| United Nations | E/1997/35 |
Economic and Social Council
United Nations
Committee for Development Planning
Report on the thirty-first session
(5-9 May 1997)
Economic and Social Council
Official Records, 1997
Supplement No.15
United Nations - New York, 1997
NOTE
Symbols of United Nations documents are composed of capital letters combined
with figures.
ISSN 0257-0661
CONTENTS
Chapter Paragraphs Page
I. MAIN FINDINGS AND RECOMMENDATIONS .................... 1 - 19 1
II. GLOBALIZATION IN THE 1990S AND DEVELOPMENT POLICY
CHALLENGES ........................................... 20 - 76 5
A. Characteristics of globalization ................. 21 - 39 5
B. The imperatives of global integration ............ 40 - 46 8
C. Perils of globalization .......................... 47 - 67 9
D. Challenges of globalization ...................... 68 - 76 13
III. NATIONAL POLICIES FOR THOSE DEVELOPING COUNTRIES
PARTIALLY OR TOTALLY INTEGRATED INTO GLOBAL MARKETS .. 77 - 171 15
A. Sustaining long-term growth ...................... 80 - 111 15
B. Safeguarding economic stability .................. 112 - 141 20
C. Promoting social cohesion ........................ 142 - 162 24
D. Protecting natural and cultural environments ..... 163 - 165 27
E. Strengthening governance and participation ....... 166 - 171 28
IV. NATIONAL POLICIES FOR THOSE DEVELOPING COUNTRIES NOT
INTEGRATED INTO GLOBAL MARKETS ....................... 172 - 185 30
A. Building human resources and infrastructure ...... 172 - 174 30
B. The pace of reform and restructuring ............. 175 - 178 30
C. Enhancing the legitimacy of national political
regimes .......................................... 179 - 183 31
D. Enlarging effective markets and developing trade
and investment networks .......................... 184 - 185 31
V. POLICIES FOR DEVELOPED COUNTRIES AND THE INTERNATIONAL
COMMUNITY ............................................ 186 - 222 32
A. Fostering a global environment conducive to
development ...................................... 186 - 193 32
B. Increasing financial resources for development ... 194 - 207 33
C. Fostering a more secure and equitable global
environment ...................................... 208 - 219 35
D. Strengthening global governance ................. 220 - 222 37
VI. GENERAL REVIEW OF THE LIST OF THE LEAST DEVELOPED
COUNTRIES ........................................... 223 - 241 39
A. The current list ................................ 228 - 231 39
B. Review of the criteria and methodology .......... 232 - 239 41
C. Recommendations to the General Assembly ......... 240 - 241 42
VII. REVIEW OF THE WORKING METHODS OF THE COMMITTEE ...... 242 - 253 47
VIII. WORK PROGRAMME FOR THE THIRTY-SECOND SESSION (1998) . 254 - 263 50
A. Migration and employment ........................ 258 - 259 50
B. Intergenerational transfers and social security . 260 - 261 50
C. Review of the criteria and methodology for
determining the list of the least developed
countries and examination of a possible
vulnerability index ............................. 262 - 263 51
IX. ORGANIZATION OF THE SESSION ......................... 264 - 270 52
Tables
1. Aggregate net resource flows to developing countries, 1990-1996 . 7
2. Summary of data for the review of the least developed countries . 44
Annexes
I. AGENDA .......................................................... 54
II. LIST OF THE LEAST DEVELOPED COUNTRIES ........................... 55
I. MAIN FINDINGS AND RECOMMENDATIONS
The globalization process is deepening
1. The 1990s have seen continuing trade liberalization and globalization of
financial markets, resulting in increasingly integrated and complex global
systems of production and distribution. On the global and regional levels,
transnational corporations and alliances of enterprises, from developing as
well as developed countries, have promoted international investment,
intra-firm and inter-firm trade, and technology transfer.
New opportunities offered by global integration
2. Some developing countries, particularly in East Asia, have been able to
take advantage of the new opportunities and have achieved high economic
growth, based on high domestic savings and investment and human resource
development, expanding exports, capital inflows and technology transfers.
East Asian countries in particular have benefitted by regional flows of
capital and technology, often involving small and medium-sized enterprises
connected to larger transnational corporations for global distribution and
marketing.
Outsiders to the globalization process
3. Most developing countries, however, and particularly the least developed
countries have not been able to expand their trade, to become integrated into
world financial markets, or to attract much foreign investment, due primarily
to lack of human resource development, infrastructure, political and economic
stability, or networking. Globalization is not only bypassing these
countries, but may also have negative impacts, including the reduction of
effective preferential treatment of their exports and a decline of foreign
exchange receipts, including official development assistance (ODA).
Financial volatility
4. While capital inflows are generally desirable to increase employment and
productivity, provide foreign exchange, expand exports and transfer
technology, large flows of capital to and from developing countries with weak
financial institutions can result in volatile exchange and interest rates,
which can discourage investment and destabilize the economy. Measures for
reducing such volatility include taxes on short-term capital inflows, improved
regulation and supervision of financial institutions, policy stability, and
diversification of sources of capital. Taxes on international short-term
capital transactions could be levied on a national basis, although
internationally coordinated taxation (such as a Tobin-type tax) would be
preferable.
Policy constraints and convergence
5. Trade liberalization, the demands of global capital markets and
financial institutions, and declining ODA limit the policy options now
available to Governments. As a result, there has been strong pressure for
policy convergence in developing countries. New policy instruments adapted to
the new context are required to promote economic growth and social development
while encouraging domestic and foreign investment and trade. The development
and implementation of new policies will require improved administration and
management in both the private and public sectors.
Regional cooperation and expanding markets
6. Promoting economic growth and investment in developing countries
requires increasing productivity, restructuring the productive base, and
expanding the effective size of markets. Regional cooperation and networking
between domestic, regional and international partners can improve access to
export markets and provide incentives for foreign direct investment (FDI).
Formal and informal networking and alliances are particularly important for
small and medium-sized enterprises, as demonstrated by the success of
enterprises in East Asia. Regional arrangements can also be useful for
negotiating access to other markets.
Appropriate sequencing of liberalization
7. The effectiveness and political acceptability of economic reforms for
adapting to globalization depend on the pace, sequencing and nature of reform
measures. When conditions have permitted gradual change, successful reform
has tended to begin with measures that produce short-term benefits and arouse
limited resistance. Short-term success then builds support for reforms that
produce longer-term benefits and that face greater opposition. In general, it
appears that regulatory frameworks should be established before
liberalization, that FDI should be liberalized before trade, and that
liberalization of other forms of capital flows should be done late in the
reform process. The pace of reform in each country should be determined
primarily by the adaptive capacity of its political and economic systems.
Expanding domestic savings and public resources
8. Capital inflows and domestic savings are not substitutes. It is
important, even for countries receiving capital flows, to increase domestic
saving rates so that economic growth can be sustained even in the face of a
decline in foreign direct or portfolio investment. For public revenues, tax
reform is a policy priority in most developing countries. Broad-based income
taxes are preferable to narrowly based import duties and corporate taxes. The
computation of taxable income via simple objective criteria might be useful in
the fight against tax evasion and the broadening of the tax base.
Maintaining and improving social services
9. While globalization has increased pressure for fiscal austerity,
investment in education, health care and other social services has become more
important in ensuring economic competitiveness, improving management in the
public and private sectors, and improving general welfare. Reductions in
spending on social services are likely to have adverse impacts on growth and
on capital inflows in the medium and long terms. Increasing public investment
while promoting private investment often requires improvements in tax policy
and administration.
Social protection and poverty reduction
10. Globalization, liberalization and rapid technological change have been
accompanied by increasing economic inequality, poverty, unemployment and
environmental degradation in many countries, both developed and developing.
Successful economic reform often requires social safety nets to minimize the
negative economic and social impacts of reform, especially on the poor, and to
maintain popular support for reform. Programmes for social protection during
reform have been most successful when they have been based on the expansion of
existing social protection programmes. Poverty reduction generally depends on
economic growth that is concentrated in labour-intensive, low-skill sectors
and improved access to productive resources and public services for people
living in poverty. Reform of obsolete or inappropriate labour regulations can
promote employment in some cases, but reducing the protection of workers
against layoffs can discourage investment in human resources without
necessarily increasing employment.
Governance and participation
11. Economic, social and political stability and cohesion are major factors
in encouraging savings and investment. Stability is promoted by a State and a
public administration with the skills and resources to design and implement
policies that promote savings and investment, raise revenues, provide public
services and infrastructure, create and regulate markets, and build a
political constituency for sound policies. Effective development policies are
facilitated by a relatively egalitarian income distribution which reduces
political struggle over distributional questions. Establishing the legitimacy
of the State, through respect for fundamental human rights, adherence to the
rule of law, effective administration of justice, and promotion of popular
participation in public affairs, is important in its own right as well as for
promoting savings and investment and preventing capital flight. Local
authorities and non-governmental organizations can also play an
important role in the development process.
Environmental protection
12. Protection of natural resources and the environment from wasteful
exploitation should be based on national policies that prevent environmental
deterioration before it occurs. Such national policies should be supported by
international standards or guidelines, including minimum, but effective,
standards developed with the participation of all countries. Regional trade
arrangements can be used to enforce environmental standards. The Commission
for Sustainable Development should consider the question of international
environmental standards.
Access to developed country markets
13. Developed countries should sustain their own economic growth and provide
increased opportunities for developing countries to expand their exports,
including both manufactured products from more advanced developing countries
and primary commodities from less developed countries. In particular,
developed countries should provide duty-free access to all products from the
least developed countries and reduce or eliminate the administrative
requirements for such access.
ODA and debt relief
14. For most developing countries, continued and expanded international
financial resources are required to meet the needs for investment capital,
foreign exchange, and human development priorities. Sustained and effective
ODA will be required for at least 10 years to enable the least developed
countries to benefit from globalization and generate sustained growth. ODA is
particularly crucial for economic diversification, for the transition from
non-market to market structures, and for investment in infrastructure and
human resource development. Developed countries should reverse the decline in
ODA and make greater efforts to meet their ODA commitments, including the
commitment to provide 0.2 per cent of GNP as ODA to the least developed
countries. Developed countries should also continue their assistance to
transition economies with a view to transforming centrally planned economies
into market-oriented systems smoothly and building national capacities for
economic restructuring, reconstruction and growth. Further efforts are also
required to reduce the debt service and debt stock, including multilateral
debt, of the highly indebted least developed and other low-income countries,
allowing resources to be focused on development and promoting access to
international capital markets.
International codes of conduct
15. There is need for further consideration within the United Nations of a
code of conduct for corporate transnational activities, taking into account
discussions currently under way in the Organisation for Economic Cooperation
and Development (OECD) on the question. International codes of conduct for
Governments are also needed to avoid policy competition that involves
undermining social conditions, competitive devaluation, minimizing financial
regulation or maximizing tax relief.
The need for a world financial organization
16. In addition to national systems of financial regulation, international
standards are also needed to promote sound financial principles and practices
and avoid destructive competition and inconsistency between countries. Such
international standards should be developed through the existing international
bodies that coordinate financial regulation and supervision. An institution,
such as a world financial organization, is needed to provide overall guidance
for these activities, monitor their progress and effectiveness, and identify
new needs for supervision as they arise.
Need for an economic and social security council
17. Given that under present-day globalization, there is a potential for a
massive financial disaster, global governance should be strengthened. Access
to large loans in a financial emergency should be provided through the
IMF/BIS, and the size of the General Arrangements to Borrow (GAB) should be
increased. An economic and social security council, parallel to the Security
Council, could promote economic coordination and initiate preventive measures
and regulatory policies that are increasingly needed in the global economy.
Review of the list of the least developed countries
18. After the triennial review of the list of the least developed countries,
the Committee agreed that Vanuatu should be graduated from the list
immediately, as recommended in 1994, and that Cape Verde, Maldives and Samoa
should be graduated in 2000, subject to review at that time. No countries
were recommended for addition to the list.
Future work programme
19. For its 1997-1998 work programme, the Committee decided to consider the
questions of intergenerational transfers and social security, international
migration and employment, and review of the criteria and methods for the
designation of the least developed countries.
II. GLOBALIZATION IN THE 1990S AND DEVELOPMENT POLICY CHALLENGES
20. In 1992, the Committee conducted a critical review of economic reform
programmes in developing countries and examined reasons for their failure to
match expectations. The purpose of the present report, which builds on that
work, is to examine the impact of globalization on development in the 1990s
and to make recommendations for policies, institutions and governance at both
the national and international levels. The recommendations are intended to
apply not only to stabilization, adjustment and reform programmes but also to
all economic policies in the context of globalization, considered as
components of overall development strategies in developing countries. In
making these recommendations, the Committee considered that all such elements
of development policies should be evaluated in terms of the objectives of
expanding human capabilities and promoting economic growth in order to improve
people's living conditions.
A. Characteristics of globalization
21. Globalization refers to the integrated cross-border organization of
economic activity, led by transnational economic actors, including
transnational corporations from both developed and developing countries and
institutional investors, achieved by the rapid expansion of international
trade, capital flows and technology transfers, and facilitated by the
revolutions in telecommunications and information technology. Globalization
is an on-going and evolving process.
22. The extensive opening of national economies throughout the world to
trade, finance, investment and technology transfers has profoundly affected
opportunities for growth and development. Some countries, generally those
already operating at higher levels of efficiency, have been well positioned to
take advantage of the new opportunities; less developed, and therefore less
flexible, economies have not. Yet nearly all countries have moved decisively
to remove or weaken instruments of public policy for direction and control of
cross-border transactions. They have also given market mechanisms more scope
internally and have reshaped institutional frameworks to accommodate the freer
play of market forces.
23. There can be little argument that these changes have contributed to
growth in the world economy in the 1990s. Yet this process of change in
national and international economic regimes has also clearly demonstrated
severe weaknesses in a number of areas. The present report will examine the
benefits and the opportunities offered by globalization and the problems and
weaknesses that it has revealed. Based on that examination, it will offer
recommendations concerning the actions that developing countries can take to
benefit from globalization and the actions that the developed countries and
the international community can take to ensure that all countries participate
in the process.
1. Towards varied and deeper forms of global economic integration
24. Since the 1970s, the globalization process has both expanded and
deepened, including capital markets as well as trade. The recycling of the
earnings of oil-producing countries in the 1970s provided the first impetus
for the rapid expansion of global financial flows. These increased flows,
together with the liberalization of financial markets in many developed and
developing countries, have promoted the integration of financial markets
around the world.
