UNITED NATIONS CONFERENCE ON TRADE AND DEVELOPMENTGENEVA

TRADE AND DEVELOPMENTREPORT, 2014

Report by the secretariat of theUnited Nations Conference on Trade and Development

UNITED NATIONSNew York and Geneva, 2014

• Symbols ofUnitedNations documents arecomposed of capital letters combinedwithfigures.MentionofsuchasymbolindicatesareferencetoaUnitedNationsdocument.

• ThedesignationsemployedandthepresentationofthematerialinthispublicationdonotimplytheexpressionofanyopinionwhatsoeveronthepartoftheSecretariatoftheUnitedNationsconcerning the legal status of any country,territory,cityorarea,orofitsauthorities,orconcerningthedelimitationofitsfrontiersorboundaries.

• Material in this publicationmay be freelyquoted or reprinted, but acknowledgementisrequested,togetherwithareferencetothedocumentnumber.AcopyofthepublicationcontainingthequotationorreprintshouldbesenttotheUNCTADsecretariat.

Note

UNCTAD/TDR/2014

UNiTeDNATioNSPUbliCATioN

Sales No.e.14.ii.D.4

iSbN978-92-1-112877-2 eiSbN978-92-1-056846-3

iSSN0255-4607

Copyright©UnitedNations,2014Allrightsreserved

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Explanatory notes .......................................................................................................................................ix

Abbreviations ...............................................................................................................................................x

OVERVIEW ......................................................................................................................................... I–XIV

Trade and Development Report, 2014

Contents

Page

Chapter I

Recent tRends in the WoRld economy ............................................................................... 1

A. Global growth ........................................................................................................................................ 1 1. Developedcountries .......................................................................................................................... 1 2. Developingandtransitioneconomies ................................................................................................ 3

B. international trade ................................................................................................................................ 4 1. Tradeingoods ................................................................................................................................... 4 2. Services ............................................................................................................................................. 6 3. Tradeandgrowth ............................................................................................................................... 7

c. Recent developments in commodity markets ..................................................................................... 8

notes ........................................................................................................................................................... 13

References .................................................................................................................................................. 14

Chapter II

toWARds A sustAined economic RecoveRy: RevieW of Policy oPtions ......... 15

A. Policy threats to a global economic recovery ................................................................................... 16 1. Policystancesinthedevelopedworld ............................................................................................ 16 2. Policystancesindevelopingandemergingeconomiesinacontext

ofgrowingvulnerabilitytoexternalshocks ................................................................................... 23 3. Currentpoliciesandoutcomesfromaglobalperspective .............................................................. 29

b. economic policies for a sustained global recovery........................................................................... 30 1. Policiesandoutcomes ..................................................................................................................... 30 2. Summingup:Theneedforpolicyconsistencyandmacroeconomiccoherence ............................. 34

notes ........................................................................................................................................................... 37

References .................................................................................................................................................. 39

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Page

Chapter III

Policy sPAce And GloBAl GoveRnAnce: issues At stAke .......................................... 43

notes ........................................................................................................................................................... 49

References .................................................................................................................................................. 49

Chapter IV

Policy sPAce And the oRiGins of the multilAteRAl economic system ........ 51

A. introduction ......................................................................................................................................... 51

B. debates on the emerging international economic order in the mid-twentieth century ................ 53 1. Theriseandfalloftheinter-warliberalpolicyagenda ................................................................... 53 2. internationalizingtheNewDeal ...................................................................................................... 55

c. development voices ............................................................................................................................. 59 1. Pursuingadevelopmentagenda ...................................................................................................... 59 2. FromaninternationalNewDealtotechnocraticmultilateralism .................................................... 61

d. the unsteady rise of inclusive multilateralism ................................................................................. 64

e. Profitsandpolicies:Thedangersofamnesicglobalization ............................................................ 68

notes ........................................................................................................................................................... 71

References .................................................................................................................................................. 74

Chapter V

tRAde And industRiAl Policies in An evolvinG GloBAl GoveRnAnce ReGime .................................................................................................... 77

A. introduction ......................................................................................................................................... 77

B. the evolving global governance framework: implications for national trade and industrial policies ......................................................................................................................... 80

1. Multilateraltradeagreements:Constraintsonpolicychoicesandremainingflexibilities .............. 82 2. Regionaltradeagreements:Additionalconstraintsonpolicychoices ............................................ 86 3. Therisingrestrictivenessofpolicycommitmentsandinternationalproductionnetworks ............. 89

c. industrial policy in an era of reduced policy space ......................................................................... 92 1. Recentproactivepoliciesforreindustrializationindevelopedeconomies ..................................... 93 2. Developingcountries:Recentexperienceswithnationalpoliciesforindustrialdevelopment ....... 96

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Page

d. current challenges to proactive trade and industrial policies ...................................................... 100 1. Apotentialdeclineindevelopingcountries’exportopportunities ................................................ 100 2. Productionnetworksandtheroleofindustrialpolicies ................................................................ 103

e. conclusions ........................................................................................................................................ 107

notes ......................................................................................................................................................... 108

References ................................................................................................................................................ 114

Chapter VI

inteRnAtionAl finAnce And Policy sPAce ...................................................................... 121

A. introduction ....................................................................................................................................... 121

B. Capitalmanagementinaneraofglobalizedfinance ..................................................................... 123 1. Capitalflowsandtheirimpactonmacroeconomicpolicyspace ................................................... 123 2. Theneedforpolicyspaceforcapitalcontrols ............................................................................... 127 3. Macroprudentialregulationandcapitalmanagement .................................................................. 130

c. Policy space with regard to foreign investment ............................................................................. 135 1. investmentprotectionrules ........................................................................................................... 136 2. Thecurrentdebateoninvestmentprotectionrulesandpolicyproposals ...................................... 141

d. summary and conclusions ............................................................................................................... 145

notes ......................................................................................................................................................... 147

References ................................................................................................................................................ 151

Annex to chapter VI

do Bilateral investment treaties Attract fdi flows to developing economies? ............................. 155

Chapter VII

fiscAl sPAce foR stABility And develoPment: contemPoRARy chAllenGes ................................................................................................... 161

A. introduction ....................................................................................................................................... 161

B. DevelopmentalStatesandtheirfiscalspace ................................................................................... 163 1. DevelopmentalStates .................................................................................................................... 163 2. long-termfiscaltrends .................................................................................................................. 164 3. Compositionofpublicrevenueandfiscalspace ........................................................................... 168

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Page

c. tax leakage and international governance of taxation .................................................................. 171 1. Keyconcepts .................................................................................................................................. 171 2. Cross-bordertaxdodgingmechanisms .......................................................................................... 173 3. Magnitudeandimpactofinternationaltaxabusesonmobilizationofpublicrevenue ................ 175 4. Recentattemptstotackleinternationaltaxleakages ..................................................................... 176

d. Improvingpublicrevenuemobilizationfromtheextractiveindustries ...................................... 180 1. Fiscalregimesandtaxincentivesintheextractiveindustries ....................................................... 180 2. Distributionofrentsintheextractiveindustries .......................................................................... 184 3. Recentinitiativesrelatedtotaxationintheextractiveindustries .................................................. 186

e. summary and conclusions ............................................................................................................... 192

notes ......................................................................................................................................................... 195

References ................................................................................................................................................ 200

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List of tables and boxes

Table Page

Box Page

5.1 Structuraltransformationindevelopingcountries:Theroleofthemanufacturingsector ........... 81

1.1 Worldoutputgrowth,2006–2014 ................................................................................................... 2

1.2 exportandimportvolumesofgoods,selectedregionsandcountries,2010–2013 ....................... 5

1.3 Worldprimarycommodityprices,2008–2014 ............................................................................. 10

2.1 exportconcentrationindex,selectedcountries,2003–2012 ........................................................ 29

2.2 Mainassumptionsofthemodelsimulationsinselectedregionsandcountries,1990–2024 ....... 32

2.3 GDPgrowthinselectedregionsandcountries,1990–2024 ......................................................... 33

2.4 Financialvariablesforselectedregionsandcountries,1990–2024 ............................................. 35

6.A.1 Regressionresults,1985–2012 ................................................................................................... 158

7.1 Shareofgovernmentrevenuesinrentsfromtheextractiveindustries,selectedcommoditiesandcountries,2004–2012 ....................................................................... 185

7.2 examplesofrevisionsintheregulatoryandfiscalregimesfortheextractiveindustries .......... 188

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List of charts

Chart Page

1.1 Monthlycommoditypriceindicesbycommoditygroup,Jan.2002–June2014 ............................ 9

2.1 Changeinrealgovernmentexpenditure,selecteddevelopedcountries,2010Q2–2013Q4 ........................................................................................................................ 17

2.2 Changesinrealunitlabourcostsandexports,selectedeuropeancountries,2010Q3–2013Q4 ........................................................................................................................ 18

2.3 RealGDP,realunitlabourcostandratioofimportstoexportsineurope,2009Q4–2013Q4 ........................................................................................................................ 19

2.4 labourincomeshareinGDP,selecteddevelopedcountries,1990–2013 .................................... 20

