UNIDO Project on International Public Goods For Economic Development(not for quotation)

EXECUTIVE SUMMARY – FIRST DRAFT – OCTOBER 2005(prepared by Roberto A. Domenech)

The concept of public goods has attracted increasing attention in the international context and has become a central issue in economic development. The process of globalization and political and economic interdependence has raised the need of cooperative actions at the national, supranational and global level. Policies of public goods, at all levels, have become key ingredients to address the pending challenges to close the gap between poor and rich countries. Despite the substantial progress made in some regions of the world, more than half of the population still lives in absolute poverty and technological advances have not reached all countries. Thus, the provision of international public goods becomes a key instrument for poverty eradication.

The key characteristic of public goods is that they can be experienced by all at nearly zero marginal cost. That is, once available, they can be made available to all or, in other words, consumption by one person does not reduce consumption opportunities by others and nobody can be prevented from consumption. Hence, international public goods (IPGs) are public goods whose benefits reach across borders thus requiring actions that go beyond national interests.

Another feature of public goods is that under externalities there is a discrepancy between marginal (social) benefits and marginal (social) costs which may result in over supply or under supply of these goods. All this calls for a collective and cooperative action.

The distinction between provision and consumption of an IPG is an important one because a public good may be readily available but other required conditions may be not in time and /or in place, i.e. the quality and quantity of National Public Goods (NPGs). These shortages or inconsistencies may cause that the sole availability of a given public goods a not a sufficient condition for taking advantage of its potential benefits and its full realization. The question arises of whether the public goods that are in short supply are national or some can be regarded as international or, more widely, what should be the appropriate combination in the provision of NPGs and IPGs. Hence, the international provision of NPGs is to be also considered. The supply or under supply of public goods, whether national or international, involves reforms of the economic system that prevails in each particular country or region. Therefore is necessary to consider the underlying political and economic processes prevailing in the different regions and countries.

The Conference of International Public Goods for Economic Development organized by WCFI and UNIDO (held on September 7-8, 2005) gathered a group policymakers, scholars and specialists in economic development to debate on the role of international public goods provision, its modalities, and its priorities, in order to extract lessons and to provide concrete proposals and recommendations for polcymaking.

The axial theme of the conference turned around the discussion of six reports covering the mayor regions in the developing world: East Asia, China and India, Middle East and North Africa, Sub-Saharan Africa, the former communist countries of the URSS and Central Europe, and Latin America. In each of these studies various kinds of international public goods were addressed. These are:

a) Trade liberalization;b) Financial stability;

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c) Knowledge and technology transfers;d) Environment and climate change.

Although for most regions these are the significant IPGs, the report for sub-Saharan Africa has also addressed other two relevant public goods such as health and peace and security, which in the African present context became of international nature.

In many cases there is a strong link between the IPGs considered. Thus, each regional report focused the analysis on a different set of IPGs and they also placed different emphasis in closely-linked national and regional public goods. Table 1 summarizes the IPGs considered in each regional report.

Table 1: International Public Goods Considered in Regional Reports

East Latin East MENA Sub-Saharan China Asia America Europe Africa India

Trade X X X X X XLiberalization

Financial X X X X X XStability

Knowledge X X X X andTechnology

Environment X X X X

Health X

Security Xand Peace

Approximately one hundred countries were considered in all the regional

analyses. They provide a rich variety of experiences with a number of dimensions to be looked at. Even though each of the regions present a unifying common features convening the grouping, such as the geographical area and similar political, or cultural, or economic experiences, a good degree of heterogeneity can also be found within each region, let alone differences among regions. However, it will be also seen that in some cases, interregional comparisons of some aspects may show stronger similarities among countries across regions than those shared by countries within a region.

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(Here we can insert a table or an appendix with an exhaustive list of the countries taken into account in each region, to give an idea of the coverage, or just a paragraph to account for the fact that the reports cover most of the less developed countries)

Each of the reports provides background on the relevant processes of reforms, successes and setbacks, and evaluations of the policies applied related to public goods. Even though the scope is on IPGs, it clearly emerges that this issue can no be addressed independently of public goods at the national and regional levels, therefore pointing a strong link between these three areas of policy decision.

The scope and methodology of the six reports are not homogeneous. Thus, the subjects covered and the emphases are different, obviously attending at the own characteristics of each of the regions and countries included. Thus, the study for China and India are made with a prospective horizon given significant weight these two countries will have in shaping the medium and long term future. China is also considered in the East Asian region denoting the significant role this large emerging economy in the region and in the world as well. In other cases, issues such as the underlying political processes, health, poverty and unemployment, education and human resource development, and armed conflicts, accompanying economic development led some of the reports to a lengthier treatment (a greater weight on theses issues) of their influences. For example, the issue of health in Sub-Saharan Africa, the war environment, political instability, unemployment and human resource development in the Middle East and North African countries, and the reform of political institutions in the former communist countries. On the contrary, the political processes are not a subject of consideration in regions where stronger political institutions were in place at the time the economic reforms were attempted, thus allowing a smoother process. Some of the reports draw on a longer period of time, e.g. Latin America, while others focus in shorter periods, e.g. former communist countries.

This diversity of countries and experiences provides a vast and extensive material that enables to draw on closely related issues that have originated controversial points of view over the last years, particularly regarding the provision of IPGs. For example, the role played by International Financial Institutions (IFIs), by multilateral organizations such as WTO, the General Agreement on Trade and Tariffs (GATT) and trade institutional frameworks such as the Trade Related Aspects of Intellectual Property Rights TRIPS), regional associations, and other entities such as Multinational Companies (MNCs). The actions and policies of these institutions in the past need to be analyzed objectively in order to shed light on the ideal role that they should play in the future.

The rest of this report is organized in two parts. In the first, a brief introductory

background for each region is given. The second part, attempts to compare similarities and contrasts among regions.

I. BACKGROUND

The grow performance of East Asian Economies during the period 1965-96 shows that this is the region with the highest rates, with most of these countries achieve annual growth rates above 6,5%. This has led to a rapid rising in per capita income.

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These economies took advantages of the external environment and thus were the major beneficiaries of the trade liberalization under GATT’s multilateral negotiations. International trade and investment flows into and within the region have grown considerably, despite some slowdowns. In this regard, we found that the East Asian region, is the most successful case in terms of achieving a high integration into the global economy.

The studies on the remarkable performance of East Asia have stressed the importance of NPGs, including macroeconomic stability, avoidance of exchange-rate overvaluation, keeping real interest rates positive, market-friendly policies, compliance with “the rule of law”, political stability, strengthening productive and trade capacity and emphasis on educational expenditures by governments and households. Other factors underlying the economic success of East Asian Economies were the existence of consensus among the political leadership and the ensuing commitment to integrate to the global economy.

External anchorage of East Asian Economies was an important factor for the chosen growth strategy. Japan showed the way as the first Asian country to achieve the status of a developed country. The transfer of experiences and lessons has been a regional public good crucial in this strategy alongside with advice and assistance from IFIs such as the World Bank (WB) and the IMF, and the Asian Development Bank. Another mechanism has been the flow of direct investment from Japan to Asian NIEs and ASEAN-4 (Indonesia Malaysia, Philippines and Thailand). This indicates the existence of a sequential pattern of economic development: Japan was the first country to become developed, followed by the Asian NIEs, and these, in turn, were followed by the ASEAN-4 economies, and most recently by China and Vietnam. The natural-resource-poor Asian NIEs (Taiwan, Hong Kong, South Korea and Singapore) adapted the Japanese model, focusing on high savings and investment, human resource development, foreign direct investment, and promotion of export-oriented industrialization. The natural-resource-rich ASEAN-4 economies made further adaptations with greater emphasis on natural resources and less emphasis on industrial policy and industrial targeting. This is the pattern followed by China and the rest of the countries considered in the region.

For the ASEAN-4 the export-oriented industrialization came in the mid-1970s. For the transition economies, China started with economic reforms from the end of the 1970s, opening to international trade and FDI, while Cambodia Laos and Vietnam followed in the 1980s. The nexus of trade and FDI was a key feature of the outward growth strategy. The initial manufactured exports were processed agricultural and mineral products and labour intensive products, but increasingly they shifted towards higher value added skill, capital and technology-intensive manufactures.

Foreign aid to Japan, particularly from the US, played a significant role in post war development in Japan, South Korea and Taiwan. In the 1970s, concessional loans from Japan to Southeast Asia were used for economic and social infrastructure and human and institutional capacity building. These have been critical in promoting private sector development in the region. This is clearly a consistent policy to complement the provision of IPGs and NPGs.

In contrast with the East Asian Economies, the performance of Latin American economies over the last three decades is rather disappointing, with a regional average growth rate in income per capita of 0.7 annually for the period 1975-02. This performance has not been homogeneous for all countries in the region. The only remarkable case of success is Chile showing an annual average per capita income growth of 4.1%.

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The causes or this poor performance pointed out by most experts have been macroeconomic instability, gaps in education and technological innovation, and several institutional deficiencies affecting the investment climate, such as bad regulations and a weak rule of law. This outcome is also closely related with differences in long term competitiveness. In brief, all these factors indicate an environment characterized by a shortage in the provision of public goods. Several factors described below explain the poor performance.

During 1947-71 Latin America chose the strategy of import substitution industrialization (ISI) while the world observed liberalization of trade. In the 1970s, when protectionism escalated in the world, several Latin American countries embarked in trade and financial liberalization. This response was in striking contrast with East Asian Economies.

In the 1960s, Latin American countries moved one step forward to base their development strategy in rapid industrialization and, to that purpose, extended government intervention in virtually all economic areas. The United Nations Conference on Trade and Development (UNCTAD) and the Group of 77 (an association of socialists and developing countries) were influential in laying the inward-looking growth strategy in which trade was not to play a significant role. As a result of this increasing interventionism the economic system became hybrid and overregulated. Recurrent crisis in the balance of payments and chronic inflationary processes developed, creating as well, more often than not, political instability. This was a long period of a very unstable and uncertain business climate for the region. Despite the growth record in the region for the 1950s and 1960s under the inward-looking ISI strategy the process was not sustainable and did not accomplished growth higher than the industrial countries.

A new wave of trade liberalization started with Chile and Mexico in the mid 1980s and was followed in the 1990s by Argentina, Brazil, Costa Rica, Peru, Uruguay and Venezuela (y Colombia?). This move to liberalize trade did not delivered for the whole region the expected results in income growth. With the exception of Chile, most of the other countries fell short of adhering to sustainable policies and in some cases reversals of trade liberalization were observed. The remark here is that the Chilean success with unilateral liberalization lies in its ability to maintain a competitive and a stable real exchange rate as a way to support export growth. This was in term backed by consistent exchange rate and monetary management, that is, the fundamentals were right. The failure of the liberalization policies in other Latin American countries lies in distortions of the incentives caused primarily by the instability of the real exchange rate.

