Richard Melson

March 2006

South Bulletin No. 121

South Bulletin 121

1 April 2006

This issue of the South Bulletin

focuses on the WTO Services Negotiations

In this Issue:

Religious Diversity A Source of Strength In Nation Building - Badawi

"The animosity and antagonism between the Western and Islamic civilizations will not end for so long as one side attempts to control and dominate the other." That was the view expressed by Abdullah Ahmad Badawi, Prime Minister of Malaysia recently at a function in Australia. "Reciprocity should be the ethical principle that conditions relations between the West and Islam," he said.

(Development) State of Play of the GATS Negotiations

The development dividends of trade liberalization in the services context cannot be reaped by market openings alone. "More than in the case of agricultural and industrial goods, a more critical element required in services is the need to help developing countries build the complex of linked and inter-related domestic infrastructures, institutions, systems and enterprises that will form the foundation of effective international competition and industrialization." A view expounded by a developing country delegate.

Moving Ahead on Aid for Trade

Aid for trade must be development-focused and consistent with the emphasis on development in the Doha Round, according to Dr. Supachai Panitchpakdi, the UNCTAD Secretary-General. This translates practically into support for building and upgrading trade-related infrastructure; addressing implementation costs arising from the outcome of the negotiations; and meeting adjustments costs arising from liberalization efforts, including costs that stem from erosion of preferences, loss of tariff revenue and sectoral adjustment.

Services Negotiations: In Synch with National Development Objectives?

For a number of developing countries, the WTO Services negotiations may not even be reflecting the overriding national economic interests. That means they are unlikely to be taking care of the interests of the majority of the nationals in the developing world, especially the Least Developed Countries. Some of the concerns raised during the South Centre’s annual workshop on Trade in Services.

Water Services: Private sector Fails to Invest in Developing World

Water privatisation in developing countries is an ongoing disaster and the private sector is failing to deliver the investment necessary to meet international targets on water and sanitation, according to a recent report, prepared by the World Development Movement (WDM) and Public Services International (PSI).

More in this Issue:

Goodbye Washington Consensus, Hello Washington Confusion?

Financing Poverty Reduction Not Indebtedness

Argentina: Recuperated Enterprises Reversing the Logic of Capitalism

South Centre News


Religious Diversity A Source of Strength In Nation Building - Badawi

"The animosity and antagonism between the Western and Islamic civilizations will not end for so long as one side attempts to control and dominate the other." That was the view expressed by Abdullah Ahmad Badawi, Prime Minister of Malaysia recently while being conferred the honorary degree of Doctor of Technology by Curtin University of Technology Perth, Western Australia. "Reciprocity should be the ethical principle that conditions relations between the West and Islam. The West should treat Islam the way it wants Islam to treat the West. Both sides should accept each other as equals. Respect, reciprocity and equality: these are the essential prerequisites for a happy and harmonious relationship between the two civilizations." Following are extracts from Prime Minister Badawi’s address.

"It is indeed a great honour for me to receive from Curtin University of technology its highest award, the degree of Honorary Doctor of Technology. I am very touched by the University’s magnanimity in organizing this special ceremony for the conferment of the degree. I also wish to thank the chancellor and the vice-chancellor for giving me the privilege to deliver an address on this occasion. I humbly accept these honours as an expression of your regard not only for me but also for my country. I know that Curtin University of Technology already has strong links with Malaysia. I am very happy to be in Perth once again because this city has always been a favoured destination for me and my family

The people of Malaysia and the people of Australia have shared a long history of positive interactions for more than 50 years. It began with the Colombo plan and since then, more than 150,000 Malaysians have graduated from Australian universities. Today, more than 30,000 Malaysians students currently study in Australian educational institutions in this country as well as in Malaysia. We acknowledge and appreciate the important part played by Curtin University of Technology in this respect.

I am very aware that the well-being of mankind, both now and in the future, depends heavily upon innovative and creative technology. I know also that Curtin University of Technology is making great strides in the field of innovation and creativity, for the good of Australia as well as the world at large.

Today, however, I wish to speak to you on another subject of equal importance that is now affecting the lives of people everywhere. I am referring to the state of affairs between the Islamic world and the West – a relationship consistently threatening to decline and which must change for the better. In that context, I will also relate to you the efforts we are making in Malaysia to adopt a fresh approach in applying the teachings and traditions of Islam, in order to achieve good governance in the process of nation building, and to contribute to greater harmony between peoples and cultures.

I consider this occasion a most appropriate time for me to speak on this subject because I am of the view that Australia and Malaysia are well placed to lead by example in the matter of managing societies which are racially and religiously diverse. Australia is home to migrants from a large number of countries. Even the Australian born population has diverse backgrounds. Malaysia, as is well known, is a multi-racial and multi-religious country. I believe strongly that a country which can establish racial harmony and religious tolerance at the domestic level will have good credentials to advocate for change at the international level. in this regard, I believe Australia and Malaysia have many similarities and good track records.

The process of globalization, and the advances in communications technology in particular, have brought peoples of the world so close to each other. But, this increasingly integrated world, at the same time, has also made people feel an even greater need to defend and champion their particular belief-systems, values and principles at all costs.

It is indeed lamentable that in this age of great scientific discoveries and huge advances in other fields of knowledge, we are faced with the daunting prospect of having to deal with extremist movements of all shades and beliefs. Christian, Jewish, Muslim, Hindu and Buddhist extremist movements have come to the fore, putting aside dialogue and placing greater emphasis on difference. Their leaders sometimes preach the politics of fear and even hate towards others of different beliefs, values, origins, culture, language or colour. We have to acknowledge as a result, that there is a certain resurgence of feelings of insecurity and anxiety within societies in various countries and between peoples and cultures globally.

The current turmoil which has embroiled many countries in Europe, the Middle East and Asia is extremely disturbing. As we all know, it was triggered by a very unfortunate spate of insensitive acts and gestures against Islam by some Western newspapers and journals. We should never underestimate the power of religion as an imperative for people to act – with or without the guiding voice of reason. In a situation that was exacerbated by a notion of rights, unchecked by a sense of responsibility which would give it meaning, voices calling for dialogue and understanding must prevail. Xenophobic diatribe should have no place in a civilised world, and certainly no part in the rhetoric of leaders and statesmen. it can only serve to incite and anger.

The international community must now recognize that it has an urgent responsibility to address the state of relations between the Christian West and the Islamic world because Christians and Muslims make up more than half of the world’s people. There are more than 2 billion Christians accounting for 32% of the world’s population while Muslims number 1.2 billion or 19% of the total.

We in Malaysia are particularly conscious and concerned about the increasing rift between the Islamic world and the West because Malaysia is an Islamic country with an important non-Muslim minority. In our country, we have never taken our diversity for granted. Indeed, we are proud to say that we have successfully managed our religious and ethnic diversity with consciousness and sensitivity. In matters of race relations, we have managed to maintain harmony by an unwritten code of mutual respect and accommodation. Actually, we celebrate our diversity, not simply because it gives Malaysia a good name internationally as a working multi-cultural society, but because we know that this very diversity is in fact a source of our strength.