25. In the 1990s, the globalization process has been increasingly driven by
the foreign production of transnational corporations, largely financed by
foreign direct investment (FDI) and by the substantial growth of international
portfolio investment. International investment, non-equity technology
transfers and cross-border associations have increased at faster rates than
world GNP, global trade, or domestic investment. International mergers and
acquisitions have also grown rapidly. Privatization of State-owned
enterprises, including the construction and operation of infrastructure, has
also contributed to international capital flows.
26. As worldwide competition has increased, foreign direct investment, trade
and technology flows are increasingly taking place through complex
international intra-firm and inter-firm strategic alliances involving
production, sourcing and distribution activities. These networks cross
borders to take advantage of differences in comparative advantage, to capture
economies of synergy or scale, to spread the risks of high fixed costs, and to
gain access to technologies, new markets, distribution channels and other
factors affecting competitiveness. They often operate on a regional basis and
involve small, medium-sized and large enterprises from developing and newly
industrializing economies, as well as large transnational corporations from
developed countries.
27. In recent years, FDI flows have been shifting from the primary to the
manufacturing to the service sector, and there have been increasing flows to
agribusiness. The composition of assets acquired by foreign portfolio
investors has also shifted from debt instruments towards equity instruments
and, within debt instruments, from commercial bank loans to bonds and new
instruments created through "securitization".
28. Developing countries have been part of the change in global capital
movements. Private capital flows to developing countries have increased
sharply in recent years, including both foreign direct investment and
portfolio flows.
29. Private capital flows have mostly taken the form of portfolio flows in
Latin America and of FDI in Asia. There is evidence, however, that this
difference is decreasing.
30. In the 1990s, the globalization process has also expanded to the
successor nations of the former Soviet Union and to Central and Eastern
European countries formerly members of the Council for Mutual Economic
Assistance (CMEA), which opened their economies to global capital markets and
liberalized trade. These new markets have not yet been fully penetrated by
the driving forces of globalization, but they have already attracted
significant capital and trade flows and represent great potential for the
further expansion of the globalization process.
31. The level of private capital flows to emerging markets is likely to
increase further in the future, in part due to increasing pressure on pension
funds and other institutional investors to diversify their investments and to
the efforts of many developing countries to attract additional foreign
investment.
2. Shift of decision-making from national political authorities
to global market actors
32. Globalization in the 1990s has been associated with a shift in the
management of global resources from national political authorities to global
market actors. The composition and distribution of global finance and global
production is determined increasingly by the private decisions and actions of
market actors, who are not politically accountable to or subject to the
control of national Governments.
33. Today, the largest 100 transnational corporations (excluding those in
banking and finance) are estimated to account for about one third of global
FDI.
34. While private capital flows to developing countries have increased,
official development finance has decreased substantially in real terms, as
indicated in table 1 below.
Table 1. Aggregate net resource flows to developing countries, 1990-1996
------------------------------------------------------------------------------
1990 1991 1992 1993 1994 1995 1996
------------------------------------------------------------------------------
Private capital flows 44.4 56.9 90.6 157.1 161.3 184.2 243.8
FDI 24.5 33.5 43.6 67.2 83.7 95.5 109.5
Portfolio flows 5.5 17.3 20.9 80.9 62.0 60.6 91.8
Commercial banks 3.0 2.8 12.5 -0.3 11.0 26.5 34.2
Others 11.3 3.3 13.5 9.2 4.6 1.7 8.3
Official development
finance 56.5 65.6 55.4 55.0 45.7 53.0 40.8
------------------------------------------------------------------------------
Source: World Bank, Global Development Finance 1997 (Washington, D.C.)
3. Concentration of capital flows
35. Despite increased flows to emerging markets, international capital flows
remain highly concentrated, going from a small number of developed countries
and transnational corporations to a small number of developing countries.
36. Of a total of about $2.7 trillion in total FDI stock in 1995, about
65 per cent originated in the five major developed economies. During that
same year, 80 per cent of FDI flows to developing countries went to 12
countries in Asia and Latin America, all of which are large or rapidly
growing, or both. Nine countries in Latin America and East Asia account for
80 per cent of net issues of international bonds by all developing and
transition economies. Six countries were responsible for 60 per cent of
borrowing through syndicated bank credits.
4. New trends in regional arrangements
37. Another characteristic of the globalization process in the 1990s has
been increasing intraregional trade and investment flows, both in regions with
formal integration arrangements and in areas where formal schemes are only in
their infancy. There has been a rapid expansion in both formal and informal
regional arrangements, driven in part by concerns over the potential negative
impacts of globalization on national economies and by the positive prospects
of regionalization. In Europe, the European Community is moving from trade
integration to monetary union and deeper forms of political integration; in
North America, the United States, Canada and Mexico have formed the North
American Free Trade Agreement (NAFTA); and a number of initiatives have been
undertaken in the Asia/Pacific region and in Latin America. In Africa, while
the African Economic Community has been established, comprising all members of
the Organization of African Unity (OAU), and South Africa has joined the
Southern African Development Community (SADC), regional economic integration
remains very limited.
38. Regional capital flows between developing countries are particularly
important in Asia, due in particular to increasing FDI from the newly
industrializing economies to South-East Asian countries. Within East Asia,
private investment and trade networks have led to a deepening of regional
economic integration. There have also been increasing flows between countries
in Latin America.
39. In contrast to the increasing regional economic integration in most
parts of the world, the regional economic alliance of the former Soviet Union
and its Central and Eastern European partners, the CMEA, collapsed in the
early 1990s. This is widely seen as the major cause of the drastic
contraction of domestic production in the region. In addition, foreign
capital inflows have been largely directed towards the acquisition of existing
firms that are being privatized. Privatization, in many cases, has led either
to the closure of production facilities or to major restructuring associated
with high levels of unemployment.
B. The imperatives of global integration
1. Access to technology and knowledge
40. Competitiveness in global markets requires both high productivity and
high quality and cannot be achieved through low wages alone. Access to more
advanced production technology can be essential to export growth and
diversification as well as to more effective competition against imports from
more developed countries.
41. For most developing countries, access to more advanced technology comes
through expanded participation in the networks of international companies and
through learning by doing. Large developing countries have been able to
promote technology transfers by making market access or public-sector
contracts to transnational corporations conditional on such transfers, but
this strategy is increasingly limited by international trade agreements.
2. Globalization of consumption patterns
42. The expansion of global communications, travel and cultural exchange is
leading to increasing demands in developing countries for the high material
standards of living of the developed countries. And the high economic growth
rates of a few developing countries, based in part on integration into global
markets, provide examples and generate expectations in others of following and
matching their achievements. The recognition that good employment
opportunities in the expanding knowledge-based industries will go to those
with extensive knowledge and skills has increased the demand for education and
other social services.
3. Pressures for policy convergence and open economies
43. The trend to policy convergence towards the open-economy model derives
in part from the demonstrated or perceived successes of that model; it is also
driven by global market actors, in particular developed country Governments
and international financial and trade institutions that make such policies a
condition for access to resources. As a result, most countries have adapted
their national economic policy-making to the new imperatives, regardless of
differences in structural characteristics and, in particular, in their degree
of integration into global markets.
44. Countries that rely heavily on private capital inflows tend to have
fewer degrees of freedom in national economic policy-making due to the
potential volatility of those flows. In particular, they are constrained in
the use of fiscal deficits or expansionary monetary policy to cushion
fluctuations in economic activity for fear of generating exchange-rate crises.
45. Countries which are dependent on concessional financial flows, which
often merely compensate for declining commodity prices and rising debt-service
payments, have also been constrained in their national policy-making as a
result of pressures from international financial institutions and the loss of
relative autonomy vis-a`-vis those institutions.
46. In the context of regional arrangements, formal regional rules or
increased competition within the region imply a loss of policy autonomy due to
the loss of traditional policy instruments such as tariffs or certain types of
subsidies or taxes.
C. Perils of globalization
1. Insiders and outsiders in global markets
47. The concentration of international capital flows to a small number of
developing countries, coupled with a proliferation of trade, investment and
technology arrangements among global market actors, has meant that the degree
and the nature of participation in global markets vary substantially among
developing countries.
48. For most developing countries, trade in goods and services constitutes
the only form of international economic activity. For others, private capital
flows constitute a substantial part of their foreign exchange receipts, either
through FDI or through portfolio investment. In only a few developing
countries, mostly in East and South-East Asia and Latin America, have domestic
companies joined the integrated networks of transnational corporations and, in
some cases, forged strategic alliances to exploit dynamic trade and investment
interlinkages. Some of these domestic companies are rapidly developing into
global actors.
49. A small but growing number of countries are thus becoming insiders in
global markets for both trade and capital. Most developing countries,
however, and particularly the least developed countries, remain outsiders to
that process. Not only are those countries bypassed by the process of growth
that the new opportunities offer, but when their economies are opened to the
full pressure of the forces of competition in the world economy, their already
weak production systems often prove unsustainable. Furthermore the terms of
trade for least developed countries have suffered a major decline since 1980.
50. While the proportion of people in absolute poverty may have been reduced
as a result of rapid economic growth in some very large low-income developing
countries (notably China and India), the process of globalization has been
accompanied by an increasing economic gap between the high and middle-income
countries and the least developed countries. While total private flows have
increased, the least developed countries have suffered a decline in private
flows, in both real terms and as a share of total flows, and their share of
world exports has been declining. The decline of ODA has further contributed
to their marginalization.
51. Furthermore, while the results of the Uruguay Round of trade
negotiations are expected to benefit most countries, there may be negative
impacts on many of the least developed countries. Trade liberalization
reduces the effective preferences that have benefited many of the least
developed countries, and liberalization has been most limited with respect to
the products of the least developed countries, especially agricultural
products, textiles and clothing. Food-importing countries may also suffer
losses from Uruguay Round trade liberalization, due to rising world market
prices for food. While these problems have been recognized and there are some
provisions to address them, such provisions have not been effective in
allowing the weaker economies to partake in the benefits of globalization.
52. In the more developed countries, there are processes and structures at
the national level to ensure that markets function within a framework of
checks and balances to protect the common good. In most developing countries,
such a framework does not exist or is very weak and needs to be developed.
This is not an issue which can be addressed by external intervention or
conditionality, whether by stronger countries bilaterally or through
multilateral institutions; development of the necessary political processes
and social protection systems must be driven and brought about by internal
political action.
53. Finally, while market forces within national economies can be subjected
to public surveillance and political control to mitigate or alleviate
inequities, there is no effective system of governance at the international
level.
2. Savings and exchange constraints
54. As a result of declining ODA and lack of access to private capital
markets, most of the least developed countries and many other developing
countries that are only partially integrated into global markets face severe
savings and exchange constraints.
55. In some countries dependent on primary-commodity exports, declining
commodity prices have adversely affected export earnings, the balance of
payments and the exchange rate, often leading to an exacerbation of debt
problems, especially in heavily indebted low-income countries. Under such
conditions, concessional financing or capital inflows are often used to
maintain imports of intermediate and consumer goods rather than to generate
growth, thus creating conditions for economic crisis when those inflows stop.
3. Potential deflation and financial instability
56. Countries that rely on capital inflows to finance unsustainable exchange
rates or monetary or fiscal policies are likely to run into serious problems
in the event that the flows stop. Even for countries that follow prudent
macroeconomic policies, large capital inflows can have negative effects on
growth, particularly when large inflows that cannot be sterilized increase
domestic liquidity, cause real appreciation of the currency, and therefore
have a negative impact on export performance and growth. When the pace of
capital inflow slows, even countries with prudent policies can run into severe
balance-of-payment crises.
57. Large capital inflows can also result in speculative bubbles in certain
economic sectors or the stock market or in an over-expansion of domestic
credit if prudential regulation is inadequate or not enforced. Speculative
bubbles are usually followed by a crash, and over-expansion of domestic credit
can lead to a banking crisis. Both can affect the performance of other
sectors, or even the entire economy.
58. Rapid trade liberalization by countries with weak industrial sectors and
with underdeveloped financial systems which have produced distortions in
capital allocation has resulted in large declines in industrial employment and
slow growth or decline in industrial production, as illustrated by the cases
of Ghana, Jamaica and other countries. The enterprises in such countries
were, in most cases, unable to take advantage of their potential comparative
advantage in low-wage labour-intensive production due to lack of
infrastructure, trained workers, technical and market information, marketing
skills and management capacities. Some traditional export enterprises were
able to increase exports, but there was little economic diversification or
entry of new enterprises into export markets. The sustainability of trade
liberalization in such countries may depend on social programmes to cushion
the initial reductions in industrial employment.
59. While liberalization is generally seen as benefiting small and
medium-sized enterprises, which tend to be labour-intensive, liberalization
can also pose threats to such enterprises by exposing them to competition from
large, capital-intensive transnational corporations. Small and medium-sized
enterprises may need assistance in strengthening management and marketing
skills in order to take advantage of the new economic environment.
60. Finally, pressures for policy convergence and for the maintenance of
macroeconomic stability are inducing many countries to cut budget
expenditures, sometimes excessively, resulting in deflation, at least in the
short run. When these cuts involve public investment expenditures in
infrastructure, education or health services, the long-run effects on
development will be negative.
4. Disruption of the social contract
61. Empirical evidence from Latin America and Asia suggests that when
international resource flows are associated with growth, they can be important
factors in poverty reduction, even when there is some increase in inequality.
In Latin America, poverty has declined in the 1990s when per capita economic
growth and international resource flows have been positive. The experience of
a number of countries, notably in East Asia, demonstrates that it is possible
to combine rapid economic growth and substantial capital inflows with social
equity.
62. However, globalization and rapid technological change, together with the
debt crisis and inflation, have been accompanied by increasing economic
inequality within many countries, both developed and developing. A major
trend in both developed and developing countries has been increasing wage
differentials between skilled and unskilled workers, due both to technological
change and to increased trade and capital flows.
63. It also appears that increased international competition for trade and
capital has put pressure on some countries to reduce the progressivity of
taxation, to cut existing social protection programmes, particularly for the
elderly and other people not producing for the market, and to avoid
establishing new social protection programmes.
64. The countries of the former Soviet Union and other Central and Eastern
European countries, which were characterized by relative equity for many
decades, are now facing a split in their societies. A new, wealthy and
powerful economic elite is emerging, while the former middle classes are
sinking into poverty. As a result of declining real wages, lack of gainful
employment and reduced social assistance benefits, families with many
children, ethnic minorities and, in most countries, pensioners are
particularly hit by this process.
