Guest blogger Charles Gore lays out a forward-looking agenda for global economic governance to address urgent challenges in the areas of trade, climate and inequality.
The most critical challenge for global economic governance is to find effective and fair ways of mitigating and adapting to climate change whilst at the same time reducing global income inequalities and realizing the development aspirations and unrealized human potential of millions of people in developing countries. Recent evidence, for example on sea level rise and the shrinking summer ice in the Arctic Ocean, suggests that climate change is occurring even faster than models pronounced by the Intergovernmental Panel on Climate Change (IPCC) have predicted. Biophysical feedback mechanisms, too often omitted from climate models, are likely to be a key factor in the underestimation and are likely to make climate change irreversible once critical atmospheric temperatures are passed. How fast we act will affect both the magnitude and reversibility of climate change. Some say 2015 will be too late; but even if they are wrong, the climate issue will certainly be at the top of the public agenda by then.
However, public action to mitigate and adapt to climate change must not stymie the development aspirations of current and future generations in developing countries. We now know that we live in a world of radical global interdependence – my carbon footprint affects the lives of everyone, everywhere, and those of future generations. But it is also a world of radical global income inequality in which there has been a globalization of economic expectations without a globalization of economic opportunities. The poorest 40 percent of the world population receive just 5 percent of the world income. It has also been estimated that the richest 1 percent of people in the world receive as much as the bottom 57 percent – in other words, less than the 50 million richest people receive as much as the 2.7 billion poorest. Action to address climate change must be conducted in a way that does not amplify and ossify these global inequalities but rather unlocks the creative potential of people in developing countries.
The design of the multilateral trading system is highly relevant to this complex challenge. The basic reason is that the governance practices of successful developmental states, most notably those in East Asia, offer the best hope for achieving the structural transformation and technological change that is involved in a transition to a low-carbon economy within a capitalist market economy. But the rules of the multilateral trading system can constrain – or enable – effective governance for this transition.
A first challenge is that of providing policy space for experimentation and learning. But on a deeper level, the challenge is to give meaning to the promise of a development round of multilateral trade negotiations. This ambition has generally been interpreted within the framework of the exchange of market access concessions, with a focus either on priority sectors (e.g. agriculture) or priority countries (e.g. least developed countries (LDCs)). But the key developmental asymmetry in the current multilateral trading system, at a time when knowledge is becoming increasingly important for global production and competition, is related to the difference in modes of technology acquisition in developed and developing countries. Research and development (R&D) can be subsidized within the current system. But such subsidies are most relevant for advanced countries that are already at the global technology frontier. For developing counties catching-up, learning through the adoption and adaptation of existing technologies is critical for technological development; it is this learning that needs to be subsidized. Addressing this asymmetry would not only provide the basis for a genuine development round, but would also serve to facilitate the technological diffusion and acquisition necessary for the transition to a low-carbon development trajectory.
The current financial crisis is like a fire in the house whose immediate negative impacts are distracting attention from the deeper challenges. Fixing the financial system is imperative. The fire is spreading rapidly-already the financial crisis has precipitated a trade crash. This has not – or not yet, at least – been propelled by protectionism, but rather by a cumulative cycle of collapsing demand and the drying up of trade credit. The scale of the crash is staggering. For example, Japan’s exports were 48 percent lower in January 2009 than in January 2008. In January 2009, the United Nations Conference on Trade and Development’s (UNCTAD) commodity price index (in current dollars) was 37 percent lower than its peak in April 2008, with minerals, ores, and metals, and vegetable oilseeds and oils both down by almost 50 percent from their peak in the previous year.
One important priority action for world leaders in this situation should be to design special measures to protect the LDCs. Most people living in LDCs are not integrated into global financial markets and so they are not directly affected by the collapse of financial asset values. But LDCs are highly integrated into the global economy through trade (which constitutes about 50 percent of their GDP) and they are mainly dependent on a narrow range of primary commodity exports, low-skill garment exports, and tourism. In addition to being highly exposed to the trade crash, LDCs also have very low resilience to external shocks, owing to the low levels of national financial resources remaining after the basic subsistence needs of the population are met. The squeeze on imports that will follow falling export receipts, if all other things are equal, will adversely affect food security, new investment, and even the maintenance of economic activity in the LDCs, compromising the already-slow progress towards the Millennium Development Goals.
A specific measure that should be considered to prevent this is the implementation of an ‘anti-shocks financing facility’, to provide large-scale, low-conditionality, rapid-disbursing, grants. This facility would serve to cushion the impact of the trade crash. Economic observers have long identified the absence of such a facility as a critical problem for poor countries. Similarly, policy makers in countries that have received debt relief through the Highly Indebted Poor Country (HIPC) initiative of the World Bank and the International Monetary Fund (IMF) have identified the introduction of such a facility as a priority. The lack of contingency financing can be traced back to the decision of the IMF to introduce the Enhanced Structural Adjustment Facility (ESAF) in 1990. This decision entailed a significant shift on the part of the IMF from its traditional financing role in low-income countries, which was to provide countries ready-access to first-line liquidity (to cover the cash flow requirements of sudden, unexpected external shocks) to a new role of medium-term macro-management and, subsequently, public expenditure management for poverty reduction. The introduction of the anti-shocks financing facility could thus also be associated with a reconsideration of the role of the IMF in poor countries.
Whilst working to fix the financial system and to mitigate the unfolding impact of the financial crisis, world leaders must view the present moment as a turning-point. The crisis marks the ending of a global development regime that has lasted for almost 60 years. The crisis was certainly triggered by misunderstood financial innovations, outrageous incentive structures, and lax financial regulation. But the increasing instability of the old development regime is ultimately rooted in radical global inequalities and, consequently, over-production in relation to effective demand. In their actions to deal with the fallout of the financial crisis, world leaders must act as midwives of the new global development regime. This new regime, which will take shape over the next five years, is likely to be driven by a cluster of new technologies related to the environment and energy use. The promotion of a more equal world income distribution can act as a demand pull and also release the under-utilized creative potential of developing countries. In dealing with the fire now, world leaders can and should therefore equally address the deeper challenges of mitigating climate change and addressing global inequality.
Charles Gore is Special Coordinator for Cross-sectoral Issues, Division for Africa and LDCs at the United Nations Conference on Trade and Development (UNCTAD). The views in this paper do not reflect those of UNCTAD.
This article is part of a forthcoming compilation on a trade agenda for G20 leaders edited jointly by Dr. Carolyn Deere Birkbeck (Global Economic Governance Programme) and Ricardo Meléndez-Ortiz (International Centre on Trade and Sustainable Development (ICTSD)). The compilation will be published in mid-March 2009.
December 7th, 2009 at 11:05 am
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