In economic and social matters, it is the official government policy to constantly plan for an equitable distribution of the country’s wealth through an ever expanding economy. The distributional strategy emphasizes reduction of economic disparities among ethnic groups and improvement of the corporate equity ownership of the Bumiputera or indigenous community.

In the realm of politics, we have engendered domestic stability and national unity through a process of power sharing. We have institutionalized a system of governing which upholds the principle of decision making by consensus, and which ensures that the representatives of the minority in the government are never marginalized or outvoted. We can confidently say that Malaysia is a thriving democracy, governed by a grand national coalition of political parties, which has brought growth and stability for the country ever since Malaysia achieved its independence in 1957.

The three main ethnic groups in Malaysia - the Malays, the Chinese and the Indians - profess different religions. Therefore, in Malaysia, the question of managing race relations and maintaining inter-religious harmony is a perpetual responsibility. While Islam is the religion of the Malay majority and the official religion of the country, freedom of religion is a right that is protected by our constitution. in this context, I have personally sought to promote good governance based on the principles of Islam Hadhari, which we have defined as a comprehensive approach to the development of mankind, society and country based on the perspective of Islamic teachings and Islamic civilization.

The 10 principles which represent the fundamentals of Islam Hadhari are:

i. faith and piety in Allah;

ii. a just and trustworthy government;

iii. a free and independent people;

iv. a vigorous pursuit and mastery of knowledge;

v. balanced and comprehensive economic development;

vi. a good quality of life for the people;

vii. the protection of the rights of minority group and women;

viii. cultural and moral integrity;

ix. the safeguarding of natural resources and the environment;

x. strong defense capabilities

In a wider sense, Islam Hadhari is also an approach to achieve reform and renewal in Islamic countries and in Muslim societies as a whole. Malaysia feels comfortable in commencing this journey of reform and renewal because the approach is eminently suited for adoption in a multi-racial and multi-religious country like ours. As I have already said, we do not consider our diversity to be a liability but an asset to be nurtured. The mutual respect and understanding between the races makes us a caring society. The peaceful coexistence among the religions which we practise makes us a compassionate people

I must clarify that Islam Hadhari is not a new religion. It is neither an undertaking to apologize for the perceived Islamic threat nor any effort to seek approval for a more friendly and gentle image of Islam. It is a way for appreciating and practising the religion in these modern times but firmly rooted in the noble values and injunctions of Islam.

Islam, as you know, is not just a religion but a way of life for the Muslims. We wish to make Islam Hadhari an example of the way Muslims should relate to their fellow men especially those of other religions. We also want to make Islam Hadhari the inspiration for the development and advancement of our society and country as a whole. It is in this spirit that the process of nation building in Malaysia accords the highest priority to the promotion and preservation of inter-ethnic and inter-faith harmony. These considerations lie at the core of Malaysia’s national development strategy.

This is the second time I have spoken about Islam Hadhari in Australia. The first occasion was a talk I gave at the Asia society in Sydney in April 2005. I feel comfortable about speaking on this subject in Australia because I consider Australians a tolerant people willing to give others a hearing. I also know that Australia is an open country which is committed to defending the dignity of the human person and devoted to fostering peace and goodwill among nations.

That is why I said in the beginning of my speech today that Australia is eminently qualified to lead by example as a country which is very involved in harnessing the dynamics of diversity, and making them serve positively the process of nation building and the pursuit of national interests. Australia can therefore speak up and speak out, at the international level, for a genuine transformation in relations between the West and the Islamic world. Australia can help bring an end to the animosity and antagonisms of the past and the present. Australia can contribute towards building bridges between peoples and cultures.

Certain voices advocating moderation and rationality, both in the West and in the Islamic world, are not given the prominence they deserve. The international media should give much more attention to them. Both in the West and the Islamic world, there remain an abundance of well-wishers, bridge-builders, communicators and facilitators who genuinely wish to come closer to the other side and to learn, work and live together. I would like to invite Australian leaders and people to add their voice to this noble cause. I would like to invite the Australian media to do their part in support of this big mission.

We must correct misconceptions and erase suspicions which exist between the West and the Islamic world. We should promote a culture of tolerance between civilizations. We must create more inter-civilizational initiatives such as the teaching of comparative religion and culture in our institutions of learning. We can celebrate world religions and cultures in our festivals. We should adopt a collaborative - rather than a competitive - approach to joint scholarship and other similar efforts.

We need to foster respect for differences within our societies. It is important however to realize that in every religious tradition of the world, there are always extremists that do not represent the vast majority of peaceful believers. The greatest travesty is not when something terrible, condemned by all faiths, is done, but when it is done in the name of religion. Please be clear that Osama bin laden does not speak for Islam.

We must not allow irresponsible talk about an impending clash between civilizations to become a self-fulfilling prophecy. The challenge that faces us now is how to bring reasonable voices from the West and the Islamic world together, in a meaningful dialogue that will serve the needs of all.

Having said that, allow me to repeat today what I said at an international conference in Kuala Lumpur 12 days ago – we cannot expect to change the situation by mere talk, dialogue or exchanging niceties alone. The animosity and antagonism between the Western and Islamic civilizations will not end for so long as one side attempts to control and dominate the other.

There must be mutual respect for one another. reciprocity should be the ethical principle that conditions relations between the West and Islam. The West should treat Islam the way it wants Islam to treat the West. Both sides should accept each other as equals. Respect, reciprocity and equality: these are the essential prerequisites for a happy and harmonious relationship between the two civilizations.

I agree that this is not a time to bemoan the injustices of the past, to point the finger at anyone, or to apportion blame on any religion. but any dialogue can only be meaningful if it is a genuine two-way process that takes place in an environment which is fair, just and equal.

It is the responsibility of political leaders, both in the West and in the Islamic world, to create that situation where the voice of reason and humanity can prevail over the voice of hate bigotry and ignorance. That voice will be diverse and complex, and it will speak of the complications of our times. But for that reason, it will also be the most honest voice we may ever hear. Indeed, this is the time to be honest, rational and sincere with ourselves for the good of our own generation and for future generations to come.

I am confident that Curtin University of Technology will also play its part to contribute to the dialogue we have been talking about. I take this opportunity to wish Curtin University of Technology great success in all its endeavours.

Before I resume my seat, I would also like to use this opportunity to make a special announcement. I have been informed that Curtin University of Western Australia has decided to contribute the royalty fee that the university receives from Curtin University Miri Sarawak, towards a fund which will provide money for research grants to post-graduate students. This is indeed a very welcome initiative, which is very much in tandem with the Malaysian government’s emphasis on the development of human capital to drive the knowledge economy.

Today, I wish to announce that the government of Malaysia will match the contribution by Curtin University of Technology in the amount of Malaysian Ringgit six (6) million to the research and scholarship fund to be created at Curtin University Miri Sarawak. This fund will be utilized for research and development between Curtin University Miri and Curtin University Western Australia, as well as for post-graduate scholarships and post-doctoral research in biotechnology."

