The Policy Space Debate: Does a Globalized and Multilateral Economy Constrain Development Policies?

ABSTRACT This Special Report asks whether multilateral economic policies constrain the abil-ity of developing countries to choose the best mix of economic polices for achieving sustain-able and equitable development. Jomo Kwame Sundaram illustrates the significance ofpolicy space for national development strategies, and assesses the principal sources of con-straints imposed by international financial institutions (IFIs) on policy space in developingcountries. Heiner Flassbeck contends that intermediate exchange rate regimes and thedevelopment of a multilateral framework for exchange rates would enable developing coun-tries to better align their monetary policies with their development priorities. Carlos Correalinks intellectual property rights (IPR) rules in the global trade regime to equitable developmentby presenting several counter-arguments to the dominant proposition that IPRs are necessaryto promote knowledge and innovation, and by providing a historical analysis of IPR policy.Elaine Zuckerman demonstrates the impact of IFI loans and projects on women and girlsthrough country case studies, arguing that IFI-imposed conditionalities intensify the feminiza-tion of poverty through, for example, the privatization of essential services.

The Policy Space Debate: Does a

Globalized and Multilateral Economy

Constrain Development Policies?

INTRODUCTIONBHUMIKA MUCHHALA

The debate on the importance of policyspace for national development strategieshas gained significant momentum in recent

years, particularly among developing country repre-sentatives in international forums.The argument forpolicy space states that developing countries needthe freedom to choose the best mix of policies pos-sible for achieving sustainable and equitable develop-ment given their specific national conditions. Thisargument reflects the idea that governments shouldhave the ability to evaluate the trade-offs betweenthe benefits of engagement in the global economyversus the loss of policy space that often accompanies

international rules and agreements. In order to bet-ter understand such an argument, a working defini-tion of policy space is necessary. One such definitionis that policy space, for developing countries, “isabout the freedom to choose the best mix of policiespossible for achieving sustainable and equitable eco-nomic development given their unique and individ-ual social, political, economic, and environmentalconditions.”1 Policy space refers to the scope a nationhas for building its own national development strat-egy and its relationships with the world economyand markets.

The three international law principles that vali-date the concept of policy space are the sovereignequality of states, the right to development, and theprinciple of special treatment for developing coun-

SPECIAL REPORTNo. 136

APRIL 2007

EDITED BY BHUMIKA MUCHHALA

Bhumika Muchhala is program associate with the Woodrow Wilson Center’s Asia Program.

Asia ProgramJOMO KWAMESUNDARAMPolicy Space? OvercomingConstraints to PursuingNational DevelopmentStrategies

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HEINER FLASSBECKMacroeconomic Policy Spaceand the Global Imbalances

PAGE 17

CARLOS CORREAConstraining Policy Space inIntellectual Property

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ELAINE ZUCKERMANPolicy Space and the GenderedImpacts of InternationalFinancial Institutions

PAGE 28

2

tries.2 These principles are reflected in the charteradopted by the United Nations Conference on Tradeand Development (UNCTAD) at its first meeting inJune 1964. UNCTAD arose from the demands ofpoorer countries to establish a trade and developmentbody that addressed their needs and concerns. GeneralPrinciple Fifteen in UNCTAD’s 1964 charter statesthat developing countries should receive special anddifferential treatment according to their particularstage of development.3 When applied to policy spacethrough its third principle of special treatment, thecharter’s General Principle Fifteen contends that someinternational rules and commitments may not beappropriate for certain developing countries at theirrespective levels of development. Forty years afterthese principles were first endorsed by UNCTAD,they have again appeared in public discourse on inter-national development. UNCTAD’s XI conference inSao Paulo in June 2004 demonstrated that these prin-ciples are just as—or even more—relevant today, asmultilateral rules for achieving development continueto fall short of their promises.

THE NORTH-SOUTH DEBATE ON POLICY SPACE

The objective of the UNCTAD XI conference wasto produce a declaration by developing countries onglobalization, trade and development strategies. TheNegotiated Text of the UNCTAD XI conference in2004 generated dispute between developed anddeveloping countries. The disagreement focused onone of the central tenets of the text in paragraph 18,which states that increasing interdependence in aglobalizing world and the emergence of rule-basedinternational economic regimes have meant that thespace for national economic policy in trade, macro-economic, and industrial development is now gov-erned by international commitments, and the prior-

itization of global market considerations over nation-al development.4 Developing countries’ call for poli-cy space to carry out their national developmentstrategies has struck a controversial chord in devel-oped countries, who argue that policy space cannotbe used as a roadmap for UNCTAD’s work nor as aprinciple in multilateral economic frameworks as itmay appear to suggest that developing countries canopt out of international rules and agreements.5

Despite the disagreements between rich and poorcountries, the UNCTAD XI conference under-scored the need to strike a balance between theobjectives of efficiency and equity, in that both themarket and the state have crucial roles to play in thedevelopment process.

Consequently, global civil society and internation-al development forums, such as the United Nations(UN) World Summit in September 2005, have rein-forced the international development community’scommitment towards enabling developing countriesto pursue their own development strategies.The 2006Trade and Development Report by UNCTAD, titled“Global partnership and national policies for development,”highlighted a paradox between the global trading andfinancial regimes.6 While multilateral and bilateraltrade rules often impose constraints on the ability ofstates to manage foreign investment or use perform-ance requirements such as local-content sourcing, theabsence of a multilateral arrangement in internation-al financial liberalization makes it difficult for states toenforce selective capital controls, for example. TheUNCTAD report urged maintaining a balancebetween sovereignty in national economic policy-making and multilateral commitments.

With the purpose of bridging the gaps betweenvarious policy alternatives already proposed by eco-nomic development scholars and advocates and thepolitical realities of enacting them in the world econ-omy, the Woodrow Wilson Center’s Asia Program

The Wilson Center’s Asia Program is dedicated to the proposition that only those with a soundscholarly grounding can begin to understand contemporary events. One of the Center’s oldestregional programs, the Asia Program seeks to bring historical and cultural sensitivity to the dis-cussion of Asia in the nation’s capital. In seminars, workshops, briefings, and conferences,

prominent scholars of Asia interact with oneanother and with policy practitioners to furtherunderstanding of the peoples, traditions, andbehaviors of the world’s most populous continent.

ASIA PROGRAM STAFFRobert M. Hathaway, Program DirectorMark Mohr, Program AssociateBhumika Muchhala, Program AssociateMichael Kugelman, Program Assistant

THE ASIA PROGRAM

The argumentfor policyspace statesthat develop-ing countriesneed the free-dom to choosethe best mix ofpolicies possi-ble for achiev-ing sustainableand equitabledevelopment.

3THE POLICY SPACE DEBATE

hosted a symposium on December 14, 2006.The fol-lowing compilation of four essays by the speakers atthe conference aims to offer four analyses on theglobal economic constraints that inhibit national pol-icy space for development goals.

FOUR PERSPECTIVES ON POLICY SPACE

The conference keynote speaker, Jomo KwameSundaram, is the assistant secretary-general for eco-nomic development at the United NationsDepartment for Economic and Social Affairs. Hestresses the significance of policy space for nationaldevelopment strategies, and assesses the principalsources of external, global constraints to national pol-icy space. He acknowledges the importance of theUNCTAD XI meeting in 2004 and the WorldSummit in 2005 for the international recognitionof—and commitment to—ensure policy space fordeveloping countries to pursue their developmentstrategies. Jomo illustrates that economic growth indeveloping countries during the 1980s and 1990s hasbeen considerably slower in contrast to the 1960s and1970s. He argues that this is due to a considerableextent to economic liberalization policies and marketreforms required by the international financial institu-tions (IFIs)—namely the World Trade Organization,the World Bank and the International Monetary Fund(IMF)—that reduce flexibilities for developing coun-tries.The key reforms occur in the areas of trade lib-eralization, financial liberalization, and contractionarymacroeconomic pressures which reduce the role andfiscal capacities of governments. The privatization ofstate-owned enterprises and public services, particu-larly in the 1990s, has had negative repercussions oneconomic development as some essential services andgoods have become harder to access. Jomo contendsthat due to greater market influences, the macroeco-nomic policies that are adopted by developing coun-tries today are pro-cyclical, which increases nationalvulnerability to economic crises.

Trade liberalization has not benefited the majorityof developing countries because the terms of tradehave moved against developing countries through theunequal relationships between primary and manufac-tured products, and between tropical and temperateagricultural products.The strategic use of trade policy,which is now restricted by global trade rules to a largeextent, is crucial for development. Jomo points outthat in post-World War II Northeast Asia, as in many

other parts of the world, effective conditional protec-tion on export promotion was instrumental tospurring industrialization. Due to the structuralreforms in trade liberalization that have been carriedout over the last two decades, many lesser developedcountries have experienced a significant collapse ofmanufacturing capacity. International financial liberal-ization, Jomo asserts, constrains fiscal space through theadoption of monetary policies that are counter-infla-tionary, which often have a deflationary effect on eco-nomic growth. Instead of generating financial flowsfrom capital-rich to capital-poor countries, interna-tional financial liberalization has resulted in a flow offunds in the opposite direction. Furthermore, Jomoposits that financial liberalization has often led to anundermining of institutions that have a developmentalpurpose, such as national development banks.The abil-ity of central banks and finance ministries to imple-ment counter-cyclical instruments and institutions hasalso been restricted through financial liberalization.

Jomo argues that counter-cyclical macroeconomicpolicies—which promote growth and employment asfiscal policy objectives of the government—wouldstrengthen the ability of the global economy to reduceglobal inequality.The conventional approach to one ofthe most crucial aspects of policy space—that of fiscalspace—is to prioritize the ability to service debt abovethe ability to increase public expenditures.The imper-ative to promote growth and employment as fiscalobjectives is undermined by this approach, as the useof fiscal policy to offset cyclical downturns is oftenrestrained through the rationale that such fiscal policywill hurt government solvency. The counter-argu-ment, he asserts, is that growth creates fiscal solvency,and not vice versa. Furthermore, achieving develop-ment goals necessitates medium-term expenditureplanning, and thus medium-term commitments tofinancing, including more stable and predictable aid. Inconclusion, Jomo stresses that if the poverty reductionstrategies of the World Bank are to genuinely addresspoverty, employment generation needs to be includedand prioritized in these strategies.

Heiner Flassbeck, director of the Division onGlobalization and Development Strategies at UNC-TAD, addresses the macroeconomic and financialpolicy framework of globalization. Flassbeck situateshis argument within the context of global economiccrises over the last two decades, spurred by financialand trade liberalization—or the free mobility of pri-vate capital and goods across open borders. Global

Jomo arguesthat counter-cyclical macro-economic policies...would strength-en the ability of the globaleconomy toreduce globalinequality.

4 ASIA PROGRAM SPECIAL REPORT

trade and financial liberalization in developing coun-tries during the 1980s and 1990s was carried outunder the policy framework of “getting the pricesright.” However, there is no framework to address“the most important international price, theexchange rate, and the closely related interest rate.”Exchange rates that are either rigidly fixed, orpegged, to the dollar as well as those that are freelyfloating have encountered monetary instabilitywhich substantially affects the health of the economy.Thus, “intermediate” exchange rate regimes havebecome the preferred option in most developingcountries with open capital markets. Flassbeck sup-ports such intermediate regimes, which “offer moreroom for manoeuvre” when financial market insta-bilities occur as well as enable exchange rate adjust-ments that better support a country’s developmentstrategy. Such an intermediate regime reflects theimplementation of national policy space, while therisks and constraints that emerge with financial liber-alization stimulate a critical debate on the monetaryand financial policies available for national govern-ments to implement. Flassbeck argues that a multilat-eral monetary system for exchange rates is requiredin order for the international financial system to steerclear of competitive depreciations and other mone-tary distortions. Depreciations and distortions impactthe productive functioning of the international trad-ing system, on which much of global and nationallevel economic progress thrives. The rationale forsuch a multilateral exchange rate system is that theexchange rate is by definition “a multilateral phe-nomenon,” where any change in its value inevitablycreates multilateral repercussions.

Flassbeck explains that the risk of a global deflationdue to the imbalance in the global economy is a seri-ous concern, as the increasing external deficit of theUnited States may trigger a strong speculative wavetowards dollar depreciation.A dollar depreciation couldsubsequently generate a downwards pressure on othermajor global currencies. Such a depreciation of thedollar would help re-balance the United States econo-my. However, given the pattern of global growth—andthe dependence that global growth has on Americanconsumption and imports—a marked slowdown inexports to the U.S. would have global deflationaryrepercussions. This has the dangerous potential tounravel the momentum in development progress andpoverty reduction seen in developing countries inrecent times without any fault of their own.

In the third essay, Carlos Correa, who is a pro-fessor and the director of the Center forInterdisciplinary Studies of Industrial Property Lawand Economics at the University of Buenos Aires,focuses on the salient issue of intellectual propertyrights (IPRs) and its links to equitable development.Correa contends that the global regime on IPRsneeds to integrate a development dimension andaddress critical public policy concerns in order toenable developing countries to promote and produceknowledge and innovation, access essential medi-cines, as well as access the technology and informa-tion necessary to industrialize and develop.Intellectual property protection creates exclusionaryrights that limit the access to—and the use of—a vastarray of intellectual works, technologies, and prod-ucts needed for social and economic development indeveloping countries. Correa highlights severalcounter-arguments to the dominant argument thatIPRs are necessary to promote knowledge-creation,innovation, and creativity through the allocation ofeconomic rewards for the producers of knowledge.He contends that competition can also lead to inno-vations in product and process—such as in the fast-paced industry for semiconductors—where IPRs donot play a crucial role as incentives for innovation.Another salient point is that non-IPR factors such aslead time, the capacity levels necessary to imitateknowledge processes, as well as established customerloyalty, impact the ability to replicate knowledgeeven in the absence of IPRs.

