June 2006

South Bulletin 125

30 May 2006

This issue of the South Bulletin focuses on

making sense of globalisation.

In this Issue

Chávez: Facing A Barrage of Opinionated Media

After attending the EU-Latin America summit, President Hugo Chávez of Venezuela went on a private visit to London. At a press conference in the London City Hall , President Chávez spoke on a number of hot global issues, including the politics of oil and war.

Globalization’s Watchdogs

The noted Nobel-prize winner and former chief economist at the World Bank, Joseph Stiglitz has reportedly joined the debate on Bolivia’s nationalization of its natural resources. Bolivia, he argued, "felt all the pains [of neo-liberal structural adjustment] but has experienced no gains - it’s clear that it must have a change in its economic model." He also contended that the sale of Bolivian hydrocarbons to private interests was illegal, since it was never approved by the country’s Congress.

Development through Globalization? - (I)

It is time to reflect on a new agenda for development where the concern for efficiency must be balanced with a concern for equity, and that for economic growth balanced with for social progress. It is also time to evolve a new consensus on development, in which the focus is on people rather than economies, going beyond ideological battles. The first of a three-part article by Deepak Nayyar.

Global Imbalances- An Indian Perspective

Though India hardly contributes to the current global financial imbalances, it stands exposed to significant impact from any large and rapid adjustments in major currencies and related interest rates. "We therefore have a large stake in the process of unwinding of global imbalances, and we are willing to play our part in ensuring successful outcomes from current initiatives," says Dr. Y. V. Reddy, Governor, Reserve Bank of India.

EU Aid: Genuine Leadership or Misleading Figures?

A joint European NGO report with the above title calls for a ‘clean up’ in aid reporting by European governments - the major providers of official development assistance (ODA) - to ensure that the only aid that is counted is aid that saves lives and not simply that which saves face. They question the current practice of inflating ODA amounts by including debt cancellation and expenditure on refugees and foreign students.

More in this issue

Health: Crucial First Step’ Toward Global R&D Framework

South American Declaration on IP, Medicine Access & Public Health

South Centre News

A Tough Going for the Doha Round

Chávez: Facing A Barrage of Opinionated Media

After attending the EU-Latin America summit, President Hugo Chávez of Venezuela went on a private visit to London, at the invitation of Mayor Ken Livingstone, a number of labour MPs, labour unions and friends on 14 May. In most of the televised images, President Chávez was smiling and confident. And he displayed a similar attitude in dealing with the media which often tried to put him in a spot. The press conference at the London City Hall was no exception. President Chavez touches on a number of hot global issues, including the politics of oil and war. Presented below are unofficial, edited extracts from a translation by Lawrence Pirela of the Spanish transcript carried by Znet.

"President Chávez: Good afternoon

Ken Livingstone:   So here we start, and I would like to get the first question from radio and television, after that maybe the domestic press and after that the press and media of Venezuela.  Is there someone here from radio or television?  Please state your name and the organizations that you represent and wait for the microphone.

CNN:  President, you have come to this country and you have not been invited to Downing Street.  Is the reason that you have not met with Tony Blair because you did not want to meet with him or he did not want to meet with you?  What is the current situation?  How do you think that you will take advantage of your power as an oil-producing country to influence the foreign policy of other countries?

President Chávez    Ah!  My esteemed friends from CNN. Alright, thank you for your question. It has become a matter of global speculation - the simple fact that everyone understands - of my private visit to London, thanks to the invitation of Mayor Livingstone, and a group of labor unions, as you know, and a significant number of Members of Parliament from the Labour Party, and many friends that we have here in Great Britain. Last night, I read the main stories of the world press, and in a very large percentage of them it was repeated, with very little creativity, without doubt pretend to manipulate, pretend to diminish the importance that this meeting in London has, starting with the human aspect of it.

We have come to give thanks to the Mayor for his support, to the Members of Parliament from Labour for their support, to the labor unions for their support for the Bolivarian Revolution; and also to give my regards to the British people, to meet with business leaders. This afternoon we will have some good meetings with business leaders. There are some very important British investments in Venezuela, as you should know: Venezuela is today an ideal country to invest in, to continue investing in and to strengthen our mutual relations.

Finally, this is a new approach to Great Britain, to its history, to the 200-year relationship that we have, from the time that General Miranda… and Bolivar were here.

So then, there has been an effort to manipulate something that is so obvious that I do not know how you… forgive me, I can see that you are an experienced journalist, and that you would ask this, something so silly. I am not calling you silly, but the question is silly.

President Chávez:  It’s as if I were to go… I am going to give you an example, as if any person that were to go to Madrid to visit some family, and he were asked, I don’t know, why he did not visit the palace and King Juan Carlos.  I came here on a private visit, you must know, especially those of you who move in these circles. There are several levels of visits.  There are State visits.  There has been talk that I did not visit the Queen, I give my regards for the Queen, my respect and affection for the Queen; I will never forget the meeting I had with her, very kind.  That I did not visit the Prime Minister, I give my regards to the Prime Minister.  Now, I did not come for that, simply put, thus the stupidity of the idea. I came on a private visit and you all know that: I did not come as part of a State visit, nor did I come in an official visit, nor even a work visit; there are three levels of visits, as you should know, and whoever does not know it look it up in the manuals of protocol. This is why I say that it is stupid the idea that has been manipulated… I don’t know in how many newspapers, on the first page, and main stories on television, trying to diminish this very affectionate visit, so joyful, this very important meeting here today in London.  Do you understand?

Ken Livingstone:    I can see that we are both on the same wavelength. Is there another?  From Reuters or DPA, or from another outlet?  Please wait for the microphone, with Reuters or DPA.

DPA:   Mr. President, is the government of Venezuela disposed to cut the flow of oil to the United States in the case that the United States attacks Iran?  And my second question is: do you want to have a gas monopoly with Venezuela, Bolivia, and Peru?

President Chávez: Right, there is another idea that has been promoted.  Venezuela is now accused of being an imperialist nation.  There would be now an imperialist Chávez who is going around monopolizing and who is using oil to dominate other countries; I have no doubt that this is a story line manufactured in Washington, a story that is sent all around the world so that it is repeated by journalists, analysts, and political leaders.  No?  This morning, a political leader from an opposition party in Latin America was saying: "Chávez is promoting a policy of domination." I am now the empire - how absurd!

First of all, we are putting forward an international policy of respect for the sovereignty of states, of the people, and also opening channels to establish a new mechanism for integration, based on solidarity, above all solidarity; based on true cooperation, on economic complementation, with respect for institutions, for international law, which is what is not recognized in Washington: how they violate international law, how they dominate, how they commit aggression against the world from Washington!   That is where the real empire is, and now they want to accuse Venezuelans as imperialists or of launching strategies of domination, or monopolies.  Monopoly - us?  We are fighting against monopolies, we are fighting against imperialism.

They pretend to twist the truth, and not only twist it, but invert it.  They will not be able to do it, they will not be able to do it because we know, as it is happening here in London, here in Great Britain, how much support we receive in the streets, the youth, the students, labor unions, members of parliament, mayors, like Mayor Livingstone: despite all the lies about us that circulate in Great Britain, the "tyrant" Chávez, the "dictator" Chávez, the "oppressor" Chávez, and even so the people know that those are lies.  We do not have any plan to monopolize gas; we are only designing plans of integration just like in Europe.  The European Union started with the integration of iron and coal; likewise we are proposing to South America, especially South America, using the great reserves of gas that Venezuela has, 150 trillion cubic feet, verified, and that will likely be doubled in the next few years; which is the largest reserve of gas in the whole American continent, and one of the largest in the world.

You asked me about oil and the relation, or the threat against Iran. I believe that the world needs to do everything possible to avoid the madness that would be a military attack against Iran, the results of which are unforeseen.  From here, we call upon the government of the United States to halt its warmongering, which intends to throw the world into an abyss of more wars, more terrorism, more death, and more desolation.  I believe that Europe has a very important role to play in this, and instead of supporting this bent for war, it should help to halt it, Europe has the power to do it, the world has the power to do it.

You ask me if Venezuela would suspend oil exports to the United States in case of an attack against Iran.  I cannot answer that question because that would depend on the circumstances.

I have said that we do not want to suspend oil delivery to any country of the world, because we are people that act responsibly. Despite the aggressions by the American empire against us, we have never stopped delivering a million and a half barrels of oil per day to the people of the United States, to the economy of the United States; we have over there a large company – Citgo - that refines 2 million barrels of crude and has 14 thousand gasoline stations where we provide gasoline to the people of the United States. This is a responsibility and we want to continue to meet this responsibility.

I have said that if the United States were to launch a military attack against Venezuela, then they can forget about Venezuelan oil. This is the same thing that Iran has said - that if there is aggression against them, the world can forget about their oil.

Now, I am going to tell you something. Given the rising price of oil, if there were an attack against Iran, the price of oil is now around 70 dollars per barrel, well, the price could rise above 100 dollars per barrel!  And Londoners, instead of paying… I don’t know how much is being paid for a gallon of gasoline, this would possibly double, and in all of Europe and the world.

In addition, we would come to a situation of greater world destabilization, this is why we have to avoid a new military aggression by the United States against anyone, we want peace and respect for international law.

VTV (Boris Castellanos):   What are the specific points that could be implemented to attain the goal of energy cooperation between London and Venezuela?  And for President Chávez, what would be the implementation of this agreement with the idea that was proposed in Vienna, of Petroeuroamerica?  Would you consider this a step in that direction, or a separate idea?

Ken Livingstone    There is no doubt that the President can do many things to ease the burden of oil cost, and anything that he does will be welcomed; but we are aware, and are very conscious of the fact that in the West we have to scale back, we have to reduce the consumption of energy, to be more efficient and pollute less, because, as it is happening in China, India, and other countries where they are coming out of a difficult situation, they are experiencing a shortage.  The poorer countries are trying to come out of this, so then America also, and Europe, have to curtail a bit the use and abuse of their resources, this is a long term goal, which would be to avoid that there be a greater climate change and the terrible consequences that this could bring.

We have been talking… me with my staff, about what measures we could take; but this is only a part, the Mayor of Caracas will be welcomed here, together with the President, and my staff has been speaking with him.  As I have said, in September there will be several cultural events, primarily a Venezuelan event in Trafalgar Square, and in Caracas the next year; and this is sort of a first step for a mutual understanding, for a mutual respect between our cultures, between cities. A large population lives in Caracas, the same as in England, these are immense urban areas, so we have to learn a lot from each other, we are already taking strong steps to control traffic.  Anything else that you wish information on we can provide it.

President Chávez Thank you, Livingstone, I would only add that the cooperation between us, which already exists at a first level, politically, socially now, with this visit, we aspire to reach a higher level, not only in the matter of energy, but also an integral cooperation.  Mayor Livingstone already indicated some plans that have been under development for quite some time with Mayor Juan Barreto.

There have been staffers from the London City Hall that have been in Caracas on various occasions, evaluating alternatives, evaluating projects that have to do, for example, with traffic and public transportation in Caracas.  Mayor Juan Barreto is here with us.

Well, the environmental problem, and everything to do with waste management.  London is a good example of it; a whole transportation system, and public safety.  I was explaining to Livingstone that Caracas, a city that one has learned to love over the years; and to me, to us, it pains us because Caracas, like the great capitals of Latin America suffered greatly during the 20th century under a model; better said the lack of a model. The growth of the cities was never planned with the exodus from the rural areas: hundreds of thousands of rural people who found themselves abandoned moved to the cities. Caracas, where a minority of very wealthy people live, and a Caracas where a large majority of very poor people live.

Then, one of the dreams that I have, I was commenting to the Mayor, is to transform Caracas, together with the people of Caracas, the metropolitan mayors, and the Greater Mayor; this is something that will require a great effort and vast knowledge; and the City Hall of London has a lot of experience and a will to help us, something which we all give thanks for in the name of Caracas, in the name of the Great Caracas.