The Bretton Woods institutions assisted countries in the region facing balance of payments crisis imposing corrective macroeconomic measures, including devaluations and fiscal and monetary contractions. The defect of this approach was that it overlooked the structural constraints that were the root of the frequent crises such as excessive industrial protection and low domestic savings.

For many decades the region has been characterized macroeconomic instability. Interest rate ceilings, officially directed credit, expansionary fiscal and monetary policies, and foreign exchange controls have been common currencies. They aimed to cheapen the credit to the private and public sectors in order to incentive investment and to finance fiscal deficits. As a result inflation accelerated, real interest rates became negative causing private savings to decline, credit allocation got severely distorted, domestic financial markets remained underdeveloped, and the economies financially repressed.

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The case of the former communist countries of the Soviet bloc is very distinct from the experiences of the other two regions reviewed above. After the collapse of the communist regimes of the Soviet bloc, the economies in the area faced the challenge of political and economic transition to democracy and to market-based institutions. The process of reforms in the region shows some contrasts and two groups countries are clearly identified. On the one hand, Eastern European Countries (EEC) and the Baltic republics have managed to carry out this process quickly and at relatively low economic and social cost. These countries were rewarded with the 2004 EU accession. From the mid-1990s on, they showed a positive trend in GDP growth. On the other hand, the Balkan countries and the twelve former Soviet republics belonging to the Commonwealth of Independent States (CIS) went through a much more costly process in political and economic terms and have been excluded for EU accession. They have lagged behind considerably in the economic recovery, if at all, and positive growth in GDP was observed only from year 2000 on.

Diverse causes have been advanced to explain this differentiated outcome, such as starting conditions, ethnic conflicts, domestic policies, strategies adopted, the external anchoring of reforms, international trade arrangements and international financial stability, the last three particularly relevant in the context of IPGs.

Despite all these countries followed the recommendations of the Washington Consensus (macroeconomic stabilization, internal and external liberalization, and privatization, avoidance of exchange rate overvaluations), the institutional reforms failed in many cases. It clearly emerged that anchoring reforms domestically is not always possible because of pre-existing political constraints, i.e. ownership of production factors. Since these reforms were at the core of the transition towards democracy and to a market economy, the focus was shifted to the political economy of reforms. A post-Washington Consensus considering other factors such as rule of law, governance and regulations amplified the emphasis of reforms. Moreover, as some reforms were not successfully implemented another constraint aroused with the possibility of policy reversal. For example, attempts to impose hard budget constraints or shed labour by compensating job losers may fail due to time inconsistency problems.

One alternative to overcome these constraints is the appropriate choice of external anchoring. In this case the conditionality associated with imposing reforms is the result of both supply and demand for reforms. However, external anchoring requires giving up some aspects of sovereignty and the willingness to do so may be more easily achieved when external anchoring is provided in a multilateral context rather than by bilateral relations in the presence of a bigger and more powerful provider.

In the post-communist countries, most external anchoring for reforms was provided by two groups: regional institutions (the EU and NATO) and global institutions (the IMF, the World Bank and the WTO). While the first group was essential and very effective in providing external anchoring for the EEC, the Baltic republics and the Balkans, the CIS countries have depended exclusively on global institutions with much less satisfactory results.

The role of the EU was crucial for the strategy followed by EEC integration. The strong desire to “come back to the west” motorized the reforms to build the fundamentals of democracy and free market economy. First, the Association Agreements and later the Copenhagen (1991) and Helsinki (1999) Accession Criteria established the agenda and conditionality for the integration. In 2004 eight transition countries joined the EU and Bulgaria and Romania are expected to join in 2007. The rest of the countries in transition are implementing reforms and some of them signed agreements to engage in the process of integration to the EU.

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CIS countries have been excluded from the EU integration process and the IMF has played the prominent role in the transition process of these countries. However, it can be seen that the CIS countries that were most exposed to IMF conditionality reformed the least. Moreover, at the peak of the conditionality imposition many of these countries showed stagnation and, in cases, reversal of reforms.

As CIS countries have so far been excluded from the EU integration process they were entirely dependent on assistance from IFIs. They have managed to build the fundamentals of democratic societies. However, they have failed to consolidate the economic reforms despite the strong presence of international financial institutions.

The strong desire of EEC countries and its people to access to the EU was underlying the reform process and despite unstable political environments due to frequent elections and weak government-coalitions, most countries maintained consistent reform strategies. On the contrary, incentives to make clear to the general public the gains of IMF programs applied in CIS countries were weak or non-existing. The conditions were more abstract, highly technical or controversial and did not gain domestic consensus and wide support by the public. Attempts by the IMF to introduce public discussions of these policies have not been enough to promote the willingness to reform and to support the reforms when they were in process.

The vast African continent and the Middle East comprise one of the poorest regions in the world and at the same time dominated by international and domestic armed conflicts. Two separated reports focus on these areas: the Middle East and North African (MENA) region and sub-Saharan Africa.

The countries considered in the MENA region are not a homogenous group. Three sub-groups can be distinguished in the region: The oil-surplus economies (forming the Gulf Cooperation Council), diversified economies, and the poor marginalized economies. They show strong contrasts regarding resource endowments and this aspect has signalled the growth patterns observed in the past. Oil prices boost has significantly explained the upturn in growth although this has benefited a small number of countries while almost half of the region witnessed a retreat in growth rates. This growth performance in the recent past has felt short of the level that must be achieved to close the employment gap, being that the region bears the highest rate of unemployment in the world. As a result, the proportion of the population living under the poverty lines is very high in some of the countries.

The region bears the highest incidence unemployment in the world, with a rate of 18 percent in 2002. Youth unemployment growth is the highest in the world. This reflects in high poverty rates as well. The share of young adults in the unemployed population is about 47 percent to the total and is highly concentrated among youth with intermediate education and low skills. The problem of the unemployed young in marginalized poor economies lies principally in the underperformance of growth of the whole economy. In the case of GCC countries the problem lies in the overdependence on expatriate labour which is more skilled than nationals.

Armed conflicts are another burden generalized in the region (Arab-Israeli, Irak war, Libya, Sudan). They have negatively impacted the growth and development prospects in the region by hindering trade and investment. However, not always they caused region-wide instability and disrupt growth. The region averaged 2.7 percent growth in GDP over the period 1980-02, with high volatility in annual rates due to oil price fluctuations and political instability. This growth has been uneven in the region. Oil-dependent economies experienced a decline in real per capita GDP during the 1980s and negligible growth during the 1990s while non-oil economies achieved average rates similar to other developing countries except East Asia.

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The macroeconomic environment in the region has showed significant advances. With the assistance of the IMF and the WB many countries in the region have followed stabilization policies with inflation falling at acceptable levels. In some cases the reforms and programs are being implemented. Most of these countries peg their national currencies to the dollar. Many Central Banks in the region were supported by international creditors to cancel or reschedule public debt. However, the unemployment rates have increased and only recently attention has been brought to the “human” side and social costs of reform.

The MENA region is facing the transition from public-sector managed to private sector-led economies and from oil-dependent to diversified economies. There has been progress across the region in the liberalization of markets, opening to foreign investment and privatization. The public sector still remains very large in most countries in the region. Structural adjustment in GCC countries has not been painful because of the availability of effective social welfare systems. In other countries, reforms of the customs administration, institutional modernization, and creation of free zones have been successful. Yet, the reforms have not produced a desired outcome in employment leaving the region with the highest unemployment rates in the world, particularly for the young people.

The rest of the African continent comprises the Sub-Saharan African countries. They conform one of the poorest regions in the world with most of its population not having access to education, health, and minimum food intakes. Distinctively, the region has been largely de-linked from world events such as international trade, technological advances, pacification, and provision of elemental health, education and food to its people.

During the last two decades the economies in this region have been characterized by economic instability mostly due to wrong domestic policies. Frequent armed conflicts generally originated on disputes over natural resources have introduced additional political instability and disruption of economic activity. Weak political institutions are the dominant picture in most countries in the region making law enforcement a difficult task to accomplish. Most countries are in pressing need for reforms to create a friendly-business environment and remove heavy regulations which have created a climate for the proliferation of informal activities and represent about one fifth to one third of the economic activity.

Many of the countries are endowed with rich resources and the FDI have flowed to the region is mostly related to these activities. This has improved the economic infrastructure but investment in this area is largely in deficit compared to the needs. Economic structure is mostly dominated by agricultural activities while industrialization is scarcely developed. Exports are concentrated in primary goods and this has made these economies highly vulnerable to shocks in the terms of trade.

Finally, China and India are distinctive in that they are the two most populous countries in the world, they both have grown rapidly over the past two decades, and are expected to maintain this trend during the coming two decades, mainly because they can transfer poor people from low- productivity agriculture to more productive activities. Therefore, the key characteristics of each of these countries and the future trends in their economies are relevant for a discussion of global public goods in view of the role they are expected to play in the future. Particularly, the rapid growth will imply increasing demand for energy and, consequently, trade flows will increase. Just as example to give an idea of the magnitude of the figures involved, in the case of China, demand for oil is expected to more than double that of Japan, while India´s demand for oil will approach that of Japan by 2025.

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II. INTERNATIONAL PUBLIC GOODS

Trade Liberalization

There is consensus that trade has a positive influence in growth. Therefore, the accession to trade is an IPG that can be viewed as a source of growth. However, the influence of trade on growth may sometimes be difficult to assess due to time inconsistency of trade liberalization and other policies, i.e. macroeconomic stability, or shortages in the provision of other NPGs, which act as impediments to the realization of available IPGs. Nevertheless, the question here is weather or not the rules set up by the international agreements such as GATT/WTO, free trade agreements (FTA), and the role of other IFIs and MNCs have contributed to the provision and consumption of trade.

Up to date both developed and less developed countries have achieved a diverse degree of trade liberalization. Economic projections of a freer trade environment in the world show that the gains to developing countries as a group from a move to free trade by industrialized countries amounts to about 2 percent of GDP while a global move to free trade would raise these gains to about 5. This is a significant fact to be considered in the discussions over the design of fairer rules of multilateral trade.

Looking roughly at regional averages, the degree of protectionism goes from the cases of highest protection such as India, African and Middle East countries to the most open economies of East Asia. In between the extremes fall Latin America, China, CIS countries and the special case of EEC within the EU.

India is one of the most protectionist countries in the world, with import tariff levels averaging 31.4 per cent. This average is substantially lower in China with an average tariff of 12.4 percent. Thus, as an example, if India´s ratio of imports to GDP were similar to that of China by 2025, imports into India would exceed by large those of Japan.

Latin America is one of the regions in the world that most heavily taxed trade, made several attempts to liberalize trade and integrate to the world during the post war period. Despite these efforts trade policies ran counter to global trends or were not consistently applied with macroeconomic policy or institutional reforms.