5. Environmental degradation and loss of cultural diversity
65. The environmental impact of globalization depends on the specific
policies, conditions and patterns of economic growth of each country. In
situations in which economic reform is required, macroeconomic constraints
often take precedence over environmental concerns, particularly in the short
term. For example, if foreign exchange is scarce and exportable natural
resources are available, the economy is likely to be driven towards
over-exploitation of natural resources.
66. The longer-term environmental effects of globalization and of adjustment
policies are complex and difficult to predict, and require further study.
Whereas international capital is attracted to the most profitable location,
this may well be a place of weak or unenforced environmental laws.
Concentration of FDI in urban areas also tends to increase urban/rural
differences, contributing to rapid urbanization and possible degradation of
the urban and rural environments. On the other hand, international investment
is also bringing more advanced, more efficient and cleaner technologies to the
recipient countries, and economic growth and rising standards of living are
likely to generate demand for environmental protection.
67. Similarly, globalization can have positive or negative effects on
cultural diversity. New information technologies, such as satellite
television, make the world a "global village" and promote international
cultural exchange for the benefit of all countries. However, economic
globalization is exporting Western consumerism to developing countries and is
spreading a consumer culture that is often incompatible with domestic
productive capacities or with traditional values. For some countries, the
cultural impact of globalization has been one- sided, with cultural messages
flowing predominantly from developed to developing countries. Unfortunately,
some of these messages have had negative and destructive impacts on local
cultural values.
D. Challenges of globalization
1. To develop new policy instruments
68. In the face of the tendency of global financial markets and
international financial institutions to demand fiscal and monetary austerity,
especially of the weaker economies, constraining both national and
international economic growth, there is a need to develop new national and
international policy instruments to promote growth and employment while
maintaining macroeconomic stability. International financial institutions
should be more sensitive to the diverse effects of globalization on developing
countries and should support the growth and development process, especially of
the weaker economies, through appropriate policy advice and financial support.
2. To prevent increasing inequality
69. In the face of the impact of globalization on inequality among countries
due to differential access to global trade and capital markets, it is
essential that policies be pursued by the international community to foster a
more secure and equitable global environment and to prevent the emergence of a
fractured world order.
3. To safeguard the "social safety net"
70. Given that economic reforms, even when they are successful in generating
economic growth, may increase inequality, poverty, unemployment or
environmental degradation, reform programmes must pay attention to the impacts
of reform on social cohesion and evaluate reform programmes accordingly.
Failure to do so may undermine the reform process, since the disruption of the
social safety net leads to social instability, with detrimental effects for
development.
71. Protection of social cohesion should be a policy priority for some of
the economies in transition, where adaptation to global markets and to
conditions imposed by international financial institutions have led to
large-scale layoffs by government and industry, declines in wages and
reductions in social services. The resulting hardship has often overwhelmed
the formal and informal "social safety nets", which have often themselves been
cut back due to declines in public and private revenues.
72. Economic reform programmes, and in particular "shock therapy" reforms,
should include social protection programmes, or safety nets, to protect poor
people from further immiserization. Such programmes may also serve an
important role in compensating losses to influential groups, such as public-
sector employees, hurt by reform, and thus reduce opposition that may prevent
or undermine reform.
4. To reduce economic instability
73. The opportunities offered by expanding global markets and financial and
trade liberalization are inevitably accompanied by increased risks of
destabilizing capital flows, either inward or outward, and external shocks due
to fluctuations in global market prices. There is therefore a need for
expanded international safety nets for countries threatened by unforeseen
capital movements or external shocks. Efforts to this end are being made by
the international financial institutions, and those efforts need to be
supported and carried further.
5. To maintain open regional trading arrangements
74. Given the potential economies of scale and "thick-market externalities"
resulting from regional trade-investment interlinkages, it is important that
regional arrangements safeguard openness to trade and promote trade creation,
rather than trade diversion. International regimes can also help to ensure
that regional arrangements do not become "closed clubs" but, through
appropriate entry rules and free-access safeguards, expand to include more
developing countries which can profit from the enlarged markets and the
sourcing, production and marketing networks facilitated by regional
arrangements.
6. To strengthen political accountability
75. In the face of the increasing power of private global actors to
determine the distribution of income and production and the content of
economic and social policies, outside the political process, it is important
to broaden participation in decision-making and to strengthen political
accountability by means of increased transparency of decision-making in
existing regional and international institutions. There is therefore need to
promote the social dialogue at supranational levels and to include
non-governmental organizations in decision-making for development.
76. There is also a growing need to ensure that regional arrangements,
especially informal ones, are subject to the political process, so as not to
undermine transparent and democratic decision-making.
III. NATIONAL POLICIES FOR THOSE DEVELOPING COUNTRIES PARTIALLY
OR TOTALLY INTEGRATED INTO GLOBAL MARKETS
77. National achievements in human resource development, capital formation,
technology development and adaptation and natural resource management are the
primary sources of development. The benefits of integration into global
markets can only be realized in the context of effective national development
efforts.
78. Policy recommendations cannot be based simply on the experience of
particular "successful" cases, but should be formulated as policy packages
adapted to the specific conditions of each country. The success or failure of
policy reform in achieving economic growth and social development depends on
the social and institutional conditions in each country as well as on initial
conditions, the timing and sequencing of reforms, and the state of the
international economic environment.
79. It is nonetheless useful to consider policy proposals under four
headings that correspond to major objectives of reform in the context of
globalization:
(a) Policies to sustain long-term growth;
(b) Policies to safeguard economic stability;
(c) Policies to promote social cohesion;
(d) Policies to protect and enrich the natural and cultural
environments.
A. Sustaining long-term growth
1. Incentives and industrial policies for attracting and
sustaining capital flows
80. In order to attract and sustain capital inflows, countries should create
an enabling environment in a context of economic, social and political
stability.
81. Liberalization of international trade and domestic markets, together
with deregulation and privatization, have proven to be important incentives
for attracting capital to developing countries. Sustained capital inflows and
long-term growth, however, also require continuous upgrading of domestic
technological and productive capabilities, for comparative advantage shifts
within and between countries and cannot be maintained based simply on static
comparative advantage and outward-oriented liberalization policies.
82. Empirical evidence suggests that the countries that have been successful
in sustaining capital inflows and long-term growth are those that have
systematically upgraded their human capital and infrastructure and have
promoted the continuous diversification or deepening of their domestic
productive base.
83. The range of policies available to individual Governments to attract
capital flows has been constrained by international agreements (e.g., of the
Uruguay Round), and by regional arrangements for policy harmonization,
particularly with respect to differential treatment of foreign investment,
such as tax relief. Nevertheless, national policies with respect to corporate
taxation, together with availability of infrastructure and human skills, can
be a significant incentive.
84. In their efforts to attract foreign private investment, many Governments
are fearful of the consequences of raising direct taxes; in the short term at
least, low rates of taxation or tax relief seem an obvious and quick way of
attracting capital. Yet there is considerable empirical evidence that
taxation is a less important determinant of FDI than infrastructure, skills,
and market size. Developing human skills, building up infrastructure and
maintaining macroeconomic stability is therefore generally a better way to
attract investment than reducing taxation, as long as tax rates are not very
high. Not only are such policies generally more effective in the medium term
but, even if they fail to attract much foreign capital, they will still
provide incentives for domestic investors.
85. Subsidies for infrastructure development in less developed areas have
proven a very effective way of encouraging the movement of private capital and
correcting regional imbalances, as the European experience shows.
86. Where the private sector is reluctant to invest, due to uncertainty,
State guarantees of loans, guarantees of a minimum return on investment, or
joint ventures may be attractive alternatives to further public investment.
87. Governments can also attempt selectively to protect and support
industries considered to have growth potential, as in the case of some Asian
countries. Other countries have also used, with various degrees of success,
selective industrialization policies, including protection of infant
industries, export subsidies, favourable interest rates for selected capital
investments, promoting industrial integration for economies of scale,
subsidization of new technologies, incentives for research and development,
and supporting troubled industries in times of stress. Such strategies,
however, require high levels of State administrative capacity and some degree
of insulation from political pressure. Since these conditions are often
lacking, many attempts to implement such industrial policies have failed to
promote industrialization and growth. Furthermore, many selective incentives
are now limited by international or regional agreements.
88. Trade and financial liberalization generally reduces the power of the
State to direct investment and promote industrialization and economic
diversification through trade policy and foreign exchange management.
Promoting development through strengthening domestic markets, encouraging
entrepreneurship and promoting exports requires more complex policy
instruments which require increased capacities in State institutions for
policy-making and implementation.
2. Using capital inflows for investment
89. The extent to which capital inflows contribute to growth depends on the
extent to which they contribute to productive investment rather than
consumption. This is also critical for ensuring long-term sustainability of
debt-servicing. However, it is difficult for policy makers to direct private
external capital to particular uses. As noted above, some of the instruments
that have been used in the past to promote investment are now limited by
regional or international trade agreements. Measures that can still be used
for this purpose include investment incentives, disincentives for consumer
product imports, strengthening domestic institutions that match capital to
investment opportunities, and reducing bureaucratic obstacles to the
establishment and growth of enterprises.
90. While both FDI and portfolio flows have the potential to promote growth,
FDI is generally more effective since it is more likely to be used to increase
productive capacity, to be more stable and diversified, and to provide
linkages with trade and technology transfer. However, direct investors, like
portfolio investors, can disinvest rapidly if they lose confidence in an
economy, possibly leading to financial crisis.
91. Capital flows into stock markets, particularly for initial public
offerings, can also be a significant source of investment finance. Foreign
investment in stock holdings also serve to establish networks between foreign
and domestic enterprises and international production and marketing
partnerships that can promote exports.
92. Stock markets, even when not a significant source of new investments,
can be useful as a means of rapidly signalling investor reactions to public
policies and expectations for future sectoral profitability. Stock market
"bubbles", or surges, however, can promote speculative and volatile financial
flows, which may disrupt financial stability and economic growth.
93. For countries where the economic growth rate is less than the real
international interest rate, borrowing on commercial terms to cover current
account deficits will be financially unsustainable. In such countries, it is
particularly essential that all resources, including foreign borrowing, be
used for productive investments, especially since developing countries
generally pay higher interest rates in international capital markets.
3. Increasing productivity and restructuring the productive base
94. Growth and development will be sustainable in the long run only if
capital inflows and domestic resources contribute, directly or indirectly, to
raising domestic productivity and enhancing the structural competitiveness of
the host country, as well as raising incomes and consumption.
95. Sustained growth therefore requires human resource development and
improved production technologies for increasing productivity and financial
resources and institutional capabilities to increase production in response to
expanding markets. It also requires investments to go to areas where local
comparative advantages can be increased. Governments should support, through
appropriate policies and incentives, the restructuring of domestic companies
to improve productivity and increase production, for example, through loans
and technical support for the upgrading or relocation operations of small and
medium-sized enterprises.
96. Although transnational corporations provide access to most advanced
technologies, the State has an important role to play in promoting national
technological development. Technological upgrading depends on the development
of absorptive capacities for technology through human and institutional
development. The development of research and development institutes, with
public support, can contribute to the development, transfer and adaptation of
advanced technologies in developing countries.
97. Raising agricultural productivity in developing countries is also an
important policy priority. Sustainable development of natural resources can
provide a basis for economic growth and development.
98. The State should provide a stable political, legal and regulatory
framework which encourages industry and agriculture to extend their investment
horizons and to respond to liberalization with increased production,
employment and exports. This may also require tax reform, land tenure reform,
improved access to credit, development of equity markets, and public
investment in the production of essential goods and services in which the
private sector is not prepared to invest.
4. Expanding domestic savings and public revenues
99. Although there are good reasons for believing that international capital
flows will continue to rise, it is also possible that they may decrease,
leading to large current account deficits and economic crises for countries
whose development strategies are excessively dependent on capital inflows. It
is important that those countries increase domestic savings rates so that
economic growth can be sustained even if there is a decline in capital
inflows. Foreign and domestic savings are complementary, since high levels of
domestic savings, in addition to promoting enterprise development, can finance
infrastructure and human development, thereby attracting FDI.
100. Some Governments have attempted to promote private capital accumulation
and investment by establishing required savings programmes such as the Central
Provident Fund of Singapore or the private pension funds in Chile, by
promoting corporate savings, by restricting consumer credit, and by taxation
policies that encourage savings. However, the evidence of the effects of such
policies on total savings and investment is still inconclusive. Policies to
promote corporate savings and investment via the protection of domestic
industry, as used in the Republic of Korea, are increasingly limited by trade
liberalization.
101. Reducing fiscal deficits, while promoting trade and maintaining and
improving social services, requires an increase in revenues through
improvements in the tax system. Tax reform is therefore a policy priority in
most developing countries.
102. The constraints on tax administration in developing countries include
insufficient skilled personnel, inadequate equipment, problems of supervision
and motivation of public sector employees, inadequately defined or overly
complex tax rates, difficulty in identifying taxpayers and in punishing tax
evaders, and inadequate accounting practices. In some developing countries,
less than half of the taxes due are collected, which suggests that investment
in improving tax administration may yield high returns. In some cases,
lowering taxes can increase revenue by improving compliance.
103. A system of taxation should be designed not only to raise money but also
to promote equity and efficiency and to be administratively feasible and
politically acceptable. With respect to equity and efficiency, broad-based
income taxes and value added tax (VAT) are preferable and are the primary
sources of governmental revenue in developed countries. Most developing
countries, however, for reasons of administrative and political feasibility,
rely on high, narrowly based import duties and corporate taxes and on non-tax
revenues such as mineral royalties and public sector and commodity marketing
board surpluses.
104. In recent years, some developing countries have successfully undertaken
tax reform, including reducing trade taxes, introducing or increasing VAT,
improving tax administration, reducing evasion, and increasing revenues.
These experiences indicate that a simple, feasible, equitable and efficient
tax system for a developing country might consist of a simple VAT, with some
exemptions for basic goods and services, and excise taxes on alcohol, tobacco,
petroleum products and some luxury goods, with some of the revenues used to
compensate groups suffering losses due to the reforms.
105. Given the limitations of tax administration systems in developing
countries, the introduction of "objective income criteria" for the computation
of taxable income, whereby taxable income is imputed on the basis of combined
criteria, including, inter alia, the number of transactions, the total value
of purchases and the size of the commercial unit, has proven to be effective
in broadening the tax base with minimum political costs.
5. Building effective networks and enlarging effective markets
106. Regional economic cooperation arrangements can promote economic growth
by increasing trade among member countries, providing larger markets,
promoting increased productivity and facilitating economic diversification.
They can also promote capital flows and investment within the region, thereby
diversifying sources of capital, reducing dependence on capital flows from
developed countries, and enabling countries to obtain more FDI on more
favourable terms.
