover competition policy, investment and capital movement, but some also cover government procurement, labour mobility and environmental standards.

Trade and Industrial Policies in an Evolving Global Governance Regime 89

and third-countryMFN treatment, is an absolutestandardthatconferstherighttoacertainminimumleveloftreatment.Someofthemalsoprovidefortheunrestrictedflowoftransfers,includingallkindsoffeesandreturnsoninvestment.

Another key commitment concerns disputesettlement.While traditional tradeagreementsfol-low the paradigm of State-to-State resolution ofdisputes,someRTAs(i.e.thosefollowingtheNAFTAapproach) include an investor-Statedispute settle-mentmechanism.The latter feature, common ininvestmenttreaties,allowsforeigninvestorstoseekcompensationforperceiveddamagesresultingfrommeasuresimplementedbyhostgovernments, typi-callythroughtheinternationalCentreforSettlementofinvestmentDisputes(iCSiD).31

TheinclusionofinvestmentchaptersinsomeRTAsalsoimpliesthattheseprovisionsgovernthemovementofcapitalunderanegative-listapproach.ThisextendsbeyondWToprovisionswherecapitalflowsaretreatedunderthepositive-listapproachoftheGATS.besides,mostRTAsdonotprovideexcep-tionsinthecaseofseriousbalance-of-paymentsandexternalfinancingdifficulties(asallowedmultilater-allyinarticleXiioftheGATS).32

With regard to government procurementpolicies,RTAs generally address social, environ-mental and national security concerns, aswell asissues related to goodgovernance, but, historical-ly, they have also been used to support industrialand regional development.Government procure-mentisexcludedfromthenationaltreatmentobli-gationofGATTarticleiii(8)(a),andoftheGATS,thoughthelattercallsformul-tilateralnegotiationsongovern-ment procurement in services.Thismeans that at themulti-lateral level, government pro-curementpoliciesaregovernedonly by theWToAgreementonGovernment Procurement(known asGPA)− a plurilat-eral agreement that currentlycoversonly42WTomembers(includingthe27memberStatesoftheeU),mostofwhicharedevelopedcountries.However,someRTAsaffectnon-GPAsignatoriesthroughprovisionssuchasreciprocityandtransparency,andmayevenextendto non-discrimination.The latter implies granting

partnercountries’firmsaccesstocontractawardpro-ceduresonconditionsnolessfavourablethanthoseaccordedtofirmsfromanyothercountry.Suchpro-visionswouldbeviolated,forexample,through“buynational”provisionsinfiscalstimuluspackages,aswereusedbymanycountriesin2008–2009,unlessthegovernmententitiesadministratingsuchstimulusprogrammesremainoutsideGPAcoverage.33

3. The rising restrictiveness of policy commitments and international production networks

(a) Why developing countries engage in RTAs

Fromtheabovediscussion,thequestionarisesas towhy developing-country governments con-tinuetoenterintoRTAsdespitetheexistenceofamultilateraltraderegimethatsupportsinternationalcooperationandlimitstheopportunitiesforbeggar-thy-neighbourpolicies.Thisquestionbecomesevenmorepertinentgiven that,by signingRTAs, thesegovernments relinquish someof the policy spacethey have been strugglinghard to preserve at themultilaterallevel.

The economic literature has discussed sev-eralmotives thatmay induce developing-countrypolicymakers to sign RTAs.one is to enhancepolicy predictability. For example,more liberal-mindedgovernmentsmightseektoengageinRTAswith a view to tying the hands of future govern-

ments that are perceived asbeingmoreeasilyinfluencedbydomesticinterestgroupslobby-ing for protection (Maggi andRodriguez-Clare,1998)orthathavedifferentideologies.RTAsmayalsobeconsidereda fall-backoptionincasemultilateralnegotiationsarecaughtinapro-longedstalemate.Additionally,policymakersmaywishtosta-

bilizeandsecurethepreferentialmarketaccessthatdevelopedcountrieshavegrantedthemunilaterallyandtemporarilythroughtheGeneralizedSystemofPreferences(GSP)andrelatedprogrammes(MangerandShadlen,2014).34

By signing RTAs, developing-country governments relinquish some of the policy space they have been struggling hard to preserve at the multilateral level.

Trade and Development Report, 201490

Further,theremaybea“dominoeffect”,withtheproliferationofRTAsincreasingthelikelihoodof furtherRTAsbeing formedasa resultof somegovernmentsfearingexclusionwhenothercountriesgain preferentialmarket access andbecomemoreattractive as destinations forFDi (baldwin and Jaimovich,2012). This is related to theemphasisonexportpromotionasadevelopmentstrategy thatmakessecuringandincreasingaccess to developed-countrymarkets, including relative tootherdevelopingcountries,almostanendinitself.ontheotherhand, thesizeablereductionofMFNtariffshasledtoverylowlevelsofappliedtariffs,andappliedMFNrateshavebeenreducedtozeroformany tariff lines.At the same time, thewaveofpreferentialtradeagreementshasallowedaverywiderangeofcountriestoenjoypreferentialaccess,furthererodinganycountry’spreferencemarginoverothercountries.Hence, fromaglobalperspective,theimportanceoftariffpreferenceshasbeengreatlyreduced(FugazzaandNicita,2013).

However, these factors cannot fully explainwhythewaveofRTAshasbeenaccompaniedbyanincreasingnumberof provisions that lead todeepeconomicintegrationwhichextendsbeyondbordermeasures such as tariffs. Such provisions includeawiderangeofdomesticpoliciesandregulations,particularlythosethatprotecttangibleandintangi-ble assets (such as foreign capital and intellectualproperty), facilitate the coordination of dispersedproductionactivities(suchastheflowofinvestment,know-how and people), and govern product andprocessstandards.Developing-countrypolicymakersmaywellbelievethatlockinginpreferentialmarketaccessisnecessaryinexchangeforpolicyandregula-torycommitmentsseeminglyrequiredforattractingFDiandforenablingtheirfirmstojoininternationalproductionnetworks.

empiricalevidenceonthelinkbetweenRTAsandinternationalproductionnetworksindeedshowsthattwocountriesthatalreadyengageintradewithinproductionnetworksaremorelikelytosignadeepRTA.This is a prominent feature in agreementsof developed countrieswith developing countriesin east and South-eastAsia, the regionwhereinternational production sharinghas increased thefastest(oreficeandRocha,2014).Relatedempirical

evidenceforbiTsandinvestmentchaptersinRTAsthatregulatethetreatmentofFDi,“whoseprotectionisacoreelementofthepackageusedbymanydevel-opingnations to join international supply chains”(baldwin,2014:31),showsthatthestrictestinvest-

mentprovisionsareoftensignedbydevelopingcountriesundereconomicallyweak conditionsinthehopethatincreasedFDiinflowswill help resolve theireconomicproblems(Simmons,2014).butwhiletheempiricalevidence that such provisions

areeffective instimulatingFDi isambiguous, themoregeneraltrendtowardsagreementswithstricterinvestmentrulesisdrivenbycompetitivediffusion;that is,defensivemovesonthepartofdevelopingcountries concerned that FDiwill be diverted tocompeting host countries. importantly, contagionmayalsohelpexplaintheincreasingseverityofpro-visions,withdevelopingcountriescaughtinaracetoconcludenotonlymoresuchagreementsbutincreas-inglymorestringentones(Neumayeretal.,2014).

(b) Tendencies towards further reductions of policy space

Theonsetoftheglobalcrisisandtheensuingcollapse in global trade in 2008–2009 promptedvarious attempts to document changes in tradeandinvestmentpolicymeasures.inpartthiswasaresponsetowidespreadfearsthattheGreatRecessionwouldleadtoasharpincreaseinprotectionismandwouldcausefurtherfragmentationoftheworldtraderegime, aswell as a sharper decline of economicactivityandaslowertrade-relatedrecovery.itwasalsofeltthatdocumentingthechangescouldincreasetransparencyrelatingtotheadoptionoftrade-relatedpolicymeasures thatmaymake the inclusion ofdeveloping-countryfirmsininternationaltrademoredifficult.

ThefearthattheGreatRecessionwouldtrig-gerasharpriseinprotectionismwasbasedonthecomparisonoftenmadebetweentheGreatRecessionandtheGreatDepressionthatstartedin1929,whichledtoawaveofprotectionismduringthe1930saspartofmoregeneralbeggar-thy-neighbourpolicies(seechapteriVandeichengreenandirwin,2010).Successive declarations byG20 leaders sought toallaythisfear,startingattheWashingtonsummitin

Empirical evidence that strict investment provisions stimulate FDI is ambiguous.

Trade and Industrial Policies in an Evolving Global Governance Regime 91

November2008,wheretheleadersdeclaredthattheywouldmaintainopentradeandinvestmentregimesandeschewprotectionism(withthequalifier“inallitsforms”addedatthelosCabossummitinNovember2012).They also proposed the establishment of a(non-binding)monitoringmechanism.

evidenceshowshardlyanyincreaseinindus-trialtariffs,eventhoughalargenumberofcountries,and especially developing countries, could haveused their so-called “tariff binding overhang” toraiseappliedtariffsbyfairlywidemarginswithoutviolating theirWTo commitments (baldwin andevenett,2012).itisdebatablewhetherpolicymakersvoluntarilyrenounceduseofthispolicyoptionthatisstillavailabletothembecausetheyfoundWTocom-mitmentssufficientlypersuasive,orbecausemanycrisis-hit countries had the possibility to let theircurrenciesdepreciate,contraryto the 1930swhen this optionwasnotavailableforcountriesunlesstheyabandonedthegoldstandard.inanycase,economichistorianshavelongpointedoutthat economic crisesgenerallyspark innovative policymeas-ures, implying a divergencein the character of pre- andpost-crisisprotectionisms.The1930s, for example,witnessedasubstantialresorttovoluntaryexportrestraints,implyingthatdocumentationoftradepolicymeasuresconcentrat-ing on traditional instruments, such as tariffs andquotas,wouldhavemissedtheshifttoprotectionism(eichengreenandirwin,2010;evenett,2013a).

Therehavebeenvariousattemptstoassessdif-ferentcountries’useoftradeandinvestmentpolicymeasuresinresponsetothecrisisinordertoevaluatetheextenttowhichsuchmeasuresmayhavewors-enedtherelativetreatmentof“foreigncommercialinterests”.TheGlobalTradeAlert(GTA)findsthatinthisrespect,France,Germany,italyandtheUnitedKingdomareamongtheworld’s10mostprotectionistcountries(evenett,2013b).35Moretraditionaltradepolicymeasuresliketariffincreasesandtradedefencemeasures (such as anti-dumping policies) haveaccountedforlessthanhalfofallrecordedactions.

evidencefromdevelopingcountries,particularlyinAsia,suggeststhatthosecountriesthathavelowerlevelsoftariffbindingoverhangshaveused“non-traditional”policies,suchasbailouts,morethanothercountriesthathavetendedtoemploytariffincreasesand trade defencemeasures.However, countriesthathadundertaken the largest tariff reductions inthepre-crisisperiodtendedtoadopttradedefencemeasures, rather than reversing those tariff cuts.ontheotherhand,countriesthatwereabletoadoptlargerfiscal stimulus packageswere less likely touse someof these trade and investmentmeasures(evenett,2013bandc).

Theverybroadcharacterizationof“murkypro-tectionism”intheGTAisproblematic,sinceitalsoincludesseveralmeasuresthathaveanimportantpub-licpolicypurpose,notonlyforpromotingfinancial

stabilityandpreventingdrasticdeclines in employment, butalsoforbuildingdomesticpro-ductivecapacityandprotectingconsumers.Theseincludehealthandsafetyregulations,stimuluspackages that earmark publicspendingfordomesticproducts,bank bailouts, industrial andinnovation policies, andmanyotherpoliciesthatdonotviolateanycurrentinternationalagree-mentsorotherlegalprovisions.Some of thesemeasures have

playedimportantrolesinallowingdevelopingcoun-triestorecoverfromtheglobalcrisisandtocontinuetheirprocessofstructuraltransformation.Moreover,theGTA’sassessmentsoftheimpactofthesemeas-ures rely entirely on subjective judgement.ThecombinationofthesefactorsraisesseriousquestionsabouttheGTA’ssometimesalarmistconclusionthatprotectionismhasincreasedoverthepastfiveyears(evenett, 2012and2013b).More importantly, thecloserelationshipbetweenthemeasuresdenouncedas“protectionist”bytheGTAanditsrecommenda-tions onhowpolicymakers should embarkon the“fastroute”toindustrializationbyincludingdomesticfirms in international production networks, risksgivingsuchassessmentsundueprominenceontheagenda of trade negotiations in the future.36ThisrelationshipisaddressedinsectionD.

Characterizing some recent trade and industrial policy measures as “murky protectionism” is problematic, since several of those measures have an important public policy purpose.

Trade and Development Report, 201492

inrecentyearstherehasbeenaglobalrevivalofinterestinindustrialpolicy.Anumberofdevelopingcountries, including the largest ones, have reas-sessedthebenefitsofindustrialpolicyforstructuraltransformationandeconomicgrowth.infact,coun-triessuchasbrazil,ChinaandSouthAfricaneverreallyabandonedtheuseofpolicymeasuresaimedatacceleratingindustrialization.instead,overthepastdecadeorso,theyhaveevenadoptednewinitiatives.Someoftheseinitiativesmaybeseenasaresponsetothevariousfinancialshocksthathitanumberofdevelopingcountriesattheendofthe1990sandattheturnofthemillennium,whileothersmayhaveresulted fromagrowing recognition that thepoli-ciesassociatedwiththeWashingtonConsensushadfailed to deliver structural transformation (TDR 2003).Yetothersmayhavebeenpromptedbythesharpincreaseincommoditypricesthatstartedaround2002–2003,raisingfearsofprematuredeindustrializationinsomedevelopingcountries.

Reassessmentsofthepoten-tialbenefitsofindustrialpolicyhavenotbeenlimitedtodevel-oping countries only.Manydevelopedcountrieshavebegunto explicitly acknowledge theimportant role that industrial policy can play inmaintainingarobustmanufacturingsector,withtheassociatedbenefitsintermsofproductivitygrowth,innovationandemploymentcreation.Thishasbeenthe case especially following the global financialcrisis and theGreatRecession,when developedcountrieswhoseeconomiesarebasedmainlyonser-vices–suchastheUnitedKingdomandtheUnitedStates – appeared to bemuchmore vulnerable to

adverseexternalshocksthanmostofthosethathaveasizeablemanufacturingbase.

There is no generally accepted definition ofindustrial policy.This could bemainly becauseindustrialpolicyhasbeenbasedonawidevarietyofeconomicperspectiveswithdifferentrationales,targetsandscopes,andrelianceonadiversemixofpolicymeasures(see,forexample,Salazar-Xirinachsetal.,2014).However,thereisprobablyageneralconsensus that “industrial policy is basically anytypeofselectiveinterventionorgovernmentpolicythatattempts toalter thesectoral structureofpro-duction toward sectors that are expected to offerbetter prospects for economic growth thanwouldoccur in the absence of such intervention” (Pack

and Saggi, 2006: 2).Usually,measuresaimedatdiversifyingthe production structure andcontributingtocreatingcapaci-tiesinneweconomicsectorsorin new types of activities arepart ofwhat is called “verti-cal” or “selective” industrialpolicy.37Thesemeasuresincludesupport in the formof sector-specific subsidies, tariffs andinvestment-relatedperformancerequirements that have gener-

allybeenassociatedwithsuccessfulindustrializationineastAsia,wheretheyhavebeencombinedwithcontrolmechanisms, such as export requirements(TDRs 1996 and 2006).Theyalsoincludemeasuresthattargetvariationsindifferentsectors’potentialtogenerate,absorbandcommerciallyuseknowledge,and, inparticular, their potential tohelp countriescatchupwith (and thenpushbeyond) the techno-logicalfrontierthroughdirectsupportforinnovation

C. Industrial policy in an era of reduced policy space

Many developed countries have acknowledged the important role of industrial policy in maintaining a robust manufacturing sector, and in boosting productivity growth, innovation and employment creation.

Trade and Industrial Policies in an Evolving Global Governance Regime 93

andlearning.examplesofsuchmeasuresincludetheestablishment of national innovation systems andimprovementsineducationandvocationaltraining(Nübler,2014).

it is the use of this formof industrial policythathasbeenthemostconstrainedbytheincreas-ingnumberofrulesandregulationsininternationaleconomicgovernance.However,constraintdoesnotimplyinterdictionandtheremainderofthissectionprovides country-specific examples of industrialpolicymeasures. it begins by discussing how theUnitedStatesandtheeUhavetriedtofostertheirmanufacturingsectors.itthenlooksatthemeasurestakenbydevelopingcountries,whichcombinecrea-tivemarketforceswithStateactivities topromotemanufacturingandraiselivingstandards.

1. Recent proactive policies for reindustrialization in developed economies

(a) United States: Multiple initiatives of a vertical industrial policy

TheUnitedStatesisoftenportrayedasacountrythattakesahands-offapproachtoindustrialpolicy.However,severalauthorshaverecentlyarguedthattheUnitedStateshasconsistentlypursuedanindus-trialpolicywithaviewtomaintainingastrongmanu-facturingbaseandsecuringthecountry’sglobaltech-nological leadership. in recentyears,UnitedStatespolicymak-ershavenotfocusedonthefor-mulationofnationalvisionsandnationalprogrammesbycentral-ized coordination agencies todevelopspecificindustries,eventhough thishasbeen themod-elfollowedattimesinthepast(Kozul-Wright,1995;Rohatyn,2009).Rather, theyhave usedamoredecentralizedapproachwherein a variety of Federal andState-led initia-tivesandprogrammeshavelentsupporttostrategicindustries, both traditional and emerging (Ketels,2007;block,2008;SchrankandWhitford,2009;DiTommasoandSchweitzer,2013;Mazzucato,2013;Wade,2014).

Assuch,twooverlappingelementshavechar-acterized industrialpolicy in theUnitedStates, sothatitisviewedbothasan“entrepreneurialState”anda“coordinatingState”.Asan“entrepreneurialState” it acts as a leading risk taker andmarketshaper in the development and commercializationof new technologies that are considered essentialforthecountry.byfundingveryriskyresearch,the“entrepreneurialState” reduces the risk to privateinvestors,thusmakingitindispensableasanenablerofsignificant innovation.According toMazzucato(2013),intheUnitedStates,theStateistheprimarysourceoffundingintheearlystagesofinnovation,withthepublicsectoraccountingforover50percentofspendingonbasicresearch,comparedwithlessthan20percentbytheprivatesector.Thistypeofpublicinvestmentcoversdifferenttypesofresearch,muchofwhichhasparticularlyuncertainprospectsintermsofreturns.38

Asa“coordinatingState”itcreatesandmanagesnetworksbetweenthedifferentactorsininnovationsystems(e.g.firms,financialandresearchinstitutionsandpublicsectorfunds),aswellaswithinorganiza-tions and institutions. it thereby encouragesfirmsofdifferenttypestobeembeddedinadecentralizedsystemofinnovationspanningthesectoral,regionalandnationallevels.39Giventhisnetworkcharacterof industrialpolicy, and theassociatedabsenceofasingleagency thatwouldberesponsiblefor thatpolicy,thiskindofStateactioninpursuingindus-trialpolicyhassometimesbeencalled“thehiddendevelopmental state” (block, 2008; Schrank andWhitford,2009).

The onset of the GreatRecessionheraldedtheadoptionofawiderangeofmorevisiblepolicies having the commonobjectiveofbringingaboutthe“renaissanceofAmericanmanu-facturing” (Sperling, 2012).Thesemeasuresarenotusuallyspecified as being part of anindustrial policy, because theirimmediate objective is to pre-

vent bankruptcies and large-scale unemployment.However,many of them target domesticmanu-facturingbecauseof itscrucial role in innovation,exports and the creation ofwell-paid jobs,whichmakes “manufacturing an essential component ofacompetitiveandinnovativeeconomy”(Sperling,

The United States can be viewed both as an “entrepreneurial State” and a “coordinating State” in the way it conducts industrial policy.

Trade and Development Report, 201494

2012:1).Theselong-termmeasuresmaybeconsid-eredpartofabroaderstrategyadoptedtoforestalltheperceivedriskofthecountrylosingitspositionasaglobaltechnologyleader,aswellastocorrectstructural problems in theUnitedStates economythatwererevealedbythecrisis,suchasthedeclineintheimpor-tanceofmanufacturingwithitsassociated adverse impacts onemployment (Sperling, 2013;Warwick,2013).40

Theinitiativesthatdirect-ly address concerns about theUnited States’ loss of globaltechnological leadership have twomain compo-nents.41The first includes a range ofR&Dpro-grammeswhich are grouped under theAdvancedManufacturingNational Programmewhose keyelementistheNationalNetworkforManufacturinginnovation(NNMi).Thisnetworkconsistsofregion-almanufacturinginstitutionswhicharepublic-privatepartnershipsdesignedtobringtogetherthebesttal-entsandcapabilitiesfromitsthreepartners(industry,academiaandgovernment,notablytheMinistriesofDefenceandenergy).42

ThesecondcomponentistheAmericanRecoveryandReinvestmentActof2009,whichisendowedwithabout$800billiontobespentovertheperiod2009–2019.The immediate objective of this economicstimuluspackagewastosmooththeadverseeffectsoftheGreatRecession.butitslongertermgoalistouseverticalindustrialpolicymeasurestostrengthenthe domesticmanufacturing sector and encourageitsstructuraladjustmenttobet-terwithstandinternationalcom-petition. For example, theActallocated funds to re-start theproductionofadvancedbatterieswiththeobjectiveofincreasingits share in global productionfrom2percentin2009to40percent in2015 (Sperling, 2012).Thisispartofthemoregeneralobjectivesof(i)repat-riatingoffshoremanufacturingactivitiesbacktotheUnitedStatesbasedon thenotion thatgeographicproximityofproductionanddesignactivitiesfacili-tatesthetaskofengineerstosolveproblemsbroughttothembytechniciansonthefactoryfloor,andhencestrengthensthelinkbetweenmanufacturingandinno-vation;and(ii)promotingcleanenergyindustries,

suchaswindandsolarpower,aswellasmorefuel-efficientvehicles. in the samevein, thebailoutofGeneralMotors andChrysler, using theTroubledAssetsReliefProgram(TARP)had the immediateeffectofsavingthousandsofjobsandreducingthe

adverse impacts of theGreatRecession. However, entitle-menttothesefundswastiedtoenvironmental considerations,such as commencing produc-tionofmorefuel-efficientvehi-cles,andthushelpedtoaddressbroader sectoral restructuringconcerns.inaddition,in2009,the environmental Protection

AgencyallowedCaliforniatoimposetougheremis-sionstandardsforcars(brunelandHufbauer,2009),andtheGeneralServicesAdministrationannouncedthat itwoulduse fundsunder theAct topurchase$300millionworthofenergy-efficientandalternativefuelvehicles,43inlinewiththeAct’smoregeneralbuyAmericanProvision.

Taken together, thesemeasures reflect theUnitedStatesGovernment’s support for industriesthatwerehitparticularlyhardbytheglobaleconomicslowdown,and,moregenerally,foractivitiesintend-edtoassistUnitedStatesenterprisesincompetingininnovativesectors.However,thequestionarisesastowhethersuchsupportiscompatiblewithmulti-lateraltradeandinvestmentprovisions.inparticular,supportunderthebuyAmericanProvisionmaybeconsidered a prohibited subsidy under the SCMAgreement.Similarly,thebailoutoftheautomobileindustryundertheTARPmayconstituteasubsidy

undertheSCMAgreement,giv-enthattheenvironment-relatedprovisionsunderarticle8oftheSCMAgreement regarding anon-actionable subsidy lapsedfiveyearsaftertheAgreement’sentryintoforce(i.e.on1January2000).However,itmaybejusti-fiedundertheGATTarticleXX

duetotheenvironmentalconditionsattachedtothesemeasures,which,itcouldbeargued,“relateto”theconservationofanexhaustiblereserve.44

However, it shouldbepointedout thatWTorulesandcommitmentsonlycarrythethreatofsanc-tions.Anyeventual impositionbytradingpartnersofretaliatory tariffsorothermeasuresdependson

The United States has skilfully used the policy space not circumscribed by the URAs to support its manufacturing sector …

… and the vertical nature of its industrial policy has helped attain at least some of its objectives.

Trade and Industrial Policies in an Evolving Global Governance Regime 95

theactualdamage.Aslongasthedamagecausedbytheinfringementofrulesissmall,aWTomemberStateisunlikelytoinvoketheDSMandinitiatetheimposition of sanctions. invoking theDSMwillalsobeunlikelyifdeterminationoftheactualdam-agecausedisdifficulttoestablish,andalsobecauseseveralcountriesaresimultaneouslyadoptingsimilarmeasuresforsimilarobjectives.Forinstance,awiderangeofcountrieshaveadoptedmeasuresdesignedtosupporttheirautomobileindustries.45inanycase,theaboveexamplesshowthattheUnitedStateshasskilfullyusedthepolicyspacenotcircumscribedbytheURAstosupportitsmanufacturingsector.Theyalsoshowthatthecountryhasemployedanindustrialpolicy,andthatitsverticalnaturehashelpedattainatleastsomeofitsobjectives.

(b) European Union: Limited effectiveness of a horizontal industrial policy

FosteringindustrialproductionhasbeenamongthemajorpolicyobjectivesofeuropeaneconomicintegrationsincetheendoftheSecondWorldWar.Nonetheless,therelatedscope,instrumentsandinsti-tutionalsetupshavevariedsignificantlyacrosscoun-triesandoverthecourseoftime.Fosteringindustrialdevelopmentthroughsector-specificmeasureswaspursued energetically during post-war reconstruc-tionunder the auspices of theMarshallPlan, andcontinuedwell into the 1970s through variousnational and regional initiatives (eichengreen andKenen,1994). in the early1980s,manycountriesadopted liberal policy agendas that considerablylimited the scopeof proactivegovernmentmeasures (GrabasandNützenadel, 2014;owen,2012). in 1990, theeuropeanCommissionoutlineditsindus-trialpolicy,whichwasthefirsttimeacommonindustrialpoli-cyapproachwasadoptedforthetheneuropeanCommunityasawhole(europeanCommission,1990).46Thegeneralaimofthisapproachwas to improve thecompetitiveness of europeanindustry and speed up indus-trial adjustments to structural changes, includingthroughinnovationandtechnologicaldevelopment.Theemphasiswasmicroeconomic(i.e.usingenter-priseandcompetitionpolicies),andpredominantly

horizontalinthatitfavouredthecreationofgeneralconditions for entrepreneurs and business under-takings, particularly small and medium-sizedenterprises.47

Variousstrategieshavebeenadoptedtoensurebetterframeworkconditionsforeuropeanindustry.ThelisbonStrategy, adopted in2000, formulatedsomequantitativegoalsat thenational level(suchas augmentingR&D expenditure to reach 3 percentofgrossdomesticproduct (GDP)),but ithasgenerallybeenconsideredafailureintermsofmeet-ing itsmultiple goals of increasing productivity,employment and convergence across themembercountries(e.g.TilfordandWhyte,2010;CopelandandPapadimitriou,2012).Theeurope2020Strategyimplemented since 2010has objectives similar tothoseof recent initiatives in theUnitedStates, asit refers to strengthening innovation and creatingexportsandjobs,butitplacesgreateremphasisoncost-related “competitiveness”.TheHorizon2020Programmeintroducedin2014includescomplemen-taryandmoretargetedmeasurestofosterinvestmentin innovation, such as €80 billion earmarked forresearch and innovation to support key enablingtechnologies48 with a view to redefining globalvalue chains and enhancing resource and energyefficiency.49TheProgrammealsofinancesprototypesanddemonstrationprojectsinordertofacilitatecom-mercializationofinnovations.

Despite thesemeasures,eU industrial policyremainslesscomprehensivethanthatoftheUnitedStates.budgetallocationsappeartobetoosmallto

effectively overcome not onlyshort-termconstraintsongrowthbut also longer term efforts toboostinnovation.limitedfund-ing for programmes is likelyto result in a smaller stock ofknowledge and fewer innova-tionsthatcouldbecommercial-ized, comparedwith themuchlarger resources dedicated toinnovationintheUnitedStates.Furthermore, using only hori-zontal industrial policymeas-ures,withoutaccompanyingver-

ticalmeasures,asintheUnitedStates,mayimpedeachievementofthedeclaredobjectiveofmaintainingastrongmanufacturingbaseineurope.50However,theadoptionofmorespecific−vertical−support

EU intergovernmental agreements illustrate how the policy choices of national policymakers can be constrained and how horizontal measures alone are insufficient in the pursuit of industrial policy objectives.

Trade and Development Report, 201496

measuresmay not be possible under current eUlegislation.Forexample,inresponsetothebailoutoftheautomobileindustryintheUnitedStates,sev-eraleUmemberStatesadoptedmeasuresinfavouroftheirownautomobileindustries.Suchmeasuresmaybeinconflictwitharticle107oftheTreatyontheFunctioningoftheeU,whichstipulatesthat“anyaidgrantedbyaMemberState…whichdistortsorthreatenstodistortcompetitionbyfavouringcertainundertakingsortheproductionofcertaingoodsshall…beincompatiblewiththeinternalcommonmar-ket”.However,therecentglobalfinancialcrisiscouldbe considered a special eventthatmay require greater flexi-bility in applying these rules.Paragraph3ofarticle107,whichreferstotheexistenceofa“seri-ous disturbance in the econo-my”,ensuresthatsuchflexibilitywould remain temporary andexceptional.51Suchexemptionsareunlikely tobemade in thefuture, because, according tothecurrenteuropeanGuidelinesonRestructuringAid(europeanCommission,2004:paragraphs 72 and 73), the granting of rescue orrestructuring aid is a one-off operation and can,inprinciple,begrantedonlyonceevery10years.Moreover,initsnewdraftguidelinesonStateaid,theeuropeanCommission considers that “rescueandrestructuringaidareamongthemostdistortivetypes ofState aid” (europeanCommission, 2013:paragraph6).

TheeUsituationillustrateshowintergovern-mentalagreementscanconstrainthepolicychoicesofnationalpolicymakers,andhowindustrialpoliciesthat are limited to theadoptionofonlyhorizontalmeasuresmayhamperachieving theobjectivesofthosepolicies.Further,giventheseconstraintsandlimitations,eUpolicymakersmaybelieve that, inorder tomaintainahealthymanufacturingbase, itwillbenecessarytoincreaseexportstodevelopingcountries.HencetheUnion’scommoninternationaltradepolicy−whichisonekeypolicyareaforwhichCommunityinstitutionshaveexclusiveresponsibility−andtheassociatedobjectiveofcontinuedmarketopeningindevelopingcountriesmayendupplay-ingacrucialroleinplansforthereindustrializationofeurope.

2. Developing countries: Recent experiences with national policies for industrial development

Theextensiveuseofproactivetradeandindus-trialpoliciesinthesuccessfultransformationofeastAsian economies has been discussed at length inpreviousTrade and Development Reports (in par-ticularTDRs1994, 1996and2003)andelsewhere(e.g.Akyüzetal.,1998;Worldbank,2005a;Chang,2011).However, the nature and scope of recent

industrial policies in develop-ingcountrieshavebeenstronglyaffectedbychangesintheglobaltradeandeconomicgovernanceregimeswithwhichtheirpoliciesmust conform.Most importantamong such changes has beenthe accession of various coun-triestotheWToand/ortheirpar-ticipationinRTAs.Atthesametime, developing-country poli-cymakershavesoughttoadjust

theirindustrialpoliciesinresponsetostructuralvul-nerabilities thathavesurfaced in theireconomiesattimesofchangeintheglobaleconomicenvironment,includingeconomiccrisesandchangesintheircoun-try’stermsoftrade.Thissectiondiscusses,throughcountry-specificexamples,howsuchchangeshaveaffected various countries’ policymix, especiallysincetheturnofthemillennium.

improvementsinthetermsoftradeofecono-mies that have benefited from higher globalcommoditypricessincetheearly2000sisonefac-torthathassparkedincreasedinterestinindustrialpolicy.Soaringcommoditypricesandtheassociatedstrongimprovementsinthetermsoftradeofnatural-resource-richcountriesfacilitatedtheirattemptstoimprove theirmacroeconomic policy stances andfiscal accounts.However, this should not lead tocomplacency in thedesignofdevelopment strate-giesinthesecountries.Theirmainchallengeremainsthat of appropriating a fair share of the resourcerents(seealsochapterViiofthisReport),avoidingan appreciation of the real exchange rate,whichwouldweakenthecompetitivenessoftheirtradablemanufacturingactivities,andchannellingrevenuestowardsinvestmentintherealeconomyinorderto

The nature and scope of recent industrial policies in developing countries reflect changes in the global trade and economic governance regimes with which their policies must conform …

Trade and Industrial Policies in an Evolving Global Governance Regime 97

spurdiversificationandupgradingoftheirproduc-tionandexports.Diversificationandindustrializationarethebestmeansinthelongrunforcountriestoreduce theirvulnerability to theadverseeffectsofcommoditypricevolatilityandunfavourablepricetrends.Accelerating themovementof labourfromlow-productivity activities in the primary sectortowardshigh-productivityactivitiesinmanufactur-ingboostsoverallproductivityandincomegrowth.Meetingthechallengeofdiversificationrequiresahighlevelofinvestmentandthecreationofavirtu-ous link between trade and capital accumulation.Policymakerscouldgreatlyfacilitatetheseeffortsbypursuinganindustrialpolicythatsupportstheprivatesector in identifyingandexpandingactivitieswithgreatervalueadded,aswellassectorswithpotentialformorerapidproductivitygrowth,alongwiththeproductionofgoodsforwhichdemandelasticitiesinworldmarketsarehigher.inparticular,suchmeasureswouldhelpreversethetrendof labourflowsfromhigh to lowproductivity sectors observed for theperiod1990–2005 inAfrican andlatinAmericancountries,most ofwhich have abundant naturalresources(McMillanetal.,2014).

in2004,brazilestablishedanewinstitutionalframeworkforindustrialpolicythroughtheadoptionofthreesetsofpoliciesaimedatincreasinginvest-ment,innovationandinternationalcompetitivenessofitsmanufacturingactivities,aswellasofitsenergy-relatedindustries.ithasprioritizedthedevelopmentof key industries and sectors,of companies that succeed as“national champions”, and ofinfrastructure projects, in partthroughpublic-privatepartner-shipcouncils.Theprovisionoflong-terminvestmentfinancingthroughthecountry’sdevelop-mentbank(bancoNacionaldeDesenvolvimentoeconômicoeSocial,bNDeS)hasbeenanimportantinstrumentforimplementationofthesepolicies.Forexample,thebNDeShasprovideddirectfinancialsupporttolarge-scaleindustrialandinfrastructureprojectsaswellassupportfortheexportofcertaingoodsandservices (Ferrazet al., 2014). inorder topromoteeconomicupgradinginbrazil,thebNDeShasbeensupportingtheautomotive,informationtechnology,aeronautics and petroleum sectors through loans,long-termandequityfinancing,guarantees,grantsandcreditinsurance.Unlikeseveralotherdeveloping

countries,brazil has not signed on to anyRTAs,whichgivesitgreaterflexibilityinpromotingsuchactivitiesthroughitsdevelopmentbank.

inSouthAfrica,theconvictionthatthecountrycouldnolongercontinuetorelyasheavilyasinthepast on traditional commodities and non-tradableservices as the basis for its growth and develop-mentledtotheadoptionoftheNationalindustrialPolicyFramework in 2007 (Department ofTradeandindustry,2007:10).Asaresult,arangeofbothhorizontalandverticalmeasureswereimplemented,suchassector-specifictariffchangesandfiscalincen-tives,withaviewtointensifyingtheindustrializationprocessandmakingitmoreinclusive.However,theadoptedmeasures have yielded somewhat fewerbenefits than expected, partly because industrialpolicywasnotproperlyalignedwiththecountry’sbroadermacroeconomicframework,andtherewereinsufficientlinkagescreatedbetweenmegaprojectsand smaller enterprises operating upstream anddownstream(Zalk,2014).

Theconstraintsonacountry’spolicychoicescausedbyitsaccessiontotheWTomaybeillustratedbytheexperienceofVietNam.52VietNamgainedWTomembershipinJanuary2007,whichintensifiedits shift froman import-substituting to an export-promotionstrategy.ThisshiftwasinitiatedwiththeintroductionoftheDoi Moi(“renovation”)economicreformprogrammein1986,andwasreinforcedbythe

signingofbilateralagreementswith the country’smajor trad-ingpartners,includingtheeU,Japan, theUnitedStatesandanumberofcountriesinAsiadur-ingthe1990sandearly2000s.Theassociatedreformsledtoacomplexsystemthatpromotedadualindustrializationstrategy.That strategy was based on

the simultaneous development of private, export-oriented,labour-intensivemanufacturingindustries(byattractingforeigninvestors,establishingexport-processingzonesandcreatingdutydrawbacksystemsfor imported inputs) and of import-substitutingindustries (through investment inheavy industriesandresource-basedsectorswhereState-ownedenter-prisescontinuedtoplayanimportantrole).53

Already in therun-up to its formalaccessiontotheWTo,VietNamhadadjustedsomeaspectsof

… as well as awareness of structural vulnerabilities that have surfaced due to changes in the global economic environment.

Trade and Development Report, 201498

its industrialpolicy, includingphasingoutexplicitexport-performance requirements, local-content-relatedsubsidiesandtaxincentives.Thecountry’sWToaccessionwasfollowedbyareductioninthesimpleaveragetariffratefrom18.5percentin2007to10.4percentin2013,andbyliberalizationoftheservicessector.

Atthesametime,VietNamhasbeenusingsomeoftheflexibilitiesstillallowedunderWTorulesandcommitments.Forexample,thedifferencebetweenboundandappliedtariffrateshasenabledVietNamtomodulate itsapplied tariffswithaviewtocon-trollingenergypricesandprotectingcertainindus-tries from import competition.it has also imposed tariff ratequotasoncertainfoodcommod-ities.inaddition,ithasprovidedsectoralsupportintheformofpreferentialimportduties,tariffexemptions, reduced taxes oncorporateincomeandland-use,andsubsidizedloansandinvest-ment guarantees aimedmain-lyatencouragingR&Dandthedevelopment of infrastructure,trainingandenterprisesindis-advantagedareasofthecountry.Althoughtheservicessectorhasundergoneexten-siveliberalization,mostofVietNam’scurrentbilat-eralagreementsfollowapositive-listapproach(i.e.signatorieslistonlythesectorstheywishtoliberal-izeleavingallothersectorsunaffected).Asaresult,VietNamhasmaintainedforeignownershipceilingsintelecommunicationservices,itcanimposehigh-erfeesonforeignfirmsinshippingandrequireaneconomic-needs test for foreign-owned retail out-lets(beyondthefirstonesalreadyestablished).TheGovernmenthasalsousedprocurementmeasurestosupportlocalsuppliers.

However,thesepolicymeasuresappeartohavebeeninsufficientforhelpingprivateenterprisesover-cometheircapitalconstraintsandreachsufficientlylarge economies of scale to achieve internationalcompetitiveness.Also, the dual track strategyhasbeenonlypartiallysuccessfulinspeedingupdesiredspilloversfromFDi,especiallyintheformoftech-nologytransferandthecreationoflinkagesbetweenexport-orientedindustriesanddomesticsupplyfirms(Nguyenetal.,2014).ifinitiativessuchastheTransPacificPartnershipmaterialize,theymaycarryeven

stricterrulesoninvestmentandiPRs,whichcouldfurtherlimitthepossibilityofdomesticlinkagesandtechnologicaladaptation.54

China’s accession to theWTohas also hadasignificant impactonthenatureandscopeof itsindustrialpolicy.owingtoitscommitmentstoabidebytheTRiMsAgreement,ithadtodiscontinuecer-tainpoliciestowardsFDi,includingmeasuresaimedat encouraging technology transfer and enhancinglinkages,suchasthroughlocal-contentrequirements.italsohadtophaseoutotherelementsofitsearlierindustrialpolicy,inparticulartradeprotectionmeas-ures,andpreferentialinterestandlowertaxratesfor

its infant industries,aswellassome formsof directfinancialassistance tosomeof itsotherindustries(TDR 2006).

Nevertheless, China hascontinuedtopursueastrategicapproach towards FDiwhichdistinguishes between sectorsthatareseenasgeneratingsig-nificant foreign exchange andemployment,andthosethataremore involved in upgradingdomesticproductivecapacities

andcapabilitiesinkeyareasoftheeconomy(Poon,2014).Theformer,efficiency-seekingtypeofFDihasbenefitedfromthekindsofincentivesgenerallyassociatedwithactivitieslocatedinspecialeconomiczones, such as selective value-added tax rebates,corporate tax holidays and the provision of infra-structure that facilitates international trade (Zeng,2011).bycontrast, the latter,market-seeking typeofFDihasbeensubjecttovaryingforeignowner-ship limits, such asminority equity stakes in thesteelandbankingsectorsor50–50jointventuresintheautomobileindustry.encouragingseveraljointventuresintheautomobilesectorhasbeenusedasaninstrumenttomaintainthatsector’scompetitive-ness,makingitmoreattractiveforforeigninvestorsto transfer andupgrade their technologies used inproduction inChina.This has been further sup-ported bymassive increases in theGovernment’sR&Dexpenditures.Moreover,governmentprocure-mentandStateinvestmentininfrastructure,suchasthebuildingofahighwaysystem,havebeenusedto boost the demand for cars (lo andWu, 2014).China began to publishFDi guidance catalogues(which list industries inwhich foreign investment

A wide range of measures can facilitate adjustments in developing countries’ production structures, such as environmental regulations, government procurement and tax policies …

Trade and Industrial Policies in an Evolving Global Governance Regime 99

is“encouraged”,“restricted”or“prohibited”)inthemid-1990s,whichhavebeenrevisedover timebyapplyingmore demanding technical thresholds toreflectimprovementsindomesticproductioncapaci-ties. For instance, in the 2011version of theFDicatalogue,thejoint-venturestipulationwasremovedfrom automobilemanufacturing andwas appliedinsteadtotheundertakingofR&Dandmanufacturingofautomobileelectronicdevices,aswellastosomekeypartsandcomponentsof“newenergyvehicles”,suchashighenergypowerbatteries(DezanShira&Associates,2011:8–9).55

TheChineseGovernmenthasalsoretainedanimportantguidingrole,especiallyinupstreamheavyindustries and producer goods sectors, inwhicha number of relatively large,Government-linkedenterprises are involved.56While the size of theseenterprisesposesobstacles forother(includingforeign)enter-prises to enter these sectors,thereappearstobeasufficientlylarge number of these enter-prises to ensure competition,and hence economically effi-cientproduction.Publicsectormanufacturers are also subjectto export disciplines, whichare enforced bymonitoring concessionary accesstoloans,forexamplefromtheChinaDevelopmentbank.TheseenterprisesareoverseenbytheNationalDevelopment andReformCommission (NDRC),whichisthecountry’skeyindustrialplanningagency.TheNDRCitselfhasalsoprovidedsupport,suchasbyformulatingapolicyongreenenergytechnologies,whichledtheGovernmenttoprovideenvironment-relatedsubsidysupporttowindturbines.Previously,this support was combined with local-contentrequirementsthatmayhavebeendeemedtoviolateChina’sWTocommitments.However,themeasureisreportedtohavealreadyattaineditsgoalandwaswithdrawnbeforeotherWTomemberscouldfileacasebeforetheDSM(Studwell,2013).

environmentalregulationscouldplayamajorrolemore generally in facilitating adjustments indeveloping countries’ production structures.onereasonforthisisthatso-called“greengrowth”fea-turesprominentlyinthelikelynextbigtechnologicalfrontiers,wheredevelopingcountries’technologicalbackwardnessmaybeanadvantage,astheywillhavefewer incumbent carbon-intensive technologies to

amortize.besides,giventheimperativeofclimatechangemitigationandincreasinglyrecognizedeco-logical limitations to theuseof traditionalenergy,it isunlikely that rapidlygrowingconsumption indevelopingcountries,emanatingfromincomegrowthandfromattemptstostrengthenthecontributionofdomesticdemandtogrowth,canbesatisfiedbypur-suingthesamematerials-andenergy-intensivepaththatthedevelopedeconomieshavefollowedsofar(TDR 2013).indeed,turningnewlyemergingcon-sumptionandproductionpatternsintochallengesforinnovationingreentechnologiescouldbeapowerfuldriverofstructuraltransformationandthecreationofemploymentandwageopportunities.57

SimilartotheroleplayedbyStateagenciesindevelopedcountries(suchastheDefenseAdvancedResearchProjectsAgencyintheUnitedStates),devel-

opment banks in developingcountries(suchasbNDeSandChina’sDevelopment bank),maybewellplacedtoextendthelong-term loans that such fun-damentalreorientationsrequire(Chandrasekhar, 2014). Thiswouldnotonlyreducetheriskofcomplementaryprivatefund-ingatinitialstagesofsuchreori-

entations; it could also induce private investmenteventuallytoassumealeadershiproleinfundamen-talstructuraltransformation.Supportivedemand-sidepoliciescould includeenergy-intensity targets, forexampleforautomobilesandbuildings,withaviewtocreatingdemandformoreenergy-efficientsystemsandcleanenergyproduction.Tosupportdomesticfirmsinsatisfyingsuchemergingdomesticdemand,thesepoliciescouldbesupportedonthesupplysidethroughWTo-compatiblesubsidiesandtaxcredits,in addition to the funding of clean-energy-relatedinnovations.58

Tospurinnovationmoregenerally,thepresenceof suitable institutions, such as industry-specificbodiesthatprovidetestingfacilitiestoensuresafetyand compliancewith product standards, can alsoplayanimportantrole.Forinstance,evidencesug-gests that economies that successfully developeddomesticautomobileindustries(suchasChina,theRepublicofKoreaandTaiwanProvinceofChina)hadwell-resourcedautoindustryresearchinstitutes.bycontrast, such instituteswere either lackingorpoorlyresourcedinothercountries,suchasMalaysia

… and development banks may be well placed to extend the long-term loans that such adjustments require.

Trade and Development Report, 2014100

andThailand,whereattempts tocreateadynamicautoindustrywerelesssuccessful(Ravenhill,2014).

Governmentprocurementcanalsobeanimpor-tant instrument of industrial policy, especially tocreatedemandonascalethatwouldbesufficientlylargefordomesticfirmstoestablishprofitablepro-ductionfacilities.Taxpolicyisanotherinstrumentthat can be used in industrial policy. inChina, ithasbeenobserved that taxpolicies favourexport-orientedfirms,whereas enterprises catering to thedomesticmarketaresubjecttoasubstantiallywiderrangeoftaxes,includingimportduties,avalue-addedtaxandaconsumptiontax(Yang,2014).Thailandsupplementedtariffprotectionwithexcisetaxreduc-tionsandcorporatetaxexemptionsforparticularcarmodelswithaviewtocreatingspecificdomesticsalesopportunities. Suchmeasureswere introduced in2002forpick-uptrucks,followedin2007bysimilarmeasures for eco-cars. Someof these taxpolicieswerelinkedtolocal-contentrequirements(NatsudaandThoburn,2013).

inbrazil,themainobjectivesoftaxreductionmeasuresadoptedin2012inafive-yearprogrammeknown as inovarAuto have been to slow downimport growth and encourage the development oflocalsuppliersintheautomobilesector.Thepolicyimpliesa30percentagepointincreaseintheexcisetaxonindustrialproducts(Imposto sobre Produtos Industrializados,iPi)leviedoncarsimportedfromoutsideMeRCoSUR, and specifies the eligibilityrequirementsforfirmstojointheprogrammeandbegrantediPitaxcredits.Someoftheserequirementsarelinkedtodomesticcontentandinvestmentininno-vation(iCCT,2013).Thesemeasurescomplementothersupportpoliciesforthedomesticautomobileindustry,suchasrelativelyhightariffsonautomo-tivepartsimportedfromoutsideMeRCoSUR.Thisproactive approach towards the development of adomestic automobile industry has allowedbraziltoattractadditionalFDibynewvehicleassemblersand a progressivedelegationof innovation activi-ties tobrazilianaffiliatesand their local suppliers(UNCTAD,2014).

D. Current challenges to proactive trade and industrial policies

1. A potential decline in developing countries’ export opportunities

Thewidevariationacrosscountriesinthepaceand scale of development of theirmanufacturingactivities indicates that country-specific factors –suchasresourceendowments,sizeofthedomesticmarket, geographical location and institutionaldevelopment–arelikelytohaveastrongbearingonthetimingandextenttowhichlabourshiftstowardsmoreproductiveactivities,bothacrossandwithineconomicsectors.butthesizeanddirectionofanysuch impacts are also influenced by policies thataffectmacroeconomicdevelopments,aswellasbythepace andnatureof investment and integrationintotheglobaleconomy.

Clearly,policiescanplayanimportantrole,asreflected,forexample,inthegrowthofmanufactur-ingthroughanexplicitpolicyofpromotingexportorientationinsomedevelopingcountries,especiallysincethe1980s.indeed,thesizeableincreaseintheshare ofmanufactures in those countries’ exportshasbeenanotablefeatureofthemoregeneralrapidexpansion of the volume ofworld trade and thegrowing share of developing-country exports intotalworldexportsduringthetwodecadespriortotheonsetoftheglobalcrisisin2007–2008.AsnotedinTDR 2013, theshareofdevelopingcountriesinglobalmanufacturedexports increasedfromaboutonefourthin1995toaboutonethirdin2007,withtradeinmanufacturesbetweendevelopingcountriesplayinganimportantrole.

Trade and Industrial Policies in an Evolving Global Governance Regime 101

exportingmayfosterstructuraltransformationin severalways.Fromamacroeconomicperspec-tive,itallowssectoralexpenditurepatternstodeviatefromsectoralproductionpatterns.Asaresult,thelev-elofmanufacturingproductioncanexceedthelimitssetbythedomesticmarket.And thehighincomeelasticityofdemandformanufacturedgoodsusuallypro-vides favourableglobalmarketconditions.Thismeans that anincreaseinmanufacturedexportscanbeexpectedtoresultinlarg-erexportrevenues,unlessmanycountriesfollowthisstrategyforthe sameproducts at the sametime.Whereas a fast-growingworldmarketallowsmanycountriestoexpandtheirexports,inastagnatingglobalmarketanindividualcountrycanonlyexpanditsexportsifitgainsmar-ketsharesattheexpenseofothers.inthelattersitua-tion,attemptstocontinuouslyexpandexportvolumesmaycauseadversepriceeffectsandreduce,oreveneliminate,theexpectedincreaseinexportearnings.

Moreover, ithas longbeen recognized thatacountry’s pace of growthwill face a balance-of-paymentsproblemunlessexportsearnasufficient-lylargeamountofforeignexchangetopayforthesubstantial capital goods and intermediate goods−and theirembodied technologies− thatmustbeimportedtobuildindustrialactivitiesandstrength-en their international competitiveness (Thirlwall,1979).Countries at the initial stages of structuraltransformationwillhavethegreatestneedforsuchimports.buteventhoughthepaceatwhichadomes-ticcapitalgoodsindustrycanbeestablishedwilldeterminehowfast the gap inmachinery andequipmentrequirementscanbebridged,aconsiderablevolumeof imports of such goodswillstillbeneeded.

in addition, as per capitaincomes rise, themore afflu-entdomesticconsumersincreasinglydemandmorediscretionaryconsumermanufacturesandservices,ratherthanbasicnecessitygoodssuchasfood.Suchrapidly increasingdomestic demand formanufac-tureswill lead to balance-of-paymentsdifficultiesand threaten sustained economic growth unless

the structural compositionof domestic productionchangesinresponsetothatofdomesticdemand,orunlessexportsfromtheprimarysectorcontinuetoprovide the necessary foreign exchange earnings.

Failingthis,thecountrywillendupaccumulatingexternaldebt,absorbing a rising amount ofnetcapitalinflowsorlettingtherealexchangeratedepreciate.59ofcourse,changing thestruc-tureofdomesticoutputtomeetchanging domestic demandalsorequirestheeconomytobelargeenoughfordomesticpro-ductiontobeonascalethatiscompetitive.

in addition to thesemacroeconomic effects,developmentsatthefirmlevelalsoaffecttheimpactsoffactorreallocationandaccumulationonaggregateproductivity.Takingaccountoftheheterogeneityoffirms,evenwithinnarrowlydefinedindustries,pro-ductivitygainscanoccurinanysectorfromshiftingresourcesawayfromless-productivetowardsmore-productivefirms.exportingmayplayanimportantrole in this context, as it has been observed thatmanufacturingfirmsthatexportaregenerallymoreproductivethanthosethatdonot.However,thereisstrongtheoreticalsupport(e.g.Redding,2011)andsignificantempiricalevidence(e.g.Wagner,2012)which indicates that only relatively fewfirms aredirectlyinvolvedintrade,andthathighproductiv-ityisaprerequisiteforexportparticipation,ratherthanitsoutcome.itisself-selectionthatmakesmoreproductivefirmsengageinexportactivities,asitisonlythosefirmsthatcanabsorbtheadditionalsunk

costs associatedwith learningabout demand and setting updistributionnetworksonexportmarkets.

once such firms engagein exporting, theymay furtherimprove productivity throughlearning effects. Such effectsoccurtotheextentthatexposure

tointernationalbuyersandcompetitorsenablesthesefirmstoachievebetterqualityandproductupgradingbylearninghowtousemoreexpensiveandhigherqualityinputsandsellingtheresultinghigherpricedand better-quality goods to themore demandingcustomersonexportmarkets.

Exporting boosts developing countries’ growth most when developed countries experience rapid economic growth along with a high elasticity of their demand for imports from developing countries ...

... however, neither of these conditions appears to have been present since the Great Recession.

Trade and Development Report, 2014102

While, overall, “there is little evidence support-ing ‘learning-by-exporting’” effects (WTO, 2013c: 87), two additional results from the empirical litera-ture are noteworthy. First, most of the benefits from productivity increases as a result of being able to export are passed on to buyers in the form of lower prices (Marin and Voigtländer, 2013). Consequently, only a small proportion, if any, of those benefits is passed on to workers in the form of higher wages, or transformed into higher profits that could be used for further investment. Second, some studies indicate that the size of any such learning effects greatly depends on the income level and market size of the destination countries. This is because exporters adjust the quality of their products across destinations by varying the quality of their inputs. Thus, productivity gains are persistently higher for firms that export higher quality

goods to high-income and larger countries (Manova and Zhang, 2012). This means that variation in the export performance of different firms depends not only on heterogeneity across firms but also across trade partners.

Thus, the favourable effects on the productivity of developing-country exporters are greatest when developed countries experience rapid economic growth, and when such growth has a high elasticity of demand for imports from developing countries. However, neither of these conditions appears to have been present since the Great Recession.

It is well known that the rate of income growth in developed economies since 2008 has been sig-nificantly lower than it was prior to the crisis, and statistical evidence also points to a considerable weakening of import elasticity of demand in these countries. Their volume of imports increased almost twice as rapidly as their income during the pre-crisis period, but it has barely changed since then, even during the slight recovery of income growth in 2012–2013 (chart 5.1). What is more, while there was a strong positive correlation between GDP growth in developed countries and developing-country exports during the pre-crisis period, this correlation became practically nil, or even negative thereafter (chart 5.2).60

Taken together, this evidence shows that the impact of developed economies’ GDP growth on their imports is becoming smaller, and that the positive effect of their income growth on developing-country exports is also weakening. The challenges that developing countries face in achieving structural transformation under favourable global demand con-ditions are even greater when they are unable to rely as much as before on growing manufactured exports to developed countries to support such transforma-tion. This may require a rebalancing of their growth strategies by according greater importance to domes-tic and regional demand, with the ensuing need to align their production structure more closely with their demand structure, as discussed in TDR 2013. In other words, the current global economic situation increases the policy challenges facing developing countries and necessitates the deployment of creative industrial policies.

Chart 5.1

GDP AND IMPORT VOLUME GROWTH, DEVELOPED ECONOMIES, 2001–2013

(Annual average percentage change)

Source: UNCTAD secretariat calculations, based on table 1.1; and UNCTADstat.

Note: Developed economies comprises Australia, Canada, Denmark, the euro area (excluding Latvia), Iceland, Japan, New Zealand, Norway, Sweden, Switzerland, the United Kingdom and the United States. Data shown are based on weighted averages.

2.3

-0.1

1.2

4.2

-0.9

-1

0

1

2

3

4

5

2001–2007 2008–2011 2012–2013

GDP Import volume

0.3

Trade and Industrial Policies in an Evolving Global Governance Regime 103

2. Production networks and the role of industrial policies

International production has often been con-sidered an advanced form of mainly bilateral trade, where a foreign affiliate of a TNC imports parts and components that embody the parent firm’s know-how and other production factors and transforms these imports into an assembled, final good for sale in the local market, or exports back to the home country or to a third market. Developing countries’ participation in such production networks has been limited mainly to low-wage, labour-intensive activities, sometimes with some local sourcing of parts and components, depending on their level of industrial sophistication and the adopted trade policy strategy. However, the combination of rapid trade liberalization and the revolution in information and communications tech-nologies (ICTs) has made possible a more fragmented

form of production sharing. It is characterized by firms from high-wage countries with advanced tech-nologies combining their managerial, marketing and technical know-how with production and distribution tasks in other developed countries, as well as with low-wage labour tasks in several developing-country locations. All of this results in a more continuous movement across national borders of capital, services and skilled personnel, rather than just of goods.61 Consequently, these production networks now span multiple national borders.

There have been some strong proponents of participation in international production networks on the grounds that this can open a new and “fast-track” to industrial development (e.g. Baldwin, 2014; WEF, 2012). This argument holds that such networks enable participating developing-country firms to special-ize in specific segments of the production process instead of being obliged to simultaneously master

Chart 5.2

DEVELOPED ECONOMIES’ GDP GROWTH AND DEVELOPING ECONOMIES’ EXPORT GROWTH, 2000–2013

(Per cent)

Source: UNCTAD secretariat calculations, based on UNCTADstat; Netherlands Bureau for Economic Policy Analysis (CPB); OECD, Main Economic Indicators; and Eurostat.

Note: The data shown are year-on-year growth rates based on quarterly data. See note to chart 5.1 for a listing of the developed economies; the group of developing economies is defined as emerging economies by the CPB. The data shown are weighted averages. Calculating the non-parametric Spearman’s rank correlation coefficient indicates that there is no correlation between the growth of developed economies’ GDP and of developing countries’ exports during the period 2012–2013.

-30

-20

-10

0

10

20

30

-5 -4 -3 -2 -1 0 1 2 3 4 5

Dev

elop

ing

econ

omie

s' e

xpor

t gro

wth

Developed economies' GDP growth

2000 Q1–2007 Q4

2008 Q1–2011 Q4

2012 Q1–2013 Q4

Trade and Development Report, 2014104

allstagesofproductionandbuildafull,verticallyintegratedindustry.Moreover,byopeningaccesstonew–andoftenhighervalue–markets,participa-tionininternationalproductionnetworkscanprovideanopportunityfornascentindustriesindevelopingcountries at an early stage of industrialization toengageinhighervalue-addedproduction.Thiscanhelpdeveloping countries to expand employment,raiseincomesandaccumulatebasicskillsandothercapabilitiesthatarerequiredtopursueindustrializa-tion involving technologicallymore sophisticatedmanufacturingactivities.

basedonthebeliefthatparticipationininterna-tionalproductionnetworkswillhelpspurstructuraltransformationindevelopingcountries,itisarguedthatthesecountriesshouldredesigntheirtradeandindustrialpoliciesaroundanexusoftrade,foreigninvestment,servicesandintellectualproperty,whichunderpins the effective func-tioningofproductionnetworks(baldwin, 2014). essentially,thiswouldmean that govern-mentswanting their domesticfirms to join such networkswouldneedtoaligntheirpolicymeasurestotheinterestsofthenetworks’ leadfirms (Milbergetal.,2014).itimpliesthattheywouldneedtoremoveallmeas-uresthataredeemedtobeobstaclestotheefficientconnectionoflocalfactorieswiththerelevantinter-nationalproductionnetwork,andadoptmeasuresthatprotecttheleadfirms’proprietaryassets.inpracticalterms,facilitatingentryintothesenetworkswouldrequire a policy that allowsmore foreign equityin domestic companies, eases themovement andemploymentofkeypersonnel,relaxeslocal-contentrules and rules relating to foreign exchange andrepatriationofprofits,strengthensinvestorprotection(includingtherighttochallengedomesticregulationsanddecisions),developsalternativedisputeresolu-tionmechanismsavailabletoforeigninvestors,andadjusts domestic laws pertaining to such aspectsas nationalization and expropriation (Taglioni andWinkler,2014;Cattaneoetal.,2013).

Manywhofavourthisapproachrecognizethatanopentradeandinvestmentregimeisnotenoughonitsowntoenablecountriestobenefitfrominser-tionintoglobalvaluechains(WeF,2012:8;oeCD,2013).Theyevenacknowledgethatthe“problemis

thatforeigninvestorsdonotactivelypursue–andsometimesresist–suchintegration”(TaglioniandWinkler,2014:6).However,theyofferonlyalim-itedsolutiontothisproblembysuggestingtheneedforhorizontalpolicymeasuresincludingeducation,infrastructuredevelopmentandtechnologytransfer,inorder toenhanceaccess toglobalvaluechains,ensurelocalspilloversandavoidabiasagainstlocalintegration(TaglioniandWinkler,2014).AsnotedbyRavenhill(2014:265),“despitetherepeatedassertionthatwenowinhabitapost-WashingtonConsensus(WC)world, themost prominent policy prescrip-tionsmimicthoseoftheWCera”andthesepolicyprescriptions“areunlikelytobesufficienttogeneratethe upgradingwithin… [international productionnetworks]thatdevelopingeconomiesseek”.

in reality, and although adding “global” tothevaluechainterminologyisalmostobligatoryin

somepolicycircles,mostinter-national production networksareregionalinnature,andtheirrecent spread across develop-ing countries has been veryheavily skewed towards eastAsia(UNCTAD,forthcoming).Moreover, lead firms are stillpredominantlyfromdevelopedcountriesandfromasmallnum-berofsectorssuchasclothing

andtextiles,electronicsandtheautomotivesectors(Nolan,2012;Starrs,2014).Whilethesefeaturesdonotnecessarilynegatethecallsfornewthinkingonpolicyrelatedtointernationalproductionnetworks,they should serve as awarning against designingstrategiesforstructuraltransformationbasedexclu-sively on the opportunities linked to global valuechains.inparticular,theneedforimportpromotionshouldnotbeusedasareasonfordownplayingthecontinuedimportanceofamixofproactivemeasuresinsupportofimportsubstitutionandexportpromo-tiontailoredtolocalconditionsandconstraints.

Moreover, theextentof thepotentialbenefitsfromparticipating in international productionnet-works remains anopen empirical question.Thosebenefits,whichwillvaryconsiderablyacrosscoun-tries, aswill the various costs entailed,will haveto beweighed carefullywhen devising specificpolicies linked to participation in such networks(TDRs 2002,2006and2013).inparticular,thereisariskofdevelopingcountriesbecominglockedinto

The extent of the potential benefits from participating in international production networks is an open empirical question.