A historical comparison of IPR enforcementreveals that when today’s developed countries wereindustrializing in the 19th century, they had vast flex-ibilities to design their own IPR systems, protectinglocal producers of knowledge, discriminating againstforeign producers through patent fees, avoiding theapplication of medical patents, and mimicking exist-ing information and technology innovations for theirown industrialization. In the current global traderegime the Trade Related Aspects of IntellectualProperty Rights (TRIPS) Agreement, under the aus-pice of the World Trade Organization (WTO), har-monizes binding IPR rules globally, prohibitingdeveloping countries from designing IPR systemsthat are in line with their development requirements,and that reflect the flexibilities that today’s industri-alized countries had when they were developing.Many developing countries have consistently arguedthat IPR implementation is not conducive to tech-

nological—and thus industrial—development, andthat patents have grave implications for accessingessential medicines. Developing countries contendthat more flexibility is needed in the implementationof IPRs and thus initiated the drafting of theDeclaration on TRIPS and Public Health at the 2001WTO Ministerial meetings in Doha,which allows forsome key flexibilities in the case of public healthemergencies. However, the advent of regional andbilateral free trade agreements with a wide array ofcountries extends IPR rules and commitmentsbeyond what is required by TRIPS in the WTO.

As president of Gender Action, a non-profitorganization dedicated to promoting gender equalityand women’s rights in all IFI investments and transac-tions, Elaine Zuckerman illustrates the impact ofIFI loans and projects on women and girls throughcountry case studies. Zuckerman argues that condi-tionalities attached to IFI loans and projects not onlyimpinge on national sovereignty by requiring govern-ments to comply with their creditors’ notions of howto reform economic, financial, and trade policies, butalso contribute to the feminization of poverty. Thenational policy space available to pursue developmentobjectives is impeded through, for example, the priva-tization of services or the requirement to reduce oreliminate tariffs without reciprocation by developedcountries. Consequently, civil society worldwide hascriticized IFI policy conditionalities for their harmfulsocial and gendered impacts. Zuckerman alludes tothe fact that 70 percent of the world’s poor arewomen, and asserts that these women shoulder a dis-proportionate amount of the economic and socialburdens that accompany IFI policy conditionalities.

Country-level case studies of gender impacts aredrawn from the Democratic Republic of Congo(DRC), Malawi, Mozambique, Tanzania, Serbia andMontenegro through an array of IFI projects and pol-icy reforms.These range from the privatization of thenational mining sector in the DRC, the national tex-tile sector in Serbia and Montenegro, the state grainreserves in Malawi, or public water facilities inTanzania, as well as new labor laws that increase laborflexibilities in Mozambique. Zuckerman contendsthat the country-level examples demonstrate that akey function of IFI conditionalities is to open updeveloping country markets to profitable private sec-tor investments. In IFI loans the main beneficiaries,Zuckerman states, have been the private sector actorsthat win IFI contracts, not the poor whom the IFIs

claim are the beneficiaries. IFI financing has resultedin the disproportionate concentration of asset owner-ship and income distribution gaps that have widenedin most countries since the late 1980s.A major driv-er of poverty, stemming from unequal income distri-bution, has been the negative impacts of IFI policiesand loans that cater to the interests and priorities ofthe political elite and the private sector before theycontribute to the vast majority of the world’s popula-tion, living in developing countries. Zuckerman con-cludes that civil society and governments worldwidemust hold the publicly-financed IFIs accountable.Initiating an end to the ability of IFIs to occupy poorcountries’ policy space through ending conditionali-ties and debt would constitute important progress.

The four essays presented in this report each high-light a specific set of dynamics that shape and con-strain international development. Jomo outlines thepolicy frameworks of the IFIs that hinder the fullimplementation of national development strategies;Flassbeck illustrates the detrimental aspects of globalmonetary and financial structures and recommends amultilateral framework for exchange rate regimes thatis more developmental; Correa demonstrates howintellectual property rights are inextricably linked todevelopment; and, Zuckerman highlights the gender-specific impacts of IFI policies. A consistent elementacross these four essays is the articulation of multilat-eral economic policies and practices which systemat-ically constrain the potential adoption of develop-mental policies. Such analyses may help to target bothmultilateral and country-level efforts to overcome theobstacles to equitable, long-term development.

POTENTIAL AVENUES OF POLICY SPACE EXPANSION

Recently, several avenues have emerged through whichnational policy space may be able to expand in newways. Large developing countries are speaking out formore decision-making power and real policy reform inthe creation of multilateral rules and policy agendas inthe World Bank, the IMF and the WTO.The weaken-ing of the IMF’s policy influence, legitimacy and rele-vance across many parts of the Global South is one ofthe most critical changes in the international financialsystem. Recently, several major borrowers from theIFIs, such as Brazil and Indonesia, have opted to repayIMF and World Bank loans before they were due.Sincethe Asian financial crisis of 1997-98, many East and


Zuckermanargues thatconditionalitiesattached to IFIloans and proj-ects not onlyimpinge onnational sover-eignty... butalso contributeto the feminiza-tion of poverty.

Southeast Asian countries have built up vast currencyreserves and achieved current-account surpluses inorder to indemnify themselves against the policy influ-ence of the IFIs.At the same time, smaller developingcountries—particularly in sub-Saharan Africa—do nothave the same level of economic security and bargain-ing power that larger middle-income countries haveand are still recipients of IFI loans and credit and thepolicy conditionalities that accompany it.Assessing thepolicy space question in lesser-developed countries(LDCs) is thus a central development question.

Recent debt cancellations of LDCs are significantbecause they have the direct potential to expand fiscalspace from resources saved, providing opportunities tocraft macroeconomic policies that are coherent withnational developmental goals. Debt relief could implyless balance of payments problems for LDCs, potential-ly leading to a decreased need for, and dependence on,external resources.This opens up possibilities for fiscalpolicy alternatives, such as expansionary public budgetsand progressive taxation policies. Debt relief could alsodiversify the sources and forms of financing for low-income countries. Some possibilities are regional mon-etary funds, bilateral financing facilities, internationalfinancial markets, and a wider pool of official bilateraland multilateral creditors. Such a diversification offinancing could enable countries to obtain resources onfavorable terms, particularly through the decoupling offinancing and policy conditionalities. LDCs could takeadvantage of this policy space expansion to undertake acost-benefit analysis of various financing sources toassess what best suits their national priorities.

REMEMBERING THE “DEVELOPMENTALSTATES”

In efforts to create and apply alternative economicand social policy options, it is important to recall howthe developed countries of today achieved develop-ment. In marked contrast to the reduced role of thestate in today’s market-led development strategies, thedevelopmental states of East Asia—particularly Japan,Korea, Taiwan, Hong Kong, and Singapore—employed strategic and flexible growth strategiesthrough a strong national government. East Asiandevelopmental states stressed the role of the govern-ment in managing the market. Instead of prioritizingforeign direct investment (FDI) and tariff reductions,Korea and Taiwan steered their growth through activeindustrial policies where the state set export targets

and provided subsidies to local firms in order to stim-ulate positive spillovers in the national economy, espe-cially in technology-driven sectors where the eco-nomic value was highest. China has been able tochannel private investment in its township and villageenterprises through partnerships between investorsand local state authorities, rather than through privateproperty rights. One of the key elements of develop-mental states is the diversification and dynamism ofindustrial production that focused on the needs of thereal economy.

When Western industrialized countries were devel-oping, they also used active industrial policies, subsi-dies and tariff protection in order to spur economicgrowth. Indeed, it was the first Treasury Secretary ofthe United States,Alexander Hamilton, who proposedthe argument for infant industry protection.7 The his-torical experiences of developed countries couldpotentially open up a comparative analysis on devel-opment strategies that could allow developing coun-tries to make more informed choices.

ALTERNATIVE POLICY VISIONS

Real development calls for much more than institu-tional change and economic policies—it calls for thetransformation of society towards local ownership,bottom-up participation, the inclusion of the mostmarginalized members of society, and consensusbuilding. National policy space is ultimately about thefreedom and flexibility of development policy choicecentered on the three international law principles ofnational sovereign equality, the right to development,and special and differential treatment for developingcountries. However, developing countries also needto strengthen their political will and coordinateamong different actors across the nation to build theirnational development strategy, and to consequentlyimplement it with accountability and transparencymechanisms in place.This involves a collective visionof what a nation’s society and economy will look liketen, twenty, thirty years down the road and how thisvision can be achieved over time through the partic-ipation of the various groups in society.

Integration into the global economy can provide thebenefits of multilateralism to developing countriesthrough many ways, however, the precondition is thatthis integration should be based on a nuanced assess-ment of the trade-offs to national development policiesand priorities. Debt cancellation and the decreasing


National poli-cy space is ulti-mately aboutthe freedomand flexibilityof developmentpolicy choicecentered onthe three inter-national lawprinciples ofnational sover-eign equality,the right todevelopment,and specialand differentialtreatment.


need of middle-income developing countries for IMFloans are avenues through which national policy spacemay be able to expand.There is an increasing level ofarticulation by developing country leadership of theimportance of the ability to choose and implement themost appropriate economic policies for their nationaldevelopment. Given this context, the argument, princi-ples, history, and empirical evidence for national policyspace are only becoming more crucial to achieve equi-table and sustainable development across all developingcountries in the Global South.

ENDNOTES

1. South Centre,“Policy Space for the Development ofthe South,” No.1, November 2005, http://www.south centre.org/ info/policybrief/01PolicySpace.pdf.

2. United Nations Conference on Trade and Development(UNCTAD),“UNCTAD XI: Sao Paulo Consensus,”

TD/410, June 25, 2004, http://www.unctad.org/en/docs/td410_en.pdf.

3. United Nations Conference on Trade and Development(UNCTAD),“UNCTAD XI: Sao Paulo Consensus,”TD/410, June 25, 2004, http://www.unctad.org/en/docs/td410_en.pdf.

4. United Nations Conference on Trade and Development(UNCTAD),“Draft Sao Paulo Consensus,”TD/L.380,June 16, 2004, http://www.unctad.org/en/docs/tdl380_en.pdf.

5. Martin Khor,“Debate on policy space dominates UNCTAD Review,”Third World Network InformationService on WTO and Trade Issues, May 9, 2006,http://www.twnside.org.sg/title2/twninfo409.htm.

6. UNCTAD,“Trade and Development Report 2006:Global partnership and national policies for development,”August 31, 2006, http://www.unctad.org/Templates/webflyer. asp?docid=7183&intItemID=2508&lang=1.

7. Ha-Joon Chang, Kicking Away the Ladder – DevelopmentStrategy in Historical Perspective (London:Anthem Press,2002).

INTRODUCTION

Policy space for nationaldevelopment strategies hasbeen recognized as indispensa-ble to development by recentevents in the internationaldevelopment community. Atthe UNCTAD XI meeting inSao Paulo in 2004, the inter-

national community strongly affirmed the impor-tance of policy space in realizing development aspira-tions, particularly for developing countries. At theWorld Summit in September 2005, the internationalcommunity once again reaffirmed its commitmentfor ensuring policy space for developing countries topursue their own national development strategies.This underscores the question of national ownershipin relation to the problems associated with existingpolicy prescriptions and packages, particularly withwhat are termed “poverty-reduction strategies.” Theissue of policy space is framed in this context.

The World Bank’s Independent Evaluation Officerecently released a report acknowledging the develop-mental consequences of the policy conditionalities ofinternational financial institution (IFI) loans and proj-ects.There has been a nominal decrease in the numberof conditionalities imposed in recent years. However,this nominal decrease in conditionalities attached toloans and projects has been exaggerated by three fac-tors. First, by using the mid-1990s rather than the morerecent period as the base year, the decline seems greaterthan it actually is. Second, with greater “bunching,” anumber of conditionalities are packaged as one condi-tion.This means that while there is a superficial nomi-nal decline in the number of conditionalities, the realnumber of conditionalities may not have decreased dueto such bunching. Thirdly, there has been a shift inemphasis to “benchmarking.” Consequently, eventhough there might not be as many conditionalities,

benchmarks have become very important signalingdevices for disciplining governments, with very similareffects as conditionalities.

GROWTH DIVERGENCES

The pattern of development in the second half of thetwentieth century is illustrated by Figure 1 on the fol-lowing page. National income per capita in developingcountries has generally declined in all regions of theworld, except Asia. If you remove China from Asia, Asiaalso experienced a relative decline in national incomeper capita. The longest collapse has been in sub-Saharan Africa, which suffered a long-term decline inthe last quarter of the twentieth century. However, thecollapse in Eastern Europe in the 1990s, and in LatinAmerica over the last two decades of the 20th century,has also been dramatic. In recent years, however, manycountries in Africa have fared reasonably well and thisis part of a larger trend of developing countries gener-ally doing quite well since 2001.