2.5 Assetprices,changeinhouseholdexpenditure,andhouseholdborrowingandnetfinancialsavingsintheUnitedStatesandtheUnitedKingdom ...................................... 22

2.6 ContributionofdomesticdemandandnetexportstorealGDPgrowth,selectedcountries,2011–2013 ...................................................................................................... 24

2.7 labourincomeshareinGDP,selecteddeveloping-countrygroups,1990–2012 ......................... 25

2.8 Totalassetsofmajorcentralbanksandglobalstockmarketindex,Jan.2009‒Dec.2013 .................................................................................................................... 26

2.9 Sovereignbondyieldspreads,selecteddevelopingandtransitioneconomies,2007Q4‒2014Q2 ........................................................................................................................ 27

2.10 Capitalinflowstotheprivatebankingsectorandstockmarketindices,selecteddevelopingandtransitioneconomies,2005Q1–2013Q4 .............................................. 28

5.1 GDPandimportvolumegrowth,developedeconomies,2001–2013 ........................................ 102

5.2 Developedeconomies’GDPgrowthanddevelopingeconomies’exportgrowth,2000–2013 .................................................................................................................................. 103

6.1 Capitalinflows,2007Q1–2013Q3 ............................................................................................ 124

7.1 RelationshipbetweengovernmentrevenuesandpercapitaGDP,2012 .................................... 165

7.2 Governmentrevenuesbysource,selectedcountrygroups,1991–2012 .................................... 167

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Classification by country or commodity group

The classification of countries in thisReport has been adopted solely for the purposes of statistical oranalyticalconvenienceanddoesnotnecessarilyimplyanyjudgementconcerningthestageofdevelopmentofaparticularcountryorarea.Themajor country groupings used in thisReport follow the classification by theUnitedNationsStatisticaloffice(UNSo).Theyaredistinguishedas:

» Developedorindustrial(ized)countries:thecountriesmembersoftheoeCD(otherthanMexico,theRepublicofKoreaandTurkey)plustheneweUmembercountriesandisrael.

» TransitioneconomiesreferstoSouth-easteuropeandtheCommonwealthofindependentStates(CiS).

» Developingcountries:allcountries,territoriesorareasnotspecifiedabove.

Theterms“country”/“economy”refer,asappropriate,alsototerritoriesorareas.

References to “latinAmerica” in the text or tables include theCaribbean countries unless otherwiseindicated.

Referencesto“sub-SaharanAfrica”inthetextortablesincludeSouthAfricaunlessotherwiseindicated.

Forstatisticalpurposes, regionalgroupingsandclassificationsbycommoditygroupused in thisReportfollowgenerallythoseemployedintheUNCTAD Handbook of Statistics 2013(UnitedNationspublication,salesno.b.13.ii.D.4)unlessotherwise stated.Thedata forChinadonot include those forHongKongSpecialAdministrativeRegion(HongKongSAR),MacaoSpecialAdministrativeRegion(MacaoSAR)andTaiwanProvinceofChina.

Other notes

ReferencesinthetexttoTDRaretotheTrade and Development Report(ofaparticularyear).Forexample,TDR 2013referstoTrade and Development Report, 2013(UnitedNationspublication,salesno.e.13.ii.D.3).

Theterm“dollar”($)referstoUnitedStatesdollars,unlessotherwisestated.Theterm“billion”signifies1,000million.Theterm“tons”referstometrictons.Annualratesofgrowthandchangerefertocompoundrates.exportsarevaluedFobandimportsCiF,unlessotherwisespecified.Useofadash(–)betweendatesrepresentingyears,e.g.1988–1990,signifiesthefullperiodinvolved,includingtheinitialandfinalyears.Anobliquestroke(/)betweentwoyears,e.g.2000/01,signifiesafiscalorcropyear.Adot(.)indicatesthattheitemisnotapplicable.Twodots(..)indicatethatthedataarenotavailable,orarenotseparatelyreported.Adash(-)orazero(0)indicatesthattheamountisnilornegligible.Decimalsandpercentagesdonotnecessarilyadduptototalsbecauseofrounding.

Explanatory notes

x

Abbreviations

AfDb AfricanDevelopmentbankAGP AgreementonGovernmentProcurementbePS baseerosionandprofitshiftingbiS bankforinternationalSettlementsbiT bilateralinvestmenttreatyCiS CommonwealthofindependentStatesCPi consumerpriceindexDSM disputesettlementmechanismeClAC economicCommissionforlatinAmericaandtheCaribbeaneiTi extractiveindustriesTransparencyinitiativeeU europeanUnionFATCA ForeignAccountTaxComplianceAct(oftheUnitedStates)FDi foreigndirectinvestmentFeT fairandequitabletreatmentFTA freetradeagreementGATS GeneralAgreementonTradeinServicesGATT GeneralAgreementonTariffsandTradeGDP grossdomesticproductGPM GlobalPolicyModel(oftheUnitedNations)GSP GeneralizedSystemofPreferencesGTA GlobalTradeAlertibRD internationalbankforReconstructionandDevelopmentiCSiD internationalCentreforSettlementofinvestmentDisputesiFF illicitfinancialflowsiiA internationalinvestmentagreementilo internationallabourorganizationiMF internationalMonetaryFundiP intellectualpropertyiPR intellectualpropertyright

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iSDS investor-StatedisputesettlementiTo internationalTradeorganizationlDC leastdevelopedcountryMDG MillenniumDevelopmentGoalMeRCoSUR CommonMarketoftheSouth(MercadoComúndelSur)MFN mostfavourednationNAFTA NorthAmericanFreeTradeAssociation(orAgreement)NAMA non-agriculturalmarketaccessoDA officialdevelopmentassistanceoeCD organisationforeconomicCo-operationandDevelopmentoFC offshorefinancialcentrePPP purchasingpowerparityPWYP PublishWhatYouPayR&D researchanddevelopmentRTA regionaltradeagreementSCM subsidiesandcountervailingmeasuresSDT specialanddifferentialtreatmentTARP TroubledAssetsReliefProgramTDR TradeandDevelopmentReportTJN TaxJusticeNetworkTNC transnationalcorporationTRiMs trade-relatedinvestmentmeasuresTRiPS trade-relatedaspectsofintellectualpropertyrightsUNCiTRAl UnitedNationsCommissiononinternationalTradelawUNCTAD UnitedNationsConferenceonTradeandDevelopmentUN-DeSA UnitedNationsDepartmentofeconomicandSocialAffairsURA UruguayRoundAgreementVAT valueaddedtaxWTo WorldTradeorganization

I

OVERVIEw

Fifty years ago this year, and twenty years after a new multilateral framework for governing the post-war global economy was agreed at Bretton Woods, a confident South gathered in Geneva to advance its demands for a more inclusive world economic order. The first United Nations Conference on Trade and Development (UNCTAD) added a permanent institutional fixture to the multilateral landscape, with the responsibility “to formulate principles and policies on international trade and related problems of economic development”. Moreover, and moving beyond the principles that framed the Bretton Woods institutions (and later the General Agreement on Tariffs and Trade (GATT)), it was agreed that “Economic development and social progress should be the common concern of the whole international community, and should, by increasing economic prosperity and well-being, help strengthen peaceful relations and cooperation among nations”.

UNCTAD’s 50th anniversary falls at a time when, once again, there are calls for changes in the way the global economy is ordered and managed. Few would doubt that, during the five intervening decades, new technologies have broken down traditional borders between nations and opened up new areas of economic opportunity, and that a less polarized political landscape has provided new possibilities for constructive international engagement. In addition, economic power has become more dispersed, mostly due to industrialization and rapid growth in East Asia, with corresponding changes in the workings of the international trading system. However the links between these technological, political and economic shifts and a more prosperous, peaceful and sustainable world are not automatic.

Indeed, growing global economic imbalances, heightened social and environmental fragilities and persistent financial instability, turning at times to outright crisis, should give pause for thought and further policy discussion. Hunger still remains a daily reality for hundreds of millions of people, particularly in rural communities, with children being the most vulnerable. At the same time, rapid urbanization in many parts of the developing world has coincided with premature deindustrialization and a degraded public sector, giving rise to poor working conditions and a growing sense of insecurity. Where these trends have collided with the ambitions of a youthful population, economic frustrations have spilled over into political unrest.

Back in 1964, the international community recognized that “If privilege, extremes of wealth and poverty, and social injustice persist, then the goal of development is lost”. Yet, almost everywhere in recent years, the spread of market liberalism has coincided with highly unequal patterns of income and wealth distribution. A world where its 85 wealthiest citizens own more than its bottom three and a half billion was not the one envisaged 50 years ago.

There is no fast or ready-paved road to sustainable and inclusive development; but the past three decades have demonstrated that delivery is unlikely with a one-size-fits-all approach to economic policy that cedes more and more space to the profitable ambitions of global firms and market forces. Countries should ultimately rely on their own efforts to mobilize productive resources and, especially, to raise their levels of domestic investment (both public and private), human capital and technological know-how. However, for this, they need to have the widest possible room for manoeuvre to discover which policies work in their particular conditions, and not be subject to a

II

constant shrinking of their policy space by the very international institutions originally established to support more balanced and inclusive outcomes.