Trade and Industrial Policies in an Evolving Global Governance Regime 105

low-value-added activities due to strong pressurefromleadfirmsandothersupplierstokeeplabourcostslow.Andtheycouldbeblockedfrommovingupthesupplychainbytheexpensiveandsuccessfulbrandingstrategiesof the leadfirms,which are usually froma developed country (MilbergandWinkler, 2013), aswell asbythefactthatthevariouslinksin supply chains have becomecharacterizedbyasizeablecon-centrationofbusinesspower,andtheorganizationofasupplychainhas evolved into a comprehen-sively planned and coordinatedactivity (Nolan, 2012).62Thesedevelopments have stronglyincreasedthecompetitivechal-lengesnotonlyforfirmstryingtomoveupthevaluechain,butalsoforthosetryingtoentertheproductionnetworks.itwillbedifficultfordeveloping-countryfirms to overcome these challengeswithout sup-portthroughtheirgovernment’stradeandindustrialpolicies.

Theextenttowhichacountry’sexports,includ-ingwithininternationalproductionnetworks,con-taindomesticvalueaddedhasbeendifficulttoassessempirically.Thisisbecauseexportshavetraditionallybeenreportedintermsofgrossvalues(i.e.thesumofdomesticvalueaddedandthevalueofre-export-edinputs).63Recently,anumberofinitiativeshavesoughttoassessthevalue-addedcontentofinterna-tionaltrade.64oneimmediateoutcomeoftheseinitia-tiveshasbeenabroaderandmorenuancedanalysisofdifferent typesof internationalproductionnetworks,includinginagricultureandtheextractiveindustries.An important find-ingtoemergefromthisanaly-sisisthatdomesticvalueaddedasashareofGDPinthegroupof transitioneconomiesand indeveloping regions thatmain-lyexportprimarycommodities,such asAfrica andWestAsia,is considerably higher than itis in thosedeveloping regionsthatareheavilyinvolvedininternationalproductionnetworks engaged inmanufacturing, such aseastandSouth-eastAsiaandtheCaribbean(UNCTAD,2013: 130).65This suggests that participating in

international productionnetworks does not neces-sarilyensureGDPgrowththroughanincreaseintheshareofdomesticvalueadded.66Theanalysisidenti-fiestwofactorsthataremorecloselycorrelatedwith

domesticvalueaddedmeasuredas a share ofGDP: the natureofcountries’exports(especial-ly natural resources, servicesor final-demand goods), andthe degree of self-sufficiencyinproductionforexport,whichisgenerallycorrelatedwiththesizeofaneconomy.Thesefind-ingsraisedoubtsabouttheargu-ment that joining internationalproductionnetworks is a “fastroute”toindustrialization.

besides,ithaslongbeenknownthattheverylogicofthebusinessmodelunderlyinginternationalproductionnetworksisbuiltonasymmetricgovern-ancerelations,whereleadfirmsshapethedistributionofrisksandprofitsintheirfavour(e.g.Gereffi,2014).Arecentexaminationofthenationalprofitsharesofthetop2000corporationsbysectorshows,onthismeasure,thecontinuingdominanceoffirmsfromtheadvanced countries, particularly theUnitedStates(Starrs,2014).Despitetheappearanceoffirmsfromsomeemergingeconomies,mainlyChina,inselectsectors,theirabilitytoclimbthevaluechainremainsachallenge.Theelectronicssectoristelling;despitebeing the largestexporter,Chinaaccounts for just3percentoftheshareofprofitsderivedfromthissector(Starrs,2014:91).Relatedempiricalevidencesuggeststhatevenwheredevelopingcountriescan

achieve economic upgrading,thismay be linked to a sig-nificantdeterioration in labourconditions and other forms ofsocial downgrading (Milbergandbernhardt,2013).

Perhapsmostimportantly,thereiseveryreasontobelievethat the previouslymentionedbehind-the-borderreformscon-siderednecessaryforinclusionininternationalproductionnet-

worksaremostlikelytocementsuchasymmetriesattheexpenseofdevelopingcountries.Forexample,productstandardsandtheirharmonizationthroughtrade and investment agreements could play an

Domestic value added as a share of GDP in developing countries that mainly export primary commodities is considerably higher than it is in those that are heavily involved in international production networks engaged in manufacturing.

The business model underlying international production networks is built on asymmetric governance relations, where lead firms shape the distribution of risks and profits in their favour.

Trade and Development Report, 2014106

importantroleindeterminingdevelopingcountries’production and trade patternswithin internationalproductionnetworks.67itistruethatcompliancebydeveloping-countryexporterswiththestandardsoftheirdeveloped-countrytradingpartnersislikelytoleadtoqualityupgradingandimprovedmanagementandproductionprocesses.Hence,matchingthemorestringent standards of developed-countrymarketswillconferthekindoflearning-by-exportingbenefitsdiscussedintheprevioussection,including“movingup the quality ladder”, by facilitating developing-countryexports tomarketswithricherconsumers.However, standardsmatching is likely to becomeincreasingly difficult as developing-country firmstrytocontinuetoprogressupthevaluechain,andatsomepoint itwillno longerbepossible,whichwillhaltthisprogression.

Harmonization of prod-uct standards also opens thedeveloping-countrymarket toimportsfromdeveloped-countryfirms.Suchimportswillincreasesignificantlyifthelessproduc-tive firms in the developingcountry, such as those that donotexportbutonlyproduceforthehomemarket,areunabletomatchthemoredemandingproductstandards.itwillalsomeanthatthesefirmswillnolongerbeabletoprovideinputstoexportingfirms,whichwillhaveanadverseeffectondomesticproductionlinkagesandreducethedomesticvalue-addedcontentofexports.Moreover,harmonizationofproductstandardswillharmdevelopingcountries’tradewithothercountriesthatarenotincludedinthetradeorinvestmentagree-mentthatrequiressuchharmonization.

Taken together, thediscussion in this sectionsuggeststhatinternationalproductionnetworksmay

provideopportunitiesforcountriesatanearlystageofstructuraltransformationtoaccelerateindustrialdevelopment in some sectors.but participating insuchnetworks should not, inmost cases, be seenastheonlyelementinacountry’sindustrialdevel-opment strategy.Developing countries that haveachievedsomedegreeofindustrialdevelopmentwillneedtoweighverycarefullythecostsandbenefitsassociatedwithrenouncingremainingpolicyflexi-bilitywhenparticipatingininternationalproductionnetworks,particularlyintermsoftheextenttowhichthiscontributestoeconomicandsocialupgrading.

Moreover,theimportanceofinternationalpro-duction networksmaywell shrink to the extent

that there is a prolonged peri-odofslowgrowthindevelopedcountriesand/oradeclineinthepositiveeffectsfromtheirincomegrowth on developing-countryexports,documentedinthepre-vioussection.Thisismorethana transitory phenomenon.Thebenefitsthatdeveloped-countryenterprisesreapedfromoffshor-inghavedeclinedasaresultofhigher transportationcosts fol-lowing the rising price of oilsincetheearly2000s.Thismay

reinforcetendenciestowardsreshoringmanufactur-ingactivitiesbacktodevelopedcountriesandeffortsinthosecountriestostrengthentheirownmanufac-turingsectors.68ontheotherhand,theimportanceofSouth-Southproductionnetworks,whicharecur-rentlypoorlydevelopedinmostdevelopingregions,willincreaseifdevelopingcountriesrebalancetheirgrowth strategies by givinggreater importance todomestic and regional demand (TDR 2013).Themain point is that noneof these shifts provides arationaleforrenouncingpolicyspacetothebenefitofdeveloped-countryfirms.

Developing countries that have achieved some degree of industrial development will need to weigh the costs and benefits associated with renouncing remaining policy flexibility when participating in international production networks.

Trade and Industrial Policies in an Evolving Global Governance Regime 107

implementationof effective policy strategieswith a view tomeeting the global developmentgoalsthatarelikelytoemergefromdiscussionsonapost-2015developmentagendawillnotbefeasi-blewithouttheavailabilityofgreaterflexibilitiesinpolicymaking.building sustainable and inclusivegrowthpathswillcertainlyrequiredevisingamoreeffectivemacroeconomicpolicymixandaddressingthemajor systemic issues in thefinancial system.However,improvingthegovernanceofglobaltradewillneedtobepartofamorecomprehensiveandinte-gratedpackagetohelppreservethe policy space for proactivetrade and industrial policies,and should complement themacroeconomic and financialreformagenda.

Whatstepscouldbetakentowards strengthening globaltradegovernanceinsupportofdevelopment?Most importantwouldbeastrengtheningofmultilateralmechanisms.Multilateral rules provide a compass for nationalpolicymakerstoensuretheconsistencyofrulesacrosscountries.CapitalizingonthenewmomentumfromtheWTo’sbaliMinisterialConferenceinDecember2013,theDohaRoundnegotiationsshouldprogressinamanner thatwould justify itsbeingdubbeda“developmentround”.Stepsinthisdirectionwouldincludeanemphasisonimplementationissues(para-graph12oftheDohaMinisterialDeclaration).Theywouldalsoneedtomaintaintheprincipleofasingleundertaking(asstatedinparagraph47oftheDohaDeclaration),ratherthanmovingtowardsavariablegeometrywherebyarangeofmandatorycorecom-mitmentsissupplementedbyplurilateralagreementsmadebyonlysomemembers.Themostimportantbenefitfromallthismaywellbesimplymaintainingthepublicgoodcharacterofmultilateralrulesand

precludingpowerfulcountriesfromcoercingothersintocompetitiveliberalizationthatmaybeill-suitedtotheirdevelopmentprospects.

Second,refocusingtradenegotiationsonmul-tilateralagreementswouldimplyareconsiderationofWTo-plusandWTo-extraprovisions,aswellasallowinggreaterflexibilityintheapplicationoftheURAs.This could respond to a number of recentdevelopments. in the area of iPR protection, forexample,theroleofpatentsinpromotinginnovation

(i.e. thecommonlycitedbasicrationale for the adoption ofstrictrulesonsuchprotection)has increasingly been chal-lenged. Some observers havenoted that“historicalevidencesuggests that patent policies,which grant strong intellec-tual property rights to earlygenerations of inventorsmaydiscourage innovation”,while

“policiesthatencouragethediffusionofideasandmodify patent laws to facilitate entry and encour-agecompetitionmaybeaneffectivemechanismtoencourageinnovation”(Moser,2013:40).69ithasalsobeensuggestedthatpatent lawsmayinfluencethedirectionoftechnicalchanges,becausesecrecy,leadtimeandotheralternativestopatentsinprotectingiPRsmayplayagreaterroleinsomeindustriesthaninothers(Moser,2013).Moreover,parallelimportsandcompulsorylicensingmaybeeasiertoapplytosomeindustriesthantoothers(MaxPlanckinstituteforinnovationandCompetition,2014).ThisimpliesthatitmaybeadvisablefordevelopingcountriestomaintainaflexiblesystemofiPRprotectionwhilebeinggivenappropriatetechnicalsupporttomakefulluseoftheavailableflexibilitiesinordertosupporttechnologyadoptionandinnovationatallstagesofstructuraltransformation.

E. Conclusions

Meeting the global develop-ment goals of a post-2015 development agenda will not be feasible without the avail-ability of greater flexibilities in policymaking.

Trade and Development Report, 2014108

With regard to subsidies, a wide range ofcountrieshavemadeuseoftheflexibilitiesthathaveremainedunder theSCMAgreementwhich allowexport credits andmeasures for promoting “greengrowth”.Thismight be understood as signallingan acknowledgement of the value of the policyspace left by theURAs. it isworth noting that, in responsetotheGreatRecession,awiderangeofcountrieshaveadoptedmeasuresthatbroadlyfallintothe category of environment-related subsidies and whosecompatibilitywithexistingrulesremainagreyarea.PerhapsforthisreasontheyhavenotbeenchallengedbeforetheDSM.Thismayevenindicatethatmanycountriesconsidersomeoftherulesestab-lishedbytheURAsasinappropriatelyconstrainingtheirpolicychoices.

AreconsiderationofWTo-plusandWTo-extraprovisionswouldalsoimplyrenouncinginvestment

provisions that gobeyond theTRiMsAgreement.Arguments that international productionnetworksprovide a rapid path to structural transformation,andthatjoiningsuchnetworksrequiresahands-offapproach to international business, have recentlygivennewimpetustomakingsuchprovisionsmore

restrictive.Yet, for countriesat early stages of structuraltransformation, it is far fromclearhowadoptingfar-reachinginvestment provisionswouldallow,orevenfoster,thedevel-opmentalgainstobehadfromtheir industries joining suchnetworks, particularly beyondthe benefits of increased low-

skillemploymentandinitialexperienceinproducingmanufactures.Theriskofbeingtrappedinsomelow-levelnicheofthevaluechain,andnotbeingabletoupgrade,maybetoohighforcountriestogiveupthepossibilityofusinginstrumentsthatinthepasthaveprovedtobeeffectiveinsupportingindustrializationandoverallproduction.

Improving the governance of global trade will need to be part of a more comprehensive and integrated package.

Notes

1 in this chapter, the term “policy space” refers totheavailabilityandeffectivenessofpolicy instru-ments inattainingpolicy targets,as introduced inTDR 2006.Giventhechapter’sfocusonrulesandregulationsintradeandinvestmentagreements,itconcentrateson thede jure componentsofpolicyspace.UNCTAD (2009) discusseslDCs-specificissuesinthisarea.

2 Forexample, in its reassessmentofgrowthexpe-riences, theWorldbank (2005a: 83) concludedthat the“roleof activist industrialpolicies is stillcontroversialbutislikelytohavebeenimportant”.SeealsoCommissiononGrowthandDevelopment,2008,andTDRs 1996,2002and2006.

3 For a discussion of the theoretical arguments infavour of proactive trade and industrial policies,seeTDR 2006.That reportemphasizes thatmuchof the success of industrial policy depends on

implementationanditexaminesinstitutionalcom-plementstoindustrialpolicydesigns.

4 Foradetaileddiscussiononimplementationofcur-rentSDTprovisions,seeWTo,2013a.

5 Some of the discussion in this section draws onThrasherandGallagher(2014),aswellasonTDR 2006 chap.V,whichexaminedtheseissuesinmoredetail.A range of otherUruguayRound agree-mentsareof limited importance in thecontextofstructuraltransformation,suchastheSanitaryandPhytosanitaryMeasuresAgreement (SPS),whichsets out basic rules designed to protect human,animalorplant life andhealth.other agreementsconcernmeasures that nowadays are rarely used.Forexample,importlicencesandbans,whichwerefrequentlydeployedinthepasttoprotectdomesticindustryandstabilizeeconomies,aregovernedbytheAgreement on import licensingProcedures.

Trade and Industrial Policies in an Evolving Global Governance Regime 109

itsobjectivesaretosimplify,clarifyandminimizetheadministrativerequirementsnecessarytoobtainimportlicences,andmakesurethattheproceduresused for granting such licences do not in them-selvesrestricttrade.Toensuretransparency,importlicensing is reviewed annually by theCommitteeonimportlicensing.QuantitativerestrictionsandimportbansaregenerallyprohibitedundertheGATT1994,except, forexample, toaddressbalance-of-paymentsproblems(articlesXiiandXViii:b),butsuchexceptions,aswellasothersafeguardmeasures,arefurtherrestrictedinsomeRTAs(fordetails,seePrusa,2011).

6 local-content requirements are closely related torules of origin in preferential trade agreementsbetweendevelopedanddevelopingcountries.Thedeveloped-countrypartnerstosuchagreementscantailortherulesoforigintotheirneeds.

7 itisclear,however,thatsuchperformancerequire-ments can be brought to dispute settlement onlywhen they are published,which is unlikely to bethecaseforprivateunderstandingsbetweengovern-mentsandfirms.

8 Moreover,Article4oftheTRiMsAgreementsetsoutcertainconditionsunderwhichdevelopingcountriescan“deviatetemporarilyfromtheprovisionsoftheAgreement”.

9 Compulsory licensing defines a situationwhenauthoritieslicensecompaniesorindividualsotherthanthepatentownertousetherightsofthepatent–tomake,use,sellorimportaproductunderpatent(i.e.apatentedproductoraproductmadebyapatentedprocess)–withoutthepermissionofthepatentowner.Parallel imports refer to importsofbrandedgoodsintoamarket,whicharethensoldtherewithouttheconsentoftheownerofthetrademarkinthatmarket.

10 This and the following discussion of theTRiPSAgreementarebasedonCorrea,2014.

11 TheSCMAgreement replaced theTokyoRoundSubsidiesCode,aplurilateralagreementacceptedbyonly24countries,whichvirtuallyexempteddevel-oping countries fromall new subsidydisciplines.Article1oftheSCMAgreementdefinesasubsidyasafinancialcontributionorpricesupportgivenbyagovernment,whichconfersabenefitondomesticfirms.Agricultural subsidies are governedby theWToAgreementonAgriculture.

12 The SCMAgreement does not apply to lDCs.Moreover,countriesthatwereWTomemberswhentheURAswereconcludedareexcludedfromthiscommitmentuntil theirpercapita incomereaches$1,000, in constant 1990sdollars, and remains atthat level for at least three consecutiveyears.bycontrast,newlyaccedingcountriesarenotexempteveniftheyfallbelowthisthreshold,suchasVietNam.ForadetaileddiscussiononSDTundertheSCMAgreement,seeCoppens,2013.

13 Thesefoursituationsare:(i)thetotaladvaloremsub-sidizationofaproductexceeds5percent;(ii)thesub-sidycoversoperatinglossessustainedbyanindustry;(iii) the subsidy covers operating losses sustainedbyanenterprise,otherthanone-timemeasures;or(iv)directforgivenessofdebtowedbyadomesticenterprisetothegovernment.

14 Article27oftheSCMAgreementcoverstheprovi-sionsgoverningSDTfordevelopingcountriesintheSCMAgreements,includingflexibilitiesfollowingtheexpirationofthetransitionperiod.

15 Moreover,annexViilistsarangeofcountries,suchas thelDCs,which,undercertaincircumstances,canusesubsidizedexportcreditsasaninstrumenttopromoteexports.

16 Someobserversarguethatthisflexibilityprovidesrelatively larger benefits to the signatories of theoeCDArrangement,forexamplebecausetheprovi-sionsmaybeconsideredasbeingtailoredtomeetthepolicyobjectivesofitsmembers,ratherthanthoseofdevelopingcountries.Moreover,othercountrieswouldhavetroublesecuringagreementonanalter-nativearrangement,asitwouldbedifficultforthesignatoriesoftheoeCDArrangementtosubscribetosuchanalternative(Coppens,2009).

17 Forcountry-specificillustrations,seeNicitaetal.,2014.

18 Forillustration,seeTDR 2006,figure5.1.19 AsexplainedbyAkyüz(2005:29,31)“thiskindof

flexibilityisbestaccommodatedbybindingtheaver-agetariffwithoutanyline-by-linecommitment;thatis,toleavetariffsforindividualproductsunbound,subject to an overall constraint that the averageappliedtariffsshouldnotexceedtheboundaveragetariff…[because]ofdifferentinitialconditions[thisapproach]…isunlikelytobecompatiblewithanyformula-basedprocedure”.

20 This negotiated text (WTo, 2008) also discussesflexibilities for various categories of developingcountriessubjecttotheformula.TheSwissformulaistnew=(toldM)/(told+M),where t indicatestariffs, inpercentages,andMisacoefficientthatindicatesthemaximumlevelofreducedtariffs.itreducestariffsandharmonizesthematthesametime.Forfurtherdetails, see: http://www.wto.org/english/tratop_e/dda_e/status_e/nama_e.htm.

21 Thistippingpointhasoftenbeenattributedtotheefforts ofmemberStates of theeuropeanUnion(eU)andeuropeanFreeTradeAssociation(eFTA)tostabilizetraderelationswithCentralandeasterneuropean countries after the dismantling of theCouncilforMutualeconomicAssistance(Comecon)in1991,andcompetition formarketaccessmoti-vatedothercountries to followsuit (baldwinandJaimovich,2012).

22 Fordiscussionofthegreatdiversityregardingspe-cificrulesandprovisioninRTAs,see,e.g.,World

Trade and Development Report, 2014110

bank(2005b)onservices,investmentandintellec-tual property; teVelde andFahnbulleh (2006)oninvestment-relatedprovisions;variouschapters inestevadeordaletal.(2009)onmarket-accessprovi-sions,technicalbarrierstotrade,andprovisionsonservicesandoncompetition;PrusaandTeh(2011)oncontingentprotectionrules;andUNCTAD(2011b)oncustomsandtradefacilitation.

23 itshouldbenotedthatthesestatisticsrefertonotifi-cationrequirements,ratherthansimplythenumberofRTAs.ThismeansthatanRTAthatcoversbothgoodsandservicesnecessitatestwonotifications.Forregular updates, see: http://www.wto.org/english/tratop_e/region_e/region_e.htm.

24 AssessingthescopeanddepthoftheseagreementsrequiresscreeningtheverylargenumberofRTAsonthebasisofitemcodes,andthescopeandcov-erageofexistingdatabasesvarywidely.Düretal.(2013)claimthattheirdatasetontheDesignofTradeAgreements(DeSTA),whichisbasedon587agree-mentscodedformorethan1,000items,isthemostcomprehensive one.However,Kohl et al. (2013)claimthat, inspiteofcoveringfeweragreements,theirdataset,whichbuildsonthoseusedbyHornetal.(2010)andWTo(2011),issuperiorbecauseitexplicitlyidentifieswhetherprovisionsarelegallyenforceable.Hornetal. (2010) indicate that legalenforceabilitymay be judged according to howpreciselytheagreementsaredrafted(e.g.useoftheword“shall”),andwhethertheagreements’terminol-ogyindicatestheintenttohavethem“governedbyinternationallaw”.Thecomplexityoftheseagree-mentsisevidentonexaminingthedatasetofHornetal.(2010),whichisupdatedbyWTo(2011)andsynthesizesRTAprovisionsinto14WTo-plusand38WTo-extraareas.Kohletal.(2013)provideawiderangeofdetailedexamplesofenforceableandnon-enforceable provisions of the 13WTo-plusand4WTo-extraareasthattheirstudyemphasizes.ForacomparisonbetweenlegallyenforceableandotherprovisionsofRTAswiththeeU,JapanandtheUnitedStates,seealsobaldwin,2012.

25 AccordingtoHornetal.(2010:1587),whousethetermpreferential tradeagreements(PTAs) insteadofthetermRTAsadoptedinthischapter,“thefactthatmuchof the ‘legal inflation’occurs indevel-opment-relatedprovisions,whichareuniquetotheeCagreements,suggeststhattheeUhasagreaterneedthantheUStoportrayitsPTAsasnotdrivensolelybycommercialinterests.”However,fromthepoliticalscienceperspective,itcouldalsobearguedthatthisfeaturemayreflecttheobjectiveoftheeUtouseRTAsasaninstrumentofforeignpolicy,thusservingasaprecursorofpoliticalintegration.

26 Forfurtherdetails,seeFink,2011.27 Foramoredetaileddiscussion,seealsochapterVi

ofthisReport.

28 labourmobilityiscoveredintheGATS,butseveralRTAsoffer greater liberalization by including (i)fullnationaltreatmentandmarketaccessforservicesuppliersaswellasfacilitationforgroups,includingthoseotherthanserviceproviders;(ii)accesstothelabourmarket;(iii)temporarymovementofbusinesspersons,includingthoseinvolvedininvestmentortradeingoods;(iv)non-discriminatoryconditionsforworkers; and (v) labourmobility for businessvisitors,independentprofessionals,intra-corporatetransfereesandcontractualservicessuppliers.ForassessmentsoftheeffectsofRTAsonlabourmobil-ity,see,forexample,GoswamiandSaéz,2013;andorefice,2014.

29 Forfurtherdiscussionsee,forexample,brusicketal.,2005;DawarandHolmes,2011;andWTo,2011.

30 SeealsochapterViofthisReport.31 issuesrelatingtothesettlementofinvestmentdisputes

arefurtherdiscussedinchapterViofthisReport.32 itisalsointerestingtonotethatarecentstudywhich

presentstheiMF’sinstitutionalviewindicatesthat“most of the current bilateral and regional agree-mentsaddressingcapitalflowliberalizationdonottake into accountmacroeconomic and financialstability”(iMF,2012:33).indeed,theyposeseriouschallengestomacro-prudentialpoliciesthatreceiv-ingcountriesmaywanttoapply,asfurtherdiscussedinchapterViofthisReport.

33 ForadiscussionregardingtheUnitedStatesAmericanRecoveryandReinvestmentActof2009,seeCiminoetal.,2014.

34 Thesepreferenceprogrammeshavetwoaspectsincommon:theyareconditionalanddiscretionary.Thepreference-grantingcountrycanestablish,accord-ing to its ownpolitical choices, theprogramme’seligibilitycriteriaandrelatedconcessions,aswellas the procedures throughwhich exceptions andwaiverstocountry-andproduct-specificlimitationsand ceilings are granted,modifiedorwithdrawn.SinceunilateralandvoluntaryconcessionsarenotboundundertheWTo,developingcountrieshavenorecoursetochallengesuchchanges.oneexamplein thiscontext is theUnitedStates’suspensionofArgentina’sdesignationasaGSPbeneficiarydevel-opingcountryinMarch2012followingArgentina’sallegednon-compliancewithprovisionsinabilateralinvestmenttreaty(WhiteHouse,2012).

35 evenett(2013b)providesadetailedassessmentofthemeasurestakenbytheG20countriesthatweredenouncedbytheGTAas“murkyprotectionism”.Healsocomparesthesewiththemeasurestakenbythe “next 10 largest trading nations”, comprisingChile,theislamicRepublicofiran,israel,Malaysia,Norway, Singapore, Switzerland,Thailand, theUnitedArabemiratesandVietNam.

36 Forexample,inMay2012,thethenDirectorGeneralof theWTo,Pascallamy, promoted the idea of

Trade and Industrial Policies in an Evolving Global Governance Regime 111

exploring this relationship as away to break thestalemateintheDohaRound;seehttp://www.wto.org/english/news_e/news12_e/gc_rpt_01may12_e.htm.Henn andMcDonald (2014) useGTAdatatoinvestigatetheeffectofpolicymeasuresimple-mentedsince2008onglobaltradeflows,withtheimplicitsuggestionthatthesedatabeusedinfuturetradenegotiations.

37 Fromatraditional,neoclassicalperspective,thisisincontrastto“horizontal”or“functional”industrialpolicies,which aim at a general improvement ofeconomicconditionsforallsectorsandfirms,suchasimprovingacountry’sinfrastructure,regulatoryandcompetitionenvironments,andthegeneralbusinessclimate.However,anyofthesemeasuresmayeffec-tivelyhavesector-specificimpacts.Thisisbecausespecific sectors have different characteristics, sothatfunctionalpoliciesappliedeconomy-widearelikely to affect different sectors in differentways(Chang,2011).Moreover,sincetheirimplementa-tionmaybetooexpensive,evenpolicymakerswhowant to implementsectorallyneutralpolicieswillneedtotakesector-specificdecisions.Forexample,forinfrastructuredevelopment,itwillbenecessarytoconsiderwhethertofocus,forexample,onurbanor ruralareas;onports thatwill favour industriesproducingbulkygoods(suchasmotorvehiclesandmachinery) or on airports thatwill favour goodswith high unit values (such as pharmaceuticals).Morenuancedvariants of this approach (e.g.linandTreichel,2014)recognizetheimportantroleofgovernment agencies in overcomingmarket fail-ures by addressing information, coordination andexternality issues inherent in the development ofnewactivitiesandsectors,butemphasizethatsuchstructural change should follow the trajectory of“latentcomparativeadvantage”,ratherthan“defyingcomparativeadvantage”.

38 Forexample,theNationalinstitutesofHealth,whichare State-funded, constitute amajor knowledgebaseinthebiopharmaceuticalsector.Theyproduceabout three-fourths of all newmolecular entities,whileprivatelaboratoriesessentiallyproduceminorvariationsofexistingdrugs.Mazzucato(2013)alsocreditsthiskindofState-fundedresearchforseveralinnovations–suchastheinternet,theglobalposi-tioningsystem(GPS)andavirtualpersonalassistantknownasSiRi–thatallowed,forexample,Appletodevelop the iPhoneandseveralotherproducts.inthesethreecases,theStatefundedtheriskyearlystagesoftheirdevelopmentfromitsmilitarybudget.

39 Themain institutionsassociatedwith this typeofindustrialpolicyhavebeen(i)theDefenseAdvancedResearch ProjectsAgency, created in 1958 inresponse to the launchingofSputnikby the thenSovietUnionwithaviewtomaintainingglobaltech-nologicalleadershipbyhavingitsofficials“working

directlywithfirmsinidentifyingandpursuingthemostpromisinginnovativepaths”(Mazzucato,2013:79); (ii) theSmallbusiness innovationResearch(SbiR) programme, created in 1982,which hasrequiredgovernmentagencieswith large researchprojects toearmarkpartof their research fundingto support small firms forwhichSbiRhas oftenbeen thefirst source of funding for technologicalinnovations; (iii) theorphanDrugAct, adoptedin 1983,whichprovides tax incentives, subsidiesand fast-trackapproval fordrugs for treating rareconditions;and (iv) theNationalNanotechnologyinitiative, launched in 2000. other developedcountrieshavealsoadoptedSbiRprogrammes.Forexample,in2009theUnitedKingdomreformeditsSbiRprogramme,establishedin2001,toresemblemorecloselythatoftheUnitedStates.inadditiontosometangibleeffectsinthepharmaceuticalindustry,thisprogrammehasbeenparticularlysuccessfulinindicating the sectorswhere potential follow-oninvestmentfromtheprivatesectormaybeprofitable(boundandPuttick,2010).

40 AccordingtoSperling(2013:7),“Theactuallossinabsolutemanufacturingjobsoverthepast50yearsprimarilytookplace[inthe]lastdecade,wherewelost over 5millionmanufacturing jobs, roughlyone-third of themanufacturingworkforce. From1965until 2000,we steadilygrewmanufacturingproductionatroughly4percentperannum,inlinewithrealGDPgrowth.From2000to2010,ourpro-ductionstagnatedandunderperformedtheeconomybyaconsistentmarginforthefirsttime”(emphasisadded).

41 inaddition,inFebruary2012Presidentobamacre-atedtheinteragencyTradeenforcementCentertomonitorandenforce tradeprovisions through, forexample,theuseofsafeguardmeasuresandinitiat-ingarangeofcasesagainstChinabeforetheWTo’sDSM(Sperling,2013).

42 inadditiontotheNNMi,theAdvancedManufacturingNationalProgrammelaunchedbyPresidentobamaincludes threeothermain initiatives: theNationalNanotechnology initiative (NNi), theMaterialsGenomeinitiative(MGi)andtheNationalRoboticsinitiative(NRi).TheNNiisamulti-agencyinitia-tivethatexpeditesthediscovery,developmentanddeploymentofnanoscalescience,engineeringandtechnologytoservethepublicgoodthroughapro-grammeofcoordinatedresearchanddevelopment.besides advancing aworld-class nanotechnologyresearchprogramme,theNNihastheprimaryman-datetofosterthetransferofnewnanotechnologiesto products for commercial and public benefit.Amajor aimof theMaterialsGenome initiative istocreatenewknowledge, toolsand infrastructurethatwill enable domestic industries to discover,manufactureanddeployadvancedmaterialstwice

Trade and Development Report, 2014112

asfastastoday.inparticular,thisinitiativeintendstoaccelerate the lowercost insertionofadvancedmaterialsintoUnitedStatesmanufacturing.ThegoaloftheNationalRoboticsinitiativeistoacceleratethedevelopmentanduseofrobotsintheUnitedStatesthatworkbeside,orincooperationwith,people.itaddresses the entire life cycle, from fundamentalresearch and development tomanufacturing anddeployment.Thisprogrammestrivestodevelopthenextgenerationofroboticsandtoencourageexist-ing andnewcommunities to focus on innovativeapplicationareas.Foradetaileddiscussionof theNationalNetwork forManufacturing innovation,see,forexample,Hartetal.,2012.

43 See:http://www.gsa.gov/portal/content/103527.44 Foradiscussionoftheselegalissues,see,forexample,

brunelandHufbauer,2009,andChukwumerije,2010.45 AccordingtoWarwick(2013),anumberofcoun-

triesrespondedtotheglobaleconomicandfinancialcrisisin2008–2009,byprovidingdirectsupporttotheautomotiveindustryandencouragingcarsales,includingCanada,China,estonia,France, israel,Japan, theNetherlands, Norway, Portugal, theRepublicofKorea,Spain,theUnitedKingdomandtheUnitedStates.

46 Under the umbrella of thiseU-wide framework,manyeUmembershavecontinued todesignandimplementtheirownnationalindustrialstrategies,inpartbecause“theeUwaslessandlessregardedas having solutions and progressively seen as animpediment to industrial restructuring” (Cohen,2007:222–223).Forexample,FrancecomplementedthelisbonStrategywithapackageofnationalmeas-uresintheearly2000s(TDR 2006).Morerecently,Francelaunchedaprogrammefor“industrialrenais-sance” that follows similar concepts and ideas astheHorizon2020inthatitintendstopromotekeytechnologiesandfacilitatetheircommercialization.For further details, see: http://www.redressement-productif.gouv.fr/files/nouvelle_france_indus-trielle_english.pdf.

47 european Parliament, General principles of eUindustrial policy; available at: http://www.euro-parl.europa.eu/aboutparliament/en/displayFtu.html?ftuid=FTU_5.9.1.html#(accessed9April2014).

48 Key enabling technologies “are knowledge andcapital-intensive technologies associatedwithhighresearchanddevelopment(R&D)intensity,rapidandintegratedinnovationcycles,highcapitalexpendi-tureandhighlyskilledemployment.Theirinfluenceispervasive,enablingprocess,productandserviceinnovation throughout the economy.They are ofsystemic relevance,multidisciplinary and trans-sectorial,cuttingacrossmanytechnologyareaswitha trend towards convergence, technology integra-tionandthepotentialtoinducestructuralchange”(europeanCommission,2011:10).

49 Fordetailsontheallocationofthese€80billionandtheprinciplesgoverningtheirdistribution,seehttp://europa.eu/rapid/press-release_MeMo-13-1085_en.htm.

50 inaddition,eUindustrialpolicyseemsnotablefortheabsenceofaspecificpatternorcommonstrategyforadoptionbyall themembercountries.This isbecause theTreaty on theFunctioningof theeU(see: http://old.eur-lex.europa.eu/en/treaties/new-2-47.htm)treatsindustrialpolicyasanareawheretheUnionmayonly“carryoutactionstosupport,coordinateorsupplementtheactionsofthememberstates,without thereby superseding their compe-tence”andwherelegallybindingactsoftheUnion“shall not entail harmonisation ofmember states’lawsorregulations”(articles6and173).

51 For thismotivation see, for example, europeanCommission, europa press release, “State aid:Commission authorisesRomanian temporary aidschemetograntcompatibleaidofupto€500000”;available at: http://europa.eu/rapid/press-release_iP-09-1876_en.htm. See alsoHeimler and Jenny(2012),whodiscusstheprovisionsthatgovernthegrantingofStateaidintheeUinnon-exceptionalcircumstances.ViewsontheappropriatenessoftheseprovisionsmaydifferwidelyacrossmemberStates(see, for example, “Aides publiques:Montebourgdénonceles‘talibansdudroit’àbruxelles”,Le Monde,20February2014;availableat:http://www.lemonde.fr/economie/article/2014/02/20/aides-publiques-montebourg-denonce-les-talibans-de-droit-a-brux-elles_4370721_3234.html).

52 ThisandthefollowingtwoparagraphsarebasedonThoburn,2013,Nguyenetal.,2014,andThrasherandGallagher,2014.

53 Nguyenetal.,(2014:table1)provideanoverviewofVietNam’sindustrialpolicymatrix.

54 WithregardtoiPRs,forexample,Fergussonetal.(2013:34)point to “negotiationofprovisions thatgo beyond the level of protectionprovided in theWToTradeRelatedAspectsofintellectualProperty(TRiPS)Agreement,mostrecentlywiththeTPPnego-tiations.Forexample,theUnitedStateshassoughttohaveitspartnercountriessigntheWorldintellectualPropertyorganization’s(WiPo’s)PerformancesandPhonogramsTreaty,anagreementtowhichbrunei,Malaysia,NewZealand,andVietnamarenotparties.”

55 China’streatmentofFDiisanimportantissueinthecurrentnegotiationsofaUnitedStates-ChinabiT,asdiscussed,forexampleinPriceandSmart,2013.

56 Formore detailed accounts ofChina’s industrialpolicy,see,forexample,Studwell,2013;Wu,2013;andloandWu,2014.

57 Movingtowardsaso-called“circulareconomy”hasbecomeanofficialdevelopmentstrategyinChina,asexplained,forexample,bySuetal.,2013.

58 For example, suchmeasuresmay fall under theenvironment-relatedprovisionsof article 8 of the

Trade and Industrial Policies in an Evolving Global Governance Regime 113

SCMAgreement,mentioned above (discussed indetailinTDR 2009:156–159).

59 The length of time any of these alternatives tochangingthecompositionofdomesticoutputcanbepursuedlargelydependsontheexternaleconomicenvironment, and they can quickly spiral into abalance-of-paymentscrisisaswell.Forfurtherdis-cussion,seeTDR 2013, chap.ii.

60 ArecentpaperbyCubedduetal.(2014)provideseconometricsupportforthisevidence.ithighlightsthesizeablecontributionofexternaldemandfromdeveloped economies to the growth performanceofnon-commodity-exportingdevelopingcountriesduringthefirstdecadeof the2000s.ontheotherhand,forthecommodityexportersamongdevelop-ing countries, itwas external demand from largeemergingeconomiesthatplayedamoreimportantroleasagrowthdriver.Thepaperalsoshowsthatthecontributionfromexternaldemandwasgreatestforthosedevelopingcountrieswhichhadthelarg-est shareofexports inGDP,and that,despite theincreaseinSouth-Southtrade,theirgrowthremainedmoresensitivetodemandfromdevelopedthanfromdevelopingcountries.

61 Thisformoftradewithinproductionnetworkshasbeen called the “second unbundling”.The “firstunbundling”referredtotheprogressiveintegrationofnationaleconomiesthroughareductionintradecosts,mainly resulting from lower transportationcosts,whichallowedtheproductionandconsump-tion of goods to be geographically separated butmaintainedproductionstagesbundledspatially infactoriesinordertominimizecommunicationandcoordinationcosts.The“secondunbundling”referstotheunbundlingoffactoriesasaresultofthespatialdispersionofproductionstages.Thiswasmadepos-siblebyareductioninthecostsofcommunicationandinformation-sharingandassociatedchangesinworkingmethods and product designs thatmakeproductionmoremodular(baldwin,2006).

62 Nolan(2012:21)indicates,forexample,“thatjusttwofirmsproduce75percentoftheglobalsupplyofbrakingsystemsforlargecommercialaircraft,…threefirmsproduce75percentoftheglobalsupplyofconstantvelocityjointsforautomobiles,[and]…threefirmsproduce80percentoftheglobalsupplyofindustrialgases”.

63 For an early assessment of the domestic value-addedcontentofdeveloping-countrymanufacturedexports,seeTDR 2002.Analysingdatafortheperiod1980–1997,theassessment’smainconclusionwasthat developing countrieswere “tradingmorebutearningless”.inotherwords,theirshareinglobalmanufacturedexportshadincreased,buttheirshareinglobalmanufacturingvalueaddedhadfallen.

64 These initiatives formeasuringvalue-added traderelypartlyonreportedstatisticsprovidedintheTrade

inValueAdded(TiVA)inter-Countryinput-outputmodel,operatedbytheoeCDandtheWTo,andtheWorldinput-outputDatabase(WioD)fundedby theeuropeanCommission,which is basedonsupply-usetablesfromnationalstatisticscompiledby a consortiumof 11 institutions and availablefromtheUniversityofGroningen.Thesedata,on18industrialsectors,cover57economies(includingalloeCDcountries,brazil,China,india,indonesia,theRussianFederationandSouthAfrica)spanningtheperiod1995–2009.Theyhavebeenused,forexam-ple,toassesstheextenttowhichindividualcountriesare involved in vertically fragmented productionprocesses (e.g.backer andMiroudot, 2013).bycontrast,thedatausedinUNCTAD(2013)relyoninput-outputtablesderivedfromtheeoraproject’sglobalmulti-regioninput-output(MRio)table.Thisdataset relieson reporteddatawith interpolationsand exploratory estimates to provide continuoustimeseriesfortheperiod1990–2010on187coun-tries,includingalargenumberofdeveloping,andsometimesdata-poor,countries.Fordetailsonthetrade-offsbetweendatacoverageandstatisticalrigor,seeUNCTAD(2013:124).

65 The same phenomenon can be observedwithinlatinAmericaandtheCaribbean,wheretheshareofdomesticvalueadded inacountry’sexports issignificantly higher for themore resource-basedeconomiesinSouthAmericathanitisforcountriesinCentralAmericaandtheCaribbean,whoseparticipa-tioninvaluechainsisbasedmoreonmanufacturing(UNCTAD,2014:figureii.12).

66 Givenitsfocusondevelopedeconomies,theTiVAdatabase offers limited evidence for developingcountries.However, theoeCD (2013:56) showsthat “China’s exports currently involve assemblyworkwithahighlevelofforeigncontent,leadingtoasignificantfall initsdomesticvalueaddedtooutputratiobetween2005and2009.”ontheotherhand,thedomesticcontentofChina’sexportshasincreased.ThereasonforthisiscloselyrelatedtothedecliningimportanceinChina’stotaltradeofpro-cessingtradewithitshighlevelsofforeigncontent(oeCD,2013:147).However,domesticvalueaddedinChina’sprocessingtradeincreasedonlyslightly,fromabout38percenttoabout40percentbetween2007and2011.Thesamesourcedoesnotprovidedata forMexico for the sameperiod, but it doesshowthatMexico’sshareofdomesticvalueaddedinprocessingtradealsoincreasedslightlybetween2000and2006, though it remainedbelow30percent(oeCD,2013:147).eventhoughtheeconomicoutcomesduringthetwodifferenttimeperiodswereclearlyalsoaffectedbydifferentexternaleconomicenvironments,takentogether,thisevidencewouldsuggestthatthelargershareofdomesticvalueaddedinChina’sexportsofprocessedgoodswasassociated

Trade and Development Report, 2014114

withChina’smore proactive trade and industrialpolicies.ThisargumentreceivesfurthersupportfromthedifferentoutcomesintheautomobileindustriesinMexicoandbrazil(UNCTAD,2014:65–69).

67 PartofthisparagraphdrawsonDisdieretal.,2013.68 Forexample,reshoringofmanufacturingoperations

intheUnitedStatesisexpectedtooccurasaresultoffallingpricesinthatcountry’sgasmarket,asnotedbyUNCTAD(2014:12).

69 AccordingtoMoser(2013:40),“Historicalevidencesuggests that in countrieswith patent laws, the

majorityofinnovationsoccuroutsideofthepatentsystem.Countrieswithoutpatentlawshaveproducedasmanyinnovationsascountrieswithpatentlawsduringsometimeperiods,andtheirinnovationshavebeenofcomparablequality.”Thismaybetakentoindicatethat“[p]atentsassuchdonotcreateinno-vation incentives.Theyrespondto incentives thatresult frommarketopportunities,whichpatenteesmayormaynotcapturebyvirtueoftheirexclusiverights” (MaxPlanck institute for innovation andCompetition,2014:3).

References

AkyüzY (2005).TheWTonegotiations on industrialtariffs:What isatstakefordevelopingcountries?Trade&DevelopmentSeriesNo.24.Penang,ThirdWorldNetwork.

AkyüzY,ChangHJ andKozul-WrightR (1998).Newperspectives oneastAsiandevelopment.Journal of Development Studies,34(6):4–36.

backerKDandMiroudotS(2013).Mappingglobalvaluechains.TradePolicyPaperNo.159.oeCD,Paris.

baldwinRe(2006).Globalisation:Thegreatunbundling(s).Geneva,GraduateinstituteofinternationalStudies;available at: http://graduateinstitute.ch/files/live/sites/iheid/files/sites/ctei/shared/CTei/baldwin/Publications/Chapters/Globalization/baldwin_06-09-20.pdf.

baldwinRe (2012).WTo2.0:Global governance ofsupply-chain trade.Policy insightNo. 64,Centreforeconomic PolicyResearch (CePR),london,December.

baldwin Re (2014).Multilateralising 21st centuryregionalism.oeCDGlobal ForumonTrade, 11February; available at: http://www.rieti.go.jp/en/events/bbl/13070401.html.

baldwinReandevenettSJ(2012).beggar-thy-neighbourpoliciesduringthecrisisera:Causes,constraints,andlessonsformaintainingopenborders.Oxford Review of Economic Policy,28(2):211–234.

baldwinRe and JaimovichD (2012).Are free tradeagreements contagious?Journal of International Economics,88(1):1–16.

blockFl (2008). Swimming against the current:TheriseofthehiddendevelopmentalstateintheUnitedStates.Politics and Society,36(2):169–206.

boundKandPuttickR(2010).buyingpower?istheSmallbusinessResearch initiative for procuringR&Ddriving innovation in theUK?ResearchReport,NationalendowmentforScience,TechnologyandtheArts (NeSTA), london; available at: http://www.nesta.org.uk/sites/default/files/buying_power_report.pdf.

brunelC andHufbauerG (2009).Money for the autoindustry: Consistent withWTo rules? PolicybriefNo.09-4.Petersoninstituteforinternationaleconomics,WashingtonDC,February.

brusick P,AlvarezAM and Cernat l, eds. (2005).Competition Provisions in Regional Trade Agreements: How to Assure Development Gains.UNCTAD/DiTC/ClP/2005/1,NewYorkandGeneva,UnitedNations.

Cattaneoo,GereffiG,MiroudotSandTaglioniD(2013).Joining,upgradingandbeingcompetitiveinglobalvaluechains.PolicyResearchWorkingPaperNo.6406,Worldbank,Washington,DC.

Chanda R (2002). GATS and its implications fordeveloping countries:Key issues and concerns.Discussion PaperNo. 25. ST/eSA/2002/DP.25,UnitedNationsDepartmentofeconomicandSocialAffairs,NewYork.

ChandrasekharCP(2014).NationalDevelopmentbanksin aComparative Perspective. JawaharlalNehruUniversity,NewDelhi,February.

Trade and Industrial Policies in an Evolving Global Governance Regime 115

ChangHJ(2011).industrialpolicy:Canwegobeyondan unproductive confrontation? in: lin JY andPleskovic b, eds,Lessons from East Asia and the Global Financial Crisis. Proceedings of theAnnualWorldbankConferenceonDevelopmenteconomics−Global2010.Washington,DC,Worldbank:83–109.

Chukwumerijeo(2010).obama’stradepolicy:Trends,prospects, and portends.Journal of International Law and Policy,16(1):39–79.

CiminoA,HufbauerGCandSchottJJ(2014).Aproposedcodetodisciplinelocalcontentrequirements.Policybrief 14-6, Peterson institute for internationaleconomics,Washington,DC.

Cohene(2007).industrialpoliciesinFrance:theoldandthenew.Journal of Industry, Competition and Trade,7(3–4):213–227.

Commission onGrowth andDevelopment (2008).The Growth Report. Strategies for Sustained Growth and Inclusive Development.Washington,DC,Worldbank.

CopelandPandPapadimitriouD,eds.(2012).The EU’s Lisbon Strategy: Evaluating Success, Understanding Failure.london,PalgraveMacmillan.

CoppensD (2009).Howmuch credit for export creditsupport under the SCMAgreement? Journal of International Economic Law,12(1):63–113.

Coppens D (2013). How special is the special anddifferential treatmentunder theSCMAgreement?A legal and normative analysis ofWTo subsidydisciplines on developing countries.World Trade Review,12(1):79–109.

CorreaC(2014).intellectualproperty:Howmuchroomisleftforindustrialpolicy?backgroundpaperfortheTrade and Development Report 2014.Geneva,UNCTAD.

Cubeddul,CuliucA,FayadG,GaoY,KochharK,KyobeA,onerC,PerrelliR,SanyaS,TsountaeandZhangZ(2014).emergingmarketsintransition:Growthprospects and challenges. StaffDiscussionNote14-06,iMF,Washington,DC.

DiTommasoMRandSchweitzerSo(2013).Industrial Policy in America: Breaking the Taboo.CheltenhamandNorthampton,edwardelgar.

DawarKandHolmesP(2011).Competitionpolicy.in:ChauffourJPandMaurJC,eds,Preferential Trade Agreement Policies for Development. A Handbook.Washington,DC,Worldbank:347–366.

DeereC(2009).The implementation game: The TRIPS Agreement and the global politics of intellectual property reform in developing countries.oxford,oxfordUniversityPress.

DepartmentofTradeandindustry(SouthAfrica)(2007).National Industrial Policy Framework.Pretoria.

DezanShira&Associates (2011).Foreign Investment Industrial Guidance Catalogue(2011version).HongKong(ChinaSAR).

DisdierAC,FontagnélandCadoto(2013).North-Southstandards harmonization and international trade.PolicyResearchWorkingPaperNo. 6710,Worldbank,Washington,DC.

DürA, baccini l and elsigM (2013).The design ofinternational trade agreements: introducing a newdataset.The Review of International Organizations:1−23; available at: http://rd.springer.com/article/10.1007/s11558-013-9179-8.

eichengreenbJandirwinD(2010).TheslidetoprotectionismintheGreatDepression:Whosuccumbedandwhy?The Journal of Economic History,70(4):871–897.

eichengreenbJ andKenenPb (1994).Managing theworldeconomyunder thebrettonWoodssystem:anoverview. inKenenPb,ed,Managing the World Economy: 50 Years After Bretton Woods.Washington,DC,instituteforinternationaleconomies:3–57.

estevadeordalA,SuominenKandTehR, eds. (2009).Regional Rules in the Global Trading System.Cambridge,CambridgeUniversityPress.

europeanCommission (1990). industrial policy in anopenandcompetitiveenvironment:GuidelinesforaCommunityapproach.DocumentCoM(1990)556,brussels.

europeanCommission (2004).Community guidelinesonStateAidforrescuingandrestructuringfirmsindifficulty.Official Journal of the European Union,2004/C244/02,october;availableat:http://eur-lex.europa.eu/lexUriServ/lexUriServ.do?uri=oJ:C:2004:244:0002:0017:eN:PDF.

europeanCommission(2011).HighlevelexpertGroupon Key enabling Technologies: Final Report;available at: http://ec.europa.eu/enterprise/sectors/ict/files/kets/hlg_report_final_en.pdf.

europeanCommission(2013).DraftguidelinesonStateaidforrescuingandrestructuringnon-financialundertakingsindifficulty;availableat:http://ec.europa.eu/competition/consultations/2013_state_aid_rescue_restructuring/draft_guidelines_en.pdf.

evenettSJ(2012).executivesummary.in:evenettSJ,ed,Débâcle: The 11th GTA Report on Protectionism.CentreforeconomicPolicyResearch,london.

evenettSJ(2013a).What Restraint? Five years of G20 Pledges on Trade. The 14th GTA Report.CentreforeconomicPolicyResearch,london.

evenettSJ(2013b).Mappingcrisis-eraprotectionisminlatinAmericaandtheCaribbean.Discussionpaperno. 9782.Centre foreconomicPolicyResearch,london.

evenettSJ(2013c).Mappingcrisis-eraprotectionismintheAsia-Pacificregion.Discussionpaperno.9783,CentreforeconomicPolicyResearch,london.

Felipe J,AbdonA andKumarU (2012).Tracking themiddle-incometrap:Whatisit,whoisinit,andwhy?Workingpaperno.715,levyeconomicsinstituteofbardCollege,Annandale-on-Hudson,NY.

Trade and Development Report, 2014116

Fergusson iF,CooperWH, JurenasR andWilliamsbR(2013).TheTrans-PacificPartnership (TPP) nego-tiationsandissuesforCongress.DocumentR42694,CongressionalResearchService,Washington,DC;availableat:http://fas.org/sgp/crs/row/R42694.pdf.

FerrazJC,KupferDandMarquesFS(2014).industrialpolicyasaneffectivedevelopmentaltool:lessonsfrombrazil.in:Salazar-XirinachsJM,NübleriandKozul-WrightR, eds,Transforming Economies. Making Industrial Policy Work for Growth, Jobs and Development.Geneva, international labourorganization(ilo):291–305.

FinkC(2011).intellectualpropertyrights.in:ChauffourJPandMaurJC,eds,Preferential Trade Agreement Policies for Development. A Handbook,Washington,DC,Worldbank:387–405.

FosuAK, ed. (2013).Achieving Development Success. Strategies and Lessons from the Developing World.oxford,oxfordUniversityPress.

FugazzaMandNicitaA(2013).Thedirectandrelativeeffects of preferentialmarket access. Journal of International Economics,89(2):357–368.

GereffiG(2014).Globalvaluechainsinapost-WashingtonConsensusworld.Review of International Political Economy,21(1):9–37.

GoswamiAGandSáezS(2013).Howwellhavetradeagreements facilitated temporarymobility? in:Sáez S, ed.Let Workers Move: Using Bilateral Labor Agreements to Increase Trade in Services.Washington,DC,Worldbank:17–38.

GrabasCandNützenadelA,eds.(2014). Industrial Policy in Europe after 1945: Wealth, Power and Economic Development in the Cold War.basingstoke,PalgraveMacmillan.

Hart DM, ezell SJ andAtkinson RD (2012).WhyAmericaneedsanationalnetworkformanufacturinginnovation.Washington, DC, The informationTechnology& innovationFoundation; availableat: http://www.itif.org/publications/why-america-needs-national-network-manufacturing-innovation.

HeimlerA and Jenny F (2012). The limitations ofeuropeanUnioncontrolofstateaid.Oxford Review of Economic Policy,28(2):347–367.

HennCandMcDonaldb(2014).Crisisprotectionism:Theobservedtradeimpact.IMF Economic Review,62(1):77–118.

HornH,MavroidisPCandSapirA (2010).beyond theWTo?AnanatomyofeUandUSpreferentialtradeagreements.The World Economy,33(11):1565–1588.

iCCT (2013).brazil’s inovar-Auto incentive program.international Council onCleanTransportation;available at: http://www.theicct.org/sites/default/files/publications/iCCTupdate_brazil_inovarAuto_feb2013.pdf.

iMF (2012).The Liberalization and Management of Capital Flows: An Institutional View.Washington,DC,internationalMonetaryFund.

KaldorN(1968).Productivityandgrowthinmanufacturingindustry:Areply.Economica,35(140):385–391.

KetelsCHM(2007).industrialpolicyintheUnitedStates.Journal of Industry, Competition and Trade,7(3–4):147–167.

KohlT,brakmanS andGarretsenH (2013).Do tradeagreementsstimulateinternationaltradedifferently?evidencefrom296tradeagreements.UniversityofGroningen,unpublished;availableat:http://www.tristankohl.org/site/KohlbrakmanGarretsen_296Agreements.pdf.

Kozul-Wright R (1995). Themyth ofAnglo-SaxonCapitalism:Reconstructuring the history of theAmericanState.in:ChangHJandRowthornR,eds.The Role of the State in Economic Change.oxford,ClarendonPress:235–251.

KrugmanPR(1993).Towardacounter-counterrevolutionin development theory. in: Summers lH andShah S, eds.Proceedings of the World Bank Annual Conference on Development Economics 1992, Supplement to The World Bank Economic Review and The World Bank Research Observer.Washington,DC,Worldbank:15–62.

lewisWA(1954).economicdevelopmentwithunlimitedsuppliesoflabour.The Manchester School,22(2):139–191.

linJYandTreichelV(2014).Makingindustrialpolicywork for development. in: Salazar-Xirinachs JM,Nübler i andKozul-WrightR, eds.Transforming Economies: Making Industrial Policy Work for Growth, Jobs and Development. Geneva, ilo:65–78.

loDandWuM(2014).TheStateandindustrialpolicyinChinese economic development. in: Salazar-XirinachsJM,NübleriandKozul-WrightR,eds.Transforming Economies. Making Industrial Policy work for Growth, Jobs and Development.Geneva,ilo:307–326.

MaggiGandRodriguez-ClareA(1998).Thevalueoftradeagreements in the presenceof political pressures.Journal of Political Economy,106(3):574–601.

MangerMS and ShadlenKC (2014). Political tradedependence andNorth–South trade agreements.International Studies Quarterly,forthcoming.

ManovaKandZhangZ(2012).exportpricesacrossfirmsanddestinations.Quarterly Journal of Economics,127(1):379–436.

MarinAGandVoigtländerN(2013).exportingandplant-levelefficiencygains:it’sinthemeasure.Workingpaper no. 19033,Nationalbureau of economicResearch,Cambridge,MA.

MaurJCandShepherdb(2011).Productstandards.in:ChauffourJPandMaurJC,eds.Preferential Trade Agreement Policies for Development. A Handbook.Washington,DC,Worldbank:197–216.

MaxPlanck institute for innovation andCompetition(2014).Declarationonpatentprotection:Regulatory

Trade and Industrial Policies in an Evolving Global Governance Regime 117

sovereigntyunderTRiPS;availableat:http://www.ip.mpg.de/en/pub/news/patentdeclaration.cfm.

MazzucatoM (2013). The Entrepreneurial States. Debunking Public vs. Private Sector Myths.london,AnthemPress.

McMillanM,RodrikD andVerduzco-Gallo i (2014).Globalization, structural change, andproductivitygrowth,withanupdateonAfrica.World Development,forthcoming.

MilbergW andbernhardtT (2013).Does industrialupgradinggenerateemploymentandwagegains?in:bardhanA,JaffeeDandKrollC,eds.The Oxford Handbook of Offshoring and Global Employment.oxford,oxfordUniversityPress:490–531.

MilbergWandWinklerD(2013).Outsourcing Economics: Global Value Chains in Capitalist Development.Cambridge,CambridgeUniversityPress.

MilbergW,JiangXandGereffiG(2014).industrialpolicyintheeraofverticallyspecializedindustrialization.in:Salazar-XirinachsJM,NübleriandKozul-WrightR,eds.Transforming Economies. Making Industrial Policy work for Growth, Jobs and Development.Geneva,ilo:151–178.

MiroudotS(2011).investment.in:ChauffourJPandMaurJC,eds.Preferential Trade Agreement Policies for Development. A Handbook.Washington,DC,Worldbank:307–326.

MoserP(2013).Patentsandinnovation:evidencefromeconomichistory.Journal of Economic Perspectives,27(1):23–44.

NatsudaKandThoburnJ(2013).industrialpolicyandthe development of the automotive industry inThailand. Journal of the Asia Pacific Economy,18(3):413–437.

NaudéW (2010). industrial policy:old andnew issues.Workingpaperno.2010/106,UNU-WiDeR,Helsinki.

Neumayere,NunnenkampP andRoyM (2014).Arestricterinvestmentrulescontagious?Hostcountrycompetition for foreigndirect investment throughinternational agreements.Working papereRSD-2014-04,WTo,Geneva.

NguyenTTA,luuMDandTrinhDC(2014).TheevolutionofVietnamese industry.Workingpaper2014/076,World institute for Development economicsResearch(WiDeR),Helsinki.

NicitaA,olarreagaMandSilvaP(2014).CooperationinthetariffwatersoftheWorldTradeorganization.PolicyissuesininternationalTradeandCommoditiesStudySeriesNo.62.UNCTAD,Geneva.

NolanP(2012).Is China Buying the World?CambridgeandMalden,Polity.

Nübler i (2014).A theory of capabilities for productivetransformation:learning to catch up. in: Salazar-Xirinachs JM,Nübler i andKozul-WrightR, eds.Transforming Economies. Making Industrial Policy Work for Growth, Jobs and Development.Geneva,ilo:113–149.

oeCD(2013).Interconnected Economies. Benefiting from Global Value Chains.Paris.

oreficeG (2014). internationalmigration and tradeagreements: The new role of PTAs.Canadian Journal of Economics,forthcoming.

oreficeG andRochaN (2014).Deep integration andproduction networks:An empirical analysis.The World Economy,37(1):106–136.

owen G (2012). industrial policy in europe sincethe SecondWorldWar.What has been learnt?occasionalpaperno.1/2012,europeanCentreforinternationalpoliticaleconomy,brussels.

PackHandSaggiK(2006).Thecaseforindustrialpolicy:Acriticalsurvey.PolicyResearchWorkingPaperNo.3839,Worldbank,Washington,DC.

PoonD(2014).China’sdevelopmenttrajectory:AstrategicopeningforindustrialpolicyintheSouth.UNCTADdiscussionpaper,forthcoming.Geneva,UNCTAD.

PriceDMandSmartMJ(2013).biTbybiT:APathtoStrengthenUS-ChinaeconomicRelations.PaulsonPolicyMemorandum. Chicago, The Paulsoninstitute;availableat:http://www.paulsoninstitute.org/media/102532/bit_by_bit_pricesmart_english_final.pdf.

PrusaTJ(2011).Traderemedyprovisions.in:ChauffourJPandMaurJC,eds.Preferential Trade Agreement Policies for Development. A Handbook.Worldbank,Washington,DC:179–196.

PrusaTJandTehR(2011).Contingentprotectionrulesinregionaltradeagreements.in:bagwellKWandMavroidisPC,eds.Preferential Trade Agreements. A Law and Economics Analysis. Cambridge,CambridgeUniversityPress.

Ranis G and Fei JC (1961).A theory of economicdevelopment.American Economic Review, 51(4):533–565.

RavenhillJ(2014).Globalvaluechainsanddevelopment.Review of International Political Economy,21(1):264–274.

ReddingSJ(2011).Theoriesofheterogeneousfirmsandtrade.Annual Review of Economics,3:77–105.

ReyesJD(2012).Thepro-competitiveeffectofinternationalharmonizationofproductstandards.in:CadotoandMaloucheM, eds.Non-tariff Measures: A Fresh Look at Trade Policy’s New Frontier.londonandWashington,CePRandWorldbank,167–185.

RodrikD(2008).industrialpolicy:Don’taskwhy,askhow.Middle East Development Journal,Demoissue,1–29.

RohatynFG(2009).Bold Endeavors: How Our Government Built America, and Why It Must Rebuild Now.NewYork,Schuster&Schuster.

Roncolatol andKuceraD (2014). Structural drivers ofproductivityandemploymentgrowth:Adecompositionanalysis for 81 countries.Cambridge Journal of Economics,forthcoming.

Salazar-Xirinachs JM,Nübler i andKozul-WrightR(2014).industrialpolicy,productivetransformation

Trade and Development Report, 2014118

andjobs:Theory,historyandpractice.in:Salazar-XirinachsJM,NübleriandKozul-WrightR,eds.Transforming Economies. Making Industrial Policy Work for Growth, Jobs and Development.Geneva,ilo:1–38.

SchrankA andWhitford J (2009). industrial policy intheUnitedStates:Aneo-Polanyian interpretation.Politics and Society,37(4):521–553.

