Development & Liberation in the Third Millennium
Alternatives for a New International Financial Order
by Michael Chai
There has been a lot of talk around the world of reforming the international financial system or architecture, especially after the recent and famous Asian Financial/Economic Crisis. Why the need for reform, what kinds of reform are being proposed, what is the situation to date and what needs to be done next? These are questions I wish to address in my paper. Of course, these are questions to which I do not have all the answers. And even if I do have the answers, a 20-minute presentation (which is how long I will try to speak) is not sufficient.
I must also add that I am no expert on the subject of international finance. What I present here is what I have learnt from others who have researched the topic and from campaigns I am involved in. One such campaign is the International Anti-Poverty Pact, which is spearheaded by the International Council on Social Welfare.1 I will refer to the Anti-Poverty Pact in the latter part of my paper. I have also included some references, at the end of this paper, which I used and you may want to refer to for more detailed explanations and analysis.
Why the Need for Reform?
Globalisation the move towards a global economy where national borders cease to matter has changed the face of the world in which we live, and industrial and financial transnational corporations [TNCs] dominate this global environment. For example, in terms of trade and investment, TNCs generate 70 per cent of all world trade and 80 per cent of all foreign direct investment (FDI). In the globalisation of financial markets, institutional investors have joined banks and companies as new financial TNCs. Today, the main institutional investors are commercial banks, insurance companies or brokerage houses managing mutual funds, speculative hedge funds and pension funds (schemes managed on behalf of investors in order to bring them returns on their investment). In 1980, the daily average of foreign exchange trading was $80 billion, a 10:1 ratio to world trade. By 1992, daily trading had reached $880 billion with a ratio of 50:1. In 1995, daily trading was $1.26 trillion and the ratio to world trade was 70:1 (Siegel, 1998)
As Susan George has rightly put it, the TNCs
There is no doubt about it - TNCs are motivated by their profit rates and "shareholder value", meaning the market price of the company's stock. TNCs even buy up their own stock to cause the market price to rise.
There are now about 60.000 TNCs with half a million affiliates. Of the top one hundred economic entities in the world, 51 are corporations, only 49 are states. These 200 corporations are responsible for about a quarter of all the measured economic activity in the world - or Gross World Product. However, TNCs directly employ only around three per cent of the worlds labour force what UNCTAD calls "a negligible proportion". Less than half of these jobs are in the South countries. In 1994 (the last year for which UNCTAD has definitive figures) only 12 million TNC jobs were located in the developing world, even though current estimates suggest the figure may now be anything up to three times that number (UNCTAD, 1998). World-wide, TNCs employ only about 60 million people. Even if we assume that each of these jobs generates another two jobs somewhere else in the economy: this still amounts to only 180 million people employed by TNCs, or well under 10% of the world's available work force (George, 2000).
TNCs also invest much less in real economic activity than is usually boasted about. In the past five years, more than three-quarters of what is called foreign direct investment (FDI) was actually cross-border mergers and acquisitions (M&As). While Greenfield investment (the construction of new factories) will almost always generate new employment opportunities, more and more foreign investment is not greenfield investment but comes in the form of cross-border M&As in which TNCs take over or merge with companies which exist already. Of the world total 1997 FDI of US$400 billion - US$342 billion or 85% of the total FDI were cross-border M&As. In the case of FDI flows to developing countries, cross-border M&As represent roughly two thirds of all FDI (US$96 billion out of the 1997 total of US$150 billion) (UNCTAD, 1998)
In the wave of the corporate mergers and financial liberalisation policies of the 1980s, we see a new generation of TNCs financiers clustered around the commercial banks, the institutional investors, insurance companies, pension funds and mutual funds or brokerage houses whose turnovers are in billions of dollars, in contrast to their industrial counterparts.