It was an integral cooperation, where the possibility was opened.  I have just proposed the idea, as you were commenting about our proposal in Vienna of a Petroeuramerica.  What is the reason for this?  We believe that the energy crisis will continue to worsen.  The Mayor spoke with great awareness about the model of energy consumption.  I believe that the societies that most consume energy in the world, especially the countries of the North, need to take time for self reflection.  Look at the good example that this building provides, because the building, the structure takes advantage of solar power.  You will see other buildings that are closed everywhere, not even the smallest window. Or the windows are dark so the sunlight does not enter; so you have to have, I don’t know how many, light bulbs and reflectors on 24 hours a day. And all the electricity that is consumed; and all of this requires energy from thermo-electrical plants, oil, or the hydro-electrical plants.

On another side, well, the energy, solar and wind energy.  Look at the temperature here, there is no air conditioning here, a good example, the architect that built this, you told me who it was… Norman.  But then you see an architecture that is completely contrary.  The Twin Towers of the World Trade Center consumed more energy than various African nations.

Another matter that has to be analyzed is vehicle use.  I learned that the Mayor has taken a special measure to try to reduce the consumption of gasoline in the center of London, and to give incentive for the use of public transportation.

Venezuela is an oil-producing country, we know the subject and study it a lot. We have centers of study and research in the OPEC also and how we waste energy. Oil is not a renewable resource and we waste it. We are not conscious of what we are doing.  In the last 20 years more oil was consumed in the world than in the 200 before that.  A madness of waste!  And there will not be more energy to continue to waste it.  How many vehicles circulate the streets of London, and of Vienna and Madrid, and New York City, and also Caracas?  Even though to a lesser degree.

You see the vehicles: in more than 90 percent you see one person, the one driving, one person occupying a space of three meters by two, this is something stupid. This is capitalism, the extreme individualism.  One can see the people that go driving at a turtle’s pace, stopping constantly, they listen to music, and take two or three hours to go a distance of five kilometers, which they could walk in 20 minutes, in half an hour, or on bicycle, or on the bus, or the subway, or the streetcar. But no, everyone wants to have their own car. Well, brothers, a car for everyone - our planet cannot support this.

This model, the so called American way of life, the extreme capitalism, is not sustainable. Life on this planet will come to an end if we continue down this road. That is why we are motivated to seek socialism and abandon capitalism, the individualism, the selfish consumerism, the so called destructive development that is destroying this planet. We are all in danger, and not so much us, our children and grandchildren!

Well, we are opening channels to seek mechanisms of cooperation which may include energy aspects.  I was commenting about it last night. We would like, as we have investments here in two refineries, one North and one South, these are small refineries but are long-term investments by Venezuela - we could use these refineries as a starting point to help in some manner the poorer communities in London, in Great Britain, especially during winter, and if the price of heating oil increases much more.

For example, there are poor people who may not have enough to pay for heating when winters here can be extremely cold, and there are people that freeze to death, the poor.  We are doing this in the United States, in New York, in Houston, in Philadelphia, in Chicago; hundreds of thousands of people who are benefiting from a program of the Venezuelan government to provide heating oil at low cost, or in some cases as donations when it comes to retirement homes, schools for poor children, and the poorest communities, etc.  Thank you very much.

Ken Livingstone:    Two questions here.

BBC: Welcome to London.  I am Lourdes Heredia of the BBC in Spanish.  Two questions.  One is… if we see the news media here, how they see you, how they see you in Europe, it is as one voice, one… What I want to ask you about is about the electoral process in Latin America.  There are elections in Peru, elections in Mexico, but also when we see the criticism against you by the press, they say well, that you are doing the same thing that you criticize Bush of doing, in other words, you are either with me or against me.

The Independent:  You have spoken passionately about your opposition to an attack by the United States against Iran. Could you clarify: is it because you do not believe that the Iranians are developing nuclear weapons, or is it that you believe that they will develop nuclear weapons, that Iran should be allowed to produce nuclear weapons?  Which is the reason that the United States should not attack Iran?

President Chávez:    This is the first time that I have been insulted like this in public, to be compared to the worst genocidal leader in the history of humanity, the President of the United States, an assassin, a mass-murderer, who should be sentenced to jail by an international criminal court.  I do not know what you are referring to when you compare me with President Bush, no, but you could clarify, I have a right to ask for clarification.  What are these attitudes that you say I take?  What makes you ask this question?  Could you clarify this?  Which, for example?  Have I invaded a country?  Have Venezuelans invaded somewhere?  Are we bombing some city?  Are we promoting coup d’etats?  Are we using the CIA to kill presidents?  Are we harboring terrorists in Venezuela?

President Chávez: That is Bush!  That is why I think that I have the right, as a human being, to ask you to clarify your question, please.  Yes?

BBC (Lourdes Heredia):     No, it is simply that "You’re with me, or against me".  For example, to qualify the question which my colleague from CNN made as "silly", well, why is a question silly?  It’s that attitude, "Either you’re with me or against me".  So, it is about that attitude; and a little about what is read.  If you want my personal opinion, why not grant me a personal interview and I will answer you.

President Chávez   I hope so!  Come by Caracas when you wish.  You are invited, please.

Now, I am not against the reporter that made the question, but I have the right to reflect, just like you have that right, freedom of thought. I have a right to give my opinion about a question, but I answered it, I did not ask security to remove him, I would never do that, nor have attacked him.  I even clarified, so that no one would misunderstand, I said: "I am not calling you stupid" it’s the idea that ran all over the world yesterday, in almost all the large newspapers and media: "Chávez visits London, he is received by Mayor Livingstone, but will not be received by Blair or the Queen." That is manipulation, clearly so, and what I am doing is confronting the idea.

Now, from that point to you comparing me to the President of the United States, what a leap! No? Well, I am not the one that applies that principle that if you are not with me you are against me.  I have great friends that are not in agreement with me. I will give you the example of the President of Colombia, Alvaro Uribe, he is a good friend of mine, we talk to each other on the phone, we discuss, converse, and the world knows that Alvaro and I have different views on the economy, on politics.  Alvaro Uribe, well, he is a right wing president, and he has signed a Free Trade Agreement with the United States, and he has permitted that United States troops base in Colombia; all of this.  Despite all of this, look, one call… President Uribe, let’s meet on the border, let’s meet tomorrow, etc.

We will soon inaugurate a gas pipeline through the border between Colombia and Venezuela, a two-nation gas pipeline and many mechanisms of cooperation, just to give you an example, and many in the world, many people, not only presidents and heads of state.  I respect others.  I think it is fundamental so that we can live in society, that we respect one another, and not attack each other, no one has the absolute truth, only fundamentalists and irrational people.

Of course, it is possible that you or someone, and I would not fault them, to have a different idea about me, victims of the Goebbelian strategy of repeating lies one and a thousand times so that some people come to believe that Chávez is a tyrant, he who is not with him is against him, is a fundamentalist, a terrorist, he is buying everyone with his oil money, he is harboring Bin Laden, etc.  All of that some people may come to believe, victims of permanent media campaigns every day around the world without rest, which is part of the imperialist aggression against us.

About the elections in Peru and Mexico, I am not going to speak about specifics, only that we wish the best for the people of Peru and Mexico and of Latin America, may it be that the turn to the left continues!  Thanks.

There was another question, yes, another question was made, sorry, about Iran.  We base ourselves on the respect for international law. We do not believe that the United States, or anyone, has the right to forbid a nation to have nuclear energy.  How many countries in the world have nuclear energy?

Venezuela, unfortunately, does not have it.  About 40 years ago, they started to develop it and later stopped the project.  Brazil is developing it, Argentina also, and many other countries in the world.

I am sure that the Iranians are not developing any atomic bomb. They are not using nuclear energy thinking about war.  Iranians, just like us, want peace. We want interchange with the world. We want the dialogue between civilizations.  From Iran, by the way, came the proposal, in 2000, of the dialogue of civilizations. But from Washington we get the proposal for a clash of civilizations, war between civilizations. Therefore, this is our criteria and we ask that the rights of the Iranian people be respected."

Globalization’s Watchdogs

The noted Nobel-prize winner and former chief economist at the World Bank, Joseph Stiglitz has reportedly joined the debate on Bolivia’s nationalization of its natural resources. Bolivia, he argued, "felt all the pains [of neo-liberal structural adjustment] but has experienced no gains - it’s clear that it must have a change in its economic model." Stiglitz also contended that the sale of Bolivian hydrocarbons to private interests was illegal, since it was never approved by the country’s Congress. "When a person was robbed of a painting and then it is given back to him," Stiglitz argued, "we don’t call it re-nationalization, but return of a property that was his to begin with." A recent article by Mark Engler, based in New York City, and an analyst with Foreign Policy In Focus.

When Bolivian President Evo Morales announced plans to nationalize his country’s oil and natural gas resources in early May, he did more than lay out a promising path for development. He also provided an ideal opportunity to illustrate how large segments of the U.S. and British press have adopted roles as watchdogs for corporate globalization. Since Bolivia’s energy exports go to Brazil and Argentina rather than the United States, and since the nationalization is unlikely to significantly alter the price of natural gas on international markets, the direct impact on our country is minimal. Yet in the weeks since Morales took action, we have been treated to a wealth of hysterical commentary.

As Condoleezza Rice criticized South American "demagoguery" and industry groups warned that Morales was "embarking on a dangerous path," the editorial pages charged to advance the front. The Wall Street Journal predictably led the way, calling "abrogation of contracts" the latest "Latin craze." It echoed The Economist’s warning from London that "Bolivia may be moving backwards" and "its people are likely to grow even poorer."

These business-oriented publications actually sounded subdued compared to some rival dailies. The Los Angeles Times wrote, "Morales put his head in an oven this week and turned on the natural gas. There are only two likely outcomes: an explosion that ends his political career—or a slow suffocation for his people."

New York’s Newsday also worked up a rabid editorial assault. There, columnist James Pinkerton derided Bolivia as "a country that is nationalizing, or, if you prefer, stealing, foreign-owned assets." The paper’s editorial page then grouped Bolivia with Cuba and Venezuela in an "Axis of Idiocy" and asserted that "nationalization of major industries has proved to be a road to economic ruin in an era of globalization."

Given that little nationalization of major industries has occurred in this era of globalization, Newsday left readers wondering about how this idea has been "proven"—at least to anyone who wants evidence instead of just blind market ideology. Nor did the paper give any indication why an increasing number of Latin American countries are inviting sure "failure" by bucking the policies of neo-liberal globalization. For its part, the Los Angeles Times gave some insight by remarking, "It’s true that [Bolivia’s] resources have long been exploited by foreigners with little benefit to the indigenous population." But it nevertheless contended that "sending in the army to take over the gas fields isn’t the answer to Bolivia’s problems."

What the alarmist viewpoints lack most is context. In predicting economic disaster for a re-nationalized Bolivian energy sector, the editorials turn a blind eye to the two-decade disaster known as neo-liberalism. In the 1980s Bolivia was on the cutting edge of the trend toward privatization, adhering to an International Monetary Fund (IMF)-recommended structural adjustment program. The pro-corporate reforms proved profitable for the multinational energy companies involved, but they utterly failed to benefit the Bolivian people. Today 64% of the population lives in poverty, with a majority of people scraping by on less than $2 per day. A March 2006 report by the Center for Economic and Policy Research shows that, according to the IMF’s own data, real per-capita gross domestic product (GDP) in Bolivia is lower now than it was 27 years ago.

Despite the general trend, there were some levelheaded voices in the media. These exceptions went far in debunking many of the Evo-bashers’ doomsday scenarios. Usually a defender of "free trade" policies, The New York Times ran an op-ed entitled, "All Smoke, No Fire in Bolivia." It noted that foreign energy companies will not be kicked out of Bolivia under Morales’ framework, but merely will have to cooperate with the state on less lucrative terms than before. While private partners will remain, Evo’s plan will increase state control of natural resources and force renegotiation of the suspect corporate contracts signed during privatization.

As a result, a greater share of the proceeds from oil and gas will be redirected to benefit Bolivia’s poor. "The companies will still profit under the new rules," commentator William Powers wrote. "They won’t see the huge profits they enjoyed under lax Bolivian control and the global rally in commodities prices, but they will make money."