107. The limitations imposed by small, or "thin", markets in developing
countries can be overcome through policies that promote networking among
domestic firms through information exchange or subcontracting agreements;
participation of domestic firms in global trading networks; strengthening
cooperative arrangements between domestic and foreign firms, especially among
neighbouring countries; and attracting a cluster of foreign firms into the
domestic economy.
108. Economic growth in small countries can also be facilitated by regional
cooperative business networks which can promote vertical and horizontal
integration of firms, enlarge the effective market and provide "thick-market"
externalities. As the combination of rising fixed investment costs and
shorter product life cycles has increased the risks associated with
"greenfield" investment in new locations, participation in regional clusters
and cooperative arrangements can substantially reduce market risks.
109. Small and medium-sized enterprises can make use of informal business
networks and subcontractor relationships with larger enterprises to create
international networks for production and distribution. Small and medium-
sized enterprises based in Singapore, Hong Kong and Taiwan Province of China,
for example, having lost comparative advantage in labour-intensive
manufacturing, have relocated their production lines to China and South-East
Asia, using informal networks to reduce information barriers and transaction
costs, while applying their own expertise in manufacturing technology. For
product design and distribution to global markets, the small and medium-sized
enterprises use their established subcontractor relationships with buyers in
developed countries.
110. Governments of home and host countries, as well as private bodies such
as local business associations, can support the efforts of small and medium-
sized enterprises to become part of international production and distribution
networks, through services that reduce information barriers and transaction
costs for investors in small and medium-sized enterprises, facilitate the
formation of joint ventures, and assist in the formation of supplier
relationships. The Government of Singapore, for example, provides
information, encouragement, incentives, assistance and, in some cases,
capital, to help small and medium-sized enterprises and subsidiaries of
transnational corporations relocate operations to neighbouring countries.
State-owned enterprises in both Singapore and Taiwan Province of China have
established industrial estates in China, Viet Nam, India and Indonesia to
facilitate FDI by small and medium-sized enterprises. Developing countries
seeking to attract such investment can help by providing assistance and
information to foreign investors in small and medium-sized enterprises,
encouraging the complementary activities of local business associations,
liberalizing investment and trade rules, and facilitating transportation links
and business visas.
111. Regional arrangements can also help in promoting FDI by transnational
corporations in more capital-intensive sectors. An example is the ASEAN
automobile industry, in which a "complementation scheme" was introduced in
1988 to allow auto makers to make different components in different ASEAN
countries and exchange them between those countries on a preferential tariff
basis. The scheme has since been upgraded to a more broadly based ASEAN
Industrial Cooperation scheme (AICO) which is expected further to facilitate
regional division of labour in the automobile industry and promote FDI by
developed country transnational corporations in the larger regional market.
The assembly, sourcing and distribution networks of the transnational
corporations in the region include heavy participation by local joint-venture
partners and suppliers.
B. Safeguarding economic stability
1. Maintaining a stable policy environment
112. Economic, social and political stability, including stable macroeconomic
policies, have been a major factor in encouraging domestic savings and
investment and attracting FDI in the more successful developing countries.
113. Successful fiscal stabilization depends on skilful political management,
which is facilitated when the Government is relatively autonomous of pressure
from interest groups. Strategies that have been used successfully to build
support for stabilization and reform include ensuring some short-term
benefits, explaining the long-term benefits, and extending social protection
programmes to assist people hurt by the reforms - for example, through food
subsidies and social funds. In some cases, fiscal stabilization has become
politically feasible only after a number of boom-and-bust cycles, with
hyperinflation and social disruption, have made it possible to build a
consensus for economic austerity among the politically powerful urban middle
and lower classes, in spite of the short-run costs.
114. Economic reform and structural change inevitably produce some
redistribution of income and threaten the privileges of some influential
groups, such as those who previously had access to credit and imported goods
at artificially low prices. In countries with high economic inequality,
redistribution tends to be larger, and resistance from groups who see their
interests threatened tends to be greater, sometimes leading to the reversal of
reforms. Under such circumstances, policy debates and political resources
tend to be focused on distributional questions rather than on economic
development, undermining the effectiveness of the reforms in promoting long-
term growth. In countries with large economic disparities, including many in
Latin America and Africa, economic crises persisted for extended periods
before privileged groups were convinced of the need for major changes in the
structure of the economy and, in particular, for liberalization measures that
eliminate privileges.
115. Countries with a more egalitarian income distribution, including many
countries in East Asia, have been able to adjust to changing economic
conditions more rapidly and effectively and with greater continuity of policy.
A well-educated civil service, with high professional standards and resistant
to pressure from privileged groups relating to distributional issues, can also
be a significant force for stable and sustainable economic policies.
116. Building and maintaining broad political support for economic reform
programmes may require compensation for influential groups that suffer
economic losses. However, guaranteeing full compensation to all losers - for
example, public sector employees who lose their jobs - may not be financially
feasible. Gradual reform, in which the least costly compensation is
undertaken at each stage, may promote consensus-building and sustainability of
the reform process at manageable costs.
117. Austerity programmes for fiscal deficit reductions should not rely on
cuts in public investment but should instead attempt to reduce governmental
consumption expenditures and promote cost-saving practices in the public
sector. Policies to curtail tax evasion and to expand the tax base should be
given high priority.
118. The political process of establishing and maintaining sound long-term
development policies tends to be most successful when the Government has a
strong legislative position, visionary leadership, and a united economic
policy team. It does not appear that authoritarian States are any more
successful than others, but there is evidence of the advantages of an initial
top-down strategy followed by consensus-building.
2. Reducing volatility of financial flows
119. The increasing ease with which capital can move around the world, as a
result of both policy changes and technological developments, has increased
the volatility of interest and exchange rates and of financial flows. Gaining
access to external capital for investment while avoiding destabilization due
to volatile financial flows therefore presents new challenges to policy
makers, particularly in smaller countries with weak financial institutions.
120. FDI flows are commonly believed to be less volatile than portfolio
investments and therefore to present lower risks of financial destabilization.
121. Driven by changes in expectations of short-term profitability, portfolio
and other short-term capital flows tend to be volatile by nature and are
particularly likely to have destabilizing effects. Such volatile flows can
produce exchange-rate fluctuations that discourage investment in export
production and create difficulties in managing external debt.
122. With the increasing volatility of exchange rates and interest rates,
investors and managers need to hedge their risks through ever more complex
financial instruments, including derivatives. This may, however, simply pass
the risk to the entire system, unless effective prudential regulation is in
place.
123. Volatile financial flows not only pose threats to the solvency of
national financial institutions, whether public or private but also have the
potential to destabilize the international financial system, given the
increasingly integrated nature of world capital markets.
124. National controls on capital inflows to reduce their volatility are
desirable, although not easy to achieve or maintain, particularly within
liberalized international financial markets. Properly designed control
measures can be effective in the short term but lose their effectiveness as
ways are found to circumvent them. To maintain effective controls, regulators
must constantly innovate to match the innovations of investors in evading
controls. In the case of capital outflows, attempts at control are generally
ineffective.
125. Some Latin American countries have successfully limited capital inflows
through such measures as requiring deposits in non-interest-bearing accounts,
regulating bank activities and taxing "hot" money flows. A Tobin-type tax on
exchange transactions, levied at a modest rate, such as 0.05 per cent, could
also serve this purpose.
126. The volatility of capital flows in Asia has been relatively low due to a
number of factors, including the predominance of FDI in capital flows, the
strength of the economies and their attractiveness to long-term investors,
improved information on the part of investors, and the stabilizing influence
of a large domestic savings base. Latin America has relied to a greater
extent on more volatile short-term flows, and Governments have often been slow
to adjust their policies to changing international and domestic conditions.
127. Short-term foreign currency bank deposits, which are particularly
volatile, can best be controlled through bank regulation and supervision,
rather than through direct capital controls.
128. Diversification of capital markets, including increasing flows between
developing countries, should contribute to the stability of capital flows.
129. The development of regional arrangements, resulting in a deepening of
their capital markets, can also help reduce exchange-rate volatility and
facilitate international trade and investment.
3. Appropriate sequencing of policies
130. Liberalization of trade and capital markets can contribute to economic
growth and human development in all countries in the long run. In the short
and medium term, however, liberalization and global integration pose difficult
problems of timing, speed, sequencing and extent, relating to the problems of
achieving an equitable and politically acceptable distribution of benefits and
minimizing short-term dislocations.
131. Much of the criticism of reform has been based on unrealistic
expectations of short-term social benefits, often promoted by the proponents
of reform. It should be recognized that reform is a long-term development
strategy, which may require a decade or more of financial investment and
institution-building before people see substantial improvements in their
incomes and standards of living. It is important for basic social services to
be maintained during this period.
132. Contrary to the view that macroeconomic stabilization is a precondition
for microeconomic or sectoral adjustment, the two can often be undertaken in
parallel. A number of countries, notably China, have successfully undertaken
market liberalization before macroeconomic stabilization measures. Some
Eastern European countries have successfully undertaken structural reforms and
regenerated economic growth with annual inflation rates as high as 50 per
cent.
133. The experience of high-growth East Asian economies has been used to
justify pressure for liberalization in other regions. However, the East Asian
economies were liberalized gradually and selectively, while most countries in
other regions have been pressured to liberalize much more rapidly and
generally. Furthermore, the gradual adjustment of East Asian countries was
facilitated by favourable initial conditions.
134. China began liberalization with rapid agricultural reform, and undertook
industrial reform, particularly of the large State industries, later and more
gradually. The slower pace of reform of State-owned industry has reduced its
negative social impacts, particularly because many large State-owned
industries provide education, health care, housing and other social services
to their employees and their families. Gradual reform of the industrial
sector has also allowed China to introduce experimental reform measures on a
small scale and then apply successful measures more widely.
135. As the case of China demonstrates, gradual and selective reform allows
success in some areas - for example, in agricultural liberalization and the
gradual development of private enterprise - to be used to build support for
reform in other sectors - for example, State-owned industry.
136. The evidence on the proper sequencing of liberalization is somewhat
ambiguous, but there is growing consensus that liberalization has been most
successful when regulatory frameworks were put in place prior to
liberalization and when financial institutions made provision for
non-performing assets prior to financial liberalization.
137. There is also growing consensus that long-term capital movements should
be liberalized prior to trade. Trade liberalization should be undertaken
gradually, allowing enterprises that are potentially, but not actually, viable
to adapt, while facilitating social protection measures to cushion the impact
of shutting down enterprises that are not viable. Liberalization of short-
term capital movements should probably be the last step of the process.
138. The economies of the former Soviet Union and, to a lesser extent, other
Eastern European economies were faced with not only deteriorating economic
conditions but also the collapse of their regional trading system, with its
great price distortions. They had to completely rebuild their political and
economic systems, and thus their situation was quite different from that of
developing countries.
139. There is no universal agreement on the advantages and disadvantages of
"shock therapy" versus gradualism. The relative virtues of the two approaches
depend on country-specific conditions. The Committee considered that the
speed of reform should be determined by the capacity of each political and
economic system to adjust in a way that preserved social cohesion. Reforms
that generate social and political instability can be easily undermined and
reversed. The costs of stop-and-go policies, which increase uncertainty, are
probably higher than the efficiency losses incurred by a relatively slower
pace of reform.
4. Establishing and enforcing regulatory frameworks
140. Economic globalization has generated pressures and incentives for
developing countries to liberalize and deregulate their economies, leading to
the entry of new actors through inflows of foreign direct and portfolio
investment. In order to provide an environment in which these actors can
operate effectively, Governments should develop and enforce regulatory
frameworks that determine the scope of activities of both national and
foreign-controlled enterprises. Regulatory frameworks particularly need to
address critical issues such as property rights, market entry, inward and
outward financial operations and competition policy.
141. In the former socialist countries, efforts to convert State-owned
enterprises rapidly to private ownership and to encourage private
entrepreneurs and foreign direct investment have been constrained by the lack
of a legal system applicable to private enterprise. Obstacles include old
laws that prohibit many entrepreneurial activities, inefficient courts that
raise the cost of settling disputes, lack of clear laws relating to essential
commercial activities, and lack of efficient enforcement of judicial
decisions. Development of a legal system facilitating private enterprise is
crucial for promoting economic growth following privatization. While it would
seem desirable to have legal reform precede privatization, effective political
pressure for legal reform and identification of priority needs emerge only
after privatization. The legal system can then evolve to meet public and
private needs as they emerge and evolve in the particular economic and social
context.
C. Promoting social cohesion
1. Reducing poverty and improving equity
142. Reduction of poverty is a high priority for moral reasons and also for
the promotion of economic development and social integration. Reduction of
inequality can also promote social and political stability and facilitate the
process of economic reform.
143. Because many developing countries depend to a large extent on trade
taxes for public revenues and hence for social spending, trade liberalization
will affect public revenues, either positively or negatively, depending on the
tariff structure and the nature of imports and exports. Low-income countries,
particularly those with economies based on subsistence production and primary
products, tend to be most dependent on trade taxes. Under such conditions,
reduction of tariffs and export taxes may require other revenue-generating
fiscal reforms to prevent the deterioration of social services.
144. As the possibilities for deficit spending, revenue-generating tariffs,
increasing taxation, and subsidizing basic needs for low-income communities or
households are increasingly constrained under current policy trends, new
policy instruments must be developed to facilitate the attainment of social
goals.
145. In most developing countries, revenues could be increased through
improved collection of non-trade taxes, without increasing tax rates. In some
countries, conversion of quota restrictions on imports to tariffs could be the
first step in raising revenues while maintaining the necessary degree of
protection of domestic producers.
146. Considering that most subsidies, even when nominally for the benefit of
the poor, disproportionately benefit middle- and upper-income households,
savings achieved by reducing or eliminating such subsidies could be
reallocated to social services for people living in poverty or to targeted
subsidies for basic needs. For the least developed countries and other
low-income countries, international assistance is essential to social services
and other programmes for poverty reduction.
147. There is a general consensus that higher growth rates are an important
condition for poverty reduction in developing countries. An integrated
approach, combining macroeconomic stabilization and structural adjustment with
appropriate public expenditures in the social sectors, mechanisms to upgrade
skills and institutional capabilities, and social protection policies, has
generally been most effective in promoting growth and reducing poverty.
148. The sectoral composition of economic growth is as important as the
achievement of higher aggregate growth rates in reducing poverty. Sectors
that are the principal providers of employment and income for the poor,
including agriculture and labour-intensive manufacturing and services, provide
the most effective basis for poverty-reducing growth and should be supported
through policies and investment programmes. As a country develops
economically and socially, the informal economy, which provides a large
proportion of livelihoods in most developing countries, can gradually be
integrated into the formal economy.