(Development) State of Play of the GATS Negotiations

The development dividends of trade liberalization in the services context cannot be reaped by market openings alone. "More than in the case of agricultural and industrial goods, a more critical element required in services is the need to help developing countries build the complex of linked and inter-related domestic infrastructures, institutions, systems and enterprises that will form the foundation of effective international competition and industrialization." That was the view expressed by José Victor V. Chan-Gonzaga the delegate from Philippines, [1] at the annual South Centre workshop on Trade in Services on 23 March, 2006. Speaking in his personal capacity, he made a comprehensive presentation on the state of play in the services negotiations. Following are extracts.

"At a symposium in 2002, Philippine President Gloria Macapagal Arroyo declared that: "central to our global engagement – and hence our development agenda – is trade. Trade is not an end in itself, but must be a means to social and human development." [2]

I would like to offer President Arroyo’s statement to us this morning as a framework within which to examine the state of play in the GATS negotiations, and how to view the way forward in 2006, as we try to bring the Doha Development Round to a successful and meaningful conclusion.

To my mind, it puts in a compelling perspective the state of play in the GATS negotiations, particularly when we look back at the last ten years that the General Agreement has been in operation, and at the exciting weeks leading up to the 6th WTO Ministerial Conference in Hong Kong.

I think it’s a compelling perspective because it compels us to view things differently, at different angles; and to take most of the positive-sounding arguments for free trade with a critical mind. But more importantly, it compels us to remind ourselves time and again, that Doha is a development round, and that the negotiations must feed into the broader global undertaking to bring entire peoples out of poverty and to allow countries around the world to share in global prosperity.

Thus, the Executive Summary of UNCTAD’s latest note to its Commission on Trade in Goods and Services, and Commodities (hereinafter UNCTAD Note) [3] correctly pointed out that: ‘The main challenge facing developing countries in the services area is strengthening domestic supply capacity, maximizing its contribution to economic growth, and reconciling economic, social and development considerations.’

General State of Play in the Negotiations

Market Access

As of February 2006, 70 initial offers and 31 revised offers had been submitted by Members. UNCTAD’s Note, however, points out that "less than half of the offers include improvements to horizontal commitments on Mode 4, and those who have made changes have not included categories of natural persons of interest to developing countries. New sectors/sub-sectors (also) contain limitations that act as barriers to entry."

At Hong Kong last December, Ministers instructed their negotiators to ensure that the services negotiations proceed to their conclusion with a view to promoting the economic growth of all trading partners and the development of developing Members and LDCs. Ministers also adopted the objectives, approaches and timelines set out in Annex C of the Ministerial Declaration, in order to intensify the negotiations, expand sectoral and modal coverage, and improve the quality of commitments. In this regard, Ministers also specifically provided that particular attention should be given to sectors and modes of supply of export interest to developing countries.

As expected, the March/April cluster of services meetings will be devoted almost entirely to plurilateral meetings. Consequently, while the WPDR and CTS/SS formal meetings have been retained in the cluster, the CTS/Regular Session and other subsidiary bodies are now expected to convene either during the week before or after the cluster. All the remaining eight days will be devoted to plurilateral and/or bilateral meetings.

As of this date, we are expecting at least 20 plurilateral groups, namely: CRS, Cross Border, Telecoms, Financial, Audio Visual, Maritime Transport, Online Games, Air Transport, Postal Courier, Distribution, Logistics, Mode 4, Environment, Construction, Architecture/Engineering, Legal, Energy, Mode 3, MFN Exemptions, and Education.

However, it would not be wise to think that the plurilateral process of negotiations is the panacea to Members’ disappointment in the services negotiations. Someone has to exercise leadership in these negotiations. We expect the demandeurs in the market access side of the services negotiations to provide the leadership, particularly vis-à-vis their expectations from other Members, by giving genuine market access to developing countries in sectors of interest to them.

We also continue to believe, as outlined in the Joint Statement of 29 September 2005 of some ASEAN Member States, that there remains room for improving the engagement between and among Members at the experts-level, if only to allow a deep appreciation of trade interests of Members, and produce productive dialogue. And this is a real and fundamental issue whether in the bilateral, plurilateral or multilateral settings.

Members, therefore, will have to continue to reflect on and devise methods and approaches that will result in more focused and intense discussions of some technical issues, which are usually not possible in Geneva during the cluster, not only because of the absence of appropriate experts, but also because of the limited time.

Domestic Regulation

Paragraph 25 of the HK Ministerial Declaration re-affirmed the right of Members to regulate. Furthermore, in paragraph 5 of Annex C, Ministers mandated the development of specific disciplines in domestic regulation before the end of the current round of negotiations, consistent with article VI:4 GATS.

The Working Party on Domestic Regulation has met three times this year, first in informal mode on 17 January 2006, formally on 6 February 2006, and then informally again on 9 March 2006. During the meetings, Members held discussions on the proposals on regulatory disciplines under Article VI:4 of the GATS. The substantive discussions focused on the revised proposal by Mexico and Switzerland with regard to technical standards; and the JOB document (upgraded from room document) co-sponsored by Brazil, Colombia, Dominican Republic, Peru, and the Philippines.

With the objective of fulfilling the Hong Kong ministerial mandate, Members also held discussions on procedural and organizational issues relating to future work of the Working Party, including a tentative calendar of meetings for the Working Party, a possible roadmap for the negotiation, and a background note on the state of play in the Working Party.

On the calendar it was stressed that while it would be helpful for logistical purposes to plan and pace the work ahead, it needed to remain flexible. Delegations had indicated that the Working Party meetings were to be based on actual needs. The roadmap, which would also be a flexible one, would stipulate indicative milestones for the negotiation. Regarding the background paper on the state of play of the negotiations, Members noted that such a document was designed to help in facilitating domestic consultations and in bridging the gap between the current phase of the negotiations, centred on Members’ proposals, and the forthcoming drafting stage.

The WPDR Chair has already circulated a ‘road map’ and calendar of meetings, which remain flexible and embody no new obligations or deadlines. The document is merely to help Members focus on the next steps in the development of article VI:4 disciplines and better organize their work in the limited time available. Noteworthy is the scheduling of WPDR meetings on the first Monday of the cluster, in order to leave open the possibility of extending the WPDR meetings during services clusters to facilitate the participation of capital based experts.

The WPDR Chair furthermore has circulated the Background Note, which provides an overview of: (i) the main issues arising from domestic regulation; (ii) the proposals by Members to address such issues; and (iii) the main questions raised in the discussions held thereon in the Working Party. In structuring the Note, the Chair gathered the various issues under the items chosen by Members for the thematic discussions, that is to say: Licensing Requirements and Procedures; Qualification Requirements and Procedures; Technical Standards; Transparency; Objectives, Scope and Application; Definitions; and Development Considerations (Including S&D and Technical Assistance). These items correspond to the various elements contained in Members’ negotiating proposals. The sequence in which the items appears in this Note does not reflect any order of priority and is without prejudice to individual positions of Members.