In Eastern Europe, the transition countries which have already joined the EU, or are going to join this bloc in the near future have to participate in the common EU external trade policy. Their economies benefit from the huge Single European Market and its freedom of movement of goods, services, capital and people. This means that they participate in the EU Common Agriculture Policy and this is the negative aspect in the trade sphere. The CIS countries remain outside European and also global trade arrangements and continue in many aspects their previous autarkic strategy of development with the global institutions playing a rather impotent role to change this situation.

The MENA region show a declining growth in exports as a percentage of GDP declined during the last two decades indicating that the region is significantly under-trading both with the rest of the world and within the region relative to its potential. The

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region remains as one of the areas in the world with high protection, with average tariff around 15 percent.

Sub- Saharan African economies have a very small and decreasing participation in the word trading system suggesting that the multilateral trade liberalization policy achieved under the GATT and WTO has not benefited much the integration of these countries to world trade reflecting the de-linking of sub-Saharan Africa in the globalization process. To a large extent, this decline is the result of African exports concentrated in primary commodities. Agricultural trade policies were not part of the negotiations under the GATT. With the creation of WTO some attempts at reducing trade barriers and subsidies in developed economies have been made with limited successes. Subsidies to the production of sugar and cotton in developed countries, EU and US, have dumped export prices of Sub-Saharan countries. In the case of sugar, some preferential agreements granted by the EU to African, Caribbean and Pacific countries (ACP) have alleviated this problem but at the expense of other developing countries. Other preferential agreements on non-agricultural have been granted on bilateral basis or to a group of selected countries.

Trade in agriculture remains protected by both developed and developing countries. GATT failed to liberalize trade in agriculture and services while it legitimized developed country protection in textiles and clothing through non-tariff barriers. This has affected agriculturally based economies of developing countries in all the regions, particularly low income countries in East Asia (Cambodia, Vietnam, Indonesia, Thailand and the Philippines), Africa and the Middle East. However, the countries in the East Asia region do not have a common position on multilateral trade liberalization in agriculture in the WTO. Japan and South Korea are highly protective on agriculture while China is more prepared for opening up its agricultural sector.

As for the ruled-base systems of multilateral trade, countries in the different regions have made a very uneven use of the trade multilateral system of GATT/WTO. In one extreme, we found the case of East Asian countries that taken advantages of trade by means of this multilateral system. Eastern Europe, CIS countries and Latin America have only recently moving to a more extensive adherence. In the other extreme, Middle East and African countries, particularly sub-Saharan Africa, have not had accession to the multilateral system. The principal cause is the exclusion of agriculture and protectionism in developed countries.

The East Asian region achieved high integration into the global economy through trade, financial flows, and technology transfer. Global trade liberalization through successive rounds of trade negotiations under GATT/WTO and FDI have enabled the economies of these countries to successfully pursue national development strategies of export-oriented industrialization and industrial upgrading. The preferential market access under GSPs in GATT/WTO has been important for the Asian NIEs during their early phases of development and are now important for the less developed economies in the region. However, by and large, most exports of East Asia were conducted under MFN tariffs. Trade in agriculture has been hindered by the failure to liberalize agricultural trade in the GATT while trade in textiles and clothing have been constrained by bilateral quotas under the Multi-Fibre Agreement.

Accession to WTO membership has become a long drawn process for countries in the region. The practice is to force new members to accept more onerous obligations than those for existing members and WTO. The accession of China took 15 years and involved enormous economic and institutional reforms and negotiations. China commitment to reduce protection in the agricultural sector is expected to have a strong

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impact on world trade. Another major impact in world trade will of China´s accession will be in the textile and clothing sector once the MFN tariffs are imposed.

Before 1986, the multilateral system represented by GATT had little influence in trade policies in Latin America. Only 12 out of 20 countries in the region were GATT members. However, some of them benefited from the most favoured nation clause (MFN), after the negotiations between the US and EU reduced tariffs on soybeans and soy oil and, later, the agreements reached on CCE subsidies which reduced their level and compensated for damages to exporters.

The post-war growth in world trade benefited Latin American countries only indirectly. They did not really adhere to GATT because, on the one hand, most governments in the region did not really trust the GATT which they regarded as a club of powerful nations to advance their own policies at the expense of developing countries. On the other, crucial issues for Latin American countries, such as non-tariff barriers in industrial countries, agriculture subsidies, and international monopolies were outside GATT regulations driving them to a defensive position.

The Uruguay Round concluded in 1994 was successful, particularly because it helped to revive the cause of multilateralism. For Latin America it was also relevant because for the firs time several countries in the region became active in the negotiations pushing for greater liberalization and for the inclusion in the agenda of the protection to agriculture and non-tariff protection in industrial countries. All this happened at a time when Latin American countries were being strongly affected by increased protectionism of industrial countries.

In the case of EEC and CIS countries, after the collapse on the communist system the GATT/WTO agreements did not become the dominant trade regulations in the region. The EEC and the Baltic republics were included by the EU in the Trade and Associations Agreements (TAA), and they were offered EU membership. This meant the access to a custom union with a common external trade policy and to the single European Market. This generous trade liberalization offer of the EU led to rapid trade creation between EEC and the EU and also to trade diversion with other partners of EEC.

The CIS countries did not have access to trade liberalization agreements prior to, or in parallel with WTO accession. Most CIS countries are not yet members of WTO and those which are members do not show evidence that their membership contributed to expanding their trade. Their strategy was directed to build first their own regional trade block but the various attempts have been unsuccessful, with most of the trade agreements never implemented. This was due mostly to mistrust among partners, asymmetry in economic and political potentials, and weak arbitrage and enforcement mechanisms. In summery, the EEC benefited mostly from regional public goods. The role of global public good (WTO) is marginal at the moment as the trade exposure of transition countries to non-EU WTO members remains limited.

The alternative possibilities that emerge for developing countries should be of interest to other poor countries. In the context of multilateral trade negotiations under GATT/WTO rules many developing countries, especially India, have benefited under “most favoured nation” treatment without making significant reductions themselves. The gains acting as “free riders”, however, are far below from the potential benefits that international trade may bring about if negotiations could reach a break through to overcome the dominant protectionist domestic policies. The point here is that these policies are not only detrimental to India but also to other developing countries. Here once more trade is beneficial when the move to trade liberalization is made by all the actors. But again trade liberalization continues to be controversial because the protected

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interests likely to be hurt by it mobilize opposition to reverse the policy while the gains from liberalization are typically diffuse and take a longer time to manifest themselves. This is the aspect that has not been satisfactorily dealt with in past experiences of trade liberalization carried out in other regions of the world, for example Latin America, CIS countries, Africa, and Middle East.

Much of the literature that looks at trade liberalization experiences in the world focus on the success of East Asian Economies (EAE) as a pivotal example for comparison. One key aspect is the choice of growth strategy underlying the East Asian economic success. This strategy was based on the export-led industrialization and accompanying Foreign Direct Investment (FDI) and technology inflows. These economies gave protection to existing industries but tied to export goals. Latin American economies did not emphasize exports and relied more on domestic markets for manufactured goods.

As EAE did not put emphasis in ISI they did not create a strong political opposition to trade liberalization which permanently motorized their interests in favour of protection. This contrasts with de LAC where the prevailing consensus in the post-war period was to follow ISI, thus creating strong political opposition to trade liberalization. LAC enjoyed higher growth during the ISI strategy in the1950s and 1960s compared to that observed during the 1990s when the region moved to liberalize trade. However, ISI was not sustainable and exacerbated the external vulnerabilities of the LAC. In fact, growth was lower in the 1980s compared to that of the 1990s.

East Asia outward looking industrialization relied on the multilateral trade system under GATT/WTO and unilateral trade liberalization. Unilateral trade liberalization is an indication of a country own strengths in terms of domestic economic and political stability to face foreign competitions, i.e. to observe the macroeconomic fundamentals, create a business-friendly environment, and have economic and political institutions adapted to the process of trade.

In contrast, Latin America´s inward-looking growth strategy did not make use of this multilateral system until the 1990s, except for the fact that many countries benefited from the MFN clause. Also, Chiles´s unilateral trade liberalization took advantage of the multilateral system much more extensively than the rest of the region. In the 1990s, the region moved to adhere to the GATT/WTO multilateral system. More recently, FTAs have proliferated in the region, a move that replicates similar to trends in EAE.

China, India and Vietnam have implemented incomplete or non-orthodox trade reforms and have performed better than those that have strictly followed the complete or orthodox trade reforms advised by the IMF and WB. However, the lessons from the experience of more autarkic but unsustainable strategies followed by Latin American countries in the post war period indicate that public policies need to be geared to improve foreign competition and move to integrate to world trade.

Another key factor in the development of EAE was the external anchorage. It was initially tailored with Japan and, more recently, China, has increasingly played a significant role in the integration process of these countries. This external anchorage has also been decisive in the integration of EEC and the Baltic republics to the EU. However, it excluded the other republics of the former URSS.

EEC found external anchorage in the EU and made an orderly move to integrate to the global economy through regional integration. Former URSS did not find a clear external anchorage and domestic political constraints (lack of consensus) made the

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move to integration very slow and so far unsuccessful. Moreover, the requirements for accession to WTO are far from being met and the attempts to regional integrations of CIS have failed.

The success of external anchorage provided by the EU to EEC may reside in that it represents a multilateral strategy. In the case of Latin America, if anything approaches to a possibility of an external anchorage is the package of measures contained in the so called Washington Consensus. However, on the one part, the dominant strategy in Latin America has been tinted by autarkic development despite strong trade and geographical linkages with the US. On the other, there is no clear political will and domestic consensus to accept the Washington Consensus, although it has made significant headways in most LA countries as well as in other regions in the world. The reason seems to lie in the unclear prospect of long-term benefits in contrast with the immediate painful consequences of adopting such measures. The international evidence, including that of former Soviet republics and Middle East and African countries is rich in showing the failed attempts and reform reversals when these policies were applied. However, given the political and institutional constraints faced by many countries it may be the only tortuous road to create sound basis in order to achieve integration.

For example, EEC had a clear gain to integrate to the EU in the sense that the prospects of being left out could have permanent negative consequences. The role of the IMF in CIS show that the reversals and stagnations of reforms requires that a previous consensus and support is reached, given the adverse or negative effects impacts that these policies produce in the first stage of reform and given that the IMF is more prepared for a technical advice and assistance and not for undertaking the advice on other aspects required to make the reform succeed.

External anchoring is not necessarily the only way to successful reforms. China and Vietnam seem to have successfully accomplished reforms with self- anchoring. (p. 5 report on EEC and URSS).