149. Countries in which rural poverty and large urban rural disparities are
driving rapid urbanization should build rural infrastructure, decentralize
social services and decision-making to rural local authorities, encourage
rural enterprises through expansion of rural credit and technical assistance,
and promote agricultural productivity. Special incentives for investment in
rural areas may also help make urban development more manageable and reduce
urban and rural environmental degradation.
150. Reduction of poverty requires not just providing goods and services to
people living in poverty but also improving opportunities for access to
productive resources and capital accumulation, including human capital
(education, health), financial capital (microcredit), physical capital
(appropriate technology) and natural resources (land, water, energy). The
participation of people in poverty in political, social and cultural life, as
well as economic life, is essential to their full contribution to development.
2. Promoting employment through active labour market policies
151. In most developing countries, the priorities for promoting employment
should be broad-based growth emphasizing labour-intensive production, combined
with human resource development. Governments should also regulate working
conditions to the extent feasible to promote worker health and safety, prevent
child labour and other labour abuses, and protect the environment. As the
economy develops and standards of living increase, regulation of working
conditions can be strengthened and social security programmes based on
employment can be developed or expanded.
152. Deregulation of labour markets in order to increase employment has often
been recommended as part of economic reform programmes and has sometimes
formed part of the conditionality that has accompanied adjustment programmes.
However, extensive deregulation of the labour market with increasing
discretion of employers over labour conditions should not be the principal
objective of reform programmes. Rights and responsibilities in the workplace
should be based on negotiated agreements on the degree of labour flexibility
best adapted to increasing productivity in the long run. In particular, an
important trade-off exists between the freedom to lay off workers quickly when
the economic situation changes and the incentive to train workers to improve
their skills and labour productivity. Economies with more worker consultation
and greater protection of workers against layoffs tend to spend more on human
resource development and have achieved higher than average productivity.
Labour deregulation and wage reductions do not always increase employment;
other policies, including macroeconomic and sectoral policies, are often the
most important factors in determining economic growth and employment creation.
153. Educational policies and training and retraining programmes should form
an integral part of labour market policies. Structural adjustment of the
labour market requires a flexible and open educational system that not only
provides needed skills and knowledge but also takes into account future needs
of the evolving structure of the economy.
154. Social protection for workers and their families is particularly
important when employment patterns are undergoing structural changes. When
worker mobility is increasing, new provisions may be needed for the
"portability" of health insurance and pensions between employers or for
greater assumption of responsibility in these areas by the State. For
reducing the impact of unemployment, employment incentives tend to be less
costly than unemployment benefits, as well as being effective instruments for
skills creation with long-term positive development effects. Minimum wage
standards have provided some protection to workers in some cases without
significantly increasing unemployment, but they are not effective when there
is a large informal sector in which the standards cannot be enforced.
155. Public works employment at minimum or sub-minimum wages has proven an
effective measure in some developing countries for increasing employment and
reducing poverty. In the more developed countries, subsidies or other
incentives for job creation have proven effective for increasing employment.
156. Programmes to address the unemployment caused by reforms have often
included programmes for retraining workers to increase their skills and
facilitate the relocation of excess workers to other public or private sector
jobs or to self-employment. However, such skill and management training
programmes have often failed to meet their objectives because they are not
embedded in existing training and management programmes and try to retrain
workers in too short a time. Programmes providing credit or vouchers that let
workers choose between credit and enrolment in existing training programmes
have been more successful.
3. Social protection programmes
157. While globalization has increased pressure for fiscal austerity and for
reductions in public spending, human resource development has become more
important in ensuring economic competitiveness. Some developing countries
have achieved substantial success in poverty reduction through broad-based
economic growth based on human resource development and production for
international markets. Reductions in spending on social services are likely
to have adverse impacts on growth and on capital inflows in the medium and
long terms.
158. Moreover, human resource development, particularly through education and
health care, deserves high priority since it alleviates poverty, improves the
status of women and children, reduces wage differentials between skilled and
unskilled workers, improves the productivity and competitiveness of
enterprises, and improves public administration.
159. While the maintenance of per capita social spending during economic
reform would be ideal, this may not be possible if an economy is declining.
Maintaining social spending as a share of GDP should be a minimum condition.
In some countries, the reallocation of military budgets to social programmes
has been undertaken for this purpose. Unfortunately, in many other countries,
military spending has been maintained or increased at the expense of social
spending. The effectiveness or quality of social spending is as important as
the amount of money spent, and social services can be maintained or expanded
through improved efficiency of public spending.
160. Maintenance of basic social services for the poor during economic reform
may require cost-sharing by middle-income groups and full-cost payment by the
rich, as has been introduced in China on an experimental basis. It should be
recognized that social services that are nominally free can nonetheless be
expensive, or even unaffordable, for low-income families. In education in
particular, the cost of books and other educational materials and the loss of
income or family production as a result of sending children to school
represents a substantial economic cost for low-income families.
161. Social protection programmes created to address problems arising from
the reform process have often been administered by institutional units outside
existing governmental structures, with higher pay scales and often with
external financing. Such an approach may avoid political interference, but
the programmes often ended before the reform process was complete, due to lack
of continued funding. When newly created programmes take resources from
existing social security, training and other social programmes, the ultimate
result may be a reduction in overall social protection. It is therefore
important to develop social protection programmes as integral parts of social
policy and not as part of sometimes hastily created reform programmes. The
expansion of existing social programmes such as public works or social
security benefits is more effective for reaching the poor than the creation of
new programmes.
162. There have been few, if any, successful examples of effective social
protection programmes in Africa, largely due to lack of financing. Elsewhere
- for example, in the Philippines - food-for-work and public works projects at
minimum or sub-minimum wage have been successful in reducing the social impact
of reform.
D. Protecting natural and cultural environments
1. Environmental policies
163. Developing countries should have appropriate national environmental
policies to protect their environments and safeguard their natural resources
against irrational and wasteful exploitation. Development plans should pay
particular attention to environmental issues, including the rehabilitation of
degraded environments, and should identify emerging environmental issues and
address them before they become critical. An anticipatory strategy of
preventing environmental deterioration before it occurs is more efficient and
less costly than rehabilitating degraded environments. National policies
should also adopt the "polluter pays" principle, so that investors and
transnational corporations are aware that they will be responsible for the
consequences of their activities.
164. Development and implementation of national environmental standards
should be supported at the regional and international levels - for example, by
international standards or guidelines such as the Montreal Protocol and
ISO 14000. Regional trade arrangements and networks can also provide a
mechanism for monitoring and enforcing environmental standards.
2. Protecting national and local cultures
165. Many voices in both developed and developing countries have expressed
concern about the adverse effects of certain television programmes and movies
on young people, and measures have been taken in some countries, including
France and the United States, to address this issue. Governments of
developing countries, with the assistance of the international community,
should adopt such measures in order to protect their cultural values.
E. Strengthening governance and participation
166. Economic competitiveness in the context of globalization depends
critically on institutional reform in order to reduce the transaction costs
for economic activities and promote a general rise in productivity.
167. A new partnership between Governments, markets and civil society needs
to be forged, in which Governments help create markets, regulate markets when
necessary, and use market-like mechanisms and incentives to foster
competition.
168. Beyond the essential roles of the State and markets, Governments have a
responsibility in areas of market failure, while markets can sometimes be used
to reduce the impact of governmental failure. The most efficient and
effective roles of State and market, and of civil society, depend on economic,
social, historical, environmental and cultural factors that are specific to
each country.
169. Some countries are experimenting, with some success, with an increased
role for private enterprise and civil society in areas that have traditionally
been the responsibility of the State, such as social services and
infrastructure. In other countries, certain local functions which are
intermediate between public and private functions, such as management of water
resources or forests, are being effectively and efficiently carried out by
community organizations, such as water user associations in Chile, which are
open to all water users in a particular river basin.
170. When resources of the central government are insufficient to meet the
needs for public services and infrastructure, local authorities and non-
governmental organizations can play an important role in raising resources,
providing services, strengthening rural/urban linkages, stimulating private
investment, and implementing national policies. In Kenya, for example,
municipal councils manage most major public services, and many rural
authorities provide services such as farm access roads, water and veterinary
services. Local authorities, particularly in rural areas, also deliver
services that the private sector fails to provide, including markets,
slaughterhouses and livestock auction yards. Non-governmental organizations
can also provide services, thereby freeing up scarce governmental resources
for other activities. Central authorities can support such efforts as a
complement to State services.
171. The State can fulfil its role effectively only if its administrative
staff are well trained and insulated from political pressure from interest
groups. Failure of economic reform is due to failure to implement and manage
policies effectively as well as to failure in the design of policies. It is
essential that economic reform policies be designed for implementation and
management by the available institutions and staff.
IV. NATIONAL POLICIES FOR THOSE DEVELOPING COUNTRIES
NOT INTEGRATED INTO GLOBAL MARKETS
A. Building human resources and infrastructure
172. Many developing countries - in particular, the least developed countries
- are limited in their abilities to attract foreign investment, due to the
limited absorptive capacities of their economies. They should continue their
efforts to increase domestic productivity, restructure and diversify their
economies, and give greater priority to the development of their
infrastructures and human resources.
173. While the least developed countries in general have not attracted
foreign investment, some low-income countries have been successful in doing so
on the basis of low wages and relatively high human resource development.
Investing in human resources and strengthening supply capacity for tradeable
goods and services are therefore essential to realizing the potential benefits
of globalization in low-income countries.
174. In the absence of improvements in absorptive capacity, increases in ODA
may be ineffective. ODA, like other financial flows, if not used effectively
for increasing investment and removing supply constraints, may lead to
increased consumption and to exchange-rate overvaluation, which may impede
economic diversification, especially under conditions of trade liberalization.
B. The pace of reform and restructuring
175. As noted in chapter III above, the pace and sequencing of reform and
restructuring depend on country-specific conditions.
176. The advantages of gradual reform must be weighed against the costs,
which may include prolonged fiscal or current account deficits or cuts in
social spending. Where appropriate, accelerated reforms should be undertaken
and maintained by the least developed countries themselves. In most
countries, priority should be given to capacity-building in economic
administration, an effective civil service, a legal framework for contracts,
and property rights. These are preconditions for effective design and
implementation of much needed reforms in the fiscal, trade and financial
spheres.
177. In most African countries, a gradual and controlled process of
liberalization, together with industrial restructuring and upgrading, is
preferable to rapid and sweeping exposure to market forces. Most African
Governments need to strengthen their capabilities to intervene effectively and
to guide resource allocation. Those capabilities should be exercised in a
transparent manner, with an emphasis on export growth and in support of
industrialization, without neglecting agriculture. In particular, there is a
need for better performance incentives and monitoring, training, and greater
insulation of the civil service from political pressures.
178. To avoid adverse effects on agricultural production, the reduction or
removal of subsidies on, inter alia, fertilizers, pesticides and water, need
to be accompanied by policies which include the liberalization of output
prices and the provision of credit and extension services so as to promote
crops of higher value and the optimum use of inputs.
C. Enhancing the legitimacy of national political regimes
179. Enhancing the legitimacy of the State in the eyes of its citizens,
through respect for fundamental human rights, adherence to the rule of law,
and promotion of popular participation in public affairs at the national and
community levels, is important in its own right. By increasing political
stability, such legitimacy is also conducive to promoting domestic saving and
investment and preventing capital flight.
180. The effective administration of justice and respect for the rule of law
can complement effective macroeconomic and microeconomic policies and
improvements in infrastructure in attracting growth-promoting foreign private
investment. This is especially true for investment coming from smaller firms
in newly industrializing countries which do not have the political clout to
protect their investments in an environment in which the rules of the game are
changing.
181. A realistic development vision indicating why and how a country can
integrate into the global economy should be explained, disseminated and
debated among the citizens in order to enhance the legitimacy of the State and
allow it to implement an "outward looking" development strategy, energize the
people and build credibility abroad. Such a national commitment can be
important in attracting potential investors.
182. A Government that implements reforms without being convinced of their
effectiveness and complains that policies are being imposed by international
financial institutions undermines its domestic legitimacy and erodes its
credibility abroad on the sustainability of the reforms. Such an approach may
provide short-term political advantages but can cause irreparable long-term
damage if the reform process is stalled or leads to social instability and has
to be reversed.
183. Political legitimacy also has to be protected in the course of reform
implementation. The loss of traditional instruments of economic regulation,
such as subsidies and tariffs, and the introduction of new ones alter well-
established political modes of operation, including rent-seeking activities,
create potential instability and require careful political handling, with a
premium on transparency and visibility.
D. Enlarging effective markets and developing
trade and investment networks
184. The development of international and regional trade arrangements,
especially with other developing countries, enables countries to benefit from
larger effective markets and form trade and investment networks, which promote
increased productivity and economic diversification.
185. In Africa, regional trade and economic diversification have been
inadequate to support market-driven regional arrangements. A structural
transformation of those economies is required in order to attract FDI, promote
diversification and provide a basis for regional economic integration. In the
absence of market forces for regionalization, State-led regional arrangements
can be useful - for example, in negotiations for access to markets outside the
region. Regional arrangements in other regions should be designed to avoid
adverse impacts on African countries, providing, where necessary, ODA and
other external financial flows to mitigate potential negative repercussions.
V. POLICIES FOR DEVELOPED COUNTRIES AND THE
INTERNATIONAL COMMUNITY
A. Fostering a global environment conducive to development
186. In view of the increasing importance of trade and international
investment as engines of growth, developed countries must provide
comprehensive support, including macroeconomic support, to the efforts of
developing countries, as agreed at various OECD ministerial meetings and the
summits convened by the seven major industrial countries.
1. Promoting stable growth in the global economy
187. Developed countries should sustain stable economic growth at home and
provide increased opportunities for developing countries to expand their
exports, including both manufactured products from more advanced developing
countries and primary commodities from less developed countries. Higher
global economic growth would, in particular, tend to improve the terms of
trade for primary-product exporters and make more resources available for
development assistance. Higher global growth rates and expanded trade will
require continuous economic restructuring on the part of developed countries,
facilitated by Governments through measures to reduce the adverse impact on
"sunset" industries in terms of employment and wages.
188. Furthermore, rapid economic growth in middle-income countries, promoted
by globalization, will expand opportunities in less developed countries, by
providing both additional markets and sources of capital investment, and by
making less developed countries more competitive in labour-intensive
manufacturing.