This Note was circulated under the responsibility of the Chairman of the Working Party. It is clearly not exhaustive of the domestic regulatory issues, of the proposals submitted by Members and of the discussions held thereon in the WPDR. It has been prepared with a view to facilitating domestic consultations and as a possible tool for discussions in the Working Party, without prejudice to Members’ proposals and positions on the development of regulatory disciplines under Article VI:4 of the GATS. It is meant to help Members to move forward in the negotiations under Article VI:4 of the GATS with the objective of fulfilling the mandate contained in the Hong Kong Ministerial Declaration. It stands ready to be amended based on Members’ inputs.

Rules Negotiations

Paragraph 4 of Annex C provides specific instructions on the rules negotiations, in accordance with the respective mandates in GATS articles X, XIII, and XV. Ministers stated that efforts must be intensified in order to conclude the negotiations on rule-making. They called for more focused discussions with regard to proposals for an ESM, on government procurement and on subsidies.

The last formal meeting of the Working Party on GATS Rules was held on 10 February with the three usual items on the agenda. On emergency safeguard measures, we presented a room document focusing on certain selected technical and procedural issues relating to an ESM.

The paper was submitted to the WPGR as a basis for intensifying our efforts to conclude the negotiations under GATS Article X, as mandated by our Ministers under paragraph 4(a) of Annex C of the Hong Kong Ministerial Declaration.

The paper contains issues that have already surfaced in prior ESM discussions in this working party. What we have done is to select a few central issues (not exclusive), which may be good beginning points for more in depth discussion of the technical and procedural questions raised over the years. The issues are: concept of domestic industry, dealing with vested rights, determination of injury, modal issues, and S&D.

Each section on the five central issues initially identified in this paper attempts to highlight some of the concerns, questions and/or objections even, as well as the options that may be available to the Membership with a view to arriving at more convergence. I would add that the options offered are not necessarily options that the proponents subscribe to but have been culled from the WPGR discussions and our informal informals. We hope to hear reactions to the options in formal and informal settings, as well as suggestions for other possible options.

We do not expect approval or endorsement of this paper. This is merely something on which we hope to build greater convergence on the critical and vital issues relating to ESM. Of equal importance is that it will also hopefully provide guidance to our delegations and capital authorities, as we continue to explore how we can craft an ESM that is acceptable to the entire Membership.

Since we have had a number of so-called living documents recently, we view this paper as belonging to that genre. It will be updated as necessary, both in terms of the listing of issues, and the options relating to particular issues.

On subsidies, Switzerland presented its responses to the questionnaire on the information exchange foreseen in Article XV of the GATS. A number of issues were raised in the ensuing discussion such as the definition of subsidy, public services, and geographical coverage. There was then agreement in the Working Party for the Secretariat to update a previous note compiling views expressed on the issue of definition.

On government procurement, discussions were brief touching upon the more recent communication from the European Communities on an Annex to the GATS on Government Procurement. Issues such as thresholds, special & differential treatment, non-discrimination, and procedural rules were raised by members.

Special and Differential Treatment & LDCs

The S&D item has been in the CTS agenda since 2003, and is periodically referred to by the General Council. Rwanda on behalf of the African Group had submitted a paper (Job(05)/151) in July 2005 compiling responses to questions and comments regarding S&D proposals in the GATS. It was agreed at the meeting in September 2005 that the Council would revert to this item at future CTS meetings.

The Hong Kong Ministerial Declaration required WTO bodies to expeditiously complete the consideration of these proposals and report periodically to the General Council, with the objective of ensuring that clear recommendations for a decision were made no later than December 2006. At the informal meeting of 7 February 2006, several Members had noted that this was one of the important tasks of the Council this year.

To facilitate discussions under this item, the Chair has urged Members, especially demandeurs, to contribute further thinking, and make new submissions on the issue of S&D proposals in the GATS. Kenya, on behalf of the African Group, recalled at the last meeting of the CTS their document Job(05)/151. He further recalled that in addition to these responses, the African Group had informal consultations with some Members on some proposals. The African Group would continue to have consultations with other Members to narrow the differences on this issue.

On LDCs, there are basically three submissions on the table. An initial paper was submitted in June by the LDC Group, raising a number of questions for discussion. During the cluster of September 2005, the LDC group circulated a follow-up room document, focusing on special market access for LDC Members in the GATS.

At that time, the EC also circulated a submission addressing the questions raised by the LDC Group.

In accordance with paragraph 9 of Annex C of the Hong Kong Ministerial Declaration, Members are supposed to "develop methods for the full and effective implementation of the LDC modalities." In particular, Members "shall develop appropriate mechanisms for according special priority" to LDCs, in accordance with Article IV:3 of the GATS and paragraph 7 of the LDC Modalities, by 31 July 2006.

Recognizing the importance of the issue and the limited time left to fulfil the mandate of the Hong Kong Declaration, the CTS/SS Chair is expected to hold open-ended consultations on this matter and the Council will revert to this item at its future meetings.

Development State-of-Play in the Services Negotiations

GATS Article IV: Increasing Participation of Developing Countries

GATS Article IV is a vital development pillar of the services negotiations, and all effort should be undertaken in order to operationalize that provision. That provision provides for the strengthening of domestic services capacity of developing countries, and their efficiency and competitiveness, with a view to increasing the participation of developing countries in the international services trade.

In order to do so, developed Members are asked to liberalize market access in sectors and modes of supply of export interest to developing countries. It is also important to note paragraph 10 of Annex C that calls for technical assistance to developing countries, i.e. compiling and analyzing statistical data, assessing interests and gains from services trade, building regulatory capacity But such technical assistance should be with a view to enhancing development objectives consistent with national policy objectives.

The UNCTAD Note cited various studies that identified Modes 1 and 4 as the modes of supply where developing countries and the LDCs have significant export opportunities. In many developing countries, outsourced services, which recent figures put at the global earnings level of $532 billion, and movement of natural persons remain the key economic drivers.

In the Philippines, for example, the business process outsourcing sector was about $1.655 billion in 2004, up from just $350 million in 2001, growing thus at an average of about 160%. Over 8 million overseas Filipino workers are deployed in 162 countries, with today’s annual deployment already double that of 1990.

Recent developments highlight many important aspects of the state of cross-border supply in services today, i.e. increasing importance of cross-border trade; the increasing inter-linkages between all modes of supply in business models; how countries continue to keep Mode 1 Unbound in many instances; and the increase in new services or combination of existing services, that are sometimes not captured in the scheduling framework of the GATS.

Indeed, advances in science and technology also make cross border supply viable for both developed and developing countries, where all countries have equal access to opportunities and costs from outsourcing arrangements. Business process outsourcing is a classic poster child of Mode 1. And both developed and developing countries seem to be benefiting from cross border trade in recent years. The importance of such trade to developing countries is well documented by trade figures, while developed countries have experienced lower labor costs and greater competitiveness for their firms.

But we wonder if we should not temper our exuberance about the increasing importance of cross-border trade. It is increasingly important to make sure that protectionism, e.g. preventing outsourcing through legislation, is avoided, particularly in the target markets of developing countries that have made the necessary infrastructure and policy adjustments in order to ride the wave of outsourcing.