However, this is not due to the economic reformpolicies imposed on developing countries by IFIloans, credit, and investment. Rather, recent develop-ing country growth results from being able to takeadvantage of higher commodity prices, particularly inthe second half of the 1970s. Much of Latin America’seconomic growth was quite rapid for a period, partic-ularly before World War II. Until the 1970s, Brazil hadhad one of the highest growth rates in the world forhalf a century.While a few developing countries haveexperienced rapid economic growth, most have faredpoorly towards the end of the 20th century.

Figure 2 underscores the significance of China—once China is omitted from the analysis a distinctly dif-ferent trend in world income inequality appears. Therapid growth of China in recent years has significantlyaffected the world distribution of income.Figure 3 pro-vides an indication of world inequality in the early1960s.The poorest 20 percent of countries had an aver-


POLICY SPACE? OVERCOMING CONSTRAINTS TO PURSUING NATIONAL DEVELOPMENT STRATEGIES

JOMO KWAME SUNDARAM

Jomo Kwame Sundaram is assistant secretary-general for economic development at the United Nations Department forEconomic and Social Affairs at the United Nations headquarters in New York.

Policy spacefor nationaldevelopmentstrategies hasbeen recog-nized as indis-pensable todevelopment.


Source: United Nations Department for Economic and Social Affairs, World Economic and Social Survey 2006.

Ratio of GDP per capita to that of developed world

— Africa— Asia— China — Eastern Europe— Latin America

0.45

0.4

0.35

0.3

0.25

0.2

0.15

0.1

0.05

01950 1973 1980 2001

Source: Jomo and Baudot, Flat World, Big Gaps: Economic Liberalization, Globalization, Poverty and Inequality, 2007.

Figure 2. Inter-Country Gini Coefficients (an indicator of inequality) with and without China

Figure 1. Ratio of GDP per capita to developed countries


age of US $212 per capita income and this increased byabout a quarter over four decades to US $267, where-as for the richest 20 countries,per capita income soaredfrom US $11,000 to about US $32,000.

A three-dimensional representation of globalincome distribution is provided by Figure 4,where thebottom axis represents income groups, with the richon the left and the poor on the right. The diagonalattempts to capture the variation among countries,with richer countries further away and poorer coun-tries closer to the foreground.The poorest segments ofworld populations, in the poorest countries, are locat-ed in the front corner of the chart, while the sky-scraper at the back refers to the richest people in therichest countries. A recent UNU-WIDER (2006)study has demonstrated that approximately 2 percentof the world’s population owns half the wealth in theworld. The unequal distribution of wealth is clearlyworse than the unequal distribution of income.

Figure 5 demonstrates global inequalities in pri-vate expenditure and consumption, while Figure 6demonstrates that economic growth has been slowerin the recent period, particularly in the 1980s and1990s, in contrast to the 1960s and 1970s, often asso-ciated with what Keynesians refer to as “the GoldenAge.” Welfare improvements have also been moremodest due to the reduced role and fiscal capacitiesof governments in service provision. Thus, povertyreduction has been slower, not only due to less

growth, but also due to worsening income distribu-tion. The bar charts of Figure 3 indicate how theslower growth of the recent period has affected dif-ferent income groups. Generally most income groupsexperienced less growth in the 1980s and 1990s,compared to the 1960s and 1970s.

The slower growth in the more recent period hasbeen principally due to the reforms associated with“structural adjustment.” Structural adjustment refers toliberal market reforms often required by the BrettonWoods Institutions, but also by other internationalfinancial institutions, as a condition for access to loans.

Three particular policies have been especiallyinfluential in reducing the policy space for develop-ing countries, namely trade liberalization, financialliberalization, and contractionary macroeconomicpressures. Developing country finance ministers andcentral bank governors find themselves increasinglysubject to signals from the market, where financialinterests strongly oppose consumer price inflation.

Such market signals result in macroeconomicpolicies that are subject to strong contractionaryinfluences. There is also a tendency, due to greatermarket influences, to adopt macroeconomic policieswhich tend to be more pro-cyclical than in themacroeconomic policies of the past.

Another important factor has been the trendtowards privatization, particularly during the 1990s,although some World Bank researchers have recently


Figure 3. Per Capita GDP in the 20 Poorest and Richest Countries in 1960-1962 versusin 2000-2002

Three particu-lar policieshave beenespecially influential inreducing thepolicy spacefor developingcountries,namely tradeliberalization,financial liber-alization, andcontractionarymacroecon-omic pressures.

11,417

32,339




Figure 4. Global Income Distribution

Figure 5. Distribution of Global Private Consumption in the Poorest and WealthiestSegments of World Population


been more critical of privatization. Strengthened intel-lectual property rights have also been important.Theadvent of stringent intellectual property rights inter-nationally is of relatively recent origin, dating back tothe second Reagan administration, when Secretary ofState Schultz played a very important role in ensuringthe enforcement of intellectual property rights by all“friendly countries.” Subsequently, this was incorpo-rated as part of the Uruguay Round of trade negotia-tions, and then became a part of the World TradeOrganization (WTO) framework, which is now fun-damental in shaping the policy space which exists fordeveloping countries.

GOVERNANCE

There is a great deal of rhetoric and concern aboutimproving governance. What “good governance”implies is often subjective, even whimsical. As a num-ber of statistical studies have pointed out, there hasbeen no demonstrably rigorous relationship betweengood governance indicators and economic growth.The other factor is the changing nature of global eco-nomic governance in the Bretton Woods Institutionsas well as the role of the new WTO.The WTO is notsimply the new name for the General Agreement onTariffs and Trade (GATT); it has created entirely newregimes of discipline on world trade, intellectual

property rights, services, investments, and legal dis-pute resolution which have been extremely impor-tant in constraining policy space.

TRADE POLICY

Three areas are especially significant to a discussion ofpolicy space constraints: trade, finance, and fiscal poli-cies. In terms of the global trade regime, it is nowgenerally accepted that the terms of trade have movedagainst developing countries in three ways. One is therelationship between primary commodities and man-ufactured goods. This was established in the UnitedNations half a century ago by Hans Singer and RaulPrebisch, the distinguished Argentine economist whobecame the first Secretary General of the UnitedNations Conference on Trade and Development(UNCTAD).Their findings have been supported bysubsequent work, most significantly, the work ofGrilli and Yang (1988).

Figure 6 demonstrates the downward trend in com-modity prices over the course of the twentieth centu-ry. Historically, the sharpest decline in commodityprices occurred around 1920, and then again in the1980s—after the oil and commodity price booms ofthe 1970s. There has been a decline in the terms oftrade of tropical agricultural products in comparison tothat of temperate agricultural product—a relationship

Source: Jomo with Baudot (2007); and Campos and Parra (2005).

Figure 6. Average Annual Growth by Income Group, 1960-1980 versus 1980-2005


which Arthur Lewis, the West Indian economist, drewattention to in the 1950s.Although comparable recentresearch has not occurred since the 1950s, trends forparticular commodities suggest that the decline in theterms of trade for tropical agricultural products hascontinued.A good example is the price trend of cottoncompared to that of wool.

The third and more recent development is therelationship between the prices of manufacturedgoods from developing countries compared to thosefrom developed countries. Over the course of the lasttwo decades of the twentieth century, there has beena decline in the prices of manufactures from develop-ing countries compared to those from developedcountries. There is no easy explanation for this.However, this trend might have something to do withthe fact that developing countries generally start pro-ducing manufactured goods where there are no strongbarriers to entry into those industries.These genericmanufactures include textiles, ready-made garments,and so on. Strong intellectual property rights consti-tute monopolistic barriers to entry, enhancing marketpower in the hands of the corporations.Thus, the pri-vate sector is able to charge more—thus collectingrents—on the manufactures they produce and sell.There is little downward pressure through price com-petition. Thus, the terms of trade for manufacturesfrom developing countries have declined compared tothose from developed countries.The consequence ofthis is what Jagdish Bhagwati, a great advocate of tradeliberalization, described more than 40 years ago as“immiserizing growth.”

Another salient factor is the importance of tradepolicy for industrialization. Due to the structuralreforms and trade liberalization carried out over the lasttwo decades, developing countries have experienced asignificant collapse of manufacturing capacity.This hasbeen largely associated with the demise of import-sub-stituting industrialization, as many infant industries didnot grow up to become internationally competitive.The region that has experienced this collapse of man-ufacturing capacity most severely is Sub-Saharan Africa.Many African countries attained independence afterAsian and Latin American countries.African countriesthus had much less time to develop their industries—and as a result their manufacturing and commodityindustries were disproportionately vulnerable whentrade liberalization was imposed on them.

Export-oriented industrialization has in comparisonbeen more successful. However, many export-oriented

industries based on preferential market access have alsocollapsed when subject to the forces of trade liberaliza-tion. Until 2005 the Multi-Fibre Arrangement (MFA)used to provide opportunities for late-comer develop-ing countries to begin industrialization through gar-ments and textile production, traditionally a steppingstone in the industrialization process.When the MFAwas phased out, the global economy witnessed the lossof millions of jobs in the garment manufacturing sec-tor, a sector with a predominantly female workforce.This is one example of the impact of trade liberaliza-tion on women, and specifically on the ability ofwomen in developing countries to attain economic andjob security.The loss of jobs is also evident in part ofthe electronics industry in certain parts of the develop-ing world that are no longer competitive with theadvent of China as the most cost-competitive locationfor the manufacturing of consumer products.

The judicious use of trade policy has been crucialfor development. In Northeast Asia during the post-World War II period, as in many other parts of theworld before that period, effective conditional protec-tion on export promotion was instrumental tospurring industrialization. Northeast Asian countriesprotected their domestic industries and firms from fullinternational trade competition, on condition thatthey export their goods within a relatively short peri-od of time. Requiring their domestic firms to exportensured that their industries became cost-competitiveas well as quality-competitive, in order for their prod-ucts to achieve acceptability and demand in foreignmarkets. Such devices, only possible through thestrategic use of trade policy, were critical for develop-ing countries in Northeast Asia to industrialize anddevelop economically.

The basis for the successful industrializationprocess in industrial and trade policies was anticipatedand expanded on by Friedrich List. The contrastbetween his two books, The Principles of the NaturalEconomy and The Principles of the National Economy, isexplained by his discovery of the work of AlexanderHamilton in the United States after his first book waspublished, and is an enlightening fact to consider.Hamilton’s second work provides the basis for thestrategy of contemporary import-substitution indus-trialization (ISI), which involves active industrial poli-cies, selectively imposed barriers to trade, and some-times, monetary policy that maintains undervalueddomestic currencies. List recognized Hamilton’s con-tribution to the understanding of the significance of

…There hasbeen a criticalshift in the internationaldebate onfinancial liber-alization inrecent years,particularly following theAsian financialcrisis of 1997-98.


trade protection for industrialization and develop-ment. In the second half of the 19th century, as theUnited States recognized its technological backward-ness in comparison to England, trade protectionbecame an integral part of the American effort toadvance national technology and industry. Thus, thesignificance of the policy space that comes with strate-gic trade policy cannot be underestimated.

THE IMPLICATIONS OF AID FOR TRADE

The discussions on Aid for Trade may provide financialsupport and technical assistance to some developingcountries for adjusting to trade reform and integration.The current discourse recognizes some adverse conse-quences of trade policy for developing countries. Interms of fiscal space, the Aid for Trade discourse recog-nizes that developing countries pursuing trade liberal-ization have lost a great deal of tariff revenue. Fordeveloping countries with very limited taxation capac-ity the loss of tariff revenue is extremelly important. Insome of the poorest countries, tariff revenue accountsfor almost half of the total government revenue.Thus,reducing tariff revenue directly implies a tremendousreduction in fiscal space by directly shrinking the rev-enue that a state has access to.

The loss of production and export capacities isanother grave consequence of trade liberalization.Thevery difficult task and cost of building new interna-tionally competitive and productive capacities andcapabilities for export is also beginning to be recog-nized by the Aid for Trade discourse.Whether or notAid for Trade programs will actually match these var-ious sizable costs and losses remains to be seen.Thusfar, the indications are that Aid for Trade may simplydivert existing aid, as some of it is specifically chan-neled and earmarked for such purposes.

INTERNATIONAL FINANCIAL LIBERALIZATION

In the area of finance, there has been a critical shift inthe international debate on financial liberalization inrecent years, particularly following the Asian financialcrisis of 1997-98. The advocates of internationalfinancial liberalization, or financial globalization, usedto argue that opening up barriers between countrieswould generate flows of funds from the capital-richcountries to the capital-poor countries. However, thisclaim has not materialized. In fact, what has occurredis a flow of funds in the opposite direction. As Ken

Rogoff, who used to be the economic counselor forthe IMF, commented at the United Nations inNovember 2006, the United States now has the singlelargest foreign aid progra, as a recipient. This is notwithout significance, as the flow of funds is originat-ing from the developing countries, even from relative-ly poor continents—such as Africa—to the developedcountries, rather than the converse.

Additionally, the cost of funds has not decreased,contrary to claims.There have been exceptional peri-ods when the U.S. interest rate was very low, but gen-erally speaking, the cost of money has not been cheap.While many of the old sources of volatility and insta-bility have undoubtedly been reduced—as it is nowpossible to hedge against exchange rate or interest raterisks—new sources of volatility and instability havebeen introduced by the proliferation of financialinstruments associated with “financial deepening.”