The London Independent observed, "Energy reserves are national assets which the state has a right to control and benefit from." And even the stodgy Financial Times, while generally suspicious of Morales, conceded "there is nothing intrinsically wrong in trying to maximize royalties and taxes" from the use of a country’s natural resources.

Not all economists think that Evo’s wager was a bad one—and some think the gamble could pay off big. Especially galling for critics has been Joseph Stiglitz’s public show of support this week for Bolivia’s re-nationalization.

After meeting with Morales on 17 May, Stiglitz, a Nobel-prize winning economist and former chief economist at the World Bank, argued that Bolivia "felt all the pains [of neo-liberal structural adjustment] but has experienced no gains - it’s clear that it must have a change in its economic model."

Stiglitz also contended that the sale of Bolivian hydrocarbons to private interests was illegal, since it was never approved by the country’s Congress. "When a person was robbed of a painting and then it is given back to him," Stiglitz argued, "we don’t call it re-nationalization, but return of a property that was his to begin with."

For all their professed concern about democratic reform, this is a point that the critics consistently miss. Morales was elected in a landslide on a platform vowing nationalization. That he actually kept a campaign promise may seem bizarre to the watchdogs of corporate globalization, but it’s something that should be lauded.

With their commentaries filled with alarm, too few papers took note of a remarkable development: This time, when democracy and neo-liberal economics collided, democracy won.

Development through Globalization? - (I)

Globalization, which gathered momentum during the last quarter of the twentieth century, has created unparalleled opportunities and posed unprecedented challenges for development. Yet, the virtual ideology of our times has transformed globalization from a descriptive word into a prescriptive word. But the reality that has unfolded so far belies the expectations of the ideologues.

The exclusion of countries and of people from globalization, which is partly attributable to the logic of markets, is a fact of life. Even so, there is a strong belief and an influential view that globalization is the road to development during the first quarter of the twenty-first century. [1]In a volume that seeks to think ahead about the future of development economics, development through globalization is an appropriate theme. It is even more appropriate, perhaps, with a question mark at the end.

The object of this essay is to reflect on development in prospect, not retrospect, situated in the wider international context of globalization. In doing so, it shall, of course, address the question posed in the title. The main object, however, is to focus on the correctives that would have to be introduced and the rethinking that would have to be done, given the reality of globalization, if development is to bring about an improvement in the living conditions of people, ordinary people.

Globalization as a mantra for development

Recent years have witnessed the formulation of an intellectual rationale for globalization that is almost prescriptive. It is perceived as a means of ensuring not only efficiency and equity but also growth and development in the world economy. The analytical foundations of this world view are provided by the neo-liberal model. Orthodox neoclassical economics suggests that intervention in markets is inefficient. Neo-liberal political economy argues that governments are incapable of intervening efficiently. The essence of the neo-liberal model, then, can be stated as follows. First, the government should be rolled back wherever possible so that it approximates to the ideal of a minimalist state. Second, the market is not only a substitute for the state but also the preferred alternative because it performs better. Third, resource allocation and resource utilization must be based on market prices which should conform as closely as possible to international prices. Fourth, national political objectives, domestic economic concerns or even national boundaries should not act as constraints. In this world, domestic economic concerns mesh with, or are subsumed in, the maximization of international economic welfare and national political objectives melt away in the bargain.

The ideologues believe that globalization led to rapid industrialization and economic convergence in the world economy during the late nineteenth century. In their view, the promise of the emerging global capitalist system was wasted for more than half a century, to begin with by three decades of conflict and autarchy that followed the First World War and subsequently, for another three decades, by the socialist path and a statist worldview. The conclusion drawn is that globalization, now as much as then, promises economic prosperity for countries that join the system and economic deprivation for countries that do not. [2] It needs to be stressed that this prescriptive view of globalization is contested and controversial. [3] Yet, for those who have this strong belief, globalization is the road to development in the first quarter of the twenty-first century. [4]

Interestingly enough, the development experience of the world economy in the last quarter of the twentieth century is invoked as supporting evidence, not only by advocates but also by critics of this prescription. In caricature form, these conflicting perceptions are almost polar opposites of each other. The pro-globalization advocates argue that it led to faster growth, that it reduced poverty, and that it brought about a decrease in inequality. The anti-globalization critics argue that it led to slower but more volatile growth, that it increased poverty in most parts of the world and that there was an increase in inequality. Of course, such a broad-brush picture of conflicting perceptions abstracts from the nuances and the qualifications. But it highlights the impasse in a debate that borders on a dialogue of the deaf.

Yet, there is a little dispute about some important dimensions of reality. In conventional terms, the world has made enormous economic progress during the second half of the twentieth century. Over the past fifty years, world GDP multiplied almost twelve-fold while per capita income more than trebled. The growth has been impressive even in the developing world, particularly when compared with underdevelopment and stagnation in the colonial era during the first half of the twentieth century. But such aggregates conceal more than they reveal. In fact, development has been uneven within and between countries. The pattern of development has been such that it has led to an increase in the economic distance between the industrialized world and much of the developing world. It has also led to an increase in the economic distance between the newly industrializing countries at one end and the least developed countries at the other. At the same time, economic disparities between regions and between people within countries have registered a significant increase.

Uneven development is not without consequences for people. Poverty, inequality and deprivation persist. And there is poverty everywhere. One-eighth of the people in industrial societies are affected by, or live in, poverty. Almost one-third of the people in the developing world live in poverty and experience absolute deprivation in so far as they cannot meet their basic human needs. As many as 830 million people suffer from malnutrition, while 1.2 billion people do not have access to clean water, and 2.7 billion people do not have adequate sanitation facilities. More than 250 million children who should be in school are not. Nearly 300 million women are not expected to survive to the age of 40. And 850 million adults remain illiterate. Most of them are in developing countries. But, in a functional sense, the number of illiterate people in industrial societies at 100 million is also large. [5]

In other words, many parts of the world and a significant proportion of its people are largely excluded from development. This may be attributable to the logic of markets which give to those who have and take away from those who have not, as the process of cumulative causation leads to market-driven virtuous or vicious circles. This may be the outcome of patterns of development where economic growth is uneven between regions and the distribution of its benefits is unequal between people, so that the outcome is growing affluence for some combined with persistent poverty for many. This may be the consequence of strategies of development as a similar economic performance in the aggregate could lead to egalitarian development in one situation and growth which bypasses the majority of the people in another situation.

Consequences, constraints, and choices

In retrospect, it is apparent that globalization has been associated with simultaneous, yet asymmetrical, consequences for countries and for people. There is an inclusion for some and an exclusion, or marginalization, for many. There is affluence for some and poverty for many. There are some winners and many losers. Joan Robinson once said, ‘There is only one thing that is worse than being exploited by capitalists. And that is not being exploited by capitalists.’ Much the same can be said about markets and globalization which may not ensure prosperity for everyone but may, in fact, exclude a significant proportion of people.

It would seem that globalization has created two worlds that co-exist in space even if they are far apart in wellbeing. For some, in a world more interconnected than ever before, globalization has opened door to many benefits. Open economies and open societies are conducive to innovation, entrepreneurship and wealth creation. Better communications, it is said, have enhanced awareness of rights and identities, just as they have enabled social movements to mobilize opinion. For many, the fundamental problems of poverty, unemployment and inequality persist. Of course, these problems existed even earlier. But globalization may have accentuated exclusion and deprivation, for it has dislocated traditional livelihoods and local communities. It also threatens environmental sustainability and cultural diversity. Better communications, it is said, have enhanced awareness of widening disparities. Everybody sees the world through the optic of their lives. Therefore, perceptions about globalization depend on who you are, what you do, and where you live. Some focus on the benefits and the opportunities. Others focus on the costs and the dangers. Both are right in terms of what they see. But both are wrong in terms of what they do not see.

On balance, it is clear that there is exclusion of countries and of people. [6] Too many people in poor countries, particularly in rural areas or in the informal sector, are marginalized if not excluded. Too few share in the benefits. Too many have no voice in its design or influence on its course. There is a growing polarization between the winners and the losers. The gap between rich and poor countries, between rich and poor in the world’s population and between rich and poor people within countries, has widened. These mounting imbalances in the world are ethically unacceptable and politically unsustainable. [7]

But that is not all. Globalization has diminished the policy space so essential for countries that are latecomers to development. Indeed, the space for, and autonomy to formulate policies in the pursuit of national development objectives is significantly reduced. This is so for two reasons: unfair rules of the game in the world economy and consequences of integration into international financial markets. In a world of unequal partners, it is not surprising that the rules of the game are asymmetrical in terms of construct and inequitable in terms of outcome. The strong have the power to make the rules and the authority to implement the rules. In contrast, the weak can neither set nor invoke the rules. The problem, however, takes different forms. [8]

First, there are different rules in different spheres. The rules of the game for the international trading system, being progressively set in the WTO, provide the most obvious example. There are striking asymmetries. National boundaries should not matter for trade flows and capital flows but should be clearly demarcated for technology flows and labour flows. It follows that developing countries would provide access to their markets without a corresponding access to technology and would accept capital mobility without a corresponding provision for labour mobility. This implies more openness in some spheres but less openness in other spheres. The contrast between the free movement of capital and the unfree movement of labour across national boundaries lies at the heart of the inequality in the rules of the game.

Second, there are rules for some but not for others. In the WTO, for instance, major trading countries resort to a unilateral exercise of power, ignoring the rules, because small countries do not have the economic strength even if they have the legal right to retaliate. The conditions imposed by the IMF and the World Bank, however, provide the more familiar example. There are no rules for surplus countries, or even deficit

countries, in the industrialized world, which do not borrow from the multilateral financial institutions. But the IMF and the World Bank set rules for borrowers in the developing world and in the transition economies. The conditionality is meant in principle to ensure repayment, but in practice it imposes conditions to serve the interests of international banks which lend to the same countries. The Bretton Woods institutions, then, act as watchdogs for moneylenders in international capital markets. This has been so for some time. But there is more to it now. IMF programmes of stabilization and World Bank programmes of structural adjustment seek to harmonize policies and institutions across countries, which is in consonance with the needs of globalization.

Third, the agenda for new rules is partisan, but the unsaid is just as important as the said. The attempt to create a multilateral agreement on investment in the WTO, which seeks free access and national treatment for foreign investors, with provisions to enforce commitments and obligations to foreign investors, provides the most obvious example. Surely, these rights of foreign investors must be matched by some obligations. Thus, a discipline on restrictive business practices of transnational corporations, the importance of conformity with anti-trust laws in home countries, or a level playing field for domestic firms in host countries, should also be in the picture. The process of globalization is already reducing the autonomy of developing countries in the formulation of economic policies in their pursuit of development. These unfair rules also encroach on the policy space so essential for national development.

The existing (and prospective) rules of the WTO regime allow few exceptions and provide little flexibility to countries that are latecomers to industrialization. In comparison, there was more room for manoeuvre in the erstwhile GATT, inter alia, because of special and differential treatment for developing countries. The new regime is much stricter in terms of the law and the implementation. The rules on trade in the new regime make the selective protection or strategic promotion of domestic firms visà-vis foreign competition much more difficult. The tight system for the protection of intellectual property rights could pre-empt or stifle the development of domestic technological capabilities. The possible multilateral agreement on investment, should it materialize, would almost certainly reduce the possibilities of strategic bargaining with transnational firms. Similarly, commitments on structural reform, an integral part of stabilization and adjustment programmes with the IMF and the World Bank, inevitably prescribe industrial deregulation, privatization, trade liberalization and financial deregulation. In sum, the new regime appears rule-based but the rules are not uniform. And it is not clear how or why this is better than discretion. For, taken together, such rules and conditions are bound to curb the use of industrial policy, technology policy, trade policy and financial policy as strategic forms of intervention to foster industrialization. [9]

At the same time, the consequences of integration into international capital markets also reduce degrees of freedom. Exchange rates can no longer be used as a strategic device to provide an entry into world markets for manufactured goods, just as the interest rates can no longer be used as a strategic instrument for guiding the allocation of scarce investible resources in a market economy. What is more, countries that are integrated into the international financial system are constrained in using an autonomous management of demand to maintain levels of output and employment. Expansionary fiscal and monetary policies—large government deficits to stimulate aggregate demand or low interest rates to encourage domestic investment—can no longer be used because of an overwhelming fear that such measures could lead to speculative capital flight and a run on the national currency. [10]

In sum, the existing global rules encroach upon essential policy space. And the problem is compounded by the rapid, sometimes premature, integration into international financial markets. Therefore, latecomers to industrialization would find it difficult to emulate the East Asian success stories. Indeed, the industrialized countries had much more freedom and space in policy formulation at comparable stages of their industrialization. [11] There is an obvious question that arises. What are the options or choices in this situation for countries that are latecomers to development? First, it is essential to use the available policy space for national development, given the international context. Second, it is important to create more policy space by reshaping the rules of the game in the world economy. In the national context, therefore, it is necessary to redesign strategies by introducing correctives, and to rethink development by incorporating different perspectives, that would make for egalitarian economic development and a more broad-based social development. In the international context, even if difficult, it is necessary to reshape the rules of the game and contemplate some governance of globalization.