There is also a need for commitments, particularly by more developed trading partners under modes 1, 3 and 4 for certain services like computer and related services, and call center services. We take this view because in many cases, it is not enough that some service can be provided via technology, but there may also be some need to establish some form of commercial presence and/or move workers or executives across borders for training. Here also, we cannot fail to take into consideration proposals and discussions on the need to re-examine and improve, where appropriate, transparency, efficiency and rationalization of entry- or visa-granting procedures.

Finally, we cannot gloss over the issue of the enormous ‘digital divide’ between developed, and developing countries, particularly the least developed. Computers, internet access, and other technological tools are vital to cross-border supply, and this remains an important challenge.

On mode 4, it is a cause for concern that less than half of the offers include improvements to horizontal commitments on mode 4; and that changes do not include categories of natural persons of interest to developing countries. Needless to say, however, in addition to mode 4 horizontal commitments, sector-specific mode 4 commitments with meaningful market openness will also be required.

But more than that, there are also critical Mode 4 challenges that developing countries must confront. For one, it remains a cottage industry in many developing countries, handled by small-time operators who are not optimally organized and are incapable of launching a focused and concerted effort in marketing capabilities to the world. Developing countries also have to address the need to improve the quality of basic education to ensure that the next generation’s desirability and not only availability is maintained. There is also the issue of compliance with international standards relating to combating money laundering, which implicates movement of natural persons and the ability to make remittances. Finally, long term planning is crucial to ensure re-integration into one’s home country. [4]

GATS Article XIX: Flexibilities for Developing Countries

In adopting Annex C last December, many Members made it clear that we were not agreeing to any new commitments or obligations aside from those clearly provided for in the GATS and the 2001 Negotiating Guidelines. Therefore, it was emphasized time and again during the Ministerial Conference, even by some demandeurs, that the full flexibilities currently enjoyed by Members under the GATS were in no way impaired by Annex C.

This was important because the full flexibility afforded by the request-offer process is a critical element of the GATS structure, and was considered vital to getting the GATS 1994 acceptable to developing countries. One observer even called it a pre-condition.

Article XIX paragraph 1, which some demandeurs often cite as the basis for their demand for more liberalization, must be read in totality. Thus, it must be invoked not only for its objective of achieving a progressively higher level of liberalization, but also to ensure that the process of liberalization shall take place with a view to promoting the interests of all participants on a mutually advantageous basis and to securing an overall balance of rights and obligations. The process of liberalization, according to paragraph 2, shall also take place with due respect for national policy objectives and the level of development of individual Members, both overall and in individual sectors. This is the delicate and sensitive structure that is the GATS.

It would be a grave mistake to think that these negotiations are solely about broadening liberalization across Members, sectors and modes, which we concede is a legitimate objective; because these negotiations must be tempered with the equally legitimate need to respect the flexibility currently enjoyed by developing countries. When we speak of ambition in the services negotiations, therefore, it is important to reiterate that, at the end of the day, it cannot be imposed by some on the many.

This balancing act is real for developing countries in bilateral negotiations; and was most controversial in the debate over some complementary approaches that were proposed prior to Hong Kong. I am sure that this tension will re-emerge as we intensify bilateral negotiations, and begin plurilateral negotiations.

The UNCTAD Note also rightly observes that trade liberalization alone does not guarantee that services needed for growth and development will automatically emerge in developing countries. A strengthened regulatory framework and the institutional development of competition and other regulatory authorities often represent preconditions for meaningful liberalization.

We have consistently maintained that services liberalization should be accompanied by sound macro-economic management and appropriate regulation and supervision. While we fully recognize the benefits of an open market, our authorities will have to continue to carefully consider the pace and sequencing of further liberalization in sectors of mutual interest, together with a comprehensive review of our existing regulatory regime in order to ensure the sustained soundness of our services sectors, particularly those relating to sensitive systems like financial services and telecoms, to name a few.

In this context, the issues of domestic regulation, transfer of technology, and ESM become very important.

Domestic Regulation

The result of the domestic regulation negotiations is critical for developing countries. We would need to ensure that the results find the optimal balance between the right to regulate (on a broad, horizontal basis), and providing for necessary disciplines, particularly on qualification requirements and procedures to reduce unnecessary regulatory barriers to trade in mode 4, for example, which is of importance to developing Members.

Beyond the question of balance, there is also the issue of ensuring that disciplines are not too administratively burdensome for developing countries and LDCs.

Thus, we could not agree more with the UNCTAD Note’s observation that from a negotiator’s perspective, regulatory assessment would be important for Members, particularly developing Members, to make informed decisions on the future disciplines. S&D elements would also be critical in the final analysis. There is, to my mind, a big question mark on whether it would be enough to just provide developing countries with longer implementation periods. Rather, we believe that more creative ideas are probably going to be necessary.

Transfer of Technology

Transfer of technology, while seemingly neglected by many Members including developing countries, is also an essential precondition for improving productivity, promoting export growth, and attaining development objectives in the services sector. This is implicitly recognized in GATS Article IV, which provides for the strengthening of domestic services capacity, efficiency and competitiveness; and improved access to distribution channels and information networks, for developing countries.

It also bears noting that in the UNCTAD Note, it was shown in the study on trade liberalization in construction services in Jordan, that foreign participation did not necessarily lead to technological capacity building in the domestic setting.

The importance of technology transfer is even foreshadowed in some of the WPDR discussions on technical standards (formulation, definition, assessment). Training and education abroad, such as exchange programs, are increasingly constrained by issues of terrorism and national security; thus, impacting on technology transfer.

Emergency Safeguard Mechanism

On ESM, the ASEAN minus continues to believe in the need for emergency safeguards in the services sector, but have been operating under no illusions in these negotiations.

We agree with the basic notion that the negotiations involve complex regulatory issues and divergent views on desirability and feasibility. We continue to believe that cooperation can solve technical issues. The combined technological capability and technical experience of Members can be harnessed towards solving many of the seemingly intractable technical, legal or policy issues raised in the last ten years.

However, at the end of the day, while we recognize that there may be valid technical issues that we have to grapple with, we believe that Members will have to confront strategic political and economic decisions if we are to effectively break the deadlock in these negotiations.

In the meantime, Members would appear to be offered two systemic options: (i) to exercise the general flexibility mechanism under the GATS in terms of offering fewer sectors and liberalizing fewer transactions (which is under severe pressure from demandeurs for greater openness and liberalization) or (ii) to exercise, in emergency situations, article XXI, the modification or withdrawal provision under GATS, which remains untested, and uncertain as to systemic issues of compensation and burden of proof.

Assessment of Trade in Services

The GATS is an extraordinarily complex agreement that contains so many inter-related and levels of rights and obligations. Aside, for example, from specific commitments in market access and national treatment, there are rules established in sectoral annexes pertaining to specific sectors and modes. Furthermore, there are general rules on MFN treatment and commitments to transparency that apply to all services sectors. Developing countries are also rightly concerned about entering into commitments without sufficient data, statistics, and information to anticipate their implications.