Other effects of financial liberalization, whichconstrain fiscal space, include the following. First,developing countries confront an increase in finan-cial pressures, especially on finance ministers, toadopt monetary policies that are counter-inflation-ary. These counter-inflationary policies often have adeflationary effect on economic growth. Second,financial liberalization often leads to an underminingof institutions and instruments that have a develop-mental purpose—the demise of national develop-ment banks in many countries, for example. Third,with the state and its institutions being much moresubject to market forces, the ability of central banksand finance ministries to adopt and develop count-er-cyclical instruments and institutions has also beenconstrained.Thus, the ability to respond to pressuresin financial markets or commodity price collapses,for example, has become much more challenging forthe majority of developing countires. The 2006Nobel Peace Prize to Mohammed Yunus of theGrameen Bank in Bangladesh recognized an impor-tant initiative to try to develop what might betermed “inclusive finance,” which involves makingavailable credit facilities to low-income groups whowould not otherwise have access to credit. Suchendeavors to make access to credit possible for alllevels of society are significantly constrained byfinancial liberalization. Overall, trade and financialinstruments have been a central part of the develop-ment path in much of the world. Other factorsinclude human resource and skills development andpolicies promoting technology and innovation.


MACROECONOMIC POLICY

Macroeconomic policy is far more pro-cyclical todaythan in previous times.This trend reflects the volatil-ity of financial markets and commodity prices. Theability of developing nations to stimulate and stabilizegrowth, and to reduce global inequality at large,requires a much greater emphasis on policy space forcounter-cyclical macroeconomics. The objectives ofmacroeconomic policy should take a broader view ofmacroeconomic stability. There is a tendency inrecent discussions to focus on only one aspect ofmacroeconomic policy: consumer price stabilization.This is reflected in the skewed priority placed by theinternational community on inflation targetting, forexample. In contrast to the focus on a narrow set ofmacroeconomic indicators, a broader and moredevelopmental view would emphasize the need formacroeconomic stability in order to generate invest-ments, growth, and employment in a much moremutually reinforcing manner.This view of macroeco-nomic policy would also avoid large economicswings, which developing countries tend to be muchmore vulnerable to, as well as gross external imbal-ances and financial crises.

The conventional approach to one of the mostcrucial aspects of policy space, that of fiscal space, isthe view that increases in public expenditures shouldbe undertaken without impairing the ability to serv-ice debt. This is particularly true with regards todeveloping countries that are heavily indebted tointernational creditors. This definition and approachtends to be biased against the imperative to promotegrowth and employment as fiscal policy objectives.The use of fiscal policy to offset cyclical downturns isoften eschewed because it will ostensibly curtail gov-ernment solvency. The counter-argument is thatgrowth creates fiscal solvency, and not vice versa.

Recent OECD experiences challenge the conven-tional claim that government solvency and macroeco-nomic stability are preconditions for long-termgrowth, a relationship that is often presumed but doesnot stand up to critical scrutiny. Counter-cyclical fis-cal policy should contribute to government solvencyand to sustaining the mobilization of domesticresources. What constitutes good fiscal policy? Theconventional approach tends to reject adopted fiscaltargets based on current fiscal balances includingexpenditures, particularly structural current balances.The counter-argument is that a careful approach dif-

ferentiates between capital and current accountexpenditures, and this would constitute not onlygood accounting policy, but also sound macroeco-nomic policy.Thus, fiscal and trade policies are crucialfor growth and structural change.

Current fiscal policy emphasizes maintaining gov-ernment solvency and consumer price stability at theexpense of promoting the expansion of domesticdemand. The recent emphasis on fiscal solvency andmacroeconomic stability has thus been detrimental tolocal growth in developing countries. In order toexpand and strengthen fiscal space for development,developing countries should shoulder more responsi-bility for their own national development throughmore effective national resource mobilization.Developing countries should be less subject to thepressures of international tax competition, as there hasbeen intense competition among countries to reducetax rates in order to attract investors.Achieving devel-opment goals necessitates medium-term expenditureplanning, and thus, medium-term commitments tofinancing, including more stable and predictable aid.Unfortunately, most development aid today is proj-ect-based aid rather than aid channeled throughnational budgets.

CONCLUSION

The World Bank adopted a number of structuraladjustment programs in the 1980s and 1990s whichwere subjected to international criticism as the pro-grams were increasingly found to have failed to alle-viate poverty in developing countries. Since the late1990s, the World Bank has switched to what are nowcalled poverty reduction strategies. However, at the2005 Summit, the international community advocat-ed national development strategies. If the povertyreduction strategy papers of the World Bank are togenuinely address poverty, employment generationneeds to be included and prioritized in these strate-gies. However, less than a quarter of the World Bank’spoverty reduction papers include a serious commit-ment to employment generation, and 80 percent ofthe poverty reduction strategy papers for Sub-Saharan Africa do not incorporate any clause onemployment generation. In addition, the MillenniumDevelopment Goals (MDGs) of the United Nationsdo not recognize employment generation as stronglyas it should.This was corrected by the 2005 Summitwhich reiterated international commitments to the


internationally agreed development goals associatedwith United Nations summits and conferences sincethe 1990s, including the MDGs, but not confinedentirely to them. Thus, the crucial question ofemployment generation has taken center stage innational development strategies, which are alsoemphasizing the issues of national ownership andpolicy space as means of achieving the MDGs andnational development goals.

In 2005, both the Report on the World SocialSituation as well as the World Economic and SocialSurvey discussed the questions of inequality anddivergences. The World Bank came out withDevelopment in the 1990s in 2005 as well, a reportthat was self-critical of the World Bank’s role inadversely affecting development prospects in muchof the developing world. This World Bank publica-tion validated the critique that “one size does not fitall,” and recognized the assertion that policy space iscrucial for successful national development strate-gies. The United Nations’ Policy Notes project pro-vides an analysis of development policies differentfrom the World Bank’s PRSP policies—in the areas

of macroeconomic policies, finance, state-ownedenterprise reform, trade, investment and technologypolicy, as well as social policy.

REFERENCES

James Davies, Susanna Sandstrom,Anthony Shorrocks, and Edward Wolff. 2006.“The World Distribution ofHousehold Wealth.” United Nations University-WorldInstitute for Development Economics Research.Available from http://www.wider.unu.edu/research/2006-2007/2006-2007-1/wider-wdhw-launch-5-12-2006/wider-wdhw-report-5-12-2006.pdf.

Enzo R Grilli and Maw Cheng Yang. 1988.“Primary Commodity Prices, Manufactured Goods Prices, and theTerms of Trade of Developing Countries:What the LongRun Shows.” The World Bank Economic Review 2 (1).

Jomo K. S. and Jacques Baudot, eds. 2007. Flat World, Big Gaps: Economic Liberalization, Globalization, Poverty andInequality. London: Zed Books.

Jose Antonio Ocampo and Maria Angela Parra. 2006.“The commodity terms of trade and their strategicimplications for development,” in K.S., Jomo, ed.The Long Twentieth Century—The Great Divergence:Hegemony, Uneven Development and Global Inequality.New Delhi: Oxford University Press.


THE CHALLENGE FORDEVELOPING COUNTRIES

The ongoing process of global-isation is changing the frame-work of national macroeco-nomic policy, offering newopportunities, challenges andconstraints for developed and

developing countries alike. However, for many devel-oping countries and economies in transition, integra-tion into the globalizing economy has not been asmooth exercise. Many countries with fully open bor-ders to international trade and private capital flowshave experienced crises over the last quarter of a cen-tury that were triggered by instability and turmoil inthe international financial markets and were character-ized by the loss of control over domestic policy due toexternal constraints.This loss of policy space has trig-gered a debate on the available tool kit of nationalgovernments in macroeconomics as well as in otherareas of economic policy.1

The deregulation of domestic financial markets—including the elimination of credit controls, thederegulation of interest rates and the privatization ofbanks—was a key element of the global economicreform agenda in the 1980s and 1990s. It was firmlybased on the belief that lifting “financial repression”and freeing prices on the capital and money marketswould improve the inter-temporal resource alloca-tion, enhance the willingness to save and attract addi-tional resources to the banking system. Combiningthis with a liberalized capital account, the rationalewas that developing countries would be able to attractfinancial savings leading to more capital richeconomies, thus overcoming a major barrier to eco-nomic growth.

Consequently, the liberalization of internationaltrade and finance in developing countries during the1980s and 1990s was carried out under the heading

of “getting the prices right.” At the same time, how-ever, a clear concept of how the most importantinternational price, the exchange rate, and the closelyrelated interest rate, should be determined or regulat-ed was lacking. Having learned the hard way thatreliance on supposedly benign capital inflows rarelyresults in a sustainable development strategy, a grow-ing number of developing countries have shifted toan alternative approach that relies on trade surplusesas one of their principal engines for investment andgrowth. It is only through the approach of trade sur-plus generation that developing countries have hadthe national policy space to use their policy instru-ments effectively.

Most of the countries affected by the storm of thefinancial crises in Asia and in Latin America decided touse low valuations of their currencies and the swingfrom current account deficit to surplus to unilaterallyfix their exchange rate or—at a minimum—to fre-quently intervene in the currency market to avoid therapid return of their currencies to pre-crisis levels.Themost striking example is China, where the nationalauthorities—following the traumatic experience of anovervaluation and a large devaluation of the renmimbiin 1994—absolutely fixed the value of the renmimbiagainst the dollar.

However, the strategy to maintain trade surplusesby defending the competitive positions that wereachieved in the wake of financial crises presupposesthat at least one country in the global economyaccepts to run the corresponding trade deficit. Otherdeveloping countries and transition economies haveused the windfall profits of rising revenues for oil andother primary commodities to improve their balanceof payments positions as well as to bolster their for-eign exchange reserves. For many of these countries,interventions in the currency markets were intendedto stem a strong concomitant rise of the real value oftheir currencies and to avoid a kind of “Dutch dis-ease,” where the loss of competitiveness in manufac-

MACROECONOMIC POLICY SPACE AND THE GLOBAL IMBALANCES

HEINER FLASSBECK

Heiner Flassbeck is director of the Division on Globalization and Development Strategies at the United Nations Conferenceon Trade and Development (UNCTAD).

For policy-makers indevelopingcountries…the role ofexchange ratemovements inthe overall com-petitiveness oftheir economyis a very salientissue for nation-al growth.


turing is induced by trade surpluses and/or the netinflows of capital, which have the potential to appre-ciate the value of their currency.

The accumulation of foreign exchange reserves indeveloping countries results from their current accountsurpluses and currency market interventions to avoidexchange rate appreciation of their currencies.This hasled to a situation in which developing countries havebecome net exporters of capital. The ability of manydeveloping countries to reach the status of being a cap-ital exporter has powerfully contested mainstream eco-nomic thinking, as it is in stark contrast to the expec-tation of orthodox macroeconomic theory that pooreconomies with a low capital endowment will have toimport capital from countries that have an abundantendowment of capital.

For policy makers in developing countries, how-ever, the role of exchange rate movements in theoverall competitiveness of their economy is a verysalient issue for national growth, security and devel-opment. The exchange rate in developing countriesimpacts the trade performance of the vast majority oflocal firms and is a crucial variable for national con-trol over the balance of payments. Indeed, avoidingcurrency overvaluation is not only a means to pre-serve or improve macroeconomic competitiveness,but also an insurance against the risk of future finan-cial crises. In this view, the current account surplusesof most of the developing world and the unwilling-ness of the developed world to consider a multilater-al solution for the exchange rate system—includingthe obligations of developed countries to stabilize theexchange rate system in a way comparable to theBretton Woods Institutions—places the burden ofadjustment on the shoulders of the rich surplus coun-tries of Japan and Germany as well as on some oilexporting countries. Unfortunately, there appears tobe a significant theoretical rift among policy makersand experts on the right theory of global macroeco-nomic imbalances, let alone on the specific policies tocorrect them.

THE BIG RIFT IN FINANCIAL AND MACRO-ECONOMIC POLICIES

Indeed, general explanations for current account bal-ances are difficult to find. Considering the theoreticalpositions of different schools of thought, there is noconsensus whether current account disequilibriashould be approached principally through trade flows

or from capital flows.This is indeed a crucial decisionfor policy considerations.The argument to address cur-rent account imbalances through trade flows stressesthe fact that by definition the current accountdescribes the difference between current receipts andexpenditures for internationally traded goods and serv-ices and income payments.On the other hand, the cap-ital flows view focuses on the fact that from a nationalperspective, the current account balance by definitionalways exactly equals the gap between national savingsand domestic investments.Although it should be clearfrom the outset that this tautological relationship doesnot provide, by itself, any explanation or imply a cer-tain causality, it is normally taken as the starting pointfor analysis and policy prescriptions.

According to the latter perspective of capital flowsthe decision to save a high share of disposable incomeleads to a current account surplus and a capitalaccount deficit—in other words, net capital out-flows—as not all of the savings can be put to produc-tive use domestically. In the capital flows argument,the occurrence of an opposite outcome—a currentaccount deficit or a net capital account inflow—is theresult of the domestic propensity to invest being inexcess of the national propensity to save. Trade andcurrent account balances are then basically the resultof the voluntary decisions of national agents to con-sume now or at a later stage. Consequently, it is notexpected that national current accounts will be bal-anced. Rather, in a world of liberalized financial mar-kets, savings should always flow toward their best useat the global level.