A key element in this globalisation of finance is foreign portfolio investment (FPI), i.e. purchase of shares in an existing company in a foreign country, but without gaining control over its management. FPI accounted for a third of all private capital flows to developing countries from 1990 to 1997 (FDI accounted for a half, commercial bank loans for around a tenth). Some developing countries have actually attracted more FPI than FDI in the period since 1992, for example, Thailand and South Korea. FPI is typically more volatile than FDI, according to UNCTAD (meaning that FPI can be withdrawn again as easily as it is provided in the first place). This is mainly because FPI "is attracted not so much by the prospect of long-term growth as by the prospect of immediate gain." FPI is also more prone to herd behaviour: "Portfolio investors have a greater tendency to take concerted action, leading both to massive withdrawals in a crisis as well as to rapid recovery once confidence is restored." (UNCTAD, 1998)
While these finance TNCs or money managers play a big role in financial markets, they are decreasingly involved in the real economy. Their activities, which escape state regulation, include speculative transactions in commodity futures2 and derivatives3 and the manipulation of the currency markets. Major financial actors are routinely involved in hot money deposits in the emerging markets of Latin America and Southeast Asia, not to mention money-laundering and the development of specialised private banks that advise wealthy clients in the many offshore banking havens. As I mentioned earlier, the daily turnover of foreign exchange transactions is of the order of 1.4 trillion dollars a day of which only 5 percent correspond to actual commodity trade and 10 percent to capital flows.
New technologies have made the globalisation of finance possible by making it easier to move capital from country to country. In this international financial system, money transits at high speed from one banking haven to the next, in the form of electronic transfers. This also makes for legal and illegal business activities to become increasingly intertwined and vast amounts of unreported wealth have been accumulated (Chussodovsky, 1997).
But there is no better example of this kind of capital flight than in the so-called Asian crisis of 1997-8. In 1996 capital was flowing into emerging Asia at the rate of about $100 billion a year; by the second half of 1997 it was flowing out at about the same rate. In Indonesia alone, US$30-40 billion was "sucked out" of the country in the six months between November 1997 and April 1998. And this was not the first nor last time such large-scale capital flight happened: in 1994-5 it was Mexico, in 1998 it was Russia and Brazil.
The three major official institutions helping to push forward this neo-liberal corporate agenda of trade and financial liberalisation are the World Bank (WB), the International Monetary Fund (IMF) and the World Trade Organisation (WTO). The IMF is the architect of so-called Structural Adjustment Plans (SAPs) in the poorer, highly indebted countries of the South and the East. There are about 95 such SAP countries at the moment. Because of their debt burdens, these countries must earn the IMF's stamp of approval in order to receive loans from any source, and to obtain the Fund's approval, they must adopt its neo-liberal views about economic management. These views, taken together, are also sometimes referred to as the "Washington Consensus".
Rules of the Washington Consensus and of SAP include strict fiscal discipline, which means limiting budget deficits and reduced government spending on fields such as health, education and infrastructure; tax reform to benefit corporations and higher income individuals; market-determined interest rates; open borders with regard to capital flows, imports, exports and foreign direct investment, plus privatisation, deregulation and downsizing of civil servants. Basic necessities invariably rise in price because subsidies are outlawed; exports are encouraged at the expense of local production for satisfying local needs. Mass unemployment often results as governments fire employees and small businesses fail due to high interest rates, retrenching their employeesl.
The WB is the world's most important "development" lender. In tandem with the IMF, it shapes policy in dozens of countries. It co-operates with TNCs not only through procurement but also by its policy choices. The Bank also oversees massive privatisation policies from which local and foreign investors profit. In a number of countries, WB-sponsored privatisation programmes have also allowed criminal mafias to acquire large amounts of state property (Chossudovsky, 1997).
The role of the WB and the IMF, especially the IMF, in managing recent financial crises in Thailand, Korea, Indonesia, Russia, Brazil and Mexico has been sharply criticised, not just by progressives but by important Establishment figures like Harvard economist Jeffrey Sachs and the Meltzer Commission, named by the US Congress. This group of eleven mainstream economists recommended a much-reduced role for both the IMF and the WB but the US Treasury so far refuses to follow these recommendations. The Treasury recognises that the combination of debt plus structural adjustment plus massive privatisation, is a far more efficient instrument than colonialism ever was for keeping countries in line. The international institutions that implement these policies help both TNCs and elites in the poorer countries to profit from structural adjustment because wages are lower. It's worth noting as well that every time a financial crisis strikes, cash-strapped local businesses can be bought up on the cheap. TNCs again benefit from these fire-sale prices as do local elites. In the case of Korea, IMF conditionalities included the lifting of restrictions to allow foreign takeover of local firms.