SimmonsbA (2014).bargaining overbiTS, arbitratingawards:Theregimeforprotectionandpromotionofinternationalinvestment.World Politics,66(1):12–46.

SperlingG(2012).RemarksbyGeneSperlingattheconferenceon theRenaissance ofAmericanManufacturing;WashingtonDC,TheNationalPressClub;availableat: http://www.whitehouse.gov/sites/default/files/administration-official/sperling_-_renaissance_of_american_manufacturing_-_03_27_12.pdf.

Sperling G (2013). The case for a manufacturingrenaissance.Remarks at thebrookings institution;available at: http://www.whitehouse.gov/sites/default/files/docs/the_case_for_a_manufacturing_renaissance_gene_sperling_7-25-2013_final_p....pdf.

Starrs(2014).TheChimeraofGlobalConvergence.New Left Review,87(May/June):81–96.

StudwellJ(2013).How Asia Works: Success and Failure in the World’s Most Dynamic Region. london,Profilebooks.

SubW,HeshmatiA,GengY andYuXM (2013).AreviewofthecirculareconomyinChina:Movingfromrhetorictoimplementation.Journal of Cleaner Production,42(March):215–227.

TaglioniDandWinklerD(2014).Makingglobalvaluechainswork for development.economicPremiseNo.143,Worldbank,Washington,DC.

teVeldeDW and FahnbullehM (2006). investment-relatedprovisionsinregionaltradeagreements.in:teVeldeDW,ed.Regional Integration and Poverty.Aldershot,Ashgate.

ThirlwallAP(1979).Thebalanceofpaymentsconstraintas an explanation of international growth ratedifferences.Banca Nazionale del Lavoro Quarterly Review,128:45−53.

ThoburnJ(2013).Vietnamasarolemodelfordevelopment.in:FosuAK,ed.Achieving Development Success: Strategies and Lessons from the Developing World.oxford,oxfordUniversityPress:99–118.

ThrasherRDandGallagherK(2008).21stcenturytradeagreements:implicationsforlong-rundevelopmentpolicy.ThePardeePapers,No.2,bostonUniversity,boston,MA;availableat:http://www.bu.edu/pardee/files/documents/PP-002-Trade.pdf.

ThrasherRDandGallagherK(2014).Thesoftfoundationsand hard consequences of “soft protectionism”.backgroundpaperpreparedforUNCTAD’sTrade and Development Report 2014.bostonUniversity,boston,MA,unpublished.

TilfordSandWhyteP(2010).ThelisbonScorecardX:The road to 2020.london,Centre foreuropeanReform; available at: http://www.cer.org.uk/sites/default/files/publications/attachments/pdf/2011/rp_967-251.pdf.

UNCTAD(2009).The Least Developed Countries Report 2009 – The State and Development Governance.UnitedNations publication, sales no.e.09.ii.D.9,NewYorkandGeneva.

UNCTAD (2011a).Report of theSecretary-General ofUNCTAD toUNCTADXiii, Development-ledGlobalization:TowardsSustainable and inclusiveDevelopmentPaths.DocumentUNCTAD(Xiii)/1,UnitedNations,NewYorkandGeneva.

UNCTAD(2011b).TradeFacilitation inRegionalTradeAgreements.DocumentUNCTAD/DTl/Tlb/2011/1,UnitedNations,NewYorkandGeneva.

UNCTAD (2013).World Investment Report 2013 – Global Value Chains: Investment and Trade for Development.UnitedNationspublication,salesno.e.13.ii.D.5,NewYorkandGeneva.

UNCTAD (2014).World Investment Report 2014 – Investing in the SDGs: An Action Plan.UnitedNationspublication,salesno.e.14.ii.D.1,NewYorkandGeneva.

UNCTAD (forthcoming).GlobalValueChains and theGrowth of South-SouthTrade. UnitedNationspublication,NewYorkandGeneva.

UNCTAD(TDR 1994). Trade and Development Report, 1994. UnitedNations publication, sales no.e.94.ii.D.26,NewYorkandGeneva.

UNCTAD(TDR 1995). Trade and Development Report, 1995. UnitedNations publication, sales no.e.95.ii.D.16,NewYorkandGeneva.

UNCTAD(TDR 1996). Trade and Development Report, 1996. UnitedNations publication, sales no.e.96.ii.D.6,NewYorkandGeneva.

UNCTAD(TDR 1998).Trade and Development Report, 1998. Financial instability. Growth in Africa.UnitedNationspublication,salesno.e.98.ii.D.6,NewYorkandGeneva.

UNCTAD(TDR 2002).Trade and Development Report, 2002. Developing Countries in World Trade.UnitedNationspublication,salesno.e.02.ii.D.2,NewYorkandGeneva.

UNCTAD(TDR 2003).Trade and Development Report, 2003. Capital accumulation, growth and structural change.UnitedNationspublication,salesno.e.03.ii.D.7,NewYorkandGeneva.

UNCTAD(TDR 2006).Trade and Development Report, 2006. Global Partnership and National Policies for Development.UnitedNationspublication,salesno.e.06.ii.D.6,NewYorkandGeneva.

UNCTAD(TDR 2009).Trade and Development Report, 2009. Responding to the Global Crisis: Climate Change Mitigation and Development.UnitedNations

Trade and Industrial Policies in an Evolving Global Governance Regime 119

publication,salesno.e.09.ii.D.16,NewYorkandGeneva.

UNCTAD(TDR 2013).Trade and Development Report, 2013. Adjusting to the changing dynamics of the world economy.UnitedNationspublication,salesno.e.13.ii.D.3,NewYorkandGeneva.

UNiDo (2013). Industrial Development Report 2013. Sustaining Employment Growth: The Role of Manufacturing and Structural Change.Vienna,UnitedNationsindustrialDevelopmentorganization.

WadeR (2014).The paradox ofUS industrial policy:The developmental state in disguise. in: Salazar-XirinachsJM,NübleriandKozul-WrightR,eds.Transforming Economies. Making Industrial Policy Work for Growth, Jobs and Development.Geneva,ilo:379–400.

WagnerJ(2012).internationaltradeandfirmperformance:Asurveyofempiricalevidencesince2006.Review of World Economics,148(2):235–267.

WarwickK(2013).beyondindustrialpolicy:emergingissues and new trends. Science,Technology andindustryPolicyPaperNo.2,oeCD,Paris.

WhiteHouse(2012).Tomodifyduty-freetreatmentundertheGeneralizedSystemofPreferencesandforotherpurposes.Proclamationof theofficeof thePressSecretary,TheWhiteHouse,Washington,DC;availableat:http://www.whitehouse.gov/the-press-office/2012/03/26/modify-duty-free-treatment-under-generalized-system-preferences-and-othe.

Worldbank (2005a).Economic Growth in the 1990s: Learning from a Decade of Reform.Washington,DC,Worldbank.

Worldbank(2005b).Global Economic Prospects. Trade, Regionalism, and Development.World bank,Washington,DC.

WeF (2012).TheShiftingGeographyofGlobalValueChains:implicationsforDevelopingCountriesandTradePolicy.Geneva,WorldeconomicForum.

WTo(2008).Fourthrevisionofdraftmodalitiesfornon-agriculturalmarket access.TN/MA/W/103/Rev.3,Geneva.

WTo(2011).World Trade Report 2011. The WTO and Preferential Trade Agreements: From Co-existence to coherence.Geneva.

WTo(2013a).Specialanddifferential treatmentprovi-sions inWTo agreements and decisions.WT/CoMTD/W/196,Geneva.

WTo(2013b).WToDisputeSettlement:one-PageCaseSummaries(1995–2012).Geneva.

WTo(2013c).World Trade Report 2013. Factors shaping the future of world trade.Geneva.

WuHX(2013).RethinkingChina’spathofindustrialization.in: SzirmaiA, NaudéW andAlcorta l, eds.Pathways to Industrialization in the Twenty-First Century: New Challenges and Emerging Paradigms.oxfordUniversityPress,oxford:155–192.

YangC(2014).Marketrebalancingofglobalproductionnetworks in the post-Washington Consensusglobalizingera:Transformationofexport-orienteddevelopment inChina.Review of International Political Economy,21(1):130–156.

ZalkN(2014).industrialpolicyinaharshclimate:ThecaseofSouthAfrica.in:Salazar-XirinachsJM,NübleriandKozul-WrightR,eds.Transforming Economies. Making Industrial Policy Work for Growth, Jobs and Development.Geneva,ilo:327–354.

ZengDZ (2011).Howdo special economic zones andindustrialclustersdriveChina’srapiddevelopment?PolicyResearchWorkingPaperNo. 5583,Worldbank,Washington,DC.

International Finance and Policy Space 121

Tobefullyeffective,policiesaimedatstructuraltransformationrequireafavourablemacroeconomicframework.Thismeanseconomicpolicymustaimtokeepthekeymacroeconomicprices(interestrates,wagesandexchangerates)atlevelsthatfavourrobustcapitalaccumulation,domesticmarketgrowthandtradecompetitiveness.Macroeconomicpolicymustalso avoid excessive instability or unsustainabledomesticandexternalimbalances.inalltheseareas,international finance can play an important, butsometimesdisruptive, role. indeed, foreigncapitalinflows, dependingon their size and composition,mayincreaseorreduceeconomicpolicy’sroomformanoeuvreand,moregenerally,supportorunder-minegrowthanddevelopment.

Regardingsize,neitherextremescarcitynoranoverabundanceofforeigncapitalcontributespositivelytopolicyspace.ontheonehand,scarcitymayrestrictthevolumeofimportsofgoodsthatareessentialforspeeding up the development process, in particularcapitalgoods thatcannotbeproduceddomestically,to the extent that such imports cannot befinancedby current export earnings.A shortage of externalfinancingmay therefore hamper policies aimed atsupportingGDPgrowth,investmentanddiversifica-tion.ontheotherhand,anoverabundanceofforeigncapital inflows usually generates financial bubbles,

currency appreciation, current account deficits andrisingindebtednessofdomesticagents.Thesedevel-opmentsalsoaffectpolicyspace,astheyweakenthelikely impact ofmonetary and credit policies andtheregulationofkeymacroeconomicprices.intheabsenceofcapitalaccountmanagement,thesituationin developing and transition economies that haveaccesstointernationalfinancialmarkets(andarethusalsoexposedtothevagariesofthosemarkets)tendstooscillatefromoneextremetotheother:overabun-danceleadstotheaccumulationofexternalliabilities,followedbysuddenstopsorevenreversalsofcapitalinflows,possiblyprecipitatingafinancialcrisis,whichinturnisfollowedbyaperiodofcapitalscarcity.

economiesareparticularlyvulnerabletofinan-cialinstabilitywheninternationalcapitalflowsaremainly of a short-termnature.Unlike the foreigncapitalthatisusedinfixedcapitalformation,1short-termflowsarenormallyusedfortheacquisitionoffinancialassets,realestateinvestmentsorconsump-tion credit, directly or through the intermediationofdomesticfinancialsystems.Suchflowsarepar-ticularlypronetoboom-and-bustcycles,dependingmainlyoneventsinthemoredevelopedeconomies.They exacerbate the fragility and vulnerability ofdomesticfinancialsystemsandleadtounsustainablecurrentaccountdeficits.

Chapter VI

INTERNATIONAL FINANCE AND POLICy SPACE

A. Introduction

Trade and Development Report, 2014122

indeed,excessiveexposuretoexternalcapitalflowsand the fact that in largepart theywerenotoriented to productive usesweremajor factors inthebuild-upofeconomiccrisesindevelopingandemergingeconomiesinthepastfewdecades,begin-ningwith the latinAmerican debt crises in the1980s.Thesewere not only balance-of-paymentsandbankingcrises;theywerealsofiscalcrises,asgovernmentsthemselvesresortedtoexternalborrow-ingand,inaddition,feltcompelledtobailoutprivatedebtorsandsocializetheir losses(Díaz-Alejandro,1985).Asaresult, theirfiscalpolicyspaceshrankdramatically as governments had to service theirexternal debtwhile economic recessiondepressedfiscal revenues and access to private credit driedout.insuchasituation,theonlyremainingsourcesofcreditsupplywereofficialinstitutions(mainlythebrettonWoodsinstitutions),whichimposedpolicyconditionalitiesontheirlendingthatplacedthewholeburdenofadjustmentonwhatthenbecamedebtorcountries,andfurtheralteredthesecountries’policyspace.Thisexperiencehasbeenrecentlyreplicatedbysomedevelopedcountriesthatwereseverelyhitbytheglobalfinancialcrisisthatstartedin2007-2008.

Partly as a reaction to thesenegative experi-ences,authoritiesinanumberofdevelopingcountrieshave tried to reduce their dependence on foreigncapital.Theyhavesoughttoavoidcurrentaccountdeficitsandreducetheirexternaldebts,andmanyofthemhavesignificantlyincreasedtheirinternationalreservesinordertolessentheirexternalvulnerability.Someof themhave been particularly reluctant toreturntoiMF-ledadjustmentprogrammes.

Therefore, there is a strong case for govern-mentstomanagecapitalflowsbyseekingtoinfluencenotonlytheamountofforeigncapitalmovements,butalsotheircompositionanduse.Suchapragmaticandselectiveapproachtocapitalflows,ratherthanunrestrictedopennessoracompleteban,couldhelpmaximizepolicyspacewithinagivendevelopmentstrategyandgivenexistinginternationalinstitutionalarrangements.Thischapterexaminespossiblewaysforapplyingneededpoliciesinthecontextoffinan-cialglobalization,aswellasvariousobstaclestosuchpolicies(seealsochapterV).2

Constraints on the ability of governments tointroduceproactivepoliciescanbeeitherdefactoordejure.Defactorestrictionsoncapitalmanagementrefertopressuresfromexistingandpotentiallenders

and investors.Theymaydeemacountry’s capitalcontrolmeasures as detrimental to the “businessclimate”, andmay therefore reduceor threaten towithdrawcapitalflowstothatdestination.Theriskofthishappeningmaydetergovernmentsfromapplyingcapitalmanagementmeasures,butthiscouldincreasethe symmetric riskofexcessive short-termcapitalinflowsaswellassuddenoutflows.

De jure obstaclesstemfrommultilaterallyorbilaterallyagreedrulesthatforbidorlimitaresorttocapitalmanagementmeasures.Forinstance,countriesjoiningtheoeCDortheeUcommittomaintainingopencapitalaccountstoothermembers,andwithinvarious regional trade agreements countries oftenpledgetoliberalizetradeinfinancialservices.

overthepast25years,alargenumberofcoun-trieshavesignedinternationalinvestmentagreements(iiAs), either in the formof bilateral investmenttreaties(biTs)orasan“investmentchapter”ofanRTA. Such agreements provide for special treat-mentofforeigninvestors,whichtendstoreducethepolicyspaceoftheparticipatinggovernments.Akeycomponentofthoseagreementsisthe“investor-Statedispute settlement” (iSDS)mechanism,wherebynational governments accept the jurisdiction offoreign arbitration centres on issues thatmightdirectlyor indirectlyaffect theprofitabilityoffor-eigninvestmentsandtherightsofforeigninvestorsunderprovisionsoftheiiAs.Suchmechanismshaveallowedinternationalinvestorstosuegovernmentsandobtainmonetarycompensationforpolicymeas-uresthat,inonewayoranother,allegedlyaffectedtheprofitabilityofthosefirms.Someofthesemeasuresconsistofregulationsdirectlyrelatedtothepublicinterestor todevelopmentchoices, suchaspublichealth, environmental protection and the kinds ofenergysourcesacountryoptstoexploit.othersarerelated tomacroeconomicmanagement, includingexchangeratemanagementandrestructuringofthebankingsystemintimesofcrisis.

Thischapterisorganizedasfollows.Sectionbdiscusses the need for capitalmanagement andotherprudentialmeasurestoenablegovernmentstopreserve their policy space for conductingmacro-economic policies and pursuing their nationaldevelopmentstrategies. it reviews theexperiencesofdevelopingcountriesthatwereaffectedbyvolatilecapitalflowsbeforeandaftertheglobalfinancialcrisis.itthenanalysestheobstaclestocapitalmanagement

International Finance and Policy Space 123

policiesandexamineswhichpoliciescountriescanstillapply–andinsomecasesareimplementing–inordertoavoidthepotentiallydisruptivemacroeco-nomic impact of capital flows and better channelthemtofinanceinvestmentanddevelopmentgoals.SectionC addresses the challenges iiAs pose togovernments,whichfaceatrade-offbetweenwhattheybelieveisawayofencouraginginwardforeigninvestmentwhilepreservingtheirsovereignty ina

numberofstrategicareas.itexaminesinwhatwaysandtowhatextenttheseagreementshavereducedthepolicyspaceofgovernmentsseekingtoimple-mentproactiveindustrialpolicies,andthuspossiblyunderminingthedevelopmentcontributionofforeigninvestmentflows.Finally,itconsiderssomeofthealternativeapproachescurrentlybeingdiscussedbypolicymakersindevelopingcountriestoaddresstheseriousshortcomingsofiiAs.

1.  Capital flows and their impact on macroeconomic policy space

Thetraditionalviewonhowopennesstocapitalflowsaffectsmacroeconomicmanagementhasbeentermedthe“impossibletrinity”or“trilemma”,fol-lowingRobertMundell,accordingtowhichacountrycannothaveanopencapitalaccount,afixedexchangerateandmonetarysovereigntyatthesametime.Forinstance,withcapitalaccountopennessandafixedexchangerate,thecentralbankwouldloseitsabilitytodeterminethemoneysupply,becauseanexpan-sionarymonetarypolicywouldtendtolowerinterestrates.Thiswouldcausecapitaloutflows,andthere-forereduceinternationalreservesandthemonetarybase,hencecancellingtheinitialmonetaryexpansion.Thesamemechanismswouldworktheotherwaytocompensateforacontractionarymonetarypolicy.

However, the reality is oftenmore shaded,ascountriesdonotopt foreithercompletecapitalopenness or a totallyfixed exchange rate, nor docentralbanksaimatfullautonomy,andtherecannotbecompletelyclosedcapitalaccountsintheeraofglobalization.Hence,therealchallengeseemstobehowtoflexiblymanagethecapitalaccountandotherpolicy variables in order to generate a favourablemacroeconomicframeworkforgrowthandstructuralchange at a timewhen the volume andpattern of

internationalcapitalflowsexceeds thecapacityofmostcountriestoabsorbthemproductively.

Thissectionexamineshowtherapidopeningupofdevelopingcountries to internationalcapitalflowssincethelate1970shasaffectedtheirabilitytoconducttheirmacroeconomicpoliciesintwomajorways.onechannelconsistsofthedirectimpactthatcapitalmovementshaveonkeymacroeconomicvari-ables,suchasexchangerates,monetaryaggregatesandinterestrates,whichinturnaffecttheavailabilityandcostofdomesticcredit,assetprices,andcon-sumptionandinvestmentdecisions.Theotherhastodowiththegreaterleverageofthemaininternationalfinancialagentsoneconomicpolicydecisions.Thisisbecausepolicymakersfrequentlyhavetotakeintoconsiderationtheagenda,perceptionsandinterestsofforeigninvestorsintheformulationoftheirmacro-economic policies, since the portfolio decisionsof those investorsmay have a significant impactoneconomicgrowthand the stabilityofdomesticfinancialsystems.

(a) Impactofcapitalflowsonmacroeconomicvariables

Giventhesizeofaccumulatedglobalfinancialassets, the impact on a country’smacroeconomicstabilityofevenmarginalchangesinitsinternational

B. capital management in an era of globalized finance

Trade and Development Report, 2014124

capitalflows canbehuge (Haldane, 2011).Theseflows tend to follow a global financial cycle, inwhich “push factors” in thedeveloped economieswherethemainsuppliersofinternationalcreditarebased havemore influence than country-specific“pull factors” (i.e. countries’ demand for credit)(Rey,2013).3indeed,almostallthemajor“waves”ofcapitalinflowsreceivedbydevelopingcountriessincethelate1970sweretriggeredbyexpansionarymonetarypolicies in developed countries (Akyüz,2012),andwereamplifiedbytheleveragecyclesofglobalbanks(brunoandShin,2013).buttheywerealsoinfluencedbyriskperceptionsinthedevelopedcountries’financialmarkets.Thosewaves usuallycame to an endwithmonetary tightening in thereservecurrencycountries.Thispatternwasrepeatedfollowingtheglobalfinancialcrisis.Moreover,thecapitalinflowsreceivedbydevelopingandemergingeconomieshave remained synchronized since thatcrisis(chart6.1).Afterthesharpflight-to-safetyofcapitalinlate2008,resultinginasignificantwith-drawalofforeignportfolioand“other”investmentsfromdeveloping countries, capital flows to thesecountriesrecovered−orevensurpassed−pre-crisislevels.Thiswasatatimewhendevelopedcountriesfollowedveryexpansionarymonetarypoliciesanddeveloping countries seemed to have successfullyrecoveredfromtheglobalcrisis.Alternatingepisodesoffinancialstrainandrestoredconfidenceindevel-opedcountries,despitecontinuedmonetaryeasing,mayexplainthefallincapitalflowstodevelopingcountries inmid-2011andtheirsubsequentrecov-ery one year later.Risk perceptions also changedsignificantly,due toanticipatedchanges inUnitedStatesmonetarypolicy,asreflectedinnewvolatilityofcapitalflowstodevelopingcountries.

Sincetheglobalfinancialcycleisdrivenmainlyby developed countries’ economic conditions anddecisions,thereisnoreasonforittobealignedwithdevelopingortransitioneconomies’macroeconomicconditions and financial needs. even though themajor developed countries that issue reserve cur-rencies have committed themselves to taking intoaccountanypossible repercussionsof theirpolicyactionsforothercountries,theirmonetaryauthori-tiesareessentiallyguidedbytheneedsoftheirowndomesticeconomies.Thiscanleadtoinconsistenciesbetween their goals and those of other countries.For instance, since the 2008 financial crisis, theUnitedStatesFederalReservehasbeenpursuinganextremelyexpansionarymonetarypolicytosupport

Chart 6.1

CAPITAL INFLOwS, 2007 Q1–2013 Q3(Billions of current dollars)

Source: UNCTAD secretariat calculations, based on IMF, Balance of Payments Statistics database.

Note: Capital inflows refer to portfolio and "other investment" flows (3-quarter moving average).

-3

-2

-1

0

1

2

3

4

5

6

7

8

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3

2007 2008 2009 2010 2011 2012 2013

South AfricaIndonesia

-15

-10

-5

0

5

10

15

20

25

30

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3

2007 2008 2009 2010 2011 2012 2013

Brazil India

Mexico

Turkey

International Finance and Policy Space 125

domesticactivity.Thispolicyhaseffectivelyledtolargecapitalflowstoanumberofemergingecono-mies,asaresultofwhichtheyhaveexperiencedadomestic credit boom and an unwanted currencyappreciation.Conversely,theprogressivereductionofmonetarysupportintheUnitedStatesmayleadtoafinancialshockinemergingeconomies resulting from areversalofcapitalflows,higherinterestratesandcreditattrition.

internationalcapitalflowsgenerally generate a financialcycleinthereceivingcountries.Capitalinflowstendtoresultinanincreaseindomesticbanks’creditsupply,afall in interest ratespreadsandanappreciationofdomesticassetsandtheexchangerate.Thisprovidesanewstimulusforincreasingdomes-ticcredit,astheeconomytendstogrowfasterandhigherassetpricesimprovethe(apparent)solvencyofborrowers.ontheotherhand,italsostimulatesnewcapitalinflows,includingintheformofcarrytrade.4but these effects of capital inflowsgreatlyincreasefinancialfragility,asgrowingindebtednessanddeterioratingcurrentaccountseventuallyleadtoareversalofthoseflowsand,possibly,afinancialcrisis.

in order to be able to create andmaintaindomesticmacroeconomic andfinancial conditionsthat are supportive togrowthand structural trans-formation,governmentsmusthaveattheirdisposalsuitablepolicyinstrumentstopreventorcopewiththeserecurrentshocks.Theymustbeabletofollowcountercyclicalfiscalandfinancialpolicies,includingthroughdiscretionaryfiscalspendingandadaptingbankleveragetomoderatecreditduringeconomicboomswhilepreventingdeleveragingduringdepres-sions.Theymustalsobeabletomaintain keyfinancial prices,such as interest rates and therealexchangerate,atlevelsthatpromoteproductiveinvestment,expanddomestic incomes anddemand, and increase exter-nal competitiveness.Thismayrequire active intervention bycentralbanksaswellascomplementarymacroeco-nomicmeasures,suchasanincomespolicy.

A combinationofmacroeconomic andfinan-cialpoliciescan formacoherent framework fora

catch-upgrowthstrategyandstructuraltransforma-tion.Suchpolicieswouldincludelowinterestrates,exchange ratemanagement aimed at fostering acompetitive economy, investment-oriented fiscalandfinancialpolicies,andanincomespolicyaimedatboostingdomesticdemand.Thesewouldneedto

be accompaniedbyprudentialpoliciesthatcanregulatecapi-talmovementsinordertolimitanyundesiredimpactstheymayhave onmacroeconomic vari-ables, such as those discussedabove.but such policies faceresistanceby thosewho arguethat financial liberalizationcontributestotheoptimization

of factor allocation.They stress that, in order topreventnegativefinancialshocksandmakefinanceworkfordevelopment,thekeyistogainandretaintheconfidenceoffinancialmarkets.

(b) Theconfidencegame

Followingcapitalaccountliberalizationandasuccessionofinternationalfinancialshockssincethe1980s,developingcountrieswereunderstrongpres-surefrominternationalfinancialinstitutionstoadoptconfidence-buildingpoliciesandstructuralreforms.Theybelievedthatsuchmeasureswouldcontributeto economic stability and help reduce the likeli-hoodofeconomiccrisescausedbyvolatileflows.Recommendedpoliciesincludedfiscalausterityandtheadoptionofcornersolutionsfortheirexchangerateregimes(i.e.eitherfullyfixedorfullyflexibleexchangerates),which,supposedly,couldwithstandspeculative attacks against a country’s currency.Accompanyingeconomicreformswereexpectedto

includeliberalizationofmarketsandprivatizationofbothStateassetsanddeliveryofessentialservices.

These recommendations,particularly influential duringthe1990s,werecloselylinkedto a broader set of adjustment

measuresthatinternationalfinancialinstitutionshadbeen recommending since the external debt crisisof the 1980s (TDR 2006, chap. ii).Theproposedpoliciesandreformswerebasedonanunderstand-ingthatfreemarketsensureanefficientallocation

The global financial cycle is driven mainly by developed countries’ policy decisions guided by the needs of their own domestic economies …

… thus, such a cycle is not necessarily aligned with developing or transition economies’ financial needs.

Trade and Development Report, 2014126

of resources, thereby leading toboth stability andgrowth.Therefore, itwassuggested thatcountriesshould implementmeasureswhichwoulddemon-strate to financialmarkets that theywere optingfor “credible” policies. Such confidence-buildingwiththosemarketswouldattractcontinuouscapitalinflows and help prevent a full-blown economiccrisis. Playing this “confidencegame” (Krugman,1998)forcedpolicymakersintoguessingwhichpoli-ciesfinancialmarketagentswouldjudgetobegoodfor addressing specific economic conditions, evenifthesemaynotbeconsideredthemostsuitablebythepolicymakersthemselvesandbyanon-negligiblenumberofeconomists.

Amajorprobleminplayingthisgameisthatmarketactors’perceptionsofadevelopingcountry’spoliciesandeconomicconditions,andassessmentsoftheirsustainability,arefrequentlyinfluencedbytheir ideologicalbelief inself-correctingfinancialmarketsandtheirdisapprovalofpublicinter-vention, such as regulation ofthefinancialsystemandcoun-tercyclicalpolicymeasures.inaddition, their perceptions canchangeveryrapidly,evenifnochangeinsuchpoliciesandcon-ditionshasactuallytakenplace.5Theresultofthesechangingper-ceptionshasbeenthat,intimesof economic turbulence in international financialmarkets,countriesfaceagreatdealofuncertaintyastowhetheradoptionof“credible”policychoiceswouldbeeffectiveornotinmitigatingmajorturbu-lenceeffectsontheireconomiesand,ultimately,inavoidinganeconomiccrisis.Atthesametime,giventheclosealignmentbetweenthemarkets’understand-ingofconfidence-buildingpoliciesandmainstreameconomicreasoning,governmentshavefewpossi-bilitiestoadoptalternativemacroeconomicpolicies,eveniftheyconsiderthesetobemoreappropriatefortacklingtheireconomicdifficulties.6

inparticular,fiscalresponsibilityhasbeenanimportant element in arguments for a confidence-buildingstrategyonthegroundsthatmarketoperatorsandratingagenciesusuallyattachgreatimportancetofiscalbalanceswhentheyassesscreditrisk,notonlytheriskonsovereignbondsbutalsoondebtissuedbythedomesticprivatesector.indeed,thisdrivestheviewthatintegrationintoglobalcapitalmarketshas

apositiveimpactonfiscaldiscipline,andthereforeonmacroeconomicstability.7

However, this view overlooks the fact that,inmany cases, economic imbalances and relatedinstabilityarecausedbyprivateexcessiveborrowingandspending,encouragedbyeasyaccesstoexternalfinancing.Thiswasamplydemonstratedduringperi-odsofabundantcapitalinflows,whichcorrespondedtoperiodsofexpansionarymonetarystancesindevel-opedcountries(suchas1976−1981,1991−1997and2001−2007),whenfiscalpolicyplayedaminorroleintherapidincreaseofdomesticdemand,risingprivatedebtanddeterioratingexternalbalances.Conversely,whencapitalflowsdecreasedorreversed,inmanycasestriggeringafinancialcrisis,fiscalausterity–whenapplied–wasunabletorestoretheconfidenceof financialmarkets and cause a resumption ofprivatecapitalinflows.onthecontrary,byfurther

cutting domestic demand, fis-cal retrenchment accentuatedeconomicdepression,andconse-quently,increasedtheperceivedcreditrisk.

Totheextentthattheygiverisetoboom-and-bustepisodes,largeandunstablecapitalmove-ments affect fiscal policy andfiscalspace.Thisisnotbecausethey favour balanced fiscal

accountsandlowdebtratios,butratherbecausethefinancialcrises theycauseentail largefiscalcosts,due to both costly bailouts of private banks andnon-financialdebtorsand topublic revenue lossesresultingfromshrinkingtaxableincomes.Thus,fis-calexpendituredoesnotalwaysdecreaseaftercrises,butitscompositionchanges,withhigherpaymentsondebtservicingandlowerexpendituresoninvest-ment,socialtransfersandpublicservices.

inthecontextofstrongcapitalflows,countrieshavebeenadvisedtoadopteitheratotallyfixedorafullyflexibleexchangerateregime–theso-called“cornersolutions”(eichengreen,1994;obstfeldandRogoff,1995).Theyhavebeentoldthat,bymovingtooneortheotherofthecorners,theywouldbebet-terabletowithstandanexternalshock,andtherebyavoidacurrencycrisis,whichcouldrapidlydevelopintoageneralizedeconomiccrisis.outcomesinthe1990s,however,haveprovidedlittlesupportforthisadvice.Neither full exchange rate flexibility nor

International capital flows generally generate a financial cycle in the receiving countries and increase their financial fragility, which can eventually lead to a financial crisis.

International Finance and Policy Space 127

“hardpegs”brought about economic stability.onthecontrary,theytendedtoexacerbatetheimpactofvolatilecapitalflows.intimesofmonetaryexpansionindevelopedeconomiesandgrowingriskappetitebyinternationalinvestors,developingcountrieslackedthemacroeconomicpolicytoolstobeabletoabsorbtheresultingcapitalinflowsproductivelyandavoidmajor internalmacroeconomic imbalances.Underafree-floatingexchangerateregime,inflowsledtostrongnominalexchangerateappreciation,therebyweakening the international competitiveness ofimport-competingindustriesandexports.ontheoth-erhand,undera“super-fixed”exchangerateregime,inflowsledtodomesticcreditexpansion,assetpricebubbles and an appreciation of the real exchangerate.inbothcases,theresultwasalmostinvariablytheemergenceordeepeningofcurrentaccountdefi-cits,makingthoseeconomiesoverlydependentoncontinuouscapitalinflows.Whentheseflowstaperedofforreversedintocapitaloutflows,policymakerstypicallyrespondedbysharplyincreasingshort-terminterestratesandusingacontractionaryfiscalpolicytomaintaintheconfidenceofinternationalinvestors,thereby reinforcing the recessionary effects of theoutflows.8Theycouldnotgenerallypreventasteepcurrencydepreciation, itspass-throughtoinflationand a rapid deterioration of the balance sheets ofthoseagents−includingthepublicsector−thathadnetdebtsinforeigncurrency.

Followingthecrisesofthelate1990sandearly2000s,mostdevelopingandemergingmarketecono-mies had less confidence in the ability ofmarketmechanisms to handle large and volatile capitalmovements.Whenanewwaveofcapitalinflowstookplacebetween2003and2008,mostofthesecountriesadoptedamorehands-onapproachtotheirexchangerate systems, generally implementing a “managedfloating”regimeinordertopreventexcessivevola-tilityandmispricing.Theypreferredtoaccumulateinternational reserves rather thanpassively acceptstrongcurrencyappreciation.9inaddition,adoptionofcapitalcontrolsinsomecountriesandmorepru-dentbankingpoliciespreventedthegenerationofnewcreditbubbles.Asaconsequence,mostdevelopingandemergingcountrieswereabletoapplycounter-cyclicalpoliciesandavoidfinancialdistressduringthe2008-2009globalfinancialshock.However,thisdidnotmarktheendofthe“confidencegame”.intheyearsfollowingtheeruptionofthecrisis,pressurebyfinancialmarketagentsinfavouroffiscalausterityandagainstpublicinterventioninfinancialmarkets

resumed. Fiscal austerity policies – particularlyin developed economies –were deemed essentialfor“ensuring thatdoubtsaboutfiscal solvencydonotbecomethecauseofanewlossofconfidence”in financialmarkets,which could trigger a newcrisis(iMF,2010:28).indevelopingcountries,asexplained in chapter ii, renewed instability in thefinancialaccountof thebalanceofpaymentsrein-forcedtheinfluenceofactorsthataskedforamore“market-based”approachinexchangerateandcapitalmanagementpolicies.

2. The need for policy space for capital controls

Theglobalfinancialcrisisshowed,onceagain,thatfinance shouldbe regulated.Atpresent, thereisbroadconsensusontheneedforbetterregulationof domestic financial systems.efforts to containbank leverage, shadow banking and toxic assetshaveadvancedattheinternationallevel(e.g.inthebaselCommitteeonbankingSupervisionand theFinancial Stabilityboard) and the national level(e.g.theDodd-Frankbill intheUnitedStatesandtheproposedring-fencingofdeposit-takinginstitu-tionsfrominvestmentbankactivitiesintheUnitedKingdom).10Moreover,macroprudentialregulationsthat aim to avoid endogenous risk and contagionwithinthefinancialsector,aswellasnegativespill-overs from thefinancial sphere to the rest of theeconomy,areunderdiscussion(GalatiandMoessner,2011;Moreno,2011;iMF,2013;Tarullo,2013;esenandbinatli, 2013).However, these efforts remaintentativeandfacestrongobstaclesonseveralfronts.

First,sincedomesticandinternationalfinancialmarketsarecloselyintertwined,itseemsimpossibletoregulatethefirstifthelatteraretotallyliberalized.indeed,foreigncapitalflowstocountrieshavecausedfinancialfragilitywhentheyhavebeentooabundantandvolatile,notonlybecausetheyhaveaffordedeasyaccesstocreditthatencouragesexcessiverisk-takingat themicro level, but alsobecause theygeneratemacroeconomicdistortionsleadingtosystemicrisks.Amoreselectiveapproachtocapitalinflowsisthere-foreindispensableifthoseflowsaretobemaintainedatmanageablelevelsanddirectedtowardsproductiveuses.Atthesametime,supervisoryauthoritiesinthecountriesfromwhere thoseflowsoriginatecannot

Trade and Development Report, 2014128

disregard thepotentiallynegative impact resultingfromthepossibleaccumulationofnon-performingcreditsinthebalancesheetsoftheirfinancialinsti-tutions,whichwouldeventuallyweakentheirownfinancialsystems.

Second,largeprivatefinancialactorscontinueto resort to de facto pressures and persuasion todiscouragepolicymakersfromapplyingregulatorymeasures,particularlycapitalcontrols.butwhileitisunderstandablethatmajorbanksandotherfinancialinstitutionswithdirectinterestininternationaltrans-actionswouldargueagainstregulatoryrestraintsbyclaimingthattheirprofit-makingactivitiesareinthegeneralinterest,thisisdeeplymisleading.Similarlymisleadingisequatingtradinginfinancialassetsandliabilitieswith trading in anyothergoodsorservices,imply-ing that no special regulationis therefore justified (see, forexample,Fama,1980).

Third, policymakers andinternational institutions havebeenreluctanttoregulatecapitalflows. indeed, there iswide-spread belief that,with sounddomestic regulation, financialdeepeningandstrongmacroeconomicfundamentals,any economycanbenefit from free capitalmove-ments, as such a frameworkwouldminimize theeconomicinstabilitytheymightgenerateandmaxi-mizetheirpositiveimpactongrowth.Accordingtothisview,evenifsomekindofcapitalmanagementmay be necessary in exceptional circumstances,such as abalance-of-payments crisis, it shouldbetheexception,nottherule.itfurtherpositsthatinnormal times countries should refrain fromusingcapitalcontrolsasaneasybutprecarioussolution,andinsteadaddressthestructuralormacroeconomicshortcomingsthatarethetruereasonsforfinancialfragility.Withsomenuances,thishasbeentheposi-tionoftheiMFandtheoeCDand,tosomeextent,ithasbeentranslatedintotheformalrulessetbytheseinstitutionsasdejureobstaclestocapitalcontrols.This last constraint on policy spacemerits closerattention.

eventhoughtheiMF’sArticlesofAgreementexplicitlyauthorizetheuseofcapitalcontrols, theiMFdiscouragedthemformanyyears.in1997,attheMinisterialMeetinginHongKong(SARChina),

itsManagingDirectorevenproposedincorporatingfreecapitalmovementintheiMFmembers’commit-ments.However, thesuccessionoffinancialcrisesthateruptedimmediatelyafterthemeeting,andthefactthatcapitalmovementswereidentifiedasamajorcauseofsuchcrises,underminedsupportforfullyopencapitalaccounts.

itwasonlyin2012thattheiMFprovidedan“institutional view” on this issue (iMF, 2012). itproposedaplannedandsequencedprocessof lib-eralization thatwouldmaximize the benefits thatcountries could obtain from foreign capital andminimize the costs of “large and volatile capitalflows”. Proposed policieswould include a rangeof progressively deeper and broader supporting

reforms, including reform ofthelegalframework,prudentialregulationandsupervision,anddevelopment of capitalmar-kets (includingadeepeningofdomesticbondandequitymar-kets and pension funds).TheiMFconcededthat“temporaryre-imposition of capital flowmanagementundercertaincir-cumstancesisconsistentwithanoverallstrategyofcapitalflow

liberalization” (iMF, 2012: 15), and can thereforebeused toprevent risks to stability, togetherwithmacroeconomic adjustment andmacroprudentialmeasures.However,notallthetoolswereaccordedthesamestatus.itsuggestedthatcapitalflowmanage-ment(CFM)measuresmaybeusefulundercertaincircumstancesforsupporting(neverforsubstituting)macroeconomic adjustment, butmacroeconomic,structuralandfinancialpoliciesremainedtheprimarytoolsforhandlingdestabilizingcapitalflows.inaddi-tion,asCFMsinvolvesomecostsanddistortions,they“shouldbetargeted,transparentandgenerallytemporary”andthereforeliftedoncethedisruptivecapitalinflowsoroutflowshadabated(iMF,2012:36).FortheiMF,liberalizationremainstherule,andcapital controls a temporary exception subject toobligationssetinitsArticlesofAgreement.inpar-ticular,thelegalityofcapitalcontrolswoulddependontheirobjective:acountrywouldnotbeallowedtorestraincapitalinflowsinordertoartificiallykeepitscurrencyundervalued,butwouldbeentitledtodosoformacroprudentialreasons,orforavoidingexces-sivecurrencydepreciationorappreciationcausedbyfinancialspeculation(iMF,2012).

A selective approach to capital inflows is indispensable if those flows are to be maintained at manageable levels and directed towards productive uses.

International Finance and Policy Space 129

Some countries havemade specific commit-ments to opening their capital account.AccessiontotheeU,inparticular,isconditionalonfullcapi-talaccountliberalization.11Similarly,the34oeCDmembers adopted the Code of liberalisationofCapitalMovements,whichobligesthemto“progressivelyabolish, between one anoth-er…restrictionsonmovementsin capital to the extent nec-essary for effective econom-ic co-operation”. in addition,“members shall endeavour toextend themeasures of liber-alisationtoallmembersoftheinternationalMonetary Fund”(oeCD,2013:9).eachcountrymaymakereserva-tionstofreecapitalflows,12andtheCodestatesthatitcannotpreventamemberfromtakingactionforthemaintenanceofpublicorderandessentialsecurityinterests.Furthermore,somemeasuresofliberaliza-tioncanbewithdrawnbyacountryiftheyresultinseriouseconomicandfinancialdisturbance,ortem-porarilysuspendedincaseofseriousdifficultieswithitsbalanceofpayments.butagain,suchactionsaresupposedtobeexceptional.

Theratherstringentcapitalliberalizationrulesof theeUandoeCDapplymainly to developedcountries, although theyalso involveanumberofdeveloping countries, such asChile,Mexico andTurkey,aswellasseveralformertransitionecono-mies thathave joined theeU.However, themainde jure restrictions on developing and emergingeconomies inmanaging their capital accounts areimposedby international tradeagreements.indeed,asalreadydiscussed in chapterVof thisReport,thoseagreementsdonotdealonly(ormainly)withmer-chandisetradeissues;theyalsoincorporate a large number ofprovisionsrelatedtootherareas,including capitalmovements.Themostrelevantofsuchagree-mentsatthemultilaterallevelistheGATS.13

Sincethe1990s,overahundredcountrieshavecommittedtoobligationstoapplyawholeseriesofmeasuresforfinancialsectorliberalizationascoveredbytheGATSanditsAnnexonFinancialServices.

Thoseobligationsrespondednotonlytosomeprivatesectorinterests,butalsotothegeneralconvictionofthattime,thatmarkets–includingfinancialmarkets–couldtakecareofthemselveswithoutjeopardizingthefunctioningoftherestoftheeconomy.eventsof

thepastfewyearshaveshownthedangersof such logic, andhave spawned efforts to re-regulatefinance.

butsucheffortsatfinancialregulation–eventhoseagreedatinternationalinstitutionssuchas the basel Committee andthe Financial Stabilityboard–maynotbefullycompatible

with commitmentsonfinancial servicesunder theGATS (seeTDR 2011).Consequently, they couldleadtolitigationundertheproceduresestablishedbytheGATSwhichcouldaffectaccesstomarketsforothergoodsandservices.Moreover,becauseoftheimpreciselanguageoftheGATS–anditsAnnexonFinancialServices−theareasofpotentialconflictarevaguelydefined(foradetailedanalysis,seeTuckerandGhosh,2011).AsinothermattersrelatedtotheWTo,whensomeregulationischallengedbyathirdparty,WTodisputepanelsandtheAppellatebodyshouldclarifythemeaningofsuchtermsas“restric-tions”,“regulations”and“prudential”.

it is precisely because of the potential forconflict, that some contracting parties have triedto take preventive action by reaching agreementon the interpretation of some terms.14on the onehand, under articleXi (Payments andTransfers)

norestrictionsoninternationaltransfers andpayments on thecurrentaccount(section1)oronthe capital account (section2)maybeappliedif“inconsistent”with specific commitments.Thismeansthatcapitalcontrolscouldbechallengedunderthisarticle.15 Furthermore, underparagraph 2 of article XVi(MarketAccess), once com-mitments aboutmarket accesshavebeenentered,itisnolonger

possibletosetlimitsonsuchaspectsasthesizeoftheservice,numberofbranches,typesofproductsoffered, legal character, and foreign capital par-ticipation.Mostoftheseconsiderationscouldclash

In the increasingly globalized economy, it is impossible to regulate domestic finance when international financial markets are totally liberalized.

Capital management measures should be applied in a preventive way as a normal instrument in the policymakers’ toolkit, and not as an exceptional and temporary device for use in critical times.

Trade and Development Report, 2014130

withattempts, for instance, topreventbanksfrombecoming“too-big-to-fail”,toimpose“ring-fencing”between deposit-taking and investment bankingactivities, or to function as alocallyincorporatedfirm–withitsowncapital–ratherthanasabranchofaforeigninstitution.These are all areas of finan-cial regulation currently beingdebated,andinsomecountriesalreadybeingimplemented.

on the other hand, theGATSdoescontainprovisionsthatreaffirmtherightofcoun-tries to apply regulations.ThefourthparagraphofthePreambletotheGATSreads:“Recognizing the right ofmembers to regulate,and to introduce new regulations, on the supplyofserviceswithintheirterritoriesinordertomeetnational policyobjectives and, given asymmetriesexistingwithrespecttothedegreeofdevelopmentof services regulations in different countries, theparticularneedofdevelopingcountriestoexercisethis right…”.More specifically, in theAnnex onFinancialServices, art. 2onDomesticRegulationcontainsageneralreservationthatallowscountriesnottocomply,forsomespecificreasons,withtheircommitmentsonservicesliberalization,particularlythatoffinancialservices:“(a)NotwithstandinganyotherprovisionsoftheAgreement,aMembershallnotbepreventedfromtakingmeasuresforprudentialreasons,includingtheprotectionofinvestors,deposi-tors,policyholdersorpersonstowhomafiduciaryduty isowedbyafinancial service supplier,or toensuretheintegrityofthefinancialsystem.WheresuchmeasuresdonotconformwiththeprovisionsoftheAgreement,theyshallnotbeusedasameansofavoidingtheMember’scommitmentsorobligationsundertheAgreement”.16

Despitetheambiguityofthelastsentence,this“prudential carve-out” clause gives a legal basisforgovernments toundertakecapitalmanagementmeasuresinapreventiveway;inotherwords,beforeundesired capital flows generatemacroeconomicdisturbances.Capitalcontrolswouldthereforebeanormalinstrumentinthepolicymakers’toolkit,notanexceptionalandtemporarydeviceforcriticaltimes.

Moregenerally,beyondGATSinterpretations,governmentswilling to re-regulatefinance should

abideby that goalwhen theynegotiate new tradeand investment agreements. inmany cases, theyintroduce clauses calling for full liberalization of

capital flows andderegulationof financial services, in directcontradictiontothepoliciestheyapplyorintendtoapplyintheirownfinancialsystems.inaddi-tion,ashintedabove,theterm“international investment” issometimesbroadenedtoincludeallsortsofcapitalflows,sothatcommitments not to restrictsuchflowswouldbemuchmorestringent thanwhatmay havebeeninitiallyintended.insuch

cases,legitimateeffortsatcapitalmanagementriskaccusationsof“murkyinvestmentprotectionism”.

3. Macroprudential regulation and capital management

(a) The need for capital management

inconditionsofgrowingmacroeconomicvola-tilitycausedbyinternationalcapitalmovements,andgiventherelativeinabilityofso-called“marketcon-fidence-enhancingpolicies”tobringaboutstabilityand long-termgrowth,developing-countrypolicy-makersresortedtomanagedexchangerates,lowerinterestratesandcountercyclicalfiscalpolicy.Sincetheglobalfinancialcrisis,thesegrowth-supportingmeasures started to find increasing acceptance ininternational policy circles, including among theinternationalfinancialinstitutions.17

Anumberofcountriesmanagedtogainsomeroomformanoeuvreinpolicymakingasaresultoftheiraccumulationofinternationalreserves,reduc-tion of external public debt and creation offiscalbuffers,made possible by a benign internationaleconomicenvironmentinthe2000s.Theyrespondedtotheglobalfinancialcrisisbyadoptingacounter-cyclicalfiscalpolicyandliquidityexpansion,whichhelpedstimulatetheireconomiesandsupportsectorsthatweremoreexposedtotheexternalshock.Theywereabletousetheirinternationalreservestopre-ventexcessivecurrencydepreciation,thushelpingtoreduceinflationarypressuresandprotectsectorsfrom

When negotiating trade and investment agreements, governments wishing to re-regulate their financial systems should reject clauses requiring full capital flow liberalization and deregulation of financial services.

International Finance and Policy Space 131

currencymismatchesintheirbalancesheets.Theycouldalsouse those reserves tofinance the largercurrentaccountdeficitsarising fromexpansionarypolicies and to counter any sudden contractionofexternaldemand.

However, even these developing countries,alongwith their less fortunate counterpartswhodidnothavethebuffersdescribedabove,stillfaceserious obstacles tomore activemacroeconomicpoliciesinsupportofcatch-upgrowthandstructuraltransformation.Anopencapitalaccountcanpresentasevereconstraintonautonomousmonetarypolicy,which,forinstance,couldbeusedcountercyclicallywhentheeconomyisboomingasaresultofcapitalinflows,evenwhenafloatingexchangerateregimeisinplace.18Undertheseboomingconditions,thealter-native,asrecommendedbyinstitutionssuchastheiMF,andsupposedlyfavouredbyfinancialmarkets,istoadoptatightfiscalpolicytomanageaggregatedemand.However,thispolicychoicecanbeprob-lematic,sinceitimpliesspendingcuts,generallyinpublicinvestment.Yet,suchspendingisnecessarytosupportsectorsoftheeconomythatareimportantforcatch-upgrowth, structural transformationandsocialinclusion.

Thepursuitofthepolicygoalofacompetitiveexchangerateisequallydifficult.Whenalargevol-umeofcapitalisflowingin,thecentralbankmighthave to intervene in the foreign exchangemarketto prevent currency appreciationby accumulatinginternationalreservesandundertakingsterilizationoperationstoavoidanexcessiveincreaseinliquidity.However,theseoperationsmaybefiscallycostlyifdomesticinterestratespaidonissuedbondsaremuchhigherthanthoseobtainedonreserves.

Thesemacroeconomicmanagement difficul-ties suggest that amore effective approach to themanagementofcapitalflowswouldbetotargetthemdirectlyandupfront,ratherthanjusttryingtomiti-gatetheireffects.Forsure,itwouldbeunrealistictoseekacompletedelinkingfromtheglobalfinancialcycle, and anticyclical andpro-growthpolicies inboththefiscalandcreditsphereswillremainoftheutmostimportance.However,reducingthevolumeandnegativeimpactofunwantedcapitalflowswouldimprovemacroeconomicmanagementandcreatetherequisitespaceforpro-growthpolicies.Therefore,properconsiderationshouldbegiventoestablishingaframeworkforeffectivecapitalaccountmanagement.

(b) Recent experiences with capital account management

Developingcountries’experiencewithcapitalaccountmanagementisnothingnew,datingasitdoesbacktothenineteenthcentury.onlyafewmonthsaftermanycountriesinlatinAmericahadaccumu-latedmassivearrearsontheirdebtservice,andwithsomeofthemnotbeingpartytothebradyPlan–andrunningseriousmacroeconomicimbalances−anewcycleofmassiveprivatecapitalflowsstarted.ThiswasaresultoftheUnitedStatesFederalReserve’spolicyofnear-zerointerestratesasasolutiontothefragile situation in this country’s banking system.Manydevelopingcountries,notlearningfromtheirpreviousexperience,againreactedtotheeasysup-plyoffundsbyintroducingfinancialliberalizationmeasuresinthelate1980sandearly1990s.Afewcountries,however,createdaspecificmechanismofcapitalmanagementtoregulatethevolumeofcapitalinflowsandtheirmaturity.Theultimategoalofthesecontrolswastomitigatethenegativemacroeconomiceffectsofinflows,suchasexchangerateappreciationandtheneedforsterilizationtoaddressexcessliquid-ity,whichcarriedfiscalcosts(Massad,1998).Chile’sexperiencewithunremuneratedreserverequirements(URR)iswellknownandhasbeenwidelydiscussedintheliteratureandinpolicycircles,butothercoun-triesalsoexperimentedwithdifferentsortsofcontrolsduringthe1990s.Forinstance,Colombiaemployedsimilar tools asChile, and inbrazil controls tooktheformofanentrancetaxoncertaincapitaltrans-actions,togetherwithotherrestrictions,mainlyonshort-termfixed-income securities (Prates, 1998;epsteinetal.,2004).

overall, controls on capital inflows provedsuccessful in helping countries regain a certainlevelofmonetaryandfiscalpolicyautonomy,reduceexchangeratepressuresandlengthenthematurityofflows.However,mostofthesecontrolswereremovedinthelate1990s,whencapitalbecamescarcewiththeonsetoftheeastAsiancrisisinthesecondhalfof1997.19

Whenanewcycleofcapitalinflowsstartedin2002-2003,developingcountriesagainhadtofindwaystomanagethem.Manycountriesrespondedbyinterveningheavilyintheirforeignexchangemar-ketstoavoidexcessivecurrencyappreciationandbybuildingforeignreservesasaself-insurancemecha-nism.othercountries,suchasindia,neverentirely

Trade and Development Report, 2014132

removedtheircontrols,maintainingrestrictionssuchasceilingsonexternalborrowingabroad.The2008globalfinancial crisis causeda sudden reversalofcapitaloutofthesedevelopingcountries,butitwasshort-livedas itwassucceededbyanewcycleoflargecapitalinflows,evenexceedingpre-crisislevelsincountriessuchasbrazil,indonesia,theRepublicofKoreaandThailand(iMF,2011).Astheseflowsagainstartedtoexertupwardpressureontheircur-rencies,inadditiontocreatingexcessliquidity,rapidcreditgrowthandassetbubbles,severaldevelopingcountries imposed newcapital controls.Althoughvaryinginformandintensityacrosscountries,thesecontrols had the common purpose of taming theinflows in order tomitigate their negativemacro-economiceffects.20

Themeasuresadoptedwererelatedbothtopricesandquantities, including taxes on certain formsofcapitalflows,unremuneratedreserverequirements,ceilings on different types of capital flows andderivativeoperations,andmini-mum stay periods (ocampo,2012).brazil introduced taxeson portfolio inflows and lateron derivatives; Peru increaseditsfeeonthepurchaseofcentralbankpaperbynon-residents;theRepublicofKoreareintroducedawithholding tax on foreignpurchasesoftreasuryandcen-tral bank bonds; indonesiaadopted aminimum holdingperiod for central bank paperand a limit on short-termbor-rowingbybanks;ThailandadoptedawithholdingtaxonforeigninvestorsinStatebonds;andTurkeychangeditswithholdingtaxrateonbondsissuedbyTurkish corporations abroad,with lower rates forlongermaturities.Thesecountriesalsousedmacro-prudentialdomesticfinancialregulationstoinfluencecapital flows, including reserve requirements onbanks’ short foreign exchange positions (brazil),additionalcapitalrequirementsforforeignexchangecreditexposure(Peru),higherreserverequirementsonforeigncurrencydeposits(indonesia),andceil-ingsontheirbanks’foreignexchangepositions(theRepublicofKorea).21

Duringtheperiod2009−2010,thesemeasureshelpedcountriesmoderatecapital inflows,at leastforsometime.inaddition,continuedinterventions

in the foreign exchangemarkets reduced upwardpressuresontheirexchangerates.Morebroadly,themeasuresprovidedgreaterpossibilities formacro-economicpolicymanagementinlinewithcountries’policy objectives ofmacroeconomic stability andsustained growth. For instance, a few countries,suchasindonesia,kepttheirinterestratesunchangeddespitestrongcapitalinflowsandpossibleoverheat-ing,andSouthAfricaandTurkeyevenloweredtheirrates,althoughthiswasintendedtodeterevenmoreflows rather than tomaintain a pro-growthpolicystance.inthefiscalarea,brazilandTurkeycontinuedtheir expansionaryfiscal policy,while indonesia,theRepublicofKoreaandThailandabstainedfrompursuingamoreproactivefiscalpolicytocurbtheinflationaryeffectsoftheinflows(iMF,2011).

However,thisnewcycleofcapitalflowsisprov-ingshorterthanpreviousones.betweenMay2013andFebruary2014, turbulenceintheinternationalfinancialmarketshitdevelopingcountriestwiceas

a result of announcements of(andlaterinitialstepstowards)changesinUnitedStatesmone-tarypolicy.Theserecentshockshave shown that developingcountries remain vulnerableto sudden reversals of capitalflows.This is despite capitalaccountmanagementandotherprecautionarymeasures thatmanyofthemundertookduringthe 2000s to restrain specula-tivecapitalinflowsandreducepossible fallouts from their

subsequentreversal.Thoseprecautionarymeasuresincludedtheaccumulationofinternationalreserves,areductionoftheexternalpublicdebtasaproportionofGDP,a lengtheningofdebtmaturityand largerlocal-currency-denominated debt, aswell asmorestringentmacroprudential regulation targetingcur-rencymismatchesinthedomesticfinancialsystem(UNCTAD,2014).

During these latest financial shocks, somedevelopingcountrieshavebeenusingtheirreservestotrytoneutralizetheirimpactontheexchangerates,butothers,lackingornotwillingtousetheirreserves,havebeenadoptingstandardpolicyresponsessuchassharpincreasesininterestratesinordertohaltcurren-cydepreciationandcontaininflationarypressures,aswellasfiscaltighteningtorestoreormaintainmarket

Capital management measures recently applied by developing countries provided greater scope for countercyclical policies in line with macroeconomic stability and sustained growth objectives.

International Finance and Policy Space 133

confidence.These policy responses demonstrate,onceagain,thatimplementationandmaintenanceofpro-growthpoliciesareextremelychallenginginthecurrentinternationalenvironment.Thisdifficultyisaggravatedbythefrequencyoffinancialshocks,whichhaslimitedtheabilityofaffectedcountries to fully recover frompreviousshocksandrebuildtheirforeigncurrencybuffers.22

Thislatestcycleofcapitalflowsindicatesthatdevelopingcountriesstillhaveawaytogobeforetheyhavefullyeffectivecapital accountmanagement.indonesia’sminimumholdingperiod for central bank paperled non-resident investors to increase their hold-ingsofgovernmentbonds,sincethelatterwerenotsubjecttothesameholdingrequirementrestriction.brazil increasedits taxonportfolioinflowstwice,andextendeditscoveragetoderivativetransactions;italsointroducedreserverequirementsonresidentbanks’foreignexchangeshortpositionstoincreasetheeffectivenessofcontrols(iMF,2011).indonesia’sexperience shows the difficulties that arisewhencontrolsarenotextensiveenoughtocontaininflows.Similarly,brazilwasinitiallytimidandslowinintro-ducingcontrols,anditwasonlyafteritspolicymakersadoptedawiderrangeofcontrolsthattheysucceededincurbinginflows.However,thedelayinstrengthen-ingcontrolsmeantthat,bythetimetheygainedteeth,substantialcapitalhadalreadyenteredthecountry,sothatitremainedvulnerabletosuddenoutflows.

Thelessonstobelearnedfromthesecountryexperiences are that capital accountmanagementshould be strong, comprehensive and dynamicenough to cover possible loopholes that investorsquicklyexploittotheiradvantage.Moreover,capitalaccountmanagementmeasuresshouldbesupportedbyanadministrationthathasthepowerandcapac-itytoimplementthemeffectively.indeed,basedonrecent empirical analysis, eichengreen andRose(2014)arguethatadjustingcontrolsinresponsetocyclicalneedsiseasierifthecountriesalreadyhavecontrolsand thenecessaryassociatedbureaucraticapparatus. Furthermore, controls should apply tobothinflowsandoutflows,anddiscriminatebetweendifferentgroupsoffinancialactors,sothattheytargetspecificinvestorsaswellasspecifictypesofflowsinordertobeeffective(Gallagheretal.,2012).

These recommendations for capitalmanage-ment go beyond thosemade by the iMF (2012).Thisisbecausecapitalaccountmanagementisnotjustameansofcrisismanagement;italsohasafun-damentalmacroprudential,andthuspreventive,role

toplay.Thisisparticularlytrueinviewofthelimitedeffective-nessofmoreconventionalpolicytools,suchasflexibleexchangeratesandausterefiscalpolicy,topreventgrowingmacroeconomicimbalancesresultingfromcapi-talflows.

Thus,inthecurrentinter-nationaleconomicenvironment,the short-term challenge for

countries is todevelopamacroeconomicmanage-ment framework that is sufficiently strong andeffectivetodealwithvolatileprivatecapitalflows.Thelong-termchallengeisforthemtodevelopthecapacitytodeployawiderrangeofinstrumentstoensurenotjustreducedvolatility,butalsosustainedcatch-upgrowth. inaddition toacoherentmacro-economic framework, development and industrialpoliciesneedtouseother instrumentsandmecha-nismsofcapitalmanagementpolicies.

(c) Channelling capital to productive uses

Reducinginstabilityarisingfromvolatilecapitalflowsmay improve thecapacity tousemacroeco-nomictoolsforgrowth-orientedpoliciesandsocialinclusion;however,itdoesnotguaranteethatinflowswillbeusedproductively.Toensuretheirproductivedeployment,thishastobemadeanexplicitpolicyobjective.Capital accountmanagement should beusedtotrytoinfluencethecompositionandmaturityofflows.Thuslong-termflowsshouldbesought,andthoseofaspeculativenaturediscouraged.Similarly,effortsshouldbemadetoattractflowsthataremorelikelytofinanceinvestmentratherthanconsumption.Several instruments are available to policymakersformanaging thecapitalaccount for thispurpose,includingunremuneratedreserverequirementsandminimumstayperiodsaimedatlengtheningthematu-rityofflows,or forbiddingcertain typesofflows,suchasinvestmentsinderivativesmarkets.Domesticbankingregulationscanalsobeusedforencouragingordiscouragingdifferentkindsofforeignborrowing.

Capital account management should be strong, comprehensive and dynamic enough to plug possible loopholes that investors could exploit to their advantage.

Trade and Development Report, 2014134

Still, althoughsuchcapital accountmeasuresmay indeed yield positive results, their power toinfluencetheenduseofexternalcapitalprobablyissomewhatlimited.Duetothegrowingcomplexityoffinancialmarkets,ithasbecomedifficulttoestab-lish,ex ante,whichflowsare short-or long-term,andwhichwillbeusedproductively.Thisdifficultyappliestoallsortsofcapital,includingFDi,whichiscommonlyviewedasmore long termandoftenperceived exclusively as greenfield investment.However, FDimay also involve short-termbankloans aswell as potentially destabilizing hedgingoperations,and itmaybeassociatedwithmergersandacquisitionsratherthanwithgreenfieldprojects.