Conception of development

Before considering these possibilities, it is both necessary and desirable to reflect on the essential meaning of development. For this purpose, a short digression is worthwhile. The reason is that the agenda on development in terms of both theory and policy has, unfortunately, narrowed with the passage of time. So has its meaning and the object of its focus. Hence, there is a need to reflect on the meaning and rethink the focus. There is a vast literature on economic development which is rich in terms of range and depth. Yet, there is not enough clarity about the meaning of development. There are many different views. And perspectives have changed over time.

In the early 1950s, conventional thinking identified development with growth in GDP or GDP per capita. The earlier literature emphasized economic growth and capital accumulation at a macro level. The contemporary literature emphasizes economic efficiency and productivity increases at a macro level. Industrialization has always been seen as an essential attribute of development. The emphasis has simply shifted from the pace of industrialization to the efficiency of industrialization. The underlying presumption is that economic growth and economic efficiency are not only necessary but also sufficient for bringing about an improvement in the living conditions of people. From time to time, dissenting voices question conventional wisdom to suggest other indicators of development but these were largely ignored by mainstream economics. And, even fifty years later, economic growth or increases in per capita remain the most important measure of development.

The early 1970s witnessed the emergence of a literature that suggested other indicators of development such as a reduction in poverty, inequality and unemployment which would capture changes in the quality of life. [12] This thinking moved further. Development, it was argued, must bring about an improvement in the living conditions of people. It should, therefore, ensure the provision of basic human needs for all—not just food and clothing but also shelter, healthcare, and education. [13] It was stressed that this simple but powerful proposition is often forgotten in the conventional concerns of economics. Such thinking culminated in writings on, and an index of, human development. [14]

The significance of this abstraction about or conceptualization of development is not lost on everyone. But it is the tangible or the measurable that remains dominant in terms of wide use and popular understanding. Per capita income is only an arithmetic mean. Social indicators are also statistical averages. And neither captures the wellbeing of the poor. Even the human development index is not quite an exception. The quantifiable is obviously important. But it should not shape our thinking about development. In fact, it does. Consequently, the focus is misplaced. It needs to be corrected. And the correction has several dimensions. It is essential to make a distinction between means and ends. Economic growth and economic efficiency, or for that matter industrialization, are means. It is development which is an end. Much of the focus in the literature on development is on economies. But aggregates often conceal more than they reveal.

Thus, it is important to shift the focus from countries to people. However, people are not just beneficiaries. It is only if people are centre-stage in the process of development, as the main actors, that development can empower people to participate in the decisions that shape their lives. The significance of this proposition is highlighted by the medieval distinction between agents and patients, which is invoked by Sen. He argues that the freedom-centred understanding of economics and of the process of development is very much an agent-oriented view. This is because individuals with adequate social opportunities can effectively shape their own destiny and help each other. They must not be seen primarily as patients, or passive recipients, of the benefits of cunning development programmes. [16]

Notes

16. For a lucid analysis, see Sen (1999).

Global Imbalances- An Indian Perspective

Though India hardly contributes to the current global financial imbalances, it stands exposed to significant impact from any large and rapid adjustments in major currencies and related interest rates. "We therefore have a large stake in the process of unwinding of global imbalances, and we are willing to play our part in ensuring successful outcomes from current initiatives," says Dr. Y. V. Reddy, Governor, Reserve Bank of India. He gave a keynote address on the above subject on 11 May at the United Nations in New York, at the invitation of Jose Antonio Ocampo, Under-Secretary-General. Following are extracts from his address.

"First, I would like to reflect upon the international perspective on global imbalances by raising three issues: (a) the essential features of the global imbalances as they stand today, (b) possible causes of these imbalances, and (c) the emerging consensus on policy responses.

Second, I will attempt to highlight India’s perspective on the global imbalances. While doing so, I would try to cover the following aspects: (a) India’s role in global imbalances, (b) approach to global consensus on causes and policy responses, (c) possible impact of global imbalances on India, and (d) the emergence of oil as a new factor in the policy debate on global imbalances.

Third, I shall explore a possible agenda for analysis to enable better understanding of global imbalances.

Global Perspective on Global Imbalances

It is useful to understand that in different countries the existence of a current account surplus or deficit is inevitable among economies at any given time. In particular, one of the arguments in favor of global integration is that capital may flow from developed economies to the capital starved developing economies which implies that there would be current account deficits in the latter. The problem is not the existence of current account deficits or surpluses per se, but it is persistence of large current account deficit and large current account surplus, particularly in large and systemically important economies, which give rise to fears of unsustainabilty and disruptive unwinding.

The current global imbalance is reflected in large mismatches in the current account positions in some countries and its mirror image in the form of domestic saving-investment mismatches. For instance, the US current account deficit was 6.4 per cent of GDP in 2005 and stood at US $ 805 billion. While the current account surplus of Japan and emerging Asia accounted for about 60 per cent of the current account deficit of the US. Now, with rising oil prices, the oil exporting countries also exhibit large current account surpluses.

It is argued by some that since the late 1990s, the growth processes in many emerging market economies (EMEs), especially those from Asia, have come to rely heavily on external demand. Under such a scenario, it has been felt, many of these countries tried to maintain their external price competitiveness by keeping their currencies undervalued. The process, it is stated, in turn, led to large trade and current account surplus for the Asian EMEs and large trade and current deficits elsewhere in the world, most noticeably in the US.

It is also clear that the sharp deterioration in the saving-investment balance in the US in the recent years along with sustained rise in consumption demand, could only be met by rising imports; hence rising large current account deficits in the US. The adverse shift in saving-investment balance in the US is reflected both in the high budget deficit since 2002 and the deterioration in net personal saving since 1998.

The global imbalance as it stands today may get corrected on its own and perhaps there could be chances of a less favorable outcome of disorderly correction. It is held that one scenario could be that an orderly private sector led adjustment in imbalances could materialize even without policy action. It is argued that, however slim the chances of a disorderly adjustment, in view of huge cost of disorderly adjustments, public policy cannot afford but strive for relatively orderly adjustment. In any case, it is felt that there is a need for better understanding of policy issues with a view to take appropriate policy actions as also to minimize the cost of adjustments if it were to take place in not very orderly fashion.

We have viewed, like many others here, that the sustained and increasing imbalances in the current account positions across the globe could entail serious risks for the functioning of the international monetary system. Rebalancing is best seen as a process with many moving parts that involve all the major actors in the global economy. The successful execution of rebalancing will require a careful application of traditional macro policies — monetary, fiscal, and currency policies — as well as implementation of comprehensive micro agenda of structural reforms.

A significant part of the debate seems to be on relative weights to be accorded by each country to the various elements of the package and the aspects of coordination among the countries that are appropriate. As regards the current global initiatives to correct global imbalances, the Communiqué issued by the International Monetary and Financial Committee (IMFC) released on April 22, 2006 highlights that action for orderly medium-term resolution of global imbalances is a shared responsibility, and will bring greater benefit to members and the international community than actions taken individually by countries. Key elements of the strategy towards orderly resolution of the global imbalance suggested in the Communiqué are as follows:

In the light of the above, the adjustments that are generally advocated in the individual economies and regions may be summarized as follows:

A major challenge for US authorities could be to seek policies that balance between measures to boost personal saving coupled with measures to cut consumption. However, US policies would need to delicately balance a gradual withdrawal of fiscal stimulus without hurting the recovery. It should be noted that demand compression could result in another recession, which would not be in the interest of the global economy. A gradual realignment of the real exchange rate of the US dollar coupled with measures targeted towards fiscal consolidation is generally advocated. Having said that, proper calibration would hold the key to the success of such a policy mix and this is an important public policy issue.

The Euro area, which continues to depend largely on external demand, could pursue some structural reforms, especially product and labor market policies, to boost domestic demand and broad-base the recovery. While there are signs of recovery in investment, it is recognized by many that further progress would be helpful to foster better integration of labor, health care, product, pension and financial market reforms. It is recognized that structural reforms by their nature are complex and their impact at best could be only over the medium term.

We are already witnessing that the Japanese economy is on the way to recovery; the current account surplus has begun to narrow against the background of strengthening domestic demand, which is critical. Thus, the Japanese economy is expected to continue to take some concrete measures to strengthen its financial system, restructure the corporate sector, and reduce large fiscal imbalances.

As for the emerging economies, especially in Asia, some experts suggest that the growth strategy could be reoriented towards domestic demand to offset possible declines in exports to the US. There are already some signs of strengthening in domestic demand in this region. It is felt that improvement in the investment climate to support higher private investment in the emerging economies is important. It is argued by some that the exchange rate policy may require some attention of the policy makers in the region. However, some others consider that exchange rate adjustments may not serve the interests of output and employment in these countries, while effectiveness of such exchange rate adjustments by themselves in unwinding the imbalances is not conclusive.

The oil exporting countries have recorded large trade surpluses, the investment of which in the domestic market and abroad would help rebalancing global demand. It is suggested that these countries could boost expenditures to some extent in areas where social returns are high like education, health, infrastructure and social security. It is felt that structural policies to strengthen legal and economic infrastructure in these countries may help promoting investment. However, it is also argued that in many oil exporting countries scope for domestic absorption is limited in the short run.

India’s Perspective on Global Imbalances

Since Independence, India has moved from a moderate growth path of the first three decades (1950 to 1980) to a higher growth trajectory since the 1980s. Over the last two and a half decades, India has emerged as one of the fastest growing economies of the world, averaging about 6 per cent growth rate per annum and the ranking of the country in terms of size of the economy, especially in purchasing power parity (PPP) terms, has improved. In the last three years, we have averaged a growth rate of 8 per cent. Apart from registering impressive growth rate over the last two and a half decades, India’s growth process has been stable. Studies indicate that the yearly variation in growth in India has been one of the lowest. During this period, we have faced only one crisis in 1991. The crisis was followed by a credible macroeconomic structural and stabilization programme encompassing trade, industry, foreign investment, exchange rate, public finance and the financial sector. The Indian economy in later years, could successfully avoid any adverse contagion impact of shocks from the East Asian crisis, the Russian crisis during 1997-98, sanction like situation in post-Pokhran scenario, and border conflict during May-June 1999.

In this context, it is appropriate to view the evidence that the policies followed by India have not in any way contributed to the widening of the current global imbalances:

Between 2001-02 and 2003-04, India registered modest current account surpluses, but this was more of a reflection of phase of business cycle, and with the turn around in the business cycle, India has registered a modest current account deficit in the last two years. In fact, going by the current indication and the projections of the tenth Five Year Plan, India is likely to maintain a modest and sustainable current account deficit in the near future.

It is observed that generally current account surplus accounted for a considerable proportion of reserve accumulation in most of the Asian EMEs and Japan during 2000-05. For India, current account surplus has been a minor source of reserve accretion. In our case, capital flows, as opposed to current account surpluses, played an increasingly important role in the accumulation of reserves.