Perhaps most useful of all to the corporate programme is the World Trade Organisation (WTO) because it is spearheading the drive towards total freedom of trade and its rules are binding. The decisions of the WTO's Dispute Resolution Mechanism (panels of trade experts, meeting behind closed doors) are enforceable through sanctions and apply to all 138 member-countries, developed and less developed, soon to be joined by China and others. The WTO's future negotiations will concern not merely the liberalisation of trade in goods and agricultural products but also rules pertaining to intellectual property, investment and government procurement. Through the General Agreement on Trade in Services (GATS), it is bringing virtually all areas of human existence under its purview, including health, education, culture, the environment, tourism, energy, etc. Its Dispute Resolution Body is proving a highly effective tool for reducing standards of food safety and environmental protection; on the whole the WTO is perhaps the greatest institutional threat to democracy now functioning.
TNCs are quite naturally interested in the greatest possible freedom of trade since fully one-third of world trade takes place between subsidiaries of the same company (e.g. IBM "trading" with IBM, Ford with Ford and so on); a further third is trade between subsidiaries of different TNCs (e.g. Ford trading with IBM). Corporations have shaped the agenda of the WTO from the beginning: workings of the WTO: as the Director of the WTO Services Division, David Hartridge, explained, "[W]ithout the enormous pressure generated by the American financial services sector, particularly companies like American Express and CitiCorp, there would have been no services agreement and therefore perhaps no Uruguay Round and no WTO" George, 2000). Thus, under the WTO, the rule of governments is weakened and the power of TNCs strengthened. Although the WTO is an intergovernmental body comprising member states, it is the TNCs that sit on important advisory committees that decide policy and set the agenda. In the case of the US, members of the Advisory Committee for Trade Policy and Negotiations include IBM, AT&T, Bethlehem Steel, Time Warner, Corning, Bank of America, American Express, Dow Chemical, Scott paper, Boeing, Mobil Oil, Amoco, Pfizer, Eastman Kodak, Hewlett-Packard, Weyhauser and General Motors (Clarke, 1996). The US proposal for an agricultural agreement was not only written by a senior Cargill executive, but Cargill (the largest agricultural corporation in the US) employees led the US negotiations throughout the Reagan, Bush and Clinton presidencies (Koivusalo, 1999). WTO agreements have been described as a bill of rights for corporate business.
The WTOs Financial Services Agreement negotiated in 1997 entered into force on March 1, 1999. The Agreement covers banking, insurance, securities, asset management, and financial information. In this agreement under the General Agreement on Trade in Services (GATS), countries made binding commitments to provide national treatment and market access in financial services, as specified in their country schedules, to financial services firms from any WTO member country. Countries that fail to honour these commitments are subject to enforcement action in the WTO.
To sum up this section, and highlight why the need for reform - the devastating social and economic impact of the global financial crisis triggered in East Asia in mid-1997 has led a growing number of civil society actors, UN bodies and governments to explore strategies to regain control over global finance, which many describe as a cause of increasing systemic instability and social regress. Simply put, the international financial system is prone to crisis, it benefits the few but the social costs of the crises it generates, as well as the financial cost of cleaning up the mess becomes socialised. These are the rules of the present system, and these rules need to be changed.
While financial analysts assess the global financial crisis in terms of stock market indexes and currency values, the real impact is being borne by the millions of people who are being pushed further into poverty and new generations will inherit a debt not of their making, And as the human costs of the crisis continue to mount, speculators and currency traders (the finance TNCs) remain unaccountable they are in fact protected by the financial system.
Uncontrolled speculative investment and currency trading have a devastating effect on economic stability and long-term development. The crises have shown that national economies no longer have control over vital aspects of economic policy, and that they too are subject to the whims of the market. The terrible human consequences of an unstable financial system demand our attention. It is imperative that international economic relations be reviewed and reshaped to control speculation, regulate financial markets and reduce inequalities between nations.
"It was the rich who benefited from the boom...but we, the poor, pay the price of the crisis. Even our limited access to schools and health is now beginning to disappear. We fear for our childrens future" said Khun Bunjan, a community leader from the slums of Khon Kaen, North East Thailand.( From: The Social Consequences of the East Asian Financial Crisis, The World Bank, September 1998)
What Kind of Reforms are Being Proposed
The proposals range from modest reforms regarding prudential regulation and transparency rules at the national level, to bolder attempts at redesigning a new "international financial architecture" of similar historical significance as the creation of the Bretton Woods institutions in 1944. Others emphasise the need to reorient national economies toward more inner-directed patterns of growth through demand-boosting national redistribution measures and more discriminate use of foreign investment and trade policy.