Apart from uncertainty about the nature ofcapitalflows,capitalaccountmanagementhasonlyalimitedcapacitytodirectcapitaltowardsproduc-tiveendsbecause,aboveall,thewayscapitalfeedsintoaneconomyandhowitisultimatelyemployedlargelydependonhowacountry’sfinancialsystemisstructuredandregulated.Afterall,mostofthecapitalthat enters a country ismediated by the domesticfinancialsystematsomepointoranother.

economicliberalizationandreforms,whichthemajority of developing countries haveundertakenduringthepast35years,haveconsistedmainlyofderegulation ofmarkets and privatization.These,havedeprivedtheirgovernmentsnotonlyofmacro-economicpolicytools,butalsooffinancialresourcesandotherpolicy instruments and leversnecessaryfor growth anddevelopment. in thefinancial sec-tor,deregulationoffinancialmarketsand,inmanycountries,privatizationofState-ownedbankshavesubstantiallyreducedthenumberofinstrumentsofindustrial,financialandsocialpolicies.Productiveinvestmenthasbeenparticularlyaffectedby thesechanges.

The hopewas that privatization of financialactivitywouldspurproductiveinvestment,structuralchangeandgrowththroughamoreefficientallocationofcapital,thatis,bychannellingcapitaltothemostproductiveuses.butthishasnothappened:thepri-vatefinancialsectoremergingfromthesereformshasnot,byandlarge,filledthegapleftbythewithdrawalofthepublicsectorfromthisarea.indeed,generally,theoutcomehasbeenjusttheopposite.banksandotherfinancialinstitutionshaveincreasinglyfocusedtheiractivitiesontheprovisionofmainlyshort-termfinance–largelyconsumptionlending–insteadof

thelong-termfinanceneededforinfrastructuralandindustrialprojects.

Thus, given howfinancial systemsdistributedomesticcredititcannotbeexpectedthatexternalcapital channelled through themwill be deployedfor productive purposes either. itwould thereforebe necessary to reformnational financial systemsandpoliciesinordertorestoreacountry’scapacityto providefinance for productive activities (TDR 2013,chap.iii).Theseshouldincludethefollowing:measuresbycentralbanksandgovernmentsaimedatencouragingmaturitytransformationoperationsbycommercialbankssothattheyprovidemorelong-termcredit;creditallocationpoliciesinthebankingsystem to support specific productive sectors orareas thatarevital fordevelopment,suchasbasicinfrastructureandresearch;andestablishinginstitu-tions, particularly development banks, specializedintheprovisionoflong-termfinance.Developmentbanksarecriticalinstitutionsfordevelopingcountriesbecausetheyprovidelong-termfinancingnotofferedbyprivatebanks,mainlyforprojectsthataredevel-opmentorientedandgeneratepositiveeconomicandsocialexternalities.Sincetheyhaveclearmandatestofulfilthisrole,theircapitalandfundingstructureisdesignedtoenablethemtomeettheseexpectationseffectively.

brazilisamongthefewdevelopingcountrieswith a strong network of development banks.AtthecentreofthisnetworkisthebancoNacionaldeDesenvolvimentoeconômico e Social (bNDeS),whichprovides loans and invests infirms’ equity,aswellasengaginginon-lendingtootherdevelop-mentbanks.Fundingfortheseloansandinvestmentscomes in different forms, including compulsorysavingsfrombrazilianworkers,23transfersfromthetreasury, government deposits derived from fundsfromprivatization,bondissuesandresourcesfrommultilateralorganizations.loansandinvestmentsaremadeinsupportofawiderangeofindustrialsectors(Chandrasekhar,2014).

likebrazil,theRepublicofKoreacountsona number of development-orientedfinancial insti-tutions, including theKoreanDevelopmentbank,whichprovideslong-termcreditforindustrialactivi-tiesdrawingonfundsderivedfromborrowingfromthegovernment, internationalfinancial institutionsandforeignbanks,aswellasbyissuingbonds.inTurkey, theTurkish industrialDevelopmentbank

International Finance and Policy Space 135

(TSKb)isamongthecountry’smaindevelopmentfinanceinstitutions.itisprivatelyowned,asitsequitycapitalbasecomesfromthecountry’sprivatefinan-cialinstitutions,butothersourcesofitsfundingalsoinclude thegovernmentand internationalfinancialinstitutions,suchastheWorldbank,theeuropeaninvestment bank and the international FinanceCorporation.TheTSKbisthusabletomakeloansandequityinvestmentsacrossawiderangeofsectorsoftheTurkisheconomy.italsosupportsaccessbyTurkishcompaniestocreditfrombothdomesticandforeignbanks(Chandrasekhar,2014).24

examplesofnationaldevelopmentbankscanalsobefoundinsomelDCs.ethiopia,forinstance,has three State-owned banks.one of them, theDevelopmentbank of ethiopia (Dbe), provideslong-termfinance to priority sectors, as identifiedbytheGovernment,suchascommercialagriculture,agro-processing activities andmanufacturing. itsfundingbase includes loans from theCommercialbank of ethiopia (another State-owned bank),

concessionalloansfromdonorsandfundsfromthecentralbank,theNationalbankofethiopia(Nbe),whichareraisedthroughbondissues.TheNbe,inturn,derivesitsresourcesfrombillsissuedbyitforpurchasebytheprivatebankingsystemonacom-pulsorybasis(Alemu,2014).

These are examples of national developmentbanks that have a funding base that carries long-termliabilities,orthataresupportedbygovernmentguarantees,whichthenpermitthesebankstofinancelong-termprojects.AWorldbanksurveycovering90developmentbanksfromaroundtheworldfoundthat64percentofthosebanksbenefitfromgovern-mentguaranteesfortheirdebtsandotherliabilities,allowingthemtoborrowatlowercostsandtransferthislowercosttotheirownborrowers(luna-MartínezandVicente, 2012).Moreover, these institutionshavetheabilitytoborrowabroadandthenchannelthe resources to productive activities, or, like theTurkishdevelopmentbank,theycanhelpfirmsobtainresourcesabroadtofinancerealsectoractivities.

C. Policy space with regard to foreign investment

Attractingforeigncapitalisnotagoalinitself.Asdiscussedabove,itmayhavepositiveornegativeeffects on bothmacroeconomic stability and eco-nomicdevelopmentdependingonitsvolume,itsnatureanditsuse. it is not surprising, then,thatdifferent authorshavenotfoundanypositiverelationshipbetween capital inflows andgrowth(bhagwati,1998;Prasadet al., 2003; Stigltiz, 2004;Prasadetal.,2007),or,forthatmatter, a negative relationship(Aizenman, 2005). it is there-fore clearly essential to havenationalpolicies formanagingtheseflows,notonlyportfolioandshort-termflows,but also longer term capital, includingFDi.How

much(orhowlittle)TNCscontributetoeconomicdynamismanddiversification, environmental con-servation, technology transfer, tax revenues and a

healthy trade balance dependscriticallyonthemacroeconomicand regulatory framework inthedifferentlocationsinwhichtheyoperate. influencing theirperformance in someof thoseaspects has been a key ingre-dient of industrial policies, asobservedinchapterVandprevi-ousUNCTADresearch(see,forinstance,UNCTAD,2003 and2012).25However, these toolshavebeenprogressivelylimited

bytheURAs,aswellasbyalargenumberofbilateraland plurilateral trade and investment agreements.

The contribution of TNCs to economic dynamism and diversification depends criti-cally on the macroeconomic and regulatory framework in the different locations in which they operate.

Trade and Development Report, 2014136

This section examines howpolicy space is beingrestrictedbythoseagreements,andexploressomepossiblewaystohelpovercomesuchrestrictions.

1. Investment protection rules

(a) Rules governing investor-State relations

Traditionally,themainlegalframeworkforfor-eigninvestmentineverycountryhasbeenprovidedbydomesticlaw,whichspecifiesthepermissibleinvest-mentsbyforeigncompanies,theproceduresfortheiradmissionandimplementation,andtheobligationsofinvestors.Domesticlawalsogovernscontractualrelationsbetweenforeigninvestorsandhostcoun-tries. it normally guarantees to foreign investorssettledinthecountrythesametreatmentbypublicauthoritiesand legal guarantees as thoseaccordedtodomesticinvestors.inaddition,severaldevelopingcountries that give highprior-ity to increasing inward FDihavepassedspecificinvestmentpromotionlawswhichprovidevarious incentives to foreigninvestors,particularlytaxincen-tives.insodoing,Statesareabletodeterminethecontentoftheirdomesticlawsgoverninginvestor-Staterelationsandtoresist,toalargeextent,thejurisdictionofforeigncourts(accordingtotheprincipleofStateimmunity).incaseofalegaldispute,foreignfirmscanresorttodomesticcourts,justlikedomesticfirms(principleofnationaltreatment).

Thislegalframeworkhasseemedinsufficienttopotentialforeigninvestors.Consequently,theyhavepushedforinvestmentliberalizationandsupplemen-taryguaranteesfortheirpropertyrightsandexpectedprofits.WiththeincreaseinFDiflowstodevelopingcountries and to several newly independent coun-tries in the 1960s, international investors (almostexclusivelyfromdevelopedeconomies)soughtthecreationofajudicialbodythatwouldsupplementorreplacedomesticlawsandnationalcourtsindevel-opingcountries,which,intheirview,didnotmeethigh standards of independence and impartiality.The resultingNorth-Southdebate sawdeveloping

countries subscribing to theCalvoDoctrine thatadvocated the principle of national treatment, andtheUnitedStatesandeuropeancountriessupportingthedoctrineofan“internationalminimumstandard”thatrequiredtheprotectionofforeigninvestorsunderinternationallaw(independentfromnationallaws).26

While theoeCDconductedlongdiscussionswhich eventually failed to create a judicial bodythatwould supplement or replace domestic lawsand national courts in developing countries,27 theConventionontheSettlementofinvestmentDisputesbetweenStatesandNationalsofotherStates,nego-tiated inparallelunderWorldbankauspices,wasadoptedin1965.ThisConventionstillgovernsinvest-mentprotectiontoday.itdoesnotcontainsubstantiveprovisions in this regard, but provides proceduralrulesforthesettlementofdisputesthrougharbitra-tion.Tothatend,itcreatedtheinternationalCentre

for Settlement of investmentDisputes(iCSiD),whichisoneofthefiveinstitutionsconstitut-ingtheWorldbankGroup.

Thelackofagreementona common international legalframework for foreign invest-ment despite several attemptssincethe1960shasmeantthatthereisnouniformregimegov-erning investor-State relations.Different legal rulesare found

inavarietyofbilateralandmultilateralagreementsconcerninginvestmentliberalizationandinvestmentprotection(Schill,2014).

Some rules on investment liberalization (e.g.rulesreducingbarrierstomarketaccessforforeigninvestors)canbefoundininternationaltradelaw.TheTRiMsAgreementandtheGATScontaininvestment-relatedregulations,asdiscussedinchapterVofthisReportandinsectionbofthischapter.Provisionson investment liberalization, namely the right ofestablishmentandfreemovementofcapital,canalsobefoundineUlaw.likewise,theoeCDCodesofliberalisation ofCapitalMovements andCurrentinvisibleoperations contain non-discriminationcommitmentsbyoeCDmemberStates,andtherebyaimatinvestmentliberalizationinspecificsectors.

However,mostofthenewinternationalrulesareembeddedinbilateralagreementsamongStates,

A key ingredient of industrial policy has been to influence TNCs performance, but it has been progressively limited by the URAs and many other trade and investment agreements.

International Finance and Policy Space 137

whichincorporatemechanismsforinvestmentpro-tection.bytheendof2012therewere2,857biTsandmore than 339 investment chapters in freetradeagreements(FTAs)(UNCTAD,2013a).Theseagreements are based on similar general substan-tive principles, such as property protection andthe rule of law, and generallyinclude investor-State disputesettlementmechanisms(iSDS),which enable investors of sig-natorycountriestodemandtheenforcementoftherightsgrant-edundertheagreementsbyhostcountries.Theabove-mentionediCSiDand theUnitedNationsCommission on internationalTradelaw (UNCiTRAl) arethetwomostactivearbitrationcentres.(Whenmorethanonepossibilityisallowedinthebilateraltreaty,thechoiceisgenerallymadebytheinvestor.)

(b) Growing restrictions on policy space

bycreatingadisputesettlementmechanismintheabsenceofacomprehensivebodyoflaw,invest-ment tribunalshavegained a singularly importantrole: instead of applying pre-existing rules to thefactsofindividualcasestheyhavegeneratedtherulesthemselves.28Thisstrategyhasgivenanextraordinarypower to arbitrators, especially because the termsof bilateral agreements protecting investments aregenerallyvagueandthelegalframeworkinwhichtheyoperateareextremelyloose.

indeed, few standards of protection in inter-national investment treaties are crafted as specificrulesthathaveaclearscopeofapplicationandtargetspecificbehaviour.instead,theyarecraftedaslooseandopen-endedstandards.Theconceptof“indirectexpropriation”,andthestandardsoffairandequitabletreatment,nationaltreatment,most-favoured-nationtreatment, full protection and security, and freecapitaltransferareallformulatedinamannerthatleavesconsiderablescopefordiscretionbyarbitraltribunals.Caselawhasshownthattheycanalsobeapplied tomeasures taken by a host government,evenwhenthosemeasuresareinthepublicinterest,includingimplementationofanationaldevelopmentstrategy.infact,Statesmayfindthattheyaresubject

tocommitmentstheyneverthoughttheyweremakingwhensigningthosetreaties.

Tobeginwith, theverydefinitionof“invest-ment” isnotunequivocallymadeexplicit inmanytreaties.Whatexactlyisprotectedisthereforeleftto

thejudgementofarbitrators.Agovernmentmaythinkitisgiv-ing special guarantees only toFDi,onlytofindoutthatotherkindsofcapitalmovements,inparticularportfolioinvestmentsand sovereign debt, are alsocovered by abiT.Therefore,in case it needs to restructureaforeigndebt,holdersofdebtinstruments (includingvulturefunds)may resort to iSDS to

request the entire face value of the original debtinsteadofparticipatingintherestructuringprocess(UNCTAD,2011).29

Furthermore,thevaguenessofinvestmenttreatystandardscanundulyrestrictthefreedomofhostgov-ernmentstoregulateinthepublicinterest,andgivesconsiderablepowertotribunals.Forexampleitisuptotribunalstodeterminewhatconstitutescompensableindirectexpropriationandnon-compensablegeneralregulation,thescopeofnationaltreatment,thecontentoffairandequitabletreatment(FeT),andtheamountofflexibilityitgrantstogovernmentdecision-making.inthelattercase,theacceptedinterpretationofFeTunder customary international law (Cil) providesforcompensationfordenialsofjustice,understoodas“denialofdueprocessincourtoradministrativeproceedingsordenialofpoliceprotection”.However,arbitratorshavefrequentlyadoptedabroaderinter-pretationofFeTtoincludetherighttoa“stableandpredictableregulatoryenvironment”,andthereforeconsideranychangesinregulatoryortaxpoliciesasviolatingiiAprovisions.30Asaresult,governmentsmightfindtheirnormalfunctionscircumscribedbythethreatofhavingtocompensateforeigninvestorsiftheyintroducepolicymeasuresdesignedtorespondtochangingcircumstances(suchasfinancialcrises31ornewscientificfindings)ortopublicdemandwithlawsofgeneralapplication(Wallach,2012).ThesolepossibilityofbreachinganinvestmenttreatycanbesufficienttodeteraStatefromtakinganymeasurethatmightalterthebusinessenvironment,evenifthisisnecessaryforeconomic,socialorenvironmentalreasons(so-called“regulatorychill”).

Since the 1960s, international investors have sought the creation of a judicial body to replace domestic laws and national courts in developing countries and obtain supple-mentary legal guarantees.

Trade and Development Report, 2014138

Anumberofcasescanbecitedinthiscontext,suchasarbitrationsinconnectionwithArgentina’seconomic crisis in 2001-2002,water concessionsinbolivia,Argentina and theUnitedRepublic ofTanzania,anaffirmativeactionprogrammeaimedatremedyinginjusticesremainingfromtheapartheidsysteminSouthAfrica,banningofharmfulchemi-calsinCanadaandtheUnitedStates,protectionoftheenvironmentinCanada,GermanyandMexico,anti-tobacco legislation inUruguay andAustralia,andGermany’snuclearenergyphase-out.32inthesecases,themanyvaguelegaltermsusedinbiTsraiseconcern thatarbitration tribunalsmayuse themtocurtailgovernmentmeasuresaimedatprotectionoftheenvironment,humanrightsandlabourandsocialstandards,orwhendealingwithfinancialcrises, for thesakeof investorprotection,withoutconsideringthepublicinterestsinvolved.

The general idea behindtheestablishmentofiSDSwasto put “procedure before sub-stance”withtheexpectationthatthisprocesswouldgenerateanaccepted legal framework forinternationalinvestment.However,this“procedure”hasnotbeen transparent andbalancedenough forgeneratinganacceptedbodyoflaw.Tobeginwith,thisprincipleinitselftransfersenormouspowertoa body of non-democratically elected arbitratorswhose ruling often has been criticized (eberhardtandbuxton,2012).

investor rights, such as receiving fair andequitabletreatment,fullprotectionandsecurityoftheir investment, national treatment or protectionfromindirectexpropriation,leaveawidemarginofdiscretiontotribunalsindeterminingthenormativecontentofthoseprinciplesandinapplyingthemtothe specific facts of a case. in fact, the principlesof international investmentprotectionareoftensobroad that it is appropriate to compare themwith“generalclauses” incivilcodes thatdelegate sub-stantial rule-making powers to dispute settlementbodies.Consequently, arbitral tribunals emerge asimportantlawmakersininternationalinvestmentlawwhentransformingthebroadprinciplesofinvestmentprotectionintomorepreciseruleswhichgovernthewaytheexecutive,legislatureandjudiciaryofahost

Statemustconductactivitiesaffectingforeigninves-tors (Sornarajah,2008).Theyareoftenable todoso,notprimarilybyapplyingtheprinciplesoftreatyinterpretationasenshrinedintheViennaConventiononthelawofTreaties(VClT)orbyhavingrecoursetocustomaryinternationallaw,butratherbyturningtoandrelyingonarbitralprecedent.

Suchlaw-makingthroughprecedentraisescon-cernbecauseitenablesinvestmenttreatytribunalstotakeoverafunctionthat,ininternationallaw,isusu-allyallocatedtoStates,andthatnormallytakesplacethroughtheconclusionofinternationaltreatiesorthedecision-makingprocessesof internationalorgani-

zations. it is also problematicbecausethereareusuallyonlyafewcontrolmechanismsStatescanusetoundothedecisionsofthetribunalswithwhichtheydonotagreeandrestricttheeffectofthosedecisionsasprecedentsforfuturecases.Sometimes,invest-ment treaties provide for insti-tutionalmechanisms throughwhichcontractingpartiestoiiAscan issue joint interpretationsof the underlying agreements

thathavebindingeffectonfuturearbitrations,butsuchmechanisms are still the exception.What ismore, there is an imbalancebetween thepotentialsystem-wideeffectofarbitraldecisionsasprecedentandthebilateralstructureofinvestmenttreatiesinwhichStatescannotgenerallybeexpectedtomoni-torarbitrationstowhichtheyarenotparties,orthattakeplaceundertreatiestowhichtheyareequallynotparties.Thisstructurefavourstheinterpretativepower of arbitral tribunals to the detriment of theinterpretativepowersofStatesunder internationallaw.Asthesetribunalstendtotreatthecasesfromthepointofviewofcommercialarbitration,theycan-notbeexpectedtotakeintoaccountthepubliclawaspectsofthosedisputesrelatedtothescopeofthehostState’sregulatorypowers,including,forexam-ple,disputesconcerninglimitsofemergencypowers,regulatoryoversightoverpublicutility companiesand the tariffs they charge, control or banning ofharmfulsubstances,theprotectionofculturalprop-erty or the implementation of non-discriminationpolicies.Therefore,theycanhardlybeexpectedtoconsidertheinterestsofaneconomyasawholeandaspectsofanoveralldevelopmentstrategy.

Critiques of the investor-State arbitration mechanism focus on its consistency, transparency and pro-investor bias, and on its adequacy to address matters of public policy.

International Finance and Policy Space 139

(c) Increasing criticism of current arbitration procedures

Problems relating to arbitration procedurebecamemorevisibleasmorecountriesadheredtothesystemandmorecaseswerebroughtbyinves-tors(Schill,2011).between1965and2000,iSDSarbitragecentresregisteredonly50cases(lessthan1.5casesperyearonaverage),whereasbytheendof2013,thecumulativenumberofknowncaseshadclimbedto568(almost40casesperyearonaveragesince2000) (UNCTAD,2014).Themost frequentcritiquesofiSDSprocedurefocusonitsconsistency,transparency and pro-investor bias;more gener-ally,itslegitimacyandadequacytoaddressmattersinvolvingpublicpoliciesareincreasinglychallenged(seeforinstanceFranck,2005;VanHarten,2007;andVanHartenetal.,2010).

Thecoreofthecriticismisthat,whileinvest-menttreatydisputesofteninvolvemattersofpublicpolicyandpubliclaw,thedisputesettlementmecha-nism, namely investor-Statearbitration, follows amodelthathasbeendevelopedfortheresolutionofdisputesbetweenprivatecommercialactors.33

Suchrulesdonottakeintoconsideration the public inter-ests that may be affected ininvestment treaty arbitration(Kingsbury andSchill, 2009).one proceduralmaxim is theconfidentiality in investmenttreaty arbitration.34 Confidentiality is a problembecausethoseaffectedbyarbitrations,inparticularthepopulationofthehostState–includingcitizensandcompetitorsofTNCs–cannotreceiveinforma-tionaboutproceedingsthatimpacttheirinterestsandtheirgovernment’sconduct.35Moreover,confidential-ityrestrictsthepossibilityfordomesticdemocraticprocessestomonitorarbitrationproceedingsandtoassesswhethertheydeliverabalancedandfairdeci-sioninforeigninvestmentdisputes.Confidentialityisalsocontrarytohowdisputesinvolvingthegovern-mentareusuallysettledindomesticcourts,namelythroughopenandaccessibleproceedings.

Closelyrelatedtothelackoftransparency,istheissueofaccessofnon-partiestoarbitration, inparticularthosethatintendtovoiceaspecificinterest

relevant to thedispute.While suchamicus curiaesubmissions are occasionally accepted by arbitraltribunals,theideathatarbitrationisaparty-ownedprocessisatoddswithopeninguptheproceedingstooutsiders.Thisissueisincreasinglyoftenaddressedin newer investment treaties and also in the 2014UNCiTRAlRulesonTransparencyinTreaty-basedinvestor-StateArbitration,butitremainsproblematicinagreatnumberofcases.

Anothermajorareaofcriticismbyseveralgov-ernments,academicsandcivilsocietyorganizationsconcernsthestandardsofindependenceandimpar-tialityofinvestmentarbitratorsandtheirprofessionalethics. in this context, a problem is that there arenorulesthatstrictlyseparatetherolesofarbitratorand counselwithin investment dispute settlementsystem.Thus, except in cases of so-called issueconflicts,servingasarbitratorsinonecase,andascounsel inanother is largelyaccepted in theprac-ticeofinvestmentarbitration.Similarly,theethicalstandardsapplicable toarbitratorsandcounselare

often rather open-ended andvague, leading to standards ofindependence and impartialitythatarewellbelowthoseappli-cableindomesticcourtproceed-ings.Arecentstudyshowedthatthemostprominent arbitratorshadaccumulatedseveralroles,simultaneouslyorsuccessively,includingthoseofcounsel,aca-demic,governmentrepresenta-tive,expertwitnessandseniorcorporatepositions.Fromtheir

differentpositions,theyhavebeenabletopromotea system fromwhich they benefit (eberhardt andbuxton,2012).Moreover,arbitratorshavepecuniaryandcareerinterestsinacceptingcasesonbehalfofinvestors,andthereforeinmakinganexpansiveinter-pretationofinvestmentrules,whichleadstomorecases.AnempiricalstudybyVanHarten(2012)ana-lysedhowinvestmentarbitratorsresolvedtheadmis-sibilityofclaimsincasesonwhichaninvestmenttreatyisambiguousorsilent.Hefoundthat,intheresolutionofcontestedissues,theytendedtofavourclaimantsbyabroadinterpretationoftheinvestmenttreatyandbyallowingmoreclaimstoproceed.36

TheeaseofsuingaStatebeforetheiSDSgivestheinvestorstrongleverageagainstthehostState.evenifitdoesnotresultinafinalresolution,themere

Arbitration tribunals follow a model developed for resolving disputes between private commercial actors, and thus have no reason to consider the broader interests of a host country and its development strategy.

Trade and Development Report, 2014140

possibilityofacasebeingtakentotheiSDSaltersthe termsof anynegotiated settlement. in severalinstances,settlementshaveincludedsomepaymentsor commercial advantages given to investors inexchangefortheirwithdrawaloftheclaimwhichthehostgovernmentwouldprobablynothavegrantedwithoutthethreatofanonerousfine.

Thepro-investorbiasofiSDSschemescanbepartlyexplainedbytheincentivesstructureforarbi-trators,but,moregenerally,itmayalsoresultfromtheverynatureof the iSDS: ithasbeendesignedfor providing supplementary guarantees to inves-tors; not formaking them respect host-countrylawsandregulations.investors,notStates,aretheonesthatcanthereforeinitiateacase,andcanevenchoosethearbitrationcentre.Therefore,TNCswithapresenceinseveralcountriescanalsochoosethetreatytheywillinvokebyestablishingtheirresidenceaccordingly.

Hence, international investment lawdoesnotincludeanyenforceableobligationson thepartofthe investorwith respect to, for instance labourstandards, human rights or environmental protec-tion.Rather, obligations that directly bind foreigninvestorsaremainlycontainedinthedomesticlawofthehostState.However,itisnotalwayseasyforaStatetoobtainreparationfromaforeigninvestordue, for instance, to tax avoidance (case ofMaliagainstRandgold; see chapterVii, sectionD) ortoenvironmentaldamage(e.g.thecaseofecuadoragainstChevron).indeed,sometimesiSDSmecha-nismshavebeenusedbyTNCstoretaliateagainstprosecutionfortheirallegedwrongdoing.

This shows an asymmetry of governance ininternationalrelations:whileinvestmentprotectionisdeeplyenshrinedinthecurrentinvestmentframe-workbasedoniiAs,competinginterests,bothpublicandprivate,rightsofStatesandobligationsofforeigninvestorsarenotenforcedattheinternationallevelthrough comparable institutions.Moreover,whilehumanrightsareprotectedunderhumanrightstrea-tiesandenvironmentalconcernsareprotectedunderinternationalenvironmentallaw,theseinternationalregimeshavemuchweakerdisputesettlementandimplementationmechanisms than the investmenttreatyframework.37Thisalsohasadirect implica-tionforpolicyspace:governments thatattempt to

introducepoliciesinthedirectionofaprogressiverealizationofthevarioushumanrightsoftheirciti-zens,includingtherighttodevelopment,ortopreventtheir rights frombeing violated by the actions ofinternational investors,may faceproblems relatedtothestipulationsofinvestorprotectioninvarioustradeandinvestmenttreaties.

onlyafewyearsafterthefirstinvestmenttreatyarbitrationsstarted,theproblemofinconsistentdeci-sionsandparallelproceedingsbecameapparent.itaroseafter twoarbitral tribunalsconstitutedundertwoseparatebiTshearddifferentdisputesrelatedtothesamefacts,andarrivedatoppositejudgements.38Similar inconsistencies in arbitral jurisprudencealsoariseinrelationtointerpretationsofidentical,oressentiallycomparable,clausesindifferentbiTsortothesameruleofcustomaryinternationallawbydifferent tribunals.Notorious examples are theinconsistentinterpretationsofmost-favoured-nationclauses− inparticulararisingfromarbitralproce-dure and arbitral jurisdiction− the interpretationofumbrellaclauses,theapplicationofthedefenceofnecessityandnon-precluded-measureclausesiniiAs,aswellasthetreatmentofproceduralaccesstoarbitrationrequirements.

Thelackofconsistencyisanobviousobstacletothestrategyofgeneratingthe“substance”ofinter-nationalinvestmentlawthroughconvergenceinthejurisprudenceofarbitral tribunals.Nevertheless, itseems thatprecedent is increasinglyusedbyarbi-tral tribunals in differentways, such as adoptingrelatively cautious approaches,where precedentservesasanindicationoftheordinarymeaningofatreatyprovision39orasa“sourceofinspiration”40forinterpretation;orformoreimposinguses,wherebyprecedent becomes a standard-setting device oreven an instrument of system-wide law-making.41Nonetheless, the danger of inconsistent decisionspersistsbecauseoftheapplicablelawenshrinedinbilateraltreatiesbeingcouchedinvagueterms,whoseinterpretationislefttoone-offarbitraltribunalsratherthantoapermanentandcentralizedjudicialsystem.42Morefundamentally,followingprecedentsdoesnotmeanimprovingthefairnessandrationalityofthesystemifsomepastrulingswerethemselvesflawed,andwereneitherannullednorcorrectedbytheiCSiDannulment committee even after having identified“manifesterrorsoflaw”(UNCTAD,2014:3).43

International Finance and Policy Space 141

2. The current debate on investment protection rules and policy proposals

(a) The need for change

Asalreadymentioned,duringthe1990s,therewasaproliferationofinvestmenttreaties,includingtheiSDS,atatimewhenFDiwasseenasthekeyto unlocking a country’s development potential,andindeedwasviewedalmostasagoalinitself.Atthattime,thedominanteconomicthinkingopposedactiveinterventionbytheStateintheeconomy.inthatcontext,itwasbelievedthatlosingpolicyspacewasnotahighpricetopayforanexpectedincreaseindirectinvestmentinflows.

Thisperceptionbegantochangeinthe2000s.inparticular, the impactofFDioneconomicper-formance–includingfixedinvestment,technologytransfer,provisionofpublicutilities,fiscalrevenues,employment, exports and balance of payments –proved to be less significant andmore contingentthanexpectedincountrieswhereitwasnotaccom-paniedbystrongindustrialpolicies.However,italsobecameapparentthatinvestment-relatedrulescouldobstructthepoliciesaimedatimprovingtheimpactofFDiontheeconomy.Thiswasreflectedinthesharprise in the number of cases brought to arbitrationmechanismsasaresponsetogovernmentpoliciesinanumberofcountries.Atthesametime,econometricstudiesontheimpactofbiTsonFDiflowsreachedambiguous results,44with several studies findingthat the existence ofbiTs or other arrangementsthatincorporatedinvestmentprotectionhadaminorinfluence–ifanyatall–onbilateralFDiinflowsfromdevelopedtodevelopingcountries(seeannextothischapter).

While benefits frombiTs became less evi-dent,thefinancialcoststheycouldinvolveclearlyappeared,andtheyweresometimesexorbitantanddifficult to justify.45 Fromgovernments’ point ofview, the perceived cost-benefit equation of iiAs,involvingthelossofpolicyspaceontheonehandandencouragingFDiflowson theother,began tochange,promptingageneralre-examinationofsuchagreements – particularly of theirmain juridicalinstrument,iSDSmechanisms.

Somewhat paradoxically, new negotiationsof investment treatieswhichmostly replicate the

featuresoftheoldonesareunderwayatthesametimeasvigorousdiscussionsaretakingplaceaboutthenetusefulnessofsuchtreaties,theseriousprob-lemstheypresentforcontractinggovernments,andthefactthattheymaynotcomplywithsomebasicprinciplesofinternationallaw.ThoseprinciplescanbefoundinUnitedNationsconstitutional lawandin comparable domestic constitutional laws.onebasicprincipleistheprotectionofself-determinationwhichreflectstherightofhostgovernmentstosettheir development strategies independently andimplementthemaccordingly.46Theprincipleofself-determinationthereforeprovidesthebasisforaclaimforsufficientpolicyspaceandforallowinghostgov-ernmentstocontrolandregulateforeigninvestorsinthepublicinterestandinlinewithoveralleconomicpolicyandlongertermdevelopmentstrategies.

The principle of sovereign equality requiresthatinvestmentrulesshouldnotbeasymmetricalorone-sidedtothedetrimentofcertainStates.47Thisnotonlyexcludestreatiesthatimposeobligationsonjustoneclassofcontractingparties(i.e.capital-importingdevelopingcountries);italsoexcludestreatiesthatone-sidedlybenefitoneclassofcontractingpartiesandtheirinvestors,namelycapital-exportingcoun-tries,withoutrecognizingatthesametimethedutiesofinvestorsandtheirhomeStatestoensurethatbothcapital-importing and capital-exporting countriesshouldbeabletobenefitfromtheirsovereigntybybeingallowedtointroduceregulationsinthepublicinterest.

The protection ofhuman rights is a furtherprincipleofUnitedNationsconstitutionallawthatshould inform international investment relations.48Togetherwith theprotectionofproperty,duepro-cessandaccesstojusticetoallinvestors,nationalorforeign,thisprinciplestressestheresponsibilityofhostStatestoregulateforeigninvestorseffectivelyinordertoprotectthehumanrightsoftheirpopulations,includingforinstance,therighttoasafeenvironment,drinkingwaterandpublichealth.Thisresponsibilityshouldalsobeextendedtothemacroeconomicandindustrialpoliciesneededfordevelopment,whichisanotheressentialobjectiveofUnitedNationscon-stitutionallaw.49

Whileproblemsarisingfromthecurrentinter-national investment frameworkbasedon iiAs areincreasinglyrecognized(evenbyactorsthatprevi-ouslychampioned thoseagreements), there is less

Trade and Development Report, 2014142

consensus onhow to resolve them.Someobserv-erswhobelievethesystemshouldbesubstantiallyreformedproposeavarietyofchanges,andmethodsto implement them; others believe that countriesshould avoid evenentering into such treaties, andindeedshouldconsiderexitingfromthosetheymayhavealreadysigned,asdiscussedbelow.

(b) Reforming international investment rules, an arduous task

An essential characteristic of a good legalsystemisthatitcanbeamendedtocorrectitsshort-comingsortobeadaptedtothechangingpreferencesinthecommunityitappliesto.Thispointstoanotherproblemofthepresentinvestmentlawsystem:itisdifficulttoreform.

inthelastfewyears,therehavebeenanumberofinitiativesandproposalsforreformingthecurrent rules on internationalinvestment to better safeguardpolicy space for host States(see in particular UNCTAD,2013b).Proposedreformssug-gest that substantive standardsin future treaties be clarifiedand improved, and the proce-duresrelatingtoinvestor-Statearbitrationchangedtoensurethatinvestmenttrea-tiesareinterpretedinawaythatisacceptabletoallstakeholdersinvolved.

Regardingthefirstissue,clarificationsofinvest-mentprotectionrulescouldincludeconsideringthebreadthofwhatkindsof investmentareprotectedunderthetreatiesandwhoisprotectedasaninves-tor.50Changescouldspecifywhethersovereigndebtshouldbeprotectedasdirectinvestment,orwhetherthereshouldbespecialruleswithregardtodebt,asisthecaseinsomemorerecentinvestmenttreaties.51TreatiescouldalsoreaffirmStates’righttoregulatein order to protect the environment, public healthand safety, social concerns and cultural diversity,andclarificationstothiseffectcouldbeintroducedinthekeyprovisionsonindirectexpropriation,andFeT.These considerationswere incorporated, forinstance,intheinvestmentchapteroftheCanada-eUComprehensiveeconomic andTradeAgreement,which stressed the intention of both contracting

partiestoconcludeatreatythatrespectstheparties’righttoregulate.

Regardingdisputesettlement,theCanada-eUtreaty,aswellastheeU’sinvestmentpolicymoregenerally,includesinvestmenttreatyprovisionsthatpreventinvestorsfromfilingmultipleclaimsattheinternationalandnationallevels,andrulesthatallowarbitral tribunals tofilteroutspuriousor frivolousclaimsatanearlystageofarbitralproceedings,thusavoidinghighcostsofafullhearing.Furthermore,transparencyofarbitrationproceedingsisstrength-enedthroughreferencetothenewUNCiTRAlRulesonTransparency inTreaty-based investor-StateArbitrationthatbecameeffectiveon1April2014.Additionally,stricterrulesonprofessionalethicsforinvestmentarbitratorsaretobeincludedinfutureeUinvestmentagreements.intheCanada-eUtreaty,thecontractingpartieshavealsoagreedtoarosterofarbi-

trators,therebyrestrictingwhocanactasarbitratorinthedis-putesundertheagreement.Thisisakeyissue,asoneofthebasicprinciplesininternationallawisthatarbitratorsmustbeexplic-itly approved by all litigatingparties, a principle that proce-duresiniCSiDdonotrespect.52The treaty also states that thecontractingpartieshaveagreedtoconsidercreatinganappellate

mechanismforarbitralawardsinthefutureinordertoensureconsistencyandincreasethelegitimacyofthesystem.Finally,mechanismsforjointinterpre-tationofthegoverningagreementareincluded,asaremechanismsforthecontractingpartiestojointlyfilteroutarbitralproceedingsinthefinancialsector.

Thisapproachfacesseverallimitations.First,evenifdefinitionsinnewtreatiesaredraftedmoreclearlyandprecisely,thereisnoguaranteethatthiswill translate into actual rulings, as shown in thecaseofRailroadDevelopmentCorporation(RDC)againstGuatemala. in that iSDS case involvingtheDominicanRepublic-CentralAmerica-UnitedStates FreeTradeAgreement (CAFTA-DR), theGovernmentoftheUnitedStatesattemptedtorestrictthe possibility of interpretationof “fair and equaltreatment”bymeansofacustomaryinternationallawannex,butthetribunalignoredtheannex,stillinter-pretedtheFeTbroadlyandfoundtheGuatemalanGovernmentguilty.53

Recognizing the problems arising from the current international investment framework based on IIAs, some observers believe the system should be substantially reformed…

International Finance and Policy Space 143

Second, changeswould only apply to newagreements, leaving all the previously agreedunchanged – unless they are renegotiated,whichwouldrequiretheagreementofallthegovernmentsinvolved.As the treatieswill remain bilateral inform,anyimprovementwillonlyhaveeffectforthebilateralagreementinquestion.inthisframework,restrictionsofthescopeofinvestmentprotectedinsometreatiesmaybecircumventedbyforeigninves-torsbyinvokingmost-favoured-nationclausesorbystructuringtheirinvestmentstocomeunderadiffer-enttreatythatprovidesmorefavourableprovisionsoninvestmentprotection.

To face the problems ofsuch “piecemeal approach”,otherproposalsaimatreform-ing the arbitration system alliiAswouldreferto.Functioningof arbitration centres can bemodified.Forinstance,areformto iCSiD Convention couldask contracting States to pre-approveanumberofpotentialarbitratorsfromthePanelofArbitratorsestablishedinsection4oftheConvention, limiting the discretionary power thePresidentof theWorldbankcurrentlyexercises.54More ambitious proposals suggest creating anappealsfacility,orreplacingadhocarbitrationtri-bunalswithaninternationalinvestmentcourt,withjudgesappointedbyStatesonapermanentbasis(VanHarten,2008).Suchinstitutions,itisargued,wouldgivemore coherence to international investmentlaw:althoughtheyshouldstillinterprethundredsofpotentiallydissimilartreaties,atleasttheinterpreta-tionswouldbemorecoherentthanthatprovidedbynumerousadhoctribunals(UNCTAD,2013b).buttheseinstitutions,whilepotentiallyleadingtomoreconvergenceininternationalinvestmentlaw,couldalsodevelopthelawindirectionsthatstatesdidnotforeseeandmaynotcontrol.Centralisationmayleadtomorecoherence,notnecessarilytomorefairness.

Changestothecurrentsystemcannotbelimitedtoprocesses.Asdiscussedearlier,oneoftherootsofthepresentflawsofiSDSwasprocedurecomingbeforesubstance.Thisputinthehandsofareducednumber of non-democratically elected arbitrators,workingwithoutcontrol,coherenceortransparency,theroleofgeneratingacorpsoflawoninternational

investment.itisnotonlytheprocedurefordisputesettlement thatmust be improved, it is thewholelogicthatmustbechanged:substancemustberede-fined,inawaythatrespectstheconstitutionalbasisand principles presented in subsection (a) above.itmust also recognise that the issues involvinggovernmentsandacountry’spolicyspacearecon-substantialtopublic,nottoprivatelaw.Publicandprivatelawsdonotonlydifferbecausetheyapplytodifferentsubjectsoflaw,butalsobecauseofdeepdifferences in their respectivecontentand inspira-tion.Privatelawappliestoprivateindividualsthat

areconsideredequalbeforethelaw,while inpublic law,whatisrelevantisthegeneralinter-estwhichispursuedbypublicpersons.This iswhydifferentsolutionsaregiventoproblemsthatinthemselvesmightappearcomparableorevenidentical(delaubadèreandDevolvé,1986).in a nutshell, general interestprevailsinpubliclawinterpre-

tations,andprivateinterestsinthoseofprivatelaw.Re-examinationofthelegalprinciplesshouldleadtoaradicalreorientationofhowthesedisputesarehandled:inparticular,“aprivatemodelofadjudica-tion(i.e.arbitration)isinappropriateformattersthatdealwithpubliclaw”(UNCTAD,2013a:116;seealsoVanHarten,2008).

Canamultilateralinstitutionprovideanalter-nativeframeworkbasedonpubliclaw?Ananswerto this question should examine several unsolvedissues,addressinginparticularthatoftheone-sidedlogic inwhich investors are always the claimantsandgovernmentstherespondents.Moregenerally,itshoulddiscusswhetheritwillremainamechanismforsolvingdisputesbetweenstatesandprivateinves-tors,orwillneedtoprovideastate-to-statedisputesolvingmechanismasdoes,forinstance,theWTo.Furthermore,countriesmaywant topreservetheirowninterpretationofpubliclaw,reflectingnationalvaluesandchoices,ratherthanacceptingauniformcorpsoflawinwhichdefinitiontheymayhavelittlesay.This has been a key concern,which explainsthe reluctance ofmost developing and also somedeveloped countries to accept initiatives like theMultilateralAgreementoninvestment(MAi),negoti-atedintheoeCDbetween1995and1998.

… while others believe that countries should avoid even entering into such treaties, and indeed should consider exiting from those they may have already signed.

Trade and Development Report, 2014144

(c) Terminating treaties and reverting to national law

Strictly speaking, iSDSmechanisms do notaddresstheproblemthatjustifiedtheirestablishment.ifthejudicialsystemofacountrydoesnotprovideindependentjusticeorenforcetheruleoflaw(includ-ingtheprotectionofprivateproperty),theappropriateresponseshouldbetofixthoseshortcomings,ratherthanallowaselectgroupofagents(i.e.foreigninves-tors)toseekjusticeelsewhere.Thiswouldtackletherootof theproblemwithout renouncing importantaspectsofnationalsovereignty,andwithoutbreach-ingtheprincipleofequalitybeforethelawbygivingforeignfirmsanadvantageoverdomesticfirms.

Forsure,improvingthedomesticjudicialsys-temmaybedifficultandmaytaketime,butrelyingonasystembasedonbiTsandotheriiAscannotbeconsideredanalternativetosuchreforms,becausesuch a system has serious legal flaws, sacrificesnationallegalsovereigntyandcanobstructthepursuitofnationalpolicyobjectives.Wherenecessary,fillinggapsinthedomesticlegalsystemshouldbegivenpriorityoverallocatingscarcejuridicalandadminis-trativeresourcestonegotiationofsuchinternationaltreaties and defending theState from subsequentcasespresentedtoiSDStribunals.inaddition,evenifpolicymakersgivehighprioritytoattractingFDi,thereisnosolidevidencethatthesetreatiesincreasesuchinvestmentsignificantly(seetheannextothischapter).AndevenifenteringiniiAsmayincreasetheattractivenessofdevelopingcountriesforTNCs,itwouldonlycomplementothermorefundamentalmotivations forFDi, inparticular thegeneralper-formanceof thehost economy (UNCTAD,2009).Hence,ifthelossofpolicyspaceandthefinancialchargethoseagreementsmayinvolvetogovernmentsaffect negatively the economic growth, itwouldnotonlylessenFDiinflows,butalsoweakentheirpotentialcontributiontofastergrowthandstructuraltransformation.Fromthehostgovernments’pointofview,theywouldpayahighpriceintermsoflostpolicyspaceandpotentialfinesinreturnforfew,ifany,gains.

onthesegrounds, itmightbesensiblenottosignsuchtreaties,adecisionalreadytakenbyanum-berofdevelopingcountries.butwhatifacountryhasalreadysigned?Renegotiatingexistingagreementsmaybeanalternative,butitpresentsmanydifficul-ties, as alreadydiscussed.Mostof all, it doesnot

addressthe“originalsin”ofiiAs,whichisreducinggovernmentspolicyspacebyapplyingprivatecom-merciallawtopublicmatters(and,inaddition,inanunbalancedway,sincetheclaimantcanonlybetheinvestor).Thequestionwouldnotbe, then, just toobtainmore“balanced”iiAs,buttorevolvetopubliclaw,whichprivilegesgeneralinterestsoverprivateones.Anotherstrategypursuedbysomecountriesistoterminatetheirinvestmenttreatiesand/orwithdrawfromtheiCSiDConvention.Forexample,bolivia,ecuador,andthebolivarianRepublicofVenezuelahavewithdrawnfromtheiCSiDConvention;somecountries, including theCzechRepublic,ecuador,indonesia,SouthAfricaandthebolivarianRepublicofVenezuela, have already terminated investmenttreatiesorhaveannouncedthewidespreadtermina-tionoftheirtreatyprogrammes.

The rationale behind such action is to onceagain have investor-State relations governed bydomesticlawanddomesticcourtsonly.Forexample,inSouthAfrica protection under investment trea-tiesisintendedtobereplacedbyaPromotionandProtection of investmentbill. in some countriesthis does not necessarily eliminate arbitration inforumsotherthaniCSiDandtheproblemoffollow-ingdifferentlegalstandards.ecuadorhasproposedthe creation of amechanismwithin theUnionof SouthAmericanNations (Union deNacionesSuramericanas−UNASUR)thatwouldapplydif-ferent legal standards.55other countries, such astheCzechRepublicandindonesia,havechosentoretainsomeinvestmentprotectionunderotherinter-nationallegalagreements(e.g.ASeANandtheeU,respectively).

Terminating investment treaties and/orwith-drawingfromtheiCSiDConventioninvolvevariouspreconditionsandlimitations(UNCTAD,2010and2013a).First, inordertobeeffective,ahostStatehastowithdrawfromallofitsinvestmenttreaties;otherwise, investorswill be able to structure orrestructuretheirinvestmentssothattheycomeunderthescopeofprotectionofoneoftheremaininginvest-menttreaties.Second,theterminationofinvestmenttreatiesaffectsnewinvestmentsbutdoesnotusuallyimmediatelyend theprotectionofexisting invest-ments,sincemostinvestmenttreatieshavesurvivalorsunsetclausesthatextendsuchprotectiontobetween10and15years.inordertocircumventthesurvivalclausesininvestmenttreaties,theCzechRepublichaschosenasomewhatdifferentapproachtoterminating

International Finance and Policy Space 145

investmenttreatieswiththeconsentofsomeofitsinvestmenttreatypartners.inafirststep,itstreatypartnershaveagreedtoamendthesurvivalclausestostatethattheynolongerapply;inasecondstep,thetreatypartnershaveagreedtojointlyterminatetheinvestmenttreatywithimmediateeffect.Finally,concerningwithdrawalfromtheiCSiDConvention,mostinvestmenttreatiescontainthehostState’scon-senttovariousarbitralforums,includingarbitrationundertheUNCiTRAlrules,oradhocarbitration.WithdrawingfromtheiCSiDConventiononlywillthereforenotsignifyacompleteexitfromtheinvest-menttreatyandfromtheinvestor-Statearbitration

system,althoughitmayreduceaninvestor’schoicebyeliminatingtheinstitutionthathasbeencriticizedthemostwithregardtotransparencyandfairness.56

in any event, retreating from an investmenttreaty remains an option that a sovereign countrymaytakewithoutdependingontheapprovalofotheractors,andithasan immediate impactonallnewforeigninvestments.inaddition,terminatingatreatycouldalsobeanegotiating strategy for reformingexistingones,pushingforacompleterevisionofthepresentsystemandrecoveringsomepolicyspaceintheprocess.

Foreigncapitalflowstodevelopingandtransi-tioneconomiesmaysupportinvestment,economicdiversification andgrowth, or generatemacroeco-nomicinstability,externalimbalancesandboom-and-bustcreditepisodes.Theeffectsarehighlydependentontheiramount,compositionanduse.Governmentsneedtoapplycapitalmanagementpoliciesinorderto establish a suitablemacroeconomic frameworkforinvestmentandgrowth,influencetheamountandtypeofcapitalinflowsandchannelthemtoproduc-tiveuses.ThisisalsotrueforFDi,asitscontributiontostructuralchange,technologicalupgrading,accesstoworldmarkets,employmentgenerationandout-putgrowthdependscriticallyontheregulatoryandpolicyframeworkinthehostcountry.However,dif-ferenttradeandinvestmentagreementsmayreducethescopeforhost-countrygovernmentstoregulatecapitalmovementsandcurtailtheirabilitytoinflu-encethebehaviourofinvestorstoensurethatFDisupportstheirdevelopmentstrategy.

Thischapterhaslookedatthewaysinwhichdevelopingandtransitioneconomiesareaffectedbyaglobalfinancialcyclethatismainlydrivenbydevel-opedcountries’economicconditionsandmonetary

policydecisions.Theresultingcapitalmovementsdonotnecessarilycoincidewiththeneedsofdevelop-ing countries.besides, given theirmagnitude andvolatility, they tend to generate disruptivemacro-economicandfinancialeffects.indeed,internationalcapitalflowsgenerallycreateafinancialcycleinthereceivingcountries.Capitalinflowstendtoresultinanincreaseindomesticbanks’creditsupply,andanappreciation of domestic assets and the exchangerate.Theseeffects,inturn,tendtoincreasefinancialfragility,asgrowingindebtednessanddeterioratingcurrentaccountseventuallyleadtoareversalofthoseflowsand,possibly,afinancialcrisis.

Formacroprudential and developmental rea-sons, governments need sufficient policy space tobeable tomanage foreigncapitalflows, influencetheir amount and composition, and channel themtoproductiveuses.inordertocreateandmaintaindomesticmacroeconomic andfinancial conditionsthat support growth and structural transformation,governmentsshouldhaveattheirdisposalsuitablepolicyinstrumentsformanagingcapitalflowsandforpreventingorcopingwiththerecurrentshockstheycouldprovoke.Thisrequiresthepreventiveuseof

D. Summary and conclusions

Trade and Development Report, 2014146

capitalmanagementmeasuresasanormalinstrumentinpolicymakers’toolkit,ratherthanasanexceptionalandtemporarydevicetobeemployedonlyincriticaltimes. Several developing countries have recentlyappliedcapitalaccountmanagementmeasuresthat,despite some shortcomings, can be creditedwithreducingtheirfinancialvulnerabilityandincreasingtheirresiliencewhentheglobalfinancialcrisisstarted.

Theremaybedefactoanddejureobstaclestotheimplementationofcapitalmanagementpolicies.Thefirstisrelatedtotheactionoffinancialagentsandthesecondtoformalcommitmentstakeninfavourofcapitalliberalization.onthelatter,despitesomedivergingviews, itseemsthatmultilateralrules intheiMF’sArticlesofAgreementandintheWTo’sGATSenablegovernmentstomanagetheircapitalaccounts forprudential reasons, including throughcapitalcontrols.However,somenewbilateraland/orplurilateralagreementsthathavebeensignedorarebeingnegotiatedintroducemorestringentcom-mitmentswithrespecttofinancialliberalizationthatmight greatly reducepolicy space in this context.Therefore,governmentsthataimtomaintainmacro-economic stability andwish to re-regulate theirfinancialsystemsshouldcarefullyconsidertherisksoftakingsuchcommitments.

Thischapteralsoanalyseshowtherulesembed-dediniiAscouldrestrictgovernments’policyspaceand how these restrictionsmay impact on theirdevelopmentpossibilities.SuchagreementscanhelppolicymakerstofocusonhowbesttoattractFDi.buttakingahistoricalperspective,itshowsthechangingperceptionoftheseagreements.WhenmostoftheiiAsweresignedinthe1990s,itwasbelievedthatanylikelylossofpolicyspaceresultingfromthoseagreementswasasmallpricetopayforanexpectedincrease inFDi inflows.This perceptionbegan tochange in the early 2000swith growing concernsthatinvestmentrulescouldobstructpoliciesaimedat improving the impact of FDi on the economy.Thisisreflectedinthesharpriseinthenumberofcasesthatinvestorshavebroughttoarbitrationasaresponsetogovernmentpolicies,sometimesentailinghighfinancialcoststoStates.Moreover,afterseveral

decadesofoperatingiiAs,thereisnostrongempiricalevidencethattheysignificantlyincreaseFDiinflows,whichhasbeentheirmainraison d’être.

ThemostcontroversialaspectrelatingtoiiAs’impactsongovernments’policyspaceistheiSDS,whichtakestheformofarbitrationtribunalsaimedatenforcingthegeneralrulesstatedinthoseagree-ments.Asthoserulesarefrequentlycraftedaslooseandopen-endedstandards,thetribunalshaveawidemargin of discretion in determining their norma-tive content. Consequently, arbitration tribunalshavebecomeimportantlawmakersininternationalinvestmentlaw,assumingafunctionthatisusuallyallocatedtoStates.inaddition,thelackoftranspar-encyandcoherenceoftenobservedintheoperationsof those ad hoc tribunals, and their apparent pro-investorbias,havegivenrisetoconcernsabouttheentiredisputesettlementmechanism.ThishasledtodifferentinitiativesrelatedtoiSDSwiththeaimofrecoveringthespacefornationaldevelopmentpoli-cies.Theseinclude:(i)progressiveand“piecemeal”reforms,includingaddingnewprinciplesfordraft-ing sustainable development-friendly agreementsand renegotiating bilateral treaties one at a time(UNCTAD,2013b);(ii)thecreationofacentralized,permanent international investment tribunal; and(iii)retreatingfrominvestmenttreatiesandrevertingtonationallaw.

ifthereasonforestablishingiSDSistorespondto failures innational judicial systems thatdonotprovideindependentjusticeorenforcetheprotectionofprivateproperty,theappropriateresponseshouldbe tofix those shortcomings, rather thanallowingforeigninvestorstoseekjusticeelsewhere.Thelegalframework for international investment based oniiAsandonadhocarbitrationtribunalshasfailedsofartoprovidealegitimatealternativetonationalcourts.Asinvestmentdisputesofteninvolvemattersofpublicpolicyandpubliclaw,thedisputesettle-mentmechanismcannolongerfollowamodelthatwasdevelopedfortheresolutionofdisputesbetweenprivatecommercialactors.instead,itshouldtakeintoconsiderationthepublicintereststhatmaybeaffectedininvestmenttreatyarbitration.

International Finance and Policy Space 147

1 long-termcapitalflowsthatfinancecapitalformationmayincludegreenfieldinvestmentsandsomelong-term credit or portfolio investments.However notallFDiflows(e.g.mergersandacquisitions)expandproductivecapacity,andneitheraretheyalllong-termcapitalflows(e.g.intra-TNCshort-termcredits).

2 Foranearlierdiscussionofrelatedissues,seeTDR 2006,chaps.iVandV.

3 Rey(2013)highlightstheinterdependencebetweenriskperceptions,leverageandglobalcapitalflows,evidencedbythefactthatreceivingcountriesandregionsborrowthematthesametime.AsnotedbyRey, “There is a globalfinancial cycle in capitalflows,assetpricesandcreditgrowth.Thiscycleco-moveswiththeViX,ameasureofuncertaintyandriskaversionofthemarkets.”Shefurtherobserves,“…oneimportantdeterminantoftheglobalfinancialcycleismonetarypolicyinthecentrecountry,whichaffects leverageofglobalbanks, creditflowsandcreditgrowthintheinternationalfinancialsystem”(Rey, 2013: 17).Therefore, the volumeof cross-borderlending/borrowingisdeterminedbyeventsin countrieswhere the big financial institutionschannellingthelendingarebased.

4 Carrytradereferstocapitalflowsmotivatedbytheopportunityforarbitrageprofitsthatcanbehadfromdifferentials in nominal interest rates in differentcountries,andbytheexpectationofexchangerateappreciation in the destination country (seeTDR 2011,chap.Vi).

5 indiscussingtheinteractionsbetweenpolitics,cred-ibilityandconfidence,MartínezandSantiso(2003)show,forexample,howperceptionsofWallStreetinvestorsaboutthesustainabilityofbrazil’snationaldebtsuddenlychangedinamatterofdaysduringthatcountry’spresidentialelectionsof2002.

6 SeeGrabel (2000) for an extensive discussionofthe relationship between policy credibility andconfidence-buildinginemergingmarkets.

7 Agood exampleof this view is that ofDomingoCavallo,Minister of economy inArgentina inApril1995,atthetimeofthe“tequila”crisis:“Fewwoulddisputethatcapitalinflowsoftheearly1990shelpedtheArgentineeconomy.butiwouldargue,

morecontroversially,thatthecapitaloutflowsthatArgentina has experiencedmore recently havehelped, too.Theyhelpedbecause, in spite of theArgentine economy’s impressive progress towardtransparencyduringthelastfewyears,somepoliti-ciansstilldidnotgetthemessage(i.e.thatfiscaldis-ciplinewasnecessary).(…)Thankstothepressuresexertedby the recent outflows, several importantreformsthattheexecutivebranchhadproposedtotheCongressyearafteryearwithoutsuccesshaveatlastbeenapproved”(Cavallo,1996:47).

8 For an early accountof country experienceswithcapitalinflowsandoutflowssincetheearly1990s,seeGavinetal.,1995;foramorerecentanalysis,seeAkyüz,2013.ontheroleofconfidence-buildingpoliciesinexplainingmacroeconomicoutcomes,seebresser-Pereira,2001.

9 internationalreservesheldbydevelopingcountriesincreased from $1,350 billion to $4,257 billionbetweentheendof2002andtheendof2007(iMF,International Financial Statisticsdatabase).

10 Developingcountrieshavealsoadoptednewregu-latorymeasures in their banking systems, includ-ing supervisory rules and credit orientation. inArgentina, for example, the reformof itsCentralbankCharterin2012gavethatbanktheauthoritytodirectbankcreditonvariousgrounds.

11 Directive88/361/eeC,June24,1988,art.63oftheConsolidatedVersionoftheTreatyontheFunctioningoftheeuropeanUnion.

12 Themost frequent reservations apply to FDi inbanking, broadcasting, energy, primary sectors,telecommunicationsandtransportation.ReservationsareregularlyexaminedbytheoeCDwiththeaimofassistingmemberstoeventuallywithdrawtheirreservations.

13 TheGATS isapositive-list agreement (i.e. coun-trieslist theircommitmentsintermsofmodeandthespecificservicestheywillliberalize,butretainautonomyoverallothersectors(seealsochapterV,sectionb.1)). it defines four differentmodes ofsupply for deliveryof services:Mode1 refers tocross-border trade,Mode2 refers toconsumptionabroad,Mode3referstothecommercialpresencein

Notes

Trade and Development Report, 2014148

theterritoryofanothermember(FDi),andMode4referstothepresenceoftheservicesupplierintheterritoryofanothermember.

14 in particular, in 2009 and 2011, theRepublic ofecuador, at theCommittee ofTrade inFinancialServicesofWTo,arguedfortheneedtoclarifythewordingofsomearticlesofGATSandtheAnnexonFinancialServices relating tomacroprudentialmeasuresand,mostspecifically,capitalflowsman-agement.TheissuewasfarfromsettledbutremainedontheagendaoftheCommittee.Subsequently,atitsmeetinginMarch2013,variouscountriesmadepresentationsontheirmacroprudentialframework,butnoconsensuswasreachedas towhether theirframeworkwascompatiblewiththerelevantGATSprovisions.

15 Also,underart.XVi(MarketAccess),partiii,ifaMemberhasgrantedaccess toa serviceprovidedfromtheterritoryofanotherMember,itmustallowthecapitalmovementswhichare“essentiallypart”or“related”totheprovisionofsuchaservice.

16 Atfirstglance,thesecondsentenceseemstocancelthefirstone,thatis,therewouldbenoroomtoregu-lateanythinggoingagainstacommitmentpreviouslyenteredinto.butithasbeenarguedthat,first,thestatement,“notwithstandinganyotherprovisionsoftheAgreement…”,providesanexceptionformeas-urestakenforprudentialreasons,whichcouldmeanthateven if inconsistentwithamember’sgeneralobligationsandspecificcommitments,theywouldstillbelegallyallowed.Second,thelistofprudentialmeasures ismerely indicative, as revealedby theword, “including”.Therefore, any othermeasuretakenfor“prudentialreasons”couldbeacceptable.Moreoverthemeasuremaynotevenhavetobe“pru-dential”,butsimplytakenfor“prudentialreasons”.Third,astothesecondsentence,ithasbeenarguedthatitonlyimposesanobligationofgoodfaithinadoptingthose“measuresforprudentialreasons”,implying that they cannot be ad hoc in order toavoidobligations entered into (seeleroux,2002;VonbogdandyandWindsor,2008).

17 However, thisacceptanceisnotuniform,asmen-tionedabovewhendiscussingtheiMF’sambiguouspositionvis-à-vissuchpolicies.

18 See,forexample,Rey(2013),whoarguesthat,ininternationalmacroeconomics,countriesdonotfacea“trilemma”buta“dilemma”; that is tosay, that“independentmonetarypoliciesarepossibleif,andonlyif,thecapitalaccountismanaged”.

19 inChile,capitalcontrolsimplementedintheearly1990senlargednotonlymonetarypolicyspace,butfiscalspaceaswell.Asthenewelectedgovernmentintended to expandpublic expenditure and socialtransfers,itsoughttocontrolaggregatedemandandinflationbyraisinginterestrates,andtheonlywaytopreventthisfromleadingtoexcessivecapitalinflows

thatwouldhaveaffectedmonetarypolicywasbymeansofcapitalcontrolsoninwardFDi.in1998,Malaysia responded to the crisis in the regionbyadoptingcontrolsoncapitaloutflows−ratherthanoninflowsasothercountrieshaddoneintheearly1990s−inordertostemtheseoutflowsandregaincontrolovermacroeconomicpolicy(Ariyoshietal.,2000).

20 See, for example,eichengreen andRose (2014),whodiscusstherationaleunderlyingtheadoptionofthesecontrolsbycountrieslikebrazil,indonesia,ThailandandtheRepublicofKorea.

21 Althoughthefocuswasonrestraininginflows,somecountries,suchasPeru,theRepublicofKoreaandSouthAfrica,alsochangedtheirregulationsaimedatencouragingmorecapitaloutflows(iMF,2011:30–34).

22 See,forexample,iADb(2014),whichnotesthatinlatinAmerica,forinstance,bothactualandstruc-turalfiscalbalanceshavedeterioratedalongsidetheincreaseinpublicdebtratiossincethe2008globalcrisis.Thisemphasizestheneedtorebuildbuffersintheregiontogivecountriessufficientfiscalcapacitytorespondtofutureshocks.

23 inbrazil,theFundodeGarantiadeTempodeServiço(FGTS)isaseveranceindemnityfundforworkers,generatedbymandatorycontributionsbyemployersofupto8percentofwages,whicharedepositedinapublicdevelopmentbank, theCaixaeconômicaFederal.