Insisting on the importance of domestic institutions and policies does not mean adopting a closed or insular attitude to the many development challenges. On the contrary, access to external financial resources and technological know-how is still critical to unlocking the development potential of many poorer and vulnerable countries. Moreover, long-standing development issues − from sovereign debt problems to improved market access in a fairer international trading system, and from commodity price stabilization to financial markets that serve the real economy − can only be addressed through effective multilateral institutions supported by (and this is no small proviso) sufficient political will on the part of the leading economies. Added to these persistent challenges, today’s interdependent world has thrown up a variety of new ones, such as health pandemics, food insecurity, and global warming, which require even bolder multilateral leadership and collective action.

Pursuing bold international collective action to correct the deep inequities of the world, along with determined and innovative domestic policy initiatives, was what motivated the participants at Bretton Woods 70 years ago and in Geneva 50 years ago. Henry Morgenthau, the United States Secretary of the Treasury, was on the mark when he insisted at Bretton Woods that “Prosperity like peace is indivisible. We cannot afford to have it scattered here or there among the fortunate or to enjoy it at the expense of others. Poverty, wherever it exists, is menacing to us all and undermines the well-being of each of us”. As the international community frames an ambitious development agenda beyond 2015, the moment is right to propose another international “New Deal” that can realize the promise of “prosperity for all”.

The world economy in 2014 still in the doldrums

Theworldeconomyhasnotyetescapedthegrowthdoldrumsinwhichithasbeenmaroonedforthepastfouryears,andthereisagrowingdangerthatthisstateofaffairsisbecomingacceptedasthe“newnormal”.Policymakerseverywhere,butparticularlyinthesystemicallyimportanteconomies,needtoassesscurrentapproachesandpaycloserattentiontosignsofinclementeconomicweatherahead.

Growthintheworldeconomyhasbeenexperiencingamodestimprovementin2014,althoughitissettoremainsignificantlybelowitspre-crisishighs.itsgrowthrateof2.3percentin2012and2013isprojectedtoincreasemoderatelytobetween2.5and3percentin2014.Thisimprovementisessentiallyduetogrowthindevelopedcountriesacceleratingfrom1.3percentin2013toaround1.8percentin2014.Developingcountriesasawholearelikelytorepeattheirperformanceofthepreviousyears,growingatbetween4.5and5percent,whileinthetransitioneconomiesgrowthisforecasttofurtherdeceleratetoaround1percent,fromanalreadyweakperformancein2013.

Themoderategrowthaccelerationexpectedindevelopedcountriesshouldresultfromaslightpick-upintheeuropeanUnion(eU),whereatentativeeasingoffiscalausterityandamoreaccommodatingmonetarypolicystance,notablybytheeuropeanCentralbank(eCb),hashelpedpulldemandgrowthbacktopositiveterritory.insomecountries(e.g.theUnitedKingdom),householddemandisbeingsupportedbyassetappreciationandtherecoveryofconsumerandmortgagecredit,andinothersbysomeimprovementinrealwages(e.g.Germany).However,inanumberofotherlargeeuro-zoneeconomies(e.g.France,italyandSpain)highlevelsofunemployment,stagnantorsluggishrealwagegrowth,andpersistentweaknessinthebankingsectorcontinuetohindertheexpansionofdomesticcreditanddemand.intheUnitedStates,theeconomyiscontinuingitstentativerecoverythrougharelianceondomesticprivatedemand.Thenegativeimpactoffiscalausterityeasedslightlyin2014,theunemploymentratehascontinuedtofall,andassetpriceappreciationsareencouragingtherecoveryofdomesticborrowingandconsumption.However,averagerealwagesremainstagnant.GrowthinJapanhasalsobeenrelyingondomesticdemand,asprivateconsumptionandinvestmentbenefitedfromtheexpansionarymonetaryandfiscalpoliciesofAbenomics.Theeffectsof

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publicspendingforreconstructionfollowingthe2011earthquake,whichhelpedpropeltheJapaneseeconomytohighergrowthin2012−2013havedissipated,whilerecenttaxincreasescouldhurtconsumerspending,sothatfurtherstimuluspackagesmaybeneededtomaintainpositivegrowthandpricetargets.

Themaindevelopingregionsarelikelytomoreorlessreplicatetheirgrowthperformanceof2012−2013.Asiaisprojectedtoremainthemostdynamicregion,growingataround5.5percent.Amongthemajorcountriesinthisregion,Chinacontinuestoleadwithanestimatedgrowthrateofcloseto7.5percentin2014,basedondomesticdemand,withsometentativesignsofanincreasingroleforprivateandpublicconsumption.Growthinindiaisacceleratingtoanestimated5.5percentasaresultofhigherprivateconsumptionandnetexports; investment,ontheotherhand,remainsflat.MostcountriesinSouth-eastAsiashouldkeepgrowingataroundorabove5percent,drivenbyprivateconsumptionandfixedinvestment,withlittleornocontributionfromnetexports.economicperformanceismorevariedinWestAsia,whereseveralcountrieshavebeendirectlyorindirectlyaffectedbyarmedconflicts.Turkeyhasbeenexposedtofinancialinstabilityandmaynotbeabletosustainagrowthratethatisheavilydependentondomesticcreditexpansion.

GrowthinAfricaalsoshowswidecontrasts.itremainsweakinNorthAfricaduetoongoingpoliticaluncertaintyanddisruptionsinoilproduction.ithasalsoremainedsubduedinSouthAfrica,ataround2percent,owingtoaweakeningofdomesticdemandandtostrikesintheminingsector.bycontrast,severallargesub-Saharaneconomieshavepostedhighgrowthrates,leadingtoprojectedgrowthforthesubregionofalmost6percentin2014.inseveralcases,historicallyhighcommoditypriceshavebeensupportingthisgrowththathaspersistedformorethanadecade.

Afterastrongreboundin2010,economicgrowthinlatinAmericaandtheCaribbeanhassloweddowntoanestimated2percentin2014.Thisweakperformancemainlyreflectsslowgrowthinthethreemaineconomies,Argentina,brazilandMexico,wheredomesticdemand(theirmaindriverofgrowthaftertheglobalcrisis)haslostmomentum.externalfinancialshocksinmid-2013andearly2014alsoaffectedthoseeconomies,leadingtomacroeconomicpolicytightening.FurtherfinancialinstabilitymightresultfromlegalobstaclestothenormalservicingofArgentina’ssovereigndebt.However,Argentina’ssolvencyandsoundmacroeconomicfundamentalsinmostcountriesintheregionshouldpreventthisshockfromdevelopinginto a regionalfinancial crisis. Several countries exportinghydrocarbonsorminerals have experiencedsignificantlyhighergrowthrates,pushedbystrongdomesticdemand.

Theeuropeantransitioneconomiesarelikelytoexperienceafurtherslowdownofgrowththisyear,with stagnant consumption and investment demand in theRussianFederation exacerbatedbyfinancialinstabilityandrenewedcapitaloutflows.ontheotherhand,theCentralAsiantransitioneconomies,mostofwhichareoilormineralexporters,seemsettomaintainfairlyrobustgrowthratesasaresultofhistoricallyhightermsoftrade.

Trade winds not picking up

Sixyearsaftertheonsetoftheglobalfinancialcrisis,internationaltraderemainslacklustre.Merchandisetradegrewatcloseto2percentinvolumein2012−2013andthefirstfewmonthsof2014,whichisbelowthegrowthofglobaloutput.Tradeinservicesincreasedsomewhatfaster,ataround5percentin2013,withoutsignificantlychangingtheoverallpicture.Thislackofdynamismcontrastssharplywiththetwodecadesprecedingthecrisis,whenglobaltradeingoodsandservicesexpandedmorethantwiceasfastasglobaloutput(atannualaveragesof6.8percentand3percentrespectively).Duringthatperiod,theshareofexportsandimportsofgoodsandservicesinGDP(atconstantprices)virtuallydoubled,fromaround13percentto27percentindevelopedcountries,andfrom20percenttocloseto40percentindevelopingcountries.

Giventheinsufficiencyofglobaldemand,itishighlyunlikelythatinternationaltradealonewillbeabletokick-starteconomicgrowth.Facilitatingtradeflowsbymodernizingcustomsprocedureswillbe

IV

helpfulinmakingthetradingsystemmoreefficientoverthelongerterm,butitwillnotaddressthemainconstraintsontradetoday.internationaltradehasnotsloweddownorremainedquasi-stagnantbecauseofhighertradebarriersorsupply-sidedifficulties;itsslowgrowthistheresultofweakglobaldemand.inthiscontext,alopsidedemphasisonthecostoftrade,promptingeffortstospurexportsthroughwagereductionsandan“internaldevaluation”,wouldbeself-defeatingandcounterproductive,especiallyifsuchastrategyispursuedbyseveraltradepartnerssimultaneously.Thewaytoexpandtradeatagloballevelisthrougharobustdomestic-demand-ledoutputrecoveryatthenationallevel.