Our approach aimed at market determined exchange rate with no predetermined target along with market interventions essentially to manage volatility has served us well. At the empirical level, the flexibility of Indian exchange rate policy is captured by marked two-way movement of Indian rupee against the major currencies including US dollar. Recent international research on viable exchange rate strategies in emerging markets has lent considerable support to the exchange rate policy followed by India.

The main driver of growth in India has been domestic demand. Impressive growth in exports and imports does strengthen the economy but the ratio of exports to GDP in India is lower than most EMEs.

The overall improvement in GDP growth during the reform period has also been facilitated by improvement in the rate of aggregate domestic saving. For instance, in the high growth phase of last three years, the saving rate rose by 5.5 percentage points from 23.5 per cent in 2001-02 to 29.1 per cent in 2004-05. Gross domestic investment rate, for the first time, remained above 30 per cent in 2004-05, mainly on account of private investment growing at 19.7 per cent. With the Fiscal Responsibility and Budget Management Act in place, the fiscal situation in India has shown improvement in the recent years. The fiscal consolidation process envisages phased reduction in the key deficit indicators. Monetary policy, while being supportive of investment demand places emphasis on price and financial stability and has succeeded in containing inflation expectations. These factors give confidence to the possibility of sustaining the present growth momentum – GDP growth of close to 8 per cent per annum.

India has, thus, been following policies which not only served it well but also contributed to global stability. As mentioned by our Finance Minister, Mr. P. Chidambaram, we do not expect any change in the basic framework of our policies both in terms of growth based on efficient use of capital and stability assured by sound macroeconomic policies.

We view that global developments, particularly those in the world financial markets, have the most direct and serious impact on the financing conditions in the emerging markets. Any abrupt and disorderly adjustment to global imbalances may have serious adverse implications. Recognising these developments, Prime Minister of India, Dr. Manmohan Singh in his welcome address to the Board of Governors of the Asian Development Bank (ADB) at the 39th Annual General Meeting in Hyderabad, a couple of weeks ago, highlighted the importance of correcting these imbalances. I quote from his address:

"While to some extent mismatches in current account positions are to be expected - and even desirable - in the global economy, large disparities raise concerns about unsustainability and hard landings. The process of correcting imbalances can be disruptive if it is sudden and unexpected. The present level of global imbalance cannot be sustained forever. It calls for action both from countries having current account surpluses and those having current account deficits. A coordinated effort is necessary to correct the imbalances to prevent a sudden down turn. International financial institutions need to play a proactive role in this regard".

During the same Annual Meeting of the ADB in Hyderabad our Finance Minister Mr. P. Chidambaram while dwelling at length on the issue of global imbalances highlighted that we have to address the global imbalance in such a manner so that the benefits of global integration continue in an uninterrupted fashion. He pointed out that Asia has an important role to play in conjunction with other countries in the process of unwinding of global imbalance. I quote from his address:

"I must reiterate that to sustain the recovery process and to correct the global imbalances in an orderly manner, there is an imperative need for a cooperative approach."

We had raised the issue of global imbalances in the Reserve Bank of India’s Annual Report of the 2002-03 realizing at that time that this problem has the potential to occupy the attention of the global economies in future. The Report observed:

"Although growing imbalances may seem to be an integral feature of globalization, there are nonetheless limits to the accumulation of net claims against an economy that are implied by persistent current account deficits. The cost of servicing such claims adds to the current account deficit and, under certain circumstances, can be destabilizing"

The apprehensions expressed, in retrospect, proved to be warranted.

At this juncture, it is appropriate to list some important considerations that should govern initiatives in regard to resolution of global imbalances recognizing that such policy initiatives may be broadly in consonance with emerging consensus described earlier in the address.

First, it is necessary for multilateral institutions like IMF to be seen as symmetrical in their analysis of national economies and their relative positions in the global economy. This would add credibility to the policy advice that could be considered by each country.

Second, at the same time, action by each country will be governed by enlightened national interest. It is necessary for multilateral institutions to analyze, explore and convince how the policy actions would serve the long term national interest.

Third, it is desirable to convince the policy makers in each country that actions considered appropriate are in the long term interest of the country itself. In this regard, the contextual challenges for each economy should be given due weight. For example, in countries like India, employment and poverty reduction need to be given highest priority.

Fourth, it is essential to recognize that co-ordination is necessary given the complex situation where neither the causes nor the solutions are clear-cut. As a first step, there could, however, be a broad agreement on the directions and the first principles that are most appropriate. Emphasis on harmony in policies and search for co-operative solutions appears appropriate.

As highlighted by our Finance Minister during the recent ADB annual meetings that apart from the impact on the real and external sectors, it is felt that the developments in the currency and capital market are intrinsically intertwined with the global imbalance and, therefore, in the eventuality of a disorderly correction, disruption in these markets in the form of large cross-currency volatility and sharp rise in interest rates are likely in the global economy. What could be the possible impact of less than orderly adjustment of global imbalances on the Indian economy?

India does not depend on the international capital market for financing the fiscal deficit and consequently to some extent adverse consequences of the global developments would be muted. However, there could be a spill-over effect of global developments on domestic interest rates and thus on fisc also. The fiscal position of the Government could also be indirectly impacted through the nature of management of foreign exchange reserves held by the Reserve Bank.

Similarly, any abrupt adjustment in global imbalances may affect corporates, banks and households in India though the impact may be less than some other emerging economies.

With respect to the impact on corporates, if there is widening of spreads due to a shift in investor confidence in the international markets, those corporates which have borrowed at variable rates may possibly suffer more than those, which have taken loans on a fixed rate basis. Corporates which have hedged against currency and interest rate risks may escape the adverse effects. It may be noted that the Reserve Bank has been urging banks to encourage corporates to hedge their foreign currency exposures. Further, exposure of the corporate sector as a whole to the external debt is limited by indicative ceilings on external commercial borrowings imposed by the Government and the Reserve Bank of India. The level of total external debt of India is currently less than the foreign exchange reserves.

Although banks in India have their deposit base predominately in rupees and their investment in foreign currency assets is not large, they have been financing investment in assets, home loans and the retail market as well as equities. Like in many EMEs, asset prices have risen sharply in India too. Should there be a reversal of capital flows, asset prices may decline but the banks exposure to the risky assets have been severely restricted by Reserve Bank’s regulatory actions. Likewise, the equity market has also seen a sustained uptrend but efforts have been made by the Reserve Bank to cap the banks’ exposures. Further, banks in India have invested significantly in government debt and other fixed income securities. If a rise in international rates gets reflected in domestic interest rates, banks will have to mark down the value of their investment portfolio.

To the extent a rise in international interest rates impacts the domestic interest rates, it would entail marked-to-market losses on the investment portfolios. However, the banking sector has acquired some added strength to absorb such probable shocks, largely aided by regulatory actions.

As regards impact on the households, there is a risk that rises in interest rates in general could impact the housing market and expose the balance sheet of the households to interest rate risk, increasing the risk of loan losses for banks. The overall banking sector’s exposure to housing loans being relatively small, adverse developments may not have any systemic implications on the banking sector.

The emergence of large current account surpluses among the oil exporting countries is an important recent development. The current account surplus of the oil exporting countries increased from 6.2 per cent of their GDP in 2001 to 19.1 per cent in 2005. Less than third of the combined current account surplus of the oil exporting countries has been reflected in their foreign exchange reserves which rose by US $ 90 billion in 2005. The IMF (World Economic Outlook, April 2006) has highlighted that to the extent that higher net savings by oil exporters have driven down global interest rates, and that these lower rates have boosted demand in economies with market based financial systems, such as the United States, the oil price shock may also have had an additional negative effect on the US external position.

The fact remains that the rising oil prices would result in further widening of global current account imbalances as according to consensus forecast the current account balance of the US is projected to deteriorate further in 2006. Other industrialized economies are projected to run a combined surplus led mainly by Japan and Germany. The aggregate current account surplus of the major oil exporting countries is expected to increase further in the near term.

In this regard, it may be noted that India’s oil import bill amounted to 2.9 per cent of GDP in 2001-02, but the bill climbed to 5.5 per cent of GDP in 2005-06, though in volume terms the increase has been marginal.

Agenda for Analysis

In view of complex nature of global imbalances and the way forward to minimize the risks of disorderly adjustments, it may be useful to explore possible agenda for further analysis.

First, national balance sheets, as mentioned by Governor Mervyn King, could be given special attention to get a fuller picture of financial claims that countries have against other countries. Looking at the national balance sheets would also be useful to acquire a sense about the potential for adjustment, and they will give a sense of the possible impact of relative price changes on the value of assets and liabilities. The composition and size of the liabilities and assets of the national balance sheets are crucial as by viewing them together we could get a global picture. However, we should look deeper into the balance sheets in terms of disaggregating them into public and private sector components and the incomes generated in the process. A relevant observation here is the perceived higher returns to external assets held by US relative to US assets held by the rest of the world. A disaggregation enables analysis of the role of private and public sector in perpetuation as well as the resolution of imbalances.

There could be dominance of bilateral claims of the private sector of one country to the public or the private sector of other country. Could such dominant bilateral claims become a noticeable force allowing, at times, non-economic factors to play a role in the whole process of engagement?

Second, following the experience of the East Asian crisis of 1997-98, where private sector vulnerabilities rather than public sector imbalances played a key role in precipitating the crisis, the third generation models have explicitly brought to the fore the role of balance sheet mismatches in causing financial crises.

A country’s balance sheet as evident from traditional macroeconomic aggregate could be quite sound, yet, analysis of composition and size of the liabilities and assets of the balance sheets of domestic entities may be useful in assessing vulnerability to the manner of unwinding of imbalances. It would therefore be useful to analyze the impact of global imbalances on various balance sheets within the country such as the government sector, financial sector including banks and financial institutions, non-financial private sector including corporates and households.

Third, as mentioned earlier, surplus of oil exporting countries has emerged as a new factor in the debate on the global imbalance. There are some indications that the oil surpluses are being deployed in more diversified avenues than official reserves. Oil exporters appear to have taken advantage of emerging investment opportunity in stock markets and real estate. Such inflows could have helped to keep long-term interest rates as also emerging market bond spreads low, even as policy rates are rising. An interesting issue would be the nature of their responses to unwinding of global imbalances.

Fourth, in a way global imbalance is a reflection of incomplete globalization. If there were complete globalization, the surplus in saving of one country could be utilized by a country which has deficit in saving as it happens among different States in India or the US. It could be argued that as the global economy integrates further, the resolution of the global imbalances might be smoother.

Fifth, what is the evolving role of viewing exchange rate regimes in influencing domestic economy? It is argued by some that the emerging evidence indicates that domestic price movements remain somewhat immune to considerable exchange rate movements. If so, the possibility of bringing about global rebalancing through exchange rate adjustment by itself may not be very encouraging. No doubt exchange rate would have an important role to play in global rebalancing, but the issue is its relationship with other components of the whole package like saving–investment, fiscal deficit, raising investment, structural reforms and domestic output as well as employment. The linkages among the various components described here could be very country specific.

Sixth, there is wide diversity among the Asian economies in terms of saving and investment rates, fiscal deficit, drivers of growth (domestic versus external demand) and the degree of flexibility in their exchange rates. Thus, it may be difficult to treat all of them as contributing to global financial imbalances, in the same manner, nor would all the Asian economies be identically affected by the adjustment of global financial imbalances. Correspondingly, the policy response of each country to the issue would be tailored to the circumstances. More importantly, with growing integration among Asian economies, how would the process of rebalancing affect them depending on the manner in which dominant economies in Asia manage the process?

Seventh, our Prime Minister, Professor Manmohan Singh has suggested that given the potential for investment demand in the region, we must find ways of making better use of savings and finding investment avenues within the region. In this regard, an important issue would be generation of demand within the region so that the aggregate current account surpluses are absorbed in the region itself. This process of demand generation would help in orderly correction of the global imbalances

Eighth, one wonders whether there is a dissonance between the perception of financial markets and that of the policy makers in regard to global imbalances. The policy makers appear to give some signals of concern, but the response of the financial markets is often out of alignment with the signals. Interestingly, anecdotal evidence shows that analysts in financial intermediaries are sensitive to the downside risk of imbalances, but the conduct of the participants does not reflect the awareness.