Many debates in this area have focused on critiquing the neoliberal rationale for unfettered financial liberalisation as part of the conventional policy package ascribed to the so-called "Washington consensus," which has been thrown into question in the aftermath of the East Asian crisis. The United Nations Conference on Trade and Development (UNCTAD) which since 1990, has been consistently warning against the inherently destabilising effects of liberalised global finance, attributed much of the causes of the East Asian crisis in its Trade and Development Report, 1998 to a "colossal market failure" of high-risk speculative ventures by international creditors made possible by imprudent financial liberalisation "based on the notion of the infallibility of markets." In a report issued in January 1999, the Task Force of the UN Executive Committee on Economic and Social Affairs also warns against across-the-board capital account liberalisation, stressing that the recent crisis has demonstrated the "enormous discrepancy" between rapid globalisation of finance and the lack of proper regulatory frameworks at national and international levels.
For ease of consideration, this paper divides the means of regulating international capital flows into three broad areas: taxes, capital controls and controls on currency exchange.
In the final section, the institutional mechanisms for implementing the policy options are described. Here, the division of opinion between those who support national approaches and those who support international approaches is sometimes quite stark. However, it is hoped that the description here illuminates some possibilities for common ground between the two camps.
Means of Regulating International Capital Flows
Taxes can be imposed at different points in a transaction (when a currency enters/exits a country, when currency is exchanged, when data is transferred, etc.) to make short term and speculative trades prohibitively expensive. Taxes are a form of regulation that is intended to influence the market without disrupting the functioning of the market.
2. Currency Exchange Controls
These are more direct regulations that limit the volume or price at which a currency may be traded.
3. Control of Capital Inflow and/or Outflow (Speed Bumps)
These controls apply directly to the inflow and outflow of foreign money. A country stipulates specific requirements to which foreign investors and/or nationals must adhere. These requirements can include time restrictions, types of industry and/or local sourcing/employment types of incentives. Control of capital can be implemented at a national level. China and India, both with forms of capital control, have suffered much less financial volatility than their Asian neighbours over the last year.
Once a particular tool (or tools) for capital control has been chosen, it will need to be implemented by an institution - most likely a governmental institution. The type of control determines in part which institution is best suited for implementing it. In general, institutions that enforce capital controls are either national or international. Some controls, by their nature, can not be implemented by a national institution and, vice-versa, some can not be implemented by international bodies. The following section addresses various forms an international organisation that regulates capital might take. National institutions are not specifically described in this section because conditions in each country vary.
International institutions should complement and reinforce national controls, addressing the aspect of cross-border capital flow that lends itself to international regulation. They should not constrain national efforts to regulate capital.
What is the Situation to Date and What Needs to be Done Next?
One of the conclusions arrived at, in a recent ESCAP-UNCTAD meeting of experts on Financing for Development (Asia-Pacific High-Level Regional Consultation on FfD, Jakarta, August 2000), is that little or no progress is being made in the reform of the global financial system. Moreover, what is being neglected are issues of concern to developing countries, and the many imbalances and asymmetries on how debtor and creditor countries, as well as developed and developing countries, are being treated in the reform process.
In the discussions on reforms, the emphasis seems to be on greater information provision. However, having more information is not enough to prevent crises. Moreover, although much has been done on getting more information from governments, there has been less work done on getting information on markets. Little has been done on highly leveraged institutions and offshore markets.
There is also an uneven nature of the use of information. IMF surveillance had focused mainly on developing countries. So far the IMF consultations with countries had been unable to prevent major financial turmoil. Traditionally, attention is paid to macroeconomic variables but not exchange rates and capital flows. The IMF has been reluctant to advise countries to control short-term inflows before a crisis strikes. On the other hand, too little attention is being paid to policies of developed countries as they affect developing countries' exchange rates. Every emerging-market crisis of the 1980s and 1990s were associated with major swings of exchange rates and the liquidity position of major industrial countries.
There is also no progress on IMF reform or crisis prevention. Although there are discussions on an early warning system and the need to bail in creditors, but there is no development of rules. For instance, there is reluctance by some governments to determine when a debt standstill should be done, there are no rules for debt workout, and so far the IMF has not developed a facility to deal with preventing a crisis.