Althoughthereisanoveralllackofdynamismintradeatpresent,insomecountriesandregionsimportshavebeengrowing(involume)atrelativelyhighrates:between8and9percentin2013.Thishasbeenthecaseinsub-SaharanAfricaandWestAsiathatcontinuetobenefitfromhighcommoditypricesbyhistoricalstandards,andinChina,whichremainsastrongmarketforseveralprimarycommodities.

Thatsaid,withafewbutimportantexceptions,mostcommoditypriceshavebeendecliningpersistentlysincetheirpeaksin2011,althoughtheirdownwardtrendseemstohavebeenslowingdownin2013−2014.Themainexceptionstothistrendareoil,thepriceofwhichhasremainedremarkablystableathighlevelssince2011,andtropicalbeverages(coffeeandcocoa)andsomeminerals(mostnotablynickel),whichexperiencedsharppriceincreasesin2014duetosupplyshortages.Despiteanoveralldecliningtrend,commoditypricesinthefirsthalfof2014remained,onaverage,closeto50percenthigherthanduringtheperiod2003−2008.

Whilerecentdevelopmentsincommoditypriceshavedifferedbycommoditygroupandforparticularcommodities,acommonfeatureinthephysicalmarketsisthatsupply-sidefactorshaveplayedamajorrole.Thisisreflected,forinstance,inthelowerpricesofminerals,asinvestmentsmadeduringtheperiodofrapidlyrisingpriceseventuallytranslatedintoincreasedsupplies.bycontrast,changesinphysicaldemandhadonlyaminorimpactontheevolutionofcommoditypricesin2013andearly2014.ingeneral,demandforcommoditieshascontinuedtogrowinlinewiththemoderateeconomicgrowthoftheworldeconomy.

Short-term developments in commodity prices continued to be influenced by the substantialfinancializationofcommoditymarketsduring2013andthefirsthalfof2014.However,regulatorychangesincommodityfuturestradinghaveencouragedashufflingofparticipantsfrombankstowardsotherfinancialoperatorssuchascommoditytradingcompanies,whichoftenoperateinalesstransparentandlessregulatedenvironmentthanmoretraditionalfinancialinstitutions.

Fromalongertermperspective,theconclusionoftheanalysisofTDR 2013thatcommoditypricesaresettoremainatrelativelyhighlevelsinhistoricaltermsinthecomingyears,withsomeshort-termcorrections,remainsvalid.Thisdoesnotsuggestthatproducingcountriesshouldbecomplacent;rathertheyshouldtryasfaraspossibletousetherentsgeneratedinthesemarketstofinancestructuraltransformation,particularlywithaviewtoproductionandexportdiversification.

A “new normal”?

Theapparentstabilizationofrelativelylowgrowthratesacrossdifferentgroupsofcountriesintheworldeconomymaygivetheimpressionthatithasreacheda“newnormal”.However,toassessthesustainabilityofthepresentsituation,itisnecessarytoexaminenotonlytheratesofGDPgrowth,butalsoitsdrivers.

Afterabriefexperimentin2009andthefirsthalfof2010withexpansionaryfiscalmeasuresinresponsetotheimmediatethreatofaglobalfinancialmeltdown,thepolicymixusedinthedevelopedeconomiescomprised,tovaryingdegrees,acombinationoffiscalausterity,wagecontainmentandmonetaryexpansioninthehopethatincreasedinvestorconfidence,labourmarketflexibility,greatercompetitivenessandtheexpectedrehabilitationofbanks’balancesheetswouldorchestratearapidandsustainedrecovery.However,withfiscal and labourmarket policies dampeningdomestic demand, liquidity expansion bymonetary

V

authoritieswas channelledmostly tofinancial, rather thanproductive, investments.This in turn led tosignificantincreasesinassetprices,despiteanaemiceconomicgrowth,andtolargecapitaloutflows,muchofthemtoemergingmarkets.Consequently,thispolicymixonlyindirectly(andwithasignificantdelay)supportedademandrecoveryinthosecountrieswhereassetappreciationgeneratedasufficientlystrongwealtheffectandencouragedrenewedconsumerborrowing.Assuch,thenewnormalhassomeobviousparallelswiththeconditionsthatledtotheglobalfinancialcrisis.

inthecaseofemergingeconomies,theextenttowhichtheexpansionofdomesticdemandwasbeingsupportedbygenuineincomeexpansionorbyunsustainableassetbubblesandexcessiveconsumerborrowing(with likely significant variations across countries) is still unclear.However, thepotential vulnerabilityofdevelopingandemergingeconomiesinthenewnormalisheightenedbypersistentweaknessesintheinternationalfinancialarchitecture.Underthesecircumstances,capitalflowscanhavesignificant,andnotalwayswelcome,effectsontherealeconomyandontheabilityofpolicymakerstorespondtounforeseenshocks.

Somedevelopingcountriesalsoremainexposedtonegativeshocksoriginatingfrominternationaltrade,particularlyincountriesthatrelymainlyonexportsofonlyafewprimarycommoditiesoronlow-skill,labour-intensivemanufactures.Diversificationoftheirproductiveandexportactivitiesisapendingtaskformanytransitionanddevelopingeconomies.TheUNCTADMerchandiseTradeSpecializationindexconfirmsthat,despitetherapidrateofgrowthoftradeinmanydevelopingeconomiesovertheperiod1995−2012,thedegreeofspecializationintheirexportstructureshasnotvariedsignificantly.

Thereis,infact,nothingparticularly“new”aboutthecurrentfinancialcycleaffectingdevelopingandtransitioneconomies.Theseeconomiesarenowexperiencingtheirfourthsuchcyclesincethemid-1970s;and,muchasbefore,becausethepresentcycleismainlydrivenbydevelopedcountries’economicconditionsandmonetarypolicydecisions,theresultinginternationalcapitalmovementsdonotnecessarilycoincidewiththeneedsofdevelopingcountries.onthecontrary,ifrecenthistoryisanyguide,theycouldhaveseriousdisruptivemacroeconomicandfinancialeffects.inordertocreateandmaintaindomesticmacroeconomicandfinancialconditions that supportgrowthandstructural transformation,governments shouldhaveattheirdisposalsuitablepolicyinstrumentsformanagingcapitalflows,andforpreventingorcopingwiththerecurrentshocksthesecanprovoke.MultilateralrulesintheiMF’sArticlesofAgreementandintheGeneralAgreementonTradeinServices(GATS)oftheWorldTradeorganization(WTo)doallowgovernmentstomanagetheircapitalaccounts,includingaresorttocapitalcontrols.However,theemphasishasbeenontheiruseonlyforprudentialreasonsorcrisismanagement.instead,capitalmanagementmeasuresshouldbeseenasanormalinstrumentinpolicymakers’toolkit,ratherthanasanexceptionalandtemporarydevicetobeemployedonlyincriticaltimes.

Somenewbilateralandplurilateraltradeandinvestmentagreementsthathavebeensigned,orarebeingnegotiated,introduceevenmorestringentcommitmentswithrespecttofinancialliberalizationthanthosecontainedinmultilateralagreements,whichmightfurtherreducepolicyspaceinthiscontext.Therefore,governmentsthataimtomaintainmacroeconomicstabilityandwishtore-regulatetheirfinancialsystemsshouldcarefullyconsidertherisksintakingonsuchcommitments.

The case for coordinated expansion

UNCTAD,usingitsGlobalPolicyModel,hasassessedanalternative,“balanced-growth”scenario,whichcouldofferawayofescapingfromthecurrentglobaleconomicdoldrums.Thetwoscenariosusedinthemodelhavethevaluenotofforecasting,butofdemonstratingthedirectionofchangethatcouldbeexpectedfromageneralshiftinpolicyorientation.Thebalanced-growthscenariointroducesthefollowingelements:incomespoliciestosupportgrowthofdemandonasustainablebasis;growth-enhancingfiscalpolicies; industrial policies to promote private investment and structural transformation; regulation of

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systemicallyimportantfinancialinstitutionsandcapitalcontrolstostabilizeglobalfinancialmarkets;anddevelopment-orientedtradeagreements.Thisiscontrastedwitha“baseline”scenario,whichbroadlycontinueswithbusiness-as-usualpolicies.

Thesimulationsforthebaselinescenarioshowthatstructuralimbalanceswillkeepongrowing,evenwithcontinuedmoderategrowth,withcountriesbecomingincreasinglyvulnerabletoshocksandfinancialinstability.Thelongersuchimbalancesremainunresolved,theharshertheconsequenceswillbe,inthefaceofanotherseriouscrisis.Thebalanced-growthscenario,ontheotherhand,showsconsiderableimprovementsingrowthrates,and,mostimportantly,agradualresolutionofglobalimbalances.Theaveragegrowthoftheworldeconomyissignificantlyfasterthanitisunderthebaselinescenario.Thefastergrowthratesforallregionsaretheresultnotonlyofindividualstimuli,butalsoofstrongsynergiceffectsfromthecoordinationofpro-growthpolicystancesamongthecountries.Finally,theresultsconfirmgreatergrowthconvergenceinthebalanced-growthscenario,aswellasimprovedfinancialstability.