No doubt, this sense of dissonance is not new, as for example, stock markets went up after Mr. Alan Greenspan’s statement regarding irrational exuberance. If such dissonance is true, and persists, what would be the effectiveness of public policy initiatives?

Ninth, is there an advantage in assessing the non-quantifiable factors to explain the persistence of what has been stated as a stable disequilibrium to describe the current status of the global economy? For example, signature value of United States in terms of confidence of financial markets as a lasting safe-haven status could be a factor, though the issue is whether it will be valid interminably. The perception of continuing productivity gains in the US due to its proven flexibilities could be another. Lack of alternatives to deploy global savings, which are expanding may also be relevant. No doubt, these are not quantifiable, but do not cease to be relevant for analysis and assessment.

Finally, is it possible that there are several intermediate scenarios between orderly adjustments and disruptive or disorderly adjustments? A series of marginal adjustments, often in spurts, could take place which may appear random, but move towards gradual lessening of imbalances through an interactive and iterative processes encompassing markets, national policies and global cooperation. The agenda for analysis proposed here may facilitate exploration of such intermediate scenarios of unwinding global imbalances.

Conclusion

To conclude, the performance of the Indian economy since 1980, and in particular since the reforms in the 1990s, is in many ways an impressive success story both in terms of growth and stability. The Indian economy has responded well to the rising global competition with gradually increasing integration with the world economy. The current high growth phase of the Indian economy is also coinciding with rising domestic saving rates.

While India by itself hardly contributes to the current global financial imbalances, any large and rapid adjustments in major currencies and related interest rates or current accounts of trading partners could indirectly, but significantly, impact the Indian economy. We therefore have a large stake in the process of unwinding of global imbalances, and we are willing to play our part in ensuring successful outcomes from current initiatives."

EU Aid: Genuine Leadership or Misleading Figures?

A joint European NGO report with the above title calls for a ‘clean up’ in aid reporting by European governments - the major providers of official development assistance (ODA) - to ensure that the only aid that is counted is aid that saves lives and not simply that which saves face. They question the current practice of inflating ODA amounts by including debt cancellation and expenditure on refugees and foreign students. "There are dangers that the problem of misleading aid reporting could get worse, not better," the report warns. Some leading European aid-providers are currently arguing that ODA reporting rules should be further loosened to include spending on security issues and on climate change mitigation. Presented below are extracts from the report by Hetty Kovach and Alex Wilks.

European Governments provide over half of the world’s development aid. In international development negotiations over the last five years they have provided crucial international leadership. In 2005 they pledged further increases to aid levels in order to help fight world poverty. If these pledges are honoured, Europe will provide at least $38 billion more aid a year from 2010 onwards.

Increases in high quality aid are vital for the fight against poverty. Providing more aid would enable millions of people in desperate poverty to get access to health, education and productive opportunities.

In 2002 European Governments set themselves a collective target of providing 0.39per cent of their gross national income (GNI) for Official Development Assistance (ODA) by 2006 and individual minimum targets for each country of 0.33per cent of ODA/GNI by 2006. This commitment was renewed and expanded in 2005, following civil society campaigning, with European Governments agreeing to contribute 0.51per cent ODA/GNI by 2010.

New official figures released by the Organisation for Economic Cooperation and Development (OECD) in April 2006 and the European Commission in March 2006 show that European Member States are fulfilling their promises and are actually ahead of their collective target and doing better than expected.

However, there is no room for complacency.

This briefing shows that, according to our calculations €13.5 billion – or almost one third – of reported European ODA in 2005 did not provide any new aid for developing countries. This vast amount of apparent aid spending was in fact money for debt cancellation and for foreign student costs and refugees in donor countries.

Official debt data reveals that more than €9 billion of EU aid in 2005 was spent on the cancellation of two countries’ debt: Iraq and Nigeria. Iraqi and Nigerian debt is largely export credit debt. It was issued primarily as a means of subsiding European companies operating in developing countries and never had any development purpose. While cancellation of this debt is vital, the resources released for poverty reduction will be far smaller than the headline figures suggest. European Union Governments’ insistence on accounting for this cancellation in their official aid figures also contravenes the United Nations Monterrey agreement, which calls for debt cancellation to be funded additionally to Official Development Assistance.

In addition, assuming that in 2005 European countries continued to spend similar levels of their ODA on these items as in the previous five years, a further €840 million will have been spent on housing refugees within European countries, and €910 million of EU aid on educating foreign students within European countries.

While spending on foreign students and refugees in Europe is important, these are not expenses which the public rightfully expects to be described as development assistance. This is because they provide no new resources for developing countries and are not tied to development objectives of improving the welfare and human security of the poor.

If these items are removed from headline aid figures, as the NGOs from across Europe who have combined forces to produce this analysis believe they should be, then Europe has still a long way to go in its fight against world poverty.

This report calls for a clean up in aid reporting to ensure that the only aid that is counted is aid that saves lives and not simply that which saves face.

Current aid reporting rules are set by the Organisation for Economic Cooperation and Development. The OECD allows European Governments to regularly include spending on debt relief as aid and to count spending on refugees and foreign students in their own countries as ODA. This must be changed immediately in order to prevent Governments from misleadingly inflating aid figures. The credibility of Europe is at stake.

Flattering official numbers

The latest figures released by the Organisation for Economic Cooperation and Development and the European Commission show that European Member States spent nearly €45 billion on Official Development Assistance in 2005. This means that European Member States have already reached their collective EU target of 0.39 per cent of ODA/GNI a year earlier than the target date they had set themselves in 2002. Most EU countries are also able to report that they have reached the minimum target for individual member countries of 0.33 per cent.

The collective European aid average is pulled up by a minority of well-performing European Union Governments – Sweden, Luxembourg, the Netherlands and Denmark – who have all been spending at or above the United Nations aid target of 0.7per cent ODA/GNI for some years.

Another seven EU countries have recorded that in 2005 they have already hit, or are just above, the minimum EU 2006 aid target. These are France, Austria, Belgium, Ireland, Finland, Germany and the United Kingdom.

At the bottom of the official European aid rankings come Portugal, Spain, Greece and Italy. All are well below the EU 2006 minimum target and have a long way to go in order to reach it. Italy, one of the EU’s largest economies, stood at only 0.29 per cent in 2005, while Portugal – the worst performer in the EU15 – stood at only 0.21 per cent.

New Member States

The ten countries which joined the European Union in 2004 (new Member States) are relative newcomers to aid spending but have rapidly increased their aid levels in recent years.

Malta posts by far the highest figure, already above the new Member State EU target for 2010 of 0.17 ODA/GNI. All the other countries are saying they intend to reach this target. However Estonia, Latvia, Lithuania and Cyprus are currently far below and it will remain a major challenge for them to increase spending rapidly enough to meet the target.

Where countries really stand: behind the official figures

On the surface, the official picture for most countries appears positive. However, there is no room for complacency.

According to our calculations, based entirely on official figures, €13.5 billion, or nearly one third of reported European Official Development Assistance in 2005 will not provide any new aid for developing countries. This is because all European Governments routinely include spending on debt cancellation and on housing refugees and educating foreign students in their own countries in their ODA statistics. The European NGOs which contributed to this report believe that these items should not be included within ODA statistics. This spending is not in line with development policy objectives and often provides minimal new resources for developing countries, resources which are badly needed to help lift people out of poverty.

Figure 3 below shows countries’ headline aid figures, and also what countries actually gave in new aid in 2005 if debt cancellation, refugee spending and student costs are excluded. At the top of the list are the 0.7 per cent countries: Luxembourg, Sweden, Denmark and Netherlands. While all but one of these countries included non-aid items in their headline aid statistics in 2005, all four of them reached the 0.7 per cent target even without inflating their aid.

A second group of countries: Ireland, Belgium, and Finland, while not yet at the 0.7 per cent target, have already surpassed the 2006 minimum EU aid target even without inflated aid. Belgium and Finland still continue to count non-aid items as part of their headline aid statistics, however. All three countries also need to do more to move towards the 0.7 per cent target without aid inflation.

The UK and France were amongst the countries with the highest levels of aid inflation in 2005, both inflating their aid by more than a third. Once non-aid items are taken out, both countries are still below the EU minimum target and will have to work hard to increase aid over the next year to reach the threshold. Both also need to stop the practice of heavily inflating their headline aid.

Worryingly, there are six countries at the bottom of the list which are highly unlikely to reach the minimum EU target once inflated aid is discounted: Austria, Germany, Italy, Spain, Greece and Portugal. Austria, which currently chairs the EU presidency, is guilty of inflating its headline aid by more than 50 per cent, while actual aid is a woeful 0.20 per cent of GNI.

Germany, one of the EU’s largest donors and host to the 2007 G8 summit, inflated its aid by more than 40 per cent in 2005 and has an actual aid level of only 0.20 per cent of GNI, while Italy’s actual aid effort is a mere 0.19 per cent without aid inflation. Unless all these countries sharply increase their aid over the next year, they are likely to face serious embarrassment when it becomes clear that they can only meet their aid targets through aid inflation and double counting.

The official rules for determining what counts as Official Development Assistance are set by the Organisation for Economic Cooperation Development. This international organization represents aid-giving countries only and allows them to count items which the public would never imagine could be included in foreign aid calculations.

For this report we have focused on three key items included to boost official headline aid figures. These are debt relief, imputed foreign student costs and immigration/domestic refugee costs. The NGOs from across Europe which have combined forces to produce this analysis believe that these items should not be counted in official aid statistics, given that they do not produce new aid for developing countries, and often fail to transfer any resources at all for poverty reduction. Moreover these areas are still only a part of the problem when it comes to ensuring that aid goes to reduce poverty. Even aid that does actually reach poor countries is often poorly allocated, of low quality, and badly reported.

This report shows that many European countries are massaging their aid figures in a way that can mislead the public. What is needed is a substantial increase in the amount of genuine aid they provide in order to translate their promises into real differences in the lives of poor people.

The following section provides an explanation of why European NGOs believe these items should not be counted as aid, and a more indepth look at just how much EU aid in 2005 is likely to have been spent on these items. New Member States’ aid inflation data is incomplete and as a result new Member States are dealt with separately at the end of this section.

Aid inflation is not a small matter.

Debt: According to our calculations – based entirely on OECD statistics – €11.8 billion of EU official headline aid in 2005 was spent on debt cancellation alone. €9.2 billion of this was spent on the cancellation of two countries’ debt: Iraq and Nigeria.

Iraqi and Nigerian debt is largely export credit debt, resulting from credits issued primarily as a means of subsiding European companies, rather than reducing poverty. Furthermore in the case of Iraq, the rationale for canceling these debts has more to do with geopolitics than poverty reduction. These transactions should not be allowed to count towards countries’ headline aid figures.

Cancelling such debts – while crucial – is often more a matter of cleaning up the balance sheets of European agencies and ministries, rather than providing new resources to invest in development. As one Danish NGO activist points out: "the money is not moving 5000 kilometres from Denmark to Africa, but 500 metres from the Ministry of Foreign Affairs to the Treasury".

Debt cancellation

All European Governments formally agreed at the United Nations 2002 Monterrey Financing for Development summit that debt cancellation – though vitally important for development – should be additional to Official Development Assistance. This was supported by poverty and debt campaigners across Europe who argue that as a matter of justice it should be creditors, not poor people, who pay for the cost of debt cancellation. If donors are allowed to score their debt cancellation as ODA, then effectively other poor countries (who would otherwise be receiving aid) pay the price rather than the donors.

The European Commission reminded Member States in March 2006 that "the Monterrey Consensus underlines the need to ensure that resources provided for debt relief do not detract from ODA resources intended to be available for developing countries".

Yet this agreed principle, as our evidence shows, is being contravened by all but one European country. Only Norway – a non-EU country – fully upholds the principle that debt cancellation should be additional to aid.