Participants at this meeting also pointed out issues that were not being addressed in the reform process. First, the global implications of exchange rate movements of major currencies on which the IMF surveillance system had little to say despite the fact that they are sources of financial and economic disturbance to other countries. Second, the unequal distribution of voting power in the global financial system, which derives from a totally arbitrary formula, designed to perpetuate the dominance of developed countries. Third, was the internal governance of the IMF, in which a very few countries, and particularly the US Treasury, has an undue influence over the Executive Board and staff. Fourth, the reluctance to apply the obligations of transparency, accountability and equity on the capital markets and institutions of developed countries.
According to Walden Bello6, the mainstream position in the reform discussions (mainly reflecting the positions of the US and to a lesser degree that of many other G-7 countries) could be captured in a school of thought which he called "It's the Wiring, not the Architecture" school. This school assigns primacy to reforming the financial sectors of the crisis economies along the lines of more transparency, tougher bankruptcy laws, prudential regulation using the core principles drafted by the Basel Committee on Banking Supervision, and greater inflow of foreign capital not only to recapitalise shattered banks but also with the expectation of stabilising the local financial system by making foreign interests integral to it. But, "when it comes to the supply-side actors in the North (private financial actors), this perspective would leave them to voluntarily comply with the Basel Principles, though government intervention might be needed periodically to catch freefalling casino players whose collapse might bring down the whole global financial architecture, as was the case last year when the US Federal Reserve organised a rescue of the hedge fund Long Term Capital Management after the latter was unravelled by Russia's financial crisis...When it comes to the existing multilateral structure, this view supports the expansion of the powers of the IMF, proposing not only greater funding but also new credit lines such as the precautionary credit line' that would be made available to countries that are about to be subjected to speculative attack. Access to these funds would, however, be dependent on a country's track record in terms of observing good macroeconomic fundamentals, as traditionally stipulated by the Fund."
Underlying most of the discussions on reforms, and what few measures have been taken, is a threefold objective to avoid future crisis, to be able to handle the crisis better and to ensure that the global financial system promotes development as usual, or economic growth. On the other hand, civil society organisations (CSOs) are calling for measures and reforms to change the global financial system so as to give local communities and national governments the chance to pursue economic policies which meet the real needs of people, instead of the markets.
The CSOs participating in the first High-Level Regional Consultation on FfD, made some recommendations in the search for funding for equitable and socially sustainable development. These recommendations are framed in terms of International Anti-Poverty Pact, a proposal generated by a series of meetings during the last two years involving representatives from thousands of CSOs around the world. The Pact is based on seven specific, high-priority, time-bound development targets (the International Development Targets endorsed recently by the UN and Bretton Woods institutions for achievement by 2015) and involves a similar number of specific, high-priority, time-bound actions to mobilise sufficient resources to achieve those targets. Some comments are made below in relation to each of the seven types of resource mobilisation listed in the Pact proposal. In its final form, the Pact would include several specific time-bound commitments and monitoring mechanisms under each of these headings.
THE INTERNATIONAL ANTI-POVERTY PACT
1. Strengthen the provision and application of official development assistance (ODA)
Until 1993, ODA was the main external source for financing development. Since then, however, its share has declined continuously. In 1996 ODA fell to 58.2 billion dollars. This amount is lower than the sixty billion dollars the countries of the South lose every year from agricultural subsidies and barriers to textile exports in the North. More dramatically, the ODA/GNP ratio reached an all-time low of 0.22 percent in 1997.
It is recognised that ODA comes with potential disadvantages encouraging dependency, artificially inflating growth rates and supporting bad national governance. However, ODA combined with other development strategies should be used to allow developing countries to access global markets, reduce poverty, transfer technology, strengthen human/institutional capacity (especially in basic education and primary health care) and leverage greater levels of domestic or foreign private capital. It is now many years since developed countries pledged to devote 0.7 per cent of their GDP to ODA. ODA has been declining in the 1990s and reached its lowest level in forty years. Currently, only Denmark, the Netherlands, Norway and Sweden meet or exceed this target of 0.7 percent and most wealthy countries fall far below.
