I am delighted to participate in the inaugural session of this intergovernmental conference on middle-income countries, which the UN Department of Economic and Social Affairs has the honour to co-sponsor. I am sure everyone would join me in offering our thanks to the Government of Spain for making this event possible. Let me thank in particular you, Minister, for your leadership, and State Secretary Leire Pajin and Director-General Milagros Hernando for the organization of this conference.
The concern that brings us together today is the inadequacy of international cooperation efforts to help deal with the challenges confronting middle-income countries in making progress towards the shared principles, objectives, and targets that have been agreed in the UN Conferences and Summits since the 1990s and that comprise the UN Development Agenda. Indeed, support for the development efforts of middle-income countries is important to all stakeholders in the great human project that is development.
I would like to mention five reasons for this, underscored in the documents prepared by the host country and my Department as the background for our discussions over these two days. Let me also thank in this regard José Antonio Alonso, from Universidad Complutense, who directed the drafting of this report.
The first reason for supporting middle-income countries is that such support is essential in the global fight against poverty. Two-fifths of the world’s people who live on less than two dollars a day, live in these countries.
Second is to consolidate and make irreversible the development progress already achieved. This is critical for middle-income countries, as the high volatility of their economic growth has resulted in a high frequency of “growth collapses” in recent decades, which have, in turn, generated serious pressures on democratic governance.
Third is to support the capacity of middle-income countries to serve as hubs for development, a role that several of them play in their respective regions or sub-regions.
Fourth is to bolster their efforts to contribute to international public goods, such as environmental sustainability, financial stability, prevention of contagious diseases, and peacebuilding.
Fifth is to ensure that the system for international development cooperation does not discriminate against those who have made advances.
The international community has been giving strong attention, and correctly so, to the poorest countries of the world, particularly in sub-Saharan Africa. Yet, this need not preclude adequate attention to middle-income countries, which, with some justification, feel largely left out of the current system of international cooperation. The five arguments that I have just mentioned forcefully indicate why we must overcome this deficit.
This demands new thinking on the specific features of middle-income countries from the point of view of development cooperation. We suggest that the conditions and rules under which countries integrate into the world economy in the areas of finance, trade, and technology are critical for middle-income countries. Thus, development-friendly rules in these areas are perhaps even more important than the ODA directed towards these countries, which is likely to continue to be limited. ODA is also less important than stable access to multilateral financing and, especially, to private financing. Yet, direct assistance can play a significant role, particularly if it catalyzes domestic efforts in key areas.
At the same time, just as developed countries are asked to cooperate with middle-income countries, the latter should increasingly serve as sources of cooperation, by playing a larger role in South-South cooperation, amongst themselves and with lower-income countries.
Our analysis also suggests three critical areas in which to intensify national efforts and international cooperation with middle-income countries. They relate to policies that enhance institutional development and social cohesion, that strengthen their financial systems and facilitate a smooth integration in the international capital markets, and that generate a dynamic process of technological and productive development.
Our knowledge of the process of institutional change and our ability to measure it are both limited. Yet, the data we do have clearly suggests that middle-income countries should make improving institutional quality a priority. It also suggests that institutional responses are highly context-specific, with no universally optimal design, and that institutional improvement is best pursued in a gradual but sustained way.
The relationship between economic growth and social equity is critical for any successful development experience. Unfortunately, too many examples exist of middle-income countries in which this link has worked inadequately. Here, again, no universal model seems to exist. Yet, the development of robust taxation systems seems critical in determining the public sector’s capacity to contribute to improving that link. This brings up the related challenge of designing a tax system that meets the basic criteria of sufficiency, efficiency, equity, administrative simplicity, and flexibility.
International cooperation has a role to play in both institutional development and tax reform, helping countries to learn from experiences of developed and other middle-income countries, with full respect for national sovereignty. It can also help to address the international effects of taxation and deal with such challenges as double taxation, tax evasion, and fraud.
While middle-income countries have become favoured destinations for international financial flows, they have also suffered acute financial crises at great social cost. Indeed, the distributional effect of macroeconomic shocks has emerged as a distinctive feature of the relationship between growth and equity in middle-income countries. The increase in poverty that occurs at times of crisis is greater and speedier than the reduction recorded during growth phases.
In a world characterized by massive and highly pro-cyclical capital movements, there is no guarantee against a repetition of the crises that hit the middle-income countries in the 1980s and in the second half of the 1990s. But steps can be taken to reduce the risks from abrupt capital movements and contagion from crises. This would require not only consolidating good macroeconomic management but also securing adequate space for countercyclical macroeconomic policies. The development of deep domestic financial markets in local currencies is also one of the surest ways for middle-income countries to build greater autonomy for their economic policy.
Nonetheless, given the current level of financial market integration, these various national responses must be supplemented by steps to strengthen the institutional and normative framework for preventing and dealing with crises. This suggests that the International Monetary Fund should be given greater capacity as lender of last resort and as guarantor of the stability of the international financial system. And we must remember that the world still lacks an appropriate framework to deal with acute problems of over-indebtedness, which still plague several middle-income countries.
To these issues we must add the need to strengthen developing countries’ representation in international economic decision-making. This issue was central to the Monterrey Consensus on Financing for Development. But so far it has been seriously taken up by only one multilateral economic institution: the IMF.
Finally, consolidating the productive transformation process and moving into more dynamic areas of specialization, with a higher technological content and greater value-added, are key to the long-term trade growth of middle-income countries. Progress on these fronts, however, is constrained by domestic capacities and by restrictions that may be imposed by the international trading system.
The international gap in the generation of knowledge continues to be a major determinant of international inequalities. Bridging this gap should be a critical concern of international cooperation vis-à-vis middle-income countries. Meanwhile, given the success that some middle-income countries have had in developing their capacities in this area, greater emphasis should also be placed on South-South cooperation, with support from industrial countries through triangular mechanisms. Improving middle-income countries’ capacities to attract foreign investment may also be deemed a way to bolster technological capabilities, provided that the foreign investment is integrated into the local productive fabric.
With regard to agriculture, the problems facing middle-income countries relate to industrial countries’ elevated levels of protection, which are incompatible with the objective of open and competitive trade. Beyond export support, several major developed countries also maintain agricultural production subsidies that affect market competition. The Doha Round should put an end to such distorting measures.
Infrastructure also conditions a country’s prospects for development and international competitiveness. Expanding infrastructure investments in many middle-income countries will require efforts that go beyond fiscal possibilities and eventual domestic or international private financing. Official resources—bilateral and particularly multilateral—can therefore be decisive in this area.
I am convinced that this Conference will advance our knowledge in these and other areas. And I am equally hopeful that it will feed into several forthcoming processes: the first-ever Development Cooperation Forum to be launched by the Economic and Social Council during its session this July, the High-Level Dialogue on Financing for Development that will take place this fall in the General Assembly, and next year’s follow-up conference to Monterrey in Doha.
Each of these processes is focused in different ways on the system for international development cooperation and the global partnership for development launched in Monterrey. For the middle-income countries and for all developing countries, achieving the UN development goals will require building an ever more strengthened, dynamic, and effective partnership among all Governments and other stakeholders. I have no doubt that this Conference will contribute to this objective.