Whiletheresultsofsuchexercisesneedtobeviewedwithafamiliardegreeofcautionandcare,theirunderlyingmessageisthat,inanincreasinglyinterconnectedglobaleconomy,policieshavetobeconsistentfortheworldasawhole.Takingintoaccountrealandfinancialfeedbacks,itshouldbeclearthatasustainedandstabledemand-ledgrowthpathhastostartdomestically,ratherthanhavingeachcountryindividuallypushingforcompetitivereductionsofcostsandimportsinordertogenerateanet-export-ledrecovery−aprocesstowhich,admittedly,surpluscountrieshavemuchmoretocontribute.

Theabsenceofeffectiveinstitutionsandmechanismsforinternationalpolicycoordinationcanpushpolicymakers intoadoptingstrategies thatmayappear tobeexpedient in the short term,butwhichareeffectivelyself-defeatinginthemediumterm.itisthereforeessentialtocontinuewitheffortstodeviseamoreeffectivesetofgloballyinclusiveinstitutionstoregulatemarkets,helpcorrectunsustainableimbalanceswhentheyemerge,andbetterpursuetheaimsofglobaldevelopmentandconvergence.

Challenges towards a new development agenda

ifmacroeconomicpolicyistackinguncomfortablyclosetothe“business-as-usual”strategyofthepre-crisisyears,thediscussionsnowunderwayonapost-2015developmentagendaaretendingtobreakwiththepast.Thepushforamoreuniversal,transformativeandsustainableapproachtodevelopmentwillplayakeyroleinthesettingofnewgoalsandtargetsforpolicymakers,atboththenationalandinternationallevels.The17goalsandsundrytargetsagreedtoattheUnitedNationsopenWorkingGrouponSustainableDevelopmentalreadysignalalevelofambitionwellbeyondtheMillenniumDevelopmentGoals.

Theinternationalcommunityfacesthreeprinciplechallengesinfashioningthisnewapproach.Thefirstisaligninganynewgoalsandtargetstoapolicyparadigmthatcanhelpraiseproductivityandpercapitaincomeseverywhere,generateenoughdecent jobsonascale tomeetarapidlygrowingandurbanizinggloballabourforce,establishastableinternationalfinancialsystemthatboostsproductiveinvestment,anddeliverreliablepublicservicesthatleavenoonebehind,particularlyinthemostvulnerablecommunities.Thedominanteconomicparadigmofmarketliberalismhasdisappointedinmostoftheserespects.inthiscontext,asPopeFrancishasrecentlysuggested,wecannolongersimplyputourtrustin“thesacralizedworkingsoftheprevailingsystem”.Undoubtedly,freshthinkingisneeded.

Thesecondchallenge toconsider informulatinganewdevelopmentagenda is themassiverise ininequality,whichhasaccompaniedthespreadofmarketliberalism.Thisisimportantbecause,inadditiontoitsmoralimplications,growinginequalitycanseriouslydamagesocialwell-being,threateneconomicprogressandstability,andunderminepoliticalcohesion.PreviousTrade and Development Reports(TDRs)haveinsistedontheneedtolookbeyondsomeoftheheadline-grabbingnumberssurroundingthetoponepercent,andexaminewhathasbeenhappeningtofunctionalincomedynamics,inparticular,thedivergence

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betweenwageandproductivitygrowthand thegrowthof rentier incomes.Heightenedcapitalmobilityhasnotonlyreducedthebargainingpoweroflabour,furtheramplifyingtheadversedistributiveimpactofunregulatedfinancialactivity;ithasalsomadeithardertotaxsomeincomesdirectly,thusincreasingtheState’srelianceonmoreregressivetaxesandonbondmarkets.Thiscan,inturn,haveaverycorrosiveimpactonthelegitimacyandeffectivenessofthepoliticalprocess.

Thethirdchallengeisensuringthateffectivepolicyinstrumentsareavailabletocountriestoenablethemtoachievetheagreedgoalsandadvancethedevelopmentagenda.Restoringadevelopmentmodelthatfavourstherealeconomyoverfinancialinterests,putssustainabilityaheadofshort-termgainsandtrulyseekstoachieveprosperityforallwillalmostcertainlyrequireaddingmoreinstrumentstothepolicytoolkitthaniscurrentlycontemplatedbyeconomicorthodoxy.

The enduring case for policy space

Anywideningandstrengtheningoftheambitionofnationaldevelopmentstrategieswillneedtobeaccompaniedbyinstitutionalchanges.Marketsrequireaframeworkofrules,restraintsandnormstooperateeffectively.Assuch,themarketeconomyisalwaysembeddedinalegal,socialandculturalsetting,andissustainedbypoliticalforces.Howandtowhatextenttheframeworkofrulesandregulationsisloosenedortightenedispartofacomplexpoliticalprocessspecifictoeachsociety,butitcannotbedispensedwithwithoutthreateningabreakdownofthewidereconomicandsocialorder.

internationalmarketsandfirms,nolessthantheirdomesticcounterparts,alsorequireaframeworkofrules,restraintsandnorms.And,asatthedomesticlevel,thelooseningandtighteningofthatframeworkisapersistentfeatureofgovernanceoftheglobaleconomy.Statesmustdecideonwhetherandhowmuchoftheirownindependencetheyarewillingtotradefortheadvantagesofhavinginternationalrules,disciplinesandsupports.inevitably,inaworldofunequalStates,thespacerequiredtopursuenationaleconomicandsocialdevelopmentaspirationsvaries,asdoesthelikelyimpactofanindividualcountry’spolicydecisionson others.The challenges ofmanaging these trade-offs are particularly pronounced at themultilaterallevel,wherethedifferencesamongStatesaresignificant.Whiletheextenttowhichanadoptedgrowthanddevelopmentpathrespondstonationalneedsandprioritiescanobviouslybelimitedorcircumscribedbymultilateralregimesandinternationalrules,itcanequallybeaffectedbyeconomicandpoliticalpressuresemanatingfromtheworkingsofglobalmarkets,dependingonthedegreeandnatureofeconomicintegrationofthecountryconcerned.

TheinterdependenceamongStatesandmarketsprovidesthemainrationaleforawell-structuredsystemofglobaleconomicgovernancecomprisingmultilateralrulesanddisciplines.Theguidingprincipleofthesearrangementsshouldbetheirabilitytogeneratefairandinclusiveoutcomesbyprovidingglobalpublicgoodsandminimizingadverseinternationalspilloversandothernegativeexternalities,regardlessofwhetherthesearecreatedbynationaleconomicpoliciesortheprofit-makingdecisionsofprivateactors.

These various tensions between national policy autonomy, policy effectiveness and internationaleconomicintegrationarecaptured,inpart,bytheideaof“policyspace”;thisreferstothefreedomandabilityofgovernmentstoidentifyandpursuethemostappropriatemixofeconomicandsocialpoliciestoachieveequitableandsustainabledevelopmentintheirownnationalcontexts,butasconstituentpartsofaninterdependentglobaleconomy.itcanbedefinedasthecombinationofdejurepolicysovereignty,whichistheformalauthorityofpolicymakersovertheirnationalpolicygoalsandinstruments,anddefactonationalpolicycontrol,whichinvolvestheabilityofnationalpolicymakerstosetpriorities,influencespecifictargetsandweighpossibletrade-offs.

Forsomecountries,signingontomultilateraldisciplinescanspurthemtoredoubletheireffortstousetheirremainingpolicyspacemoreeffectivelythanwhentheyhadgreaterpolicyspace;thisseemsto

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betrue,inparticular,forcountriesemergingfromconflict,aswellasformanyformersocialisteconomies.Moreover,thesedisciplinescanoperatetoreducetheinherentbiasofinternationaleconomicrelationsinfavourofcountriesthathavegreatereconomicorpoliticalpower.Thus,suchdisciplinescansimultaneouslyrestrict(particularlydejure)andease(particularlydefacto)policyspace,sinceconstraintsononecountry’sbehaviouralsoapplytoothercountries,therebyaffectingtheexternalcontextasawhole.

buttherearealsovalidconcernsthatthevariouslegalobligationsemergingfrommultilateral,regionalandbilateral agreements have reduced national policy autonomyby affecting both the available rangeandtheefficacyofparticularpolicyinstruments.inaddition,theeffectivenessofnationalpoliciestendstobeweakened−insomeinstancesverysignificantly−byforcesofglobalization(especiallyfinancialglobalization)andbytheinternalizationofmarkets,whichaffectnationaleconomicprocesses.

Inclusive multilateralism: Back to the future

Historyhasatendencytorepeatitself,thoughnotnecessarilyastragedyorfarce.Consequently,therearealwayspositivelessonstobelearnedfromexamininghowearliergenerationsofpolicymakersdealtwithbigchallenges.Theneedforreconcilingtherequirementsofpolicysovereigntyatthenationallevelwiththeimperativesofaninterdependentworldeconomymayseemtodaytoberelativelynew.infact,itisalong-standingchallengethathasbeendiscussedextensively,andfrommanydifferentangles,foralmosttwocenturies,thoughnoneascompellingorsignificantasthosearisingfromthecrisesoftheinter-warera.