The dwindling importance of ODA has also given rise to a more fundamental rethinking of the concept of aid. The notion of "development aid" or "development assistance" was always a misleading euphemism, which reduced the co-operation between sovereign states to paternalistic relations between donors and recipients. With the dwindling of ODA, the southern countries' dependence has shifted to the international financial markets, banks, pension funds and TNCs of the North. To overcome the old donor-recipient dependence, forms of contractual relations between all countries should be established under the auspices of the United Nations. Required is a new contract social between North and South that lays down rights and obligations of the states and guarantees a reliable and sufficient resource flow to the South.
The outlook for official development assistance (ODA) is poor: it seems unlikely to top $50 billion in the next few years. That is the bad news. The good news is that, although ODA volume has been severely limited and will probably not grow, research indicates it is being used more effectively and is increasingly being targeted toward sustainable human development and poverty reduction.
2. Improve debt cancellation arrangements and establish debt standstill processes
Huge debt-financed projects often lead directly to environmental degradation (roads, dams, petroleum prospecting, etc.) and enormous sums (sometimes half or more of a project cost) are siphoned away as corruption into the pockets of politicians and their private sector allies. Projects aimed at providing public goods such as environmental protection or basic social services like education, public health, clean water and sanitation do not directly produce a surplus for repaying debts and interests. As a consequence, Governments have been often forced to raise new loans just to meet their current obligations. This vicious circle has driven them ever deeper into debt. The situation often has got worse as a result of decreased raw material prices, currency devaluation, the costs of environmental and social damage, bad management and corruption. The result has been a deepening debt crisis during the past two decades, which has driven more than half the world's countries to the brink of bankruptcy and forced on them ever-more-draconian austerity policies.
The overall foreign debt of developing countries reached an all-time high in 1997 estimated at 2,171 billion dollars, compared to 603 billions in 1980 and 1,444 billions in 1990. Even the emerging market economies of Latin America and South-East Asia face a highly volatile debt situation - as the Mexican crisis in 1994 and the Asian crisis of 1997 and after clearly demonstrate.
The amount of money which countries spend on debt servicing is a crucial issue. The Asian crisis has generated new levels of indebtedness. In 1997, the total debt-service flow from the developing countries to northern governments, commercial banks and international institutions amounted to 269.2 billion dollars, more than four times as much as the ODA flow to these countries. If these debtor-countries were companies, they would long ago have sunk into bankruptcy and the lenders would have lost their capital. But instead, the military and financial might of lender governments (which maintains the current international financial system) protects the dubious original loans, shielding the lenders from risk. So the borrowers must pay, however gruesome the social consequences. To restore the solvency of the highly indebted countries, the World Bank and IMF imposed Structural Adjustment Programs (SAPs) on most of them which further reduced their capacity to finance programs.
The World Bank and International Monetary Fund, in co-operation with major bilateral and multilateral donors, have introduced the Heavily Indebted Poorer Countries (HIPC) initiative to reduce debt to "sustainable" levels (up to a 67 percent reduction in net present value terms). However, HIPC has moved slowly, and only a few countries have benefited from the initiative. Debt remains a concern for the poorest countries, for whom even levels considered "sustainable" by current standards may represent a significant drain on scarce resources. A number of lender governments have recently adopted debt reduction plans and much support for debt relief has been generated through initiatives such as the Jubilee 2000 Campaign. Despite these efforts, the question of how debt relief will be implemented and the issue of moral hazard persist. Even setting aside the question of accountability, the HIPC doesn't go nearly far enough. Its criterion for a sustainable debt level is too narrow. Clearly, this restrictive definition is determined by the interests of the creditors, not by the real needs of the debtor countries and their people. Instead of this narrow approach, the debt level of a country should only be regarded as sustainable if the basic needs of the people living in this country are satisfied and debt-service payments don't restrict their ability to meet these basic needs. Comparable rules for private debtors have been for a long time part of national insolvency laws in many developed countries (for instance, debtors have a legal right to pay for their basic needs for shelter and food before they pay their creditors). If such indicators could be developed and applied, the group of countries eligible for debt relief would increase significantly. Simultaneously the amount of debt remission would be much higher than the minuscule 7.4 billion dollars of the current HIPC Initiative out of a debt total of 2,171 billions. The United Nations with its multidisciplinary scope would be the right place to develop the necessary sustainability indicators for debtor countries and to draw the conclusions for further debt remission proposals.