24 See also: iDFC, 2014, at: http://www.idfc.org/Members/tskb.aspx(accessed21March2014).

25 AccordingtoUNCTAD(2003:87),“AttractingFDimaynot be enough to ensure that a host countryderives its full economic benefits. Freemarketsmaynot leadforeign investors to transferenoughnewtechnologyortotransferiteffectivelyandatthe depth desired by a host country.but policiescan induce investors to act inways that enhancethedevelopment impact—bybuilding local capa-bilities, using local suppliers andupgrading localskills,technologicalcapabilitiesandinfrastructure.”More recently,UNCTAD (2012: 102) includedamongthe“keyinvestmentpolicychallenges”theneedto“connecttheinvestmentpolicyframeworkto an overall development strategy or industrialdevelopment policy thatworks in the context ofnationaleconomies,andtoensurecoherencewithotherpolicyareas,includingoverallprivatesectororenterprisedevelopment,andpoliciesinsupportof technological advancement, international tradeandjobcreation.‘Newgeneration’investmentpoli-ciesincreasinglyincorporatetargetedobjectivestochannel investment to areas key for economic orindustrialdevelopmentandforthebuild-up,main-tenanceandimprovementofproductivecapacityandinternationalcompetitiveness.”

International Finance and Policy Space 149

26 TheUNResolution1803oftheGeneralAssemblyof 1962 onPermanent Sovereignty overNaturalResources,UNDocA/ReS/1803(XVii), 2 i.l.M.223(1963)representsacompromiseonthisissue,althoughitclearlyrecognizestheownershipofnatu-ralresourcesbythepeopleoftheproducingcountries.

27 Draft Convention on the Protection of ForeignPropertyandResolutionoftheCounciloftheoeCDontheDraftConvention,7i.l.M.117(1968).

28 Whencreating theiCSiDin themid-1960s,Aronbroches,thenGeneralCounseloftheWorldbank,championed the formula, “putting the procedurebeforesubstance”.inordertoovercometheimpasseinfindingaglobalconsensusonrulesofpropertyprotectionduring the timesofdecolonizationandtheColdWar,headvocatedsettingupaframeworkforresolvinginvestor-Statedisputesthatcouldworkoutsubstantiverulesonthego.

29 ThreecasesagainstArgentinahavebeenacceptedbyiCSiD,undertheArgentina-italybiT.

30 Some treaties includepartial exceptions for taxa-tionmeasures, stating that if bothhomeandhostgovernmentsagreewithinthespecifiedperiodthatataxmeasureisnotexpropriation,thentheinvestorcannotchallengethattaxmeasureundertheiSDS.

31 Forinstance,Argentinawasforcedtosharplydevalueitscurrencyinearly2002,whichresultedinalargenumberofclaimsagainstthecountry.Similarly,aclaimwasopenedagainstCyprusfortakingoverabankin2012toavoidtheimplosionofitsbankingsystem,andanotheragainstGreeceduetoitsrene-gotiationofsovereignbonds.

32 Seerespectively:1)CMSGasTransmissionCov.ArgentineRepublic, iCSiDCaseNo.ARb/01/8,Award,12May2005;lG&eenergyCorp,lG&eCapitalCorp,lG&einternationalincv.ArgentineRepublic, iCSiDCaseNo.ARb/02/1,Decisionon liability, 3october 2006;bGGroup plc v.RepublicofArgentina,UNCiTRAl,FinalAward,24December 2007;ContinentalCasualtyCo v.ArgentineRepublic, iCSiDCaseNo.ARb/03/9,Award, 5 September 2008; National Grid plcv.Argentine Republic, UNCiTRAl,Award,3November 2008; 2)Aguas del Tunari SA v.Republic ofbolivia iCSiDCaseNo.ARb/02/3,DecisiononRespondent’sobjectionstoJurisdiction,21october2005;Suez,SociedadGeneraldeAguasdebarcelona SA, andVivendiUniversal SA v.ArgentineRepublic, iCSiDCaseNoARb/03/19andAWGGroupv.ArgentineRepublic,Decisiononliability,30July2010;biwaterGauff(Tanzania)ltdv.UnitedRepublicofTanzania,iCSiDCaseNo.ARb/05/22,Award,24July2008;3)PieroForesti,idalauradeCarliandorsv.RepublicofSouthAfrica,iCSiDCaseNo.ARb(AF)/07/1,Award,4August2010; 4)Methanex Corp v. US, UNCiTRAl/NAFTA,FinalAwardoftheTribunalonJurisdiction

andMerits,3August2005;ChemturaCorp(formelyCromptonCorp)v.Canada,UNCiTRAl/NAFTA,Award,2August2010;5)VattenfallAb,VattenfalleuropeAG,VattenfalleuropeGenerationAG&CoKGv.FederalRepublicofGermany,iCSiDCaseNo.ARb/09/6,RequestforArbitration,30March2009;MetalcladCorporationv.TheUnitedMexicanStates,iCSiDCaseNo.ARb(AF)/97/1(NAFTA),Award,30August2000;SDMyers,incv.Canada,UNCiTRAl(NAFTA),PartialAward,13November2000;6)FTRHoldingSA,PhilipMorrisProductsS.A.andAbalHermanosSAv.orientalRepublicofUruguay,iCSiDCaseNo.ARb/10/7,NoticeofArbitration, 19 February 2010 (pending); PhilipMorrisAsia limited v.Australia, UNCiTRAl,NoticeofArbitration,21November2011(pending);and7)VattenfallAbandothersv.FederalRepublicofGermany,iCSiDCaseNo.ARb/12/12,registered31May2012(pending).

33 infact,manyinvestmentdisputesrelyonthesamedisputesettlementrulesasthoseapplicableinprivate-privatearbitration,suchastherulesoftheArbitrationinstituteoftheStockholmChamberofCommerce,orinsomecasesthoseoftheinternationalChamberofCommerce,oraremodelledonsuchrules,suchastheUNCiTRAlArbitrationRules.

34 Recently, somepositivedevelopmentshave takenplace towardsmore transparency, inter alia inNAFTAandinothermorerecentinvestmenttreaties,in the revisions in2006of the iCSiDArbitrationRulesandunderthenew2014UNCiTRAlRulesonTransparency inTreaty-based investor-StateArbitration.

35 ThearbitrationconcerningGermany’snuclearpowerphase-out,forinstance,remainsconfidential;onlythe registration of the case and some proceduraldetailsaboutitareknownandavailableontheiCSiDwebsite.

36 VanHarten (2012) examined the frequency ofexpansiveandrestrictiveinterpretationofrulesonissuesonwhichthetextofaninvestmenttreatyisambiguousorsilent.Resolutionsofanissuefroman expansive interpretation tend to favour claim-antsandallowmoreclaimstoproceed.Thestudyfound“tentativeevidenceofsystemicbias”resultingfromexpansiveinterpretationsofthetreaties,basedontheresolutionoffourissues:theconcept(largeorstrict)ofinvestment,theacceptabilityofclaimspresentedbyminorityshareholders,theacceptabilityofclaimsbycorporationswhentheownershipoftheinvestmentextends throughachainofcompaniesrunningfromthehosttothehomeStateviaathirdState;andtheacceptabilityofparallelclaims.ThatbiaswasevengreaterwhentheclaimantwasfromaWesterncapital-exportingState.

37 For instance, human rights complaints,whetherbeforeoneof theregionalhumanrightscourtsor

Trade and Development Report, 2014150

beforethecommitteesintheuniversalregime,areonly accessible regularly after the exhaustion oflocalremedies;ininternationalenvironmentallaw,individualaccessisevenmorelimited.Thisleadstoanasymmetricenforcementofinternationalnormsoninvestmentprotectiontothedetrimentofotherinternationallegalregimes.

38 Thecasereferredtoaninvestmentinthetelecom-municationssectorintheCzechRepublic.onepro-ceedingwasbroughtbytheinvestoritself,andtheotherbyitsshareholders.eventhoughtheapplicablebiTswerevirtuallyidentical,onetribunalheldtherespondentStateliableforapproximately$270mil-lionindamages,whiletheotherfoundnocompen-sablewrongdoing.CompareCMeCzechRepublicb.V.v.TheCzechRepublic,UNCiTRAl,PartialAward,13.13Sept.2001,FinalAward,14March2003,withRonaldS.lauderv.TheCzechRepublic,UNCiTRAl,FinalAward,3Sept.2001.

39 See, for example,Azurix Corp. V.ArgentineRepublic, iCSiDCaseNo.ARb/01/12,Award,14July2006,para.391.

40 AeSCorp.V.Argentina,iCSiDCaseNo.Arb/02/17,DecisiononJurisdiction,26April2005,para.31.AsimilarapproachmaybefoundinGasNaturalv.Argentina, iCSiDCaseNo.ARb/03/10,DecisiononJurisdiction,17July2005,para.36.Similarly,RomakS.A.v.RepublicofUzbekistan,UNCiTRAl,PCACaseNo.AA280,Award,26November2009,para.170;ChevronCorp.andTexacoPetroleumCo.V.Republicofecuador,UNCiTRAl,PCACaseNo.34877,PartialAwardontheMerits,30March2010,para.164.

41 onthedifferentusesofprecedentininternationallaw,see Jacob,2011.

42 UNCTAD (2014) presents a number of deci-sions taken in 2013 as examples of contradictoryinterpretations.

43 See CMS Gas Transmission Company v. theRepublicofArgentina,iCSiDCaseNoARb/01/8,DecisionoftheadhocCommitteeontheapplicationoftheannulment,25September2007.

44 SeeUNCTAD(2009),Annex:Asummaryofecono-metricstudiesontheimpactofbiTsonFDi.

45 Up to now, the highest awardwas ruled againstecuador,whichwas sentenced to pay $1.8 bil-lionbecauseitterminatedthecontractwithanoilcompanythathadfailedtocomplywithitscondi-tions.SeeOccidental Petroleum Corporation and Occidental Exploration and Production Company v. The Republic of Ecuador (iCSiD Case No.ARb/06/11),Award5october2012.

46 SeeUnitedNationsCharterArt.1(2),andArt.2(7)(regardingnon-interferenceinmattersofdomesticjurisdiction).

47 UNCharter,Art.2(1).48 UNCharter,Preamble,Recital2,Art.55(c).

49 UNCharter,Preamble,Recital3(“socialprogress”),Art.55ff.

50 Tohelpdesign investment treaties thatstrengthenthe development dimension, rebalance rights andobligationsofStatesandinvestors,andthatmanagethesystemiccomplexityoftheiiAregime,UNCTAD(2012)presentsadetailedlistofalternativemodelclausesoneveryissueusuallyincludedinaninvest-menttreaty,startingwithdefinitionsofinvestmentand investor,and includingsubstantivestandards,suchasindirectexpropriationandfairandequitabletreatment,andprovisionsrelatingtoinvestor-Statedisputesettlement.

51 Forexample,thePeru-RepublicofKoreaFreeTradeAgreementwhich entered into force on1August2011,states(inannex9d):“ThePartiesrecognizethatthepurchaseofdebtissuedbyaPartyentailscommercial risk. For greater certainty, no awardmaybemade in favorof adisputing investor foraclaimwithrespecttodefaultornon-paymentofdebtissuedbyaPartyunlessthedisputinginvestormeetsitsburdenofprovingthatsuchdefaultornon-paymentconstitutesanuncompensatedexpropriation[...]orabreachofanyotherobligationunderthisChapter.”And:“NoclaimthatarestructuringofdebtissuedbyaPartybreachesanobligationunderthisChaptermaybesubmittedto,orifalreadysubmit-tedcontinuein,arbitrationunderthisChapteriftherestructuringisanegotiatedrestructuringatthetimeofsubmission,orbecomesanegotiatedrestructuringaspersuchsubmission,exceptforaclaimthattherestructuringviolatesArticle9.3or9.4[i.e.nationaltreatmentorMFNtreatment].”

52 Article37.2 (b) states: “Where thepartiesdonotagreeuponthenumberarbitratorsandthemethodof theirappointment, theTribunalshallconsistofthreearbitrators,onearbitratorappointedbyeachpartyand the third,whoshallbe thepresidentoftheTribunal, appointed by agreement of the par-ties.”Article 38 states: “if theTribunal shall nothavebeenconstitutedwithin90days afternoticeof registrationof the requesthasbeendispatchedbytheSecretary-Generalinaccordancewithpara-graph(3)ofArticle36,orsuchotherperiodasthepartiesmayagree,theChairmanshall,attherequestofeitherpartyandafterconsultingbothpartiesasfaraspossible,appointthearbitratororarbitratorsnot yet appointed.”Article 5 specifies that “ThePresidentofthebankshallbeexofficioChairmanoftheAdministrativeCouncil(hereinaftercalledtheChairman).”AreformtoiCSiDConventioncouldaskcontractingStatestopre-approveanumberofpotential arbitrators from thePanel ofArbitratorsestablishedinsection4oftheConvention.

53 See: http://www.citizen.org/documents/RDCvs-Guatemala-Memo.pdf.VariousattemptstonarrowFeThaveallbeenignoredbyiSDStribunals,such

International Finance and Policy Space 151

thatsomeinvestmentlawexpertsarebeginningtothinkthatnoprecisewordingofFeTispossible.

54 SeeArticles5,13.2,14.2and38oftheConventionontheSettlementofinvestmentDisputesbetweenStates andNationalsof otherStates, available at:https://icsid.worldbank.org/iCSiD/StaticFiles/basic-doc/CRR_english-final.pdf.

55 ThemaindifferencebetweeniCSiDarbitrationandalternativeoptions is thegreatercontroldomesticcourtscanexerciseinoverseeingnon-iCSiDarbi-trationsandinenforcingnon-iCSiDawardsundertheNewYorkConventionfortheRecognitionandenforcement of ForeignArbitralAwards,whichcontains, inter alia, a public policy exception forrecognitionandenforcement.

56 inaddition,art.72oftheConventionprovidesthatwithdrawal from theConvention“shall not affecttherightsorobligationsunder thisConventionofthatStateorofanyofitsconstituentsubdivisionsoragenciesorofanynationalofthatStatearisingoutofconsenttothejurisdictionoftheCentregivenbyoneofthembeforesuchnoticewasreceivedbythedepositary.”Howthisprovisionistobeinterpreted,andwhetheritonlycoverstheeffectofarbitralpro-ceedingsthathavebeeninitiatedbyforeigninvestorsbeforetheeffectsofdenunciationoftheConventiontakeplaceorwhetheritensuresthesurvivalofallconsentstoiCSiDarbitrationcontainedinanypriorinvestmenttreatyisaheavilycontestedand,sofar,unresolvedissue.

Aizenman J (2005). Financial liberalization inlatin-America in the 1990s:A reassessment. NbeRWorkingPaperNo.11145,February.

AkyüzY(2012).Theboomincapitalflowstodevelopingcountries:Will it gobust again?Eckonomi-tek, 1:63−96.

AkyüzY(2013).Wavingordrowning:Developingcoun-tries after thefinancial crisis.ResearchPaper 48,SouthCentre,Geneva.

AlemuG(2014).Financialregulationandinclusivegrowthinethiopia. Paper prepared under theUKDFiD-eSRCproject,FinancialRegulationinlow-incomeCountries:balancinginclusiveGrowthwithFinancialStability.AddisAbaba,AddisAbabaUniversity.

AriyoshiA,HabermeierK,laurensb,Ötker-Robe i,Canales-KriljenkoJandKirilenkoA(2000).Capitalcontrols:Country experienceswith their use andliberalization.iMFoccasionalPaperNo190,iMF,Washington,DC.

bhagwati J (1998).The capitalmyth:The differencebetween trade inwidgets and dollars.Foreign Affairs,May/June:7−12.

bresser-PereiralC(2001).incompetênciaeconfidencebuildingpor trásde20anosdequaseestagnaçãodaAméricalatina.Revista de Economia Política,21(1):141−166.

brunoVandShinHS(2013).Capitalflows,cross-borderbankingandglobal liquidity.GriswoldCenter foreconomicPolicyStudies.WorkingpaperNo.237a,June.

CavalloD(1996).CommentarytoGavinM,HausmannRandleidermanl,Themacroeconomicsof capitalflowstolatinAmerica:experienceandpolicyissuesin:HausmannR andRojas-Suarez, eds.Volatile Capital Flows. Taming their impact on Latin America.Washington,DC,inter-AmericanDevelopmentbank.

ChandrasekharCP(2014).Nationaldevelopmentbanksinacomparativeperspective.NewDelhi,JawaharlalNehruUniversity.

delaubadèreA andDelvolvé P (1986).Droit Public Économique,Paris,Dalloz.

Diaz-AlejandroC (1985).Good-bye financial repres-sion,hellofinancialcrash.Journal of Development Economics,19:1−24.North-Holland.

eberhartP,olivetC,AmosTandbuxtonN(2012).Profitingfrominjustice.Howlawfirms,arbitratorsandfinan-ciers are fuelling an investment arbitration boom.CorporateeuropeobservatoryandtheTransnationalinstitute,brusselsandAmsterdam,November;avail-able at: http://www.tni.org/sites/www.tni.org/files/download/profitingfrominjustice.pdf.

eichengreenb(1994).internationalMonetaryArrange-ments for the 21st Century.Washington, DC,brookingsinstitution.

eichengreenbandRoseAK(2014).Capitalcontrolsinthe21stcentury.VoX;availableat:http://www.voxeu.org/article/capital-controls-21st-century.

epstein G, Grabel i and JomoKS (2004). CapitalManagementTechniquesinDevelopingCountries:AnAssessmentofexperiencesfromthe1990sand

References

Trade and Development Report, 2014152

lessonsfortheFuture.G-24DiscussionPaperSeriesNo.27,March.

esenoandbinatliAo(2013).TheMinskyPerspectiveonMacroprudentialPolicy,PeRiWorkingPaperSeries,No.308,UniversityofMassachusetts,Amherst,MA.

Famae(1980).bankinginthetheoryoffinance.Journal of Monetary Economics,6:39−57.

Franck S (2005).The legitimacy crisis in investmenttreaty arbitration:Privatizingpublic internationallaw through inconsistent decisions, 73Fordham Law Review,1521.

GalatiGandMoessnerR(2011).Macroprudentialpolicy–aliteraturereview.biSWorkingPapersNo.337,bankforinternationalSettlements,basel.

GallagherKP,Griffith-Jones S andocampo JA (2012).Capital account regulations for stability anddevel-opment:Anewapproach.in:GallagherKP,Griffith-Jones S andocampo JA, eds.Regulating Global Capital Flows for Long-Run Development. PardeeCenterTaskForceReport,bostonUniversity,boston,MA.

GavinM,HausmannR andleidermanl (1995).ThemacroeconomicsofcapitalflowstolatinAmerica:experience and policy issues. Revised versionof abackgroundpaperprepared for a seminaroninternationalCapitalFlows:Prospects andPolicyissuesattheAnnualMeetingsoftheinter-AmericanDevelopmentbankinJerusalem,3April.

Grabeli(2000).Thepoliticaleconomyof‘policycred-ibility’:The new-classicalmacroeconomics andthe remakingofemergingeconomies.Cambridge Journal of Economics,24(1):1−19.

HaldaneAG(2011).Thebigfish,smallpondproblem.SpeechdeliveredattheAnnualConferenceoftheinstitute forNeweconomicThinking, brettonWoods,NewHampshire,9April2011.

Hallward-DriemeierM(2003).DobilateralinvestmentTreatiesAttractFDi?onlyabit…and theycouldbite.WorldbankDevelopmentResearchGroup(DeCRG),July.

iADb(2014).Global Recovery and Monetary Normali zation: Escaping a Chronicle Foretold?latinAmericanandCaribbeanMacroeconomicReport,2014.Washington,DC,inter-AmericanDevelopmentbank.

ieo (2007a).The iMF and aid to sub-SaharanAfrica.Washington,DC,independentevaluationoffice,iMF.

ieo(2007b).Structural condionality in iMF-supportedprograms.Washington,DC,independentevaluationoffice,iMF.

iMF(2010).Fiscal Monitor.Washington,DC,May.iMF (2011). Recent experiences inmanaging capital

inflows−Cross-cuttingthemesandpossiblepolicyframework.Preparedby theStrategy,Policy, andReviewDepartment.Washington,DC,February.

iMF(2012).Theliberalizationandmanagementofcapi-talflows:An institutional view.Washington,DC,November.

iMF (2013).Key aspects ofmacroprudential policy.backgroundpaper,June.

JacobM(2011).Precedents:lawmakingthroughinter-national adjudication. 12German Law Journal:1005−1032.

KingsburybandSchillS(2009).investor-Statearbitrationas governance:Fair and equitable treatment, pro-portionality,andtheemergingglobaladministrativelaw.in:VandenbergAJ,ed.50 Years of the New York Convention,iCCACongressSeries,14:5–68.london,Kluwerlawinternational.

KrugmanP(1998).Theconfidencegame:HowWashingtonworsenedAsia’scrash;availableat:www.pkarchive.org/crises/krugman1.html.

lerouxe (2002).Trade infinancial servicesunder theWorldTradeorganization.Journal of World Trade,36(3):413−442.

luna-MartinezJandVicenteCl(2012).Globalsurveyofdevelopmentbanks.PolicyResearchWorkingPaper5969,Worldbank,Washington,DC.

MartinezJandSantisoJ(2003).Financialmarketsandpolitics:The confidencegame inlatinAmericanemergingeconomies.International Political Science Review,24(3):263−395.

MassadC(1998).Theliberalisationofthecapitalaccount:Chileinthe1990s.in:FischerS,ed.ShouldtheiMFPursueCapital-AccountConvertibility?Essays in International Finance,No.207:34−46.Princeton,NJ,PrincetonUniversity.

MorenoR(2011).Policymakingfroma“macroprudential”perspectiveinemergingmarketeconomies.biSWPNo.336,bankforinternationalSettlements,basel.

obstfeldMandRogoffK (1995).Themirageoffixedexchangerates.Journal of Economic Perspectives,9(4):73−96.

ocampoJA(2012).Thecaseforandexperiencewithcapitalaccountregulations.in:GallagherKP,Griffith-JonesSandocampoJA,eds.Regulating Global Capital Flows for Long-Run Development. PardeeCenterTaskForceReport,bostonUniversity,boston,MA.

oeCD(2013).oeCDCodeofliberalizationofcapitalmove-ments; available at: http://www.oecd.org/daf/inv/investment-policy/CapitalMovements_Webenglish.pdf.

Prasade,RajanRandSubramanianA(2007).Foreigncapitalandeconomicgrowth.Brookings Papers on Economic Activity,(1):153−209.

Prasade,RogoffK,Shang-JinWandKoseMA(2003).Theeffectsoffinancialglobalizationondevelopingcountries:Someempiricalevidence.iMFoccasionalPaper220,Washington,DC.

PratesD(1998).investimentosdeportfolionomercadofinanceirodomestico.Abertura Externa e Sistema Financeiro. Final report, chapter 1, São Paulo,FundacionparaelDesarrollo.

ReyH(2013).TheGlobalFinancialCycleandMonetaryPolicy independence. london,londonbusinessSchool,CePR.

International Finance and Policy Space 153

SchillS(2011).enhancinginternationalinvestmentlaw’slegitimacy:Conceptualandmethodologicalfounda-tionsofanewpubliclawapproach.Virginia Journal of International Law,52(1):57−102.

SchillS(2014).internationalinvestmentlawasinterna-tionaldevelopmentlaw.Yearbook on International Investment Law and Policy.NewYork,NY,oxfordUniversityPress.

SornarajahM(2008).Acomingcrisis:expansionarytrendsin investment treaty arbitration. in: SauvantK, ed.Appeals Mechanism in International Investment Disputes.NewYork,NY,oxfordUniversityPress:39–80.

StiglitzJ(2004).Capital-marketliberalization,globaliza-tionandtheiMF.Oxford Review of Economic Policy,20(1):57−71.

TarulloDK (2013).MacroprudentialRegulation. SpeechattheYalelawSchoolConferenceonChallengesinGlobalFinancialServices,NewHaven,CT,September.

TuckerTandGhoshJ(2011).WToconflictwithfinan-cialre-regulation.Economic and Political Weekly,XlVi(51):75–79.

TurnerP(2014).Thegloballong-terminterestrate,financialrisksandpolicychoicesineMes.biSWorkingPapersNo441,bankforinternationalSettlements,basel.

UNCTAD(2003).World Investment Report 2003 – FDI Policies for Development: National and International Perspectives. UnitedNationspublication,salesno.e.03.ii.D.8,NewYorkandGeneva.

UNCTAD(2009).Theroleof international tradeagree-mentsinattractingforeigndirectinvestmenttodevel-oping countries.UNCTADSeries in internationalinvestmentPoliciesforDevelopment,Geneva.

UNCTAD(2010).DenunciationoftheiCSiDConventionandbiTs:impactoninvestor-Stateclaims.iiAissuesNoteNo.2.Geneva,December.

UNCTAD(2011).Sovereigndebtrestructuringandinter-national investment agreements. iiA issuesNoteNo.2.Geneva,July.

UNCTAD(2012).World Investment Report 2012 – Towards a New Generation of Investment Policies. UnitedNationspublication,salesno.e.12.ii.D.3,NewYorkandGeneva.

UNCTAD(2013a).World Investment Report 2013 – Global Value Chains: Investment and Trade for Development.

UnitedNations publication, sales no.e.13.ii.D.5,NewYorkandGeneva.

UNCTAD(2013b).Reformofinvestor-Statedisputesettle-ment:insearchofaroadmap.iiAissueNoteNo.2.Geneva,June.

UNCTAD(2014).Therecentturmoilinemergingecono-mies.PolicybriefNo.29,Geneva,March.

UNCTAD(TDR 2006).Trade and Development Report, 2006. Global Partnership and National Policies for Development.UnitedNationspublication,salesno.e.06.ii.D.6,NewYorkandGeneva.

UNCTAD(TDR 2011).Trade and Development Report, 2011. Post-crisis Policy Challenges in the World Economy.UnitedNationspublication,salesno.e.11.ii.D.3,NewYorkandGeneva.

UNCTAD(TDR 2013).Trade and Development Report, 2013. Adjusting to the changing dynamics of the world economy.UnitedNationspublication,salesno.e.13.ii.D.3,NewYorkandGeneva.

VanHartenG(2007).investmentTreatyArbitrationandPubliclaw.NewYork,NY,oxfordUniversityPress.

VanHartenG(2008).A Case for an International Invest-ment Court.inauguralConferenceoftheSocietyforinternationaleconomiclaw,16July;availableat:http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1153424.

VanHartenG(2012).Arbitratorbehaviourinasymmetri-cal adjudication:An empirical studyof investmenttreatyarbitration.Osgoode Hall Law Journal501(1):211−268;availableat:http://digitalcommons.osgoode.yorku.ca/ohlj/vol50/iss1/6/.

VanHartenGetal.(2010).Publicstatementontheinter-national investment regime, 31August; availableat:http://www.osgoode.yorku.ca/public_statement.

VonbogdandyAandWindsorJ(2008).Annexonfinancialservices.in:WolfrumR,StollP-TandFeinäugleC,eds.Max Plank Commentaries on World Trade Law, Vol. VI: WTO − Trade in Services.leiden/boston,MartinusNijhoffPublishers:640−666.

Wallach l (2012). ‘Fair and equitable treatment’ andinvestor’s reasonable expectations:Rulings in theUSFTAs&biTsdemonstrateFeTdefinitionmustbe narrowed.WashingtonDC, Public Citizen,5September.

Do Bilateral Investment Treaties Attract FDI Flows to Developing Economies? 155

Thisannexpresentsaneconometricexerciseaimedattestingwhetherbilateralinvestmenttreaties(biTs)fosteredbilateralforeigndirectinvestment(FDi)flowsfromdevelopedtodevelopingeconomiesbetween1985and2012.

Annex to chapter VI

DO BILATERAL INVESTMENT TREATIES ATTRACT FDI FLOwS TO DEVELOPING ECONOMIES?

This exercise relies on the standard gravitypaneldatamodel,whichpredictsthatFDibetweenhomeandhostcountriesisproportionaltotheirmar-ketsizeandinverselyproportionaltothegeographicdistancebetweenthem:

• TheexplainedvariableisFDiasmeasuredbythenetbilateralFDioutflowsfromdeveloped(home)todevelopingcountries(host),inmillionsofdol-lars.ThemainsourceforbilateralFDioutflowswastheoeCDInternational Direct Investment Database. Serieswere completedwith datafrom theUnitedStatesbureau ofeconomicAnalysisandfromUNCTADdatabases.

• MarketsizewasmeasuredbyrealGDPofthehomeandhostcountriesinconstant2005dol-lars,usingUnitedNationsNational Accounts Main Aggregatesdatabaseandnationalsources.ApositivesignwasexpectedforthecoefficientsofbothGDPs.Thelargerthesizeofthehome

Model and data sources

country, themoreFDi shouldflowfrom thatcountry;andthelargerthesizeofthehostcoun-trythegreatershouldbethepotentialdemandfortheoutputofforeigninvestors.

• Geographicaldistancebetweenthecapitalcitiesof thehomeandhostcountrieswasobtainedfromtheCEPII GeoDist database(MayerandZignago,2011).itisusedasaproxyfortransac-tionandtransportationcostsaswellasfortheinstitutionalandculturaldistancesbetweentwocountries.Thesignofthecoefficientisindica-tiveoftheprevailingkindofFDi.ApositivesignwouldsuggestexportsandFDiaresubsti-tutes,becauseenterpriseswillservecustomersbyinvestinginthehostcountryratherthanbyexportingfromthehomecountry.AnegativesignwouldindicatecomplementaritybetweenFDiandbilateraltrade,typicallyininvestmentsrelatedtoaninternationalproductionnetworkinvolvingthehomeandhostcountries.

Trade and Development Report, 2014156

Asetofdummiesrepresentingtime-invariantvariables taken fromCEPII GeoDist datawereincluded. They capture geographical, culturaland historical similarities of country pairs,whichincreaseeconomictiesorreducetransactioncosts.Correspondingdummiesareequaltoonewhenbothcountriesshareacommonlandborder,languageorcolonialhistory.Apositivesignwasexpectedforthecoefficientsofthesevariables.

The standard gravitymodelwasmodified tointroducethevariablesrelatedtobiTsandotherdeter-minantsofFDitocompletetheestimableequation:

• AdummyvariableequalsoneafterthecountrypairhassignedabiT,asreportedbyUNCTAD.GiventhanbiTsaresupposedtoreduceinvest-mentrisks,theycanbeviewedasprovidinganincentive to investors, therefore the expectedsign is positive.Three alternative variablesrepresentingbiTswere used in the estima-tions:twodummyvariables(asignedbiTandtheentryintoforceofabiT)andonevariablewhichmeasuredthenumberofyearsthathadpassedsincethesigningofthebiT.

• labourskillwasmeasuredbytheaverageyearsofsecondaryschoolingintheadultpopulation(over25yearsofage)ofhostcountries.Dataweretakenfrombarroandlee(2010),whichprovide the educational attainment data atfive-yearintervalsfrom1950to2010.Alinearinterpolationwasusedtoobtaindatabyyear.Apositivesignwasexpectedforthiscoefficient.

• Thedifference in averageyears of schoolingwasusedasaproxyfortheabsoluteskilldif-ferencebetweenthehomeandhostcountry.1ifFDiismotivatedbymarketaccess,anegativesignshouldbeexpected,as“absoluteskilldif-ferences reduceaffiliate sales” (seeblonigenetal.,2002);however,ifFDiismotivatedbylowerwagecostsinthehostcountry,apositivesignwasexpected.

• opennesswasmeasuredbytheratioofimportstoGDP.DatawereextractedfromUNCTADdatabasesandnationalsources.Apositiverela-tionshipwasexpected,asitcouldbeinterpretedasameasureofoverallopenness.

• Regionaltradeagreements(RTA)wasadummyvariableequaltooneafterbothcountrieshadsigned a bilateral free trade agreement or aregional trade agreement.Datawere derivedfromadatabaseindeSousa(2012).Apositiverelationshipwas expected, given thatRTAslowertradebarriersandfacilitatethemovementofintermediateandfinalgoodsbetweenfirmsinhomecountriesandforeignaffiliatesinhostcountries.MoreoversomeRTAsincludeotherconditionssuchasinvestmentregulationsthatfacilitatethemobilityoffundsandcapitalflows.SincesomeRTAsincludeFDi-relatedclauses,RTAswereexcludedfromtheestimableequa-tionstoisolatetheimpactofbiTs.inthatcase,thecoefficientofthebiTvariableswasexpectedtobebiasedupwards.

Estimation methods and results

AlargepaneldataofbilateralFDioutflowsto119developingeconomiesfrom27developedecono-miesovertheperiod1985−2012wasusedtoexaminetheeffectofbiTsonFDitodevelopingeconomies.Themodifiedgravityequationwasestimatedbased

ontwoestimationmethods:ordinary leastsquares(olS) and Poisson pseudo-maximum likelihood(PPMl).All time-variant explanatory variableswere laggedbyoneperiod to reduce endogeneityproblems.

Do Bilateral Investment Treaties Attract FDI Flows to Developing Economies? 157

Ordinary least squares (OLS)

• Given themultiplicative formof the gravityequation,theusualmethodistotakethenaturallogarithms of the explained and explanatoryvariables(excludingdummies)andapplyordi-nary least squares to the resulting log-linearequation.2

• Tocontrolforomittedvariablebias,homeandhostfixedeffectswereincludedthroughdummyvariableswhichcontrol for all time-invarianthome or host country characteristics.3Alsoincludedweretimefixedeffectstoaccountforanyshocksthataffectallcountries.

• Columns1to5ofthetable6.A.1presenttheresults of the estimations obtained byolS,alongwith robust standard errors and threetypesoffixedeffects (year,host countryandhome country). overall, this specificationexplainsabout50percentofthevariationofbilateralFDioutflows.Resultsshowthatexceptforopennessandcommonborder,coefficientsare all statistically significant. in particular,“geographicaldistance”hasastrongeffect:itsnegativesignindicateseitherthatFDiisrelatedtobilateraltradeorhighoperatingcostsduetogeographical distance, and cultural and insti-tutionaldifferences.Thecoefficientof“labourskill” in host countries has a positive sign,suggestingamoreimportantroleofdomesticmarkets.Allothervariableshavetheexpectedsign.inthisspecificationbiTscoefficientsaresignificantandpositive.However,thepropor-tion ofFDi that can be attributed tobiTs isvery low,asreflected innegligiblechange inR-squaredwhenincludingabiTvariable.

Poisson pseudo-maximum likelihood (PPML)

• Santos Silva andTenreyro (2006) showedthatduetoJensen’sinequality4theuseoflog-linearizedgravitymodelsbyolScangeneratebiased5estimationsandproducemisleadingcon-clusions.Theysuggestedthatthecoefficientsinthegravityequationshouldbeestimatedinits

multiplicative form, and proposed using thePoissonpseudo-maximum-likelihood(PPMl)estimationmethod.PPMlisconsistentinthepresenceofheteroskedasticity,andprovidesawaytodealwithzerovalues(unlikelogarithmspecifications).

• Columns 6 to 10 show results obtained byPPMl,alongwithrobuststandarderrorsandthreefixedeffects.Thecoefficientofskilldiffer-enceisstatisticallysignificant,anditspositivesignprovidessupportforFDithatismotivatedbylowerwagecostsinthehostcountry.Marketsize, labour skill, openness andRTA are allstatisticallysignificantandhave theexpectedsign,whereas coefficients ofbiT variablesarenotsignificant.Thecoefficientsofthefourtime-invariantvariables–geographicdistance,commonborder,commonlanguageandcolony–areallstatisticallysignificant.

• RuizandVilarrubia(2007)arguethatbecausecultural and historical factors are difficult tomeasure,gravitymodels shouldbeestimatedbyusingtimeandcountry-pair6fixedeffects.Columns11to15showtheresultsoftheesti-mationsbyPPMl,withyearandcountry-pairtreatedasfixedeffects.exceptforbiTvaria-bles,alltime-variantcoefficientsarestatisticallysignificant.Sizesofcoefficientsare,ingeneral,higherthanthoseobtainedbyPPMlwithyear,homeandhostcountryfixedeffects.

• When comparing resultswith thoseobtainedusing theolS specification,olS estimatestendtobemuchlargerthanthoseestimatedbyPPMl.Thisshowsthatresultsarequitesensi-tive to the specification. For this reason, theresultsofprevious studiesusingolSshouldbeinterpretedwithcaution.

• Tocheckforrobustness,thegravityequationswerealsoestimatedby includingalternativesdefinitionsofvariablessuchasopenness(i.e.totaltradeoverGDP),skilldifference(i.e.abso-lutevalue,positiveandnegativevalues),andbiT(i.e.numberofyearssinceratificationofabiT).Moreover,varioustransformationsoftheFDivariablesweretried.7inallthesespecifica-tionsthePPMlestimatesofthecoefficientsofbiTremainedstatisticallyinsignificant.

Trade and Development Report, 2014158Ta

ble

6.A

.1

REG

RES

SIO

N R

ESU

LTS,

198

5–20

12(B

ilate

ral F

DI,

mill

ions

of d

olla

rs)

OLS

: ln

FDI

Poi

sson

-Pse

udo-

Max

imum

Lik

elih

ood

(PP

ML)

: FD

I

Exp

lana

tory

var

iabl

e1

23

45

67

89

1011

1213

1415

ln G

DP

- hos

t0.

93**

*0.

96**

*0.

90**

*0.

88**

*0.

94**

*1.

16**

*1.

19**

*1.

16**

*1.

15**

*1.

16**

*1.

22**

*1.

23**

*1.

22**

*1.

21**

*1.

22**

*ln

GD

P - h

ome

2.40

**2.

33**

2.42

**2.

41**

2.40

**0.

97**

0.93

*0.

97**

0.98

**0.

97**

1.40

**1.

40**

1.41

**1.

40**

1.40

**ln

labo

ur s

kills

- ho

st3.

94**

*3.

89**

*3.

90**

*3.

87**

*3.

95**

*1.

58**

*1.

48**

*1.

60**

*1.

57**

*1.

58**

*1.

93**

*1.

91**

*1.

88**

*1.

88**

*1.

93**

*ln

ski

ll di

ffere

nce

2.57

***

2.58

***

2.48

***

2.39

***

2.59

***

0.95

**0.

96**

0.98

***

0.90

**0.

94**

1.44

***

1.46

***

1.36

***

1.32

***

1.40

***

ln o

penn

ess

-0.1

0-0

.11

-0.1

3-0

.14

-0.1

00.

36**

0.40

**0.

36**

*0.

35**

*0.

36**

*0.

45**

*0.

47**

*0.

44**

*0.

43**

*0.

43**

*

Reg

iona

l tra

de a

gree

men

t0.

35**

0.42

***

0.20

**B

IT -

sign

atur

e0.

25**

-0.0

40.

09B

IT -

entry

0.44

***

0.06

0.14

BIT

- ye

ars

sinc

e si

gnat

ure

0.00

0.00

0.01

Tim

e-in

varia

nt v

aria

bles

ln d

ista

nce

-2.6

1***

-2.5

7***

-2.5

9***

-2.5

8***

-2.6

2***

-0.7

3***

-0.6

8***

-0.7

3***

-0.7

3***

-0.7

3***

Com

mon

bor

der

-0.0

6-0

.10

-0.0

00.

00-0

.06

0.53

**0.

47**

0.52

**0.

54**

0.52

**C

omm

on o

ffici

al la

ngua

ge2.

54**

*2.

54**

*2.

56**

*2.

56**

*2.

53**

*0.

92**

*0.

88**

*0.

92**

*0.

94**

*0.

93**

*C

olon

y1.

51**

*1.

51**

*1.

48**

*1.

46**

*1.

51**

*0.

26**

0.31

***

0.27

***

0.24

**0.

25**

Num

ber o

f obs

erva

tions

12 5

7312

573

12 5

7312

573

12 5

7312

573

12 5

7312

573

12 5

7312

573

12 5

7312

573

12 5

7312

573

12 5

73

R-s

quar

eda

0.50

00.

500

0.50

00.

500

0.50

00.

734

0.73

70.

734

0.73

40.

734

0.82

50.

826

0.82

50.

825

0.82

5

Fixe

d ef

fect

s

Year

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Hos

t cou

ntry

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Hom

e co

untry

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Cou

ntry

pai

rYe

sYe

sYe

sYe

sYe

s

Not

e:

***

Sig

nific

ant a

t 1 p

er c

ent.

** S

igni

fican

t at 5

per

cen

t. *

Sig

nific

ant a

t 10

per c

ent.

H

ome:

dev

elop

ed e

cono

mie

s. H

ost:

deve

lopi

ng e

cono

mie

s.a

Pse

udo

R-s

quar

ed is

repo

rted

for P

PM

L.

Do Bilateral Investment Treaties Attract FDI Flows to Developing Economies? 159

Thiseconometricanalysisshowsthatstandardgravitymodels permit ameaningful explanationofFDibilateralflowsfromdevelopedtodevelop-ingcountries.However,whenthebiTsvariableisincluded,theresultsareambivalent.Usingonemeth-odology(olSestimationoflog-linearregression),resultsindicatethatbiTshaveapositiveimpactonbilateralFDi,althoughtheestimatedmagnitudeofthisimpactissmall.Since,accordingtorecentlit-erature,thismethodologyproducesbiasedestimates,analternativemethod(PPMl)wasalsoused.ThismethodshowedthatbiTsappeartohavenoeffectonbilateralNorth-SouthFDiflows:themagnitudeof

theestimatedcoefficientsisclosetozero.Moreover,thebiTcoefficientsarenotstatisticallysignificant;inotherwords,resultsdonotsupportthehypothesisthatbiTsfosterbilateralFDi.

These resultsareconsistentwith theexistingliterature,whichobservesthatthecurrentstateoftheresearchisunabletofullyexplainthedeterminantsof FDi, and, in particular, the effects ofbiTs onFDi.Thusdeveloping-countrypolicymakersshouldnotassumethatsigninguptobiTswillboostFDi.indeed,theyshouldremaincautiousaboutanykindofrecommendationtoactivelypursuebiTs.

Concluding remarks

Notes

1 Skilldifferenceismeasuredasthelogarithmoftheratioofthehighesttothelowestaverageyearsofschoolinginthetwocountries.

2 TheFDidatausedherecontain15,983observationsofwhich2,844arezeroand3,410arenegative.Asitisusualintheliteraturetoavoiddeletingobserva-tionswhenapplyinglogarithms,thevalueofFDiwasincreasedin1dollarandnegativevaluesweredeleted.

3 inpaneldataestimations,coefficientsmaybesub-ject toomittedvariablebias; that is, the estimatedcoefficientofanexplanatoryvariableisbiasedwhenimportantvariablesthatareunknownordifficulttomeasure are not included in the equation and arecorrelatedwiththeaboveexplanatoryvariable.SeeAndersonandvanWincoop(2003)foradiscussionofomittedvariablesbiasinthetradegravityliterature.

4 AccordingtoJensen’sinequality,themeanvalueofalogarithmisdifferentfromthelogarithmofameanvalue.

5 Theyshowedthatinagravitymodel,evencontrol-lingforfixedeffects,thepresenceofheteroskedas-ticitycanaffecttheconsistencyofestimators.Thisisbecause,duetoJensen’sinequality,thelogoftheexplainedvariablechangesthepropertiesoftheerrorterminawaythatrendersthecoefficientsbiased.

6 Country-pairdummiesabsorbtheeffectsofallomit-tedvariablesthatarespecifictothecountrypairsbutremainconstantover time, including thestandardgravityvariables (geographicaldistance,commonborder,commonlanguageandcolony).

7 Thefirstrobustnesscheckconsideredonlyastrictlypositive value for FDi.The second included thenegativevaluebyapplying thelevy-Yeyatietal.(2007)transformation,i.e.replacingtheoriginalFDivariable by sign (FDi)*log(abs(FDi)+1). Finally,nominalFDivaluesweredeflatedbytheGDPUnitedStatesdeflator.

Trade and Development Report, 2014160

Anderson JeandvanWincoope (2003).Gravitywithgravitas:Asolutiontotheborderpuzzle.American Economic Review,93(1):170−192.

barroRJandleeJW(2010).Anewdatasetofeduca-tionalattainmentintheworld,1950–2010.NbeRWorkingPaper15902,NationalbureauofeconomicResearch,Cambridge,MA.

blonigenbA,DaviesRbandHeadK(2002).estimatingtheKnowledge-CapitalModeloftheMultinationalenterprise:Comment.NbeRWorkingPaperNo.8929,NbeR,Cambridge,MA.

deSousaJ(2012).Thecurrencyunioneffectontradeisdecreasingover time.Economics Letters, 117(3):917−920.

References

levy-Yeyatie,PanizzaUandSteine(2007).Thecycli-cal nature ofNorth-South FDiflows. Journal of International Money and Finance,26(1):104−130.

MayerTandZignagoS (2011).NotesonCePii’sdis-tancesmeasures(GeoDist).CePiiWorkingPaperNo.2011-25,Paris.

RuizJMandVilarrubiaJM(2007).Thewiseuseofdum-mies in gravitymodels: export potentials in theeuroMed region.Research PaperNo.WP-0720,bankofSpain,Madrid.

Santos Silva JMC andTenreyroS (2006).The log ofgravity.The Review of Economics and Statistics,88(4):641–658.

Fiscal Space for Stability and Development: Contemporary Challenges 161

Anappropriatemacroeconomic environmentandindustrialpoliciesaimedatproductionupgradinganddiversificationneedtobepermanentelementsof a long-termnational development strategy, buttheyhavebecomeevenmorecriticalaseconomiesareforcedtoadapttotheneweconomiclandscapeemergingfromtheglobalfinancialcrisis(TDR 2013).PreviouschaptersofthisReporthaveshownhowcur-rentinternationalarrangementsintradeandcapitalflowscaninhibitthenationalpolicyspaceneededforcountriestoadapt;theyhavealsosuggestedwaysforencouragingdifferentpatternsofeconomicintegra-tionthatwouldopenupnewopportunitiesbothfordevelopingcountriesandtheirtradingpartners.Yetthisisonlyonepartofthestory:evenifgovernmentswereallowed,withintheframeworkofmultilateral,regional and bilateral agreements, to pursue theirdesireddevelopmentstrategy,theywouldstillneedtofinanceit.inthecontextofpreservingpolicyspace,strengtheningfiscalrevenuesiskey,asthesearenotonlymoresustainablethanothersourcesoflong-termfinance,butalsolessconstrainedbyrestrictionsandconditionsthatimposelimitsonpolicyspace.

AsnotedinpreviousUNCTADreports,strate-giesforboostingpublicfinanceshavebeenessentialunderpinningsofdevelopmentalStates,andarealsocritical formacroeconomic stability (UNCTAD,

2009).However,theglobalizedeconomyposesseri-ous challenges to increasingfiscal revenues.Thischapterexamineshowfiscalspacehasbeenaffectedbytaxcompetitionamongcountriesandbytaxavoid-ancebyinternationalfirmsandwealthyhouseholds,aswellasbythespecificchallengesfacingcountriesthatareheavilydependentonnatural-resourcerent.itexploressomewaysofaddressingtheseproblemsconcentratingonissuesrelatedtothedomesticcol-lectionof taxesandothercurrentpublicrevenues.Development assistance and debt financing canprovide alternative sources of revenue and are ofparticularsignificancetosomedevelopingcountries.ThedifferentchallengestheseflowsposeforfiscalandpolicyspacehavebeendiscussedingreaterdetailinTDRs 2008, 2010, 2011and2013,andthereforearenotdiscussedatlengthinthisReport.

Fiscalspacerefers to theabilityofagovern-ment to use fiscal instruments to pursue variouseconomic,developmentandsocialpolicyobjectives.An increase in public revenues can enhance thepossibilitiesofusingparticularinstruments,suchasdifferentialtaxrates,subsidiesandsocialtransfers,tomeetsocialanddevelopmentalgoals.Fiscalspacehasaquantitativeorbudgetarydimension,whichcanberoughlyapproximatedbymeasuringtheshareofpublicrevenueinGDP.butthenotionoffiscalspace

Chapter VII

FISCAL SPACE FOR STABILITy AND DEVELOPMENT: CONTEMPORARy ChALLENGES

A. Introduction

Trade and Development Report, 2014162

shouldnotberestrictedtocurrent levelsofpublicrevenue.inparticular,itshouldnotbeseenasbeingequivalenttofiscalbalance;agovernmentmaybeindeficit,andyetbeabletofinanceadditionaldesiredexpendituresifthesegenerategrowth,oritmayincurdebtifthisdoesnotthreatenstabilityandotherpolicygoals. Fiscal space also refers to the potential forincreasingpublicexpenditure, includingformeas-uresinsupportofstructuraltransformation,andforvariations in that expenditureas an instrument of demandmanagement.

Fiscal space also has aqualitative dimension, relatedto the level and compositionsofpublicrevenuesandexpendi-tures.Decision-makingonthiscanbeconstrained,dejure, byinternationalarrangementsandagreements,byexter-nallyimposedconditionalitiesandbylegalrulessuchasthoserelatingtodeficitceilings;butitcanalsobeconstraineddefacto,forexamplebytheperceivedrequirementsofglobalinvestorsandfinancialmar-kets,orbythepowerofdomesticinterestgroups.

Fiscalspaceisadynamicconcept,sincechangesinpublicspendinghaveanimpactontheeconomy,and consequently ongovernment revenues. in theshortrun,itcanbeexpandedthroughthemultiplica-tiveeffectsofpro-growthpolicies.inparticular,inarecessionarysetting,whencountercyclicalstimu-lusmayberequired,fiscalspacecanbecreatedbyaugmenting revenues through various short-termmeasures,inadditiontoincreasingpublicborrow-ing (TDR 2011). However, from a longer term,development perspective, fiscal spacemeans hav-ing the capacity tofinance spending requirementsthatincreaseandchangeovertime.indeed,duringthe process of development, public spending as ashareofGDPgrows,particularlyforfinancinginfra-structure,socialtransfersandbasicservices,andinparallel,sodotherevenuestofinanceit.Fiscalspace

isanessentialelementof thepolicyspaceneededfordevelopment,andatthesametimefiscalspaceincreaseswithdevelopment.

Sectionb of this chapter examines currenttrendsinthefiscalrevenuesofdifferentgroupsofcountries,andthechallengesfacedbygovernmentsthatareseekingtoimprovethevolumeandcompo-sitionof those revenues. it presents the long-term

trendsoffiscalspace,andshowsthat it is a constitutivepart ofthedevelopmentprocess.italsodiscusseshowglobalizationandrelatedpolicychoiceshavebeenalteringthecompositionoffis-calrevenues.

The subsequent sectionsfocus on the ways in which

globalgovernanceand international actorsgreatlyaffectthefiscalspaceofdevelopinganddevelopedcountriesalike.SectionCexamineshowtaxhavens,secrecyjurisdictionsandillicitfinancialflowserodethetaxbase,underminethefairnessofthetaxsystem,anddistorttradeandinvestmentpatterns.itevaluatestheamountoftaxleakagescausedbythosemecha-nisms,anddescribessomenationalandmultilateralinitiatives taken to tackle thisproblem.SectionDanalysesissuesrelatingtotheextractiveindustriesthatareofparticularrelevanceformanydevelopingcountries.Given the boom in commodity prices,theseindustriesofferhugepotentialtoboostfiscalrevenues.However,thispotentialisnotalwayswellexploitedduetoinadequatetaxrulesortodifficultiesin enforcing them, sinceTNCs in these industriesfrequently resort to taxavoidance techniques.Thesection also analyses how the rent from naturalresources is distributed in selected countries, andexplainshowtherulesaffectingthisdistributionhavebeenchanginginrecentyears.Finally,sectionesum-marizesthemainfindingsandpresentssomepolicyorientationsaimedatimprovingthefiscalspacefordevelopmentstrategies.

Fiscal space is an essential element of the policy space needed for development, and at the same time fiscal space increases with development.

Fiscal Space for Stability and Development: Contemporary Challenges 163

1. Developmental States

SuccessfuldevelopmentalStateshavehadtheforesight and capacity to encourageprivate sectordevelopment, including by increasing profits andinvestmentabovethelevellikelytohavebeenpos-siblebyrelyingonmarketforcesalone.Theyhavealso been able to design effectivemechanisms todisciplineprivateinvestorsanddirecttheirresourcestoareaswheretheeconomicandsocialreturnsmightbe particularly high (TDRs 1996, 1997, 2003 and2009).Fromthisperspective,Adelman(2000)hasidentifiedessentialelementsforasuccessfuldevel-opmentalState.Theseincludeasubstantialdegreeofautonomy,capacityandcredibilitytosetpoliciesin thenational interest, leadership commitment toeconomic development, good economic policies,andanecessarydegreeofeconomicautonomywithrespecttotheinternationalenvironment.

Previouschaptershavefocused,inparticular,onthelastoftheseelementsinsecuringtherequisitedegree of policy space.but developmentalStatesarealsointhebusinessofmobilizingandallocatingresources,whichare likely tobekey to their suc-cessinthelongterm.Theseareneededtosupportinfrastructure development by investing in bothphysicalandhumancapital,wheretheprivatesector,particularlyindevelopingcountries,islikelytobeweak,orabsent,anddependentongoodinfrastructurefor its ownprofit-making activities.However, thebasicbargainbetweentheStateandbusinessgoeswellbeyondprovidingonlygoodinfrastructure;atvarioustimesandtovaryingdegrees,italsorequirestheStatetoassumeotherfunctionsaswell,suchasincreasingthesupplyofinvestableresources,social-izing long-term investment risks, and providingsupportservicesinsuchareasastechnology,trainingand exporting. State-sponsored accumulation and

technologicalprogressislikelytoinvolve,variously,thetransferofassetsfromlesstomoreproductivesectors,controlofthefinancialsystem,theobtainingofforeigntechnologiesandtheiradaptationtolocalconditions, anddirect public investments in someactivitiesalongwithselectedpriorityinvestmentstoencouragediversificationandupgrading.

These activities can only be pursuedwithinanintegratedstrategybasedonasharedvisionofacountry’sdevelopment,andtheydependonbuild-ingbroadsocialconsent,supportedbyinstitutionalarrangementsforcontinuousdialogueandcoordina-tionwithkeystakeholders.Publicfinance,includingthemobilizationoftaxrevenues,isakeycomponentinlegitimizingtheroleoftheStateandestablishingtheareasofgovernment responsibility in theeco-nomicandsocialspheres.ocampo(2007)identifiesfive components of this “fiscal covenant” that areessentialforeffectiveStatemobilizationofresources:clear rules of fiscal discipline, accompanied byadequatetaxrevenuestofinancethefunctionsthatsocietyassignstotheState;transparencyofpublicexpenditure;thedesignofefficiencycriteriaforthemanagementofStateresources;acknowledgementofthecentralroleofthepublicbudgetintheprovisionof“goodsofsocialvalue”,and,moregenerally,inthedistributionofincome;andthedesignofbalancedanddemocraticfiscalinstitutionswhichareopentocitizens’participation.

The challenge is particularly demanding atlowerlevelsofincomeanddevelopmentwhenthepotential sourcesof revenueare limited,andevenmoresoforcountriesthatareheavilydependentonnaturalresourcesfortheirinitialdevelopmentdrive.Mostextractiveindustrieshavealimitedlocalmarketandseektomaximizetheirrevenuesfromexports.This can generate significant profits and valu-ableforeign-exchangeearnings,which,ifproperly

B. Developmental states and their fiscal space

Trade and Development Report, 2014164

managed,caneaseanumberofconstraintsonfastergrowth.However,thisiseasiersaidthandone:theproblemof“Dutchdisease”,wherebyanexpandingminingsectortriggersarealcurrencyappreciationandafallinoutputandemploymentinothertrad-ablesectors,canintroduceseriousmacroeconomicimbalancesandincreaseexchangeratevolatilityandeconomicvulnerability.However, a largebodyofevidencesuggeststhatthisismanageableprovidedpolicymakershavetherequisitepolicyspace(iMF,2003;UNCTAD,2005).

Moredamagingtolong-termprospectsiswhenthiskindofexpansiongeneratesapatternoflopsidedinternalintegrationthroughthecreationofenclaveeconomies.ThestructureofinternationalcommoditymarketsissuchthatwhenpolicymakersinviteTNCstodevelopthissector,theyfindthemselvesinaweaknegotiatingposition,astheseverylargefirmshaveattheirdisposalbetterinformationthantheirhostsaswellasgreaterfinancial,technologicalandmar-ketstrengths, includingthethreatofcapitalflight.Moreover,unpredictablerentsassociatedwithpricevolatility can seriouslydistort thewider incentivestructure,addingaspeculativedimensiontoinvest-mentplanninginboththeprivateandpublicsectors.ThesolutionisnotoneofeitherStateorforeignown-ershipofnaturalresources;ithastodowithhowbesttomanageresourcerentswithlong-termdevelopmentgoalsinmind.inrecentyears,asdiscussedinprevi-ouschapters,thependulumhasswungtowardstryingtoattractFDitothissector,withinsufficientattentiongiven to strengthening the bargaining position ofhostgovernmentstoobtainbetterreturnsfromtheirnatural-resourcebase and stimulate the upgradinganddiversification of national output.Refocusingon long-termdevelopmentwill requirechanges inexistingfiscalandlegislativearrangementsinordertoincreaserevenuesandensurethatagreaterpropor-tionofvalueaddedremainsinthehosteconomy,asdiscussedfurtherbelow.

2.  Long-term fiscal trends

in general, developed countries tend to havegreater fiscal space than developing countries, astheycollectlargerrevenuesasashareofGDP.Thisistheresultofalonghistoricalprocess:intheearly1900s,revenuescollectedbytheGovernmentinthe

UnitedKingdomamountedto15percentofGDP,comparedwith40percentonecenturylater(ClarkandDilnot,2002);intheUnitedStates,governmentrevenues rose frombelow10per cent ofGDP to30percentduringthesameperiod(Maddison,2001).Thisenlargementofthetaxbasewastheresultnotonlyofthegrowthofthemodern(andformal)sectoroftheeconomy,butalsoofadjustmentsinlegislation,theintroductionofnewtaxesandotherfiscalcharges,andtheirvariationovertime,aswellasconsiderableeffortstostrengthentaxadministrationandenforce-ment(besleyandPersson,2013).Greaterrevenuecollectioncapacity,inturn,providedthemeansformeetingthedemandsofcitizensforpubliclyprovidedgoodsandservicesbasedontheconceptofawelfareState.Moregenerally,itpermittedfinancinghighergrowth-enhancingpublicspending,whichgeneratedapositiveinterrelationshipbetweendevelopmentandfiscal space. in the period 2011−2012, developedcountries,onaverage,collectedpublicrevenuestotal-ling41.5percentofGDP,withtaxrevenuesaloneamountingto25.5percent.incontrast,duringthatperiodthetotalrevenuesandtaxrevenuesofgeneralgovernmentinlDCsamountedto23percentand14.5percentofGDP,respectively.

Despitethisbroadassociationbetweenlevelsofincomeandfiscalrevenues,thereisnobenchmarkfor the ratio of public revenue toGDP.The latterdependsasmuchonaneconomy’scapacitytofurnishpublicrevenues−andtheadministrativecapabilitytocollect them−asonpoliticalchoice.Therearesignificantdifferencesinthisratioacrosscountriesatsimilarlevelsofpercapitaincome,reflectinghis-toricalcircumstances,dissimilarrevenue-generatingcapacitiesandsociallyacceptedpolicychoicesabouttheroleoftheState.Thosepolicychoicesconcernitsredistributiveroleandtheextenttowhichbothsociallyimportantservicesshouldbedeliveredbythepublicsector,andinstrumentsofpublicfinanceareusedformacroeconomicmanagementandtosupportpoliciesforstructuraltransformation.

Thereisapositiverelationshipbetweengovern-mentrevenuesasashareofGDPandpercapitaGDPacrossawiderangeofdeveloped,developingandtransitioneconomies,butalsoasignificantdisper-sionwithin thesegroups(chart7.1).Forexample,governmentrevenuesinmosthigh-incomeeuropeancountries, including (in decreasingorder)Norway,Denmark,Finland,Sweden,France,belgium,Austria,italy, theNetherlands andGermany, are above or

Fiscal Space for Stability and Development: Contemporary Challenges 165

Chart 7.1

RELATIONShIP BETwEEN GOVERNMENT REVENUES AND PER CAPITA GDP, 2012

Source: UNCTAD secretariat calculations, based on ECLAC, CEPALSTAT; Eurostat, Statistics Database; OECD.StatExtracts database; European Commission, Annual macro-economic database (EC-AMECO); and IMF, World Economic Outlook and Government Finance Statistics databases.

Note: Data refer to 2012 or latest year available. Revenue data refer to general government revenue, except for Argentina, the Plurinational State of Bolivia, Colombia, Ecuador, El Salvador, Mexico, Panama, Paraguay, Uruguay and the Bolivarian Republic of Venezuela, for which data refer to the non-financial public sector. Per capita GDP data are shown in logarithmic scale.

0

10

20

30

40

50

60

70

80

100 1 000 10 000 100 000

Tota

l rev

enue

(Per

cen

t of c

urre

nt G

DP

)

Per capita GDP at constant 2005 dollars

A. Total revenue

0

5

10

15

20

25

30

35

40

45

50

100 1 000 10 000 100 000

Tax

reve

nue

(Per

cen

t of c

urre

nt G

DP

)

Per capita GDP at constant 2005 dollars

B. Tax revenue

LDCs Oil- and gas-exporting developing and transition economiesOther developing and transition economies Developed economies

Trade and Development Report, 2014166

close to 50 per cent ofGDP;while in Japan, theUnitedStates andAustralia, government revenuesare around 30 per cent ofGDP.This differenceillustrates diversemodels of social coverage andthewelfareState.At the other endof the incomehierarchy,lDCsalsoshowsomeheterogeneity,withgovernmentincomesrangingfromaround15percentofGDP(inascendingorder)inHaiti,Sierraleone,Uganda,ethiopia,Guinea-bissau and theCentralAfricanRepublic,tocloseto30percentinMalawi,burundi,theDemocraticRepublicoftheCongoandMozambique.Thelattertwocountriesareexportersofmineraloresandmetals,whichproviderevenuestotheirgovernmentsindependentlyoftheaverageincomeofthepopulation.

Thecapacityforraisingpublicrevenuefromtheextractiveindustries,largelyunrelatedtopercapitaincome,isclearlyapparentinoil-andgas-exportingdeveloping countries and transition economies.Whereas inmost other countries, income tax col-lectioncontributesaroundtwothirdsofgovernmentrevenues,inoil-exportingcountriesthatshareisclosetoonlyonethird(comparecharts7.1Aand7.1b).GovernmentrevenuesofAngola, thePlurinationalState ofbolivia, iraq,Kuwait, libya,oman andSaudiArabia are close to or over 50 per cent ofGDP,despitethefactthatthesecountriesrangefromlower-middle-income tohigh income levels.Mostof their government revenues comedirectly fromdividendsofState-ownedextractivefirms,royaltiesorproduction-sharingagreements,whileincometaxcontributesalowershare.However,exportingminer-alsorhydrocarbonsdoesnotguaranteehighlevelsofgovernmentincome,asindicatedbythedatafromPeru,TurkmenistanandZambia.itdependslargelyondomesticpoliciesrelatedtothedistributionoftherentsfromnaturalresources,asdiscussedinsectionDofthischapter.