2. Avoiding the imposition of inappropriate policies on
developing countries
189. The open-economy approach to economic adjustment requires expanding
world markets to absorb increased exports from adjusting countries. However,
adjustment programmes are designed on a country-by-country basis, and the
amount of international finance available to support adjustment is not related
to the total amount needed by adjusting countries. To support adjustment and
reform programmes in developing countries, developed countries should reduce
their protection of agricultural and other exports from developing countries.
Developed countries and international financial institutions should also
reduce the pressure on developing countries to increase commodity exports,
which contributes to oversupply and declining prices.
3. Improving cooperation with developing countries
190. Developed countries generally provide preferential access to their
markets for developing countries under the Generalized System of Preferences
(GSP) and other schemes. In most cases, however, the preferences are partial
and selective in terms of product coverage and country eligibility.
Furthermore, the elimination of quotas and reductions of tariffs called for by
the Uruguay Round agreements will erode the value of those preferences,
particularly for the least developed countries. The administrative
requirements that must be met to benefit from GSP preferences also limit their
effectiveness in promoting exports from developing countries. To assist
developing countries in export expansion and economic diversification, the
developed countries should provide duty-free access for all products from
least developed countries, reduce or eliminate the administrative requirements
for such access, and generally reduce constraints on developing country
exports.
191. The Uruguay Round agreements provide for special and differential
treatment for developing countries - in particular, the least developed
countries - including exemptions from certain obligations, longer transition
times, and greater flexibility in meeting the trade liberalization
obligations. The agreements also call for special measures to assist the
least developed countries and net food-importing developing countries and to
compensate them for losses that they may suffer from global trade
liberalization. Developed countries should take measures to implement those
provisions. They should also assist developing countries to strengthen their
administrative capacities relating to trade liberalization and the
implementation of the Uruguay Round agreements.
192. The Committee noted the limited results of the World Trade Organization
(WTO) Ministerial Conference held in Singapore in December 1996 concerning
measures in favour of the least developed countries. The Committee
recommended that the high-level meeting to be organized in October 1997 should
address broader trade-related development questions relating to the least
developed countries, including supply capacity for tradeable goods and
services, and should agree on specific commitments by the trading partners of
the least developed countries to further market-access measures in their
favour.
193. Developed countries should not use political means to prevent market-
economy countries from joining international organizations of universal
character, such as WTO, or from enjoying most favoured nation status.
B. Increasing financial resources for development
1. Enhancing development assistance
194. Most developing countries, and particularly the least developed
countries, do not have access to global capital markets to meet their needs
for investment capital. Furthermore, the limited capital inflows that do
occur will generally not meet the human development priorities of those
countries. Economic growth is also limited by foreign exchange constraints,
and market borrowing to meet that need would be unsustainable. Continued and
expanded international financial resources are required to meet those needs,
to support structural adjustment, and to enable the least developed countries
and other low-income countries to benefit from globalization and to generate
sustained growth.
195. Developed countries and international organizations should provide
financial resources so that low-income countries can reduce fiscal deficits
and thus avoid increases in debt burdens or unsustainable monetary expansion.
196. For some time, a number of low-income countries are likely to benefit
very little from the global economy. Moreover, financial liberalization may
increase capital flight from these countries unless other policies are
undertaken to promote domestic investment. Diversification of their economies
is essential if these countries are to benefit from globalization. This will
require sustained levels of ODA, combined with active diversification policies
for a considerable period - at least 10 years.
197. ODA and foreign investment should not be considered simply as
alternatives. Rather, ODA should be used to enhance export capacities and
attract foreign investment through the development of infrastructure and human
resources which can attract private investment in order to contribute to
reducing the structural weaknesses of the least developed countries.
198. In Africa, in particular, the absorptive capacity for investment is
limited by a number of factors, including the large subsistence sector,
illiteracy, and lack of education and infrastructure. ODA is crucial for
economic diversification, for the transition from non-market to market
structures, and for investment in infrastructure and human resource
development, enabling people to respond to economic incentives. ODA provides
a "cushioning" effect until such time as those countries can effectively
respond to and utilize private capital inflows.
199. The current high growth rates of some East Asian economies are based in
part on high levels of ODA in the 1960s, which were used for investment in
infrastructure and human resource development. This experience and other
evidence indicates that 5-10 years of growth in export values at the rate of
3-5 per cent per year, supported by ODA, are required to provide a basis for
export diversification, human resource development and sustained economic
growth. ODA should be committed on this basis.
200. Developed countries, in the mutual interests of donors and recipients,
must sustain existing levels of bilateral and multilateral ODA and other
official finance to developing countries and improve their quality in order to
better meet the growing demand for modern economic infrastructure, health and
education, environmental protection and policy reforms. Developed countries
should coordinate their ODA policies and programmes, to avoid unnecessary
competition and duplication, and should re-examine their ODA and related
procedures and machinery to further delegate their decision-making authority
to their local resident representatives and indigenize their capabilities in
recipient countries.
201. At the second United Nations Conference on the Least Developed Countries
(Paris, 1990), developed countries agreed to allocate 0.2 per cent of their
GNP as ODA to the least developed countries. That commitment, however, has
been met by only a few donors (including, in 1995, Norway, Denmark, Sweden and
the Netherlands), and total ODA to the least developed countries as a
proportion of developed-country GNP has been declining. The decline poses
major problems for the least developed countries and many other low-income
countries, particularly in Africa. Developed countries should reverse the
decline in ODA and make greater efforts to meet their ODA commitments.
202. Developed countries should continue to reorient their ODA in favour of
the least developed countries, whose trade and investment opportunities are
otherwise limited, and in favour of those new social-sector targets agreed
upon by the OECD Development Assistance Committee (DAC) at its ministerial
meeting in May 1996. 1/ Furthermore, given the rapid emergence of advanced
developing countries in Asia and Latin America as new donors, South/South
cooperation could be encouraged with financial assistance from developed
countries.
203. Developed countries should continue their assistance to transition
economies with a view to transforming centrally planned economies smoothly
into market-oriented systems and building national capacities for economic
restructuring, reconstruction and growth.
204. Developed countries should enhance their regional and subregional
efforts to increase trade and economic cooperation among neighbouring and
like-minded countries, consistent with the new WTO regime.
2. Debt relief
205. In 1994, the Paris Club of creditors for official bilateral debt
introduced the Naples terms for debt relief, increasing debt-service reduction
to 67 per cent and providing, for the first time, for reduction of debt stock
as well as debt service. In 1995, eight of the least developed countries had
their official bilateral debts rescheduled in the Paris Club, but many other
low-income countries continue to suffer from unsustainable debt burdens.
206. The IMF and the World Bank, in 1996, established the Heavily Indebted
Poor Countries (HIPC) initiative to help low-income countries (IDA
beneficiaries) with unsustainable debt burdens. Considered on a case-by-case
basis, countries would be eligible for a reduction in their debt burden,
including multilateral debt, to sustainable levels, provided that certain
conditions were met, including debt-burden reduction from official bilateral
creditors beyond the Naples terms and a record of satisfactory implementation
of adjustment policies. This initiative should be supported by developed
countries and should be implemented flexibly by the concerned institutions and
countries.
207. The Committee considered that further efforts were required to reduce
the debt service and debt stock of the highly indebted least developed
countries, including multilateral debt, allowing resources to be focused on
development and promoting access to international capital markets.
C. Fostering a more secure and equitable global environment
1. International standards and codes of conduct 2/
208. While national systems of regulation and control are essential
prerequisites for financial stability and sustained capital flows,
international standards are needed to promote sound principles and practices
and to avoid competition and inconsistency between countries.
209. International principles and practices need to be established for:
(a) Accounting, by the International Accounting Standards Committee or
the United Nations Expert Group on International Standards of Accounting and
Reporting;
(b) Payments and settlements, by the Committee on Payments and
Settlement Systems of the central bank governors;
(c) Banking supervision, by the Basel Committee on Banking Supervision;
(d) Securities market supervision, by the International Organization of
Securities Commissions (IOSCO);
(e) Insurance supervision, by the International Association of Insurance
Supervisors;
(f) Financial conglomerates, by the three supervisory groupings for
banking, securities and insurance.
210. An institution is also needed to provide overall guidance for these
activities, monitor their progress and effectiveness, and identify new needs
for supervision as they arise. Such an institution would be like a WTO for
finance - i.e., a world financial organization (WFO). It would also monitor
the functioning of credit-rating agencies.
211. Acceptance of such international standards would tend to reduce the
volatility of capital flows. Taxes on international short-term capital
transactions might also help. They could be levied on a national basis,
although internationally coordinated taxation (such as the Tobin tax) would be
preferable.
212. Efforts within the United Nations to develop a code of conduct for
corporate transnational activities have been unsuccessful. Discussions
currently under way in OECD on a code of conduct might have a greater chance
of success because of the relative homogeneity of the OECD countries. There
is a need for further consideration of this question within the United
Nations, taking into account the work of OECD.
2. Policy competition and environmental standards
213. Policy competition that involves undermining social conditions,
competitive devaluation, minimizing financial regulation or maximizing tax
relief is undesirable. International codes of conduct to help prevent such
competition need to be developed and monitored by multilateral agencies.
214. Environmentally sound investment strategies require a broad framework of
international support if they are to flourish. One of the most important
elements in that framework should be an array of baseline international
standards. For such standards to be effective, they will need to meet three
basic standards of their own: they must be "floors", rather than "ceilings" -
that is, they must block downward but not upward movement; they must be set
high enough to make a real impact, rather than at a least-common-denominator
level; and they must be developed through an open and inclusive process that
will build a strong consensus for them.
215. Environmental management systems and standards have been established on
a national and regional basis (in Europe, for example) to set norms to which
the manufacturing and other sectors should adhere. However, the formulation
and application of an international environmental management system (such as
ISO 14000) have proved to be more difficult. A major weakness of the ISO
process has been its relatively narrow base; industry has been an active
player from the beginning of the process, but developing countries and
environmental groups have not participated fully.
216. International trade and investment negotiations are another important
forum for discussions about environmental standards in global markets.
Progress here could yield an enormous payoff, but it has proven difficult to
incorporate environmental concerns into these negotiations. For example, OECD
is negotiating a multilateral agreement on investment, intended to reduce
obstacles to the flow of FDI, but so far little attention has been paid to the
agreement's environmental implications. NAFTA and the Non-binding Investment
Principles of APEC contain environmental provisions that need to be
strengthened.
217. The establishment of international environmental codes of conduct and of
international environmental standards is, therefore, of primary importance to
avoid conflicts between countries and regions. The codes would be important
in preventing the dumping of environmentally damaging goods, materials and
technologies on developing countries and the irrational exploitation of their
resources. The Commission for Sustainable Development should consider this
question.
3. Promoting open regional arrangements
218. Regional arrangements should avoid becoming "closed clubs"; they should
have flexible and open rules for market access so as to minimize possible
negative externalities for non-participating countries. They should have
institutional arrangements that are flexible, democratic, transparent and
responsive to changing global and regional conditions. Within the framework
of the general regional arrangements, members should be free to create deeper
integration with other members, if desired.
219. Regional arrangements should allow participating countries the
flexibility they need for gradual liberalization. Countries should be prudent
in entering into regional arrangements that restrict their policy autonomy.
Experience has shown that pressure to conform to common standards has pushed
some countries to restructure and liberalize their economies too quickly,
reducing economic growth.
D. Strengthening global governance
220. Under present-day globalization, there is a potential for a massive
financial disaster. At the international level, there is no system for a
"lender of last resort", apart from ad hoc bilateral arrangements. Countries
following prudent policies under the surveillance of the IMF should have
agreed automatic access to large loans in a financial emergency. This would
help reduce instability in financial markets and thereby lessen outflows.
Such loans could be provided through the IMF/BIS, from prior commitments by
developed countries already in existence under the General Arrangements to
Borrow (GAB). For this purpose, the size of the GAB should be increased, and
a new allocation of SDRs would also be helpful.
221. At present any economic policy coordination at the international level
is the consequence of ad hoc meetings of a few developed countries. The
developing countries are excluded from these meetings, despite the fact that
they are greatly affected by any decisions taken. Moreover, there is no
systematic way of ensuring serious high-level discussion of important issues
requiring international action, such as those discussed in the present report.
Emergencies may force action, as on the Mexican financial crisis, but there is
a need for long-term solutions or preventive actions to be considered by those
with the power to take action.
222. We believe there is a major gap in the international system. An
economic and social security council, parallel to the Security Council, could
help bring about systematic consideration of global economic action, promote
economic coordination, and initiate the preventive measures and regulatory
policies that are increasingly needed in the global economy. Such a council
would include representatives of developing countries, although the most
powerful economic actors would maintain a dominant position, which is
essential if the council were to be effective.
VI. GENERAL REVIEW OF THE LIST OF THE LEAST DEVELOPED COUNTRIES
223. The General Assembly, in resolution 46/206 of 20 December 1991,
requested the Committee for Development Planning to undertake every three
years a general review of the list of low-income countries with a view to
identifying which of those countries should qualify for inclusion in, or
should be graduated from, the list of the least developed countries, and to
present that review to the Assembly through the Economic and Social Council.
The Assembly, noting with appreciation the new criteria recommended by the
Committee in 1991 for identifying the least developed countries, also
requested the Committee to consider further possible improvements in the
criteria and their applications and to report thereon to the General Assembly
at its fifty-second session through the Economic and Social Council.
224. Having previously reviewed the list of the least developed countries in
1991 and 1994, the Committee undertook the triennial review at its 1997
session, including the consideration of further possible improvements and
their applications.
225. The review was conducted applying the indicators adopted by the
Committee in 1991 (E/1991/32):
(a) GDP per capita, three-year average for 1993-1995, in United States
dollars at the official exchange rate;
(b) Augmented physical quality-of-life index (APQLI), which incorporates
life expectancy, per capita calorie consumption, primary and secondary school
enrolment, and adult literacy;
(c) Economic diversification index (EDI), which incorporates share of
manufacturing in GDP, share of labour in industry, per capita electricity
consumption and export concentration ratio;
(d) Population.
226. In accordance with the established procedures, the Committee did not
apply the criteria mechanically, but considered, particularly in difficult or
borderline cases, the consistency of the indicators, trends in the indicators
over time, alternative indicators for per capita income, and other factors.
The Committee noted the varying accuracy and timeliness of indicators and used
its judgement in interpreting the data.
227. Following a review of data for low-income and other countries, based on
the criteria, the Committee agreed upon the recommendations that are detailed
below. A summary of the data reviewed by the Committee is contained in
table 2 below.