The question, therefore, is how do we bring all these together?

In the CTS/SS, there is an item on the agenda of the Council since 2000 in accordance with Article XIX:3 of the GATS, which addresses both overall and sectoral assessment of trade in services, based on notes of the Secretariat, Members’ submissions, or studies by other international organizations.

It is also important to recall here that paragraph 15 of the negotiating guidelines, in fact, provides for an evaluation, before the completion of the negotiations, of the results attained in terms of the GATS article IV objectives.

These seem to be important exercises if only to provide developing countries a better and deeper appreciation of services trade, and the implications of liberalization in specific sectors and/or modes.

Some Reflections

It is not enough that the gospel of trade liberalization and globalization is preached to developing countries. The development dividends of trade liberalization, at least in the services context in particular, cannot be reaped by market openings alone. Consequently, I do not think that much of the promised growth and prosperity can be guaranteed by what we get or give, for that matter, in the negotiating table.

Perhaps, more than in the case of agricultural and industrial goods, a more critical element required in services is the need to help developing countries build the complex of linked and inter-related domestic infrastructures, institutions, systems and enterprises that will form the foundation of effective international competition and industrialization.

Let Members listen to the wise counsel of Joseph Stiglitz: the countries that have benefited the most from trade liberalization have been those that took charge of their own destiny and recognized the role government can play in development rather than relying on the notion of a self-regulated market that would fix its own problems.

Special and differential treatment for developing countries should be an integral element of multilateral trade negotiations. Developing countries should be afforded more economic policy space within the framework of special and differential treatment based on their individual developmental needs.

Developing countries need to learn how to begin working with each other more efficiently and more effectively. In the months leading to Hong Kong, we effectively rallied around the cause of rejecting benchmarks or numerical targets. But alliances around rejections and negative things are always the easiest to make, and also the easiest to break. This is because fundamental differences will prove stronger than our shared rejection of something.

Having covered UNCTAD and the UN in some of my past life times, I continue to believe that the multilateral trading system must be viewed within the broader context of the current development discourse. While some cynical observers will view the UN system, including the G77 and China, as mere debating societies, I firmly believe that in order to promote a fairer multilateral trading system by mitigating its existing asymmetries, the debates in the UN and its related bodies, can clearly address and question, where necessary, conventional wisdom on trade, globalization, and other related aspects of trade and development especially in light of growing inequalities and poverty.

Final Remarks

I have always maintained that the Doha Round cannot be a free round, but it has to be a fair round. Indeed, the Doha Round cannot be one where developing Members are not obliged to do anything, but we cannot also be expected to do everything. Indeed, the Doha Round cannot be a round for free, but it has to be a round for all. The challenge today is for governments and nations to be able to look beyond the politics and economics of trade liberalization, and integrate economic efficiency with broader social objectives and considerations. For only then can we truly claim that the development we have come to embrace is the type that fulfils the aspirations of developing nations to attain the greatest possible freedom and dignity as human beings.

At a panel on the negotiations during the last session of the UNCTAD Commission on Trade in Goods and Services, and Commodities, I made the point that at some time, it may be useful for the WTO to take a step back, and examine the whole gamut of multilateral trade negotiations. Then, we can ask ourselves, directly and honestly in the context of the broader development discourse, how the MTS is addressing issues like: striking the balance between efficiency and equity; minimizing the social negative impact of globalization; recognizing policy space; deepening coherence; and enhancing synergies. For Doha, after all, is a Development Round."


[1] The views expressed in this presentation are those of the presentor, and do not necessarily reflect those of the Philippine Government or of the South Center.

[2] Address before the ASEAN Free Trade Area Symposium, Manila, Philippines, 30 may 2002.

[3] Trade in Services and Development Implications, Note by the UNCTAD Secretariat, TD/B/COM.1/77 (dated 16 January 2006).

[4] Jaime Augusto Zobel de Ayala II, The Challenges and Opportunities in the Philippine Services Sector (2003).

Moving Ahead on Aid for Trade

Aid for trade must be development-focused and consistent with the emphasis on development in the Doha Round, according to Dr. Supachai Panitchpakdi, the UNCTAD Secretary-General. Addressing a joint UNCTAD/Commonwealth Secretariat meeting on the subject, he said, "This in turn translates practically into support for building and upgrading trade-related infrastructure, including achieving compliance with product standards, meeting the cost of trade facilitation measures and enhancing productive capacities and strengthening competitiveness." Aid for trade also involves addressing implementation costs arising from the outcome of the negotiations and meeting adjustments costs arising from liberalization efforts, including costs that stem from erosion of preferences, loss of tariff revenue and sectoral adjustment, he added. Following are excerpts from Dr. Supachai’s address on 21 March, 2006.

"It is with great pleasure that I welcome you to this meeting organized jointly by UNCTAD and the Commonwealth Secretariat on aid for trade, one of the most important development-related outcomes of the recent WTO Hong Kong Ministerial Conference. The Ministerial Declaration tasked the WTO, in cooperation with relevant stakeholders, to operationalize aid for trade. Under this mandate, WTO Director-General Pascal Lamy has already set up a task force to deliberate on the concept and come up with recommendations by this coming July. Mr. Lamy has also been entrusted to consult with the IMF, the World Bank and other international organizations on appropriate mechanisms for securing additional financial resources. I hope this meeting can contribute useful ideas to support these efforts.

The challenge ahead is to effectively put in place and deliver the much- awaited aid-for-trade support to developing countries, particularly LDCs, and thus facilitate their beneficial integration into the world trading system.

At the same time, I must emphasize that aid for trade is not a panacea to all trade-related problems facing developing countries. However, if the initiative is adequately designed, managed and implemented, it can make a significant difference in enabling developing countries to really use trade and trade liberalization as an engine of development and poverty reduction. Another caveat is that, as recognized by the trade ministers in Hong Kong, the aid-for-trade initiative is not a substitute for development benefits that must arise from a successful completion of the Doha Round. It is thus a complement, and not a substitute for, a successful outcome of the negotiations with the adoption of a significant development package. But serious efforts are urgently needed regardless of the negotiations.

In this light, I wish to set out for your consideration a few issues on how the initiative can be conceptualized, operationalized and implemented. I will address this in terms of three questions: what is aid for trade; what are the funding scope and mechanisms; and what might be the modalities for implementation?

Identifying and defining the types of needs that should be supported by the initiative, along with who should benefit, will be critically important. Clearly, the intended beneficiaries are developing countries, and LDCs in particular. It is also evident that aid for trade must be development-focused and consistent with the emphasis on development in the Doha Round. In my view, this means that the objective of aid for trade should be to maximize development gains from trade for developing countries.

This in turn translates practically into support for building and upgrading trade-related infrastructure, including achieving compliance with product standards, meeting the cost of trade facilitation measures and enhancing productive capacities and strengthening competitiveness.