In the case of Latin American, there was not a clearly defined external anchorage during the trade liberalization move in the 1970s. In the 1990s, the cases of Chile and Mexico have been able to deepen commercial links with the US. The Chilean unilateral TL was successful and did not count on an external anchorage other than to adhere to the policies recommended by the Washington Consensus. Thus, Mexico´s and Chile´s access to NAFTA, vis-à-vis the US markets, are cases of accession to IPGs in a bilateral context with the presence of a big and powerful provider. On the contrary, this has been a missing factor for most LAC attempting integration to the global economy.

In light of the EU integration process one interesting point is the flexibilization of conditionality to accession that took place from the initial Copenhagen agreement of 1991 to the Helsinki agreement of 1999. In this new strategy for accession the conditionality was adapted to match supply with demand of reforms. The strategy followed by the EU to use the carrot of clear short term benefits and the stick of negative prospects from exclusion was a useful mechanism in a context of the overall dominant political will for integration on the part of both the EU and former Eastern communist countries.

It has been argued that the ideologically polarized world prevailing during the cold war period may have led to sustain protectionism. Nevertheless, a new push was made for the re-foundation of multilateralism after the creation, in 1995, of the WTO as an independent institution from the UN system. The Uruguay round ended with developing countries accepting trade rules and domestic disciplines whose ensuing costs exceeded the gains they received. This created a strong stance on the part of developing

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countries for WTO negotiations are to consider non-trade barriers (NTB), and protection on agriculture and services.

The Doha Round of multilateral trade negotiations, started in 2001, the ninth since multilateral TL since 1947, has been called Development Round with the intention that developing countries should especially benefit from its successful conclusion. Focus on reducing further the trade barriers of rich countries on the imports of goods and services from poor countries, especially agricultural goods. One aspect to be emphasized is the import barriers in poor countries to products from other poor countries, both agricultural and non-agricultural, especially labour-intensive manufactured products. Since the results of the Round will be in effect by years 2016/17, it is important to consider the trade levels and patterns to prevail in two decades which, in turn, are to be influenced by the results and contents of the Doha Round.

China and India do no form a region with shared characteristics despite its geographical proximity. In fact, in most aspects differ substantially, except in that they are the two largest countries in population. This fact, together with the trends in their economies observed over the recent past, are precisely the relevant aspects that need to be looked at considering that events in these countries are expected to have significant impacts in the rest of the world.

Projections two decades forward were made on the assumption that imports into rich countries grow as rapidly as GDP, whereas they grow fifty percent more rapidly than GDP in developing countries. This is the same pattern observed in the world during the past half century. This would result in China becoming a major market and the growth of imports into developing countries likely to exceed the growth of imports into rich country markets. In this context, the trade policies of developing countries will be of great interest to other developing countries. The fact that in trade liberalization processes losses are short term and the gains are long term requires paying special attention to the transition period, particularly in regard of facilitating compensation mechanisms to make the losers to afford the costs that arise from resource reallocation. Of course, this is a complementary policy once the macroeconomic fundamentals are in place. Several studies have quantified the gains and losses from trade liberalization and their influence on poverty. For example, a move to free trade by industrialized countries would have an impact of 2 percent of GDP in developing countries as a group. However, a global move to liberalize trade would raise these gains to about 5 percent of GDP. These figures and the role that these two economies are to play in the future make clear that their trade policies will have a significant impact in the provision of international public goods and a liberal trading system in particular.

The Doha Declaration is missing major issues that are crucial to developing countries such as export dumping, and trade of agricultural goods and services. (distinguir qué diferencia hay entre the Doha Round and the Doha Declaration?, es la primera el comienzo de la segunda? O algo diferente?) Protection to agricultural domestic production in developed countries offset the Official Development Assistance provided by OECD to African and Middle East countries. When it comes to industrial goods, developed countries maintain high barriers to imports from developing countries to the extent that average manufacturing tariffs are about four times higher in developed countries. (P. 56, bottom, of MENA report). Therefore, trade liberalization in many countries can only be sustainable is markets of developed countries are more open to imports from developing countries.

The protectionist policies have also been a major impediment to expand trade in sub-Saharan countries rendering them to be well below its potentials in trade and

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growth compared to the possibilities emerging from their richness in resource endowments. These countries do not have a diversified structure of exports and heavily depend on exports of primary goods and low-tech products, including oil exporters. Similarly, MENA countries are not competitive in international export markets of industrial products while high protection to agricultural exports on the part of developed countries poses a clear asymmetry which disfavours the less developed countries.

Additionally, the trade agreements, multilateral or regional, which duplicate testing and rules of origin, have not dismantled regulatory requirements, and excluded agriculture and services, have also seriously limited the effective market access of countries in this region.

The Bretton Woods Institutions were founded in 1944 to finance the reconstruction of Europe and their role has influenced many developing countries through what became known as the “Washington Consensus” policies. The consensus is mainly credited to the IMF and the World Bank but is advocated by industrial countries governments as well. It refers to policies calling for liberalization of trade, investment and the financial sector, deregulation and privatization.

African and Middle East countries have made extensive use of advice provided by IFIs. They provide several kinds of basic “goods”: first, rules and regulation applying to international financial and commercial transactions; second, global knowledge through reports and statistics published regularly; third, policy advice through technical assistance; fifth, loans and financial assistance.

Publicness does not only depend on the consumption but also on the ability of a nation to access and make use of the good. Regarding policy advice as a public good there are several factors that deterred its utilization by the countries in this region. Some are of political nature such as pressure groups and some of economic origin such as protectionism, and weak industrial and financial structures. In the formal decision making, the WTO follows a one-country one vote procedure but the IMF and the World Bank weight the votes according to the financial contribution of members. The publicness of benefits accruing from policy advice is biased to favour developed countries given the conditionality imposed and the deficiencies hindering the full utilization of advice.

Sub-Saharan African Countries face a generalized situation of under supply of IPG. This is very often related to the de-linking of the continent form the global economy. In the area of trade countries in the region have been unable, with few exemptions, to take advantage of the access to international markets. On the one hand, unfair trade rules, particularly with respect to agriculture, are a matter in the domain of the international community. On the other, African countries need to improve and invest in trade capacities. The reforms in institutions and the financing of needed infrastructure require both local and international efforts.

The role of FDI has played a most significant role in the growth strategy of East Asian Economies. A friendly environment and appropriate provision of NPGs, were decisive for attracting these flows. Despite the fact that in MENA economies the flows of FDI have been significant but primarily allocated in protected activities oriented to the domestic market and not for export markets. This has increased the anti-export bias, favoured protection, and consolidated an inward-looking strategy of growth. Similarly, in Latin America and adverse economic environment and the anti-export bias has limited flows of FDI.

As some of the East Asian countries developed, they turned less dependent on foreign aid and became themselves aid donors, particularly at the regional level. An

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important form of international aid has been development advice and knowledge of best practices. The geographical effect has been a strong regional public good in East Asia. Here we can also see a sequential pattern in the growth process. Japan was followed by the NIEs and these, in turn, were followed by the other Southeast Asian Economies.

The umbrella of multilateral trade is open and used to the extent that is advantageous. However, but regional, sub-regional or bilateral Free Trade Associations and Agreements that are proliferating in all regions may provide concrete and specific rules for local needs in which the demand and supply for the one IPG such as trade can be more feasible than global integration.

This proliferation of Regional Trade Agreements is a tendency well established in all regions reflecting a move away from multilateralism. Free trade areas and customs unions are permitted under GATT Article XXIV, under certain conditions, particularly with regard to sectoral comprehensiveness and not raising barriers against non-members. The RTAs are to be notified to the WTO and the WTO Committee is supposed to review these agreements and determine whether they are consistent with WTO provisions. However, many agreements have not been notified and the WTO Committee has failed to reach agreement as to whether these agreements meet GATT conditions.

In the 1990s the East Asian countries promoted many initiatives of regional integration in the form of regional and bilateral economic cooperation and FTA agreements. These are perceived to be regional public goods. The initiatives of creating an ASEAN Economic Community (AEC) by 2020 which will include ASEAN plus China, Japan and South Korea, would mean the formation of the largest economic bloc in population. Given that is driven by strategic and economic competition, particularly between China and Japan for regional dominance, the reduction in trade and investment barriers in East Asia may be bigger and faster than under the Doha Round. Another challenge will be to develop trans-Pacific as well as Asia-Europe partnerships to check that the move to multilateralism is not dissolved by counteracting effects of Regional Trade Agreements (RTAs) or bilateralism.

More recently, in Latin America the emphasis has also shifted from unilateral liberalization to PFTAs, a trend also observed in other regions of the world. Examples of this trend are the Mercosur (Southern Common Market) created in 1991 by Argentina, Brazil, Paraguay, and Uruguay, NAFTA (North American Free Trade Agreement) created by US, Mexico and Canada. Chile signed a bilateral agreement with the US, Mexico with the EU and Central America and the US created CAFTA (Central America-US Free Trade Agreement). There is a more ambitious hemispheric proposal with the creation of a Free Trade Association of The Americas (FTAA).

The push for regional trade integration in Latin America show mixed results. On the one hand, NAFTA and Mercosur succeeded at increasing regional trade and FDI. On the other, the impact in per capita income and on institutional transformation has been limited.

Regional integration in MENA countries has been attempted at a sub-regional level with the advent of the Gulf Cooperation Council (GCC), the Arab Cooperation Council (ACC), and the Arab Maghreb Union (AMU). Given the heterogeneity of the countries, cooperation is more likely to succeed at the sub-regional level. Of these associations, the GCC is the more successful case with the introduction of an external common tariff (customs union) and plans to be a common market by 2007 and a monetary union by 2010.

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A regional trade agreement ratified by 19 Arabian countries is the Agreement for Facilitation and Promotion of Intra-Arab Trade (GAFTA) does not provide effective mechanisms to compensate for the losers as a result of integration, a fact that refrained many countries from liberalizing trade. The impediments to the implementation of Greater Arab Free Trade Area (GAFTA) are similar to those the region faces for global integration. They are: 1) the issue of NTBs which requires more transparency and reports to evaluate the state of affairs and missions to identify obstacles to be removed or, alternatively, the possibility of a “tarification” of existing NTBs; 2) Reports to show progress achieved in implantation; 3) Reaching a consensus on a commonly accepted set of rules of origin; and 4) Harmonization and review of bilateral and sub-regional FTAs.

Despite the fact that tariff and non-tariff barriers, except for the GCC countries and Lebanon, remain at high levels relative to other countries, the region has made great progress to opening their economies to trade and to foster FDI. Also, there are several efforts by Middle East countries to integrate globally and regionally such as GAFTA, the Agadir Agreement (between Morocco, Jordan, Tunisia, and Egypt), and the GCC custom union. Free Trade Agreements with the EU and US have also been signed or are initiating negotiations. Here the fall in import duties was larger in imports from the US than from Mediterranean countries.