A. The current list
228. The 48 countries currently on the list were considered with respect to
the criteria for graduation: GDP per capita greater than $865 and either
APQLI greater than 52 or EDI greater than 29. Of those countries, 43 did not
meet the criteria for graduation: Afghanistan, Angola, Bangladesh, Benin,
Bhutan, Burkina Faso, Burundi, Cambodia, Central African Republic, Chad,
Comoros, Democratic Republic of the Congo, Djibouti, Equatorial Guinea,
Eritrea, Ethiopia, Gambia, Guinea, Guinea-Bissau, Haiti, Kiribati, Lao
People's Democratic Republic, Lesotho, Liberia, Madagascar, Malawi, Mali,
Mauritania, Mozambique, Nepal, Niger, Rwanda, Sao Tome and Principe, Sierra
Leone, Solomon Islands, Somalia, Sudan, Togo, Tuvalu, Uganda, United Republic
of Tanzania, Yemen and Zambia. The Committee recommends that those countries
be retained on the list.
229. Five of the countries on the list met the criteria for graduation:
Vanuatu, Maldives, Samoa, Cape Verde and Myanmar:
(a) Vanuatu met the criteria for graduation at the time of the 1994
review and was recommended by the Committee for graduation, provided that it
continue to satisfy those criteria at the time of the 1997 review. Since
Vanuatu remains well above the threshold for both GDP per capita and APQLI and
appears to be stable or improving on all three measures, the Committee
recommends that Vanuatu be graduated from the list immediately;
(b) Maldives is now above the threshold for graduation with respect to
GDP per capita, APQLI and EDI, and has been improving on all three criteria.
The Committee recommends that Maldives be graduated from the list, provided
that it continue to meet the criteria for graduation at the time of the next
review in 2000, on the basis of a more detailed assessment of its situation at
that time;
(c) Samoa is now above the threshold for graduation with respect to GDP
per capita and APQLI. The Committee recommends that Samoa be graduated from
the list provided that it continue to meet the criteria for graduation at the
time of the next review in 2000, on the basis of a more detailed assessment of
its situation at the time;
(d) Cape Verde had met the criteria for graduation at the time of the
1994 review but had been recommended for retention on the list due to
uncertainty as to the validity of the data for GDP per capita, owing to
exchange-rate instability. Since Cape Verde remains above the threshold for
graduation with respect to GDP per capita and APQLI and appears to be stable
or improving on all three measures, the Committee recommends that Cape Verde
be graduated from the list, provided that it continue to meet the criteria for
graduation at the time of the next review in 2000, on the basis of a more
detailed assessment of its situation at that time;
(e) While Myanmar appears to meet the criteria for graduation with
respect to GDP per capita and APQLI, the Committee felt that the data for GDP
per capita do not accurately reflect the economic situation of the country,
due to an official exchange rate that does not reflect the value of the
currency. This interpretation of the data is supported by data on GDP
converted on the basis of purchasing power parity and by data on inflation and
the exchange rate. The Committee therefore recommends that Myanmar be
retained on the list and that efforts be made to obtain improved data for the
review in 2000.
230. Countries that are not on the current list of the least developed
countries were considered with respect to the criteria for including
additional countries on the list: GDP per capita less than $765, APQLI less
than 47, EDI less than 26, and population less than 75 million.
231. One country not currently on the list, Cameroon, met the criteria for
inclusion as a result of a large decline in GDP. The Committee noted that the
decline in GDP, as expressed in United States dollars, was the result of the
50-per-cent devaluation of the CFA franc in 1994 and did not reflect a real
proportionate decline in production. It also noted that Cameroon met the
criteria in part because its substantial exports of petroleum resulted in a
high export concentration index and hence a low EDI. Based on those
considerations, the Committee recommends that Cameroon not be added to the
list of the least developed countries. In considering the data for Cameroon,
the Committee noted that a number of other countries were close to meeting the
criteria for inclusion and that a modest deterioration of the situation in
those countries could make them eligible for inclusion. The Committee
recommends that particular attention be given to collecting accurate and up-
to-date data for those countries for the 2000 review.
B. Review of the criteria and methodology
232. As requested by the General Assembly in resolution 46/206, the Committee
also considered possible further improvements in the criteria for the
designation of the least developed countries and in their application. For
that purpose, the Committee considered an alternative data set with two new
indicators in place of current indicators:
(a) GNP per capita for the most recent available year (1995), converted
to United States dollars by the World Bank Atlas method, to replace the three-
year average of GDP per capita (1993-1995), converted at current exchange
rates;
(b) Commercial energy consumption per capita (in kg oil equivalent), to
replace per capita electricity consumption (in kWh per year) in the
calculation of EDI.
233. The Committee felt that commercial energy consumption appeared to be a
better indicator of the availability and use of energy for development than
the narrower measure of electricity consumption.
234. The Committee noted that the GNP data was significantly different from
the GDP data for a number of countries and felt that it was unclear as to
which might be a better indicator of the development capabilities of
countries.
235. The use of these two new indicators in place of the established
indicators did not significantly change the conclusions concerning the
designation of the least developed countries.
236. Several other suggestions were made for possible improvements to the
criteria and methodology for the designation of the least developed countries,
bearing in mind that the criteria should reflect structural constraints on
development rather than the welfare of the population and taking into account
the availability and reliability of data.
237. The Committee decided to establish a working group as part of its
1997-1998 work programme to consider possible improvements to the criteria and
methodology. In addition to giving further consideration to the two new
indicators considered by the Committee at the current session, the working
group should consider, inter alia, the following possible changes:
(a) Concerning the APQLI, use of the following indicators: mean years
of schooling in place of primary and secondary school enrolment and literacy;
calorie supply as a percentage of daily requirements or as a percentage of the
average minimum energy requirements, in place of absolute calorie supply;
under-5 child mortality in place of life expectancy; the UNDP human
development index (HDI) without the income component, in place of the APQLI;
(b) Concerning the EDI, use of the following indicators: paved road
density; a measure of the modern service sector;
(c) Concerning population, use of population as a criterion for
inclusion or graduation;
(d) Concerning methodology, consideration should be given to replacing
the transformation of component indicators into indices through scaling
between maximum and minimum values to scaling between the lowest value of the
top decile and the highest value of the bottom decile.
238. The working group should also provide its views and recommendations on
the report to be prepared by the Secretary-General on the development of a
vulnerability index for small island developing States, as requested by the
General Assembly in resolution 51/183, and consider the usefulness of a
vulnerability index as an element of the criteria for the designation of the
least developed countries.
239. The Committee requested the Secretariat to prepare a report describing
the criteria for the designation of the least developed countries and to
assess, in cooperation with the United Nations Conference on Trade and
Development, the effective benefits derived by the least developed countries
specifically on the basis of their inclusion on the list.
C. Recommendations to the General Assembly
240. The Committee, based on its triennial general review of the list of the
least developed countries, in accordance with General Assembly resolution
46/206, recommends:
(a) That Vanuatu be graduated from the list with immediate effect;
(b) That Cape Verde, Maldives and Samoa be graduated from the list at
the time of the next review in 2000, provided that they continue to meet the
criteria for graduation at that time.
241. In response to the request of the General Assembly, in resolution
46/206, to the Committee to consider further possible improvements in the
criteria and their applications, the Committee submits the following
information:
(a) At the time of the 1994 triennial general review of the list of the
least developed countries, the Committee introduced a technical refinement in
the calculation of the economic diversification index in order to improve the
contribution of the data on per capita consumption of electricity;
(b) The Committee, as part of its 1997 triennial review, reviewed the
criteria for the designation of the least developed countries and their
application and concluded that the improvements to the criteria adopted in
1991, with the refinement adopted in 1994, remained valid. The Committee
considered the possibility of further improving the criteria through the
inclusion of a number of new indicators, either in place of or in addition to
the current indicators. The Committee considered that one proposed change -
namely, the introduction of per capita commercial energy consumption in place
of per capita electricity consumption - appeared to improve the criteria. The
Committee decided to further examine that proposal, and to consider a number
of other possible improvements to the criteria, as part of its 1997-1998 work
programme and to report to the Economic and Social Council in 1998 on its
conclusions;
(c) In response to the request of the General Assembly, in resolution
51/183, the Committee decided to review, as part of its work programme for
1997-1998, the report to be prepared by the Secretary-General on the
development of a vulnerability index for small island developing States. The
Committee, as requested, would submit its views and recommendations to the
General Assembly at its fifty-third session, through the Economic and Social
Council, and make its views available to the Commission on Sustainable
Development. The Committee would also consider the usefulness of a
vulnerability index as an element of the criteria for the designation of the
least developed countries.
Table 2. Summary of data for the review of the least developed countries
-----------------------------------------------------------------------------
Country GDP in US$ Population
1993-95 APQLI EDI (millions)
-----------------------------------------------------------------------------
Current LDCs below all graduation criteria: GDP<$900, APQLI<52, EDI<29
-----------------------------------------------------------------------------
Sudan 67 35.1 21.5 27
Mozambique 77 21.4 28.4 17
Ethiopia 100 18.2 14.3 56
Eritrea 100 22.7 13.9 3.2
Cambodia 111 26.2 15.4 10
Somalia 118 12.0 16.2 9.5
Tanzania, United Rep. of 136 38.2 23.2 30
Bhutan 152 31.4 22.3 1.8
Malawi 158 32.5 12.7 9.7
Democratic Republic
of the Congo a/ 161 41.4 22.0 45
Burkina Faso 172 22.7 13.4 10
Guinea-Bissau 180 33.5 14.5 1.1
Chad 186 26.1 11.0 6.3
Rwanda 191 27.3 16.7 5.2
Burundi 194 21.6 11.5 6.1
Nepal 202 39.4 15.0 21
Niger 213 17.1 8.5 9.2
Mali 217 21.0 14.1 11
Madagascar 221 44.7 24.5 15
Bangladesh 239 39.2 28.0 118
Sierra Leone 245 18.5 16.5 4.2
Uganda 254 32.1 14.0 20
Gambia 264 28.6 22.0 1.1
Togo 306 39.9 19.5 4.1
Haiti 324 30.2 26.2 7.1
Lao Dem. Peoples Rep. 327 42.7 21.3 4.9
Benin 366 34.9 15.2 5.4
Comoros 383 36.7 12.9 0.61
Central African Republic 392 33.1 11.9 3.3
Zambia 398 39.2 20.3 8.1
Equatorial Guinea 403 44.4 15.0 0.40
Mauritania 407 37.6 16.1 2.3
Guinea 433 26.4 5.4 7.3
Angola 694 25.4 7.3 11
Yemen 861 38.5 14.5 15
Djibouti 893 25.2 21.4 0.60
-----------------------------------------------------------------------------
Current LDCs meeting one graduation criterion (in bold): GDP>$900,
APQLI>52, EDI>29
-----------------------------------------------------------------------------
Sao Tome & Principe 97 59.6* 8.4 0.13
Lesotho 446 52.9* 26.4 2.0
Kiribati 593 70.1* 8.1 0.08
Solomon Islands 667 53.8* 16.9 0.38
Tuvalu 877 65.4* 20.4 0.01
Liberia 990* 15.9 18.4 2.1
Afghanistan 3728* 15.6 18.5 20
----------------------------------------------------------------------------
Current LDCs meeting two or three criteria for graduation (in bold); thus
qualifying for graduation
----------------------------------------------------------------------------
Cape Verde 941* 68.9* 24.8 0.39
Maldives 990* 67.6* 30.5* 0.25
Samoa 1025* 72.7* 26.9 0.17
Vanuatu 1206* 60.0* 19.6 0.17
Myanmar 1767* 58.3* 24.7 45
----------------------------------------------------------------------------
Other countries meeting all four criteria for inclusion: GDP<$800, APQLI<47,
EDI<26, Pop<75 million
----------------------------------------------------------------------------
Cameroon 640* 45.2* 21.4* 13*
----------------------------------------------------------------------------
Other low-income countries meeting three criteria for inclusion (in bold)
----------------------------------------------------------------------------
Kenya 270* 50.8 25.2* 27*
Nigeria 394* 46.5* 5.7* 112
Ghana 361* 49.4 23.4* 17*
Senegal 580* 29.9* 26.7 8.3*
Cote d'Ivoire 700* 36.4* 26.5 14*
----------------------------------------------------------------------------
Other low-income countries: GDP<$800
----------------------------------------------------------------------------
Tajikistan 126 69.1 5.8
Armenia 221 66.8 3.6
Viet Nam 222 63.7 26.9 74
Azerbaijan 233 70.9 7.5
Kyrgyzstan 270 4.5
Bosnia & Herzegovina 298 3.6
Mongolia 311 59.6 35.3 2.5
India 318 51.8 36.3 929
Uzbekistan 326 73.4 23
Georgia 329 5.5
Moldova, Republic of 350 69.1 4.4
Pakistan 431 39.2 34.4 136
Nicaragua 477 59.4 34.3 4.1
China 516 72.2 44.7 1022
Guyana 653 66.4 26.1 0.83
Sri Lanka 655 70.6 32.9 18
Honduras 659 62.9 28.7 5.7
Turkmenistan 672 4.1
Ukraine 678 79.6 52
Albania 692 69.9 3.4
Zimbabwe 726 54.8 34.2 11
Belarus 735 82.8 10
-----------------------------------------------------------------------------
---------------------------------------------------------------------------
*/ Criteria meeting requirement for inclusion
Notes: GDP Gross domestic product
APQLI Augmented physical quality-of-life indicator
EDI Economic diversity index
LDCs Least developed countries
a/ Formerly Zaire.
VII. REVIEW OF THE WORKING METHODS OF THE COMMITTEE
242. The Economic and Social Council, in decision 1995/215, requested the
Committee on Development Planning to examine its working procedures with a
view to improving them, in particular, to reflect the ongoing work of the
Council and the General Assembly and their subsidiary bodies. At its
thirtieth session (May 1996), the Committee decided to conduct that
examination at its thirty-first session. In April 1997, the Vice-President of
the Council wrote to the Chairman of the Committee requesting the views of the
Committee on its role, working methods and relations with other bodies in
connection with the review of subsidiary bodies of the Council mandated by the
General Assembly in resolution 50/227 and by the Council in resolution
1996/41. To assist the Committee in its review, the Committee had before it
the report of the Secretary-General entitled "Methods of work of the Committee
for Development Planning" (E/1995/82).
243. The Committee agreed that the independence and extensive experience of
its members in a wide range of development-related fields provided it with a
comparative advantage as a forum for the discussion and review of emerging
development issues facing developing countries, particularly where such issues
were cross-sectoral or cut across the responsibilities of various
international bodies or agencies. The Committee stressed that the themes it
would address would be forward-looking and would highlight emerging issues,
with particular reference to developing countries.