Through the arbitrage of capital flowing fromexcess-saving countries toward countries withgreater opportunities for profitable investments, theglobal economy achieves a more efficient allocationof resources and higher growth rates than would bepossible without the free mobility of capital.However, the theoretically assumed outcomes offinancial liberalization do not find sufficient empiri-cal support even in the “consensus evidence.” Prasad,Rogoff,Wei, and Kose (2003) sum up the existing lit-erature and assess that “…an objective reading of theresult of the vast research effort undertaken to datesuggests that there is no strong, robust, and uniformsupport for the theoretical argument that financialglobalization per se delivers a higher rate of econom-ic growth…[and] the volatility of consumptiongrowth has, on average, increased for emerging mar-ket economies in the 1990s.”2


The main theoretical problem with this view is itsinherent tautological nature and its inability toexplain the outcomes of the conflicting preferencesof national households or national governments atthe global scale. In other words, this approach, despitebeing well founded in microeconomic decision mak-ing, cannot explain how the autonomous decisionsof private households of n countries in the world tosave more than to invest leads to the necessary resultthat only n-1 countries will succeed in generating acurrent account surplus while one country, althoughalso willing to achieve a current account surplus,finds itself possessing a huge deficit. In other words,the fallacy of composition systematically excludes anunprejudiced, truly voluntary decision of all partici-pating players. Moreover, the approach has to relyextensively on an assumption of “all things beingequal,” as it does not systematically consider theeffects that changes in the saving decisions of onesector or one agent may have on the savings of thecompany sector whose income is the residual of themarket process.

The trade-based explanation of macroeconomicimbalances is more substantive in its main message asit does not just describe movements of imports andexports as result of voluntary decisions of economicagents, but also points out the shocks in trade flowsinduced by large unforeseen changes in the relativeprices between tradable and non-tradable goods andservices as well as in the international competitive-ness of countries. For example, the trade-basedexplanation stresses commodity price fluctuations toprovide an explanation for two occurrences: the cur-rent account swings of producers of key commodi-ties like oil, and the exchange rate exceeding the fun-damental determinants of overall competitiveness. Inthis view, the decision of private households to saveless does not affect the trade balance as long as theadditional demand can be satisfied by competitivedomestic production. The decline in the privatehousehold savings rate can also be compensated byincreases in saving of other agents: initially throughbusiness profits, and consequently by higher govern-ment savings or higher tax levels.Thus, in the trade-based approach to macroeconomic imbalances, therelationship between national savings and the tradebalance is much more complex than in the capitalaccount approach, as it involves decisions by all therelevant agents in a society and all agents in othercountries including policymakers.

In the latter view, the global benign outcome isowed primarily to the pragmatism of macroeco-nomic policy management in the United States. Asthe U.S. authorities have not attempted to fight thequickly rising current account deficits early on, thesystemic deficiencies in the global economic orderhave not led to global deflation yet. However, it hasled to a very serious global imbalance. However,even with U.S. macroeconomic policy pragmatism,the resulting global pattern of production, trade andfinance has become increasingly precarious. It seemsthat sooner or later the United States will becomeoverburdened by playing the role of the globalgrowth engine and that of the creditor of last resort.The U.S. could largely ignore its external imbalanceas no serious conflict with sustaining full employ-ment domestically has occurred up to this point.However, if the U.S. economy slows down, such aconflict may soon become a significant risk. Buteven without a major slowdown in the U.S. econo-my the world economy will have to manage with-out the growth stimuli from the U.S. economy,which the world economy has become used to overthe past fifteen years.

THE SUSTAINABILITY OF THE U.S. EXTERNAL IMBALANCE

International concerns about the sustainability of theUnited States increasing external imbalance areincreasing among financial market analysts, as it is asignificant and imminent risk. Slow progress in theunwinding of the imbalances may trigger a strongspeculative wave towards dollar depreciation, whichcould subsequently generate a downwards pressure onother major global currencies. Such a depreciation ofthe dollar would help re-balance the United Stateseconomy. However, given the pattern of globalgrowth—and the dependence that global growth hason American demand in consumption and imports—a marked slowdown in exports to the US would haveglobal deflationary repercussions.This could quite eas-ily unravel the momentum in development progressand poverty reduction seen in developing countries inrecent times without any fault of their own.

The main reason for the United States perhapsincreasingly unmanageable global burden is not therising number of developing countries running cur-rent account surpluses, rather, it is primarily the factthat other key industrial countries have failed to play

For small openeconomies,and develop-ing countries inparticular, theexchange rateis the mostimportant single price.


their corresponding international role in stimulatingglobal demand. Even worse, they have decisivelyadded to the global burden of the United States byimproving their overall competitiveness at theexpense of other countries through deflationarymacroeconomic policies and real depreciation oftheir currencies. Japan and Germany are two coun-tries in particular that are now being called upon tolive up to their global responsibility by reversing theirpast economic trends. The required competitivenessgains of the U.S. economy should come predomi-nantly at their expense. This would compensate forthe gains in competitiveness that these countries haveachieved over the past few years.

China can also play a crucial role in the benignunwinding of global imbalances, albeit in a differentway. Since the beginning of the 1990s China’sdomestic demand and its imports have grown verystrongly, and the country has been a vital actor inspreading and sustaining the growth momentumthroughout the developing world. This is a processwhich must not be derailed. Therefore, renminbirevaluation should continue gradually rather thanabruptly, taking into careful account the regionalimplications. More recently, oil exporting countrieshave also acquired a significant position in addressingthe global macroeconomic imbalances. Oil producersshould use favourable terms-of-trade practices toincrease and promote productive investments andaccelerate the diversification of their production andmanufacturing sectors. Should elevated oil pricespersist, oil producers have the potential to contributeto the correction of global imbalances through creat-ing stronger domestic demand and import growth inline with higher incomes.

THE CASE FOR A MULTILATERAL EFFORT TOMANAGE EXCHANGE RATES

For small open economies, and developing countriesin particular, the exchange rate is the most impor-tant single price, as it has a strong impact on thedomestic price level and on overall competitiveness.It must be flexible enough to prevent persistent mis-alignments that would harm the competitiveness ofdomestic producers and their trade performance. Atthe same time, excessive volatility of the exchangerate must be avoided, as this would heighten therisks for long-term investment, increase domesticinflation, and encourage financial speculation.

The “corner solutions” are based on two distinctassumptions.The first assumption is that in the case offree-floating exchange rates, international financialmarkets will smoothly adjust exchange rates to their“equilibrium” level.The second assumption is that inthe case of a hard peg, product, financial, and labormarkets will always smoothly and rapidly adjust to anew equilibrium at the predetermined exchange rate.In reality however, exchange rates under a floatingregime have proved to be highly unstable, leading tolong spells of misalignment with dire consequencesfor the real economic activity of the economiesinvolved.The experience with hard pegs has not beensatisfactory either. As the exchange rate cannot becorrected in cases of external shocks or misalignment,adjustments are expensive in terms of lost output,which affects the real sectors of the domestic econo-my the hardest.

Given this experience with both rigidly fixed andfreely floating exchange rates,“intermediate” regimeshave become the preferred option in most developingcountries with open capital markets. Intermediateregimes provide more room for manoeuvre whenthere is an instability in international financial mar-kets.They also enable adjustment of the real exchangerate to a level that better supports a country’s devel-opment strategy. None of the “corner solutions” offerthese possibilities.

For developing countries that are not members ofa regional monetary arrangement that enables themto cope with the vagaries of the global financial mar-kets, they resort to capital controls on short-termcapital flows or strictly follow a strategy of underval-uation and unilateral fixing.3 In the words of MartinWolf, “By accident the world has found a way tomake the crisis-prone world of financial globalizationwork.”4 This strategy—based on national policy spaceand control over the relevant monetary instrumentssuch as the exchange rate and the interest rate—canonly be replaced by a multilateral effort or multilat-eral surveillance if the rich developed economies arewilling to play a more proactive role in the steeringof the international monetary system. This wouldinclude directly intervening in the internationalmonetary system to enable orderly currency depreci-ations for countries in monetary and financial trou-ble. Past experience has demonstrated that develop-ing countries with strong current account positionsare able to avoid destabilizing capital inflows andoutflows, either by taxing those flows or by limiting

…The idea ofa cooperativeglobal mone-tary system isas compellingas the idea ofa multilateraltrading system.


their impact through directly intervening in bothlocal and global capital and financial markets. In thesecases the hardest choices and the gravest misalloca-tions due to erratic exchange rate changes have beenavoided. However, neither the resort to capital con-trols nor to permanent intervention can be a substi-tute for an appropriate exchange rate system at theregional or—preferably—the global level.

A long run solution for the international finan-cial system has to commence with the observationthat the exchange rate of any country is—by defini-tion—a multilateral phenomenon, and that anychange in the exchange rate of open economies pro-duces externalities and multilateral repercussions.That is why the idea of a cooperative global mone-tary system is as compelling as the idea of a multilat-eral trading system. In the same way that multilater-al trade rules design a global trading system, theglobal financial system has to create equal conditionsto all parties involved and help avoid unfair compe-tition. Indeed, most of the ideas on which theInternational Monetary Fund was founded morethan 60 years ago are still valid—including the ideaof supra-national money replacing the U.S. dollar asthe global medium of exchange. Avoiding competi-tive depreciations and other monetary distortionsthat have negative effects on the functioning of theinternational trading system are more important intoday’s highly interdependent world than at anyother time in history.

In a well-designed global monetary system theadvantages of exchange rate changes in one currencyneed to be balanced against the disadvantagesincurred to other affected countries.As changes in thenominal exchange rate deviating from the fundamen-tals in terms of inflation differentials affect interna-tional trade in exactly the same way as changes in tar-

iffs and export bounties do, such real exchange ratechanges have to be subject to multilateral oversightand negotiations. Reasons for the deviation from thefundamentals and the necessary dimension of thedeviation need to be identified by an internationalinstitution and should be enforced by a multilateraldecision-making body. If such rules apply, the realexchange rate of all the parties involved—includingtheir overall competitiveness-will have to remainconstant, despite permanent structural changes andhuge variations in competitiveness on the level of theprivate sector.

ENDNOTES

1. See a discussion of the various aspects of the policyspace debate in United Nations Conference on Tradeand Development,“Trade and Development Report2006: Global partnership and national policies for devel-opment,”August 31, 2006, http://www.unctad.org/Templates/webflyer.asp?docid=7183&intItemID=2508&lang=1.

2. M.Ayhan Kose, Eswar S. Prasad, and Marco E.Terrones,“Financial Integration and Macroeconomic Volatility,”(Washington: IMF Staff Papers,Vol.50, Special Issue,2003), http://faculty.fuqua.duke.edu/~charvey/Spur/Kose_Financial_integration_macro_volatility.pdf.

3. United Nations Conference on Trade andDevelopment,“Trade and Development Report 2004:Policy coherence, development strategies and integra-tion into the world economy,” September 16, 2004,http://www.unctad.org/Templates/WebFlyer.asp?intItemID=3236&lang=1.

4. Martin Wolf,“Beijing should dip into China’s corporatepiggy bank,” Financial Times, October 3, 2006,http://www.ft.com/cms/s/09d39538-5302-11db-99c5-0000779e2340,Authorised=false.html?_i_location=http%3A%2F%2Fwww.ft.com%2Fcms%2Fs%2F09d39538-5302-11db-99c5-0000779e2340.html&_i_referer=http%3A%2F%2Fwww.google.com%2Fsearch%3Fhl%3Den.


THE ARGUMENTS ONINTELLECTUAL PROPERTYRIGHTS

Intellectual property protectioncreates exclusionary rights thatlimit the access to and the use ofa vast array of intellectual works,technologies, and products

needed for social and economic development in devel-oping countries. Intellectual property rights (IPRs) mayaffect developing countries’ capabilities to educate theirpeople, produce and compete domestically and global-ly, as well as to provide essential health services.

Given the overarching influence of IPR systems onnational interests, it would seem logical to incorporatesufficient flexibilities for developing countries to designthe systems of intellectual property rights in a mannerthat is consistent with their development needs. Theforms and levels of IPR protection should correspondto the characteristics of different countries’ innovationsystems, taking into account people’s income and needs.

Each country and each sector is affected in differentways by IPRs.Welfare economics examines the impactof intellectual property rights on economic efficiency.

There are two main types of efficiency:

• Static efficiency is achieved when there is anoptimal use of existing resources at the lowestpossible cost.

• Dynamic efficiency is the optimal introductionof new or better products, more efficient pro-duction processes and organization, and (eventu-ally) lower prices.

In general, static efficiency is best achievedthrough competitive markets. In terms of consumerwelfare, competition may lead to allocative efficiencywhen the price of a product is equal to the marginal

cost of producing a unit of it. In this scenario there isa maximum diffusion of existing products.When theproducts are essential for life—as with food and phar-maceuticals—allocative efficiency becomes an impor-tant objective on both economic and equity grounds.