Regarding the sub-Saharan African region, one of the most recent preferential treatments is the “Everything But Arms” (EBA) initiative. It included thirty African countries with the status of Least Developed Countries. But this is not particularly favourable to sub-Saharan countries because they already enjoy preferential treatment. Being that the EU/ACP preferential agreement on sugar is to be phased out because it is incompatible with the GATT, the proposals to replace it are to be harmonized with the EBA initiative.

Another temporary preferential trade scheme called African Growth and Opportunity Act (AGOA), was introduced by the US granting sub-Saharan countries with free entry in American markets. The AGOA scheme has had a significant positive impact on a few African countries particularly in the textile and clothing sector.

Overall the impact of FTAs has only reached a few number of countries and most of the region is still unable to access to the benefits of trade. The inability to expand exports, particularly in non-traditional products is directly linked to their lack of export capacities: infrastructure in transportation and communications, absence of technically skilled workforce and rudimentary financial systems. This indicates a significant undersupply of NPGs. These complementary activities have been recognized in a large number of projects which are necessary to make possible the consumption of the available IPG on multilateral trade liberalization.

Criticisms of RTAs point the negative consequences for the multilateral trading system because they diminish incentives for multilateral TL, that they are discriminatory and undermine the WTO principle of MFN, the overlapping rules derive in different rules of origin and product and standards requirements increasing transaction costs.

The question here is whether the RTA limited steps given to trade liberalization (TL) can later be made compatible with WTO rules. The problem resides in whether or not countries forming RTAs or FTAs are simultaneously making progress in competitiveness, that is, are following an outward-looking growth strategy. Different resource endowments, technology available and other factors may hinder some

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countries from moving rapidly to multilateral TL, because this could have devastating effects, particularly when welfare systems to alleviate the costs of transitions for looses are not well established. Thus, the creation of RTA could be a second best solution, whether compatible or not, with multilateral TL. This calls for a thorough revision of agreements and harmonization with WTO rules. In other words, what matters is whether regional integration turns to be a complement and not a substitute for multilateralism.

One final point is that, without reforms that dramatically reduce the existing gap in education, technology, and enabling institutions, Free Trade Agreement Associations (FTAA) (podemos unificar llamando a todas FTA o RTA?) will have modest impact on average living standards. These, in addition of appropriated infrastructure, are also missing key factors that constraint the access to trade in Latin America, and more pressingly in African and Middle East countries. Successful experiences of integration of East Asia have emphasized efforts to enhance the provision of these public goods. MENA countries in particular, need to design programs of investment in human resources development according to the specificity and need of each country. The experiences of brain drain and brain repatriation of East Asia are useful for policies to be replicated in these countries.

Financial Stability

Financial stability is a global public good because of the tendency for financial turbulence to split across borders. This was manifested in the series of contagious financial crises in the 1990s, (mention the regions if not all of them) producing high costs and strong negative impacts in economic activity in many cases. Financial instability is mostly due to unsustainable macroeconomic policies, fragile financial systems, institutional weaknesses and flaws in the structure of international financial markets.

Achieving financial stability in emerging markets requires having macroeconomic and microeconomic institutions in place. When prevention fails, the role of IFIs is of most significance, particularly when the central bank or the government is exceeded in its ability to handle the crisis.

The causes of these crises are diverse and according to them five types of financial crises can be identified: (a) macroeconomic policy-induced; b) moral hazard-induced; c) bubble collapse; d) financial panic; and e) disorderly debt workout.

The financial crisis of the 1990s in East Asia was caused by a combination of factors: deterioration of macroeconomic fundamentals, massive short-term capital flows, pegged exchange rates and a weak domestic financial system. Additionally, poor policy prescriptions and poor public sector and corporate governance delayed the recovery. The pegged exchange rate had provided an implicit government guarantee against exchange rate risk and spurred domestic borrowers to access cheaper international funds. The exchange rate overvalued and asset bubbles in real estate and stock market were created. The quality of investment deteriorated and short term debt was used to finance longer term projects. Government efforts to defend the exchange rate were costly and futile. The depletion of reserves and currency devaluation caused financial panic. Capital outflows caused macroeconomic collapse with soaring interest rates and inflation, plunging stock market and real estate prices, and sharp economic downturns. China was not affected because it retained capital controls and the type of capital inflow has mostly been direct investment.

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The response on the part of national governments and IFIs was mostly inadequate. Initially the IMF applied its standard prescription of fiscal and monetary restraint making no distinction between the East Asian Crisis caused by external borrowings of the private sector and the more orthodox financial crises elsewhere caused by expansionary public sectors. National initiatives have focused on establishing sound domestic policies and robust domestic institutions. Government policy maintaining the currency peg proved misguided and opening capital accounts and liberalizing financial markets without having put in place appropriate regulatory regimes.

In Latin America, the attempt to financial liberalization in the 1970s by Argentina, Chile and Uruguay ended with a collapse of the financial systems and in cases defaults on the entire external debt. The main cause of this failed move was the misalignment of the exchange rate and expansionary fiscal policy.

In the 1980s other LAC were also hit by financial crises. In this case the main cause was the four-fold increase in international interest rates and the excessive accumulation of foreign debt without generating the capacity to finance the current account. Some of these cases ended in dramatic episodes of hyperinflation

The financial crises in the 1990s in LAC, particularly Mexico, Brazil, Ecuador and Argentina were triggered by different causes. In the case of Mexico, the crisis was primarily due to a panic in a context of high current account deficit and capital outflows financed by monetary expansion. The Russian crisis of 1998 had a contagion effect on Brazil, Ecuador, and Argentina, causing a significant reduction in capital inflows in these countries and, consequently, interest rates increases. This, in turn, increased the risks of devaluation and default on the external debt. In Brazil, the announcement of a state government of default on its debt to the national government, and in Argentina the weakness in macroeconomic fundamentals given by the fiscal expansion of provincial governments, introduced additional factors triggering the crises.

The former communist economies have experienced several episodes of financial instability during the last 15 years: high inflation or hyperinflation in the early transition years and a series of currency and debt crises in the second half of the 1990s. Towards the beginning of the century and at different speed they had been able to sort out these crises and stabilize their economies with inflation rates of levels around 10 percent annually.

Empirical evidence clearly shows that the 1998 financial crisis in Russia was triggered in part by the Asian financial crises of the 1997-98 and, undoubtedly, by serious flaws in domestic policies. In turn, the Russian crisis had a very serious contagion effect for other CIS countries and to other transition economies such Argentina and Brazil.

The IMF as the main international actor responsible for financial stability emphasized macroeconomic stability with policy advice to individual countries and its programs of conditionality. Initially, these adjustment programs were unable to reduce fiscal deficits and did not achieve stabilization in the entire region. A monetary reform the ruble area was delayed and central banks of the former CIS did not coordinate their monetary policies prolonging macroeconomic instability. The IMF was unable to prevent the Russian financial crises in 1998 and its propagation to other countries in the region and elsewhere. The support for hybrid monetary/exchange rate regimes has proved to be a choice particularly vulnerable and fragile in cases unexpected shocks and speculative attacks. Besides, IMF overlooked the cross-country consequences of

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individual countries’ policies and the process of structural reforms. On the positive side, the IMF has increased the transparency of its operations and policies followed in the region regarding the macroeconomy, the financial and payments systems thus significantly contributing to reduce uncertainty, information asymmetry, herding and moral hazard behaviour on the international financial markets. (All this has been provision of NPGs)

As many countries in the region have stabilize the IMF role has been taken over by the EU and it has increasingly shifted its adjustment programs to low income CSS and Balkan countries.

China and India so far have been spared serious domestic financial crises, perhaps because they are still quite poor and financially under-developed. Both countries maintain stringent controls on both inward and outward movements of capital with transactions being subject to official approval.

China´s yuan pegged to the US dollar in a context of large swings in major currencies seems to have served this country very well. However, China announced that from July 2005 will use a basket of currencies to peg the yuan. India has a managed floating exchange rate. Both countries have been able to build-up reserves dramatically.

In the present context the two countries would remain free to choose the exchange regimes that best suit them. As their financial markets develop they might find greater flexibility more suitable and their choice will depend on international financial system trends.

In sub-Saharan Africa financial markets are underdeveloped and, consequently, the crises in world financial markets have not had major impacts on the region. With the exception of South Africa, these countries have not participated in financial globalization. The South African financial markets have been hit by the Asian crisis, and later after the Argentine crisis, despite the fact that the fundamental of macroeconomic policy were satisfactory. It is to be noted that the economic performance of this country was almost equally disappointing when capital flew in and out. However, the economies in the region have suffered frequent crises of balance of payments originated in terms of trade fluctuations.

The most significant impact of global macroeconomic and financial instability in this region is related to commodity markets. Terms of trade shocks on these economies have usually had a very long duration. This factor combined with exogenous climate variations have produced high instability in export receipts, triggering cycles of expansion with overspending and contraction with insolvency. Some initiatives to cushion shocks like the one offered by the EU to members of ACP, have in cases proved to be pro-cyclical due to the cumbersome mechanism of financing decision. The IMF has provided the Compensatory Financial Facility (CFF) in case of shortfall in export earnings. However, its financial terms are very restrictive and make them unattractive for African governments. The Poverty Reduction and Growth Facility (PRGF) have been granted to a couple of countries in the region but it seems to be feasible for a limited number of situations. One additional complication arises when these disbursements are conditioned by performance and the donors reduce their involvement when the country situations are very critical.

The policy advice provided by IFIs, particularly the IMF, has played a major role in sub-Saharan Africa and is perhaps one of the regions in the world with highest amount of policy advice by multilateral institutions. In support of policy advice, Africa

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receives also a lot of technical assistance and training as well, with resident technical assistants within the Ministry of Finance and or the Central Bank.

Many developing countries have experienced financial crises during the past quarter century. The IFIs such as the IMF, WB, IBS, IDB, ADB, etc., have participated in financial support packages for countries affected. There are two positions on the role of these institutions. On the one hand, the widespread impression that the international financial system is highly imperfect in ways conducive to precipitation such crises, and that therefore the system should be reformed to eliminate or at least reduce both the number and the severity of financial crises. On the other hand, that the number and severity of financial crises are overwhelmingly domestic in origin and there is little the international community can do other than to publicize the lessons and give advice of best practices, given that the international community does not have the ability to coerce countries that are deemed to be following unwise financial policies.

The lessons from the East Asian financial crisis in the 1990, both regarding the causes and the management of the crises, have prompted several initiatives at the national and global level to prevent these unhappy episodes.

Reforms include the need for stronger national policy-making processes as fundamental prerequisite for financial stability, particularly the procedures for formulating fiscal and monetary policies; establish vigorous prudential regulation and supervision of the bank and non-bank financial institutions and strengthening multilateral surveillance; strengthening shareholder and creditor rights, improve corporate governance and financial transparency, and place clear and credible limits on the official safety net protecting financial institutions and markets; amend the Basel capital standards to allow capital requirements to behave counter cyclically.