Theprincipal objective of the architects ofbrettonWoodswas to design a post-war internationaleconomicstructurethatwouldpreventarecurrenceoftheopportunisticactionsanddamagingcontagionthathadledtothebreakdownofinternationaltradeandpaymentsinthe1930s.Accordingly,suchastructurewouldneedtosupportthenewpolicygoalsofrisingincomes,fullemploymentandsocialsecurityinthedevelopedeconomies.butaprominentgroupofRoosevelt’sNewDealersalsostruggledtoplacedevelopmentissuesfirmlyonthemultilateralagendainthe1930sand1940s.ThisincludedmeasuresthatsoughttoexpandthepolicyspaceforState-ledindustrializationandtoincreasethelevelandreliabilityofthemultilateralfinancialsupportnecessarytomeettheneedsofdevelopingcountries−effortsthateventuallymetwithconsiderableresistance.

ThoseresultssetthestagefortheNorth-Southconflictsofthepost-warperiod.inthatcontext,theconstructionofamoredevelopment-friendlyinternationaleconomicorderwasamuchslowerandmoreunevenprocessafterthewarthanthebrettonWoodsarchitectshadanticipated.ittookthegrowingvoicesofnewlyindependentdevelopingcountriesinthelate1950sandearly1960stoshiftmultilateralismontoamoreinclusivefooting.ThisledtothecreationofUNCTADin1964,andtoasubsequentbroadeningofthedevelopmentagendaaroundanewinternationaleconomicorder.TheoftenforgottenbrettonWoodsdevelopmentvisionandthedetailsofitsvariousproposalscanstillprovidesomeinspirationforthoseseekingtoadvanceaninclusivedevelopmentagendatoday.

Managing creative destruction

Noneoftoday’sdevelopedcountriesdependedonmarketforcesfortheirstructuraltransformationanditsattendanthigherlevelsofemployment,productivityandpercapitaincomes.Rather,theyadoptedcountry-specificmeasurestomanagethoseforces,harnessingtheircreativesidetobuildproductivecapacitiesandprovideopportunitiesfordynamicfirmsandentrepreneurs,whileguidingtheminamoresociallydesireddirection.Theyalsouseddifferentformsofgovernmentactiontomitigatethedestructivetendenciesofthosesamemarketforces.Thisapproachofmanagingthemarket,notidolizingit,wasrepeatedbythemostrapidlygrowingemergingmarketeconomies−fromthesmallsocialdemocraticeconomiesofNortherneuropetothegianteconomiesofeastAsia−inthedecadesfollowingtheendoftheSecondWorldWar.

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Weak initial economic conditions and low administrative and institutional capabilities, aswell aspolicyerrorsandexternalshocksexplain,tovaryingdegrees,whyotherdevelopingcountrieshavebeenlesssuccessfulinreplicatingtheseearlierexperiences.However,internationaleconomicgovernancehasalsoincreasinglyposedgreaterconstraintsontheoptionsforindividualcountriestopursueeconomicpoliciestoachievetheirdevelopmentobjectives.

Thepost-warmultilateraltraderegimewasessentiallydesignednottocompromisethepolicyspaceofthedevelopedcountriestoachieveanappropriatelevelofeconomicsecuritythroughthepursuitoffullemploymentandextendedsocialprotection.but italsosought to limitmercantilistpracticesamong itsmembers andprovidepredictability in international tradingconditions.What emergedwasa regimeofnegotiated,bindingandenforceablerulesandcommitmentswithbuilt-inflexibilitiesandderogations.

SubsequentmultilateraltradenegotiationsundertheauspicesoftheGATTculminatedintheUruguayRoundAgreements (URAs),which entered into force in 1995.The scope of those negotiationswasconsiderablywidened,bothintermsofthecountriesparticipatingandthetarifflinesinvolved.Theyalsoextendedintotrade-relatedareasbeyondtradeingoods,withthemost-favoured-nationandnational-treatmentprinciplesbeingappliednotonlytotradeingoods,butalsototradeinawiderangeofservices,suchasfinance,tourism,educationandhealthprovision.Asaresult,allWTomemberStatesacceptedrestrictionsontheirconductofawidersetofpolicies,includingsomedesignedtopromoteanddirectthestructuraltransformationoftheireconomies.Yetsomeofthepolicyspacetheygaveuphadplayedanimportantroleinsuccessfuldevelopmentprocessesinthepast.Thefollowingaresomeexamples.

• Theuseof subsidies, circumscribedby theAgreementonSubsidies andCountervailingMeasures(SCM),hadbeenapreferredinstrumenttosupportstructuraltransformation,particularlyineastAsiancountries.

• Performancerequirementsonforeigninvestorswithrespecttoexports,domesticcontentandtechnologytransfer, restrictedunder theAgreementofTrade-related investmentMeasures (TRiMs),hadbeenfrequentlyusedtoenhancethecreationoflinkagesbetweenforeigninvestorsandlocalmanufacturers.

• Reverseengineeringandimitationthroughaccesstotechnology,curtailedundertheAgreementonTrade-relatedAspectsof intellectualPropertyRights (TRiPS),hadpreviouslybeenusedbymanycountries,includingthenowdevelopedones.

Despite greater restrictions on the use of certain policy instruments,WTomembers retain someflexibilitytosupportstructuraltransformation,includingintariffpolicywheresomelinesarestillunbound,andwherethedifferencebetweenboundandappliedtariffsprovidesroomformodulatingtheminsupportofdevelopmentgoals.WTomemberscanalsocontinuetousecertainkindsofsubsidiesandstandardstopromoteresearchanddevelopmentandinnovationactivities,aswellasexploitflexibilitiesintheuseofexportcredits.UndertheTRiMsAgreement,policymakersmaycontinuetoimposesector-specificentryconditionsonforeigninvestors,includingindustry-specificlimitations.Theagreementalsoallowssomeflexibilitythroughthemechanismofcompulsorylicensing(wherebyauthoritiescanallowcompaniesotherthanthepatentownertousetherightstoapatent)andparallelimports(i.e.importsofbrandedgoodsintoamarketwhichcanbesoldtherewithouttheconsentoftheownerofthetrademarkinthatmarket).

Weighingthelossofpolicyspaceinspecificareasagainstthepotentialgainsofamorepredictableopenmultilateraltradingsystemisnoeasytask.inanyevent,themoreimmediatequestionishowbesttousethespacethatremainstosupportmoresustainableandinclusiveoutcomesthanhavebeenachievedbymostdevelopingcountriesoverthepastthreedecades.inthisrespect,practicesandcapacitieslinkedtotheinstitutionalconstructofadevelopmentalStatearestillkey,asUNCTADhaslonginsisted.butitisalsoimportanttorecognizethatinconsistenciesandgapsacrossthemultilateralarchitecture,particularlyattheinterfaceoftradeandfinancialflows,continuetomakeitdifficultfordevelopingcountriestomakethemostofthespacethatremains.Moreover,manyofthemneedmuchbettersupportfromtheinternational

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communitytousethecurrentarrangementsinawaythatwillhelptheirtransformationefforts.inmanyrespectsthatsupporthasbeengivenreluctantly,orhasnotbeenforthcomingatall.UNCTAD’sproposalforanindependentcommissiontoundertakeadevelopmentauditofthemultilateraltradingsystemtoexaminetheseandothertensionsthatdisturbthesmoothworkingsofthissystemcouldofferawayforward.

The steady erosion of policy space

Sincetheearly1990s,therehasbeenawaveofbilateralandregionaltradeagreements(RTAs)andinternationalinvestmentagreements(iiAs),someofwhichcontainprovisionsthataremorestringentthanthosecoveredbythemultilateraltraderegime,ortheyincludeadditionalprovisionsthatgobeyondthoseofthecurrentmultilateraltradeagreements.

ProvisionsinRTAshavebecomeevermorecomprehensive,andmanyofthemincluderulesthatlimittheoptionsavailableinthedesignandimplementationofcomprehensivenationaldevelopmentstrategies.eventhoughtheseagreementsremaintheproductof(oftenprotracted)negotiationsandbargainingbetweensovereignStates,thereisagrowingsensethat,duetothelargernumberofeconomicandsocialissuestheycover,thediscussionsoftenlackthetransparencyandthecoordination−includingamongallpotentiallyinterestedgovernmentministries−neededtostrikeabalancedoutcome.

Regardlessofthecountriesinvolved,bysigningthoseagreementsdeveloping-countrygovernmentsrelinquishsomeofthepolicyspacetheyhavebeenendeavouringsohardtopreserveatthemultilaterallevel.Thismayseempuzzling,but itcouldbemainlybecausesomegovernments fearexclusionwhenothercountriessigninguptosuchagreementsgainpreferentialmarketaccessandbecomepotentiallymoreattractiveasdestinationsforFDi.Theymayalsoseeparticipationinafreetradeagreementasameanstofacilitatetheentryoftheirdomesticfirmsintointernationalproductionnetworks.