244. The Committee agreed that the relationship between the work of the
Committee and that of other bodies within the United Nations system could be
further enhanced in a number of ways. While the Bretton Woods institutions
and the specialized agencies of the United Nations system had regularly
participated in the plenary and working group meetings of the Committee,
greater efforts could be made to encourage their contribution to, and
participation in, the Committee's examination of particular topics where they
had special expertise and experience. Contributions of organizations of the
United Nations system could take the form of invited papers drawing on the
expertise of those organizations. In order to further enhance its
relationship with bodies within and outside the United Nations system, the
Committee proposed to make greater use of dialogues with invited organizations
and experts on selected themes, especially at the meetings of its working
groups.
245. The effectiveness of the work of the Committee would also be enhanced
through the establishment of a closer relationship with the intergovernmental
machinery of the Economic and Social Council and the General Assembly. The
Committee could also provide advice on topics of current concern to the
Secretary-General and on issues to be considered by the Council, its
functional Commissions and the Second and Third Committees of the General
Assembly, as identified through consultations with their bureaus. In that
advisory role, the Committee could function similarly to national councils of
economic and development advisers and could respond to the priority
development issues facing the United Nations. When required by the schedule
of meetings, working groups of the Committee could submit their reports
directly to interested bodies, on the authority of the experts involved. The
normal practice of the Committee in considering the working group report,
revising it, as necessary, and adopting it would be retained.
246. Maintaining the independent nature of the Committee would ensure its
capacity to provide expert views and recommendations in a balanced and
non-partisan manner in an expanded advisory role to the Organization. Greater
utilization of the expertise of the Committee in that manner would be
cost-effective and could reduce the need to convene ad hoc expert groups to
advise the Secretary-General. However, such additional use of the Committee's
expertise would have to be consistent with the Committee's regular work
schedule and the availability of individual members.
247. The Committee welcomed the opportunity for the Chairperson of the
Committee to address the Council at its substantive sessions, as provided for
in Council decision 1995/215, to present the Committee's conclusions and
recommendations on the issues it considered. The Committee would endeavour to
follow a similar practice with other intergovernmental bodies to which its
work was relevant.
248. The Committee found that the changes it had instituted in its working
procedures and meeting schedules in the past, including shorter plenary
sessions, reduced processing of documents, and more informal servicing of
working groups, usually without simultaneous interpretation, had increased its
efficiency and cost-effectiveness. The Committee would seek to build upon
those improvements by requesting working groups to submit their findings as
self-contained reports to the plenary. This would permit the Committee to
study those reports closely before its annual plenary sessions and allow its
members to provide, whenever necessary, prepared submissions for consideration
by the Committee at the plenary session.
249. The Committee decided to maintain its current practice of holding one
plenary session of five days each year and three working group sessions of
from three to five days each. In some cases, working groups might need to
meet twice. Each working group would continue to consist of from five to
eight experts, comprising both Committee members and co-opted experts.
250. Pursuant to paragraph 8 of General Assembly resolution 51/211, the
Committee reviewed its practice of occasionally holding one of its annual
working group meetings at venues other than New York. The Committee concluded
that when deliberations on the subject matter dealt with by one of its working
groups could be enhanced by the expertise available in the secretariats of
other organizations of the United Nations system, it was highly cost-effective
to hold such meetings at other United Nations duty stations. In the past such
meetings, or those of the full Committee, had been held in Geneva, Vienna,
Rome, Santiago, Addis Ababa and Bangkok, and the discussions, on such topics
as regional planning issues, industrialization and agricultural development,
had benefited from the expertise in the United Nations organizations located
at those duty stations. The Committee recommended that the practice should
continue, when justified on substantive grounds.
251. There was general agreement that the effectiveness of the Committee's
work would be improved through wider dissemination of its reports. Improved
dissemination could be achieved in a number of ways which would bring the
Committee's reports to the attention of a wider audience and would be accorded
priority by the Committee.
252. The Committee reviewed its terms of reference as described in
paragraph 190 of document E/1996/97. The Committee recommended that its name
should be changed to the Committee for Development Policy, which would better
reflect the Committee's main functions. It decided not to propose any formal
changes in its terms of reference at the current time but considered it useful
to comment on how it would interpret some of them. The terms of reference
contained in subparagraphs (a) through (d), (i) and (j) were self-explanatory.
The Committee considered subparagraph (e) to refer to policy development and
implementation at the national level. It considered subparagraph (f) to refer
to reviewing, from time to time, methodologies used within the United Nations
system for projections of economic, social and environmental trends as well as
their policy implications. Subparagraph (g) was taken to refer to views and
recommendations which the Committee might, from time to time, formulate on the
development advisory services provided by the United Nations system to
developing countries and economies in transition. The Committee considered
subparagraph (h) to refer to analyses of good practices in policy development
and implementation, which it might undertake from time to time.
253. The Committee stressed that, in view of the part-time nature of the
commitment of the members of the Committee to its work, members could not be
expected to prepare lengthy reports comparable to those of a full-time
research staff. In order to ensure the effectiveness of the Committee,
considerable substantive support would need to be provided by the Secretariat,
with the assistance of consultants, if necessary, on specific topics, for
which additional resources would be needed. Additional resources would also
be required to implement procedures to improve the dissemination of its
findings.
VIII. WORK PROGRAMME FOR THE THIRTY-SECOND SESSION (1998)
254. The Committee agreed on the work programme outlined below and decided to
prepare for its thirty-second session by convening three working groups, which
would be supported by relevant studies to be undertaken by the Secretariat and
independent experts on the themes selected. The working groups would submit
their findings to the Committee at its thirty-second session, as contributions
to its report on that session.
255. The Committee agreed that, in addition to the members of the working
groups indicated below, the members of the bureau might join one of the three
working groups, and each working group might also use co-opted experts, within
existing resources, to assist it in its work.
256. The Committee agreed that it would hold its thirty-second session in New
York from 4 to 8 May 1998.
257. The Committee agreed that, in accordance with Council decision 1995/215,
the Chairman of the Committee would brief the Council at its substantive
session in 1998 on the results of its thirty-second session.
A. Migration and employment
258. The Committee agreed to examine the following issues related to
migration and employment:
(a) Trends in international labour flows and causal factors;
(b) Relationships between labour mobility and globalization;
(c) Implications for developing economies;
(d) Recommendations for national policies in developing countries;
(e) Recommendations for policies in developed countries;
(f) Recommendations for policies of international institutions.
259. Working Group I, which would examine those issues, would include
Arjun SENGUPTA (Chairman), Solita MONSOD (Co-Chairperson/Rapporteur),
Makhtar DIOUF, GAO Shangquan, Taher KANAAN, Linda LIM and Akilagpa SAWYERR.
It would meet in New York from 29 to 31 October 1997.
B. Intergenerational transfers and social security
260. The Committee agreed to examine the following issues:
(a) Economic and social implications of demographic trends, including
the changing ratio between populations of working age and the young and the
old;
(b) Distribution of income among generations, with respect to the costs
of child-raising, education and retirement;
(c) Role of the family, communities, State and private institutions in
intergenerational transfers;
(d) Impact of globalization and economic reforms on intergenerational
income distribution;
(e) Recommendations for developing countries and for policies of
international organizations.
261. Working Group II, which would examine those issues, would include
Maria AUGUSZTINOVICS (Chairperson), Frances STEWART
(Co-Chairperson/Rapporteur), Dionisio CARNEIRO-NETTO, Ryokichi HIRONO and
Miguel URRUTIA. It would meet in New York or Geneva from 12 to 14 January
1998.
C. Review of the criteria and methodology for determining the
list of the least developed countries and examination of a
possible vulnerability index
262. The Committee agreed to examine the following issues:
(a) Improvements to the criteria and methodology for the designation of
least developed countries;
(b) Review of the development of a vulnerability index for small island
developing States, in response to the request of the General Assembly, in
resolution 51/183, for the views of the Committee on the question;
(c) Usefulness of a vulnerability index as a criterion for the
designation of the least developed countries;
(d) Review of the effective benefits derived by the least developed
countries specifically on the basis of their inclusion on the list, based on
the assessment requested from the Secretariat and UNCTAD;
(e) Aspects of the issues addressed by the other two working groups
that relate specifically to the least developed countries.
263. Working Group III, which would examine those issues, would include
Patrick GUILLAMONT (Chairman), Essam EL-HINNAWI (Vice-Chairman/Rapporteur),
Just FAALAND, Nguyuru LIPUMBA and Bishnodat PERSAUD. It would meet in New
York from 17 to 19 December 1997.
IX. ORGANIZATION OF THE SESSION
264. The thirty-first session of the Committee for Development Planning was
held at United Nations Headquarters from 5 to 9 May 1997. Twenty members of
the Committee attended: Maria AUGUSZTINOVICS, Dionisio Dias CARNEIRO-NETTO,
Makhtar DIOUF, Essam EL-HINNAWI, Just FAALAND, GAO Shangquan,
Patrick GUILLAUMONT, Ryokichi HIRONO, Nurul ISLAM, Taher KANAAN,
Louka T. KATSELI, Linda LIM, Nguyuru H. I. LIPUMBA, Nora LUSTIG,
Solita C. MONSOD, Bishnodat PERSAUD, Akilagpa SAWYERR, Klaus SCHWAB,
Arjun SENGUPTA and Frances STEWART. Four members were unable to attend:
Alexandre SHOKHIN, Lance TAYLOR, Alvaro UMAN~A and Miguel URRUTIA.
265. The officers elected at the thirtieth session for a term ending on
31 December 1997 were:
Chairman: Nurul ISLAM
Vice-Chairman: Klaus SCHWAB
Rapporteur: Louka KATSELI
266. The session was opened by the Chairman, Nurul ISLAM.
267. Preparations for the session had been carried out by the three working
groups of the Committee. The working group on rethinking the impact of
globalization on development (New York, 24-25 February 1997) consisted of
Frances STEWART (Chairperson), Lance TAYLOR (Vice-Chairman/Rapporteur),
Dionisio CARNEIRO-NETTO, Ryokichi HIRONO, Akilagpa SAWYERR and Miguel URRUTIA.
The working group on re-examining stabilization, structural adjustment and
economic reform in the context of globalization (New York, 18-20 December
1996) consisted of Arjun SENGUPTA (Chairman), Solita MONSOD (Vice-Chairperson/
Rapporteur), Makhtar DIOUF, GAO Shangquan and Bishnodat PERSAUD. The working
group on the general review of the list of the least developed countries (New
York, 22-24 January 1997) consisted of Patrick GUILLAUMONT (Chairman),
Essam EL-HINNAWI (Vice-Chairman/Rapporteur), Just FAALAND and Nguyuru LIPUMBA.
268. The Under-Secretary-General for Policy Coordination and Sustainable
Development of the United Nations Secretariat made a statement suggesting some
possible themes for the future work of the Committee and provided some
guidelines for the Committee's review of its working methods.
269. The Committee held a discussion with the Secretariat of the Economic and
Social Council on the theme of the 1997 high-level segment of the Council on
fostering an enabling environment for development: financial flows, including
capital flows, investment, trade. The effects of globalization and, in
particular, the globalization of financial flows on the environment for
development were among the issues being considered by the Committee at its
current session, and the members of the Committee provided a range of views on
the theme.
270. Substantive services for the session were provided by the Department for
Policy Coordination and Sustainable Development. The following bodies were
represented at the session: Department for Economic and Social Information
and Policy Analysis, Department for Development Support and Management
Services, United Nations Conference on Trade and Development, Economic and
Social Commission for Asia and the Pacific, Economic Commission for Latin
America and the Caribbean, United Nations Development Programme, United
Nations Children's Fund, United Nations Population Fund, United Nations
University, International Labour Organization, United Nations Educational,
Scientific and Cultural Organization, Food and Agriculture Organization of the
United Nations, International Monetary Fund, United Nations Industrial
Development Organization and the World Trade Organization.
Notes
1/ OECD, Shaping the 21st Century: The Contribution of Development
Cooperation (Paris, 1996).
2/ This section draws on the report of the working group on financial
stability in emerging market economies (April 1997).
Annex I
AGENDA
1. Adoption of the agenda and organization of work.
2. Implications of financial globalization for development policy: report
of Working Group I.
3. Development policy: lessons from stabilization, adjustment and reform:
report of Working Group II.
4. General review of the list of the least developed countries: report of
Working Group III.
5. Examination of the working procedures of the Committee with a view to
improving them, in particular to reflect the ongoing work of the
Economic and Social Council and the General Assembly, in accordance with
General Assembly resolution 50/227, Council decision 1995/215 and
Council resolution 1996/41.
6. Future work.
7. Other business.
8. Report of the Committee on its thirty-first session.
Annex II
LIST OF THE LEAST DEVELOPED COUNTRIES
Country Date of inclusion on the list
1. Afghanistan 1971
2. Angola 1994
3. Bangladesh 1975
4. Benin 1971
5. Bhutan 1971
6. Burkina Faso 1971
7. Burundi 1971
8. Cambodia 1991
9. Cape Verde a/ 1977
10. Central African Republic 1975
11. Chad 1971
12. Comoros 1977
13. Democratic Republic of the Congo b/ 1991
14. Djibouti 1982
15. Equatorial Guinea 1982
16. Eritrea 1994
17. Ethiopia 1971
18. Gambia 1975
19. Guinea 1971
20. Guinea-Bissau 1981
21. Haiti 1971
22. Kiribati 1986
23. Lao People's Democratic Republic 1971
24. Lesotho 1971
25. Liberia 1990
26. Madagascar 1991
27. Malawi 1971
28. Maldives a/ 1971
29. Mali 1971
30. Mauritania 1986
31. Mozambique 1988
32. Myanmar 1987
33. Nepal 1971
34. Niger 1971
35. Rwanda 1971
36. Samoa a/ 1971
37. Sao Tome and Principe 1982
38. Sierra Leone 1982
39. Solomon Islands 1991
40. Somalia 1971
41. Sudan 1971
42. Togo 1982
43. Tuvalu 1986
44. Uganda 1971
45. United Republic of Tanzania 1971
46. Vanuatu c/ 1985
47. Yemen 1971
48. Zambia 1991
Note: Botswana, included on the list in 1971, was graduated from the
list in December 1994 (General Assembly resolution 49/133), having satisfied
the criteria for graduation.
a/ Recommended for graduation from the list in 2000, subject to review in
that year.
b/ Formerly Zaire.
c/ Recommended for graduation from the list on 31 December 1997, subject
to the approval of the General Assembly at its fifty-second session.
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