Non-oil-exporting developing and transitioneconomies,mostlymiddle-income countries, havean intermediate level of public revenues,with anon-weightedaverageof26.8percentofGDP.inthisheterogeneousgroup,transitioneconomieshaveclearlyabove-averagepublic revenue levels (mostnotablybosniaandHerzegovina,Serbia,UkraineandUzbekistan),partlyduetothesignificanceofsocialcontributions.ThisisalsothecaseforanumberoflatinAmericancountrieswithstrongredistributivepolicies,andwherethesocialsecurityandpensionsystem have remained the State’s responsibility

(e.g.Argentina,brazilandCuba).bycontrast,pub-licrevenuelevelsarecomparativelylowinseveralCentralAmerican countries (e.g.Guatemala andHonduras) andSouthAsia (e.g. Pakistan andSrilanka).

ThegapbetweenanumberofdevelopinganddevelopedcountriesintermsofpublicrevenuesharesinGDPhasnarrowedoverthepasttwodecades,asaresultofgrowingdomesticresourcemobilizationinmostdevelopingandtransitioneconomies.inlatinAmericaandAfrica,totaltaxrevenuesasapercent-ageofGDProsesignificantly,bolsteredbystrongereconomicgrowthandabroadlyfavourablemacro-economicenvironment(chart7.2).1increasedpublicearningsfromcommodityexportsalsocontributed,reflecting higher commodity prices, and in somecases,changesinthetermsofcontractsagreedwithoilandminingcorporations.inlatinAmerica,lowerunemployment,higherrealwagesandalargershareofformaljobsalsoraisedsocialcontributionlevels.Theresultingprogressivereductionofinequalitywasaccompaniedbyariseinconsumptionandindirecttaxes. Furthermore, revenues benefited from theintroductionofnewtaxesalongsideadvancesintaxadministration(eClAC,2014a).inAfrica,overallgrowthofpublicrevenueswassmaller,inpartduetothelowercontributionofbordertaxes,whichremainanimportantcomponentoftotaltaxrevenues.TotalgovernmentrevenuesalsoincreasedsignificantlyinWestAsiaandinthetransitioneconomies, largelydue to gains from risingoil prices. in general, inalldevelopingregionsandtransitioneconomiestheshareofgovernmentrevenueinGDPincreased,withtheexceptionofeast,SouthandSouth-eastAsia.ThelowratesofgrowthoftaxesrelativetoGDPinpartsofAsiaandthePacific,despiteyearsofrapideconomicgrowth,hasbeenattributedtotheregion’slow levelsofpersonal income taxandheavy reli-anceonvalueaddedtax(VAT)(eSCAP,2013).ontheotherhand,indevelopedcountries,theshareofgovernmentrevenuesinGDPdeclinedslightly,fromanaverageof43percentintheperiod1991−1995to41.5percentin2011−2012.

output growth has broadly positive effectsonfiscal space. inmostdevelopingand transitioneconomies, government revenues have tended toincrease faster thanGDP, especially inmiddle-income countries.A study of 17latinAmericanand 6 South-eastAsian countries suggests thatduring theperiod1990−2012, a1per cent rise in

Fiscal Space for Stability and Development: Contemporary Challenges 167

Chart 7.2

GOVERNMENT REVENUES By SOURCE, SELECTED COUNTRy GROUPS, 1991–2012(Per cent of GDP)

Source: UNCTAD secretariat calculations, based on ECLAC, CEPALSTAT; IMF, World Economic Outlook and Government Finance Statistics databases; Eurostat, Statistics Database; OECD.StatExtracts database; and EC-AMECO database.

Note: Data refer to the five-year average of the mean observation of general government revenue, except for Argentina, the Pluri-national State of Bolivia, Colombia, Ecuador, El Salvador, Mexico, Panama, Paraguay, Uruguay and the Bolivarian Republic of Venezuela, for which data refer to the non-financial public sector. Data for China refer to budget revenue only; they do not include extra-budgetary funds or social security funds. Other revenues include capital revenues.

0

5

10

15

20

25

30

35

40

45

1996–2000 2001–2005 2011–2012

Transition economies

0

5

10

15

20

25

30

35

40

45

1991–1995 2001–2005 2011–2012

Developed economies

Corporate income tax Other income tax Other tax revenueSocial contributions Other revenues

VAT Border taxTax revenue

0

5

10

15

20

25

30Africa

0

5

10

15

20

25

30Latin America

1991–1995 2001–2005 2011–2012 1991–1995 2001–2005 2011–2012

0

5

10

15

20

25

30East, South and South-East Asia

0

5

10

15

20

25

30

35

40

45West Asia

1991–1995 2001–2005 2011–20121991–1995 2001–2005 2011–2012

Trade and Development Report, 2014168

GDPcauseda1.15percentincreaseingovernmentrevenues(Weeks,2014).Thiscanpartlybeexplainedbystructuraltransformationstakingplaceinparal-lelwith output growth,mainly resulting from theenlargementofthemodernsectoroftheeconomy,andanincreaseintheproportionofthelabourforceemployedinmediumandlargeenterprises.Thisinturnprovidesalargertaxbase,includingfordirecttaxation.ontheotherhand,indevelopingcountrieswithlowpercapitaincomesandhighlevelsofinfor-mal employment, governments have fewer entrypossibilitiesthroughwhichtocapturemorerevenuesfromprivateincomes.Consequentlytheirgrowthoffiscal revenues as a percentageofGDP isweakerthanthatofmiddle-incomedevelopingcountries.Amajorexceptionmaybeincountrieswhererevenuesareaugmentedbyvarioustaxesonlargefirmsintheextractiveindustries,asdiscussedinsectionD.

3. Composition of public revenue and fiscal space 

Thecompositionoftaxesmattersbecauseofitsdistributive implicationsand its role ingeneratingincentives for particular elements of demand andsupply.Forexample,applyingdifferentialtaxratestoparticularsectorsisaformofindustrialpolicy.Directtaxes,especiallycorporateandpersonalincomestax-es,canbetailoredforincomedistributionpurposes,andcanalsoactasbuilt-instabilizers,astheyriseingoodtimesandfallinrecessions.indevelopedcoun-tries,incometaxisstillthepredominantsourceofrevenue,followedbysocialcontributions(chart7.2).

Developingcountriestendtorelymoreonrev-enuesraisedfromindirecttaxesonconsumptionandtrade.in2012,VATaloneaccountedfor22percentoftotalrevenuesinAfrica,26percentinlatinAmericaand29percentineast,SouthandSouth-eastAsia.onlyinWestAsiawasitscontributionrathermod-est(12percent),sincemostoftherevenuesthereoriginatedfromtheextractiveindustries.inaddition,sincetheearly1990s,theshareofVATinGDProseineveryregionoftheworld.evendevelopedcountriesareincreasinglyapplyingconsumptiontaxes,whichhavebecomethesecondhighestsourceoftheirtaxrevenuesafterincometaxes.

Thistrendhasanegativedistributionalimpact,asVATandotherindirecttaxesareregressivecompared

with income taxes. Some countries have tried toreduce their regressivenature throughexemptionsanddifferential treatment.inlatinAmerica,someproductsarezero-ratedandexemptionsareofferedincertainindustrialsectorsortoparticularcategoriesof consumers (eClAC, 2014a).2other countriesusedifferentialVATratestopromoteenvironmen-tal priorities, for example, by setting higher ratesonpurchasesofplastics,fuelsandmotorvehicles.Also inlatinAmerica, several countries recentlyadopteddualtaxsystemssimilartothoseappliedintheScandinaviancountries,withstandardtaxratesforcapitalincome,higherratesforcorporatetaxesand progressive rates on labour income. in othercountriesofthatregion,fiscalinstrumentshavebeenusedtoboostformalemployment,helpingtoshiftthetaxburdenfromcompaniesinsectorsthatemploymoreformalworkerstowardsthose,suchasextrac-tive industryTNCsthataremorecapital-intensive(eClAC,2014a).

Comparedtosuchcompensatoryefforts,otherpolicieshavetendedtowardsfiscalregressivity.ortizandCummins (2013) found that some94govern-mentsin63developingand31high-incomecountriesconsideredoptions toboost revenueby increasingVATorsalestaxratesorremovingexemptionsasoneofthemostcommonpost-crisisadjustmentmeasures.

inaddition,amajortrendinallregionsisthesteadydeclineintheratesofcorporateincometaxes,asgovernmentscompetetoattractorretainmobileinvestors(TDR 2012,chap.V).Averagecorporatetax rates inmanyoeCDcountries fell fromover45percentintheearly1980stobelow25percentby2012.Corporatetaxratesindevelopingcountriesalsofellsignificantly,onaveragefrom38percentintheearly1990sto32percentbytheearly2000s(KeenandSimone,2004),andagaintoaround27percentin2012.3Thesecutsincorporatetaxratesdidnot necessarily lead to proportional reductions incorrespondingtaxrevenues.insomecasestheywerecompensatedbyabroadeningofthetaxbase,whileinotherstheywereamplifiedbymeasuressuchastaxholidays, reduced statutory rates forparticularsectorsorregions,anddirecttaxbreaksforexportersandfree-tradezones.

Reducing corporate tax rates in developingcountries seems to go against the usual adviceto broaden their tax revenues: if those countrieshavehugepublic revenue requirements tofinance

Fiscal Space for Stability and Development: Contemporary Challenges 169

investment and limited capacity to raise revenuesbyothermeans,whywould they reduce tax ratesfortheeconomicagentsmosteasilytaxable(atleasttechnically)?onepossible reason is that “perhapstheirpoliticaland institutionalstructuresaremorevulnerable to the exercise of influenceby interestgroups,includingforeignmultinationals”(KeenandSimone, 2004: 1321). Such atendencymayalsobearesponsetogreatercompetitiontoattractglobal investors, although taxdifferentialsdonotseemtobethemostimportantdeterminantof FDi.This is evidenced indeveloped economies,wheretax incentives to corporationshave not led to rising produc-tive investment. Despite thesteadyfallintherateofstatutorycorporateincometaxessincetheearly1980s,andothertaxincentivesdesignedtoencourageinvestors,grossfixedcapitalformationdeclinedinalargenumberofdevelopedcountries,evenbeforetheglobalcrisis(TDR 2012,chap.V,sectionC).

in2011−2012,theshareofgovernmentrevenuesfromcorporatetaxesinGDPincreased,despitethecontinued downward trend of corporate tax rates,mainlybecausetheshareofprofitsinGDPincreasedinmostcountries.Publicrevenuesfromcorporatetax-esrosesignificantlyinmostregionsofthedevelopingworld,ascompanyprofitsbenefitedfromeconomicgrowthandtheriseininternationaltrade.However,theextent towhichcorporate taxescontributed tototalrevenueshasvaried,andingeneralithasnotkeptpacewith the increase inprofitsduring theseyears(UN-DeSA,2013).

Anothermajor change in fiscal compositionthatreflectsglobal influencesconcernsborderandtradetaxes.Revenuesfromimporttariffstypicallyaccountedforalargeproportionofpublicrevenuesindevelopingcountries,andespeciallyinlDCs.Thiswasmainlybecausetheyarefairlyeasytoimplement,requiringonlyarelativelysimpleinstitutionsuchasacustomsauthorityattheborder,comparedwithothertaxes,suchasVATorincomeandcorporatetaxes.However, trade liberalizationagreementsandpro-gressivetariffreductionshavehadamajorimpactonwhatwasonceoneofthemostimportantsourcesofrevenueformanydeveloping-countrygovernments.4by2012,almost40percentofinternationaltradewas

duty-freeunderMFNterms,andanadditional35percentwasduty-freeunderbilateralorregionalpref-erentialterms.inaddition,giventhemanyongoingnegotiationsforbilateralandplurilateraleconomicpartnershipagreements, thecontributionof importdutiestopublicrevenueswilllikelycontinuetoerodeintheyearstocome.

Such a trendwould havesignificant adverse effects onfiscalrevenues inanumberoflow-incomecountries.inAfrica,bordertaxesaccountedfor15percent of government revenuesin 2011−2012.Those revenuesremainparticularlysignificantforlDCs;indeed,theyhavebecomeevenmore important in recent

years,partlyowingtothesecountries’increasingpar-ticipationininternationaltrade(bothinimportsandexports),andpartlybecausetheirtariffratesremainhigher than those of other countries (UNCTAD,2014).The total imports of sub-SaharanAfricancountries, for instance, increased by over 70 percentbetween2006and2011.importtariffrevenuesaccountedfor5percentofGDPonaverageinlDCs,comparedwithjust0.5percentindevelopedcoun-tries(chart7.2).

export taxes can also be applied, and areimposedmost frequently on exports ofmetals,includingwasteandscrap,mineralsandagriculturalcommodities.Thosetaxratescanberelativelyhigh,ataround20percentonunprocessedcommoditiesand13−17percentonsemi-processedorfinishedgoods (UNCTAD, 2014).Apart from augmentingrevenues,exporttaxesareimposedbygovernmentsforanumberofotherreasonsaswell,includingforconservingnaturalresources,protectinghealthandtheenvironment,encouragingdomesticvalue-addedactivities in processingprimary commodities, andalso for “sterilizing”windfall profits from priceincreases.However,many of the ongoing tradenegotiations atmultilateral and bilateral levelsincludereducingoreliminatingthesetaxes,whichmeanstheirusemaydiminishinthefuture.Giventhemultiplepurposesservedbyexporttaxes,suchrestrictionsmayhavenegativeimpacts,andnotonlyonfiscalrevenues.

Manygovernmentshaveturnedtheirattentiontonewsourcesoftaxrevenuerelatingtothefinancial

The composition of taxes matters because of its dis-tributive implications and its role in generating incentives for particular elements of demand and supply.

Trade and Development Report, 2014170

sectorandfinancialtransactions,includingproposinglevies on trading in stocks, bonds andderivatives(intheeU),ortaxesontherepatriationofoverseasearnings (in theUnited States). if thesewere tomaterialize, theycouldcreatea significantchangeintaxstructures.Theproposedfinancialtransactionstax(FTT)couldbeconsideredaglobalizedversionof stampduty,which isoneof theoldest taxes inexistence.The latterwas introduced in theUnitedKingdommorethan300yearsago,andhaslongbeenappliedtopurchasesofshares,aswellasproperty,inmanyother countries aswell.likemanyfiscalcharges, they are promoted formultiple purposes.TheFTTisproposednotonlyforitscapacitytoearnsubstantial revenues, but also as an instrument toinfluencethebehaviourofeconomicagents.itmaydampen speculative activities that can be damag-ingfortherestoftheeconomy,andensureamoreequitabletreatmentofthefinancialsectorvis-à-visothersectors.

it seems, therefore, that different forces areinfluencingthecompositionandleveloffiscalrev-enues,sometimesinoppositedirections.Thesearenotpurelytechnicalmatters,sincetheenlargementorretrenchmentoffiscalspaceiskeytotheimplementa-tionofdifferentdevelopmentstrategies.Furthermore,theyinvolveadistributionofthetaxburden,whichhasdistributionalandeconomicimpacts,benefiting(oraffecting)someagentsmorethanothers.

in thiscontext, it isworthmentioning thedefactopervasiveinfluenceofsophisticatedlobbyistsand interest groups on national and internationalpolicymaking,which is often insufficiently recog-nized.Whilelobbyinghasbeenalong-standingandacceptedfeature in theUnitedStates, it isgainingin importance in other developed and developing

countriesaswell.lobbyistscanbenefitsocietyasawhole by conveying complex information fromexpertstolegislatorsandbureaucrats,buttheycanalsoleadtothegenerationandprivateappropriationof rents that are detrimental to society.lobbyingiscostly,andcollectiveactionproblemsmeanthathouseholds, consumers and industry groupswithmanysmallactorsanddisparateinterestsareunlikelytobeadequatelyrepresented.Thefinancialsector,forexample,iswellorganizedandhasahighlevelof“firepower”aimedatfiscalpolicymakingfarbeyondthescopeofthehouseholdswhouseorareaffectedbyfinancialservices.5itsinfluenceonfiscalspacecanbedirect;forexample,morethan900ofthe1,700amendmentsthatweretabledbyeUparliamentar-ianstolegislateontheactivitiesofhedgefundsandprivateequityfirmshadbeenauthoredbyfinancialindustry lobbygroups, and therewas evidenceoflarge-scale“copyandpaste”oftextsgivenbythelob-byists(Corporateeuropeobservatoryetal.,2014).Similarly,intheUnitedStatesithasbeenfoundthatfirmsthatincreasedtheirlobbyingexpendituresby1 per cent in one year reduced their effective taxratesintherangeof0.5to1.6percentagepointsthefollowingyear(Richteretal.,2009).Thesuggestionthatstrategiclobbyingyieldsquantifiablebenefitsforparticulargroupsissupportedbythescaleofrecenteffortsonthepartofcorporationstopromoteapack-ageoftaxbreaksestimatedtocost$46billionin2014andabout$700billionover10years,accordingtodatafromtheCongressionalbudgetofficereportedinarecentsurvey.6Particularlywhencombinedwiththe“revolvingdoor” thatoftenallows lawmakers,bureaucrats and lobbyists to change places, thesepracticesdirectlyandindirectlyaffectfiscalpolicies.Therecentproliferationofsuchpracticesinseveraldevelopingcountriesisanotherfactoraffectingfis-calspace.

Fiscal Space for Stability and Development: Contemporary Challenges 171

Untilthetwentiethcentury,taxcollectionandenforcementwere primarily a domestic concern,withlittlespillovertotaxsystemsinothercountries.Today, although tax collection remainsmostly anationalconcern,withtheprocessofglobalizationtax systems in some countries can affect publicrevenuecollectioninothercountries.Thishashadthenegativeeffectofcreatingnewchannelsthroughwhichsometaxpayers–particularlyhigh-net-worthindividuals(HNWis)andTNCs–canreduceorevenavoidpayingtaxes.HNWisavoidpayingwealthandinheritancetaxes,aswellastaxesonincomefromtheseassets,mainlybyplacingtheirfinancialassetsin taxhavens. in addition, part of their income issometimesroutedthroughthesejurisdictionstohideitfromthetaxauthorities.AsforTNCs,taxavoid-ancemainlytakestheformof“creativeaccounting”practices,althoughtheymayalsoholdfinancialassetsorregisternon-financialassetsintaxhavens.

Threepointsareimportantwhenlookingattheinternationaldimensionoftaxleakages.First,suchpracticesresultinmassivelossesofpublicrevenues.Second, a large proportion of the financial flowsresultingfromsuchcreativeaccountinggoesthroughoffshorefinancialcentres(oFCs)basedintaxhavens,ormoreprecisely,insecrecyjurisdictions.Third,manyflawsremainintheinternationaltaxationarchitecture,whichhasfailedtoproperlyadapttothecurrentreality.

1. Key concepts

(a) Tax havens, secrecy jurisdictions and offshorefinancialcentres

Taxhavens,secrecyjurisdictionsandoFCsareoftenconsidered synonymous.However, the threetermsrefertodistinctaspectsofthesameproblem.Taxhavensarepoliticaljurisdictions–notallofthem

identicaltosovereignStates–whichhavesufficientautonomytowritetheirowntax,finance,andotherlawsandregulationsinordertocreatealegislativeframeworkdesignedtoassistnon-residentpersonsor corporations in avoiding regulatoryobligationsimposedonthemintheplaceswheretheyundertakethesubstanceoftheireconomictransactions(Palanet al., 2010).They provide a place to record, foraccountingandtaxpurposes,transactionsthathaveimpacts elsewhere (Tax JusticeNetwork, 2012).Suchplacesofferanescapenotjustfromtaxes,butalsofrommanyotherrulesandregulations,becausethestructurescreatedundertheirlocallawscanbeusedeithercompletelyanonymously,orlargelyso(Shaxson, 2011). in addition, prosecution of eco-nomicandfinancialcrimesandjudicialcooperationwithothercountriesareoftenextremelylimited.Forthesereasons,theseplacesarealsowidelyreferredto as “secrecy jurisdictions”because theyprovidesecrecy tooFC commercial operators and theirclients, thereby facilitating various kinds of illicitfinancialflows(iFFs).

inmany respectsoFCs are fictional spaces.The term refersmore toa setofactivities than toageographical setting.7The termoffshorederivesfrom the fact that the transactions recorded in thesecrecy jurisdictions actually take place in otherlocations.A subtle distinction is sometimesmadebetweentaxhavensandsecrecyjurisdictions,ontheonehand,andoFCsontheother.Thelattercompriseaccountants,lawyersandbankers,plustheirassoci-ated trust companies andfinancial intermediaries,whosellservicestotheresidentsofotherterritoriesorjurisdictionswishingtoexploitthemechanismscreatedbylegislationin thetaxhavensorsecrecyjurisdictions.inpractice,theseoperatorscaneasilymovetheiroperationstowherevertheywantatanytime;indeed,theyhavesometimesusedthispowertothreatentoleaveajurisdictionthatdoesnotsecurethelegislationtheydesire(Murphy,2008).

C. Tax leakage and international governance of taxation

Trade and Development Report, 2014172

TheoeCDhastakentheleadattheinternation-alleveltoaddresstheproblemoftaxhavens,usingseveralcriteriaonthesizeandtransparencyoffiscalrulestoidentifysuchlocations(oeCD,1998).8basedonthesecriteria,theoeCDidentified35jurisdictionsastaxhavensin2000,butthislistwascriticizedbya number of researchers because it omittedmanyjurisdictionsthatdisplayedthecharacteristics of tax havens.9between2000andApril2002,themajorityoftheselistedtaxhavensmade formal commit-mentstoimplementtheoeCD’sstandards of transparency andexchange of information andweresubsequentlytakenoffthislist;onlysevenjurisdictionsthatdidnotmakecommitmentstotheoeCD’sstandardswere identified as “unco-operative tax havens”,but subsequently, following various commitmentsbythem,theywereremovedfromthelistbetween2003and2009.Asaresult,nojurisdictionremainscurrentlylistedasan“unco-operativetaxhaven”bytheoeCD,thoughnewlistshaverecentlyappearedundertheumbrellaoftheGlobalForum(seebelowsubsection4(a)).

The2013FinancialSecrecyindex(FSi)devel-opedby theTax JusticeNetwork (TJN) offers analternative to theoeCDapproach (TJN,2013). itestablishesarankingof82jurisdictionsthatprovidefinancial secrecy according to both their degreeof secrecy and their relative importance in globalfinance.Thefocusshifts,therefore,fromgovernanceissueswithincountriestothejurisdictions’responsi-bilityforofferingfinancialsecrecyatthegloballevel.insteadofrelyingonabinaryindicator,whichisoftenpronetopoliticalnegotiations,theFSiisbasedonasecrecyscoreconstructedfrom15indicators,whichranges from zero (total financial transparency) to100(totalfinancialsecrecy).10Noneoftheanalysedjurisdictionshasscoredlessthan30,suggestingthatthereisnocleardividinglinebetween“secrecyjuris-dictions”(ortaxhavens)andothers,andthatthereisawidespectrumofsecrecy.

From this perspective, some of theworld’sleading providers of financial secrecy are amongtheworld’s largest andwealthiest countries.Thiscontrastswith thewidespread perception that taxhavensaresmall(oftentropical) islandsormicro-States.11indeed,taxhavensarenotworkingonthe

marginsoftheworldeconomy,butratherasaninte-gral part ofmodernbusiness practices.Accordingtooneestimate,twomillioninternationalbusinesscompaniesandthousands(ifnotmillions)oftrusts,mutual funds, hedge funds and captive insurancecompaniesarelocatedinthe56countriesthatcouldbe considered tax havens in 2009.About 50 per

cent of all international banklendingisroutedthroughthesejurisdictionsand30−40percentof theworld’s stockofFDi isaccountedasassetsoffirmsreg-isteredthere(Palanetal.,2010).

ithasbeenpointedoutthata number of developed coun-tries,andevenlocationswithin

thesecountries,12havesomekeyfeaturesincommonwithmoretraditionaltaxhavens.The Economisthasrecentlysharedthisviewbynotingthat“someofthebiggest taxhavensare in factoeCDeconomies”.Moreover, itdrawsattention to the fact that“[theseeconomies] provide something the offshore islandscannot: a destination formoney rather than amereconduit”.13Theyalsobenefitfromtheperceptionthat,overall, theyarepoliticallystableandthat therearestronglobbiesthatsupporttheirtaxhavenstatus.Thus,oFCs,andthesecrecyjurisdictionsthathostthem,arenotpartofaparalleleconomicsystem;theyarefullyintegratedintotheglobalfinancialsystemandexistnotnecessarilyinoppositiontotheState,butoftenwithitsaccord.Moreover,asfurtherdiscussedinsubsection2,manywell-establishedtaxpayers,bothindividualsandcorporations, turn to themwith a certain degree ofimpunityand(atleastalleged)innocence.intheviewofTJN,14 the implications for global powerpoliticsaresignificant,andcouldhelpexplainwhy interna-tionaleffortstocrackdownontaxhavens,oFCsandfinancialsecrecyhavesofarbeenratherineffective,despite recurrent announcements by theG20 andoeCDcountriesfortheneedtoaddresstheseissues.indeed,someoftheeconomicallypowerfulresidentsoftheseeconomiesaretheprimarybeneficiariesoftheso-called“illicitfinancialflows”andareabletoinfluencetherulesofthegame(Rodrik,2014).

(b) Illicitfinancialflows

oneofthemajorrolesofsecretjurisdictionsisthefacilitationofillicitfinancialflows.TherearetwodefinitionsofiFFs.inanarrowsense,theyreferto

Tax havens are not working on the margins of the world economy, but rather as an integral part of modern business practices.

Fiscal Space for Stability and Development: Contemporary Challenges 173

allunrecordedprivatefinancialoutflowsinvolvingcapitalthatisillegallyearned,transferred,orutilized.inthisregard,theyaregenerallyusedbyresidentstoaccumulateforeignassetsincontraventionofapplica-bledomesticregulatoryframeworks.Thus,evenifthefundsoriginatefromlegitimatebusinessactivities,theirtransferabroadinviolationoflocallaw,suchasexchangecontrolregulationsortaxregulations,wouldrenderthecapitalillicit.inabroadersense,iFFsalsoencompassallkindsofartificialarrange-mentsthathavebeenputinplacefortheessentialpurposeofcircumventingthelaworitsspirit.Thus,illicitmightnotnecessarilymeancontraveningtheletterofthelawbutgoingagainstitsspirit.inthiscase,illicitcanbeunderstoodassomethinghiddenordisguised.

itisgenerallyacceptedthatthenarrowdefini-tionisinadequatefordescribingtax-motivatediFFs.itfailstotakeintoaccountseveralpracticesdesignedtoreducetaxliabilitywhichgoagainsttheinterestsofsocietyandultimatelyharmthemajorityof thecitizens,eveniftheycannotbeprovedtobeillegal.inthisReport,thekeycriterionusediswhethersuchtax-motivatediFFsarejustifiedfromaneconomicpointofview.ifagiveninternationalfinancialflowis part of a “tax-optimization” schemewithoutanyconcreterelatedeconomicactivity,itcouldbeconsidered “illicit”.To take a concrete example,severalTNCs have taken advantage of a conten-tious loophole in irish corporate law15 known asthe“doubleirish”.Thisallowsthemtoberegisteredinirelandwithoutbeingconsideredataxresident,because,asfarastheirishauthoritiesareconcerned,thecompanyisataxresidentinbermuda,whichhasazerorateofcorporatetax.Yetinpractice,mostoftherealeconomicactivitiesarenotunder-takeninirelandorinbermuda.Suchaggressivetaxplanningarrangementsalsoneed tobeconsideredwhen analysing the factors thatmay reducefiscalspace.

empirical estimates show that tax-motivatediFFsaccountforthebulkofalltheiFFs.16Amongthethreebroadtypesofmotivations–crime,corruptionandtaxabuse–thatdrivepeopleandentitiestoturntoiFFsandtaxhavens,onlyaboutathirdoftotaliFFsrepresentcriminalmoney,linkedprimarilytodrugs,racketeeringandterrorism.it isnoteworthy

thatmoneyfromcorruptionisestimatedtoamounttojust3percent.Thethirdcomponent,whichaccountsfor the remaining two thirdsof the total, refers tocross-border tax-relatedtransactions,abouthalfofwhichconsistsoftransferpricingthroughcorpora-tions(baker,2005).

2. Cross-border tax dodging mechanisms

internationaltaxdodgingtakesmanyforms,allofwhichaimatreducingtaxliabilities.Suchpracticesarearrayedalongaspectrumofvaryingdegreesoflegality(Herson,2014).onesuchpracticeisillegaltax evasion,whichreferstoataxpayer’sattemptstoescapeataxliabilityunderacountry’slaw.ittypi-callyinvolvesconcealingfromthefiscalauthoritiesthe income and assetswhich are liable for taxesor,inthecaseoffraud,falsifyingpaperwork.Thisimpliesacriminalactivityoratleastafailuretomakearequireddisclosure.17Manytaxevasionpracticesmayoccuronlyatthenationallevel,butastheaimof thischapter is toanalysewhatstructures in theglobaleconomycanfavoursuchbehaviours,purelynationalpracticesarenotaddressedhere.

Anotherformoftaxdodgingisreferredtoastax avoidance, including aggressive tax planning,whereby individuals or companies exploit loop-

holesinlegislationtopaylowertaxes.These practicesmaybewithinthelaw,buttheycanbeperceived as crossing ethicalboundaries.Tax avoidance isoften understood as referringtopracticesdesignedtogainataxadvantagebycontravening

the intention, but not the letter, of the legislation(Herson,2014).inpractice,thedifferencebetweentaxavoidanceandtaxevasionisfrequentlyblurred.Forinstance,taxpaymentscanbeavoidedbyusingmispricing techniques in intra-firm transactionsorrecording artificially high payments for intra-firmdebt.The legality of thesemanoeuvres is open toquestion.Much of it depends on how domesticlawsaredraftedtoavoidtheexistenceofloopholes.Moreover,somestrategiesthathavebeenarguedasconstituting“avoidance”havebeenjudgedas“eva-sion”when challenged and scrutinized in courts.Thisisevenmorerelevantwhentaxschemesinvolve

Empirical estimates show that tax-motivated IFFs account for the bulk of all the IFFs.

Trade and Development Report, 2014174

severaljurisdictions.Sinceinternationaltaxationisextremelycomplex,taxpayersembarkingonsuchtaxoptimizationstrategiesoftenarenotsurewhetherthesestrategiesarefullylegal(Palanetal.,2010).itisforthisreasonthatthisReportreferstotax-motivatediFFswhenevertheinternationalstructuringoftrans-actionsorassetportfolioshaslittleornoeconomicsubstance,andtheirexpresspurposeistoreducetaxliabilities.

Forthepurposeoftaxavoidance,firmsusuallycreate oneormore subsidiaries, affiliates or shellcompaniesinoneorseveraltaxhavens.Thisallowstheirrealeconomicbeneficiariestorelocate,atleastonpaper,acertainproportionof theiractivities tolow-taxand/orsecrecyjurisdictionstominimizetheirtaxliabilities.Suchrelocationtechniquesoftenoffersecrecyofownership,nofilingrequirements,protec-tion from creditors, low incorporation costs, andothersubterfugesthatfacilitateshamoperations.18

Manytaxavoidanceschemesexistworldwide.evidencesuggeststhatindevelopingcountriestradeandtransfermispricingisthemainvehiclefortaxavoidance, evasion and tax-related capital flightthrough taxhavens (Palanetal.,2010).19Transferpricing refers to themechanismbywhich cross-border,intra-firmtransactionsarepriced.itisoftenusedintheglobaltransactionsofTNCsintheformoftransferofpropertyorservicesamongaffiliatesofthesameTNC.TheoeCDhasestimatedthataboutonethirdofworldtradetakesplacebetweensuch“relatedparties”(lanz andMiroudot, 2011).20However,iftheintra-companyprice does not reflect the truevalue,profitsmighteffectivelybeshiftedtolow-taxorno-taxjurisdictions,while losses anddeductionsareshiftedtohigh-taxjurisdictions.Thesepracticesclearlyresultinanoverallerosionofthetaxbaseand,ceteris paribus,inlowerrevenues.

it is generally accepted that pricing reflectsthe true value of transactions, including underArticle 9 of theUnitedNationsModelDoubleTaxation Convention between Developed andDevelopingCountries, when it occurs “at arm’slength” (UN-DeSA, 2011).This principle impliesthatthetransferpricecorrespondstothepricethatwouldbepaidinamarketwhereeachparticipantisactingindependentlyinitsowninterest.inpractice,

however, it is often difficult to assesswhetherthe reported price corresponds to an arm’s lengthvaluation.Many intra-firm transactions relate tospecializedgoodsnottradedinanymarket,ortofeesfortheuseofintangibleswhosevalueisinherentlydifficulttoestablish(e.g.royaltiesforbrands).Thismakessuchpricingsusceptible to taxabuses.Thepracticeofshiftingprofits for theminimizationofcustomsdutiesortaxesthroughthemanipulationoftransferpricesiscalledtransfermispricing.

onepurposeoftransferpricingregulationsistoclearlydeterminehowafirm’sprofitsaredistributedbetweentwojurisdictionsinordertoavoiddoubletaxation (i.e.when thecross-border activitiesof acompany operating in several countries could betaxed bymore than one tax authority).However,becauseoftheseparateentityprincipleintaxtrea-ties,whichrestrictsadoptionofaunitaryapproachtocorporategroupsandrequires theapplicationofthe so-called arm’s length principle, internationaltaxruleshaveprovidedaperverseincentivetotax“planning”oravoidancebyusingintermediaryenti-ties in secrecy jurisdictions.Hence, inpractice theproliferationofbilateraltaxtreatieshasoftenresultedinadoublenon-taxation.

Transfermispricingandotherpracticesaimedattaxavoidancecanbechallengedbytaxauthori-ties.Yettheprocesscanbedifficult,asthoseactionsresult from increased globalization in production

processes, international com-petition amongst countries toattractcapitalandtheaggressiveexploitation of grey areas intax laws.The latter isparticu-larlycommonamongTNCsthatoperate across several juris-dictions and hire specialized

professionalsandconsultantsspecificallytohandletaxplanning.Moreoversinceinternationalcoopera-tionacrosscountriesontaxmattersremainslimited,forexampleintheareaoftransparencyandexchangeof information, it is difficult for an individual taxadministration to control transfermispricing andother tax avoidance practices.This is particularlytrue in low-income countrieswhose governmentshavefewerresourcestofighttax-relatedcapitalflightandtaxbaseerosionthancorporationsthatplantheirtaxmattersaggressively.inaddition,theadministra-tionsintaxhavensdonothaveastronginterestincooperatingwiththeircounterpartsincountriesthat

International cooperation across countries on tax matters remains limited.

Fiscal Space for Stability and Development: Contemporary Challenges 175

mayhavelegitimateclaims,sincetheyobtainsomebenefitsfromthesituation.

Currentinternationalrulesprovideconsiderablescopefor“baseerosionandprofitshifting”(bePS).Thisreferstotaxplanningstrategies,whichenablecompanies to exploit gaps andmismatches in taxrulestomakeprofits“disappear”fortaxpurposes.They do this by shifting their profits away fromjurisdictionswhere the activities are taking placetojurisdictionswheretaxesarelow,sothattheypaylittleornooverall corporate tax (oeCD,2013aandb).

TheoveralleffectofbePSisatendencytoassociatemoreprofits with legal constructsand intangible rightsandobli-gations,andtolegallyshiftintra-grouprisk,whichreducestheshareofprofitsassociatedwithsubstan-tive operations (oeCD, 2013c).These tendenciesbecomemore pronouncedover time as economicactivities are increasingly based on informationtechnology and intangibles.The overall effect ofthese corporate taxplanning strategies is to erodethecorporatetaxbaseofmanycountriesinamannerthatisnotintendedbydomesticpolicy.ThisreflectsthefactthatbePStakesadvantageofacombinationoffeaturesof taxsystemswhichhavebeenput inplacebyhomeandhostcountries(oeCD,2013c).itimpliesthatwhileinternationalorbilateralcoop-eration to effectively combatbePSbehaviours ispreferable,countriescanalsoactindividuallytofightsomeofthesepractices.

3. Magnitude and impact of international tax abuses on mobilization of public revenue

The scale of iFFs, the amount of assets thatforeigners hold in tax havens and themagnitudeoftherelatedpublicrevenuelossesaredifficulttoestimate.by their verynature, these activities arecharacterizedbyalackoftransparency,andestimatesoftheamountofsuchassetsdonotalwaysconsiderexactlythesameitemsorusethesamemethodologiesand/orassumptions.Nevertheless,somerecentand

well-documentedstudiesofferahintofthemagni-tudesinvolved.

Regardingglobaloffshorefinancialwealth,ithasbeenestimatedthatitamountedto$5.9trillionin2008,suggestingthatapproximately8percentoftheglobalnetfinancialwealthofhouseholds(bankdeposits, equities, bonds and insurance contracts,netofdebts)washeldintaxhavens,threequartersofwhichwent unrecorded. Developing-country

residents hold around 30 percent of all offshorewealth, ofwhich one third is owned byresidentsofoil-exportingcoun-tries (Zucman, 2013). Theseareprobablyunderestimations;otherestimatessuggestarangeof$21−$32trillionin2010,withroughlyonethird(between$7.3

and$9.3trillion)originatingindevelopingcountries(Henry,2012).21However,noneofthesestudiestakesintoaccountnon-financialwealth(suchasrealestate,yachts,racehorsesandgoldbricks)thatcanalsobe“owned”byoffshoreshellstructures.Thisroughlycorrespondsto10−15percentofalltheestimatedglobalfinancialandnon-financialwealth.22

Thelossofpublicrevenueresultingfromassetholdingsintaxhavensmotivatedbytaxevasionisenormous.Henry(2012)estimatesthatiftheunre-ported$21−$32trillionhadearnedamodestrateofreturnofjust3percent,andiftheincomefromthereturnshadbeentaxedat30percent,thiswouldhavegeneratedincometaxrevenuesof$189−$288billionperyear.Fordevelopingcountries,asimilarcalcu-lationyieldsataxgapof$66−$84billionperyear,whichisabouttwothirdsoftotalofficialdevelop-mentassistance(oDA).Theseare,byconstruction,conservativeestimates,especiallybecausetheydonottakeintoaccountthelossoftaxrevenueontheincomegeneratedbythiscapitalbeforeitwastrans-ferredtotaxhavens.Moreover,thisfigurewouldbeconsiderablyhigherifadditionaltaxesonthiscapital,suchastaxesoninheritance,capitalgainsandwealth,weretobeincluded.

With respect to themagnitude of iFFs, esti-matesarealsoverylarge.Nominalcommercialillicitoutflows fromdeveloping countries amounted to$946.7billionin2011,up13.7percentfrom2010.Andtheyareestimatedtohaveamountedtoabout4per centofGDPover thepast decade (Kar and

There is wide agreement that the public revenue losses due to tax abuses are huge.

Trade and Development Report, 2014176

leblanc, 2013). inAfrica, for instance, conserva-tivelyestimatedcumulativeillicitfinancialoutflowstotalled$437billionovertheperiod2000−2008(KarandCartwright-Smith,2010).Similarly,boyceandNdikumana(2012)haveestimatedthatillicitfinancialoutflows fromagroupof 33 sub-SaharanAfricancountriesamountedto$814billion(inconstant2010dollars)from1970to2010.

estimatingtherevenuelossesassociatedwithiFFs,ChristianAid(2008)suggeststhatdevelopingcountries lose an annual $160billion in revenuesfromcorporation taxes due to transfermispricingandfalsifiedinvoicingininternational trade.eventhough these practices represent only a subset ofillegalactivitiesresultinginpublicrevenuelosses,theyamountedtomorethanone-and-a-halftimesthecombinedaidbudgetsoftheentiredevelopedworldin2007.FitzGerald(2012)looksatthegapbetweenthetaxrevenuethatcouldbelegallycollectedandtheactualrevenuethatresultsfromtaxmisconductassociatedwith undeclared expatriatedprofits andoverseas assets; estimates of public revenue lossfor developing countrieswere $200−$250 billionannually in themid-2000s.Thisfigure is likely tohaveincreasedinsubsequentyearsbecauseofgrowthintheworldeconomyandfurtherfinancialintegra-tion.AnearlierestimatebyCobham(2005)putstherevenuelossindevelopingcountriesat$385billionannually.This includes tax lossesdue todomestic“shadoweconomicactivity”,togetherwiththenon-paymentoftaxesonincomefromassetsheldinoFCsandfromprofitsearnedbythecorporatesectorthatwereshiftedtolowertaxjurisdictions.TJN(2011)usesestimatesfromSchneideretal.(2010)onthesizeoftheshadoweconomy(including,butnotlimitedto,oFCs).itfindsthattaxevasioncostscountriesaroundtheworldmore than$3.1 trillionannually.ofthistotal,Africaaccountsforabout$79billion,Asiafor$666billion,europefor$1.5trillion,NorthAmericafor$453billion,oceaniafor$46billionandSouthAmericafor$376billion.

Some of these estimates are criticized onmethodological grounds.23However,mostly, theirmagnitudeisinlinewiththatofnationaltaxauthori-tiesorotherofficialsources.24Notwithstandingtheinherent limitations of such assessments, there iswideagreementthatthepublicrevenuelossesduetotaxabusesarehuge.Thiscallsforimprovingtaxscrutiny,butalsoforpreventingtax-relatedcapitalflightorcomplex taxschemes through taxhavens

andshellcompanieswhosesolefunctionistoreducetaxliabilitieswithoutcreatinganyeconomicvalue.

4. Recent attempts to tackle international tax leakages

Thefalloutfromtheglobalfinancialcrisisof2008-2009crisispromptedintensifiedefforts,atbothnationalandinternationallevels,totargettaxabuseandthesecrecyjurisdictionsthatfacilitatetheseprac-tices.Taxleakageshavealwaysbeenaseriousissuefordevelopingcountries,but inacontextoffiscalausterityandspendingcutsindevelopedeconomies,thishasalsobecomeincreasinglyrecognizedbytheirgovernmentsandpublicopinionasanissuethatneedstobetackled.Someofthemainrecentdevelopmentswithcross-bordereffectsareoutlinedbelow.

(a) Global Forum on Transparency and Exchange of Information for Tax Purposes

TheGlobalForumhasbeenthemainmultilat-eralframeworkwithinwhichworkontransparencyandexchangeof informationfor taxpurposesandother related domains has been carried out since2000.25TheoeCD,which initiated this process,lateropenedthisplatformtonon-oeCDcountries.inSeptember2009,itwasrestructuredinresponsetoacallbytheG20tostrengthenexchangeofinfor-mationsoastoprotectthetaxbasesofgovernmentsfrom non-compliancewith their tax laws.26Theworkof theForum involves threemain initiativesasdescribedbelow.

(i) Country classification and peer review process

TheGlobalForumhasstartedtoreportonindi-vidualcountries,basedoninternationallyagreedtaxstandards.Accordingtoitsclassification,countriesaredividedintothreegroups:jurisdictionsthathavesubstantiallyimplementedtheinternationallyagreedtaxstandard(alsoreferredasthe“whitelist”);juris-dictionsthathavecommittedtotheinternationallyagreedtaxstandard,buthavenotyetsubstantiallyimplemented it (“grey list”);and jurisdictions thathave not committed to the internationally agreed

Fiscal Space for Stability and Development: Contemporary Challenges 177

taxstandard(“blacklist”).inApril2009,thethirdcategorywasnothingbutanemptyshell,andsincethenmostofthejurisdictionshavemovedfromthesecondtothefirstcategory.Thiswasnotdifficult:inordertoberemovedfromtheblacklist,itwassuffi-cienttoprovidetheoeCDwiththesolemnassurancethatitintendedtoabidebyinternationalagreementsinthefuture.Acceptanceintothewhitelistrequiresajurisdictiontohavesignedonly12ormoreagree-mentsthatmeetthestandard.Thus,severalgreylistjurisdictionssignedbilateraltaxagreementsamongthemselvestoreachthisthreshold.Thus,theapparentdisappearanceoftaxhavens(accordingtothisnewoeCDstandard)was,aboveall,theresultofskilfuldiplomacy.Accordingtosomecritics“eventhemostnotoriousoffshorefinancialcentreshavemanagedto quickly purge themselves of all suspicions ofaidingandabettingtaxevaders.”27JohannesenandZucman (2014) show that thesenew treatieshaveaffectedonlyasmallproportionofoffshoredeposits,mainlythroughtheirrelocationbetweentaxhavens,buthavenotresultedinsignificantrepatriationsoffunds.The least compliant havens appear to haveattracteddepositswhilethemostcomplianthavelostsome,leavingroughlyunchangedthetotalamountofoffshore-managedwealth.Meanwhile,theGlobalForum’speerreviewprocessstartedin2010,andinNovember2013 it adopted ratingson the levelofcompliancewiththeinternationallyagreedstandardforexchangeofinformation.However,ithasbeencriticizedforitsbiastowardsstandardsthatalignwiththeinterestsofoeCDmemberStatesandforgivingnotorioustaxhavensafullseatatthetablefromtheverybeginning,whichmayexplainwhytheagreedstandardsareweak(Meinzer,2012).

(ii) Declaration on Automatic Exchange of Information in Tax Matters

At theirmeeting in theRussian Federationin September 2013, theG20 leaders issued theDeclarationonAutomaticexchangeofinformationinTaxMatters(Aeoi).ThiswasendorsedinMay2014byall34oeCDmembercountries,aswellasbyArgentina,brazil,China,Colombia,CostaRica,india,indonesia,latvia,lithuania,Malaysia,SaudiArabia,SingaporeandSouthAfrica.Through thisDeclaration, these countries have thus committedto implementing a new single global standard onAeoi.28ThestandardmostlyincorporateselementsofbotheUinitiativesandtheUnitedStatesForeignAccountTaxComplianceAct(FATCA).Theseserved

tocatalysemovestowardstheautomaticexchangeofinformationinamultilateralcontext.

However, thelackofinclusionofdevelopingcountriesinthedesignphaseofthenewsystemandthe premature inclusion of countries known to betax havens riskweakening the new system.29Thepoorer countries that are not yet in a position toprovidereciprocalinformationwillgainlittlefromit,whilesomedevelopedcountrieshavesuggestedthatdevelopingcountriesbeexcludedbecausetheycannotbetrustedtokeepinformationontheirowntaxpayers confidential.30one solution could be toestablish a fixed transition period of some yearsduringwhichdevelopingandtransitioneconomiescouldreceivedatawithout reciprocity.Thiswouldallowthemtoascertainthevalueofthedata,adapttheirownsystemstomakegooduseofit,andinvestinthecapacitytoreciprocate(Cobham,2014).

(iii) Initiatives on base erosion and profit shifting

in July 2013, at the request ofG20FinanceMinisters, theoeCD launched anActionPlan on baseerosionandProfitShifting(bePS)todrawupnewglobaltaxrulestocounterbePS.Thiscontains15actionstoaddressarangeofissuesrelatingtotaxtransparency,accountability,informationexchangeandotherpotentialchangestointernationaltaxation.Theactionplanalsoinsistsontheneedforinterna-tionalagreementandcooperationsothatcountrieswillnothavetoactunilaterally.Therearesixkeyareaswherethereisurgentneedforaction(oeCD,2013c):

• internationalmismatchesinentityandinstru-ment characterization,which includeshybridmismatcharrangementsandarbitrage;

• Applicationoftreatyconceptstoprofitsderivedfromthedeliveryofdigitalgoodsandservices;

• Taxtreatmentofrelatedpartydebt-financing,captiveinsuranceandotherinter-groupfinancialtransactions;

• Transfer pricing, in particular in relation tothe shiftingof risks and intangibles, the arti-ficialsplittingofownershipofassetsbetweenlegalentitieswithinagroup,andtransactionsbetween such entities thatwould rarely takeplacebetweenindependents;

Trade and Development Report, 2014178

• Theeffectivenessofanti-avoidancemeasures,inparticularthegeneralanti-abuserule,controlledforeign company regimes, thin capitalizationrulesandrulestopreventabuseoftaxtreaties;and

• Theexistenceofharmfulpreferentialregimes.

Anothertopicthatappearsthroughouttheactionplanconcernstax-relateddisclosuresbycompaniestothetaxauthoritiesonacountry-by-countrybasis.Usingacommontemplate,TNCswillberequiredto provide all relevant authoritieswith necessaryinformation on their global allocation of income,economicactivityandtaxespaid.Althoughamajorityofbusinessleadersnowsupportcountry-by-countryreporting(CbCR),thepublicationofthisdataisbeingfiercelyopposedbysomebusiness representativesandsomenationalgovernments.31

(b) Other G20 and related initiatives

inadditiontotheinitiativesdiscussedaboveinthecontextoftheGlobalForum,inNovember2008G20leadersdeclaredtheirintentiontopromoteinfor-mationsharingwithrespecttoallkindsofabusesandfraudulentactivities (G20,2008).At theirlondonSummit,inApril2009,theyannouncedthattheeraofbanksecrecywasover.Theycalledonalljurisdic-tions“toadheretotheinternationalstandardsintheprudential,tax,andAMl/CFT[anti-moneylaunder-ing/combatingthefinancingofterrorism]areas”,withtheaimofprotectingtheirpublicfinancesandcurbingtaxabuses.Sincethen,severalinitiativesthatcouldhelp tackle taxabuseshavebeen launchedbydif-ferentactors,overandabovethoseoftheoeCD.inparticular,theFinancialStabilityboardhasworkedontheestablishmentofagloballegalentityidentifiersystemthatwillattributeareferencecodeinorderto uniquely identify a legally distinct entity thatengagesinafinancialtransaction.Thiswouldhelptrackfinancialflows,eveninsecrecyjurisdictions.

(c) United Nations Committee of Experts on International Cooperation in Tax Matters

TheworkoftheUnitedNationsCommitteeofexpertsoninternationalCooperationinTaxMatters(a subsidiary body of the economic and SocialCouncil)offersauseful frameworkforaddressing

internationaltaxchallenges.inparticular,itaimsatenhancing technical capacity in developing coun-tries to handle complexmatters in taxation.TheCommitteehasrecentlyprovidedtwomaincontri-butionstoinfluenceinternationaltaxpractices.oneis the 2011 revisionof theUnited Nations Model Double Taxation Convention between Developed and Developing Countries(UN-DeSA,2011).Thisaddresses possible abuseswith respect to capitalgains, the importance of exchangeof informationandassistanceinthecollectionoftaxes.TheotheristheUnited Nations Practical Manual on Transfer Pricing for Developing Countries (UnitedNations,2013a).Thisofferspracticalguidancetopolicymak-ersandadministratorsontheapplicationofthearm’slengthstandardamongbothdevelopinganddevel-opedcountries.RegardingtheoeCDandG20bePSproject,inoctober2013theCommitteeestablishedaspecificsubcommitteeformonitoringdevelopmentsonbePS-related issues and communicatingwithofficialsindevelopingcountries.

(d) Other regional, bilateral and national initiatives with spillover effects

Regionalcooperationbetween taxauthoritiesviaregionalplatforms,suchastheinter-AmericanCentre ofTaxAdministrations and theAfricanTaxAdministration Forum (ATAF), has helpedstrengthenmutualassistanceandcapacity-building.inparticular,therecentlycreatedATAFhasworkedtowardsincreasingthelevelofvoluntarytaxcompli-ancewhilstcombating taxevasionandavoidance.Comparedwith these regional initiatives, regionalcooperation amongAsia-Pacific tax authorities inestablishingframeworksandpracticeshasbeenmod-est,sofar(Araki,2014).

inparalleltotheprogressmadeintheGlobalForum onAeoi, numerous bilateral tax treaties(bTTs) and tax information exchange agreements(TieAs)havebeensignedrecently.However,manydeveloping countries do not benefit from them.indeed,only8percentofbTTs,and5percentofTieAs,32havebeensignedwithlDCssince2008.Furthermore,someoeCDtaxhavenshaveusedthenegotiationswithdevelopingcountriesforinclusionofinformationexchangeclausesasaleveragetopushforsignificantconcessionsfromthepartnerstotheagreements.33

Fiscal Space for Stability and Development: Contemporary Challenges 179

intheUnited States,inthecontextofthepost-crisis scandals related to foreignbanks aiding taxevasion, FATCAhas sought to recoup federal taxrevenuesbymakingitmoredifficultfortaxpayerstoconcealassetsheldinoffshoreaccountsandshellcorporations.inparticular,FATCArequiresallUnitedStates nationals, including those living abroad, toreporttheirfinancialaccountsheldoutsidethecountry.italsorequiresforeignfinancialinstitutionstoreportontheirUnitedStatesclientstotheinternalRevenueService.However,thismeasurewillonlyaffectinter-est ondirectlyheld, non-business bankdeposits ofindividuals.Wealthyindividualswhousecorporationsandlimitedliabilitycompanies(llCs)registeredinDelaware,forinstance,wouldnotbeaffected.34

inDecember2012,theeuropeanCommissionpresentedanactionplanformoreeffectivelydealingwithtaxevasionandavoidanceintheEU.Theactionplan specifies a comprehensive set ofmeasures,to helpmemberStates protect their taxbases andrecapturebillionsofeuroslegitimatelyduetothem.Theplanhighlightstheneedtopromoteautomaticinformationexchangeasaninternationalstandard,andtoend“doublenon-taxation”bycompaniesandindividuals.Thisincludes,forinstance,theRevisedSavingsTaxationDirectiveadoptedinMarch2014.eU governments are expected to implement theamended rules and adopt aneU-wide anti-abuselaw−asafeguardagainstabusivetaxpractices−bytheendof2014.

intheUnited KingdominNovember2012,theHouseofCommonsPublicAccountsCommitteeheld

hearingsonthebehaviourofthreetopUnitedStatesTNCsthathaveusedcross-borderroyaltypayments,transferpricingandsitingofregionalheadquarterstolowertheircorporationtaxpayments.MembersofparliamentaccusedtheseTNCsofmanipulatingtheir accounts tominimize the corporate tax theypaidintheUnitedKingdom,despitetheirsignificantcommercialpresenceinthatcountry.Theconsequentpublicoutcryledoneofthecompaniestoannouncevoluntarypaymentsof£20milliontoHMRevenueandCustomswithin two years.Thiswas after itemerged that thecompanyhadpaid just£8.6mil-lionincorporationtaxesin14yearsoftradingintheUnitedKingdomandnonebetween2009and2011.35

Asaunilateralattempttofighttrademispric-ingincommodities,Brazil introducedasimplifiedcomparable uncontrolled pricemethod in 2012(ernst&Young,2013;PereiraValadão,2013).Thisaimstoprovideareferencepriceforcommoditiesthatbrazilianexportersandimportersshouldusetoavoidtrademispricingintheirvaluationofinterna-tionaltrade.inparticular,thelaw(no.12715/2012)authorizesthebraziliantaxauthoritiestodeterminewhat should be considered as commodities, andwhichcommodity exchange shouldbe recognizedforapplyingthenewlyintroducedmethods.Thelawallowsforpriceadjustmentssuchasmarketpremiumand transportations costs, and,where there are nointernationallyrecognizedspotorfuturesquotations,thepriceofimportedandexportedgoodscouldbecomparedwiththepricesobtainedfromindependentdatasourcesprovidedbyinternationallyrecognizedresearchinstitutions.

Trade and Development Report, 2014180

1. Fiscal regimes and tax incentives in the extractive industries

(a) Tax incentives: Risk of a race to the bottom

The generation of public revenues from theextractive industries and their use for financingdevelopment are central to the strategies ofmanydeveloping countries. in resource-rich countries,theseindustrieshavebeenthemainsourceofforeigncurrencyandfiscalrevenues.Withtheriseofcom-moditypricesoverthepastdecade,themagnitudeof natural-resource rents and, consequently, theirpotentialforsupportinginvestmentandgrowthhaveincreasedsignificantly.Thishasledtorenewedinter-estintheissueofdistributionofthoserentsamongtheownersoftheresourcesandthecompaniesthatareassignedexploitationrights.36

Asextractiveindustriesaretypicallylargescaleandhighlycapitalintensive,firmsthatinvestinthissectortendtobeverylarge.Theynormallypossessthe necessaryfinancial resources and exploitationtechnology thatmost governments in developingcountrieslack.TheyaregenerallyprivateTNCs,most-lybasedindevelopedcountries,thoughanincreasingnumberofState-ownedenterprises, including fromdevelopingcountries,arealsooperatinginthissector.investorshavetonegotiatethetermsoftheirinvest-mentandsubsequentoperationswiththegovernmentsofthecountriesowningthenaturalresources,whichhavesovereigntyovertheseresources.37

extractive industries present some specialfeaturesthatinfluenceeachparty’spositioninsuchnegotiations.Since thenatural resourcesexploitedbytheseindustriesarenon-renewable,asasource

of revenue theywillbeexhausted sooneror later.Hence,fromthepointofviewofproducingcountries,capturingasignificantproportionoftherentsgener-atedfromtheirexploitationiscrucialforfinancingdiversificationofthedomesticeconomytoenableittogeneratenewsourcesofincome,foreignexchangeearnings andpublic revenues. in this context, the“fiscal linkage” is of particular importance sinceotherlinkagesoftheextractiveindustrieswiththedomestic economy (e.g. employment anddemandfordomesticallyproducedinputs)tendtobeweak,exceptduringtheinitialperiodwhentheproductionfacilitiesandassociatedinfrastructurearebeingbuilt.Moreover,sincemostofthefirmsinthesectorareTNCs,alargeshareoftheirrevenuesislikelytoberepatriatedratherthanreinvestedinthecountrywherethenaturalresourcesarebeingexploited.

FromthepointofviewoftheTNCs,activitiesinthiscapital-intensivesectortypicallyinvolvehighsunkcosts,investmentshavealonggestationperiod,andthepricesfortheirproductsarevolatile.Thustheprofitabilityoftheirinvestmentisextremelyuncer-tain.Moreover,onceaninvestmenthastakenplace,itcannotbemovedtoanotherlocation.Thisiswhytheytrytoobtainspecialfiscaltreatmentandfavourastabletaxregime.

Therefore, governments need to establish afiscal framework for the extractive industries thatrespondstotwomajor–andpotentiallyconflicting– objectives: first, thefiscal conditions should beappropriatetoattractinvestment;andsecond,theyshould ensure that theState receives an appropri-ateshareoftherentsforfinancingitsdevelopmentgoals.ReconciliationofthesetwoobjectivesresultsessentiallyfromtherespectivebargainingpowerofgovernmentsandTNCs.Suchbargainingpowerhaschangedsignificantly– indifferentdirections– in

D. improving public revenue mobilization from the extractive industries

Fiscal Space for Stability and Development: Contemporary Challenges 181

the past few decades, based on developments incommoditymarkets.

Withthecommoditypricehikesofthe1970sandtheperceivedriskofsupplyshortages,thebar-gaining power shifted in favour of the producingcountrieswhichownedthescarceresources.Thisledtoawaveofnationalizationsoftheoilandminingsec-torsinmanydevelopingcountries.However,follow-ingthedebtcrisisofthe1980s,andwithcommoditypricesdeclininginthe1990s,thebalanceofpowerchangedagaininfavourofTNCs.Thesefirmsownedthetechnologiesandthefinancial resources thatmanydevelopingproducingcountrieslacked for profitably exploit-ing their resourcesata timeoflowprices.Underthesecircum-stances, governments inmanydeveloping countries soughtto attractFDi to the extractive industries either byprivatizationoftheirState-ownedenterprises,espe-ciallythoseontheminingsector,orbyopeningthesectortoforeigncompanieswhilemaintainingsomeStateparticipation.inbothcases,theyusedavarietyoftaxincentivesforTNCs,manyofwhicharestillappliedtoday.

Theseincentivescantaketheformofreducedtax rates (royalties or corporate tax rates) or taxholidays,accelerateddepreciationperiods,orcapitalcostallowancesthatallowthemtorecovercapitalcosts during thefirst years of production or carryforward losses. Similarly, firmsmayhave the pos-sibilitytoconsolidaterevenuesandlossesofdifferentinvestmentprojectsifthegovernmentdoesnotimposea ring-fencing regulation.other incentives includelowercorporatetaxesforreinvestedearnings,tax-freeremittanceofprofitstohomecountriesandexemptionsonfuelandimportduties.inaddition,TNCsmaybeexemptedfromcapitalgainstaxes.Thisparticulartaxincentiveissettobecomeincreasinglyrelevantinanevolvingenvironmentwheresmallandhigh-risk-tak-ingjuniorcompaniesengagedinexplorationactivitiestendtoselltheirrightstolargercompaniesthatextracttheresources.Therecanalsobestabilizationclausesthatfixfiscalconditionsforlongperiodsoftime,orevenfortheentirelifeofanextractiveindustryproject.

it is important to recognize that the grantingof tax privileges in one country tends to have an

impactonothercountries.Foreigncompaniestaketheirinvestmentdecisionsinaninternationalcontext,comparing the profitability of similar investmentsindifferentlocations.Thus,aneighbouringcountryoracountryinanotherregionthatisendowedwiththesameorsimilarnaturalresourcesmayfeel thepressure to offer similar or evenbetter incentivestocompeteasadestinationforFDi.Thisnotonlyunderminestheeffectivenessoffiscalincentives,butalsorunstheriskofleadingtoaracetothebottom,

whereallcountriesreducetheirtaxes to harmfully low levels,withnowinnersbuttheforeignprivatefirms,mostnotablytheTNCs.

Privatizationand liberali-zation offiscal regimes in theextractiveindustriestookplaceinmany countries under theauspicesofthebrettonWoods

institutions in the contextof structural adjustmentprogrammes.initsStrategyforAfricanMiningin1992,theWorldbankpresenteditsprivate-FDi-ledapproachtotheminingsectorinAfricancountries.38Similarly,in1996theWorldbankformulatedamin-ingstrategyforlatinAmericaand theCaribbean,althoughtheprinciplesunderlyingthisstrategyhadbeenappliedlongbefore.Theideawasthat,thankstoincreasingFDi,governmentrevenueswouldauto-maticallyaccruefromtherisingproduction.

by the turn of the century, themining sec-tor indevelopingcountrieswas largelydominatedbyTNCs,mostly fromdeveloped countries, thatengagedinlarge-scaleproduction.39bycontrast,intheoilandgassector,State-ownedenterpriseshavecontinuedtoplayaprominentrole.Thisisprobablybecausetheymanagedtoremainprofitableevenwhenoilandgaspriceswerelow,andbecausethetechnol-ogyrequirementsforexploitingexistingfieldswerelowerthanthoseintheminingsector.

Taxincentiveshavebeenwidelyquestionedonthegroundsthattheircostsintermsofforegonepub-licrevenuesmayoftenoutweighthebenefitsforthedomesticeconomy.inparticular,followingtherecov-eryofcommoditypricessince2003,itisincreasinglyrecognizedthatthepublicrevenuegainsoftenhavenotbeencommensuratewiththeincreasingprofit-ability of activities in this sector.40Civil societyorganizations have been playing a prominent role

The “fiscal linkage” is of particular importance since other linkages of the extractive industries with the domestic economy tend to be weak.