Secondly, the vast majority of the debts currently being counted as ODA are export credit debts which were not intended to serve development purposes. Export credits are primarily a means of subsidising European companies operating in developing countries. And, as in the cases of Iraq and Nigeria, many export credit loans have been provided during periods of military rule, giving little opportunity for citizens to scrutinise the investment or their outcomes.

As many Governments have not been able to repay these debts for several years, in numerous cases debt cancellation does not free up resources to invest in development and represents a belated recognition that the money will not be repaid. Even when debt cancellation does deliver new resources – as with much of the Highly Indebted Poor Countries debt relief – funding for debt cancellation should be additional to aid spending.

Finally, the way EU Governments account for debt relief ensures they maximise its value. They count the entire stock of debt in the year that it is cancelled, even though debt service payments would have happened over many years.

Refugees in Europe

In addition, assuming that European countries continued to spend similar levels of their ODA on these items as in the previous five years, we estimate that a further €840 million of EU aid in 2005 was spent on housing refugees within Europe. Several EU Governments, most notably Denmark, Sweden and the Netherlands, include the first year costs of refugees arriving from developing countries in the donor countries and all costs associated with any repatriation back to the developing country. Spending on refugees is of course necessary, but this spending should not be counted as ODA as it never actually leaves the donor country.

Foreign students

Some European Governments also inflate their aid figures by including spending on educating foreign students in their country. Assuming past spending trends, European Governments are likely to have accounted for €910 million of the EU’s ODA in 2005 on educating foreign students in donor countries. Funding foreign students’ education in Europe may be worthwhile, but it should not be counted as development assistance for overseas countries.

New Member States: lack of data

For the 10 new Member States in the European Union providing development assistance is relatively new. In many of the countries there are serious problems of coordination and transparency. In the Czech Republic, for example, responsibility for official aid spending is spread across 11 ministries. For this reason, amongst others, access to information on the details of development spending is limited, making it difficult for citizens and NGOs to monitor.

The Hungarian development NGO platform reports that different figures on overall aid volumes are provided by different ministries in Budapest. Because of this, few NGOs in new Member States are aware of whether or how much official headline aid statistics are inflated with spending that does not provide new resources. In some cases, however, this practice is clearly occurring. Malta’s aid is deceptively doubled by the inclusion of its spending on refugees in Malta, and Poland includes debt cancellation spending in its official development assistance totals.

Change the aid reporting rules

Political will is required to increase aid budgets and to report transparently and accurately on progress. We are challenging European Governments to resist the temptation to make misleading claims. Official aid figures should continue to rise and should only show spending which delivers new resources for poverty reduction in developing countries.

There are dangers that the problem of misleading aid reporting could get worse, not better. One reason is that further major debt cancellations for Iraq and Nigeria are due in 2006, 2007 and 2008. Another is that a number of Governments – including leading European aid-providers – are currently arguing that Official Development Assistance reporting rules should be further loosened. They are arguing that spending on security issues and on climate change mitigation should be allowed to be counted as part of their ODA. Development NGOs consider that only interventions which have poverty alleviation as their main objective should be included in aid figures.

Since September 2001 there have been moves by a number of countries to use aid money to directly or indirectly contribute to the "war on terror", for example by boosting certain countries’ military capacities. Support for security should not be taken from the already limited resources allocated to development.

Using ODA money to fund military-related activities will result in a diminishing of the funds allocated to achieve the Millennium Development Goals. This is a problem in itself and might deepen inequalities and contribute to further instability.

Climate change is another important issue, but not one which should divert development spending. A number of countries propose to classify their spending under the Clean Development Mechanism as part of their official aid statistics. This mechanism is part of the Kyoto Protocol which aims to assist industrialised countries to comply with their emission limits and create a new and additional incentive for these countries to invest in clean technologies in developing countries. Governments which choose to channel financing through this mechanism should do so additionally to their Official Development Assistance.

Development NGOs will work to ensure that their Governments take a firm stand on this issue in negotiations before and at the OECD meeting on aid accounting rules in 2007. The rules for accounting Official Development Assistance need strengthening, not weakening.

Aid quality and allocation: key additional issues

This report focuses on some vital issues that must be resolved to improve public confidence that Governments are meeting aid commitments. There are, however, many other problems which frequently stop aid resources reaching those who need it most. Among these important issues – which civil society groups in the South and North are continuing to monitor and campaign on – are:

* Tied aid. Forcing recipient Governments to buy goods and services from the aid providing country raises costs by between 15 and 40 per cent. Only the United Kingdom, Ireland and Norway abide by a 2001 OECD recommendation to fully untie all their aid to least-developed countries (LDCs). Greece, Austria and Spain have extremely high proportions of aid tied. Finland, Italy and Luxembourg fail to report their tied aid figures, presumably because the figures are so bad. In 2001, the last time Italy reported its tied aid, for example, 92 per cent of its ODA to LDCs was tied.

* Ineffective technical assistance. In 2004, European Governments spent €8 billion – almost one fifth of the total aid spend – on training and research in developing countries. Yet as the OECD has recently acknowledged, technical assistance has been criticised for frequently being too costly, inappropriate to recipients’ needs, and for fostering dependency.

* Politically-motivated aid allocation. Aid has often been targeted not to countries that need it most but to Governments which are geo-politically important. Countries that have seen their aid volumes nearly treble over the last decade include Afghanistan, Colombia, Iraq, Jordan and Pakistan, for example. Some 68 per cent of total EU aid is currently spent in low-income countries. However Greece only allocates 29 per cent of its aid to low-income countries, Austria 57 per cent and the European Commission 55 per cent.

* Conditionality. In exchange for aid finance bilateral and multilateral agencies impose a large number of policy conditions, up to 100 in some cases. This is administratively burdensome for developing countries to implement and distorts national policy-making processes. Progress on implementing official pledges to reduce conditions has been very slow. The UK Government is the only EU Government with a policy to limit economic policy conditions such as services privatisation and trade liberalisation.

* Un-coordinated aid. Overstretched civil servants in aid dependent countries are required to meet a raft of disbursement, procurement, reporting, monitoring and auditing requirements from multiple agencies, diverting scarce time and resources. A typical African Government submits 10,000 quarterly donor reports each year and hosts more than 1,000 donor missions. In 2005, EU Governments signed up to targets aiming to reduce the administrative burden of their aid delivery, but progress remains well below what is possible.

* Predictability: Only 70 per cent of pledged ODA is actually delivered. ODA flows are highly volatile: four times more volatile on average, than recipient countries’ GDP. Donors need to work towards ensuring far greater stability of aid flows in the near future, improving disbursements and procedures so that recipient Governments can increase their budgets and spending predictably.

Conclusions and demands

European Governments have taken a vital leadership role in international diplomacy on development assistance in recent years. They provide a very substantial amount of the world’s development assistance, and the amount is rising. However there is no room for European Governments to rest on their laurels. The harsh reality is that European countries as a whole are a long way off from meeting their aid pledges. The millions of people who campaigned for an end to global poverty in 2005 wanted action, not just announcements, and have made their own pledges – to continue to watch and pressure their Governments until they deliver on their promises.

This report calls for:

- Genuine increases in European aid

European Governments must increase their ODA so that they reach their minimum and average commitments for 2006, 2010 and 2015 without distorting the figures. This means they should not inflate their headline aid figures by including items such as debt relief, refugees arriving in Europe or foreign students educated in Europe.

- Clear year-on-year timetables to reach 2010 targets

All European Governments must develop their own clear timetable for reaching the 2010 European targets. Italy, Austria, Portugal, Spain, Greece and Germany still need to provide details on when they will meet their pledges. New Member States also need to produce clear timetables for reaching their own targets.

- Tighten official aid reporting rules

The rules which determine the criteria for Official Development Assistance must be changed to ensure that Governments cannot mislead their citizens by exaggerating the figures. The Organisation for Economic Cooperation Development’s Development Assistance Committee (OECD DAC) is the official body responsible for setting the international rules for official aid statistics. The rich country Governments represented in the DAC should agree to change the rules for counting Official Development Assistance so that countries are no longer able to include items which do not provide new resources for poverty reduction in developing countries.

- Greater transparency in aid reporting

European Governments must be more transparent in the way they report their official aid. Countries routinely fail to provide their citizens or the OECD with data, making comparisons across countries hugely difficult. Italy, for example, has failed since 2001 to publish how much of its aid is tied to the purchase of Italian goods and services. All Governments must provide a complete breakdown of their official aid each year and publish their data much more rapidly. Currently final statistics for each country’s official aid statistics are only made public after a lag of two years, making it difficult for citizens to track their Government’s current performance.

- Enhance the allocation and quality of aid

Take the IMF Off Life Support

As economists and politicians debate what to do about the latest challenges facing the Internationa Monetary Fund (IMF), some in the civil society argue that rather than trying to put it on life-support by supplying it with new power, it should be allowed to die a natural death. The following article by Walden Bello and Soren Ambrose takes such a line. The authors are, respectively - head of Focus on the Global South and policy analyst at ‘50 Years Is Enough: US Network for Global Economic Justice.’ The article was carried on 24 May by CommonDreams.org.

For over 25 years the world has had one answer for countries that find themselves in a financial crisis: take the IMF policy medicine and get on the debt treadmill that comes with IMF and World Bank loans. This path has worked very well – for big corporations in wealthy countries which walk into countries through the doors opened by the IMF’s policies and walk out with massive profits.

But for the people the IMF and World Bank say they are trying to help – the poor – the results have been very different – in fact, downright disastrous. The IMF has tremendous power -- it can tell all other creditors to cut a country off if its orders are disobeyed -- so it is no surprise that governments comply with its demands.

Neither should it be surprising that when a government lays off workers, sells off companies to foreigners, cuts spending on nurses and teachers, cuts the subsidies poor farmers and consumers rely on, privatizes essential services like healthcare and water provision, and makes credit unavailable to small businesses – in other words, following IMF instructions – the result is deeper poverty, worsening health indicators, growing illiteracy, and an economy reduced to providing raw materials and cheap labor to multinational corporations.

The IMF’s commitment to market fundamentalism – the conviction that the solution to every problem is to open up to the forces of supply and demand -- is so extreme that it ordered Malawi to "commercialize" its grain reserve agency in 2001. If you are puzzled by why an agency devoted to preventing famine would submit itself to market forces, imagine how the families of the thousand people who died later that year feel. They were left without access to food after the agency was forced to sell its existing reserves in order to "capitalize" itself; before it could replenish, shortages set in and prices shot up, leaving it, and poor Malawians, defenseless.

The governments that control the IMF – the U.S., the European Union, Canada, and Japan – met in Washington in April amid growing signs that the IMF’s borrowers have had enough of these one-sided, catastrophic policy demands. While the poorest countries, mostly in Africa, remain locked in the grip of the IMF, those countries that can afford to do so – Brazil, Argentina, Indonesia, Uruguay, Turkey – are either paying off their IMF debts ahead of schedule or seriously discussing the option. All of them say they will take no more IMF loans. That these are also some of the IMF’s biggest debtors has given its bosses serious pause, since it might mean shrinking or even closing the IMF.

The assembled finance ministers and central bank governors – several of whom had been making loud noises of concern in the weeks leading up to the IMF meeting – pronounced themselves satisfied with the solution they had mapped out.

What is the new approach for the IMF? That’s not entirely clear – mostly they talked about giving the institution more power to convene mini-summits of countries facing possible economic problems. But if the relieved expressions on the delegates’ faces mean that they feel they have saved the IMF by increasing its role in the global economy, we could all be in trouble.

Since the end of the "Bretton Woods" currency arrangements in the early 1970s, the IMF has had virtually no influence over wealthy governments that do not require its loans. If what emerges from the latest crisis of confidence about the institution’s role is an agency newly-emboldened to impose its constricted brand of economic orthodoxy – the same one that exacerbated the Asian financial crisis by ordering layoffs and increased interest rates, moves the IMF itself now admits might not have been very wise – then the notoriety that the IMF has earned in Latin America, Asia, and Africa could spread quickly in the richer parts of the world.