National initiatives have focused on establishing sound domestic policies and robust domestic financial institutions. To this purpose non-performing loans (NPLs) have been transferred to asset management companies and banking systems have been re-capitalized.

Initiatives at the regional level include Executives Meeting of East Asia Pacific Central Banks (EMEAP, payments systems and financial market infrastructure), the ASEAN+3 has established a Study Group on Capital Market Development and Cooperation and the Asia Cooperation Dialogue has established a Working Group on Financial Cooperation (guidelines for the development of Asian bond markets).

To enhance information exchange and surveillance finance ministries and central bankers of 14 countries (South East Asia China, Japan South Korea, Australia New Zealand, Canada and the US). The Chiang Mai Initiative in 2000 proposes regional monitoring and surveillance of macroeconomic and financial fundamentals of member economies. It also comprises a network of bilateral swap and repurchase agreement facilities to assist central banks facing liquidity problems. Efforts intensified to develop regional bond markets (Asian Bond Fund, Asian Bond Market Initiative).

Another policy change was a shift capital flows towards more FDI and longer term investments to reduce volatility associated with short term capital flows. Exchange rate regimes need to move away from the fixed and pegged exchange rates towards more flexible regimes to avoid exchange rate misalignment. There is no consensus on what the optimal level of foreign exchange reserves should be for each country. The Asian Development Bank has argued that the reserve levels are well beyond optimal levels in the region. This is a subject that requires to be analyzed further.

To cope with the systemic risks generated by global financial markets the IMF has adapted financing facilities for East Asia (and other regions) with the enhanced

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facilities and Supplemental Reserve Facility (SRF), Contingency Credit Line (CCL) and increase IMF quotas.

In the case of Latin American financial crises the IFIs delayed to understand the insolvency problem faced by the region was not temporary but permanent, thereby requiring more than debt rollovers. The solution came only in the early 1990s with the Brady Plan through which loans of defaulted commercial banks were swapped to longer term sovereign securities. Chile, however, did not make use of this facility and solved the crisis with a strict fiscal discipline and debt-to-equity swaps. An important development in Chile was the increase in the national saving rate and the growth of the domestic capital market. This happened in a context of macroeconomic stability, social security privatization, financial asset indexation, and a friendly business environment.

One striking contrast in the resolution of the financial crises in the 1990s in LAC is provided by the case of Chile where national savings were significantly raised. In the other cases, coping with the crises had to depend more in foreign assistance. In the case of Brazil the IMF provided liquidity assistance but in the case of Argentina it was curtailed.

Another institutional factor intervening in the Brazilian and Argentine crises was the undermining effects of local government policies when they are not compatible with those of central governments. The more centralized decision-making in Chile prevented these conflictive policies. The lesson is, therefore, in the context of decentralized decision-making set up, policies applied by local governments are not to be overlooked and must be harmonized with the central government.

Comparing the EAC and LAC it is clear that the actual conditions of each economy are very sensitive to create panic situations that trigger the crisis. Therefore, the institutional arrangements and capital market structures of national and international capital markets are of fundamental importance to prevent the crises.

Issues of sovereignty are to be considered in the provision of IPGs such as financial stability. It is clear that domestic constraints make many countries unable to make use of this IPGs. These may be of diverse origin: political, social, cultural, or reside in the resource endowments they have. When those political constraints can not be removed, the application of inconsistent policies will sooner or later lead to crises that can have devastating effects. Obviously, the resolution of these crises will be smoother when global financial institutions intervene in time and appropriately. The experiences of many countries show that this is not always the case. The responsibility of IFIs regarding the promotion of well structured systems of international interchange of information, transparency in the decision making at all levels. Countries should evaluate to what extent they give up sovereignty and become more integrated to the global economy, integrating their decision making process in order to consume this IPG. Supranational organizations should promote and divulgate the advantages and disadvantages of being in or out. However, once IFIs get involved in assistance to one country must strengthen its efforts and capabilities to follow up the cases which have entered in a crisis situation and let them derive in unmanageable outcomes. Whether or not the financial crisis in the 1990s worsened in some cases because of intentional decisions of IFIs or to their limited capability, both financial and logistically, is a grey zone of competence. When local governments are themselves the guardians of sound practices and are detached, disinterested, and farsighted, the antithesis of the modern politicians, then to what extent are IFIs capabilities to coerce local governments to change wrong policies.

Clearly, the removing of these constraints has been a feasible outcome when external anchorage was clearly defined as in the case of EEC with EU and EAC with

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Japan and China. But it turns to be a insurmountable task in cases when this anchorage is non existing or when it depends on IFIs whose capabilities are exceeded by country needs, or do not match domestic demands, or not consider a longer period, or simply do have the ability to intervene in domestic decision-making. Basically here too much is left to the outcomes of the particular political processes of the countries affected. In these cases this type of external anchorage can be fully exploited when a strong political consensus in the country allows for permanent adherence to the policy precluding policy reversals. The case of Chile is an example, particularly considering that the country maintained adherence to a long term process of integration even in the transit from a military to a democratic government.

The cause of the financial crises of the late 1990s in Russia, and later followed by the crisis in other CIS countries and other transition economies, clearly show that they have both a domestic and an international component. Altogether, they contributed to destabilization of global financial markets.

It has been argued (Report on China and India) that financial crises seem to be an inevitable concomitant of economic development. As private savings are mobilized for productive investment in developing countries all kinds of attractive projects become financially possible. Initial caution is often forgotten and the productivity of investments is not observed. After boom of credit expansion the scheme becomes unsustainable in the long run. Central banks overlook these developments, often conditioned by political decisions and financial crises result.

It is true that every country experiencing a financial crisis during the 1990s had a domestic situation with a miss-match between growing financial claims and the performance of the real economy. The heart of the problem in most LAC financial crisis has been government debt and the fact that a large part of if was denominated in foreign currency. However, governments and bankers involved in lending to developing countries to finance public expenditures often, and irresponsibly, overlooked appropriated weighting the long tem-capacity of the recipient economies to repay the debt. This practice permitted to enjoy the wonders of international markets to finance public expenditures and avoid, for some time the unpopular choice of tax increases.

The choice of exchange rates policy is a key decision for any developing country, possibly the most important single economic policy decision it can make. A present feature of international financial arrangements that is troubling to many developing countries is the floating exchange rates among the leading currencies in the world. The problem has arisen due to wide swings in the values of these currencies which greatly complicate decisions of resource allocations.

This raises the question of what should be the exchange regime that best suits developing countries. If they simply float their currencies in this international context and provided their economies are well managed, their currencies will iron out the large swings among the major currencies. However, many developing countries find convenient to fix their currency to another major currency and, even in that case, they may want to manage it through intervention.

A common currency among the industrialized democracies could make the choice easier for developing countries. Flexible exchange rates can provide a useful shock absorber but they can also are means to transmit financial disturbances to the real economy. This would not happen within a monetary area and this is a strong reason for major economies to move toward a common currency. However, this seems no to be foreseeable in the near future.

Countries where the financial stability is strongly affected by their exports earnings are adversely affected by the swings among major currencies. The impact of

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terms of trade fluctuations are in many cases the principal cause o insolvency problems, particularly when exports are diversified. Here the provision of IPG financial stability requires concerted actions of industrial democracies to maintain major currencies fluctuations in appropriate limits.

Facilities provided by IFIs involving lags in the decisions until disbursements are effective are often destabilizing or may arrive when they are no longer needed. (SSA) Whatever the reasons are for these practices, the donors as a group ought to build a more appropriate international aid architecture to afford anti-cyclical aid flows to recipient countries. This would be particularly desirable in the countries with high volatility in export prices.

The availability of policy advice given to African and Middle East countries by IFIs has been very intensive and extensive. However, this is not reflected in the poor growth and employment performances of these economies. Three reasons for this outcome can be advanced: i) The advice has no impact if the policy maker does not believe in it and this often happens in view of the fact that the advice comes along with a conditional financing or when unpopular measures are to be taken; ii) Advice given by IFIs are sometimes contradictory due to lack of coordination among donor agencies; iii) Policy recommendations are not necessarily based on a thorough knowledge of local economic conditions.

Nevertheless, comparing the early 1980s with the present the sub-Saharan African countries have improved its macroeconomic fundamentals and this is reflected in reduced fiscal deficits and inflation, and balance of payments equilibrium. Although the de-linking of sub-Saharan Africa has largely shielded the region from the turbulences of global finance, shocks in the terms of trade have had strong negative impacts on African economies. One form of cushioning these shocks is to avoid pro-cyclical aid flows at no costs for the donors. In sum, the region has not received much financial assistance from the international community to mitigate external shocks but it has benefited from policy advice to significantly improve macroeconomic stability. In this respect, IFIs have contributed to the provision of NPGs.

As for financial assistance, Latin American countries benefited from the change in the strategy of the IFIs regarding their lending practices, shifting their emphasis from financing investment projects into supporting structural reforms in economic institutions, i.e. trade and financial systems. The Extended Fund Facility (EFF) was critical for the successful implementation of the Brady Plan for debt and debt interest reduction in ten Latin American countries. The assistance of the World Bank and the Inter American Development Bank (IADB) was to finance infrastructure and to close the gap between the rate of required investment and domestic savings. However, the wrong domestic policies that distorted economic incentives caused low rates of domestic savings and insufficient flows of FDI. Paradoxically, under these circumstances international financial assistance was more likely to crow out national savings than to increase investment. Moreover, in addition to low investment rates, price distortions, over regulations, and government inefficiency created an adverse climate for productivity growth, thus decreasing investment efficiency.

Knowledge and Technology Diffusion

Knowledge creation and dissemination have attributes of global public goods. The main policy issues are under provision and unequal and inadequate access by developing countries. The developed countries have both the financial and technical

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capabilities to generate new knowledge, but there is a marked tendency for them to pursue knowledge that primarily furthers their own interests. A crucial challenge faced by developing countries to take advantage of global knowledge created, is first to acquire complementary NPGs, particularly educational attainment, and develop capabilities to generate and manage technological changes and innovation.

Technological innovation is the outcome of the interplay among different social actors including firms, universities, research centres, and the government. Their relationships, institutions, policies and practices define a country´s National Innovation System (NIS).

Knowledge for development is an IPG. The managerial and organizational knowhow are readily available from IFIs involved in development policy research, such as the WB, IMF, OECD, IDB, ADB and others. Another source of development advice is learning from the lessons and best practices of the more advanced economies. Also, the presence of MNCs contributes to disseminate innovations in management and organization.

More recently, the debates on the dissemination of knowledge and transfer of technology at the global level are centred around the WTO discussions on the trade related intellectual property rights (TRIPS). This is a comprehensive agreement was reached during the Uruguay round to enter into force in 1995 and was created to protect intellectual property rights (IPRs). The system works by setting minimum levels of protection to which each member must commit. It provides for the availability, scope and use, enforcement, acquisition and maintenance of IPRs, dispute prevention and settlement mechanisms, and transitional and institutional agreements. The agreement has special provisions for compliance of developing and least developed countries and economies in transition. Least developed countries must implement TRIPS by 2005 with the exemption of pharmaceutical patenting which have been extended until 2016.