A distinguishing feature of this kind of support is that it is directed to addressing supply-side constraints on developing countries. Aid for trade also involves addressing implementation costs arising from the outcome of the negotiations and meeting adjustments costs arising from liberalization efforts. This include costs that stem from erosion of preferences, loss of tariff revenue and sectoral adjustment.

With regard to resources, expectations of the magnitude that may be required can be gleaned from current allocations to trade-related assistance. According to the 2005 joint WTO/OECD report on trade-related technical assistance and capacity-building, commitments for trade policy and regulations amounted to US$ 811 million in 2004; for trade development activities, US$ 2.2 billion.

Actual expenditures on assistance for building infrastructure totalled around US$ 9.3 billion. A question for this meeting which may need some further deliberation is how far aid on such a scale would go in meeting the needs arising from the Round. Is it enough to cover the need to absorb the costs of adjustment implied by the negotiations, as well as addressing supply-side constraints? We have already seen some welcome initiatives by donors. In Hong Kong, for example:

· Japan announced it would spend US$ 10 billion over a three-year period on trade, production and distribution infrastructure;

· the United States announced annual aid-for-trade grants of US$ 2.7 billion by 2010;

· and the EU and its member States announced annual trade-related spending of €2 billion - a €600 million increase - by 2010.

Whatever the current and forthcoming pledges, the principles of additionality, predictability and functionality should guide the funding mechanism of aid for trade, as provided in the Hong Kong Declaration. The issue here is how to secure "fresh money". In addition, funding must be substantial and adequate if we are to have a real impact in developing countries on the ground. It should also be commensurate with their individual trade-related needs.

The nature of funding is no less important. To the extent possible, such funding should be provided in a non-debt-creating manner, without new conditionalities, and managed with full respect for national ownership so as to maximize the chance of an enduring and sustained impact.

It may be somewhat premature at this juncture to reach definitive conclusions about the magnitude and detailed uses of the aid-for-trade funds. As for UNCTAD´s aid-for-trade-related budget, this is but a small fraction of the funds pledged, but if the fresh aid-for-trade money has the same impact on the ground as do our own trade-related technical assistance activities, it will fulfil a large part of its promise.

There are several possible avenues through which aid for trade could be set up, operationalized and disbursed. One option is to build on existing mechanisms, such as the Integrated Framework for LDCs. Another is to create a new, dedicated mechanism, in view of the new mandate. At the very least, several alternatives should be available to suit the specific trade and development needs of each country. The delivery mechanisms also call for further reflection on governance issues and on ensuring a balance between multi-stakeholder involvement and an effective delivery mechanism with minimal transaction and implementation costs. The principle of country ownership, involving all stakeholders, is essential to the success of the initiative.

Institutional coherence on aid-for-trade-related work remains a prerequisite for efficient results. In our view, the best way to ensure such coherence would be to create an advisory group for the WTO Director-General´s task force on aid for trade, to which all relevant international organizations could provide inputs based on their specialized knowledge. Such a group would be useful not just to ensure institutional coherence, but also to provide each agency´s experiences and expertise in supporting implementation of aid for trade.

Aid for trade has indeed always been a core of UNCTAD´s mandates and work, both implicitly and explicitly. As the UN´s focal point on the integrated treatment of trade and development, our work has been traditionally geared, and more so recently, to building up developing countries´ trade policy and trade-related capacities.

One promising avenue is to expand the scale of our projects aimed at meeting the supply constraints of developing and least developed countries. Let me give you some examples of the many activities that have already contributed to some of the objectives targeted by the aid-for-trade initiative. We have a project under way in partnership with the Swiss Import Promotion Programme (SIPPO) and the Swiss supermarket chain Migros, intended to help small farmers improve the quality and competitiveness of their products. We have targeted small mango and papaya producers in Ghana, for example.

As a result, farmers were able to comply with quality and phytosanitary requirements, and the first export flows generated by the project surpassed $100,000. This is three times the value the farmers would have received had they used the traditional intermediaries and distribution networks. The project is sustainable, and in the long run we expect an even higher multiplier effect. In addition, around 10,000 experts from developing countries and LDCs have benefited from our activities, including on national services assessment, commodity sector development, competition policy and sustainable development and biotrade.

We have supported customs reforms and set up a trade facilitation platform, including transport and trade logistics. We have explored ICT development and e-commerce, and we have expertise in investment promotion, investment policy review and enterprise development. With its multi-disciplinary perspective and extensive experience in working with and in developing countries on trade and development, UNCTAD certainly has much to contribute to the operationalization and implementation of an aid-for-trade package. We are committed to doing this in close cooperation with our partners."

Services Negotiations: In Synch with National Development Objectives?

For a number of developing countries, the WTO Services negotiations may not even be reflecting the overriding national economic interests. That means they are unlikely to be taking care of the interests of the majority of the nationals in the developing world, especially the Least Developed Countries. Following are some of the concerns raised during the South Centre’s annual workshop on Trade in Services by Kennedy K. Mbekeani on the subject of ‘Services and GATS Negotiations: Concerns and Interests of LDCs’ on 20 March, 2006. Mr. Mbekeani, who hails from Malawi, currently works for the UNDP in Johannesburg.

"I would like to explore what might be done to make the GATS negotiations a more effective instrument to support economic development. At the end of the day, any outcome from the negotiations would be irrelevant if they do not promote human development.

The premise is that the objective of the negotiations must shift from market access to economic development. The modus operandi of negotiating and implementing trade agreements will therefore have to change if we want to have regard to economic development, and for us to assure our constituencies about what our negotiators are doing here in Geneva. One reason for this is that many of the poorest countries may not benefit much from a traditional trade agreement - they cannot export services. Small, poor countries have little to offer in these type of negotiations to induce large countries to remove policies that harm them, because the negotiations are mercantilist in nature. The Least Developed Countries, whose needs are small, have therefore little influence on the developed countries. So the manner in which these negotiations are conducted has little relevance to their needs.

Another reason is that the priority needs in many least developed countries are not trade policy (services export) related but revolve around bolstering trade capacity and improving the investment climate. We need to think beyond the Geneva language and take the issues back home and see what the constraints are. These specific disciplines may not be a priority for development - implying that even if financial and technical assistance were made available, given the current status quo in GATS negotiations, it could constitute "diversion" - the resources would have had a higher return elsewhere. Because our interests are different.

We have national economic objectives in developing countries. These are poverty reduction; employment creation; health; clean water; housing; and education. As long as the assistance provided is not going to help with all these priorities, politically it is not going to be acceptable.

Too often, services fail poor people in terms of quantity and quality. The quantity and quality of water that the poor are consuming is pathetic. The quality of public education today too is very poor. These are the main issues that we need to look at. Freedom from disease and illiteracy are important ways of getting away from poverty. Five of the eight Millennium Development Goals are in Health and Education. But progress in human development has lagged behind that in reducing income poverty. We have been so obsessed with income poverty that we have ignored human development. When we look at these negotiations, we have concentrated on the commercial aspects of services such as telecom and finance. But a lot of the human development related services sectors are being ignored when we are engaging our partners in GATS negotiations.