Global economic governance is not a bad idea. But the IMF is not the agency to carry it out. It is thoroughly discredited in developing countries and "emerging economies" after 25 years of abuse. Its attempts to impose its solutions on governments and citizenries accustomed to making their own decisions is not likely to get very far. Indeed, the only solution to the continuing crises in Africa and other impoverished parts of the world is a restoration of policy sovereignty to people and governments.

The IMF’s obsolescence is showing; rather than trying to put it on life-support by supplying it with new power, it should be allowed to die a natural death.

Health: Crucial First Step’ Toward Global R&D Framework

The civil society representatives were generally upbeat about the resolution passed by the World Health Assembly (WHA) on essential health research and development (R&D). Some even expressed surprise over the fact that the resolution, based on an initial proposal by Kenya and Brazil, could sail through by even getting the governments’ support from unexpected quarters. Set below is a compilation of BGO reactions to the agreement at the annual meeting of health ministers, in Geneva on 27 May.

The medical humanitarian organization Médecins Sans Frontières (MSF) called it a ‘breakthrough agreement’ on essential health research and development (R&D) reached by the World Health Assembly. With a resolution passed by the annual meeting of health ministers, the governments agreed to start talks to establish a global plan of action to tackle the current crisis in R&D and to implement the recommendations of the report of the Commission on Intellectual property, Innovation and Public Health (CIPIH).

"The current system that is based on patents and high drug prices as the way to finance R&D leaves huge health needs unmet, particularly in developing countries, and it leaves millions without access to the drugs they need," said Ellen ‘t Hoen, Director of Policy and Advocacy at MSF’s Campaign for Access to Essential Medicines. "Without political leadership, the gaping holes in essential R&D and the lack of access to innovations will never be adequately addressed. This week, we have seen health ministers take the lead, and show that they want to set the priorities, they want to find new ways of financing the development of new products, and they want to assure access to innovations for all," she added.

By passing the resolution that was based on an initial proposal by Kenya and Brazil, countries are agreeing to work towards "…securing an enhanced and sustainable basis for needs-driven, essential health R&D." This will ensure that patients’ needs – and not simply profits – drive medical innovation.

"For the first time, we’re starting to see action that begins to mirror the magnitude of the problems and needs that we witness everyday in our field programmes," said Dr. Tido von Schoen-Angerer, Director of R&D at MSF’s Campaign for Access to Essential Medicines. "This is a crucial first step that will help us put in place new ways of stimulating R&D for health problems that so far industry has ignored," he added.

Published in April 2006, the CIPIH report added to the growing body of evidence showing that the system is fundamentally flawed because it steers investment towards areas of highest profitability, and thus fails to find a balance between global medical needs and resource allocation.

Other NGO quotes:

"The negotiators tackled a contentious issue with more grace and better outcomes that many had predicted. The decision to create a new intergovernmental working group that has a mandate to create a global strategy and framework to address the setting of essential health R&D priorities and sustainable funding mechanisms, consistent with access, was bold and action oriented.

"R&D is too important to be left up to one person (Bill Gates), one country (US NIH/CDC) or private investors only. It is also the beginning of a serious discussion of how we can reconcile incentives to innovate with access. Now we need to focus on the working group.

"The deal is not perfect. The resolution unhelpfully focused on "diseases" rather than health care problems, and the European Commission blocked the most explicit references to the need to refashion R&D incentives to ensure access, or to promote more openness in scientific research. But it is an impressive and tangible start. There is much credit to go around, starting with several dedicated public health advocates, most importantly Nicoletta Dentico and Ellen ‘t Hoen, but also many others from the NGO community, public health leaders from Kenya and Brazil, who set their sights high, and provided the leadership that changed minds everywhere, and scientists Tim Hubbard and Sir John Sulston.

"The United States delegation, led by Bill Steiger, provided constructive and positive contributions, as did delegations from many other countries, including the Netherlands, Italy, Norway, New Zealand, Switzerland, Thailand and South Africa. We were disappointed at the hostile attitude of the European Commission, but this too was moderated by the more forward looking delegations from some EU member states.

"The global trade framework will be transformed by this initiative. No longer will countries see trade agreements about intellectual property rights or drug prices as the only mechanism for sustainable funding of R&D, or the only possible outcome of a bilateral or multilateral trade negotiation."

South American Declaration on IP, Medicine Access & Public Health

On 23 May, 2006, the Ministers of Healh from Argentina, Bolivia, Brazil, Chile, Colombia, Ecuador, Paraguay, Peru, Uruguay and Venezuela signed a joint declaration on intellectual property, access to medicines and public health. They called for alternatives to the current system that may contribute to the promotion of innovation and the transfer of technology, while favouring social appropriation at accessible costs. An unofficial translation of the original version in Spanish, signed in Geneva, is presented below.

"Ministers of Health from Argentina, Bolivia, Brazil, Chile, Colombia, Ecuador, Paraguay, Peru, Uruguay and Venezuela gathered in the city of Geneva, on 23rd May 2006,

Considering that:

Access to medicines and critical raw materials is an integral part of the right to health, which is a basic human right of every individual and a fundamental prerequisite that governments have a duty to ensure.;

Medicines and critical raw materials are key in the healthcare of people. Nonetheless, large populations in the world, and particularly people in developing countries, lack or have very limited access to these health tools;

The provision of patents in the pharmaceutical sector has gained increased relevance in the region since the enforcement of the Agreement on Trade-related Aspects of Intellectual Property Rights (TRIPs) in the World Trade Organisation;

We are aware of the soaring burden of diseases and conditions that disproportionately affect our countries, and particularly those illnesses that mostly affect women and children, as well as of the health problems that are emerging or re-emerging, including neglected and non communicable diseases;

Significant price increase is being recorded in the area of government programmes related to pharmaceuticals and in the direct costs to consumers, as well as in the market prices; this is a consequence of the patent system which concerns health products that are essential for the prevention and/or the treatment of serious public health conditions, leading to a deterioration of access to essential drugs;

Our countries have in different ways adopted all the flexibilities and safeguards in our national legislations, as provided by the Agreement on Trade-related Aspects of Intellectual Property Rights (TRIPs), and as reiterated in the Doha Declaration on Intellectual Property Rights and Public Health signed in Doha, Qatar, on 21st November 2001;

A growing concern is emerging globally, made explicit in several Resolutions and Declarations by international and intergovernmental bodies, in relation to governments’ responsibility to grant access to essential medicines and tools to respond to public health needs;

Both in the Andean countries’ group and in the MERCOSUR, Ministers of Health have developed their work on the issue of access to essential medicines, thereby considering aspects of intellectual property and public health;

A continued dialogue must be fostered at the regional level concerning the impact of intellectual protection on access to drugs, leading to the adoption of concerted measures in order to ensure the supremacy of the public interest over commercial concerns

WE DECLARE OUR COMMITMENT TO:

1. Promoting the implementation of the Doha Declaration on Intellectual Property Rights and Public Health in our own countries, and particularly the decision of the TRIPs Council (Decision IP/C/W/405, dated 30/08/2003), in relation to the provisions regulating paragraph 6 of the Declaration mentioned above ‘granting of compulsory licences and use of parallel importing mechanisms.’

2. Promoting public opinion awareness about the importance of Intellectual Property Rights and Public Health in terms of the successful implementation of the safeguards and flexibilities included both in the agreement and in the Doha Declaration;

3. Strengthening international cooperation initiatives, seeking technological capacity by means of

4. Maintaining the flexibilities provided in the TRIPs Agreement in bilateral and regional agreements, while seeking to

5. Seeking the active role of our Ministries of Health in the negotiation of bilateral trade agreements, in the negotiation among regional groups as well as in the process of modification, updating and consolidation of national intellectual property rights norms, by means of: a. affirming the needs of the health sector with technical supports, based on the Doha Declaration on Intellectual Property Rights and Public Health, and the declaration of the UN Millennium Development Goals ; b. training health professionals in the domain of intellectual property rights, including their current and future repercussions with regards to access to essential medicines.

6. Promoting and supporting the continued international dialogue on the impact of patent protection on access to essential medicines and critical raw material, by means of research initiatives and exchanges of experiences;

7. Recommending the promotion of studies allowing the monitoring of drugs prices and the effects of the TRIPs Agreement in the domain of public health in our countries, with the intent of identifying alternatives to the current system that may contribute to the promotion of innovation and the transfer of technology, while favouring social appropriation at accessible costs.

In the city of Geneva, on 23rd May 2006."

South Centre News

Trade for Development Progreamme

Staff under the Trade for Development Programme (TDP) organized:

They also participation in the following conferences and in meetings:

Innovation, Access to Knowledge and IP

King Bhumibol Gets Human Development Award

Bangkok, 26 May – The UN Secretary General Kofi Annan presented the United Nations Development Programme’s inaugural Human Development Lifetime Achievement Award to His Majesty King Bhumibol Adulyadej of Thailand.

"Human development, reduced to its essence, is a very simple concept: it is about empowering people," Mr. Annan said. "Not the few, not even the many, but all people. It is about empowering them through education, through opportunity, through health care and nutrition. It is about empowering individuals with choices so that they may live healthy, knowledgeable and creative lives.

A Tough Going for the Doha Round

"To tell the truth, it is almost impossible to react in a meeting summoned at such short notice and when the details of what is going to be discussed are unknown. We would appreciate it if in the future this type of encounter is summoned in good time. In any case it is useful, because it frequently happens that the delegations know more about what is happening regarding the process here and the numbers and ranges of numbers that are being considered from the press, than in our own meetings.

This is a clear signal that what has been done in the field of transparency continues to be insufficient, and that a lot remains to be done regarding participation and real negotiations which truly involve all Members. It is also evident that the process has not returned completely to Geneva and that peripheral meetings that can have a decisive incidence in the outcome of the process are still taking place.

My delegation continues to be committed to the conclusion of this Round of negotiations, not just for the sake of meeting a deadline no matter what the results are, but only to achieve a satisfactory outcome - with the participation and consensus of all the Members- that fully complies with the development mandate of the Doha Declaration.

After almost 5 months of reinitiated negotiations, there are no clear signs of convergence in the key questions of modalities, nor in the flexibilities and mandated special and differential treatment for underdeveloped countries in general, and the LDCs, in particular.

The past scenario of endless mutual recriminations between the big actors of the developed countries is repeated, disputing among themselves who must take the first step so that the other flexibilizes its positions and of unrealistic demands to the developing countries that are not only unfair, but impossible to meet, if this is really a development Round.

The issue of development arrived at this organization to remain, not like a temporary or junctural element. Liberalization cannot be an aim in itself. Let us remember the first two preambular paragraphs in the Marrakech Agreement, by which this Organization was created and that constitutes the foundation of this and the rest of the WTO agreements. In the main agreement of this Organization, we, the Parties, recognized that trade must tend to increase the standards of living, to achieve full employment, to increase real income and to achieve the objective of sustainable development and that whatever we did would be compatible with our respective needs and interests, according to the different levels of economic development. Likewise, we agreed on the need to make efforts so that the developing countries, and specially the LDCs, could get a part of the increase of the international trade in accordance with their economic development needs.

Judging by the statements of the Chair of the Committee on Trade and Development and the Chairs of the different negotiating bodies about the state of play regarding the proposals on special and differential treatment in the last meetings of the Trade Negotiations Committee and the General Council, all those objectives are far from being materialized, according to the current status of the process. Cuba reiterates that the negotiations should not be held hostages to the arbitrary establishment of deadlines. We cannot reduce the development dimension agreed in Doha, which is the priority and reason for being of this Round.

The intensification of the negotiations does not ensure, by itself, a satisfactory outcome. There is a need for political will of the main actors - which we have lacked and continues to be absent - to advance the process. We also hope that any Ministerial meeting convened in the future, will count on the participation of all members and not a less than full Ministerial in which only a few participate.

My delegation also shares the view expressed by the delegation of Venezuela that the modalities are only a portion of the mandate of this Round and that they must include all and each of the questions included in the mandates such as special and differential treatment and the flexibilities for developing countries, special products, etc. Likewise, we would like to clarify our stance that the outcome of a future Ministerial meeting on modalities, without having fulfilled the remaining mandates, will have to be subject to the definitive approval of the negotiations as a whole at the end of the Round."