Internal debt, money owed by a government to its citizens in its own currency, has not received much international attention. Yet the internal debt now exceeds the external debt for many countries-including India, Pakistan, Malaysia, Singapore and the Philippines.
We recommend that, debt cancellation must encompass more developing countries, including those categorised as middle income by the international financial institutions, and must involve much greater amounts than are currently being offered. Creditors should not use debt cancellation to impose conditionalities on debtor countries in the form of macroeconomic policies, or other unjustifiable intrusion in national autonomy. Debtor countries should ensure that resources from debt cancellation are used for development spending. International mechanisms must be established that uphold the legitimacy of debt standstill measures and define systematic international procedures of them. To manage crisis effectively, a debt workout system is needed that fairly shares the cost and burden between creditors and debtors. An international bankruptcy court along the lines of Chapter 11 of the US bankruptcy laws should be set up to implement this approach.
Human development is a unifying concern-for both the developing and the industrial countries. So, too, is the question of development's sustainability. Each generation must meet today's needs without incurring debts it cannot repay: financial debts, by over-borrowing; social debts, by neglecting to invest in people; and environmental debts, by exhausting natural resources
3. Reduce excessive volatility in international financial markets, including through a co-ordinated system of national taxation on currency transactions
Private capital flows to developing countries have increased dramatically during the past decade and outstripped ODA as major source of external financing. In particular the sharp rise in the amount of foreign direct investment (FDI) and portfolio investment has misled many governments into hoping that private moneys can compensate for the lack of government funding in the environmental and development fields. The Secretary-General of the UN stated rightly in a report on the Rio follow up: "Although private capital has the potential to finance sustainable development, so far it has typically avoided projects whose main purpose is to generate environmental and social benefits"
The advocates of free global markets try to convince critics of just the opposite. "Open markets matter" is the credo of a OECD report describing the economic, social and environmental benefits of trade and investment liberalisation. The OECD published this report in April 1998 as a response to the sharp opposition of citizen's groups, NGOs and trade unions against the proposed Multilateral Agreement on Investment (MAI). From a macroeconomic perspective, the effects of short-term portfolio investments in the South may be even worse. It is a fantasy to imagine that the billions of dollars in mutual funds and pension funds world-wide could be mobilised to support sustainable development in the South. For this kind of capital is particularly speculative and volatile by nature and mainly interested in quick appreciation, growing profits and stable investment conditions - legitimate interests from the owners point of view. If there appear even slights signs of crisis in an economy, this capital often "disappears" immediately and thus greatly aggravates the emerging crisis.
These private capital flows are no substitute for domestic savings and, at best, can only supplement domestic resources." But as the investment-saving gap in most countries of the South cannot be filled exclusively by domestic capital in the nearer future, clear rules for international portfolio capital flows have to be established to protect the economies of the South from the adverse effects of these investments - particularly the effects of sudden movement. Companies must also be held responsible for working conditions in their plants and for the welfare of their employees just as they must be held responsible for the impact their products and production methods have on the environment. Efforts on the part of trade and industry groups to obviate government regulation by assuming voluntary obligations such as the ISO standards - which concomitantly take the wind out of the sails of calls for tougher measures - should not be allowed to obscure the fact that legally binding global regulation is needed. All these elements of a new global investment regime aimed at the objectives of sustainable development should not be negotiated in the limited and business biased fora of the OECD or the WTO. Instead, the United Nations (specifically, UNCTAD) should take up these questions, possibly by organising a World Conference on Investment for Sustainable Development with the clear objective of establishing binding environmental and social responsibilities for investors. But it must be emphasised that even the most effective private investment measures cannot substitute for the activities of public institutions. The private sector cannot and should not take over the responsibilities of the state. To fulfil public tasks, be it in the area of peace and security, or in the economic, social or environmental fields, states must be provided with the necessary funding on the national and international level.
The Asian financial crisis was not a new phenomenon but the latest in a series over the last few decades that have left developing countries facing severe withdrawal of funds.