However,asdiscussedinpreviousTDRs,participationininternationalproductionnetworksrunstheriskofgeneratingadverseterms-of-tradeeffectsoncountries,particularlythoseatthelowerendsofproductionchains,anditcreatesfewdomesticlinkagesandtechnologyspillovers.Moreover,developingcountriesatanearlystageofindustrializationmaybecomelockedintolow-value-addedactivitiesduetostiffcompetitionfromothersupplierstokeeplabourcostslow,andbecausethetightcontroloverintellectualpropertyandexpensivebrandingstrategiesoftheleadfirmblockthemfrommovingupthevaluechain.evenrelativelysuccessfulmiddle-incomecountriesdonotfacealevelplayingfieldinmanyofthesenetworks.Chinaisaninterestingcaseinpoint.Considerableattentionhasbeengiventoitsriseasadominantexporterofelectronicsgoods,totheextentthatitnowaccountsforasmuchasone-thirdoftotaltradeinthissector.butthereare,infact,veryfewChinesefirmsthatcontrolthedifferentpartsoftheelectronicschain.Moretellingstill,Chinesefirms,ononerecentestimate,accountforjust3percentoftotalprofitsinthissector.Thus,developingcountriesneedtocarefullyweighboththecostsandbenefitswhenconsideringanindustrializationstrategythatplacesconsiderableemphasisonparticipationininternationalproductionnetworksifthispushesthemtoaracetoconcludeevermoreandincreasinglystringentagreementswithoutafullandproperunderstandingoftheirdevelopmentpotential.

Policyspaceisnotonlyreducedbyfreetradeagreements,butalsowhencountriessignuptoiiAs.Whenmostsuchagreementswerebeingconcludedinthe1990s,anylossofpolicyspacewasseenasasmallpricetopayforanexpectedincreaseinFDiinflows.Thisperceptionbegantochangeintheearly2000s,asitbecameapparentthatinvestmentrulescouldobstructawiderangeofpublicpolicies,includingthoseaimedatimprovingtheimpactofFDiontheeconomy.besides,empiricalevidenceontheeffectivenessofbilateralinvestmenttreatiesandinvestmentchaptersinRTAsinstimulatingFDiisambiguous.Moreover,thelackoftransparencyandcoherencecharacterizingthetribunalsestablishedtoadjudicateondisputesarisingfromtheseagreements,andtheirperceivedpro-investorbias,addedtoconcernsabouttheireffectiveness.Arangeofpossibilitiesiscurrentlyunderconsiderationtorebalancethesystemandrecovertheneeded

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spacefordevelopmentpolicies.Theseinclude:(i)progressiveandpiecemealreformsthroughthecreationofnewagreementsbasedoninvestmentprinciplesthatfostersustainabledevelopment;(ii)thecreationofacentralized,permanentinvestmenttribunal;and(iii)aretreatfrominvestmenttreatiesandrevertingtonationallaw.

Alongwiththeproliferationoftradeagreementsandtheirexpansionintotrade-relatedareas,therehasbeenaglobalrevivalofinterestinindustrialpolicy.Reconcilingthesetwotrendsisahugechallenge.Manydevelopedcountries,especiallysincetherecentfinancialcrisis,havebeguntoexplicitlyacknowledgetheimportantrolethatindustrialpolicycanplayinmaintainingarobustmanufacturingsector.TheUnitedStates,whileoftenportrayedasacountrythattakesahands-offapproachtoindustrialpolicy,hasbeen,andremains,anaviduserofsuchapolicy.itsGovernmenthasactedasaleadingrisktakerandmarketshaperinthedevelopmentandcommercializationofnewtechnologies,adoptingawiderangeofpoliciestosupportanetworkofdomesticmanufacturingfirmsthathavethepotentialforinnovation,exportsandthecreationofwell-paidjobs.bycontrast,theexperienceoftheeUillustrateshowintergovernmentalagreementscanconstrainthepolicychoicesofnationalpolicymakers,andhowindustrialpoliciesthatarelimitedtotheadoptionofonlyhorizontalmeasuresmayhampertheachievementofstatedobjectives.

Assomedevelopingcountrieshavereassessedthemeritsofindustrialpolicyinrecentyears,theyhavealsousedsomeoftheirpolicyspacetoinducegreaterinvestmentandinnovationbydomesticfirmssoastoenhancetheirinternationalcompetitiveness.Someofthemeasuresadoptedinclude,sector-specificmodulationofappliedtariffs,usingthedifferencebetweenboundandappliedtariffrates;applyingpreferentialimportduties;offeringtaxincentives;providinglong-terminvestmentfinancingthroughnationaldevelopmentbanksorsubsidizingcommercialloans;andusinggovernmentprocurementtosupportlocalsuppliers.Variouspolicymeasurescontinuetobeusedincountriesatdifferentlevelsofdevelopment−fromVietNamtobrazil−inanefforttocreateavirtuouscirclebetweentradeandcapitalaccumulation.

Safeguarding policy space while strengthening multilateral mechanisms

UNCTADhasbeenarguingforsometimethatifdevelopingcountriesaretomaintainandimprovetheirrecentgrowthtrajectories,theyshouldwidenanddeepenthestructuraltransformationoftheireconomies.Theresultingpolicychallengeisafamiliaroneincommodityexporters,wherealackofdiversificationmakestheireconomiesvulnerabletoexogenousshocksandpolicyshifts.butalso,strongergrowthdoesnotautomaticallytranslateintoimprovedlivingstandardsforthemajorityofthepopulation.Whilestructuraltransformationisimperativeforalldevelopingcountriesforsimilarreasons,inthecomingyearstheyarelikelytofindamuchlessfavourableglobaleconomicenvironmentthanexistedintheopeningdecadeofthiscentury.Consequently,structuraltransformationwillbeextremelydifficultwithoutgreaterflexibilitiesinpolicymaking.

Thus,strengtheningthegovernanceofglobaltradeinsupportofdevelopmentgoalswillneedtobepartofamorecomprehensiveandintegratedpackagetohelppreservethepolicyspaceforproactivetradeandindustrialpolicies.Suchreformshouldcomplementmacroeconomicandfinancialreforms.itwillneedtoincludevariouselements,foremostamongthembeingthestrengtheningofmultilateralmechanisms.ThenewmomentumfromtheWTo’sbaliMinisterialConferenceinDecember2013shouldbetakenforwardtoachieveanoutcomeoftheDohaRoundnegotiationsthatjustifiesitsdescriptionasa“developmentround”.Anyrenewalofsuchacommitmentcouldincludeanemphasisonimplementationissuesandmaintainingtheprincipleofasingleundertaking,ratherthanmovingtowardsavariablegeometrywherebyarangeofmandatorycorecommitmentsissupplementedbyplurilateralagreements.Thegreatestbenefitfromthismaywellbesimplymaintainingthepublicgoodcharacterofmultilateralrules.

ArefocusingoftradenegotiationsonmultilateralagreementswouldimplyreconsideringprovisionsthatgobeyondexistingWToagreements;butitshouldalsolookintogreaterflexibilityintheapplicationof

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theURAsbyrespondingconstructivelytoanumberofrecentdevelopments.Forexample,theflexibilitiesintroducedintothesystemofintellectualpropertyrightsprotectionwithrespecttopublichealthcouldbeextendedtosupporttechnologyadoptionandinnovationatallstagesofstructuraltransformation.Furthernegotiationsonindustrialtariffreductionscouldalsoprovidegreaterflexibilityforsector-specificpublicsupportpolicies.Thelatterwouldimplychangingthesector-specificlevelandstructureoftariffsovertime,whilemaintainingconsiderabledispersionoftariffsacrosseconomicsectors.

Fiscal space in the global context

Fiscalspacegoeshand inhandwithpolicyspace.evenifgovernmentsareallowedtodesignandimplementthedevelopmentpoliciesoftheirchoicewithintheexistinginternationalframeworkofnegotiatedrules andacceptednorms, theywill still need tofinance the investment andothergeneral and targetedexpendituresrequiredforimplementingthosepolicies.Thus,strengtheninggovernmentrevenuesiskey.

Fiscalspaceisbothacauseandaneffectofeconomicgrowthandstructuralchange.Higheraveragelevelsofincome,expansionofthemodernsectorsoftheeconomyandashrinkingoftheinformaleconomybroaden the tax base and strengthen the governments’ capacities tomobilizefiscal revenues.This, inturn, allows for higher growth-enhancing public spending, both on the supply side (e.g. investment ininfrastructure,researchanddevelopment,andeducation)andonthedemandside(e.g.social transfers).Conversely,limited,orevenadiminished,fiscalspaceisoftenpartofaviciouscircleofunderdevelopment.Theneedforreclaimingandexpandingfiscalspacefacesparticularchallengesinanincreasinglyglobalizingeconomy.officialdevelopmentassistance(oDA)cansupporttheexpansionoffiscalspace,particularlyintheleastdevelopedcountries(lDCs),ascanforeignborrowing,andonamoresustainablebasisifitisusedforexpandingproductivecapacities.However,theunpredictabilityofoDAcanmakeitdifficultforlong-termpolicyplanning,anditcanalsodelaytheestablishmentofpoliticalmechanismsthatsupportthedevelopmentalState.Moreover,inmostcases,relyingonothers’savingstofundbasicStateactivitiesraisesquestionsaboutvoiceandlegitimacy.Also,excessiverelianceonforeignsourceshasledtooverindebtednessandchronicdeficitsincountries’fiscalandexternalbalances,therebyreducingfiscalspaceinthelongrun.Therefore,expandingfiscalspaceshouldrely,asfaraspossible,ondomesticrevenuesourcesif it is tosustainanationaldevelopmentstrategy.Foreignfinancecancomplement,butnotreplace,suchrevenues.