The static-dynamic efficiency rationale applicableto a developed society does not necessarily have arationale when strong inequalities exist. High levels ofIPRs protection may have significant negative alloca-tive consequences in developing countries, withoutcontributing—or even impeding—their social andeconomic development. For instance, consumers indeveloping countries contribute to the research anddevelopment (R&D) budgets of pharmaceutical com-panies. Such companies, however, tend to concentrate,for the most part, on research projects that lead todrugs that address the needs of the rich, neglectingthose drugs required for the majoritively low-incomepopulations and health epidemics—such as malaria, forexample—in developing countries. In addition, sinceIPRs create a monopoly over information or theexpression thereof, the exclusive rights on informationcan collide with certain fundamental social needsand/or individual rights, such as the right to educationand health and the right to freedom of expression.

IPRs have a powerful potential to promote inno-vation and creativity, as the very nature of knowl-edge—as a public good—makes it particularly diffi-cult to stop free-riders from enjoying a third party’sworks or innovations without paying for them. Thepredominant argument supporting the establishmentof strong IPRs is that they are required for preservingthe ability of the creator or producer of knowledge toobtain an economic reward.Without the presence ofeconomic rewards, there may be little or no incentiveto provide public goods privately, leading to the sup-ply of some public goods becoming scarce.

However, several refutations can be made on thisargument. First, competition in the absence of IPRscan lead to dynamic efficiencies as it may be a pow-

CONSTRAINING POLICY SPACE IN INTELLECTUAL PROPERTY

CARLOS M. CORREA

Carlos Correa is a professor and the director of the Center for Interdisciplinary Studies of Industrial Property Law andEconomics at the University of Buenos Aires.

Intellectualproperty rights(IPRs) mayaffect develop-ing countries’capabilities to educate their people,produce andcompetedomesticallyand globally,as well as toprovide essen-tial health services.


erful incentive to introduce product, process, or orga-nizational innovations. Many important innovationsare the result of stiff competition, particularly whendifferent technological options may be pursued. Onewell known example is the case of the industry forsemiconductors, where IPRs play a marginal role asan incentive for innovation. Many studies also indi-cate that patent protection is not always, or even usu-ally, the driving force behind R&D. In the area ofsoftware, non-appropriation mechanisms, such asopen source schemes, have proven to promote avibrant process of innovation. Second, protectionfrom imitation may result from several non-IPRsmechanisms, such as lead time, the innovator’s capac-ity to move on the learning curve before other com-petitors, the customer loyalty derived from superiorsales and services, and from the very structure of themarket, such as in the case of oligopolistic marketstructures.Third, the exclusionary rights conferred byIPRs can lead to the underutilization of information,especially for the generation of subsequent innova-tion. Cumulative forms of innovation prevail in mostsectors of the economy, including the biomedicalfield. Since information is both an output and an inputin its production process, a conflict arises betweenfirst and second generation innovators, because thegreater the rights (and hence incentives) of the firstgeneration, the greater the costs (and hence the lowerthe incentives) of the second generation producers.Finally, a significant part of innovation takes place as aresult of routine production activities and learning,completely unrelated to the existence and scope ofIPRs protection.

James Boyle, in his article on the World IntellectualProperty Organization (WIPO) and the future ofintellectual property, has noted that:

Intellectual property policy is in the sway of amaximalist “rights-culture” which leads debatesastray.The assumption seems to be that to pro-mote intellectual property is automatically topromote innovation and, in that process, themore rights the better. But both assumptionsare categorically false. Even where intellectualproperty rights are the best way to promoteinnovation, and there are many areas wherethey are not, it is only by having rules that setthe correct balance between the public domainand the realm of private property that we willget the innovation we desire.

But genius is actually less likely to flower in thisworld, with its regulations, its pervasive surveil-lance, its privatized public domain and its taxeson knowledge. Even if the system workedexactly as specified, it could not solve some ofthe most important human problems we face,and it would likely hamper our most importantcommunications technology.1

A HISTORICAL ASSESSMENT

In contrast to the current trends towards the expan-sion and strengthening of IPRs, when today’s indus-trialized countries were in their process of develop-ment, they enjoyed a great deal of flexibility to designtheir IPR systems. Mark Twain’s personal struggle tohave his copyright recognized internationally pro-vides an example of the lack of IPR rules at that time.Twain even tried to register his name as a trademarkin order to avoid the free copying of his novels.Twain’s literary works, as well as those of other Britishauthors, were pirated in the U.S. during much of the19th century. Foreign authors did not receive copy-right protection until 1891. Charles Dickens touredthe USA in 1842 pleading for international copy-right.He published the American Notes in 1843,wherehe expressed his frustration with the lack of copyrightlaw in the United States. Fifty thousand pirated copieswere sold in only three days within the U.S. Duringthat period, A Christmas Carol by Charles Dickenssold for the equivalent of $2.50 in London, whereasin the U.S. it sold for merely six cents a copy.2

The arguments articulated during that period inthe United States against international copyright lawshave a strong parallel to the situation many low-income developing countries are in today, wheredozens of students chase the only available copy of aneducational book. At that time in the 19th century,the U.S. argued four key points. First, expanding lit-eracy demanded cheap yet high-quality books.Second, there was no inherent property rights in lit-erature. Third, granting copyrights to foreignerswould give them a monopoly at the expense of theU.S. reading public. Finally, local publishers in theU.S. and their employees are in need of the de factoadvantage afforded by the absence of protection.3

In the case of patents, the United States—as a netimporter of technology between 1790 and 1836—prioritized the issuing of patents to its own citizensand residents. In 1836, patent fees for foreigners were


fixed at ten times the rate for U.S. citizens, exhibitinga robust protection for and promotion of localknowledge and products over that of the foreign.European countries such as France, Germany, andSwitzerland, while being avid proponents of strongpatent protection today, only recognized pharmaceu-tical product patents after the 1960s. Similarly,Portugal, Spain and the Nordic countries did not rec-ognize pharmaceutical patents until the end of 20thcentury. Furthermore, the most successful cases inrecent history of industrial and technological devel-opment, in such countries as Japan and South Korea,occurred under a flexible framework of IPR protec-tion.The development of the Indian pharmaceuticalindustry, which has become a major world supplier ofcheap generic medicines and active ingredients, wasalso possible in the absence of pharmaceutical prod-uct patents.4

THE TRADE RELATED ASPECTS OF INTELLECTUAL PROPERTY RIGHTS AGREEMENT

Such a flexible scenario, however, has changed dramat-ically with the adoption of the Trade Related Aspects ofIntellectual Property Rights (TRIPS) Agreement of theWorld Trade Organization (WTO).This Agreement isessentially the outcome of a well-organized campaignof a few industries, notably in the pharmaceutical,entertainment, software, and semiconductors sectors.Under the TRIPS rules much of the flexibility thatdeveloped countries enjoyed to design their IPR sys-tems is not permitted to developing countries.Although many arguments regarding increased technol-ogy transfers, foreign direct investment (FDI) to, andinnovation in developing countries were made duringthe negotiations by the proponents of the TRIPSAgreement, the Agreement itself is quite clearly intend-ed to benefit the industrialized countries and industrieswho already have a greater capacity to generate newknowledge and information.

An early study by Phillip McCalman concludedthat:

Patent harmonization has the capacity to gen-erate large transfers of income between coun-tries, with the United States being the majorbeneficiary…These transfers significantly alterthe perceived distribution of benefits from theUruguay Round, with the U.S. benefits sub-

stantially enhanced, while those of developingcountries and Canada considerably dimin-ished. Furthermore, accounting for theincrease in dead weight loss from higher stan-dards of patent protection undermines theaggregate benefits of the Uruguay Roundpackage, with the increase in dead weight lossamounting to as much as one fifth of the effi-ciency gains from trade liberalization.5

McCalman’s findings have been amply confirmed byrecent statistics. Although there is no conclusive evi-dence of an increase in the flows of production tech-nologies to developing countries, there has been animpressive rise in global royalty payments, which grewfrom 61 billion dollars in 1998 to 120 billion in 2004,the United States being the main beneficiary thereof.6

Unlike other WTO agreements, the TRIPSAgreement does not include a Special and DifferentialTreatment (SDT) for developing countries.The absenceof SDT also applies to Least Develop Countries(LDCs)—the poorest countries in the world—whosemarkets are too small and thus largely irrelevant fortransnational companies (TNCs). However, LDCs havebeen permitted to delay their compliance with TRIPSobligations and rules until July 2013.7

According to Article 66.2 of the TRIPS Agreement,developed Member countries are obliged to provideincentives under their national legislation to enterprisesand institutions in their territories for the purpose ofpromoting and encouraging the transfer of technologyto LDCs “in order to enable them to create a sound andviable technological base.”8 It has been unclear how thisobligation is to be effectively implemented. Inter-estingly, this provision is premised on the concept thatthe implementation of intellectual property protection,as required by the Agreement, is not conducive to thetechnological development of LDCs and that moreflexibility is needed.This is precisely the argument thatdeveloping countries have articulated, during theTRIPS negotiations and that have thereafter reiteratedin different fora, such in the context of the“Development Agenda” submitted by a group of devel-oping countries to the World Intellectual PropertyOrganization.The main argument of this proposal is:

A vision that promotes the absolute benefits ofintellectual property protection withoutacknowledging public policy concerns under-mines the very credibility of the IP system.

The Declar-ation recog-nized the“gravity” of thepublic healthproblems afflicting manydevelopingcountries—and LDCs inparticular.


Integrating the development dimension intothe IP system… will strengthen the credibilityof the IP system and encourage its wideracceptance as an important tool for the promo-tion of innovation, creativity and development.9

The constraints imposed by the TRIPS Agreementhave been highly debated, particularly on the subjectof patents for pharmaceuticals. The Agreementimposed a number of detailed obligations on patentcreation, application, and distribution with the aim toconstruct a global patent regime (see Table 1).

The concerns about the implications of patentsfor access to drugs have also been voiced by devel-oping countries and NGOs in various forums, par-ticularly due to the impact of patents on the pricesof essential medicines and the proliferation ofpatents of low or non-existing inventive steps thatare aggressively used to restrain legitimate genericcompetition.These concerns on the access to medi-cines were eventually brought to international atten-tion, and subsequently reflected in the Doha

Ministerial Declaration on TRIPS and PublicHealth, or the Doha Declaration on TRIPS. TheDeclaration recognized the “gravity” of the publichealth problems afflicting many developing coun-tries—and LDCs in particular—from HIV/AIDS,tuberculosis, malaria, and several other epidemics.11 Itconfirmed some of the flexibilities incorporatedinto the TRIPS Agreement, such as the possibility ofgranting compulsory licenses and of permitting theparallel importation of patented products. A keyparagraph in the Declaration stated that:

We agree that the TRIPS Agreement does notand should not prevent WTO Members fromtaking measures to protect public health.Accordingly, while reiterating our commitmentto the TRIPS Agreement, we affirm that theAgreement can and should be interpreted andimplemented in a manner supportive of WTOMembers’ right to protect public health and, inparticular, to promote access to medicines forall (paragraph 4).

• Patents shall be granted for any inventions,whetherproducts and processes, provided they are new,involve an inventive step and are capable of indus-trial application.

• Patents shall be granted in all fields of technology,including pharmaceuticals. No discrimination isallowed with respect to the place of the invention,or based on whether the products are locally pro-duced or imported.

• Member countries can exclude from patentabilitydiagnostic, therapeutic and surgical methods fortreatment of humans or animals, as well as plantsand animals and essentially biological processes forthe production thereof.

• Exclusive rights conferred in the case of productand process patents are defined, subject in the caseof imports to the principle of exhaustion (article 6).

• Inventions shall be disclosed in a manner which issufficiently clear and complete for a skilled person

in the art to carry out the invention.The indicationof the best mode of carrying out the invention, aswell as information concerning correspondingpatent applications and grants, may be required.

• Limited exceptions to the exclusive rights can bedefined by national laws (article 30).

• Conditions for granting other uses without theauthorization of the patent holder (compulsorylicenses) are set forth;Member countries can deter-mine the grounds to allow such uses.

• Revocation/forfeiture is subject to judicial review.

• The term of protection shall be at least twenty yearsfrom the date of application.

• Reversal of the burden of proof in civil proceedingsrelating to infringement of process patents is to beestablished in certain cases.

Table 1. TRIPS Obligations Regarding Patent Protection10

The quest forequitable glob-al developmentis not benefit-ing from, andis indeedbeing seriouslyharmed, by aglobal IPRregime.


BILATERAL AND REGIONAL FREE TRADEAGREEMENTS

While the adoption of the Doha Declaration onTRIPS seemed to address the pressing concerns ofdeveloping countries, the U.S. simultaneously initiat-ed a series of negotiations on bilateral and regionalfree trade agreements (FTAs) with more than twentycountries. Bilateral and regional FTAs incorporatewhat is commonly termed as “TRIPS-plus” require-ments—essentially, IPR rules and commitments thatgo beyond that of TRIPS. FTA agreements were pro-duced between the U.S. and a various countries glob-ally: Jordan, Chile, Singapore, Morocco, the CentralAmerican countries and the Dominican Republic,Bahrain, Oman, Peru, and Colombia. Some of themhave already been ratified by the US Congress.12

Other FTAs have been signed by or under negotia-tion between developing countries and the EuropeanUnion or the European Free Trade Association.