Trade and Development Report, 2014182

inraisingawarenessaboutwhatisseenbymanyasunfairfiscalregimesinmanydevelopingcountries.41TheWorldbank(2010:9)hasalsoacknowledgedthat “Miningfiscal regimes developed in the past(oftenunderbankguidance)werenotadequatetocapturemuchofthelargeincreaseinrentsgeneratedbythesepriceincreases”.Forexample,astudyoffourcountries ineastAfrica (Kenya,Rwanda,UgandaandtheUnitedRepublicofTanzania)byTaxJusticeNetwork-AfricaandActionAidinternational(2012)showsthattaxincentivesareresultinginlargelossesofgovernmentrevenueofupto$2.8billionannual-ly,deprivingthosecountriesofcriticalresourcesfordevelopment andpoverty reduction.The iMFhasalsoemphasizedtheneedfordevelopingcountriesthatarebecomingnewproducersofnaturalresourcestopaygreaterattentiontothedesignoftheirfiscalregimeinordertotapintothispotentialsourceofrevenue(iMF,2012).

Severalinternationalinstitutionsandcivilsoci-etyorganizationshavewarnedaboutthelackofeco-nomiceffectivenessoftaxincentivestoattractFDi(iMFetal.,2011;TaxJusticeNetwork-AfricaandActionAidinternational,2012).Similarly,theUnitedNations(2010:2)concludesthat“investmentincentivesaregen-erallyunnecessaryforthemin-ing sector becausemining ac-tivities are locationbased andgovernmentsshouldcollecttherentsfromsuchresources”.Thisisequallyapplicabletooilandgasextraction.

indeed, there are indica-tions that, inmany cases, taxprivilegesforforeigncompaniesintheextractiveindustrieshavefarexceededreason-able limits, and that suchprivilegesmayoftenbeunnecessary.Forinstance,theAfricanDevelopmentbank(AfDb)etal.(2010:109)recognizethat“mostnaturalresourcescanbetaxed,withintheboundsofreason,withoutscaringawayinvestors”.Moreover,varioussurveysamonginvestorshaveconfirmedthattaxmotivationsranklowamongthefactorsinfluenc-ingadecisiononwheretoinvest;inotherwords,inmanycasesinvestmentwouldmostlikelytakeplaceanyway,evenwithlowerornospecialtaxincentives(KeenandMansour,2009;ValeColumbiaCenteronSustainableinvestment,2013).

Since the early 2000s investment in naturalresourceexploitation,particularlyFDi,hassurged(UNCTAD, 2007),42 particularly inAfrica, latinAmerica,WestAsia and the transitioneconomies.However, there is no clear evidence that thiswasdue to tax incentives (Worldbank, 2012a: 132).Rather,itismorelikelytohavebeenmotivatedbythe expectationof newprofit opportunities result-ingfromincreasingdemandfromemergingmarketeconomies,particularlyChina,andthecommoditypriceboomsince2003.buttherehavebeengrowingconcerns thatneither thehighercommoditypricesnortheincreaseinFDihavesignificantlyimproveddevelopmentprospectsinmanyproducingcountries.

TNCs in the extractive industries saw theirprofits soar during the price boom:between2002and 2012 revenues of theworld’s largestminingcompanies increasedfivefoldandnetprofitsmorethan tenfold (Stevens et al., 2013).Meanwhile,governmentrevenuesfromnaturalresourceslaggedfar behind.Many commodity-dependent countriesfailedtoachievemarkedimprovementsintermsofincome distribution, poverty reduction or humandevelopment.43bythesecondhalfofthe2000s,ithad

becomeevidentthattheincen-tives to attract FDi had beenoverly generous, especially inthecontextofthechangedcom-moditymarkets environment.Therefore, it was considerednecessary to revise taxationpoliciesrelatedtotheextractiveindustries in order to protectthe interests of the host coun-tries.As in the 1970s, strongdemandandhigherpricesagainincreasedthebargainingpower

ofproducingcountries,whichprovidedadditionalpoliticalimpetusforsuchrevisions.

Hostgovernmentshavealsoseentheirbargain-ingpositionstrengthenedbytheemergenceofnewmajor players in the extractive industries.WhileTNCsfromdevelopedcountriescontinuetodomi-natethesceneincommodity-producingdevelopingcountries,FDifromemergingcountriesisgrowingveryrapidly.Thisgivesproducingcountriesagreaterchoiceofinvestors.Therefore,contractswiththesetraditionalTNCsmaybenegotiatedmorefavourablyforthehostcountry.

Tax incentives have been widely questioned on the grounds that their costs in terms of foregone public revenues may often outweigh the benefits for the domestic economy.

Fiscal Space for Stability and Development: Contemporary Challenges 183

(b) Forms of State participation in the extractive industries

TherearedifferentwaysfortheStatetocaptureashareoftherentsoftheextractiveindustries.Theserangefromroyaltiesandvariousformsoftaxation,tocontractualarrangementssuchasproduction-sharingandservicescontracts, aswell as full par-ticipation in production, eitherthrough public ownership orthroughjointventuresbetweenState-owned enterprises andprivatefirms.Methodsof rais-ingpublicrevenuecanbebasedon production or on profits.Production-basedmethods,intheformofperunitor“advalorem”royalties,aremoreadvantageousforthegovernmentasitreceivesthemfromthemomenttheprojectbeginsoperation,evenifthecompaniesdonotregisterprofitsintheiraccounts.Forthisreason,governmentstendtopreferthem.Theyarealsorela-tivelyeasytoadminister,anadvantagewhichisofparticularimportanceindevelopingcountrieswheretaxadministrationsoftenfinditdifficulttocorrectlyassesstaxablerevenues.Privatecompanies,ontheotherhand,prefertaxationbasedonprofits,mainlythroughcorporate incometaxes,as theystartpay-ingtaxesonlywhentheyrecordprofits.Specialtax-ationintheextractiveindustriesbasedonprofitsmayalsoincluderesourcerenttaxesandtaxesonwind-fallprofits,althoughthesearelesscommon.Anotheradvantageofprofit-basedtaxesforTNCs,butamajordisadvantageforproducingcountries,isthatprofitsaremoredifficulttomonitorwhichmakesiteasierforcompanies toadopt taxevasionandavoidancetechniques(seesectionC).

Governmentscanalsoim-poseexporttaxesontheextrac-tiveindustries,asanotherformof production-based taxation.Theymayoffer the advantageofbeingeasiertocollect,whilealsohelpingtocontrolthevol-umes, prices and qualities ofthecommodityexportedatthecustomspoint. For instance, acompanymaytrytoavoidtaxationbyunderestimat-ingthegradeofthemineraloresorofpossibleby-productscontainedintheexportedconcentrate,andthiscouldbecontrolledbythecustomsauthorities

inproducingcountries.44Such taxescouldalsobeusedasaninstrumentofindustrialpolicyifthetaxrateislowerforprocessedproductsthanfortherawmaterials.Anotherwaytoincreasepublicrevenuesin producing countries is by taxing capital gainsin the extractive industries,which are increasing

in importance, asmentionedabove.Additionally, environ-mentaltaxescanbeappliedtointernalizetheexternalcostsofextractiveactivity.

overall,thereisnouniver-salrecipeforanoptimaltaxationregimeforthissector.inprac-tice, governments tend to use

a combination of instruments.Thefinal outcomedependslargelyonthespecificgeological,economic,institutional and political circumstances of eachcountry.Asaresult,thereisnoabsolutebenchmarkorreferencepointbasedonwhichparticularfiscalregimefortheextractiveindustriescouldbejudgedas “fair” or “unfair”. inpractice, awide rangeoftaxationlevelsareappliedindifferentcountries.45

Producingcountriesshouldnotonlybeabletonegotiateataxationsystemthateffectivelyexpandstheirfiscalspace;theymustalsobeabletoenforceit, avoidingmassive losses due to aggressive taxplanning and accounting practices ofTNCs, suchas transfermispricingandthincapitalization.Thisisparticularlyimportant,sincethenaturalresourcessectorisusuallythemainsourceofillicitfinancialflows in resource-rich countries (AfDb andGFi,2013).

Transfermispricing practices appear to bequitecommonintheextractiveindustries.TNCscan

manipulate profit reporting byinflatingcostsandundervaluingpricesintheirintra-firmopera-tions.inthiswaytheycanshiftprofitsfromthetaxjurisdictionof the natural-resource-pro-ducing country to a lower taxjurisdiction.46Tax losses fromthese kinds of practicesmaybe huge.TheUnitedNations

economicCommissionforAfrica(UNeCA,2013)hasfoundthatillicitfinancialflowsfromAfricaintheformoftrademispricingarehighlyconcentratedinafewsectors,notablyintheextractiveindustries.

Producing countries should not only be able to negotiate a taxation system that effectively expands their fiscal space…

… they must also be able to enforce it, avoiding massive losses due to aggressive tax planning and accounting practices of TNCs.

Trade and Development Report, 2014184

During theperiod2000−2009,more thanhalf (56percent)ofthoseflowsfromAfricawerefromoil,preciousmetalsandminerals,ores, ironandsteel,andcopper.AndareportoftheAfricaProgressPanel(APP)titled“equityinextractives”preparedunderthe leadership of formerSecretary-General of theUnitedNations,KofiAnnan,emphasizedthatAfricaloses$38billionannuallydue to trademispricing(APP,2013).

TheabuseoftransferpricingisfacilitatedbythewayinwhichTNCsdesigntheircorporatestructures.inanattempttounravelthelabyrinthinecorporatestructurescreatedbythebiggestcompaniesinthissector,PWYP(2011)foundthatthe10mostpowerfulcorporationsintheextractiveindustriesowned6,038separatecompanies.Similarly,aninvestigationintoextractiveindustriesprojectsfinancedbytheWorldbank’s international FinancialCorporation (iFC)found that 57per cent of the companies analysedchannel their investments in developing countriesthroughintermediateholdingcompanieslocatedintaxhavens(DanWatch,2011).itmaybedifficulttoexplainwhyTNCsintheextractiveindustrieshavetheirheadquartersorsubsidiariesinlow-taxjurisdic-tionsifnottoavoidpayingtaxesintheproducingcountries.47

Another damaging practice for producingcountries,similartotransferpricing,isthatofthincapitalization.According to theUnitedNations(2013a)Practical Manual on Transfer Pricing, acompanyissaidtobe“thinlycapitalized”whenithasahighproportionofdebtinrelationtoitsequitycapital.excessivedebtfundingofasubsidiarycom-panyinaproducingcountryisadisguisedwayoftransferringprofitstoheadquarters.Thiscanleadtoanunacceptableerosionoftherevenuebaseoftheproducingcountry,suchaswhentheinterestspaidareinflatedsoastoshowhighercosts,andconsequently,lowerprofits.48

inadditiontoensuringappropriatefiscalregimesand negotiation of contracts aswell as adequatecollection of taxes in the extractive industries, afinalimportantaspectinthetaxationchainisthatofjurisdiction for thesettlementofdisputesbetweenforeigninvestorsandthegovernment.inprinciple,according to the voluntaryOECD Guidelines for Multinational Enterprises,foreigninvestorsshouldabide by national laws.However, under bilateralinvestment agreements, investors can submit tax

disputestointernationalarbitration.49TNCscanalsofile cases at international arbitration centreswhengovernmentsreviewtheir taxregimesorrenegoti-atecontractsonthegroundofbreachesofstabilityclauses(onthisissue,seealsochapterVi).

2. Distribution of rents in the extractive industries

AnempiricalassessmentofthesizeofaState’sparticipationintherentsfromitsnaturalresourcesremainsadifficult task.Natural resourcerentsaredefinedasthedifferencebetweenthesalesvalueandthecostofproductionofthecommodityconcerned.Costsofproductionnormallyrefernotonlytooperat-ingcostsbutalsotoamortizationanddepreciation,aswellasothercostssuchasinterestsfromloans;andinthemostcomprehensivedefinition,normalprofitsarealsoconsideredacomponentofproductioncosts.Calculationofthevalueofproductionisstraightfor-ward,becausedataonproductionbycountryandoninternationalcommoditypricesarereadilyavailable.However,thereisverylittleinformationonthecostofproduction.Anadditionalcomplicationistheavail-abilityofspecificdataongovernmentrevenuesfromnaturalresources,sincefewcountriesreportthemasaseparateitem.50

With these considerations, this subsectionupdatespreviousUNCTADworkinthisarea(TDR 2005, chap.iii,sectionFandannex;andTDR 2010, chap.V,sectionD.5) inorder to throwmore lightontherecentevolutionoftheshareofgovernmentrevenues in therentsof theextractiveindustries.51The results,byproductandcountry,areshown intable 7.1. itwas possible to perform calculationsmainlyforcountrieswhereaparticularmineraloroilaccountsforamajorproportionoftheirnaturalresources production.For example, in the case ofgold,thecostofproductioninAfricancountriescouldbecalculatedbyreferringtotheaverageproductioncosts reportedbymajorTNCs thatprovided thesedataintheirannualreports.Asgovernmentsdonotreporttheirnaturalresourcerevenuesdisaggregatedbyproduct,thedataonrevenuescoverthosefromgold andothermetals.Gold revenues account formost of government revenues from the extractiveindustriesinthesecountries,andeventhoughtheyleadtoanoverestimationofgovernment’ssharein

Fiscal Space for Stability and Development: Contemporary Challenges 185

therents,thedataareconsideredtobevalidasanapproximationforthisexercise.52

Theseestimationsshowthatthereiswidevari-ationinthesizeofgovernments’sharesoftherents,asexpected.ThemainreasonforthedifferencesisthedegreeofownershipofthenaturalresourcebytheState.inthosecountrieswheretheStateparticipatesinproductionthroughState-ownedcompanies,suchasSonangol inAngola,PDVSA in thebolivarianRepublicofVenezuela,Petroecuadorinecuadorforoil,andCoDelCoinChileforcopper,thegovern-ments’sharesoftherentsarerelativelyhigh.53

by contrast, in those countries and activitieswhereprivatecompaniesaretheonlyordominantactors,theshareofgovernmentrevenuesintherentsismuchlower.Thisismainlythecaseforcountriesproducingminerals,suchasZambia,wheretheStatecapturedanextremelylowshareoftherentsfromcopperuptotheendofthelastdecade.Thiscouldbe

attributedlargelytothegeneroustermsoftheagree-ments thatwere reachedbetween theGovernmentandTNCs.Forexample,eventhoughtheroyaltyratewas3percentinthegeneralminingregime,inrealityTNCspaidonly0.6percentasaresultofspecificdevelopmentagreements.inthecaseofGhana,wheretherangeforroyaltieshadbeengenerallyestablishedatbetween3and6percent,mostcompaniespaidatthelowerleveloftheband.TheshareoftheStateinrentsfromgoldproductionintheUnitedRepublicofTanzaniahasalsobeenvery low.Similarly, theshareoftheStateintherentsfromminingproductioninPeru,whichiscontrolledbytheprivatesector,isrelativelylow.

inlatinAmerica, thecomparisonof thedis-tributionofcopperrentsinChileandPeruprovidesinteresting insights. in both these countries,whenonlyprivatefirmsaretakenintoconsideration,thegovernment appropriates about one third of therents.WhenconsideringtheState-ownedenterprise,

Table 7.1

ShARE OF GOVERNMENT REVENUES IN RENTS FROM ThE ExTRACTIVE INDUSTRIES, SELECTED COMMODITIES AND COUNTRIES, 2004–2012

(Per cent)

2004 2005 2006 2007 2008 2009 2010 2011 2012Cumulative

share

Oil

Angola 63.2 56.8 75.9 81.4 79.6 81.4 88.1 91.9 95.1 83.3Colombia 32.7 28.7 34.1 44.3 39.0 52.4 34.0 37.0 55.1 41.1Ecuador 71.8 67.4 69.5 68.8 65.8 66.6 72.9 93.1 93.5 76.3Venezuela (Bolivarian Republic of) 58.4 54.9 70.1 72.1 52.0 56.4 63.5 70.3 70.9 64.1

Copper

Chile 50.9 53.5 51.0 54.0 60.1 44.7 51.3 50.1 55.5 51.9

10majorprivatefirms 20.7 27.7 28.8 35.7 36.8 24.0 29.8 38.3 40.4 32.0CODELCO 99.7 84.3 88.9 90.7 101.1 79.3 91.3 66.3 89.5 86.9

Peru 23.5 37.5 30.9 24.5 31.0 34.0 32.2 33.7 47.0 32.7Zambia 0.8 2.0 3.4 8.9 21.6 167.4 19.2 30.5 .. 17.5

Gold

Ghana 20.1 61.9 27.6 29.8 23.9 18.6 21.0 31.1 32.8 27.7Mali 21.4 18.0 29.6 43.3 38.5 39.6 35.8 28.3 .. 33.6Peru 23.7 24.6 26.4 25.7 28.1 28.3 29.2 28.1 29.9 27.7United Republic of Tanzania 17.3 37.5 12.8 12.6 17.4 13.2 12.2 13.9 28.5 17.9

Source: UNCTAD secretariat calculations, based on annual reports of producing companies; UNCTADstat; IMF, Country Reports, various issues; IMF, International Financial Statistics database; World Bureau of Metal Statistics, World Metal Statistics Yearbook 2014; BP, Statistical Review of World Energy 2014; EITI Country Reports, various issues; and national sources.

Trade and Development Report, 2014186

CoDelCo,inChilethepublicshareisover50percent.WhileCoDelCoaccountedforabout36percentoftotalcopperproductioninthelastdecade,itcontributedasmuchas60percentoftotalgovern-mentrevenuesfromthisactivity.ThisdifferenceisduetothefactthatCoDelCotransferredtothegov-ernmentmorethan85percentoftherentsgenerated.

in general, up to the turn of the decade, theamountofgovernment revenues fromminingwasquitelow,exceptinthecaseofChilewhenCoDelCoisincluded.Whiletheshareofthegovernmentintherenthasfluctuatedovertheperiodconsidered,par-ticularlyinAfricancountries,54thecumulatedflowsshowthatthegovernmentcapturesbetween17percentand33percentoftherents.AccordingtoDanieletal.(2013:22)“Fiscalregimesaroundtheworldoffer governments, on average, about half of therentsgeneratedbymining,andtwo-thirdsormorefrompetroleum—perhapsbecausepetroleumusuallygeneratesmorerent.Actualcollectionsmaybelowerifthereareloopholesorinefficienciesincollection.Fiscalpoliciesthatraiselessthanthesebenchmarkaveragesmaybecauseforconcern”.

Theincreases in theshareof thegovernmentintherentsthathaveoccurredinthepastfewyearsmaybepartlyrelatedtorecentchangesinregulatoryregimesfortheminingsector,whichaimedatraisingtheState’sshare(seebelow).itmayalsobeduetothefactthatcompaniesthathadbenefitedfromacceler-ateddepreciationandloss-carry-forwardincentiveshadtostartpayingcorporateincometaxeswhentheperiodfortheseincentivesexpired.

Until recently, royaltieswere themain com-ponent of government revenues in the extractiveindustries.However, it appears that the trend ischanging,probablyduetotheincreasingimportanceofcorporatetaxesthatTNCsarenowbeingobligedto pay. inlatinAmerica, the principal source ofgovernmentrevenuesfromminingisataxonprofitsreportedbytheminingcompanies,whileroyaltiesaccountforonlyasmallshare(eClAC,2014b).ThismaynotbethecaseyetformanyAfricancountries,whereroyaltiesstillaccountforthemajorshareofgovernmentrevenuesfromtheminingsector(Gajigoetal.,2012b).onereasonforthisdifferencemaybethatproductioninAfricancountriesstartedlater,andthereforemostTNCsoperatingtherearestillenjoyingthebenefitsofaccelerateddepreciation.itmayalsobethatthecapacitiesofAfricancountriestocontrol

andpreventharmfultaxmanagementpracticesaremorelimitedthanthoseoflatinAmericancountries.

3. Recent initiatives related to taxation in the extractive industries

(a) Changes in the regulatory environment for the extractive industries

Withrapidlyrisingcommodityprices,theper-ceptiongrewthatthedistributionofrentsbetweentheState and foreign private corporations tendedtobeskewedinfavourofthelatter,thusdeprivinghost-country governments of an appropriate sharein the risingvalueof theirnatural resources.Thishasled,sincethemid-2000s,toanincreasingtrendtowardsreviewingthefiscalconditionsunderwhichtheextractive industriesoperate. inmanynatural-resource producing countries, governments havetakendifferentmeasurestocorrectthesituation.Asillustratedwiththeselectedexamplespresentedintable7.2, thesemaytakevariousforms, includingrevisionofcontractsthatmayleadtotheirrenegotia-tionorcancellation,increasesintaxorroyaltyratesortheintroductionofnewtaxes,andchangesinStateownershipoftheextractiveprojects.

Althoughthemainobjectiveofthesechangeswasgenerallytoimprovethedistributionoftherent,onsomeoccasionsrevisionsintheregulatoryenvi-ronmentmayalsoaimatexpandingtheproductionorthelocaltransformationofprimarycommodities.Thegovernmentmayapplytheprincipleof“useitor lose it” if there is insufficient investment in,ordevelopmentof,aparticularconcessionorproject.For example, inApril 2012 theGovernment ofArgentina assumedmajority ownership ofRepsolYPF,thelargestoil-producingcompanyinthecoun-try,bytakingovertheSpanishTNC,Repsol’s51percentstakeinthatcompany.TheGovernmentclaimedthatinsufficientinvestmentbythelatterhadledtoasteepdeclineinoilandgasproductionandhadturnedArgentinaintoanetimporterofhydrocarbons,fromhavingbeenanetexporter.inlessthantwoyears,theState-controlledcompany reversed thedeclineininvestmentandproduction.55Taxesmayalsobeintroducedorraisedforindustrialpolicypurposes.Forinstance,inJanuary2014indonesiaimposedanexporttax,alongwithabanonmineraloreexports,

Fiscal Space for Stability and Development: Contemporary Challenges 187

inordertoinduceminingcompaniestoprocesstherawmaterialsdomestically.

inanumberofcountries,governments’attemptstointroducechangestotheirfiscalregimesforextrac-tiveindustrieshavebeenfoiledbyvariouspressures.inZambia,forinstance,a25percentwindfalltaxwasintroducedin2008,butitwasrepealedin2009fol-lowingafallincopperpricesaftertheglobalfinancialcrisis.TNCs’warningsaboutthepossibilityofinvest-mentreductionsandmineclosures,andtheirthreatstotakelegalactionalsoplayedarole.likewise, theGovernmentofGhana’splantointroducea10percenttaxonwindfallrevenuesinits2012budgetwasdroppedfollowingthreatsbyminingcompaniestolayoffworkers.56However,ingeneral,TNCsdonotfollow throughon their threats to leave a countryafteritintroducesregulatorychanges.Forinstance,inecuador in 2010most companies accepted theGovernment’srequesttorenegotiatetheircontractswiththeGovernment.Similarly,afterthechangesinpublicownershipinthenaturalgassectorinboliviain2005-2006,TNCsstayedoninthecountryunderthenewconditions;andforeignTNCsarecontinuingtosigncontractswithArgentina’sYPFforexplora-tion and exploitation of largeshaleoilandshalegasreservesinthecountry.

it is not only developingcountriesthathaveintroduced,or attempted to introduce,changes to theirfiscal regimesrelatingtotheextractiveindus-tries;anumberofgovernmentsindevelopedcountrieshavealsobeen reviewing their shares inthe distribution of the rents from these industries.Asshownintable7.2,intheUnitedKingdom,thesupplementarytaxonoilproductionwasincreasedin2011,andinAustralia,againstheavyoppositionfrom the boomingmining sector and after a long(andongoing)debate,theGovernmentintroducedamineralresourcerenttaxin2012of22.5percent”.57

Revisionsoftheregulatoryenvironmentfortheextractiveindustriesareongoingprocessesthrough-outtheworld.inanumberofcountries,discussionsamongdifferentstakeholderscontinuetotakeplacewithaviewtoreformingtaxandownershipregimes. Theseincludebrazil,theDemocraticRepublicoftheCongo,india,Mali,Mozambique,thePhilippinesand

SouthAfricabutalsotheUnitedStates.58inSouthAfrica,therehasbeenextensivedebateontheissueofnationalizationoftheminingsector.ThisresultedinareportonStateinterventioninthemineralsectorin2012(knownastheSiMSreport),59whichruledoutnationalization,butconsideredwaysforafairerredistributionofminingprofits,includingthrougharesourcerenttaxof50percentandthecreationofaStatemineralcompanytodevelopstrategicminerals.

(b) Transparency-related initiatives

increasedtransparencyabout theactivitiesofboth governments andTNCs is a key componentfor ensuringappropriatepublic revenuecollectionfrom the extractive industries. Themain initia-tiveconcerning transparency in thiscontext is theextractiveindustriesTransparencyinitiative(eiTi)launched in 2003.60Amulti-stakeholder initiative,eiTi involvesgovernments, companies, investors,civilsocietyorganizationsandotherpartnerorgani-zations,whowork together to improve opennessand accountablemanagement of revenues fromnaturalresources.CountriesimplementingtheeiTi

Standardareexpectedtoensurefull disclosure of taxes andother paymentsmade by oil,gas andmining companies togovernments.These paymentsare disclosed in annual eiTiReports. by July 2014, therewere29eiTi-compliantcoun-tries (i.e. countries thatweremeetingalltherequirementsoftheeiTiStandard),allofwhichweredevelopingandtransition

economies,exceptNorway,and16candidatecoun-tries(i.e.countrieswhichwereimplementingeiTibutnotyetmeetingalltherequirements).inaddition,35countrieshadproducedeiTireports.61

TheeiTimarks significant progress towardsincreasingtransparencyintheextractiveindustries.Nevertheless,ithassomemajorweaknesses.First,itisvoluntary,andisthereforenon-bindingonbothgovernmentsandprivatecorporations.Asaresult,ithaslimitedeffect,sinceaconsiderableproportionof global production by the extractive industriesremainsoutsideitsstandards.Second,theeiTirec-onciliationexerciseisunidirectionalinthatitonlyallowscheckingwhether therevenuesreportedby

Increased transparency about the activities of both governments and TNCs is a key component for ensuring appropriate public revenue collection from the extractive industries.

Trade and Development Report, 2014188

Table 7.2

ExAMPLES OF REVISIONS IN ThE REGULATORy AND FISCAL REGIMES FOR ThE ExTRACTIVE INDUSTRIES

Measure Country Details of change Year

Contracts/licences revisions or renegotiations

Democratic Republic of the Congo

An expert committee reviewing 61 mining deals concluded that they were all bad deals, and recommended cancellation of 22 and renegotiation of 39.

2009

Dominican Republic Renegotiation of contract with Barrick Gold Pueblo Viejo Mine.

2013

Ecuador Law compelling private oil companies to renegotiate their service contracts in order to replace the taxation arrangement in production-sharing agreements with a flat rate per barrel of oil.

2010

Guinea Review of validity of existing contracts. Ongoing

Liberia Review of concession agreements signed between 2003 and 2006 (36 out of a total of 105 contracts were recommended for outright cancellation and 14 for renegotiation).

2006

United Republic of Tanzania

Review of mining development agreements and the fiscal regime for the mineral sector, leading to renegotiations on a case-by-case basis.

2006

Zambia Ending of tax stability clauses in development agreements. 2008

Changes in royalty rates

Chile Increase from 5 to 9 per cent. 2010

Ghana Increase from a range of 3−6 per cent (which in practice was normally 3 per cent) to 5 per cent.

2010

Peru Companies that do not have stabilization clauses or agreements with the Government must pay royalties of 1−12 per cent on operating profits (before the new law, rates ranged from 1 to 3 per cent on net sales), as well as a special tax ranging from 2 to 8.4 per cent of operating profits. Companies that have stabilization clauses must pay a special mining lien of between 4 and 13.12 per cent of operating profits.

2011

United Republic of Tanzania

Royalty rate for copper, gold, silver and platinum group minerals increased from 3 per cent to 4 per cent, while that for other minerals, including gemstones and diamonds, remained at 5 per cent.

2010

Zambia Increase from 0.6 to 3 per cent. 2008

Zambia Increase from 3 to 6 per cent. 2012

Changes in corporate tax rates

Ghana Increase from 25 to 35 per cent. 2012

United Kingdom Increase in supplementary tax rate from 20 to 32 per cent in the hydrocarbons sector.

2011

Zambia Increase in company income tax from 25 to 30 per cent. 2008

Introduction of new taxes

Australia Resource super profits tax (RSPT) with a headline tax rate of 40 per cent, applicable to all mining projects (but replaced soon after approval).

2010

Australia Mineral resource rent tax, replacing RSPT, with a reduced headline tax rate of 30 per cent (effectively 22.5 per cent), applicable to coal and iron ore.

2010

Fiscal Space for Stability and Development: Contemporary Challenges 189

Chile Mining royalty of 5 per cent. 2006

Mongolia Windfall tax of 68 per cent on profits from copper and gold. 2006

South Africa Royalty rate that varies with mine profitability. 2008

Zambia Windfall tax of 25 per cent. 2008 (but revoked

in 2009)

Zambia Variable income tax rate, in addition to fixed rate of 30 per cent; it applies when assessable income is higher than 8 per cent of gross sales, with a maximum rate of 15 per cent.

2009

Increasing the State’s equity participation

Algeria Participation rate of national oil company Sonatrach is fixed at a minimum of 51 per cent.

2006

Argentina State takes a 51 per cent majority stake in hydrocarbons company YPF.

2012

Bolivia (Plurinational State of)

Increased participation of the State in the hydrocarbons sector from 18 to 82 per cent of production value.

2005/2006

Bolivia (Plurinational State of)

Law of mining rights increases State´s expropriation powers targeting mines deemed unproductive, inactive or idle.

2013

Guinea Expropriation of half of Simandou iron ore deposit from Rio Tinto, claiming slow development of the deposit by the company.

2008

Guinea Mining code that grants the State a 15 per cent stake in all projects, as well as an option to buy up to 35 per cent equity.

2011

Kazakhstan Kazmunaigas (KMG), a State energy company, doubled its share in the Kashagan consortium to 16.6 per cent.

2008

Namibia State mining company, Epangelo, is established. 2008

Papua New Guinea Government takes full ownership of the Ok Tedi copper and gold mine.

2013

United Republic of Tanzania

Increased government participation but percentage not stated in mining act.

2010

Other Ghana Tax depreciation reduced, introduction of ring-fencing. 2012

United Republic of Tanzania

Income tax ring-fencing by mine licence area. 2010

Zambia Capital depreciation allowance reduced to 25 per cent. 2008 (but back in 2009)

Zambia Ring-fencing of non-contiguous mines. 2009

Source: UNCTAD secretariat compilation, based on Kingsley, 2014; Stevens et al., 2013; Medina Herasme, 2014; UNCTAD, 2012; Eigen, 2013; Sachs et al., 2012; Tarimo, 2013; Ralbovsky and Caywood, 2013; Muganyizi, 2012; ZIPAR, 2013; USGS, 2006; National Treasury of South Africa, 2008; Park and Benayad, 2013; EY Resource Nationalism Updates (various); Gray Molina, 2013; Hawala, 2013; and RioTinto Mongolia, available at: http://www.riotintomongolia.com/ENG/oyutolgoi/881.asp.

Table 7.2 (concluded)

ExAMPLES OF REVISIONS IN ThE REGULATORy AND FISCAL REGIMES FOR ThE ExTRACTIVE INDUSTRIES

Measure Country Details of change Year

Trade and Development Report, 2014190

governmentscorrespondtothepaymentsreportedbythecompanies,butthereisnojudgementabouttheappropriatenessofTNCs’taxburden.Thus,theeiTifocusislimitedtopreventingcorruptioninproduc-ingcountries.Third,thereisroomforimprovementinsimplifyingthepresentationofthereports,whichmaybedifficultformanystakeholderstounderstand.Thequality,timelinessandconsistencyofthedatacould also be improved.Finally, there is no clearcourseofactionwhenmismatchesarefoundindatadisclosure.

Sincetheglobalfinancialcrisis,therehasbeengrowing interest in improving transparency in theextractiveindustries.inthecontextofreformsofthefinancialsystem,G8andG20countrieshavebeensupportiveofcountry-by-countryreportingonthoseindustries.Thistrendhasledtovariousdevelopedcountriespassingnewregulationsconcerningpublicdisclosureoffinancialpaymentsbyprivatecorpora-tions.TheUnitedStatestookthelead,stimulatingawave of changes in other developed countries.New regulations for increased transparency in theextractive industries emerged fromSection 1504of the 2010Dodd-FrankWall StreetReform andConsumerProtectionAct (known for short as theDodd-FrankAct).on22August2012,theSecuritiesandexchangeCommission (SeC) adopted rulesmandated by theAct requiring companies in theextractive industries to disclose certain paymentsmade to theGovernment of theUnitedStates orto foreigngovernments.The activities coveredbycommercial development of oil, natural gas andmineralsincludeexploration,extraction,processingandexport,ortheacquisitionofalicenceforsuchactivities; trading isnot included.62ThedisclosureprovisionappliestoanycompanylistedonastockexchangeintheUnitedStates.Thisincludes90percentofallmajorinternationallyoperatingoilandgascompanies,and8ofthe10majorminingcompaniesglobally.Paymentsbysubsidiariesarealsoincluded(RWi,2011).However,followingalawsuitfiledbytheAmericanPetroleuminstituteagainstthisSeCrule, aUnitedStatesCourt ruled in favour of theinstitute.Asaresult,theSeChastoreissueanotherrulebeforeSection1504ofDodd-FrankActcanbeimplemented,whichithaspubliclypledgedtodobyMarch2015.Alargenumberofinvestors,govern-mentofficialsandcivilsocietyorganizationshavecalledontheSeCtoreissuestrongdisclosurerules,bycountryandbyproject(PWYP,2014).Similarly,on26June2013,theeuropeanParliamentandtheeU

Councilpassednewlawsrequiringoil,gas,miningandloggingcompaniestodisclosepaymentsmadetogovernmentsannuallyonacountry-by-countryandproject-by-project basis.The new disclosure rulesareincludedintheeUAccountingDirectiveandtherevisedeUTransparencyDirective.Theyapplytoallcompanies,parentandsubsidiaries,thatareactiveintheextractiveindustryorintheloggingofprimaryfor-ests,andthatareeitherlistedonaneU-regulatedstockmarketorarelargeextractiveandforestrycompanies.63Activitiesincludeexploration,prospection,discovery,development and extraction.once again, tradingactivitiesareexcludedfromtheseregulations.64

inaddition,anumberofdevelopingcountrieshavedecidedtopublishalltheircontractswithcom-panies in the extractive industries.These includeAzerbaijan, the Plurinational State of bolivia,ecuador,Guinea,liberia,Niger,Peru andTimor-leste (berneDeclaration,2012).Furthermore, theValeColumbiaCenteronSustainableinvestment,theWorldbankinstituteandRevenueWatchinstitute,incollaborationwithawidearrayofpartnersfromcivilsocietyorganizations,havedevelopedasearchabledatabaseofpubliclyavailableoil,gasandminingcontractsallovertheworld.65

(c) Other relevant initiatives in the extractive industries

Probably themost remarkable initiative thathas been recently adopted at the regional level istheAfricanMiningVision (AMV), approved bytheAfricanUnionSummit ofHeads ofState andGovernmentinFebruary2009.66itsmaingoalistocreate“atransparent,equitableandoptimalexploi-tationofmineralresourcestounderpinbroad-basedsustainable growth and socio-economic develop-ment”.AccordingtotheAfricanUnion(2009:14),“Africanstateswithweakgovernancegenerallyfailtoimposeresourcestaxregimesthatensureanequi-tableshareoftherents,particularlywindfallrents,dueeithertoalackofstatecapacityorthesubversionofthatcapacitytoproduceoverlyinvestorfriendlyoutcomes”.TheVisionunderlinesthatrevenuesfromtheexploitationofmineralsandresponsibletaxationthatallowshostcountriestobettercapturewindfallgainsarecentraltotheprocessofstructuraltrans-formation. it recommends self-adjusting resourcetaxregimesthatcanrespondtochangingeconomiccircumstances.

Fiscal Space for Stability and Development: Contemporary Challenges 191

Focusingontheimportanceofthedevelopmen-talstate,theAMVcallsforenhancingthecapacityofgovernmentstonegotiatecontractswithaviewtosecuringbetterdeals,andforimprovingtheirabil-itytoaudit,reviewandrenegotiateexistingminingagreements.itwarnsagainststabilizationclauses,aswellasbilateralandinternationalinvestmentagree-ments thatmay have negative impacts on policyspace.enhancing tax administration capacities toprevent damaging illicit financialflows, includingtransfermispricing,isalsopartof the strategy advocated bytheAMV.Further, it favoursacollaborative approach amongdifferent stakeholders in thesector,withafocusonregionalcooperation and a pooling ofresources for capacity devel-opment and the financing ofsuch reforms. TheVision istranslated into anActionPlanwhichisimplementedthroughtheAfricanMineralsDevelopmentCentrecreatedinDecember2013.ThemainvalueoftheVisionasanelementofadevelop-mentstrategyisitscooperativeownershipbyAfricancountries,whichcanhelptoimprovepolicyspacefordevelopmentatthenationalandregionallevels.

AnotherrelevantinitiativeattheregionallevelinAfricaistheAfricanlegalSupportFacilitycreatedbytheAfDb.itaimstoassistAfricancountriesinthenegotiationofcontractsandcomplextransactionsrelatedtotheextractiveindustries(Ngalani,2013).There have also been attempts at the subregionalleveltoharmonizemineralpoliciesandregulatoryregimesintheminingsector.oneoftheobjectivesofsuchinitiativesistopreventcompetitionamongcountriesinofferingtaxincentivesthatcouldleadto a race to the bottom.The SouthernAfricanDevelopmentCommunity(SADC)startedthehar-monization process in 2004, and appears to havemadeprogresstowardsharmonizationinanumberofareas,includingdiscouragingcompetitivebehaviouramongthemembercountries(Mteghaandoshokoya,2011).Similarly,theeconomicCommissionofWestAfricanStates(eCoWAS)issuedaDirectiveonthe

HarmonizationofGuidingPrinciplesandPoliciesintheMiningSectorin2009.Thisincludedtheimple-mentationofacommonminingcode.

inother developing regions, there havebeenfewer effortswith regard to regional cooperationand harmonization of tax issues in the extractiveindustries.Nevertheless,in2013theUnionofSouthAmericanNations(UNASUR)promotedacommonstrategyfortheprofitableuseofnaturalresources,

which could lead to increasedcooperation in thesematters.Also,intheDeclarationoftheFirstMinisterialConferenceoflatinAmericanStatesaffectedbyTransnational interests thattookplaceinecuadorinApril2013,itwasagreedtoestablisharegionalframeworkforcoor-dinating actions to tackle thegrowingnumberofinternational

dispute cases beingfiled against governments byTNCs,includingthoseintheextractiveindustries.Thisincludedthecreationofaregionalarbitrationcentre(Khor,2013).

inacontextofhighcommodityprices,indus-trialized countries have directed their attention tostrategiestosecureaccesstothesecommodities.oneexampleinthisregardisthe2008europeanUnionRawMaterialsinitiative(eURMi),67whichaimstopromoteundistortedaccesstorawmaterialsonworldmarkets.Withanemphasisontradeandinvestmentconditions, the resource diplomacy envisaged intheeURMiwouldleadtopressureondevelopingcountries toliberalizetheirrawmaterialsmarkets,includingtheirtaxregulations.Thishasraisedcon-cerns about its effectsondevelopmentpolicies asitmayaffectpolicyspace indevelopingcountries(Curtis,2010;FairPolitics,2011;Küblböck,2013).inthespiritofaglobalpartnershipfordevelopment,itisoftheutmostimportancethattheeURMidoesnotunderminerecentstrongattemptsbymanydevel-opingcountriestoensurethatincomegeneratedintheirminingandoilsectorseffectivelycontributestosustainableandinclusivegrowthanddevelopment.

The main value of the African Mining Vision as an element of a development strategy is its cooperative ownership by African countries.

Trade and Development Report, 2014192

Fiscalspaceisconsubstantialwithpolicyspace.evenifgovernmentshavethepossibilitytoconducttheir development policies within themultilat-eral,regionalorbilateralframeworks,theywillstillneedtofinancetheinvestmentandotherspendingrequiredbythosepolicies.Therefore,strengtheninggovernmentrevenuesisessential.Fiscalspacehasaquantitativedimension,roughlyapproximatedbytheshareofgovernmentrevenuesinGDPanditscapac-itytoexpandpublicspendingaccordingtovariousmacroeconomicgoalsandconstraints.italsohasaqualitativedimension,relatedtothedesiredstructureofgovernmentrevenuesandspending,andtheabil-itytoreorientthemasneeded.both dimensions are dynamicin nature, as theymust adaptto the development process.Historical experience and thecomparisonbetweenhigh-andlow-income countries show apositive relationship betweentheshareofgovernments’rev-enuesandspendinginGDP,ontheonehand, and the levelofdevelopmentontheother.Thisrelationshipisneitherlinearnormechanical,asdifferentcountries(orthesamecountryatdifferenttimes)makediversechoiceswith respect to the roleof government indeliver-ing social servicesand inassuming the tasksof adevelopmentalState.SuchchoicesfrequentlyleadtolargerorsmallerlevelsofgovernmentrevenuesandexpendituresincountrieswithsimilarlevelsofpercapitaGDP.

Fiscalspaceisbothacauseandaneffectofeco-nomicgrowthandstructuralchange.Higheraverageincomeandtheexpansionofthemodernsectorsoftheeconomyvis-à-vistheinformalonesbroadenthetaxbaseandstrengthenrevenuecollectioncapacity.This, in turn, allows for higher growth-enhancing

publicspending,bothonthesupplyside(e.g.invest-mentininfrastructure,researchandeducation)andthedemandside(e.g.socialtransfers).Reciprocally,thelackoffiscalspaceandtheconstraintsonexpand-ingitinmanylow-incomecountriesareamongthemostseriousobstaclestoescapingtheunderdevelop-menttrap.

Thisgeneralneedformaintainingorexpandingfiscalspacefacesparticularchallengesintheincreas-inglyglobalizedeconomy.ontheonehand,thereisthepossibilitytoincreasefiscalspace,atleasttem-porarily,throughforeignfinancing.inthiscontext,

oDAmaybeofvitalimportancefor lDCs, and foreign creditmayenlargefiscalspaceifitisusedforexpandingproductioncapacities,whichinturnwouldgeneratemorefiscal revenues.However, excessive relianceonforeignsourceshasinmanycases led to overindebtednessandchronicdeficitsinthefiscalandexternalbalances,limiting

fiscalspaceinthelongrun.inaddition,thosedeficitscreatetheneedformoreforeignfinancing,whichissubjecttoconditionsthatmaysignificantlyhamperoverallpolicyspace.Therefore,fiscalspaceshouldrelybasicallyondomesticrevenuemobilizationifitistosustainanationaldevelopmentstrategy.

on theotherhand,globalizationhasaffectedtheabilityofcountriestogeneratedomesticgovern-mentrevenuesandtochoosetheirtaxationstructure.loweringtradetariffshassignificantlyreducedrev-enuesfrombordertaxes,whiletheincreasedmobilityofcapitalanditsintensiveuseoffiscalhavenshavegreatlyalteredtheconditionsfortaxingincomeandwealth.Theglobalized economyhas favoured taxcompetitionamongcountries,pushingthemintoa

E. Summary and conclusions

Globalization has affected the ability of countries to generate domestic government revenues and to choose their taxation structure.

Fiscal Space for Stability and Development: Contemporary Challenges 193

“racetothebottom”inofferingincentivestoforeigninvestorsintheformoflowertaxes.Corporatetaxrates have declined in developed and developingcountriesalike,andmanyofthemhavealsoofferedsubsidiesortaxexemptionstoattractorretainforeigninvestment. in addition, finance-led globalizationhasledtoaproliferationofoffshorefinancialcen-tres,taxhavensandsecrecylocationsthatprovidepotentialtaxpayers,includinginternationalizedfirmsandwealthyindividuals,withvariousmeansfortaxavoidanceor evasion.This not onlymeans a verysignificantlossofpublicresources, italsotendstomaketaxationsystemsmoreregressiveifcountriesincreaseVATandotherindirecttaxesinanattempttooffsetdecliningrevenuesfromdirecttaxes.

Themainvehicleforcorporatetaxavoidanceorevasionandcapitalflightfromdevelopingcountriesisthemisuseoftransferpricing(i.e.thevaluationofintrafirmcross-bordertransactionsbyinternationalcompanygroups).iftheintracompanyorintragrouppricedoesnotreflectthepricethatwouldbepaidinamarketwhereeachparticipantactsinde-pendently in its own interest,profitswithinacompanygroupcanbeeffectivelyshiftedtolow-taxorno-taxjurisdictions,whilelossesanddeductionsareshiftedto high-tax jurisdictions. Suchoperations explain the largenumberofcompaniesregisteredintaxhavensandoffshorecentres,andthesignificantproportion offinancial and trade transactions thatnominallytransitthroughthem.

Thenegativeconsequencesofsecrecyjurisdic-tions,transferpricing,profitshiftingandalltheotherpractices leading to an erosionof the taxbase gowellbeyondtheirimpactintermsofpublicrevenuelosses;theyalsoaffectthefairnessofthetaxsystem,underminetaxpayers’confidenceinitsintegrityanddistorttradeandinvestmentpatternsaswellashumanandphysicalcapitalallocations.

The international tax architecture has failedsofartoproperlyadapttothisreality.Theopacitysurroundingtaxhavensmaypartlyexplainthedif-ficultiesfacedbypolicymakersincurbingtaxevasionpractices,buttherearealsosignificantpoliticalandeconomicobstacles.offshorefinancialcentresandthe secrecy jurisdictions that host them are fully

integratedintotheglobalfinancialsystem,andlargeshares of trade and capitalmovements (includingFDi) are channelled through them.Moreover, themost important providers of financial secrecy aresomeoftheworld’sbiggestandwealthiestcountries,orspecificareaswithinthosecountries.Thus,chang-ingthissystemrequiresnotonlyknowledgeofthetechnicalitiesinvolved,butalsostrongpoliticalwillanddetermination.

Recently,therehavebeenanumberofdevelop-mentsaimedatimprovingtransparencyandexchangeofinformationontaxissues:inparticular,since2009theoeCDhashostedarestructuredGlobalForumonthesespecificissues,andhaslaunchedanActionPlanonbaseerosionandProfitShifting;theG20leadersdeclaredtheirintentiontopromoteinforma-tionsharingwithrespecttoallkindsofabusesandfraudulentactivities;severalnationaltaxauthoritiesorparliamentshavealso increased themonitoringof tax abuses by rich individuals andTNCs; and

numerous bilateral tax treatiesand tax information exchangeagreementshavebeensigned.

Althoughtheseinitiativesareallsteps in therightdirec-tion, their implementation hassometimes been slow, as hasenforcementoftheagreementsreached.This is especially thecasefortransferpricingabuses,

whichareparticularlyharmfulfordevelopingcoun-tries, as they result in the loss of not only publicrevenues,butalsoforeignexchange.becausetheseinitiativesaremostly ledby thedevelopedecono-mies–someofwhichthemselvesharboursecrecyjurisdictionsandpowerfulTNCs–therearerisksthatthedebatewillnotfullytakeintoaccounttheneedsandviewsofmostdevelopingandtransitionecono-mies.itwillthereforebeimportanttogiveamoreprominentroletoinstitutionsliketheUnitedNationsCommitteeofexpertsoninternationalCooperationinTaxMatters, and consider the adoption of aninternationalconventionagainsttaxavoidanceandevasion.Amultilateralapproachisessentialbecause,ifonlysomejurisdictionsagreetopreventillicitflowsandtaxleakages,thosepracticeswillsimplyshifttoother,non-cooperativelocations.

Amultilateralframeworkwouldalsofacilitatetheadoptionofmeasuresforradicallyaddressingtax

There are risks that the debate on international taxation issues will not fully take into account the needs and views of most developing and transition economies.

Trade and Development Report, 2014194

avoidancebyTNCs,suchasrulesofunitarytaxationofsuchcorporations,makingthefirmspaytaxesinthecountrieswheretheyactuallyconducttheiractivi-tiesandgeneratetheirprofits(UnitedNations,2014).Thiswouldrequiretheimplementationofcountry-by-country reporting employing an internationalstandardsupportedbytheinternationalAccountingStandardsboardora similarbody,68 andensuringthatthesedataareplacedinthepublicdomainforallstakeholderstoaccess.inaddition,evenwithouttheestablishmentofafullyunitarytaxationsystem,muchcouldbeimprovedbyreplacingtheseparateentity conceptwith a unitary approach (Picciotto,2013).

Althoughtheverynatureoftheproblemcallsfor amultilateral approach, governments can alsoapplymeasuresatthenationallevel,suchasinclud-ing a general anti-avoidance rule in legislation toincreasetheprobabilitythat“aggressive”taxschemesend up being declared ille-gal once challenged in courts(europeanCommission,2012).Governments can alsomoreeffectivelyaddresstransfermis-pricing in their internationaltradebyusingreferencepricesfor anumberof tradedgoods.Thiswouldbeofparticularrel-evanceforcommodityexports,whicharerelativelyhomogeneousgoods,andusu-ally account for a large share of the exports ofcommodity-producingcountries.

inmanydevelopingcountries, increasing thegenerationofpublicrevenuesfromnaturalresources–especiallytheextractiveindustries–isessentialforthefinancingofdevelopment.indeed,governmentrevenues are often themain contribution of theseactivitiestodevelopment,astheyotherwisetendtogenerateenclaveeconomies.Capturingafairshareofresourcerentsfromacountry’snaturalresourcesanddecidinghowtheywillbeusedfordevelopmentisitsgovernment’sresponsibility,whichcannotbetransferredtotheprivatecompaniesexploitingtheresources.Corporatesocialresponsibilityhasaroletoplayhere,butitshouldnotbeconsideredapri-marymeansforTNCsintheextractiveindustriestocontributetothesocietiesorcommunitiesinwhichtheyoperate.Thetaskofprovidingsocialservicesandinfrastructureshouldbethegovernment’srespon-sibility.TheprincipalcontributionofTNCs to the

producingcountryshouldbethroughtaxation.Yet,whiletheriseofcommoditypricesinthelastdecadeledtoatenfoldincreaseintheprofitsoftheworld’slargestminingcompanies,thegainsforpublicrev-enuesmoreoften thannot laggedwellbehind thegrowthofnatural resource rents.Thiswasmainlybecause taxation regimes in developing countries,whichhadbeenestablishedatatimeoflowprices,and often on the recommendation of thebrettonWoods institutions, placed toomuch emphasis onattractingFDithroughtaxincentives.

Against this background,manygovernments–bothfromdevelopedanddevelopingcountries–havebeguntorevisetheirpolicieswithregardtotheextractive industries.This has included renegotia-tionorcancellationofexistingcontracts,increasesintaxorroyaltyrates,introductionofnewtaxesandchangesinthedegreeofStateownershipofextractiveprojects.Successfulrenegotiationshavebeenfacili-

tated by the stronger bargain-ingpowerofhostgovernmentsresultingfromtheappearanceofnewmajorplayersintheextrac-tiveindustry,suchascompaniesfromemergingeconomies.

A comprehensive policyaimed at improving revenuesfrom natural resources needs

toincorporateseveralelements.First,governmentsshould retainsovereigncapacity to review the taxregimesandownershipstructureswheneverdeemednecessaryfortheeconomicanddevelopmentinterestsofthecountry.Aminimumleveloftaxationcouldalso be negotiated at the regional or internationallevelstoavoidaracetothebottomonthismatter.Second,theyshouldhavethemeanstoenforcetherules and obtain the due revenues by controllingtransferpricingmanoeuvresandunderreportingofexport volumes.Third, they should be allowed todosowithoutthethreatoflegalretributionthroughtheexistinginvestmentdisputemechanisms,forthereasonsnotedinchapterVi.

Mostoftheneededmeasurescanbetakenatthe national level, butmultilateral cooperation isstilloftheutmostimportance.Transparencyinitia-tivessuchastheextractiveindustriesTransparencyinitiative (eiTi) should bemademandatory andextended:theyshouldnotfocusonlyongovernments,butalsoonproducingfirmsandcommoditytrading

Fiscal space and governance issues should be a prominent part of the post-2015 develop-ment agenda.

Fiscal Space for Stability and Development: Contemporary Challenges 195

companies.Thereisalsoaneedtoincreasethefocusonmonitoring,auditingandaccountability,aswellasstrengthenenforcementofthefiscalconditionsandregulationsunderwhichextractiveindustriesoperate;for instance, frequently, thevolumeproduced andexportedisreportedbytheoperatingTNCwithlittleornoeffectivecontrolbyhostStates.institutionaldevelopment and capacity-building are crucial, inparticular to improve thecapacity tomonitorpro-duction costs, import and export prices, volumes,qualitiesandtimeofdeliveryofthenaturalresourcesextractedaswellas tohelp indatacollectionandprocessing.Givenitsexpertiseintheareaofcom-modities, transport, customs and trade,UNCTADcouldprovidesupportinthisdomain.

Regionalcooperation initiatives forcapacity-buildingcanbeveryuseful.Theinternationaldonorcommunityhasanimportantroletoplayinsupport-ing such initiatives.oDAand other internationalsupportcouldbesignificantlyexpandedintheareaofimprovingdevelopingcountries’taxsystemsandcontractnegotiatingcapacities,aswellascurtailingtax-motivatediFFs.

Muchcanbedonealsotocurtailtransfermis-pricing.At present, recommended protocols forcontrollingthispracticesuggestcomparingthepricesfixedbyTNCswiththoseofasimilaroperationmadeby non-related agents (a “compared uncontrolled

price”),whichwouldindicatethefairmarket(arm’slength)price.inpractice,findingsucha“freemarket”comparable transactionmaybecomplex(orvirtu-allyimpossible),andrequiresstrongadministrativecapabilitiesandcostlyprocedures(UnitedNations,2013a).Amoreworkablealternative,alreadyusedby some developing countries, is to generate aclear benchmark of publicly quoted commoditypriceswhichwouldbeofmandatoryuseincommod-ity transactions, inparticular those that takeplacebetween related parties (oeCD, 2014).extensivedataprocessingwillbenecessary,notonlytoidentifytherightinternationalprices,butalsotoadaptthemtothespecificconditionsofthetransactions.Suchinitiative could be facilitated by the creation of apublicinternationaldatabaseofreliablecomparableprices,whichwouldenabletaxauthoritiesindevel-opingcountrieswithlimitedresourcestobebetterequippedtodealwithpotentialabusesinthisarea.

Given their relevance formany developingcountriesandtransitioneconomies,fiscalspaceandgovernance issues should be a prominent part ofthe post-2015 development agenda. internationalcooperationintaxmattersshouldbeenhancedinacoherentmannerinordertosupportnationaldevel-opment objectives.Avoiding the resource draincausedbyillicitfinancialflowswouldhelpprovidethenecessaryresourcestofinancetheattainmentofdevelopmentgoals.

Notes

1 in chart 7.2, east, South and South-eastAsiaincludes:Afghanistan,China,HongKong(China),TaiwanProvince ofChina, india, indonesia, theislamicRepublic of iran, theRepublic ofKorea,laoPeople’sDemocraticRepublic,Malaysia,Nepal,Pakistan, the Philippines, Singapore, Sri lanka,Thailand andVietNam;latinAmerica includes:Argentina,thePlurinationalStateofbolivia,brazil,Chile,Colombia,CostaRica,Cuba,theDominicanRepublic,ecuador,elSalvador,Guatemala,Haiti,Honduras,Mexico,Nicaragua,Panama,Paraguay,

Peru, Uruguay and the bolivarian Republic ofVenezuela;Africa does not include: botswana,burkinaFaso,equatorialGuinea,lesotho,liberia,Madagascar,Mauritania,Mayotte, SaintHelena,Seychelles,Somalia,WesternSaharaandZimbabwe;WestAsiadoesnotincludetheoccupiedPalestinianterritory;Croatiaisincludedinthetransitionecono-mies;anddevelopedeconomiesincludes:Australia,Canada, eUmember countries (excl. Croatia),iceland,israel,Japan,NewZealandandtheUnitedStates.

Trade and Development Report, 2014196

2 For example,Uruguay initiated a systemwherelow-income householdsmaking purchaseswithcreditcardscouldbepaidaVATrefundthroughtheelectronicbankingsystem.

3 Sources includeKPMG international,Corporate and Indirect Tax Survey 2012 and 2014;http://www.kpmg.com/GlobAl/eN/SeRViCeS/TAX/TAX-ToolS-AND-ReSoURCeS/Pages/corporate-tax-rates-table.aspxandoeCDtaxdatabase;availableat:http://www.oecd.org/tax/tax-policy/tax-database.htm#C_CorporateCaptial.

4 between2002and2012,theaverageappliedtariffimposedbydevelopingcountriesineastAsiafellfromaround8percentto4percent,andinlatinAmericafrom6percentto4percent.inregionswithalargenumberoflDCs(e.g.sub-SaharanAfrica),theaverageappliedtarifffellbyalesserextent,from8percentto7percent(UNCTAD,2014).

5 FinancialsectorlegislationhasbeenoneofthekeyprioritiesoftheeU,andeurope’sfinancialsectorspendsmore than120millioneurosannuallyandemploysover1,700lobbyistsdevotedtoinfluenc-ingeUinstitutions,accordingtonewresearchbytheCorporateeuropeobservatoryandtheAustrianFederal Chamber of labour andTrade UnionFederation (Corporateeuropeobservatory et al.,2014).This amounts tomore than twofinancialindustry lobbyists for everyeuropeanParliamentmemberand60-pluslobbyistsforeachMinisteroftheCounciloftheeU,inadditiontothelobbyistsfromothersectorsoftheeconomy.bycomparison,therewere only 150 civil society organizationsreported to be lobbying legislators covering allissues, not just finance.Thefinancial sector out-spendsitscivilsocietycounterpartsbyaratioofatleast30to1.

6 AmericansforTaxFairnessandPublicCampaign(2014) reports that1,359 lobbyistssupporting thepackagemademorethan12,378visitsorcontactstomembers ofCongress and their staff betweenJanuary2011andSeptember2013.Thisrepresentsaminimumof 93 contacts perweek, on a singleissuealone.Therearemorethan2.5lobbyistsforeverymemberofCongress,andmorethan21foreverymemberofthetwotax-writingcommitteesinCongress:theHouseWaysandMeansCommitteeandtheSenateFinanceCommittee.

7 SeeThe Economist,“onshorefinancialcentres−Notapalmtreeinsight”,16February2013.

8 These criteria are: (i)No or only nominal taxesare imposedon the relevant income; (ii)A“ring-fencing”regimeeffectivelyprotectsthesponsoringcountryfromtheharmfuleffectsofitsownregimeonitsdomesticeconomy;(iii)lackoftransparencyin the operation of tax lawsmakes it harder forthehomecountrytotakedefensivemeasures;and(iv)lackofeffectiveexchangeoftaxinformation

relatingtotaxpayersbenefitingfromtheoperationwithforeigntaxauthorities.

9 SeeBBC News,“Sanctionsthreatto‘taxhavens’”,26June2000;availableat:http://news.bbc.co.uk/2/hi/business/806236.stm.

10 FulldetailsoftheFSimethodologyareavailableat:http://www.financialsecrecyindex.com.

11 Forfurtherdiscussionsonthemythslinkedtotaxhavensandother related issues,see, forexample,Palanetal.,2010;andShaxson,2011.

12 Forcountriesthatareidentifiedastaxhavensbyatleast twodifferent studies, seePalanet al., 2010,table1.4.

13 The Economist,“onshorefinancialcentres−Notapalmtreeinsight”,16February2013.

14 Formoredetails,see:http://www.financialsecrecyin-dex.com/.

15 For further details about the irish inversion, seeFinancial Times,“Taxavoidance:Theirishinver-sion”,29April2014.

16 NotalltheiFFsaretax-motivatedinanarrowsense.Forinstance,themainmotivationforiFFsmaybeforevadingexchangecontrolsorformoneylaundering.Yet,eveniftheyarenotspecificallytax-motivated,theydohavefiscalconsequences,andthusreducefiscalspace.

17 Herson (2014) notes that if the taxpayer falsifiespaperwork, for example by knowinglymakingfalsestatementsinataxreturnorengaginginfalseinvoicing, this constitutes tax fraud.Tax evasionusually involves awider rangeof practices, suchas forgetting to declare some elements thatmustbe taken into account in a taxpayer’s tax returns.Thedistinction is important,because taxevasion,unliketaxfraud,isnot(orhasnotbeen)treatedasacriminaloffenceineverycountry.Forthisreason,somecountrieswherethisis,orhasbeen,thecasehavesystematicallyrefusedtoprovidejudicialandadministrativeassistancetoforeigncountriesinrela-tiontotaxoffencesthatarenotliabletoprosecutionintheircountry.AnotableexampleisSwitzerland,which,untilrecently,didnotprovideanyadministra-tiveassistanceincasesoftaxevasion,excepttoafewcountrieswithadoubletaxationagreementthatconformstotheoeCDstandard.

18 Thecreationoftrusts,foundationsandliechtensteinAnstalts (an anonymous companywith a singlesecretshareholder)insecrecyjurisdictionsprovidesthesamekindoffacilitiestoindividuals(forfurtherdetails,see,forexample,Palanetal.,2010).

19 Whensuchpracticestakeplacebetweenunrelated,orapparentlyunrelated,partiestheyarereferredtoas“re-invoicing”.Whentheytaketheformofcross-borderintra-grouptransactions,theyarereferredtoas“transfermispricing”.

20 otherstudiessuggestthisfigureisaratherconserva-tiveestimate.Forinstance,anarticleintheOECD

Fiscal Space for Stability and Development: Contemporary Challenges 197

Observernotedthat“morethan60percentofworldtradetakesplacewithinmultinationalenterprises”(See: http://www.oecdobserver.org/news/archives-tory.php/aid/670/Transfer_pricing:_Keeping_it_at_arms_length.html%22%20/l%20%22sthash.RvTzq9X0.dpuf.

21 otherestimatesofglobaloffshorefinancialwealthsuggest $6.7 trillion in 2008 (bostonConsultingGroup,2009),$8.5trillionin2002(MerrilllynchandCapGeminiernst&Young,2002),$11.5trillionin2005(TJN,2005)and$12trillionin2007(Frank,2007).

22 CreditSuisse(2011)estimatedtotalglobalwealthat$231trillioninmid-2011,includingfinancialassetsandnon-financialassetsatmarketvalue.