The TRIPS agreement has led to a contentious debate between developed countries as producers of innovations and developing countries as users. Strengthened IPR regimes play a role in technology generation by compensating inventors and creators. Inadequate protection undermines support for local innovation and product introduction, but excessive protection limits access to new technologies by consumers and rivals. The main issue is whether TRIPS can foster the transfer of technology to developing countries. Industrial countries argued that broader IPR would foster innovation on a global scale and increase the flow of technology and investment to developing countries. Although the agreement requires governments of developed countries o provide incentives for their companies to transfer technology to LDC, up to date this has not been effective.

It has also been pointed out that the agreement does not recognize the different needs of appropriate intellectual protection in developed and less developed countries and, therefore, they should not be included in a global agreement. More recently, it has been recognized by the World Intellectual Property Organization (WIPO) that the current global rules on intellectual property reflect more the interests of the advanced industrial countries rather than the interest of the developing world.

The public goods nature of pharmaceuticals for communicable diseases is obvious. Low income countries in the region are in need to access and afford patented medicines to contain diseases such as HIV/AIDS, malaria, tuberculosis, and more recently the SARS. The Doha Declaration underscored flexibilities for compulsory licensing and parallel importing and extended the exemptions on pharmaceutical patent protection for least developed countries until 2016.

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Latin American countries have made significant efforts to comply with the TRIPs agreement but, at the same time, some of them have contended that legitimate interest of the developing countries should be considered. The two most pressing issues are the protection of traditional knowledge developed by indigenous communities and the effect of TRIPS on technology transfers. The empirical evidence suggests that the technological gap has continued to grow since TRIPS was adopted.

Major LAC, such as Argentina Bolivia, Brazil, Chile, Mexico, and Peru have signed the agreement and enacted legislations to protect IPRs.

In East Asian Economies the creation and dissemination of technology are largely through private market-oriented channels. FDI inflows and capital goods imports have been major mechanisms for technology transfer. These technologies have been effectively used when combined with high domestic technological capability, particularly the availability of qualified human resources in which educational attainment have played an important role. FDI by MNCs link developing economies and enterprises to global and regional value chains and production networks. It has contributed to the rapid growth of intra-industry and intra-product specialization as manifested in the rise share in parts and components in total world trade.

The more advanced economies of East Asia have well articulated technology policies, including technology creation, while the less advanced economies focus mainly on technology transfers from abroad.

Domestic capabilities are essential in assimilating foreign technology. One strategy applied in South Korea was to restrict FDI and follow an industrial policy that protected the domestic market and favoured the creation and growth of large firms whose production was oriented to exports. The protection applied by Korea are not readily replicable by late-comers because is countries are to abide to the present trade rules.

Another strategy followed by Singapore was a heavy FDI dependence with policies to induce the foreign MNCs to upgrade and deepen into advanced activities and functions in the country, such as R&D, joint ventures with government-funded research institutes and universities, provision of scientific ant technological manpower through higher education, and strong protection of intellectual property rights. More recently, the national innovation system is being transformed from one emphasizing the role of MNCs to one promoting indigenous innovation capabilities and local high-tech undertakings. The Philippines and Thailand have followed a similar strategy of dependence on FDI without a complementary industrial policy to deepen the technology innovation system. Finally, China is following a mixed strategy with significant domestic R&D efforts as well as sizeable inflows of FDI. Foreign MNCs are now producing an ever-widening range of technology-intensive products for the world market. Although foreign firms are reluctant to transfer technology they have beneficial spill over effects in training and competition.

In Latin American Countries Science and Technology (S&T) policies (were introduced in the 1950s along the period of ISI and most of these efforts were funded by the government and the state-owned enterprises. The protectionist policies reduced innovation incentives in the private sector. This situation resulted in the alienation of the scientific community from the business and their technological needs inasmuch linkages between the private and public sectors were not in the pursuit of technological knowledge an adaptation.

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More recently, privatization and trade liberalization permitted firms in the region to upgrade their technological standards, thus moving toward a modernization in the production structure and colder to international productivity standards but less intensive in the use of local technical knowledge and engineering services.

Recent trends show that, with the exception of Brazil, R&D investment in the region is well below that of the world level. However, the private sector involvement in R&D financing has increased significantly, from 22 percent in 1990 to 37 percent in 2002.

Despite the fact that there is no shortage of scientists and engineers in the region, most employment opportunities for well trained and highly educated scientists are still found in the universities and the public sector. Compare to the Asian tigers, the education system is of lower quality.

The role of FDI and MNCs enhancing technological innovations has been limited due to restrictive policies followed during the ISI period.

More recently, another policy followed in the region has been the creation of innovation clusters formed by firms (mainly SMEs), research centres, and investors which work in close geographical proximity to create new products and technologies in areas where business success critically depends on the availability of technology. They have focused in the transfer of technology rather than on creating new knowledge. Precisely, one of the problems is that these clusters are unaware of the existence of freely available technologies.

Despite the fact that Latin America has been less successful than Asia and peripheral Europe adapting and diffusing knowledge, there have been successful cases such as the Green Revolution in Mexico (adapted later in many other developing countries), the Chilean successful promotion of fruit production and exports, Brazil´s experience with clusters and incubators, and exports of air transport equipment, to mention the most significant.

The main challenge that MENA countries face to accessing knowledge and technology innovations is fundamentally the development of qualified human resources. There are three groups of economies facing specific challenges. The GCC expatriate workers represent almost three quarters of the labour force. The public sector is a big employer with low productivity. The more diversified economies have weak human resource development and require reforms in the education and training programs. The less developed and marginalized economies are characterized by the predominance of informal economic activities and self-employment and require institutional building and to resume growth. Even though there are the priorities for each group the whole region is to undertake reforms of the educational and training systems to dispense the type of education and knowledge that is in line with the requirements of modern market economies and that improves the labour productivity.

Government and elites in the region have clearly conveyed a preference for mild and gradual reform policies. Although the abrupt application of Washington Consensus policies can have devastating social and political effects, regional governments have not adopted an alternative. In fact, in some of the countries the economic liberalization is well ahead of political liberalization leaving in place semi-authoritarian regimes and autocracies. In this political context, the economic reforms are often slow down because further steps in this direction might threaten their status quo and question the legitimacy of these regimes.

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Knowledge is dramatically missing in sub-Saharan Africa. Indicators of the knowledge performance of sub-Saharan Africa compared to other regions clearly place this region at the lowest level, with a reduced sub-group of three countries performing similarly that Latina American Countries. Existing inventions are not necessarily adapted to conditions prevailing in the region. An example was the failure of the green revolution in an area of crucial significance for the region. It is estimated that 40 percent of all farmers in the developing world were using green revolution seeds. However, the scarcity of well-trained human resources and the need to adapt the new seeds to the region were the main obstacles encountered by recipient countries. More recently, several donor agencies have established the Consultative Group for International Agriculture Research (CGIAR) to enhance the diffusion of these technologies among farmers of developing countries and to expand the international agriculture research system. The progress made through the agricultural research promoted by the CGIAR is significant even though the results are not yet quantitatively impressive.

The absence of local knowledge is principally a local issue. This calls for investments complementary to those made in IPG production. The efforts must be oriented to combine global knowledge with local knowledge. Domestic policies have to address the high illiteracy which comes from insufficient investments in primary education. Secondary and higher education require to adequate the curricula and reallocate investment to give priority to knowledge for development.

The area where the international community has a more direct responsibility is with respect to the out-migration of a significant proportion of skilled individuals, particularly in the medical sector. Given the shortage of professionals and the high cost paid for the training those emigrating, solutions should be searched in the framework of discussions on international public goods.

The advice of IFIs in knowledge for development is abundant. There is need, however, to produce indigenous knowledge by African researchers, particularly in the academia. This requires to strengthen and transform African the universities and to promote other continental initiatives. One successful case is the African Economic Research Consortium supported by bilateral and multilateral donors. Graduates from this institution are presently involved in policy making at senior level positions. On the contrary, other well established institutions such as the African Development Bank have not produced significant research compared to IFIs.

In summery, international public goods must be customized to the specific needs of the African continent this has to be complemented by the provision of required NPGs such as the strengthening and reformation of educational systems.

East Asian countries have succeeded in attracting MNC investments and have been able to provide domestically the technical capabilities to participate in the value chain. However, gaining access to production networks has not been widespread across the developing world. Countries have to succeed in attracting MNC investments and have the technical capabilities to participate in the value chain.

Innovation and technology has become the dominant source of growth. Development of indigenous innovation systems is very costly. Countries in the region with strong systems are realizing that innovation is expensive and specialized while production is being increasingly organized in internalized MNC systems spanning several countries. This calls for a more concerted policy with technology leaders to find the appropriated role of government and private efforts to create and nurture these systems.

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More and more innovations in agriculture and pharmaceuticals draw on indigenous traditional knowledge. However, the TRIPS agreement is essentially silent on this subject while it requires adoption of IPR system for improved plant varieties and not for resources emanating from essentially indigenous biological processes. Thus some developed countries patent the product they have developed based on traditional knowledge and developing countries perceive themselves doubly disadvantaged, with their indigenous resources being used without compensation and the resulting products coming to them at a higher price as a result of associated patents. Pharmaceutical companies argue that they should be entitled to a full patent without any compensation to the countries from which the traditional knowledge was taken and where the biodiversity is preserved.

Another problem arises with IPR infringements. Many member countries do not effectively enforce the WTO provisions to protect creators and the fake branded goods, CDs, DVDs and software become readily available. Also, counterfeit pharmaceuticals and cosmetics, and substandard parts of machinery and equipment are hazardous to health and safety. Lack of effective enforcement could disadvantage developing countries as it would discourage FDI and transfer of technology. It also discourages local IP production.

In Latin American Countries the agendas of R&D institutions did not respond to national or regional priorities, nor were they aligned with demands of private firms. The technological innovation performance has been weak and dysfunctional. The progress made recently is far from closing the technological gap if the region is compared with the Asian tigers.

In the area of knowledge the problem o sub-Saharan countries does not lies mainly in the obstacles created under the TRIPS rules but on the incapacity of the continent to access to the existing knowledge. This is due to the shortage in the provision of NPGs such as local knowledge and infrastructure. Reforms in the educational systems are necessary to adapt the curricula and train human resources needed for the accession and implementation of new technologies.