Amajorproblemisthatglobalizationhasaffectedtheabilityofgovernmentstomobilizedomesticrevenues.Theirloweringoftariffshasresultedinreducedrevenuesinmanydevelopingcountries,oftensignificantlyso,whiletheincreasedmobilityofcapitalanditsgreateruseoffiscalhavenshaveconsiderablyalteredtheconditionsfortaxingincome−bothpersonalandcorporate−andwealth.Thedominantagendaofmarketliberalismhasledtoaglobalizedeconomythatencouragestaxcompetitionamongcountries,attimespushingthemtoa“racetothebottom”inofferingincentivesintheformofreduceddirecttaxation.Corporatetaxrateshavebeenonadecliningtrendindevelopedanddevelopingcountriesalike,oftenaccompaniedbysubsidiesorexemptionstoattractorretainforeigninvestment.inaddition,finance-ledglobalizationhasledtotheproliferationofoff-shorefinancialcentres,taxhavensandsecrecyjurisdictionsthatprovidevariousmeansoftaxavoidanceorevasiononascalethatismeasuredinbillions,ifnottrillions,ofdollars.

Taxation problems for the international community

Trademispricing, including through transfer pricing (i.e. the valuation of intra-firm cross-bordertransactionsby internationalcompanygroups),hasbecome theevasionmechanismofchoice formanycompanies. if the intracompany or intragroup price does not reflect the price thatwould be paid in amarketwhereeachparticipantactsindependentlyinitsowninterest,profitswithinacompanygroupcanbeeffectivelyshiftedtolow-taxorno-taxjurisdictions,whilelossesanddeductionsareshiftedtohigh-taxjurisdictions.Anotherwayofshiftingprofitsandlossesamongjurisdictionsisthrough“thincapitalization”,

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whichoccurswhenacompanyhasahighproportionofdebtinrelationtoitsequitycapital,andmixesandmatchesintragroupdebtsandinterestpaymentsacrossitssubsidiariestominimizetaxpaymentsandgeneratehigheroverallprofits.

Theinternationaltaxarchitecturehasfailed,sofar,toproperlyadapttothisreality,therebyallowingamassivehaemorrhagingofpublicrevenues.Theopacitysurroundingtaxhavensmaypartlyexplainthedifficultiesfacedbypolicymakersincollectingpublicrevenues,butthemainobstacleispolitical:themajorprovidersoffinancialsecrecyaretobefoundinsomeoftheworld’sbiggestandwealthiestcountries,orinspecificareaswithinthesecountries.indeed,offshorefinancialcentresandthesecrecyjurisdictionsthathostthemarefullyintegratedintotheglobalfinancialsystem,channellinglargesharesoftradeandcapitalmovements,includingFDi.

Recently,anumberofdevelopmentsaimedatimprovingtransparencyandexchangeofinformationfortaxpurposeshavetakenplace.TheyincludeadeclarationbyG20leaderstopromoteinformationsharingwithrespecttoallkindsofabusesandfraudulentactivities,anoeCDActionPlanonbaseerosionandProfitShifting(bePS),increasedmonitoringbyseveralnationaltaxauthoritiesoftaxabusesbyrichindividualsandTNCs,andnumerousbilateraltaxtreaties(bTTs)andtaxinformationexchangeagreements(TieAs).

While these initiativesare steps in the rightdirection, their implementationandenforcementhavegenerallybeenveryslow.Thisisparticularlysowithregardtotransferpricingabuses,whichareextremelyharmfulfordevelopingcountries.becausetheseinitiativesaremostlyledbythedevelopedeconomies–themainhomestoTNCsandtosomesecrecyjurisdictions–therearerisksthatthedebatewillnotfullytakeintoaccounttheneedsandviewsofdevelopingandtransitioneconomies.itwillthereforebeimportanttogiveamoreprominentroletoinstitutionsliketheUnitedNationsCommitteeofexpertsoninternationalCooperationinTaxMatters,andtoconsidertheadoptionofaninternationalconventionagainsttaxavoidanceandevasion.

Althoughtheverynatureoftheproblemsuggeststheneedforamultilateralapproach,governmentscanalsoapplymeasuresatthenationallevel.Theycan,forinstance,legislatefortheadoptionofageneralanti-avoidancerule(GAAR)sothat“aggressive”taxschemescanbedeclaredillegalwhenchallengedincourts.Theycanalsobemoreeffectiveincombatingtransfermispricingintheirinternationaltradebyusingreferencepricingforanumberofhomogeneoustradedgoods.

Natural resources for public revenue

inmanydevelopingcountries,collectinghigherpublicrevenuesthroughrentsfromnaturalresources–andparticularlyfromtheextractiveindustries–isofparticularimportanceforthefinancingofdevelopment.Themaincontributionoftheseactivitiestodevelopmentiswhattheypayingovernmentrevenues,astheyoftengenerateenclaveeconomieswithweakornolinkageswiththerestoftheeconomy.However,astheriseofcommoditypricesduringthepastdecadeorsoledtoatenfoldincreaseintheprofitsoftheworld’slargestminingcompanies, itbecameobviousthat thepublicgainsfromresourcerentswerelaggingfarbehind.Corruptionmaybepartlytoblame,butthemainreasonhasbeenoverlygeneroustaxationregimesestablishedatatimeoflowprices,andoftenontherecommendationofthebrettonWoodsinstitutions,withtheaimofattractinginternationalfirmsandinvestorstothesector.

As a result,manygovernments–both fromdevelopedanddevelopingcountries–havebegun torevisetheirpoliciesrelatingtotheextractiveindustries.Thishasincludedrenegotiationorcancellationofexistingcontracts,increasesintaxorroyaltyrates,introductionofnewtaxesandchangesinthedegreeofStateownershipoftheextractiveprojects.Hostgovernmentscanalsobenefitfromastrengtheningoftheirbargainingpositions incontractnegotiationswithTNCsinvolvedin theextractive industriesdue to theemergenceofnewmajorplayers,suchascompaniesfromemergingeconomies.However,thesechanging

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marketconditionsshouldnotobscurethewiderpolicychallengesfacedbyproducingcountriesinmakingthemostofextractiveindustriesfordevelopment.

Acomprehensivepolicyaimedatimprovingrevenuesfromnaturalresourcesneedstoincorporateseveralelements.First,governmentsshouldretaintheirrighttoreviewthetaxregimesandownershipstructureswheneverdeemednecessaryfortheeconomicanddevelopmentinterestsofthecountry.Aminimumleveloftaxationcouldalsobenegotiatedattheregionalorinternationallevelstoavoidaracetothebottom.Second,theyshouldhavethemeanstoenforcetherulesandobtaintheduerevenuesbybeingabletocontrolTNCs’transferpricingmanoeuvresandunderreportingofexportvolumes.Third,theyshouldbeallowedtodosowithoutthethreatoflegalretributionthroughtheexistinginvestmentdisputemechanisms.

Mostoftheneededmeasurescanbetakenatthenationallevel,butmultilateralcooperationisstilloftheutmostimportance.TransparencyinitiativessuchastheextractiveindustriesTransparencyinitiative(eiTi)shouldbemademandatoryandextended:theyshouldnotfocusonlyongovernments,butalsoonproducingfirmsandcommoditytradingcompanies.Thereshouldalsobeagreaterfocusonmonitoring,auditingandaccountability,aswellasenforcementofthefiscalconditionsandregulationsunderwhichextractiveindustriesoperate.institutionaldevelopmentandcapacity-buildingarecrucial,inparticulartoimprovethecapacitytonegotiatecontracts,butalsotoamelioratethemonitoringofproductioncosts,importandexportprices,volumes,qualitiesandtimeofdeliveryofthenaturalresourcesextracted,aswellasfordatacollectionandprocessing.Givenitsexpertiseintheareaofcommodities,transport,customsandtrade,UNCTADcouldprovidesupportinthisdomain.Regionalcooperationincapacity-buildingcanalsoproveveryuseful.Theinternationaldonorcommunityhasanimportantroletoplayinsupportingsuchinitiatives.

Preventingtheresourcedraincausedbyillicitfinancialflowsandtaxavoidancecanhelpprovidethenecessaryrevenuestofinancetheattainmentofnewdevelopmentgoals.Thus,giventheirrelevanceformanydevelopingcountriesandtransitioneconomies,fiscalspaceandrelatedgovernanceissuesshouldbeprominentcomponentsofthepost-2015developmentagenda.

MukhisaKituyi Secretary-GeneralofUNCTAD