23 Fordetails,see,forinstance,FuestandRiedel,2009;GiZ,2010;andHenry,2012.

24 Mostof theofficialestimateswere fordevelopedeconomies. in theUnitedKingdom, for instance,totaltaxevasionandavoidancecosttheexchequerabout£9billioninboth2010/11and2011/12(HMRevenue&Customs,2012and2013).intheUnitedStates, thetotal“nettaxgap”,whichreferstotheamount of tax liability thatwill never be paid totheUnitedStatesinternalRevenueService(iRS),amountedto$290billionin2001and$385billionin2006(iRS,2012).Finally,accordingtoareportof theeuropeanParliament (2013), an estimatedone trillion eurosofpotential tax revenue for theeUislostannuallyfromtaxfraud,taxevasion,taxavoidanceandaggressivetaxplanning.

25 TheGlobalForum’smainachievementshavebeenthedevelopmentofstandardsoftransparencyandexchangeof information through the2002ModelAgreement onexchange of information onTaxMatters,andtheissuanceofapapersettingoutthestandardsforthemaintenanceofaccountingrecords,titled,enablingeffectiveexchangeofinformation:AvailabilityandReliabilityStandarddevelopedbytheJointAdHocGrouponAccountsin2005.ForacriticalassessmentoftheGlobalForum’swork,seeMeinzer,2012.

26 MoreinformationofTheGlobalForumonTrans-parency and exchange of information for TaxPurposes is available at: http://www.oecd.org/tax/transparency/global_forum_background%20brief.pdf and http://www.oecd.org/tax/transparency/Frequently%20asked%20questions.pdf.

27 See Spiegel internationalonline, “Theworld’sshortestblacklist:Whythefightagainsttaxhavensisasham”,11April2009;availableat:http://www.spiegel.de/international/world/the-world-s-shortest-blacklist-why-the-fight-against-tax-havens-is-a-sham-a-618780.html.

28 Formoreinformation,see:http://www.oecd.org/tax/transparency/automaticexchangeofinformation.htm.

29 SeeThomsonReuters Foundation, “Developingcountriesnotreadytojointaxevasioncrackdown–oeCD”,26May2014.

30 SeeFinancial Times, “Poorest nationswill gainnothingfromtaxpledge”,9May2014.

31 Reuters,“Ceosbackcountry-by-countrytaxreport-ing–survey”,23April2014.

32 UNCTAD secretariat calculations following themethodologyofMisereor(2010)andbasedontheTaxResearchPlatformoftheinternationalbureauofFiscalDocumentation(http://www.ibfd.org)andtheoeCDdatabaseonTieAs,availableat:http://www.oecd.org/ctp/exchange-of-tax-information/taxinformationexchangeagreementstieas.htm.

33 inthecaseofSwitzerland,forinstance,thedevelop-ingcountriesconcernedmust,amongotherthings,declaretheirreadinesstolowerwithholdingtaxesontheearningsofSwisscompaniesabroad(AllianceSud,2014).

34 See,forinstance,Sheppard,2013.35 BBC News Business, “Starbucks, Google and

Amazongrilledovertaxavoidance”,12November2012,and“Starbucksagreestopaymorecorporationtax”,6December2012.

36 Rent is defined in thisReport as the differencebetween the value of production (at internationalprices)anditscost,includingnormalprofits.

37 TheUnitedNationsGeneralAssemblyResolution1803 (XVii) of 14December 1962 established:“The right of peoples and nations to permanentsovereigntyovertheirnaturalwealthandresourcesmustbeexercised in the interestof theirnationaldevelopment andof thewell-beingof the peopleoftheStateconcerned…Theexploration,develop-mentanddispositionofsuchresources,aswellastheimportoftheforeigncapitalrequiredforthesepurposes, should be in conformitywith the rulesandconditionswhichthepeoplesandnationsfreelyconsidertobenecessaryordesirablewithregardtotheauthorization,restrictionorprohibitionofsuchactivities…Theprofitsderivedmustbeshared inthe proportions freely agreedupon, in each case,betweentheinvestorsandtherecipientState,duecarebeingtakentoensurethatthereisnoimpair-ment,foranyreason,ofthatState’ssovereigntyoveritsnaturalwealthandresources.”

38 For a recent in-depth discussion on the role oftheWorldbank inmining reforms inAfrica, seeJacobs, 2013; andbesada andMartin, 2013. SeealsoUNCTAD,2005.

39 onenotable exception isChile,where thepubliccompany,CoDelCo, has continued to play animportantroleincopperproduction,althoughpri-vatefirmsnowproduceabouttwothirdsofChileancopper.

40 increasing interest in the issue of taxation in theextractiveindustriesisevidencedbytheenormous

Trade and Development Report, 2014198

numberofseminarsanddiscussionsonthisissuethathavebeentakingplaceatnational,regionalandinter-nationallevelsinrecentyears.Similarly,therehasbeenasubstantialincreaseinthebodyofresearchonthistopicsincethesecondhalfofthe2000s.intheUnitedNations,apartfromtheanalysesonthedistributionofrentsfromtheextractiveindustriesinTDRs2005and2010, UNCTAD(2005and2007)havelookedatissuesrelatingtoFDiintheextrac-tiveindustries.Attheregionallevel,theeconomicCommissionforlatinAmericaandtheCaribbean(eClAC),forinstance,hasproducedseveralstud-ies on this issue. in addition, theUnitedNationsCommitteeofexpertsoninternationalCooperationonTaxMattersconvenedanexpertGroupMeetingonextractiveindustriesTaxationinMay2013(seeUnitedNations, 2013b and c).At the operationallevel,itismainlytheUnitedNationsDevelopmentProgramme(UNDP) thatprovidesadvicerelatingtothissubject,mostlyonacountry-by-countrycasebasis (see for instance,UNDP-Cambodia, 2008).The international financial institutions have alsopublishedrelevantstudies,includingtheiMF(2012)Danieletal.(2010)fortheiMF,ottoelal.(2006)fortheWorldbank,andtheWorldbank(2012a).Someexamplesofresearchonthistopicbyacademia,civilsocietyorganizationsandtheprivatesectorincludePWYP (2013), theUniversity ofCalgary (2012),theGermanDevelopmentinstitute(Die,2011),theRawMaterialsGroup(2013a)andtheinternationalCouncilonMiningandMetals(iCMM,2009).

41 indeed,muchofthemostusefulresearchandcasestudy analyses on issues related tofiscal regimesfortheextractiveindustriesandtheirconsequencesfordevelopingcountriesduringthefirstdecadeofthis century have been produced by civil societyorganizations.

42 The analyses of UNCTAD’sWorld Investment ReportofsubsequentyearscontinuedtoconfirmtheimportanceofnaturalresourcesforFDiinAfricaandlatinAmerica.

43 Forexample,theWorldbank(2012b)hasshownthatinAfricathedeclineinpovertyratesinresource-richcountrieshasgenerallylaggedbehindthatofcoun-tiesthatarenotrichinnaturalresources.

44 Thisisalsoanadvantageinthecaseofexportsofmorerefinedproducts,asitmaybeeasiertocheckthemforqualitythanitistocheckores.

45 For comparisons of taxation in the extractiveindustries indifferentcountries,see, forexample,RawMaterialsGroup,2013b;Gajigoetal.,2012a;Conrad, 2012; and iHS-CeRA, 2011. Globalconsultingcompanies,suchasDeloitte,ernstandYoung,KPMGandPricewaterhouseCoopers(PWC)alsoproduceregularreportsprovidinginformationontaxationintheextractiveindustriesaroundtheworld.Althoughthisinformationisveryillustrative,

itislikelyintendedasadvicetocorporationsonhowtooptimizetheirtaxpayments.

46 Pricemanipulationcanalsooccurinoperationsofcommodity trading companies located in interna-tional tradinghubs.Arecentstudyhasfoundthatthe average prices for commodity exports fromdevelopingcountriestoSwitzerland,whereseveralofthesecompaniesarelocated,arelowerthanthoseto other jurisdictions,while (re-)export prices forthosecommoditiesfromSwitzerlandarehigherthanthosefromothercountries,whichmaybeduetoataxratedifferential(Cobhametal.,2014).

47 An example of transfermispricing in the extrac-tiveindustriesisthecaseofMopaniCopperMines(MPM) in Zambia.MPMwas the subsidiarycompanyofGlencore internationalAGandFirstQuantumMineral.in2010twoauditingcompanieshiredbytheZambianGovernment,foundthatMPM-Glencorehad succeeded in substantially reducingaccounting profits and therefore its tax paymentsover theperiod2003−2008.Theanomalies foundincludedanunexplainedincreaseinoperatingcostsin2007ofover$380million,adeclarationofverylow cobalt production volumes comparedwithothercompaniesofsimilarsizeintheregion,andthemanipulationofcoppersalepricesinfavourofGlencore.inApril2011,fiveNGosfiledacomplaintwith theoeCDagainst these corporations basedon thefindings of the audit report (Sherpa et al.,2011).HoweverGlencorecontestedtheallegations,questioningtheinformationandmethodologyusedinthereport.otherexamplesoftrademispricinginAfricacanbefoundincountrieslikeGhana,MalawiandtheUnitedRepublicofTanzania.inAustralia,byJuly2013thetaxofficewasrunning26inves-tigationsintosuspectedprofitshifting,15ofwhichwereintheenergyandresourcessector(seePWP,out ofAfrica, tax tricks emerge, 6 July 2013 at:http://www.publishwhatyoupay.org/resources/out-africa-tax-tricks-emerge).inSouthAfrica,brackingandSharife (2014) founddiscrepancies indicativeofpossibletransferpricingmanipulationofroughdiamondvalues.

48 Forexample, inChile,asnotedbyRiesco(2005:15),“CompañíaMineraDisputadadelasCondes,amineownedbyexxon,ostensiblyoperatedatalossfor23years.Therefore,itdidnotpayanytaxesatalland,onthecontrary,accumulated$575mil-lionintaxcredits.Nevertheless,in2002exxon(bythenexxonMobil)soldthis“money-losing”opera-tionfor$1.3billion...exxonexportedtheminingoperation’ssubstantialprofits,mostlydisguisedasinterestpaymentstoexxonFinancials,asubsidiaryinbermuda.”

49 ThisiswhathappenedrecentlyinMali,whentheGovernmentclaimedaduepaymentoftaxesfromthegoldproducingcompany,RandgoldResources

Fiscal Space for Stability and Development: Contemporary Challenges 199

(seeeiU,2013;andRandgoldResources’sAnnual Report 2012).

50 The iMF is currently attempting to improve thissituation.ithasdevelopedadraftstandardtemplateforcountriestouseforthecollectionofdataongov-ernmentrevenuesfromnaturalresources,whichisavailableatitswebsite:http://www.imf.org/external/np/sec/pr/2014/pr1454.htm.

51 TheWorldbank,initsWorld Development Indicators database, hasprovidedestimationsoftherentsfromnaturalresourcesforawiderangeofcountries,cover-ingalongperiodoftime.TheyareavailableattheChangingWealthofNationsDataset,at:http://data.worldbank.org/data-catalog/wealth-of-nations.Thesedataarebeingincreasinglyusedworldwideinanaly-seson this subject.However, themethodologyofcalculationremainsunclear,andacomparisonwithpreviousUNCTADestimatesshowssignificantdif-ferences.Therefore,asUNCTADremainscautiousaboutWorldbankdataonthenaturalresourcerents,itwasdecidedtocontinuetouseitsownestimations.

52 The contribution of the extractive industries togovernmentrevenuesisoftenmeasuredintermsoftheeffectivetaxrate,orwhatiscalledgovernmenttake.bywhatevermeasure,itisimportanttoclarifyifthecontributionisassessedagainstsalesrevenuesoragainsttherentsfromthenaturalresources,asisthecasehere.

53 in the case ofColombia, although there is also aState-controlledenterprise (ecopetrol)whichpro-ducesabouttwothirdsoftotaloil,theshareoftherentcapturedbythegovernmentiscomparativelylow.This is due to the highproportionof profitsretainedbythecompany.

54 Table7.1showsremarkablyhighlevelsoftheshareofthegovernmentsintherentsfor2005inGhanaandtheUnitedRepublicofTanzaniaandfor2009inZambia.This has not resulted, however, fromsignificant changes in public revenues, but ratherfromtemporaryreductionsinthemagnitudeoftherents.inthecasesofGhanaandtheUnitedRepublicofTanzania,goldproductioncostsincreasedmuchmore than prices. inZambia, the reason for thedeclineintherentwasthecollapseincopperpricesthatfollowedtheglobalfinancialcrisis.

55 See, for instanceEl País, “lapetrolera argentinaYPFaumentalaproducciónylasreservasen2013”(oilcompanyYPFincreasesproductionandreservesin2013),9March2014.

56 SeeReuters,“Ghanaputsplansforminingwindfalltaxonhold”,24January2014.

57 TheHenryTaxReview(afterKenHenry,whowasthen the Secretary of theTreasury ofAustralia)recommended a uniform resource rent tax of 40percenttoguaranteeanappropriatereturnonnon-renewableresources.TheGovernmentthenproposedaresourcesuperprofitstax(RSPT)of40percentfor

anyprofitaboveagiventhreshold,whichwouldbeappliedtoallminerals.Therewasstrongoppositiontothisdecisionfromthesector.TheRSPTwaslaterreplaced by amineral resource rent tax (MRRT)whichtookeffectinJuly2012atareducedeffec-tiverateof22.5percent,andonlyforironandcoalprojects.However,thecontroversycontinued,andon24october2013theGovernmentannouncedthatitwouldseektorepealtheMRRTlawwitheffectfrom1July2014. legislationtorepealtheminingtaxwasrejectedbytheAustralianSenateinMarch2014.TheHenryTaxReviewcanbeaccessedat:http://taxreview.treasury.gov.au/Content/Content.aspx?doc=html/home.htm.

58 See, for instance, GMP (2013) and recent eYResouceNationalismupdates.

59 TheSiMSreportwascommissionedbytheAfricanNationalCongress to inform the debate.Anotherrelevantcontributioninthiscontextwasthestudyof the SouthernAfrican institute ofMining andMetallurgyontheriseofresourcenationalism(seeSAiMM,2012).

60 ThecreationoftheeiTihadbeenannouncedearlier,inSeptember 2002, by thePrimeMinister of theUnitedKingdomattheWorldSummitonSustainableDevelopmentinJohannesburg.

61 Source: eiTiwebsite at: http://eiti.org/countries(accessed16July2014).

62 Formoreinformation,seeSeCAdoptsRulesRequiringPayment Disclosures by Resource extractionissuers; available at: http://www.sec.gov/News/PressRelease/Detail/PressRelease/1365171484028.

63 AccordingtoPWYPAustralia(2013),regulationsoftheUnitedStatesandtheeUtogetherwillcoverabout65percentofthevalueoftheglobalextrac-tivesmarket,andover3,000companies,includingmost of themajor internationalmining and oiland gas companies, aswell asChinese,Russian,brazilianandotherState-ownedenterprises.

64 Fordetailedinformation,seePWYPFactSheet−eUrulesfordisclosureofpaymentstogovernmentsby oil, gas andmining (extractive industry) andloggingcompanies,July2013;availableat:http://www.pwyp.ca/images/documents/Working_Group/eU_Fact_Sheet.pdf.

65 Thedatabaseisavailableatwww.resourcecontracts.org.

66 TheAMVprocesswasinitiatedthroughaTaskForceinvolvingdifferentorganizationsatthemultilateralandregionallevels,includingUNCTAD.FormoreinformationontheVision,see:http://africaminingvi-sion.org/.

67 TheeURMi is included in theCommunicationpresented inNovember 2008 by the europeanCommission to theeuropeanParliament and theCouncil under the heading,The Raw Materials Initiative – Meeting Our Critical Needs for Growth

Trade and Development Report, 2014200

and Jobs in Europe.itwasfurtherdevelopedin2011intheeuropeanCommissionCommunicationtitled,“TacklingtheChallengesinCommodityMarketsandonRawMaterials”.

68 in its present form, the internationalAccountingStandardsboard (iASb)maynot be the suitablebodyforthistask,asitisnotapublicinternationalbodyaccountabletonationalormultilateralbodies.

TheiASbisinfactaprivateorganizationfinancedby thebigFour accountancyfirms,major banksand globalmultinationals. it is headquartered intheCityoflondonandregisteredinDelaware(SeeiFRS,Annual Report 2013; available at: http://www.ifrs.org/The-organisation/Governance-and-accountability/Annual-reports/Documents/iFRS-Foundation-Annual-Report-2013.pdf).

References

Adelmani(2000).Theroleofgovernmentineconomicdevelopment. in: Tarp F, ed.Foreign Aid and Development: Lessons Learnt and Directions for the Future.london,Routledge:48–79.

AfDb andGFi (2013). illicit financial flows and theproblem of net resource transfers fromAfrica:1980−2009.Tunis andWashington,DC,AfricanDevelopmentbankandGlobalFinancialintegrity.

AfDb,oeCDandUNeCA (2010).African Economic Outlook 2010.AddisAbaba,ParisandTunis.

AfricanUnion(2009).AfricanMiningVision,February.AddisAbaba;availableat:http://pages.au.int/sites/default/files/Africa%20Mining%20Vision%20english_1.pdf.

Alliance Sud (2014). Financial centre policy rid-dled with contradictions. bern; available at:http://www.alliancesud.ch/en/policy/tax_justice/financial-centre-policy-riddled-with-contradictions.

AmericansforTaxFairnessandPublicCampaign(2014).Corporatelobbyingontaxextendersandthe“Geloophole”;availableat:http://www.americansfortax-fairness.org/report-on-lobbying-on-tax-extenders/.

APP (2013).Africa ProgressReport 2013: equity inextractives.StewardingAfrica’sNaturalResourcesforAll.Geneva,AfricaProgressPanel.

ArakiS(2014).enhancingcooperationamongtaxadmin-istratorsinAsia-Pacific.International Tax Review;availableat:http://www.internationaltaxreview.com/Article/3302780/enhancing-cooperation-among-tax-administrators-in-Asia-Pacific.html.

bakerRW (2005).Capitalism’s Achilles Heel: Dirty Money and How to Renew the Free-Market System.Hoboken,NJ,JohnWiley&Sons.

berneDeclaration(2012).Commodities – Switzerland’s most dangerous business.lausanneandZurich.

besadaHandMartinP(2013).MiningcodesinAfrica:emergence of a “fourth” generation?TheNorth-SouthinstituteResearchReport,ottawa.

besleyTandPerssonT(2013).Taxationanddevelopment.in:AuerbachA,ChettyR,FeldsteinMandSaeze,eds.Handbook of Public Economics(5).Amsterdam,elsevier:51–110.

bostonConsultingGroup (2009).Global Wealth 2009: Delivering on the Client Promise. boston,MA;availableat:http://www.bcg.com.cn/en/files/publica-tions/reports_pdf/bCG_Global_Wealth_Sep_2009_tcm42-28793x1x.pdf.

boyceJKandNdikumanal(2012).Capitalflightfromsub-SaharanAfricancountries:Updatedestimates,1970−2010.Amherst,MA, Political economyResearch institute.University ofMassachusetts;availableat:http://www.peri.umass.edu/fileadmin/pdf/ADP/SSAfrica_capitalflight_oct23_2012.pdf.

brackingSandSharifeK(2014).Roughandpolished.Acasestudyofthediamondpricingandvaluationsystem.WorkingPaperSeriesNo.4,leverhulmeCentrefortheStudyofValue,Manchester.

ChristianAid(2008).Deathandtaxes:Thetruetolloftaxdodging.london;availableat:http://www.christia-naid.org.uk/images/deathandtaxes.pdf.

ClarkTandDilnotA(2002).long-termtrendsinbritishtaxationandspending.briefingnoteno.25,instituteforFiscalStudies,london.

CobhamA(2005).Taxevasion,taxavoidanceanddevel-opmentfinance.QueenelizabethHouseWorkingPaperNo.129,Universityofoxford,oxford.

CobhamA (2014). Joining the club:TheUnitedStatessignsupforreciprocaltaxcooperation.TheCenterforGlobalDevelopment blog, 16May; availableat: http://www.cgdev.org/blog/joining-club-united-states-signs-reciprocal-tax-cooperation.

Fiscal Space for Stability and Development: Contemporary Challenges 201

CobhamA,JanskýPandPratsA(2014).estimatingillicitflows of capital via trademispricing:A forensicanalysisofdataonSwitzerland.WorkingPaper350,CenterforGlobalDevelopment,Washington,DC.

ConradRF (2012). Zambia’smineral fiscal regime.Working Paper 12/0653, international GrowthCentre,londonSchoolofeconomicsandPoliticalScience,london.

Corporateeuropeobservatory,AustrianFederalChamberoflabourandTradeUnionFederation(2014).Thefirepowerofthefinanciallobby:AsurveyofthesizeofthefinanciallobbyattheeUlevel;availableat:http://corporateeurope.org/sites/default/files/attach-ments/financial_lobby_report.pdf.

CreditSuisse(2011).Global Wealth Report 2011.Researchinstitute;availableat:https://publications.credit-suisse.com/tasks/render/file/index.cfm?fileid=88e41853-83e8-eb92-9D5895A42b9499b1.

CurtisM(2010).Thenewresourcegrab:HoweUtradepolicy on rawmaterials is underminingdevelop-ment.Traidcraftexchange,oxfamGermany,Worldeconomy, ecology&Development (WeeD),AssociationinternationaledeTechniciens,expertsetChercheurs(AiTeC),andComhlamh–DevelopmentWorkersinGlobalSolidarityireland.

Daniel P,Gupta S,MattinaT and Segura-UbiergoA(2013). extracting resource revenue. Finance & Development,50(3):19–22.

DanielP,KeenMandMcPhersonC, eds. (2010).The Taxation of Petroleum and Minerals: Principles, Problems and Practice.NewYork,NY,RoutledgeandiMF.

DanWatch(2011).escapingpoverty-ortaxes?ADanWatchinvestigation of tax planningopportunities in iFC-supportedextractivesprojectsindevelopingcountries;available at: http://www.danwatch.dk/sites/default/files/documentation_files/danwatchifcnov2011.pdf.

DiJohnJ(2010).Taxation,resourcemobilizationandstateperformance.Workingpaperno84:Developmentasstate-making.Crisisstatesworkingpapersseriesno2,lSeDevelopmentStudiesinstitute,london.

Die(2011).Taxationofnon-renewablenaturalresources:What are the key issues?briefingPaper 5/2011,GermanDevelopmentinstitute,bonn.

eClAC(2014a).Fiscal Panorama of Latin America and the Caribbean: Tax reform and Renewal of the Fiscal Covenant.Santiago,Chile.

eClAC (2014b).Compacts for Equality: Towards a Sustainable Future.Santiago,Chile.

eigenP(2013).AprosperousAfricabenefitseverybody.The Journal of World Energy Law & Business AdvanceAccess,7(1):4–7.

eiU (2013).Mali. CountryReport 4thQuarter 2013.economistintelligenceUnit.

eSCAP(2013).Economic and Social Survey of Asia and the Pacific: Forward Looking Macroeconomic Policies for Inclusive and Sustainable Development.bangkok.

ernst&Young (2013).brazil amends transfer pricingrules:Newrulesfordeductibilityofintercompanyinterestandnewnormativeinstruction. EY Global Tax Alert,9January;availableat:http://taxinsights.ey.com/archive/archive-pdfs/2013G-CM3127-TP-brazil-amends-TP-deductibility-rules.pdf.

europeanCommission(2012).Commissionrecommendationof6December2012onaggressivetaxplanning,Official Journal of the European Union;availableat:http://ec.europa.eu/taxation_customs/resources/documents/taxation/tax_fraud_evasion/c_2012_8806_en.pdf.

europeanParliament(2013).Report on Fight against Tax Fraud, Tax Evasion and Tax Havens.brussels;avail-ableat:http://www.europarl.europa.eu/sides/getDoc.do?pubRef=-//eP//NoNSGMl+RePoRT+A7-2013-0162+0+DoC+PDF+V0//eN.

Fair Politics (2011).TheRawMaterials initiativeThenewscrambleforAfrica?;availableat:http://www.fairpolitics.eu/doc/fair_politics_eu/raw_materials_initiative/The%20RMi%20case%20updated.pdf.

FitzGeraldV (2012). international tax cooperation andinnovativedevelopmentfinance.backgroundpaperprepared forUN-DeSA’sWorld Economic and Social Survey 2012;availableat:http://www.un.org/en/development/desa/policy/wess/wess_bg_papers/bp_wess2012_fitzgerald.pdf.

Frank R (2007).Richistan: A Journey Through the American Wealth Boom and the Lives of the New Rich.london,Piatikus.

FuestCandRiedelN(2009).Taxevasion,taxavoidanceand tax expenditures in developing countries:Areviewoftheliterature. oxford,oxfordUniversityCentre forbusinessTaxation; available at: http://r4d.dfid.gov.uk/output/181295/.

Gajigoo,MutambatsereeandNdiayeG(2012a).Fairermining concessions inAfrica:How can this beachieved?Africa Economic Brief, 3(3),AfricanDevelopmentbank,Tunis.

Gajigoo,MutambatsereeandNdiayeG(2012b).Royaltyrates inAfricanmining revisited:evidence fromgoldmining.Africa Economic Brief,3(6),AfricanDevelopmentbank,Tunis.

GiZ(2010).Addressingtaxevasionandtaxavoidanceindevelopingcountries.eschborn,DeutscheGesell-schaft für internationaleZusammenarbeit (GiZ)GmbH; available at: http://www.taxcompact.net/documents/2011-09-09_GTZ_Addressing-tax-evasion-and-avoidance.pdf.

GMP (2013).Taxation trends in themining industry.Toronto,GMPSecurities.

GrayMolinaG(2013).Globalgovernanceexit:Aboliviancase study.WorkingPaper 2013/84,TheGlobaleconomicGovernanceProgramme,University ofoxford,oxford.

G20 (2008).Declaration on the Summit of FinancialMarketsandtheWorldeconomy.SpecialleadersSummitontheFinancialSituationinWashington,

Trade and Development Report, 2014202

DC,14−15November;availableat:http://www.g20.utoronto.ca/2008/2008declaration1115.html.

Hawalae(2013).RoleofepangelointheNamibianMiningSector.NamibiaChamber ofMines. PresentationatMiningexpo; available at: http://www.cham-berofmines.org.na/uploads/media/1.3.The_role_of_epangelo_in_the_Namibian_Mining_industry.pdf.

HenryJS(2012).Thepriceofoffshorerevisited.london,TaxJusticeNetwork,22July;availableat:http://taxjustice.blogspot.ch/2012/07/the-price-of-off-shore-revisited-and.html.

HersonM(2014).Tax-motivatedillicitfinancialflows:Aguidefordevelopmentpractitioners.U4issueNo.2,U4Anti-CorruptionResourceCentre at theChr.Michelseninstitutebergen;availableat:http://www.u4.no/publications/tax-motivated-illicit-financial-flows-a-guide-for-development-practitioners/.

HMRevenue&Customs(2012).Measuring Tax Gaps, 2012 Edition: Tax Gap Estimates for 2010–11.london.

HMRevenue&Customs(2013).Measuring Tax Gaps, 2013 Edition: Tax Gap Estimates for 2011–12.london.

iCMM(2009).Minerals taxation regimes.A reviewofissuesandchallengesintheirdesignandapplication.london,internationalCouncilonMiningandMetals.

iHS-CeRA(2011).Comparativeassessmentofthefed-eraloilandgasfiscalsystem.Herndon,VA,fortheUnitedStatesDepartmentoftheinterior.

iMF(2003).World Economic Outlook.Washington,DC,September.

iMF (2012). Fiscal regimes for extractive industries:Designandimplementation.Washington,DC.

iMF,oeCD,UnitedNations andWorldbank (2011).Supporting the Development of More Effective Tax Systems. Report to theG-20DevelopmentWorkingGroup;availableat:http://www.oecd.org/ctp/48993634.pdf.

iRS (2012). iRS releases new tax gap estimates; com-pliance rates remain statistically unchanged frompreviousStudy,6January;availableat:http://www.irs.gov/uac/iRS-Releases-New-Tax-Gap-estimates;-Compliance-Rates-Remain-Statistically-Unchanged-From-Previous-Study.

Jacobs J (2013).An overview of revenue flows fromthemining sector: impacts, debates and policyrecommendations. in:Campbellb, ed.Modes of Governance and Revenue Flows in African Mining.Hampshire,PalgraveMacMillan:16–46.

JohannesenNandZucmanG(2014).Theendofbanksecrecy?AnevaluationoftheG20taxhavencrack-down.American Economic Journal: Economic Policy,6(1):65−91.

KarD andCartwright-SmithD (2010). illicit financialflowsfromAfrica:Hiddenresourcefordevelopment.Washington,DC,UnitedStates,GlobalFinancialintegrity; available at: http://www.gfintegrity.org/report/briefing-paper-illicit-flows-from-africa/.

KarDandleblancb(2013).illicitfinancialflowsfromdevelopingcountries:2002–2011.Washington,DC,

UnitedStates,GlobalFinancialintegrity;availableat:http://iff.gfintegrity.org/iff2013/illicit_Financial_Flows_from_Developing_Countries_2002-2011-HighRes.pdf.

KeenMandMansourM(2009).Revenuemobilizationinsub-SaharanAfrica:Challengesfromglobalization,iMFWorkingPaperno.157,Washington,DC.

KeenMandSimoneA(2004).istaxcompetitionharmingdevelopingcountriesmorethandeveloped?Specialsupplement,Tax Notes International,1317−1325.

KhorM(2013).Dealingwithtransnationalcorporations.Third World Resurgence No. 273,ThirdWorldNetwork,Penang.

Kingsleyi(2014).Nolongeracurse?Africanleaderstakeactionthatcouldtransformtheminingsector.Africa Renewal,28(1):24–25.

KPMG(2012).CorporateandindirectTaxRateSurvey2012; available at: http://www.kpmg.com/FR/fr/issuesAndinsights/ArticlesPublications/Documents/Corporate-and-indirect-Tax-Survey-2012.pdf.

KPMG(2014).CorporateandindirectTaxRateSurvey2014;availableat:http://www.kpmg.com/Global/en/issuesAndinsights/ArticlesPublications/Documents/corporate-indirect-tax-rate-survey-2014.pdf.

KüblböckK(2013).TheeURawMaterialsinitiativeandeffectsuponresource-baseddevelopment:lessonsfromAfrica.PolicyNote08/2013,ÖsterreichischeForschungsstiftungfürinternationaleentwicklung,Vienna.

lanzRandMiroudotS(2011).intra-firmtrade:Patterns,determinantsandpolicyimplications.oeCDTradePolicyPaperNo. 114, Paris; available at: http://dx.doi.org/10.1787/5kg9p39lrwnn-en.

MaddisonA (2001).The world economy: A millennial perspective.Paris,oeCD.

MedinaHerasmeA(2014).Miningtaxregimeasdevelop-menttool.PresentationattheUNCTADMulti-YearexpertMeetingonCommoditiesandDevelopment,Geneva,9–10April.

MeinzerM (2012).The creeping futility of the glob-al forum’s peer reviews. Tax Justice briefing,london;availableat:www.taxjustice.net/cms/upload/GlobalForum2012-TJN-briefing.pdf.

MerrilllynchandCapGeminiernst&Young (2002).World Wealth Report 2002.MerrilllynchandCapGeminiernst&Young.

Misereor (2010).Double tax treaties and tax informa-tion exchange agreements:What advantages fordevelopingcountries.Aachen;availableat:http://www.taxjustice.net/cms/upload/pdf/DTTs_100126_TieAs-Developing-Countries.pdf.

MteghaHDandoshokoyao(2011).Miningfiscalenvi-ronment in theSADC:Statusafterharmonizationattempts.The Journal of Southern African Institute of Mining and Metallurgy,111(7):455−458.

MuganyiziTK(2012).MiningsectortaxationinTanzania.Researchreport1,internationalCentreforTaxand

Fiscal Space for Stability and Development: Contemporary Challenges 203

Development, institute forDevelopment Studies,brighton.

MurphyR(2008).Taxhavenscreatingturmoil:evidencesubmitted to theTreasuryCommitteeof theHouseofCommonsbytheTaxJusticeNetworkUK.Ches-ham,TaxJusticeNetworkinternationalSecretariat;available at: http://www.un-ngls.org/cfr/upload/1234518529_80.47.24.143_CreatingTurmoil.pdf.

NationalTreasuryofSouthAfrica(2008).explanatorymem-orandumfortheMineralandPetroleumRoyaltybill;available at: http://www.treasury.gov.za/public%20comments/eM%20Royalty%20bill%202008%20-%2020%20Aug%202008.pdf.

NgalaniCD(2013).Negotiationoffaircontracts:ForasustainabledevelopmentofextractiveindustriesinAfrica.Great Insights,2(2):23−24,europeanCentreforDevelopmentPolicyManagement.Maastricht.

ocampoJA(2007).Market,socialcohesionanddemoc-racy.in:ocampoJA,JomoKS,andKhanS,eds.Policy Matters: Economic and Social Policies to Sustain Equitable Development.londonandNewYork,orientlongmanandZedbooks:1–31.

oeCD(1998).Harmful Tax Competition: An Emerging Global Issue.Paris.

oeCD (2012).Dealing effectivelywith the challengesoftransferpricing.Paris;availableat:http://dx.doi.org/10.1787/9789264169463-en.

oeCD(2013a).ActionPlanonbaseerosionandProfitShifting. Paris; available at: http://dx.doi.org/10.1787/9789264202719-en.

oeCD (2013b). bePS - Frequently asked questions.Paris; available at: http://www.oecd.org/ctp/beps-frequentlyaskedquestions.htm.

oeCD (2013c).Addressing base erosion and profitshifting, Paris; available at: http://dx.doi.org/10.1787/9789264192744-en.

oeCD(2014).TransferPricesComparabilityDataandDevelopingCountries; available at: http://www.oecd.org/ctp/transfer-pricing/transfer-pricing-com-parability-data-developing-countries.pdf.

ortiz i andCumminsM (2013).The age of austerity:A review of public expenditures and adjustmentmeasuresin181countries.WorkingPaperNo.24,initiativeforPolicyDialogueandSouthCentre,NewYork,NYandGeneva.

ottoJ,AndrewsC,CawoodF,DoggettM,GujP,StermoleF,StermoleJ,TiltonJ(2006). Mining Royalties: A Global Study of Their Impact on Investors, Government, and Civil Society. Washington,DC,Worldbank.

PalanR,MurphyR andChavagneuxC (2010).Tax Havens: How Globalization Really Works. ithaca,NY,CornellUniversityPress.

ParkYSandbenayadS(2013).HydrocarbonslawandbiddingopportunitiesinAlgeriaJournal KSMER,50(5):750–759.

PereiraValadãoMA(2013).TransferPricing inbrazil.Presentation to the Panel discussion onTransfer

PricingChallengesforDevelopingCountriesattheeCoSoCmeeting on international CooperationinTaxMatters,NewYork, 29May; available at:http://www.un.org/esa/ffd/tax/2013iTCM/Valadao_TPChallenges_29may13.pdf.

PicciottoS (2013). is the internationalTaxSystemFitforPurpose,especiallyforDevelopingCountries?iCTDWorkingPaper13,instituteofDevelopmentStudies; available at: http://www.ictd.ac/sites/default/files/iCTD%20WP13_0.pdf.

PWYP (2011).PipingProfits; available at: http://www.publishwhatyoupay.org/sites/publishwhatyoupay.org/files/FiNAl%20pp%20norway.pdf.

PWYP(2013).Thecaseforwindfalltaxes–Aguidetooptimalresourcetaxation;availableat:http://www.publishwhatyoupay.no/sites/all/files/Download%20-%20english_4.pdf.

PWYP(2014).SeCannouncesplantoimplementland-markoil,gasandminingtransparencylaw;availableat: http://www.publishwhatyoupay.org/resources/sec-announces-plan-implement-landmark-oil-gas-and-mining-transparency-law.

PWYPAustralia (2013).Australia:Anunlevel playingfield.extractiveindustrytransparencyontheASX200. PublishWhatYouPay; available at: http://publishwhatyoupay.org/sites/publishwhatyoupay.org/files/ASX.pdf.

RalbovskySandCaywoodH(2013).PresentationatthePwC’s16thAmericasSchoolofMines,Miningtaxpolicy,losCabos,Mexico,21−24May;availableat: http://www.pwc.com/gx/en/mining/school-of-mines/2012/pwc-hallie-caywood-school-of-mines-presentation.pdf.

RawMaterialsGroup (2013a).Taxation, Royalties and Other Fiscal Measures Applied to the Non-Ferrous Metals Industry.ReporttotheinternationalStudyGroupsonCopper,Nickel,leadandZinc.

RawMaterialsGroup(2013b).TheRosiaMontanaMinein Romania. ComparativeAnalysis ofMiningRoyalties,TaxationandStateownershipinSelectedCountries(ForGoldandbaseMetals);availableat:http://rmgc.ro/Content/uploads/reports/report-raw-materials-group.pdf.

RichterbK,SamphantharakKandTimmonsJF(2009).lobbyingandtaxes.American Journal of Political Science,53(4):893−909.

RiescoM(2005).Payyourtaxes!Corporatesocialrespon-sibilityandtheminingindustryinChile.in:UNRiSD,The “Pay Your Taxes” Debate: Perspectives on Corporate Taxation and Social Responsibility in the Chilean Mining Industry.Geneva:14–54.

RodrikD(2014).AClassonitsown;availableat:http://www.project-syndicate.org/print/dani-rodrik-explains-why-the-super-rich-are-mistaken-to-believe-that-they-can-dispense-with-government.

RWi(2011).Dodd-Frank.Thefactsaboutdisclosurerequire-ments.NewYork,NY,RevenueWatchinstitute.

Trade and Development Report, 2014204

Sachsle,ToledanoP,MandelbaumJandottoJ(2012).impactsoffiscalreformsoncountryattractiveness:learningfromthefacts.in:SauvantK,ed.Yearbook on International Investment Law & Policy 2011–2012.oxford,oxfordUniversityPress:345–386.

SAiMM(2012).Theriseofresourcenationalism:Aresur-genceofStatecontrolinaneraoffreemarketsorthelegitimatesearchforanewequilibrium.CapeTown,SouthernAfricaninstituteofMiningandMetallurgy.

SchneiderF,buehnAandMontenegroCe(2010).Shadoweconomiesallovertheworld:Newestimatesfor162countries from1999 to 2007.WorldbankPolicyResearchWorkingPaperNo.5356,Washington,DC.

ShaxsonN (2011).Treasure Islands: Uncovering the Damage of Offshore Banking and Tax Havens.NewYork,NY,PalgraveMacmillan.

SheppardlA(2013).WillU.S.HypocrisyoninformationSharingContinue?TaxAnalysts;availableat:http://www.taxanalysts.com/www/features.nsf/Articles/0C26b2CFD92F1Fbe85257AFC004e8b38?openDocument.

Sherpa,berneDeclaration,CentreforTradePolicyandDevelopment,l’entraidemissionnaireandMiningAlerte(2011).SpecificinstanceregardingGlencoreinternationalAGandFirstQuantumMineralsltd.andtheirallegedviolationsoftheoeCDGuidelinesforMultinationalenterprises via the activities ofMopaniCopperMinesPlc.inZambia;availableat:http://www.google.ch/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&ved=0Cb4QFjAA&url=http%3A%2F%2Foecdwatch.org%2Fcases%2FCase_208%2F925%2Fat_download%2Ffile&ei=VbjfU5u-A9SS7AaU5YDoAQ&usg=AFQjCNFd9QWoMYplYKuRAqb0wP_kU7x20A&bvm=bv.72197243,d.ZGU&cad=rja.

StevensP,KooroshyJ,lahnGandleeb(2013).Conflict and coexistence in the extractive industries.london,ChathamHouse.

TarimoD(2013).Mining−Taxlandscape–Africa.PWC;available at: http://www.pwc.com/en_TZ/tz/pdf/mining-tax-landscape-africa.pdf.

TaxJusticeNetwork(2005).Thepriceofoffshore.briefingPaper,buckinghamshire;availableat:http://www.taxjustice.net/cms/upload/pdf/briefing_Paper_-_The_Price_of_offshore_14_MAR_2005.pdf.

Tax JusticeNetwork (2011).The cost of tax abuse:Abriefing paper on the cost of tax evasionworld-wide.buckinghamshire; available at: http://www.tackletaxhavens.com/Cost_of_Tax_Abuse_TJN%20Research_23rd_Nov_2011.pdf.

TaxJusticeNetwork(2012).Taxusifyoucan,2ndedition.buckinghamshire;availableat:http://www.taxjus-tice.net/cms/upload/pdf/TUiYC_2012_FiNAl.pdf.

Tax JusticeNetwork (2013). Financial Secrecy index− 2013,Results.buckinghamshire; available at:http://www.financialsecrecyindex.com/introduction/fsi-2013-results.

Tax JusticeNetwork-Africa&ActionAid international(2012).TaxcompetitionineastAfrica:Aracetothebottom?NairobiandJohannesburg.

UNCTAD (2005)Economic Development in Africa Report 2005: Rethinking the Role of Foreign Direct Investment.UnitedNationspublication,NewYorkandGeneva.

UNCTAD (2007).World Investment Report 2007: Transnational Corporations, Extractive Industries and Development.UnitedNationspublication,NewYorkandGeneva.

UNCTAD(2009).The Least Developed Countries Report 2009: The State and Development Governance.UnitedNationspublication,NewYorkandGeneva.

UNCTAD(2012).World Investment Report 2012: Towards a New Generation of Investment Policies.UnitedNationspublication,NewYorkandGeneva.

UNCTAD(2013).World Investment Report 2013 – Global Value Chains: Investment and trade for Development.UnitedNationspublication,NewYorkandGeneva.

UNCTAD(2014).Theroleoftradeinfinancingforsus-tainabledevelopment.intergovernmentalCommitteeofexpertsonSustainableDevelopmentFinancing.UnitedNationspublications,Geneva.

UNCTAD(TDR 1996).Trade and Development Report, 1996.UnitedNations publication, sales no.e.96.ii.D.6,NewYorkandGeneva.

UNCTAD(TDR 1997).Trade and Development Report, 1997. Globalization, Distribution and Growth.UnitedNations publication, sales no.e.97.ii.D.8,NewYorkandGeneva.

UNCTAD(TDR 2003).Trade and Development Report, 2003. Capital accumulation, growth and structural change.UnitedNationspublication,salesno.e.03.ii.D.7,NewYorkandGeneva.

UNCTAD(TDR 2005).Trade and Development Report,2005. New Features of Global Interdependence. UnitedNationspublication,salesno.e.05.ii.D.13,NewYorkandGeneva.

UNCTAD(TDR 2008).Trade and Development Report, 2008. Commodity Prices, Capital Flows and the Financing of Investment.UnitedNationspublica-tion,salesno.e.08.ii.D.21,NewYorkandGeneva.

UNCTAD(TDR 2009).Trade and Development Report, 2009. Responding to the Global Crisis: Climate Change Mitigation and Development.UnitedNationspublication, sales no.e.09.ii.D.16,NewYork andGeneva.

UNCTAD(TDR 2010).Trade and Development Report, 2010. Employment, Globalization and Development.UnitedNations publication, sales no.e.10.ii.D.3,NewYorkandGeneva.

UNCTAD(TDR 2011).Trade and Development Report, 2011. Post-crisis Policy Challenges in the World Economy.UnitedNationspublication,salesno.e.11.ii.D.3,NewYorkandGeneva.

UNCTAD(TDR 2012).Trade and Development Report, 2012. Policies for Inclusive and Balanced Growth.

Fiscal Space for Stability and Development: Contemporary Challenges 205

UnitedNations publication, sales no.e.12.ii.D.6,NewYorkandGeneva.

UNCTAD(TDR 2013).Trade and Development Report, 2013. AdjustingtotheChangingDynamicsoftheWorldeconomy.UnitedNationspublication,salesno.e.13.ii.D.3,NewYorkandGeneva.

UN-DeSA(2011).United Nations Model Double Taxation Convention between Developed and Developing Countries (2011 update).NewYork,UnitedNations;availableat:http://www.un.org/esa/ffd/documents/UN_Model_2011_Update.pdf.

UN-DeSA(2013).Report on the World Social Situation:Inequality Matters.UnitedNationsDepartmentforeconomicandSocialAffairs,UnitedNationspub-lications,NewYork.

UNDP-Cambodia(2008).Theglobalpetroleumcontext:opportunities and challenges facing developingcountries.DiscussionPaperNo.6,UnitedNationsDevelopmentProgramme,NewYork.

UNeCA(2013).The State of Governance in Africa: The Dimension of Illicit Financial Flows as a Governance Challenge.e/eCA/CGPP/3/2,AddisAbaba.

UnitedNations(2010).Secretariatnoteonagendaitem3(o)oftheprovisionalagenda:Taxcompetitionincorpo-ratetax:Useoftaxincentivesinattractingforeigndirect investment. e/C.18/2010/CRP.13,UnitedNations,NewYork.

UnitedNations(2013a). United Nations Practical Manual on Transfer Pricing for Developing Countries.ST/eSA/347,NewYork,UnitedNations.

UnitedNations(2013b). issuesconcerning the taxationoftheextractiveindustriesforconsiderationoftheCommittee.Noteby theSecretariatof theUnitedNations.Committee of experts on internationalCooperationinTaxMatters.e/C.18/2013/CRP.13,NewYork.

UnitedNations(2013c).SecretariatReportontheexpertGroupMeeting onextractive industriesTaxation.UnitedNationsCommitteeofexpertsoninternationalCooperation inTaxMatters.e/C.18/2013/CRP.19,NewYork.

UnitedNations (2014). Committee forDevelopmentPolicy.GlobalGovernance andGlobalRules forDevelopment in the Post-2015era. e.14.ii.A.1,UnitedNations,NewYork.

UniversityofCalgary(2012).Capturingeconomicrentsfrom resources through royalties and taxes. SPPResearchPapers, 5(30), School of Public Policy,Calgary.

USGS (2006).Mongolia. in:2006 Minerals Yearbook.UnitedStatesGeologicalSurvey.

Vale Columbia Center on Sustainable investment(2013).backgroundpaperfortheeighthColumbiainternationalinvestmentConferenceoninvestmentincentives −TheGood, thebad and theUgly:Assessing the costs, benefits andoptions for pol-icy reform,ColumbiaUniversity,NewYork,NY.13–14November.

WeeksJ(2014).interactionbetweenfiscalspaceandeco-nomicgrowth;policiesformiddle-andlow-incomecountries.backgroundpaperforUNCTAD’sTrade and Development Report 2014,unpublished.

Worldbank(1992).StrategyforAfricanMining.Worldbanktechnicalpaperno.181.Washington,DC.

Worldbank(1996).AminingstrategyforlatinAmericaand theCaribbean.Worldbank technical paperno.345.Washington,DC.

World bank (2010). TheWorld bank’s evolutionaryapproachtominingsectorreform.extractiveindustriesforDevelopmentSeriesNo.19,Washington,DC.

World bank (2012a).Rents to riches? The political economy of natural resource-led development.Washington,DC.

Worldbank(2012b).Africa Pulse,6.WashingtonDC.ZiPAR(2013).MiningtaxinZambia.Policybrief,Zambia

instituteofPolicyAnalysisandResearch;availableat:http://www.zipar.org.zm/documents/mining%20tax%20brief.pdf.

ZucmanG (2013).Themissingwealth of nations:Areeurope and the U.S. net debtors or net credi-tors?Quarterly Journal of Economics, 128(3):1321−1364.

Selected UNCTAD Publications 207

trade and development Report, 2013 UnitedNationspublication,salesno.e.13.ii.D.3Adjusting to the changing dynamics of the world economy iSbN978-92-1-112867-3

Chapter i CurrentTrendsandChallengesintheWorldeconomy Annex: AlternativeScenariosfortheWorldeconomyChapter ii TowardsMorebalancedGrowth:AGreaterRoleforDomesticDemandin

DevelopmentStrategies Annex: ShiftingGrowthStrategies:MainimplicationsandChallengesChapter iii FinancingtheRealeconomy

trade and development Report, 2012 UnitedNationspublication,salesno.e.12.ii.D.6Policies for Inclusive and Balanced Growth iSbN978-92-1-112846-8

Chapter i CurrentTrendsandChallengesintheWorldeconomyChapter ii incomeinequality:TheMainissuesChapter iii evolutionofincomeinequality:DifferentTimePerspectivesandDimensionsChapter iV ChangesinGlobalizationandTechnologyandtheirimpactsonNationalincomeinequalityChapter V TheRoleofFiscalPolicyinincomeDistributionChapter Vi TheeconomicsandPoliticsofinequalityReconsidered

trade and development Report, 2011 UnitedNationspublication,salesno.e.11.ii.D.3Post-crisis policy challenges in the world economy iSbN978-92-1-112822-2

Chapter i CurrentTrendsandissuesintheWorldeconomyChapter ii FiscalAspectsoftheFinancialCrisisanditsimpactonPublicDebtChapter iii FiscalSpace,DebtSustainabilityandeconomicGrowthChapter iV FinancialRe-RegulationandRestructuringChapter V FinancializedCommodityMarkets:RecentDevelopmentsandPolicyissues Annex: ReformofCommodityDerivativesMarketRegulationsChapter Vi TheGlobalMonetaryorderandtheinternationalTradingSystem

UNITED NATIONS CONFERENCE ON TRADE AND DEVELOPMENT

PalaisdesNationsCH-1211GeNeVA10

Switzerland(http://unctad.org)

Selected UNCTAD Publications

Trade and Development Report, 2014208

trade and development Report, 2010 UnitedNationspublication,salesno.e.10.ii.D.3Employment, globalization and development iSbN978-92-1-112807-9

Chapter i AftertheGlobalCrisis:AnUnevenandFragileRecovery Annex: CreditDefaultSwapsChapter ii PotentialemploymenteffectsofaGlobalRebalancing Annex: SimulationoftheTradeandemploymenteffectsofGlobalRebalancing:

ATechnicalNoteChapter iii MacroeconomicAspectsofJobCreationandUnemploymentChapter iV StructuralChangeandemploymentCreationinDevelopingCountriesChapter V RevisingthePolicyFrameworkforSustainedGrowth,employmentCreationand

PovertyReduction

trade and development Report, 2009 UnitedNationspublication,salesno.e.09.ii.D.16Responding to the global crisis iSbN978-92-1-112776-8Climate change mitigation and development

Chapter i TheimpactoftheGlobalCrisisandtheShort-termPolicyResponse Annex: TheGlobalRecessionCompoundstheFoodCrisisChapter ii TheFinancializationofCommodityMarketsChapter iii learningfromtheCrisis:PoliciesforSaferandSounderFinancialSystemsChapter iV ReformoftheinternationalMonetaryandFinancialSystemChapter V ClimateChangeMitigationandDevelopment

trade and development Report, 2008 UnitedNationspublication,salesno.e.08.ii.D.21Commodity prices, capital flows and the financing of investment iSbN978-92-1-112752-2

Chapter i CurrentTrendsandissuesintheWorldeconomy AnnextabletochapteriChapter ii CommodityPriceHikesandinstabilityChapter iii internationalCapitalFlows,Current-AccountbalancesandDevelopmentFinance

Annex: econometricAnalysesofDeterminantsofexpansionaryandContractionaryCurrent-accountReversals

Chapter iV DomesticSourcesofFinanceandinvestmentinProductiveCapacityChapter V officialDevelopmentAssistancefortheMDGsandeconomicGrowth Annex: DetailsoneconometricStudiesChapter Vi CurrentissuesRelatedtotheexternalDebtofDevelopingCountries

trade and development Report, 2007 UnitedNationspublication,salesno.e.07.ii.D.11Regional cooperation for development iSbN978-92-1-112721-8

Chapter i CurrentissuesintheWorldeconomy StatisticalannextochapteriChapter ii Globalization,RegionalizationandtheDevelopmentChallengeChapter iii The“NewRegionalism”andNorth-SouthTradeAgreementsChapter iV RegionalCooperationandTradeintegrationAmongDevelopingCountriesChapter V RegionalFinancialandMonetaryCooperation Annex1 TheSouthernAfricanDevelopmentCommunity Annex2 TheGulfCooperationCouncilChapterVi RegionalCooperationinTradelogistics,energyandindustrialPolicy

Selected UNCTAD Publications 209

trade and development Report, 2006 UnitedNationspublication,salesno.e.06.ii.D.6Global partnership and national policies for development iSbN92-1-112698-3

Chapter i GlobalimbalancesasaSystemicProblem Annex1: CommodityPricesandTermsofTrade Annex2: TheTheoreticalbackgroundtotheSaving/investmentDebateChapter ii evolvingDevelopmentStrategies–beyondtheMonterreyConsensusChapter iii ChangesandTrendsintheexternalenvironmentforDevelopment AnnextablestochapteriiiChapter iV MacroeconomicPolicyunderGlobalizationChapter V NationalPoliciesinSupportofProductiveDynamismChapterVi institutionalandGovernanceArrangementsSupportiveofeconomicDevelopment

******

trade and development Report, 1981–2011 UnitedNationspublication,salesno.e.12.ii.D.5Three Decades of Thinking Development iSbN978-92-1-112845-1

Part One TradeandDevelopmentReport,1981–2011:ThreeDecadesofThinkingDevelopment 1. introduction 2. interdependence 3. Macroeconomicsandfinance 4. Globaleconomicgovernance 5. Developmentstrategies:assessmentsandrecommendations 6. outlook

Part Two PanelDiscussionon“ThinkingDevelopment:ThreeDecadesoftheTrade and Development Report” openingstatement byAnthonyMothaeMaruping originsandevolvingideasoftheTDR introductoryremarksbyRichardKozul-Wright StatementbyRubensRicupero StatementbyYιlmazAkyüz TheTDRapproachtodevelopmentstrategies introductoryremarksbyTaffereTesfachew StatementbyJayatiGhosh StatementbyRolphvanderHoeven StatementbyFaizelismail Themacroeconomicreasoninginthe TDR introductoryremarksbyCharlesGore StatementbyAnthonyP.Thirlwall StatementbyCarlosFortin StatementbyHeinerFlassbeck evolvingissuesininternationaleconomicgovernance introductoryremarksbyAndrewCornford StatementbyJomoKwameSundaram StatementbyArturoo’Connell Thewayforward ClosingremarksbyAlfredoCalcagno Summaryofthedebate

******

Trade and Development Report, 2014210

Thesepublicationsmaybeobtainedfrombookstoresanddistributorsthroughouttheworld.ConsultyourbookstoreortheUnitedPublicationsSalesandMarketingoffice,300e42ndStreet,9thFloor,iN-919JNewYork,NY10017,UnitedStates.tel.:+12129638302,fax:+12129633489,e-mail:publications@un.org,https://unp.un.org.

the financial and economic crisis of 2008-2009 UnitedNationspublication,salesno.e.11.ii.D.11and developing countries iSbN978-92-1-112818-5editedbySebastianDullien,DetlefJ.Kotte,AlejandroMárquezandJanPriewe

introductionthe crisis – transmission, impact and special featuresJanPrieweWhat Went Wrong? Alternative Interpretations of the Global Financial CrisisDanielaMagalhãesPratesandMarcosAntonioMacedoCintraThe Emerging-market Economies in the Face of the Global Financial CrisisJörgMayerThe Financialization of Commodity Markets and Commodity Price VolatilitySebastianDullienRisk Factors in International Financial Crises: Early Lessons from the 2008-2009 Turmoil the crisis – country and Regional studieslaikeYangandCorneliusHuizengaChina’s Economy in the Global Economic Crisis: Impact and Policy ResponsesAbhijitSenGuptaSustaining Growth in a Period of Global Downturn: The Case of IndiaAndréNassifBrazil and India in the Global Economic Crisis: Immediate Impacts and Economic Policy ResponsesPatrickN.osakweAfrica and the Global Financial and Economic Crisis: Impacts, Responses and Opportunitieslooking forward – Policy AgendaAlejandroMárquezThe Report of the Stiglitz Commission: A Summary and CommentRicardoFfrench-DavisReforming Macroeconomic Policies in Emerging Economies: From Procyclical to Countercyclical ApproachesJürgenZattlerA Possible New Role for Special Drawing Rights In and Beyond the Global Monetary SystemDetlefJ.KotteThe Financial and Economic Crisis and Global Economic Governance

******

the Global economic crisis: UnitedNationspublication,salesno.e.09.ii.D.4systemic failures and multilateral Remedies iSbN978-92-1-112765-2Report by the UNCTAD Secretariat Task Force on Systemic Issues and Economic Cooperation

Chapter i AcrisisforetoldChapter ii Financialregulation:fightingtoday’scrisistodayChapter iii ManagingthefinancializationofcommodityfuturestradingChapter iV exchangerateregimesandmonetarycooperationChapter V Towardsacoherentefforttoovercomethesystemiccrisis

******

Selected UNCTAD Publications 211

Regional monetary cooperation and Growth-enhancing Policies: the new challenges for latin America and the caribbeanUnitedNationspublication,UNCTAD/GDS/2010/1

Chapter i WhatWentWrong?AnAnalysisofGrowthandMacroeconomicPricesinlatinAmerica

Chapter ii RegionalMonetaryCooperationforGrowth-enhancingPolicies

Chapter iii RegionalPaymentSystemsandtheSUCReinitiative

Chapter iV PolicyConclusions

******

PriceFormationinFinancializedCommodityMarkets:TheroleofinformationUnitedNationspublication,UNCTAD/GDS/2011/1

1. MotivationofthisStudy

2. PriceFormationinCommodityMarkets

3. RecentevolutionofPricesandFundamentals

4. FinancializationofCommodityPriceFormation

5. FieldSurvey

6. PolicyConsiderationsandRecommendations

7. Conclusions

******

Thesepublicationsareavailableonthewebsiteat:http://unctad.org.CopiesmaybeobtainedfromthePublicationsAssistant,MacroeconomicandDevelopmentPoliciesbranch,DivisiononGlobalizationandDevelopmentStrategies,UnitedNationsConference onTrade andDevelopment (UNCTAD), Palais desNations,CH-1211Geneva 10,Switzerland;e-mail:gdsinfo@unctad.org.

Trade and Development Report, 2014212

UNCTAD Discussion Papersareavailableonthewebsiteat:http://unctad.org.CopiesofUNCTAD Discussion Papersmaybeobtained fromthePublicationsAssistant,MacroeconomicandDevelopmentPoliciesbranch,DivisiononGlobalizationandDevelopmentStrategies,UnitedNationsConferenceonTradeandDevelopment(UNCTAD),PalaisdesNations,CH-1211Geneva10,Switzerland;e-mail:gdsinfo@unctad.org.

unctAd discussion Papers

******

No.216 April2014 AndrewCoRNFoRD Macroprudentialregulation:Potentialimplicationsforrulesforcross-borderbanking

No.215 March2014 StephanyGRiFFiTH-JoNeS AbRiCSdevelopmentbank:Adreamcomingtrue?No.214 Dec.2013 JörgMAYeR Towardsmorebalancedgrowthstrategiesindeveloping

countries:issuesrelatedtomarketsize,tradebalancesandpurchasingpower

No.213 Nov.2013 ShigehisaKASAHARA TheAsiandevelopmentalStateandtheFlyingGeeseparadigm

No.212 Nov.2013 VladimirFiliMoNoV, Quantificationofthehighlevelofendogeneityandof DavidbiCCHeTTi, structuralregimeshiftsincommoditymarkets NicolasMAYSTRe andDidierSoRNeTTeNo.211 oct.2013 AndréNASSiF, Structuralchangeandeconomicdevelopment: CarmemFeiJó isbrazilcatchinguporfallingbehind? andelianeARAúJoNo.210 Dec.2012 GiovanniAndreaCoRNiA Developmentpoliciesandincomeinequalityinselected andbrunoMARToRANo developingregions,1980–2010No.209 Nov.2012 AlessandroMiSSAle Multilateralindexedloansanddebtsustainability andemanuelebACCHioCCHiNo.208 oct.2012 DavidbiCCHeTTi Thesynchronizedandlong-lastingstructuralchangeon andNicolasMAYSTRe commoditymarkets:evidencefromhighfrequencydataNo.207 July2012 AmeliaU.SANToS-PAUliNo Trade,incomedistributionandpovertyindeveloping

countries:AsurveyNo.206 Dec.2011 AndréNASSiF, Thelong-term“optimal”realexchangerateand CarmemFeiJó thecurrencyovervaluationtrendinopenemerging andelianeARAúJo economies:ThecaseofbrazilNo.205 Dec.2011 UlrichHoFFMANN Somereflectionsonclimatechange,greengrowth

illusionsanddevelopmentspaceNo.204 oct.2011 PeterboFiNGeR ThescopeforforeignexchangemarketinterventionsNo.203 Sep.2011 JavierliNDeNboiM, Shareoflabourcompensationandaggregatedemand DamiánKeNNeDY discussionstowardsagrowthstrategy andJuanM.GRAñANo.202 June2011 PilarFAJARNeS Anoverviewofmajorsourcesofdataandanalyses

relatingtophysicalfundamentalsininternationalcommoditymarkets

No.201 Feb.2011 UlrichHoFFMANN Assuringfoodsecurityindevelopingcountriesunderthechallengesofclimatechange:Keytradeanddevelopmentissuesofafundamentaltransformationofagriculture

No.200 Sep.2010 JörgMAYeR Globalrebalancing:effectsontradeflowsandemployment

No.199 June2010 UgoPANiZZA, internationalgovernmentdebt FedericoSTURZeNeGGeR andJerominZeTTelMeYeR

Q u e s t i o n n A i R e

Trade and Development Report, 2014

In order to improve the quality and relevance of the Trade and Development Report, the UNCTAD secretariat would greatly appreciate your views on this publication. Please complete the following questionnaire and return it to:

ReadershipSurveyDivisiononGlobalizationandDevelopmentStrategiesUNCTADPalaisdesNations,Roome.10009CH-1211Geneva10,Switzerlande-mail:tdr@unctad.org

Thank you very much for your kind cooperation.

1. Whatisyourassessmentofthispublication? Excellent Good Adequate Poor overall Relevanceofissues Analyticalquality Policyconclusions Presentation

2. Whatdoyouconsiderthestrongpointsofthispublication? __________________________________________________________________________________ __________________________________________________________________________________ __________________________________________________________________________________

3. Whatdoyouconsidertheweakpointsofthispublication? __________________________________________________________________________________ __________________________________________________________________________________ __________________________________________________________________________________

4. Forwhatmainpurposesdoyouusethispublication? Analysisandresearch educationandtraining Policyformulationandmanagement other(specify) ____________________________ __________________________________________________________________________________

5. Whichofthefollowingbestdescribesyourareaofwork? Government Publicenterprise Non-governmentalorganization Academicorresearch internationalorganization Media Privateenterpriseinstitution other(specify) ____________________________

6. Nameandaddressofrespondent(optional): __________________________________________________________________________________ __________________________________________________________________________________ __________________________________________________________________________________

7. Doyouhaveanyfurthercomments? __________________________________________________________________________________ __________________________________________________________________________________ __________________________________________________________________________________

Printed at United Nations, Geneva GE.14-00000–August 2014–4,362

UNCTAD/TDR/2014

Phot

o Cr

edits

: ©FO

TOLI

A: F

renk

58, G

illes

Pai

re, H

erbe

rt Ru

bens

, Orla

ndo

Flor

in R

osu,

Raw

pixe

l – ©

ILO:

M. C

roze

t, J.

Go,

A. M

irza.