We recommend the strengthening of domestic financial systems and the restructuring of the international financial system. Specifically, this can be done by measures such as the discouragement of short-term capital flows by taxation (a co-ordinated system of national taxes on foreign exchange transactions, sometimes known as Tobin taxes), reserve requirements and risk-weighed cash requirements for institutions like US mutual funds. IMPORTANTLY, revenues from this and other forms of taxation should be channelled for genuine development spending. We also support the transparent publication of financial data and bank regulations to prevent excessive borrowing and lending. There should also be a review of the financial services agreement in the WTO to take into account the lessons learnt from the latest round of financial crisis. Other measures should include:
The Independent Commission on Population and Development (ICPD), after its 1996 survey of global development needs, concluded, "Relying on the faltering generosity and sagging payment morale of individual nations is no longer adequate. The globalisation of economic, environmental and other problems requires both global institutions commensurate with the task and financing mechanisms scaled to global dimensions. Many proposals seek to tap resources in the globalised financial market for development. Economist and Nobel laureate James Tobin once suggested a tax on all short-term currency transactions to discourage speculation; the "Tobin Tax" has been proposed as a way of raising international revenues for development. Considering the volume of international transactions, a small fraction of a percentage point tax would yield substantial revenues.7 Other alternatives include debt swaps, tradable quotas for carbon dioxide emissions, and other charges on international activities. The Office of Development Studies at the United Nations Development Program is exploring potential funding mechanisms as well as a new paradigm for thinking about development financing as "global housekeeping" rather than just aid, since poverty reduction and environmental protection contribute to "global goods" of justice, inclusion and efficiency which are in everyone's interest.
4. Reduce unfairness for developing countries in international trade arrangements, especially in agriculture and intellectual property
Trade is one of the most important methods of financing for development. Developing countries have traditionally exported basic commodities such as minerals and agricultural products providing an important source of foreign exchange. Currently, however, the Uruguay Round GATT Agreements and their implementation is biased in favour of the wealthy industrialised economies. This is most clearly evidenced in the Multifibre Arrangement (MFA), the TRIPs and Agriculture (AoA) Agreements and their implementation and review processes.
We recommend that the WTO and its developed-country members honour their commitments to a fair review of the MFA, TRIPs and the AoA as well as their special and differential treatment for the Least Developed Countries.
5. Discontinue excessive military expenditure and exports
Military and other defence spending has increased in recent years in many developing country budgets, often at the expense of social services. Nearly $50 billion a year, about 2 percent of the GNP of the developing countries, could be released for more productive purposes. Much of this could come from reducing military expenditure, which absorbs 5.5 percent of the GNP of the developing world. In some of the poorest countries, this spending is at least twice that on health and education.
We recommend that governments seriously implement the "20:20 compact" advanced in the World Summit for Social Development, which called for both donor and recipient governments to commit 20 percent of their respective budgets (the aid budget for donors, the government budget for recipients) to basic social services. An added measure, proposed by the UNDP, is that industrial countries reduce their military spending by 3 percent this would provide $25 billion a year. And if developing countries freeze their expenditure at current levels, this would save potential future increases of over $10 billion a year. It is also essential that tighter constraints are placed on military exports, especially in relation to the G 7 countries which are responsible for most such exports.
Strengthen anti-corruption systems at national and international level
Corruption is a major cause of misdirection and waste of resources which could otherwise be devoted to economic and social development. UNDP reports that in one particular developing country about 4% of GNP was misdirected as a result of corruption by people in public office. Estimates of corruption are even higher for many other countries.
It is essential, of course, that anti-corruption initiatives focus as much on people who solicit or acquiesce in demands for corrupt payments as on those who are the recipients of those payments. We support international and national initiatives which are being taken to adopt corporate codes of conduct prohibiting corrupt payments and international conventions to assist in preventing and punishing corruption.
Enhance equity and sustainable productivity in the ownership and usage of land and other natural resources
Access to and sustainable use of productive land is crucial both for enabling many people, especially in developing countries, to avoid poverty but also for promoting genuine economic development. In many countries, reform of land ownership is essential to enable fair access, especially for women, indigenous peoples and long-term tenants. It is also essential that further measures, including introduction of adequate and equitable taxes or charges on consumption of natural resources, be taken to reduce inefficient, unfair and unsustainable depletion or pollution of these resources.
We recommend that governments re-examine the concrete blueprints for a comprehensive ecological tax reform, which were drawn up years ago but have yet to be put into effect. These plans involve an energy/CO2 tax and a tax on renewable resources. While harmonised taxes on the global scale would be the best solution, there remains the possibility of initiatives on a regional and even national level. Countries like Denmark and the Netherlands demonstrate this very clearly and their leadership may inspire wider reforms.
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