The common pattern of the ensuing FTAs is thatthey further elevate the level of protection conferredvirtually in all areas of IPR, most notably copyrightand patents. In the latter case, partner countries areobliged, inter-alia, to grant patents on plants, extendthe patent term in certain circumstances, and adoptthe “utility” standard for patentability (in substitutionof the narrower requirement of industrial applicabil-ity).They are also obliged to grant exclusive rights inrespect of test data regarding pharmaceuticals andagrochemicals. In some cases, the protection enforce-able under the FTAs with the U.S. is significantlyhigher than that applicable in the U.S. itself.13

Paradoxically, FTAs do not seem to generate thesame scale of obligations in the U.S., thus leading toa critically skewed situation where U.S. companieswill receive more extensive and deeper IPR protec-tion in FTA signatory countries, including manypoor LDCs, than the same companies will receive inthe United States itself.

There is no justification—legal or economic—for this augmented limitation to the already narrownational policy space that countries had retained onIPRs after the TRIPS Agreement was first produced.There is an urgent need to thoroughly review theimplications of these developments, particularly forthe poor.The IPR agenda, today under the controlof a small but extremely powerful coalition of busi-ness interests, needs to be placed under publicaccountability.The quest for equitable global devel-

opment is not benefiting from, and is indeed beingseriously harmed, by a global IPR regime that maylead to a dangerous stifling of knowledge-creation,technology transfer, innovation, and access to medi-cines. Such a situation will only perpetuate povertyand injustice in vast parts of the low- and middle-income developing world that will fundamentallydeteriorate the quest for equitable and sustainableglobal development.

ENDNOTES

1. James Boyle,“A Manifesto on WIPO and the future ofintellectual property,” Duke Law & Technology Review 9(2004), http://www.law.duke.edu/journals/dltr/articles/PDF/2004DLTR0009.pdf.

2. S Vaidhyanathan, Copyrights and Copywrongs:The rise ofintellectual property and how it threatens creativity (New York:New York University Press, 2001).

3. Ibid.4. Sudip Chaudhuri, The WTO and India’s Pharmaceuticals

Industry: Patent protection,TRIPS and developing countries,(New Delhi: Oxford University Press, 2005).

5. Phillip McCalman,,“Reaping What You Sow:AnEmpirical Analysis of International PatentHarmonization,” University of California, Department ofEconomics Working Paper No. 454, December 1999,http://ssrn.com/abstract=200788.

6.The World Bank,“World Development Indicators 2000,”April 2000, http://www.worldbank.org/wdr/2000/fullre-port.html; and The World Bank,“World DevelopmentIndicators 2006,”April 2006, http://web.worldbank.org/WBSITE/EXTERNAL/DATASTATISTICS/0,,contentMDK:20899413~pagePK:64133150~piPK:64133175~theSitePK:239419,00.html.

7.The term extends to January 1, 2016, with regard to phar-maceutical patents and test data protection.

8.The World Trade Organization,“Agreement on Trade-Related Aspects of Intellectual Property Rights:Text of the Agreement,Article 66.2”April 1994,http://www.wto.org/english/tratop_e/trips_e/t_agm7_e.htm.

9.World Intellectual Property Organization,“Thirty-First(15th Extraordinary) Session, Geneva, September 27 toOctober 5, 2004,”WO/GA/31/11,Annex 5,August 27,2004, http://www.wipo.int/documents/en/document/govbody/wo_gb_ga/pdf/wo_ga_31_11.pdf.

10.The World Trade Organization,“Agreement on Trade-Related Aspects of Intellectual Property Rights:Text of the Agreement,Article 66.2”April 1994,http://www.wto.org/english/tratop_e/trips_e/t_agm7_e.htm.

11.The World Trade Organization,“Declaration on theTRIPS agreement and public health,”WT/MIN(01)/DEC/2, November 20, 2001, http://www.wto.org/English/thewto_e/minist_e/min01_e/mindec1_trips_e.htm

27THE POLICY SPACE DEBATEPERCEPTIONS

12. United States-Jordan free trade agreement (2001);United States-Chile free trade agreement, signed atMiami June 6, 2003; entered into force January 1, 2004.(Chile FTA). United States-Singapore free trade agree-ment, signed at Washington May 6, 2003; entered intoforce Jan. 1, 2004. (Singapore FTA). United States-Morocco free trade agreement, signed at WashingtonJune 15, 2004 (Morocco FTA); entered into force onJuly 1, 2005. United States-Dominican Republic-CentralAmerica free trade agreement, signed at Washington May28, 2004 and Aug. 5, 2004. Parties: Costa Rica,Dominican Republic, El Salvador, Guatemala, Honduras,

Nicaragua and the United States (CAFTA). UnitedStates-Bahrain free trade agreement, signed atWashington Sept. 14, 2004. (Bahrain FTA).

13. Frederick M.Abbott,“Intellectual Property Provisions ofBilateral and Regional Trade Agreements in Light ofU.S. Federal Law,” United Nations Conference on Trade and Development-International Centre for Trade and Sustainable Development Project on IPRs and Sustainable Development, February 2006,http://www.iprsonline.org/unctadictsd/docs/IP14_abbott_FTAs.pdf

For over a quarter of acentury, the internationalfinancial institutions

(IFIs) have been constrainingcountry sovereignty andnational policy space—the abil-ity of a country to have optionsand flexibilities in designingnational policies.1 This protract-ed process has exacerbated

poverty in the world’s poorest countries, instead ofreducing it, despite IFI claims to the contrary. Thispaper first discusses IFI policy space occupation, andsecond, its gendered impacts, which are illustrated bycountry-level case studies.

THE POLICY SPACE OCCUPATION OF IFI CONDITIONALITIES

This section illustrates IFI policy space occupationthrough examining “conditionalities” and debt can-cellation and reduction.

ConditionalitiesSince 1980, the primary vehicle that IFIs have used tosqueeze borrowing governments’ policy space is the“conditionalities” attached to IFI StructuralAdjustment Loans (SALs) and projects. SALs are anearly name for policy-based loans that IFIs have usedto impose conditionalities on developing and transi-tion countries.2 Besides financing policy-based loansthat significantly restrict policy space, the World Bankand other Multilateral Development Banks (MDBs)also use project loans to impose conditionalities oneconomic policies.3 Agricultural, rural development,water supply, sanitation, education, health and virtual-ly every type of conventional IFI project imposesconditionalities such as requiring developing coun-tries to privatize services and drop tariffs unilaterallywithout developed country reciprocity. Increasingly

popular non-project-specific sector-wide loans alsoinflict IFI conditionalities that squeeze country poli-cy space.

Over time, IFIs have responded to persistent civilsociety and citizen complaints, including popular streetprotests, which have vociferously criticized IFI policyconditionalities for their harmful social and genderedimpacts. IFI responses include avoiding using thenames “SALs” and “conditionalities” and claiming thatconditionalities have been eliminated.4 IFIs have actu-ally increased the number of conditionalities throughbundling several conditionalities into one, and renam-ing them, for example by calling them benchmarks.

DEBT CANCELLATION AND REDUCTION

Another recent IFI policy space issue that has attractedsignificant press coverage is the cancellation and/orreduction by IFIs of poor countries’ debts. Many civilsociety organizations (CSOs) applaud an increasingseries of IFI debt cancellations, as unconditional debtcancellation can free up policy space, permitting coun-tries to choose policies that advance human develop-ment instead of spending their national revenues torepay IFI debts. Debt relief can release otherwise debt-locked public resources for spending on education,health, and other critical development programs.

Two types of IFI debt cancellation are being dis-cussed: those initiated by countries themselves andthose resulting from debt cancellation or reductionby the IFIs and other creditors. First, regarding debtcancellation initiated by countries themselves,Gender Action and many civil society partners cele-brate that a cascade of countries have been paying offtheir debts to the International Monetary Fund(IMF), and announcing an end to their ties to theIMF. Since 2003, some of the IMF’s largest debtorcountries have decided to pay off their IMF debtsahead of schedule. These countries includeArgentina, Brazil, Colombia, Indonesia, Serbia and


POLICY SPACE AND THE GENDERED IMPACTS OF INTERNATIONAL FINANCIAL INSTITUTIONS

ELAINE ZUCKERMAN

Elaine Zuckerman is president of Gender Action, a non-profit organization dedicated to promoting gender equality andwomen’s rights in international financial institution investments.

…IFI-mandatedtariff reductionsundermine thelivelihood offarmers, themajority ofwhom arewomen in theworld’s poorestcountries.

Uruguay. For example, in 2006 Brazil paid its totaldebt of $15.5 billion, Argentina its debt of $9.5 bil-lion, and Uruguay its debt of 1.08 billion to the IMF.Ecuador has vowed to repay, or restructure, its IMFdebt of $10.28 billion.5 These Latin American coun-tries have found unconditional alternative financingfrom oil-rich Venezuela. Several of these countriesannounced that they no longer want, or need, IMFcontrol over their policy space due to the sharplynegative impacts of IMF loan conditionality on theirnational growth and development processes.

These debt cancellations have placed the IMF in alegitimacy, relevancy and budget crisis. The IMF issearching for a new mandate and for ways to survive.6

IMF supporters, particularly the Group of Eightcountries (G-8), are attempting to reinvent the IMFby creating new IMF programs.Taking advantage ofthe timing of the IMF crisis, hundreds of CSOsaround the world have launched a campaign in 2006titled “The IMF: Shrink or Sink It!”7 The involvedCSOs believe that the IMF needs comprehensivereform at the least, and if that fails, it should close.Thecampaign aims to eliminate the IMF’s “gatekeeper”function: its powerful role as head of an aid cartel.Without the IMF’s “green light,” or signaling power,endorsing a government’s policies, most multilateraland bilateral donors and creditors, as well as the pri-vate sector, withdraw aid to that government. Policiescomprising the IMF’s overarching market-drivendevelopment strategy occupy national policy space.These policies—imposed as conditionalities—call forderegulation, privatization and public spendingreductions, among other economic reforms. In manyAfrican countries, these conditionalities have resultedin annual per capita incomes falling by over 50 per-cent in the last two decades.

Anti-IMF campaign recommendations involve thefollowing points: First, to refuse to sign new loanagreements or enter into new programs with the IMF.Second, to conduct citizen, parliamentary, and othergovernment audits of IMF performance and impacts.The campaign popularizes the option of withdrawingfrom the IMF altogether. Citizen pressure has led tothe poorest countries receiving IFI debt cancellation,in order to relieve low-income countries that are bur-dened by illegitimate IFI debt. In 2005 the G-8 coun-tries decided to cancel African Development Bank,World Bank, and IMF debts of 18 Highly IndebtedPoor Countries (HIPC) countries. In early 2007, theInter-American Development Bank cancelled debts

amounting to US$6.5 billion out of a total of US$15billion that five Latin American countries owed thebank. To become eligible for debt relief, countriesmust comply with IFI-imposed policy reforms, fur-ther giving up policy space.

To date, only one country, Bolivia, among the poorcountries receiving debt relief, has publicly announcedits intention to break with IMF policies.Another low-income country, Ghana, announced that it would notrenew its Poverty Reduction Growth Facility (PRGF)agreement with the IMF upon its imminent expiration.Following up could open Ghana’s nationally-ownedpolicy space to determine the design of its economicand social policies, for example, on revenue-raising andsocial sector spending priorities. Most countries wantand deserve to regain sovereign control of their policyspace and resources, instead of spending their resourceson massive debt repayments to IFI creditors. However,countries receiving debt relief need to be on guard ofattempts by the IMF, World Bank, and other IFIs toimpose new conditionalities through new arrange-ments. Debt-relieved countries must carefully retaintheir ability to determine national economic policies,even after debt relief is implemented.

GENDERED IMPACTS

This section discusses the gendered impacts of IFIpolicy conditionalities through examining povertyreduction strategies and operations and several coun-try cases. Framed by the above picture of IFIs squeez-ing national policy space and sovereignty, GenderAction’s starting point is that the 70 percent of theworld’s poor who are women bear a disproportionateamount of the burdens of IFI economic reform con-ditionalities. IFI loan conditionalities to poor devel-oping countries not only impinge on country-levelsovereignty by requiring governments to complywith their creditors notions of how to reform eco-nomic, financial and trade policies, but they also con-tribute to the feminization of poverty. Not only haveover a trillion dollars of IFI development loans notreduced poverty, rather the loans have in manyinstances deepened poverty, especially amongwomen.8 For example, IFI-mandated tariff reductionsundermine the livelihood of farmers, the majority ofwhom are women in the world’s poorest countries.In Africa, most of the 80 percent of farmers who arewomen have experienced income drops due to con-ditionalities such as required tariff reductions.



Until recently, Gender Action monitored PovertyReduction Strategy Papers (PRSPs) for the genderimpacts of economic policies contained within theprograms. Both the IMF and World Bank require thatlow-income country governments prepare nationaldevelopment plans called “PRSPs.” PRSPs are a pre-requisite for accessing virtually all development aid.Although the IMF and World Bank constantly statethat PRSPs are country-owned, PRSPs must meetWorld Bank and IMF specifications and obtain Fundand Bank Board approval. Gender Action found thatPRSPs address gender issues unsystematically. Sincerealizing that PRSPs policies are not enforceable,Gender Action stopped engaging in PRSPs, shiftingattention to Poverty Reduction Growth Facilities(PRGFs) and Poverty Reduction Support Credits(PRSCs), described below, because they containenforceable conditionalities. PRSPs are aspirationalin comparison. Gender Action also continues tofocus on mandatory IFI sector project loan condi-tionalities—for example conditionalities requiringcountries to privatize services and/or adopt user feesin post-conflict reconstruction, health, education,agriculture and other sector loans.