Environment and Climate Change

Emission of greenhouse gases (GHGs) such as carbon dioxide (CO2) generated largely by the extensive use of fossil fuels (coal, oil, and natural gas) contribute to climate change. The concerning threat is that temperature of the earth will rise during this century with a concomitant rise in sea levels due to thermal expansion and glacial melting. This is expected to have a significant impact in water resources, ecosystems, agriculture and plantation forestry and human health. These effects will be more severe in those regions in the world already facing severe processes of environmental decline characterized by land degradation, deforestation, air, water and soil pollution, resource depletions, and loss of biodiversity. All these phenomena are clearly of a global nature and solutions can only be reached by means of international cooperation.

Undoubtedly, the adverse impacts of global warming will be stronger in poorer countries whose economies are agriculturally-based. For example, droughts in sub-Saharan Africa by 2050 are expected to result in an additional 30 million people hit by famine. Additionally, the projections indicate that the economic cost for this region will be 8,7 percent of its GDP, to be compared with 1,3 percent in the US and 1,4 percent of the EU, that is, roughly an impact seven times higher in this region compared to developed countries.

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The prevention and mitigation of the global warming is typically an international public good that can not be produced in the major economic powers do not accept to pay for it, even though it is also in their own collective interest to do so.

The Framework Convention on Climate Change (FCCC) of 1992 and its Kyoto Protocol of 1997, addressed these issues and obliged the rich countries to limit emissions of six specified GHGs. This will have a limited impact, not only because Australia and the US declined to ratify but also because it has not been extended to developing countries, including China, India, Brazil, and others, whose fossil fuel consumption is growing rapidly. Considering only the impact of CO2 emissions which account for two thirds of the total, projections to the year 2025 yield a 58 percent increase with respect to year 2000, with China and India combined exceeding the emissions of the US. These projections clearly indicate that serious solutions to tackle this global bad require the engagement of developing countries.

Within the Kyoto protocol, the Clean Development Mechanism (CDM) provides for an original instrument combining environment and development objectives. Within this mechanism, industrialized countries that have agreed to reduce their CO2 emissions can buy “carbon credits” (CERs) trough financing investments leading to emissions reductions in developing countries. CERs can also be acquired through investment in CO2 sinks (deforestation and reforestation projects).

The targets of the Kyoto Protocol are keyed to a base year, 1990, an approach that is unappealing to countries that desire to growth rapidly. Another approach, favoured by economists to deal with negative externalities from human action, is to tax the offending activity. The idea is to levy a tax on CO2 emissions (burning of coal, oil, and natural gas, and cement production) from major sources around the world unless the CO2 released is prevented from entering the atmosphere. Eventually, the tax rate could be calibrated to the desired reduction in emissions.

China is signatory of the FCCC and the Kyoto Protocol. However, is concerned with other priorities such as maintain rapid growth, provide employment to people leaving agriculture, and in the environment area to reduce floods and water and air pollution, while preserving energy security. More aggressively, India holds that CO2 concentrations over the past two centuries are due mostly to emissions from the rich countries and, therefore, they should pay for mitigating climate change.

Sub-Saharan Africa has not contributed significantly to the global change in climate and has little or no participation in the prevention of global environmental damages caused by climate change or the depletion of natural resources. Therefore, this is an area where international and local efforts combined should be made to achieve an effective engagement of the region in global environmental issues.

Similarly, Latin American Countries have a relatively low participation in global GHG emissions with per capita values 30 percent lower than the global average. The land-use changes (deforestation agriculture and urbanization) constitute the most important sources of GHG, almost 67 percent of total and in many countries emissions from this source are greater than those from fossil fuel combustion.

Nevertheless, countries in the region are increasingly taking actions to address environmental problems. On the one hand, the have enacted environmental legislation, created ministries, increased protected areas and developed actions oriented to environmental awareness. Also, there has been a progressive ratification of major multilateral environmental agreements. On the other, they have no formal emission reduction targets under the Kyoto Protocol. Nevertheless, many countries in the region have been adopting several measures that reduce GHG emissions. These include the reduction in oil consumption, particularly oil dependent economies, the development of

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alternative sources of energy, and the creation of energy efficiency programs. Examples are with the provision of subsidies of concessions for renewable energy in countries that are advancing with rural electrification (Argentina, Brazil and Chile). Other saving energy efforts were undertook in Colombia and Brazil to reduce emissions of CO2 in the vehicle fleet. Guatemala have granted subsidies to imports of new equipment for projects of renewable energy and Brazil gives incentives to the government-owned utility Electrobras to develop biomass cogeneration, wind, and small hydro generators.

The Clean Development Mechanism (CDM)is another initiative in which LAC have been actively involved. Thus, in 2003, out of the total energy projects, hydroelectric projects represented 50 percent, wind projects 15 percent, and biomass projects 13 percent. Ethanol and bio diesel projects are potentially significant in Brazil where many programs are being developed as well as in Argentina.

Various legal and market-based instruments have been applied by governments in LAC aimed at reversing the trend of biodiversity destruction. Venezuela has a tax on deforestation, Costa Rica compensates private landowners who maintain or increase the forested area, and Brazil has recently launched an action plan to prevent and control deforestation in the Amazon, the largest project ever undertaken in the country against deforestation. Bolivia and Mexico have secured the participation of indigenous and local communities in the conservation and sustainable use of biological diversity.

National protected areas represent 11 percent of the total land area, similar to the world average. The creation of private or community-managed forest reserves is also increasing. However, there have been isolated successes in curbing the illegal trade in endangered species. As all the LAC are parities to the Convention on Biological Diversity (CBD), there are important regional agreements related to biodiversity and land degradation that constitute strong platforms upon which to build regional actions.

The region has also adopted cooperative action in capping chlorofluorocarbons (CFCs) production and ratifying international agreements to phase-out productions of ozone depleting substances. Also, the majority of countries in the region have ratified the agreements complementary to the Basel Convention over the global regime governing the movement and use of chemicals to minimize the adverse effect on human health and the environment. In this respect, the region will need further assistance to strengthen their capacities to comply with these agreements.

Sub-Saharan Africa is also affected by the depletion of its natural resources. One activity that is posing serious risks is fishing by foreign trawlers in the west coast of Africa. Although the activity is regulated by bilateral agreements that provide the payment of royalties to the local governments, the system does not contemplate the preservation of the resource and, in fact, the present structure of EU incentives may be conducing to an over exploitation of the resource. Another case is the fish export industry in the Lake Victoria area which is based on the exploitation of the Nile perch. The export activity developed without any regulation and there are signs of depletion of the resource. The introduction of the perch in Lake Victoria has also produced the extermination of other species and this loss in bio diversity is also and adverse change in the environment.

Another major issue in Sub-Saharan Africa is related to water management. Several water basins in the region are originating risks of conflicts related to the access to water supply. The access to these basins involves more than half of the countries in the region.

Health and Peace and Security in sub-Saharan Countries

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SSA is one of the weakest links of the global system with respect to the production of international public goods. In this setup actions taken by the different participant are complementary instead of additive, which implies that producing such IPGs depends on the contribution of the weakest participant. Hence, health and peace and security become two relevant IPGs in which sub-Saharan Africa may play a significant role as the weakest link. Two undermining maladies have smashed the region: communicable diseases and armed conflicts. Therefore, is important to consider the incentives that other participants have to provide assistance in health and in the achievement of peace and security in the region.

The prevention of communicable diseases is clearly a public good, particularly with the globalization of travel and transportation. Examples are the recent appearance of the West Nile virus in the US, the SARS crisis originated in China, the pandemics of HIV/AIDS, and the other diseases such as malaria, tuberculosis, etc. The most pressing issue for sub-Saharan Africa is the case of HIV/AIDS with a prevalence rate nearly seven times higher than in the world average. Several initiatives have been taken to tackle this pandemic such as the UNAIDS funding. However, the financial aid is half of the estimated needs. The initiative to put infected people into anti-retroviral treatment only reaches about 8 percent of people in need. As vaccines do not exist yet these needs will increase in the future.

With respect to use of vaccines that could efficiently help eradicate diseases such as diphtheria, tetanus, poliomyelitis, pertussis, measles, yellow fever and hepatitis B, the region shows by far the lowest immunization rates in the world. A crude example is measles which kills one child per minute in SSAC and can be prevented with a vaccine at the cost of US$ 0.80. The Global Alliance for Vaccine Immunization (GAVI) is a recent initiative which has committed 65 percent of its funds to 39 SSAC.

It is clear that efforts to cope with these problems require of regional and multilateral initiatives given the trans-frontier spreading of communicable diseases and health problems faced by SSAC.

Since the end of the cold war military expenditure and the number of people killed in armed conflicts has decreased in developing and transition economies. Regrettably, the sub-Saharan Africa has not followed the same path. Consequently, the burden of military spending on GDP is now on average higher in SSAC than in other developing countries, while it was lower in the late 1980s. Thus, since the end of the cold war, the region has been absent in the process of pacification seen in the rest of the world showing its weak capacity to build peace. The principal cause of armed conflicts in the region are linked to government disputes rather than territorial disputes and exceptionally internationalized. However, in all cases they have repercussions in the neighbours, destabilizing other governments and disrupting trade routes implying that these conflicts are an international public bad.

Other economic repercussions are international when these armed conflicts occur in resource-rich countries where foreign companies have business interests. This suggests that very often the underlying cause of the armed conflicts is related to the access to resources. One initiative aimed at improving governance is the Kimberley process to reach an agreement between governments and the diamond industry to control trading through the implementation of a certification scheme which reduces purchasing power of the belligerents.

Other initiatives can be taken by developed countries, for example a better control of assets deposited in bank accounts and capital markets in OECD countries. In this respect, some progress has been made with money use to finance terrorist groups,

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very little has been done to control assets deposited by corrupt politicians of developing countries, even when the illegitimate nature of the fortunes amassed by such leaders was beyond doubt.

Therefore, the international community has certainly different possibilities at its disposal to improve the governance situation that is very often leading to civil wars in the region. The modesty of these actions so far is consistent with the fact that developed countries do not feel much concerned about armed conflicts that make huge numbers of victims in this region. However, the costs of these conflicts are taking a very high toll on foreign aid budgets.

The African experience shows that external interventions may be necessary to stop armed conflicts. Diplomatic interventions have often failed when not complemented by costly military intervention of peace-making armed forces.

The African community is also building some instruments to improve governance through the APRM of the NEPAD. The African Union (AU) is another legitimate institution which can play a role in peace-making in the region but does not have the necessary resources to solve complex conflict crises. The same is true for the Economic Community of West African States (ECOWAS) and the Southern African Development Community (SADC).

In sum, sub Saharan Africa is one of the regions of the world where producing peace, as an international or as a regional public good, is very complex challenge. The region is one of the weakest links of the global system in these areas. The threat caused by the region on international peace and security has yet to produce a more energetic change of attitude on the part of the international community to providing necessary support as required in the case of an IPG. Similarly, as for the case of health, the region has been largely de-linked from the global system. It is to be noted that the issue of armed conflicts has been recently taken more seriously into account in view of their enormous economic and human costs.

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