In 1999 the IMF renamed its macroeconomic sta-bilization loans for the poorest countries, known asEnhanced Structural Adjustment Facilities, to PovertyReduction Growth Facility (PRGF) Arrangements.The World Bank renamed some of its SALs PovertyReduction Support Credits (PRSCs). These namechanges were intended to announce a greater empha-sis on poverty reduction. Despite their rhetoric aboutreducing poverty, macroeconomic policies in PRSPs,PRSCs and PRGF Arrangements continue twodecades of IMF and World Bank conditionalities thatprioritize decreasing government spending andincreasing government revenue to repay debts owed tothe IFIs and other creditors over reducing poverty.Ironically, the World Bank’s new Gender Action Plancommitted the Bank to address gender issues in poli-cy-based loans.9 However, the World Bank’s paramountOperational Policy on Gender and Developmentwaives policy-based loans from its requirement that allBank loans promote gender equality.10

GENDERED IMPACTS IN COUNTRY-LEVEL CASES

The following country-level cases illustrate the fore-going discussion of the gendered impacts of IFI-man-dated policy reforms.

Democratic Republic of the CongoThe Democratic Republic of the Congo (DRC) pro-vides an example of IFI loans that guarantee corporateinvestments in mine privatization and restructuringwith tragic incomes for women.The gender dimensionis missing in IFI policy discussions governing miningloan conditionalities and revenues.The major benefici-aries of IFI mining operations are transnational corpo-rations and local elites who turn a blind eye to harm-ful gendered outcomes that include forced householddisplacements, sexual slavery and mass rape.

For example, the World Bank Group’s MultilateralInternational Guarantee Agency provides politicalrisk insurance to private mining companies operatingin the DRC; the World Bank Group’s InternationalDevelopment Association makes loans to the DRCto “restructure” the mining sector including layingoff tens of thousands of workers.11 These reinforcingpolicy conditionalities affect the economic liveli-hoods of women and girls who are involved in laborand services attached to dangerous mining activities,sometimes involving children as young as seven yearsold. Their livelihoods are also undermined by theenvironmental destruction caused by mining. Theseenvironmental effects require local women in sur-rounding communities to have to walk even fartherto find firewood—an endeavor that increases theirexposure to rape and other forms of violence.Households, and particularly the women and girls inthem, face a daunting array of needs for physical safe-ty. IFI loans do not address these gendered outcomesof their loan operations.

MalawiFor years, the Bank and Fund have been forcingMalawi to privatize ADMARC—the state marketingboard—and the Strategic Grain Reserve (SGR),which used to keep the price of maize affordable.Privatization of ADMARC and the SGR has con-tributed to a food crisis in Malawi.12 Women, forcedto wait into the night in long lines at ADMARC tobuy maize, risk attack on their way home from thequeue. When women cannot afford to buy maize,women must scavenge for leaves and boil tubers androots to feed themselves and their families.

Chronic hunger has also forced desperate ruralMalawian women and girls into sex work and earlymarriage, and increased their exposure to HIV/AIDS.The excess supply of sex workers has glutted the mar-ket; sex workers claim that prior to the food crisisthey could charge US$8 for unprotected sex and


US$1-2 for sex with a condom. Since the food crisis,rates have sharply plummeted to US$0.80 without acondom.Workers would rather die a little later fromAIDS than die from hunger today.

MozambiqueMozambique’s successive IMF PRGF and WorldBank PRSCs—the policy-based loans describedabove—mandated a new labor law which increaseslabor flexibility in five ways. One, retrenchmentcosts are reduced, including severance pay. Two,wages are paid in the form of piece-rates rather thanfixed wages based on hours worked. Three, compa-ny-led downsizing and the use of short-term labor isfacilitated. Four, hiring practices become contractu-al rather than secured through long-term employ-ment contracts; and, five, employing foreign nation-als is made easier. It is unexpected for a country thathas maintained an average per capita income growthrate of about ten percent for a decade to be asimpoverished as Mozambique is, with extraordinar-ily high rates of illiteracy and HIV/AIDs, especiallyamong females.Although Mozambique did endure adeep civil war, it has achieved a postwar decade ofhigh-rate growth. This anomaly exists because ahandful of transnational corporations (TNCs) ownsa few large capital-intensive and export-orientedprojects that employ only a small percentage ofMozambique’s total population and enrich only aminority elite and the TNCs. IFI policies and loansthat support TNCs and elites, rather than the poor,have deepened poverty in Mozambique especiallyamong women who compose the majority of thepoor, the illiterate, and the ill.

Serbia and MontenegroSerbia and Montenegro are now two independentrepublics but when Gender Action reviewed theirWorld Bank policy-based loans in 2004, the tworepublics were united. In Serbia and Montenegro,World Bank and IMF structural adjustment loans(SALs) formed the primary response to a devastatingdecade of civil war. After Serbia and Montenegrorejoined the World Bank in 2001, at least 80 percentof initial Bank operations were SALs.This high pro-portion of adjustment operations characterizes eco-nomic reforms in transition countries more broadly.Gender Action’s analysis shows how Serbia andMontenegro’s SALs fail to acknowledge or mitigatethe harmful impacts on men and women.13 Here area couple of examples:

• In Serbia and Montenegro, women comprise themajority of service sector workers providingfinance, education, and health services, and themajority of textile industry employees.The WorldBank Private and Financial Sector AdjustmentCredit required the governments to privatize thetextile industry and smaller enterprises and down-size the public sector including finance, health,and education without regard for the genderimpacts. Women’s precarious economic positionin these enterprises and government jobs madethem especially vulnerable to lay-offs. They con-stituted the majority of the unemployed andinformal sector employees with few assets tobecome self-employed.

• The World Bank Serbia Social Sector StructuralAdjustment Credit reforms pension, labor, andemployment laws. It encourages self-employmentbut fails to acknowledge the barriers that preventwomen from succeeding in small businesses. Itdiminishes protection from discrimination forwomen and other workers in weak positions in thelabor market. For example, women lack the collat-eral to access loans since men own most of theproperty. Serbia’s new labor law eliminates previous-ly required collective bargaining and weakens labor’spower.Women now comprise a larger percentage ofthe unemployed. Women have been hurt most bythe Bank policy conditions.

TanzaniaTanzania has borrowed over US$5.8 billion for 45operations from the African Development Bank, theInternational Monetary Fund, and the World Banksince the year 2000. At least half of these operations,comprising over a quarter of loan funds, appear to beloans containing potentially harmful components.

For example, World Bank projects in Tanzaniainclude the following:

• A Secondary Education Development Programapproved in 2004 for $150 million, and includesresettlement, administrative decentralization, decreas-ing costs per pupil, and increasing class sizes.

• The Primary Education Development Programapproved in 2001 for $150 million imposes double-shift teaching on 50% of primary schools, increasingstudent enrollment but limiting instruction time perstudent.

Women’s pre-carious eco-nomic positionin these enter-prises and gov-ernment jobsmade themespecially vulnerable tolay-offs.


• The World Bank’s Second Health Sector Develo-pment Project approved in 2003 for $65 millionintroduces user fees.

• The Bank’s Dar es Salaam Water Supply andSanitation Project approved in 2003 for $62 millionincludes retrenchment of workers, price increases,and resettlement of unauthorized water users.Women who already comprise the vast majority of poor Tanzanians are hardest hit by these condi-tionalities.

In another operation, to comply with World Bankand IMF loan requirements, the Tanzanian govern-ment sold the management of the Dar es SalaamUrban Water and Sewerage Authority (DAWASA) toCity Water, a joint venture between private compa-nies based in Germany, Britain and Tanzania.14 AfterCity Water took over in 2003, tariffs increased.Although women were primarily responsible forfetching water in Tanzania, an Action Aid reportfound that the City Water privatization scheme utter-ly neglected to consider household gender relationsor the needs of women and girls in the reform.Theprimary benefits of high water prices were reaped bythe corporation, City Water, and owners of privatewater wells while poor women and girls continued tohave to walk often long distances to carry water with-out remuneration. Women and girls who could notwalk long distances for affordable water were forcedto spend the majority of their household income onwater instead of much-needed food supplies and edu-cation.Bowing to public complaints, in 2005 the gov-ernment of Tanzania was forced to cancel its contractwith City Water.

CONCLUSIONS

The burdens on women in accessing essential servic-es, such as water, show how basic human needsremain unfulfilled in Africa. How is it that the IFIs,despite the billions of dollars they have allocated towater supply and transportation projects in Africa,hardly succeed in relieving poor women and girlsfrom having to carry water on their heads barefoot onunpaved roads? First-hand testimonies by Africanwomen have revealed that carrying water for hoursevery day significantly diminishes the amount of timethat they have for income-generating work. As theTanzanian example above illustrates, IFI investments

in privatizing water monopolies increases poverty andcorporate profits.The programs and loans of the IFIshave diminished or eliminated opportunities ofwomen and young girls to earn income and attendschool, respectively.

Why are such IFI policy conditionalities so persist-ent and so sticky? Why do the IFIs do everything tocamouflage the continuation of conditionalities? Ourcase examples demonstrate that a key reason is thatIFI conditionalities open up developing country mar-kets to profitable TNC investments. In IFI loans themain beneficiaries have been the TNCs that win IFIcontracts and local elites, not the poor whom the IFIsclaim are the beneficiaries. If the poor were the ben-eficiaries of the $100 billion that IFIs disburse annu-ally, there would be much less poverty in this world.

In 1989, the World Bank had a task force that laidthe groundwork for the 1990 World DevelopmentReport on poverty.15 The task force concluded thatreducing poverty requires asset and income redistrib-ution.Asset ownership has become more concentrat-ed and income distribution gaps have widened inmost countries since the late 1980s. IFI policies andloans that cater to TNCs and elites, not the poorwhom they claim to serve, help explain why povertyand income distribution have worsened.

ENDNOTES

1.That the Woodrow Wilson International Center forScholars first invited me to present in 1987 and againalmost 20 years later on this topic underscores the longintractability of IFI occupation of poor countries’ policyspace.

2. For a description of the many names IFIs use for poli-cy-based loans since launching SALs, see Vladisavljevic,Aleksandra and Elaine Zuckerman,“StructuralAdjustment’s Gendered Impacts:The Case of Serbia andMontegnegro,” Gender Action, 2004, http://www.gen-deraction.org/images/Gender-SALs-Serbia&Mont.PDF.

3.All IFIs support both SALs or policy-based loans as wellas investment projects except the IMF that only makesloans for the former.

4.Vladisavljevic,Aleksandra and Elaine Zuckerman,“Structural Adjustment’s Gendered Impacts:The Case of Serbia and Montegnegro.”

5. Manuela Badawy,“Venezuela:A Financing Center forLatin America-Fitch,” Reuters, February 6, 2007,http://www.veninfo.org/news/02-06-07reu.html.

6.The International Monetary Fund,“Eminent PersonsGroup Outlines Long-Term Revenue Plan to FinanceIMF Activities,” IMF Press Release No. 07/18, January31, 2007, http://www.imf.org/external/np/sec/pr/2007/pr0718.htm; and “Funding the Fund: Putting

Civil societyand govern-ments world-wide must holdthe publicly-financed IFIsaccountable.


the IMF’s own house in order,” The Economist. February3, 2007.

7. Gender Action is a founding member of the first con-certed anti-IMF campaign that citizens’ groupslaunched during the September 2006 annual WorldBank-IMF meetings. See the initial campaign docu-ment,“The IMF: Shrink it or Sink it:A ConsensusDeclaration,” July 2006, http://www.genderaction.org.

8. Suzanna Dennis and Elaine Zuckerman,“Gender Guideto World Bank and IMF Policy-Based Lending,” GenderAction and the Heinrich Boell Foundation, December2006, http://www.genderaction.org/publications.html.

9.The World Bank Group,“Gender Equality as SmartEconomics:A World Bank Group Gender Action Plan (Fiscal years 2007–10),” September 2006,http://siteresources.worldbank.org/INTGENDER/Resources/GAPNov2.pdf.

10.World Bank mandatory Operational Policies haveprecedence over action plans.

11. For example, the World Bank Group’s MultilateralInternational Guarantee Agency provides political risk

insurance to private mining companies operating inthe DRC: http://www.cao-ombudsman.org/html-english/DemocraticRepublicofCongo.htm; the WorldBank Group’s International Development Associationmakes loans to the DRC to “restructure” the miningsector, including laying off 10,000 workers; informa-tion on this is available at: http://www-wds.world-bank.org/external/default/WDSContentServer/WDSP/AFR/2004/12/15/8793B0DBCBC1CC6585256F030017596D/1_0/Rendered/PDF/38150DRC1CONFORMED.pdf and http://www.bicusa.org/Legacy/DRCWorldBank_August_2003.pdf.

12. Suzanna Dennis and Elaine Zuckerman,“GenderGuide to World Bank and IMF Policy-BasedLending.”

13. Ibid.14. Ibid.15.The World Development Report, the World Bank’s

annual flagship publication, highlights a differenttheme each year and is available at http://www.worldbank.org/wdr.

35

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