What are the national economic priorities in LDCs? Obviously, infrastructure support is a priority. Farmers would like to be able to reach major market centers at reasonable cost. What has happened here is that the Farmers Marketing Boards were discouraged and abandoned – abetted by the international financial institutions like the IMF and the World Bank - making it very difficult for farmers to trade whatever they were producing. Similarly, firms need access to a reliable and efficient power supply but we are aware of the erratic power supply. Every now and then there are black-outs that have a negative impact on the industry.

Transportation (logistics) and transactions costs are often a multiple of any tariffs exporters confront. Both domestic and international transportation are very expensive. More expensive is our ability to transport from South to North than it is to transport from North to South. The cartels that are formed in the North are actually making it very difficult to transport our goods to the North – while at the same time making it easier to transport goods from the North to the South. This helps explain the more limited participation of poor countries in the process of international specialization.

Part of the national economic priority is access to credit. Access to finance is a critical input both in terms of new start-ups and expansion of exiting plants. For example, achieving minimum consignment size might entail hiring draught power or seasonal labor, but this is not possible without credit. Now with liberalisation, our governments are surrendering their role in financial institutions. The private sector has abandoned the provision of financial services to the rural poor. It has concentrated in the urban areas where there are higher profits.

In terms of establishing new businesses, there are cumbersome regulations for establishing new firms, constraints on access to inputs (e.g., utilities), restrictions on physical expansion or labor recruitment and separation. All these can curtail the willingness of entrepreneurs to start or expand operations.

We have to ask ourselves whether the GATS negotiations can be made development friendly? The WTO negotiations must help achieve national economic objective. However, what has been happening is that the WTO negotiations have been defining national economic objective while it is supposed to be the other way round. Overnight, everyone is a trade expert. The Geneva process usually forgets the development policy experts from the Capitals who are supposed to provide guidance to the negotiators.

So what must be done in order to make GATS negotiations a more effective instrument to support economic development? Central decision-makers cannot rely on the trade negotiating process to obtain an outcome that is welfare-improving for their economies. The negotiations are not going to provide that outcome because the major players in the negotiations have different economic interests than those of people living in poor areas. Therefore, strategic choices must be made to define and sequence the liberalization and reform process. These choices are supposed to be defined by ourselves and the process and sequencing are supposed to be country-specific. If we await for the WTO agenda to define those, then we would be prying blindly and at the end of the day, the WTO would be determining our national economic objectives.

As long as we know the extent to which the reforms are going to improve the livelihoods of the poor, the opposition by domestic firms to the prospect of increased competition from foreign firms, or even domestic firms, may not be as strong in services as in goods. The political economy of services liberalization is different from goods: the gross negative impact on labour employed in services is likely to be lower given that foreign entrants will often use mode 3 and employ mostly nationals, thereby creating more jobs. But if foreign firms are only going to sell in the domestic market, where are they going to get the foreign exchange? Those are issues that need to be considered. However, the support for reform by businesses that would benefit from higher quality and lower-prices services are more likely to be stronger.

Domestic Regulation

One of the ironies of the GATS is that provisions dealing with domestic regulations are among its weakest, even though they have an obvious powerful influence on trade in services. Making service work for the poor will involve change in service delivery and the way public institutions function. So the Services negotiations are, first and foremost, issues regarding domestic regulation. Each country has different and specific needs. The specific content of regulation should reflect national (or local) circumstances. Thus, what may be most appropriate from an economic welfare (development) perspective is to create a framework for assisting governments to identify good policies, not a system that aims at harmonization. Besides, the policies of neighbouring countries, especially for land-locked countries, can also play an important role.

Getting institutions right the first time is very difficult, if not impossible; they require continuous monitoring and adjustment. Even the EU has been continually adjusting its policies in the light of experience. So when you give a commitment to the WTO, it has to be understood that this is an ongoing exercise which will require changing, monitoring and then adjusting depending on the level of economic development. So we need to put in place the appropriate set of policies and strengthen the institutions before certain types of reforms are undertaken.

Achieving Universal Service

The achievement of social objectives in an economically efficient manner is a major challenge for national policy-makers. The manner in which the objective is pursued can have profound impact on trade in a variety of areas: financial, transport, telecommunications, health and education services. For example, in South Africa, transparent government regulation under the new government ensures that the poor are protected and ownership of banks is extended to Africans.

The telecom Reference Paper acknowledges the right of a country to define universal service obligations provided they are administered in a transparent, non-discriminatory and not excessively burdensome manner. We have seen how telecom has operated in terms of rolling out its services in the rural areas. This is part and parcel of the Services Agreement. Why can the same thing not be part and parcel of the Education Agreement or the Health Agreement?

At the time that I was growing up in my country Malawi, the best students were going to the public schools. Even before my time, during the colonial period in Malawi, people had to make a choice between Makerere in Uganda and Oxford in the UK – both were equally good. So people were making choices between Makerere and Oxford. But today there is no choice, because Makerere University is not what it used to be. We have seen a deterioration of the public schools. Such issues of inequality and inefficiencies are not coming out in these GATS negotiations. That is a problem. The GATS negotiations are not going to address these inherent inequalities and inefficiencies in our economies.

We need to ask ourselves: Of course, universal service obligations can in principle be imposed on new entrants. Such obligations were part of the license conditions for new entrants into fixed network telephony and transport in several countries, making use of several instruments: fiscal; direct regulation; and to fund consumers through vouchers.


GATS must becomes more balanced in terms of the magnitude and distribution of the benefits of the Agreement for different groups of countries. We have to build mechanisms to pursue priority national regulatory policy objectives in developing country partners, as opposed to harmonization on the standards of OECD countries, while maintaining the role of preferential trade agreements (PTAs) as a commitment device. Harmonization would mean adhering to the status quo of the North. So the burden in terms of improvement would lie on us. But the regulations and standards of the North are a reflection of the standards of their economies and the participation of their industries – which are different from our own.

So we need to be careful with harmonisation of standards in the services negotiations. Our countries are holding back in terms of what is good for development in terms of services reform, by waiting for what the developed countries can give us in other sectors. We do not need the WTO to tell us that clean water can help the rural poor; that a good transport infrastructure is good for our economies. But we are waiting because of the nature in which the WTO is arranged – the necessity to give and take.

There is a need for strengthening the grant-based financing mechanisms to improve trade supply capacity and increase the benefits of trade reforms for poor households, based on a local analysis of needs, with allocations determined by the country’s overall development strategy. In a number of services sectors, there are infrastructure and other bottlenecks that need to be removed. Particular mention has been made to education and health – these, in my opinion, are the cornerstone of human development. Regulation in these sectors would demonstrate the responsibility of the governments to their people to improving living standards and intellectual capacities. These two service sectors – health and education – are vulnerable to market failures. We cannot rely on the market to ensure proper delivery. The private sector alone cannot guarantee the achievement of the Millennium Development Goals in these areas. The public sector will have to shoulder its responsibilities.

In order to participate effectively and maximize the benefits of the GATS negotiations, it is important that governments come with a well-defined domestic reform agenda. Most of the trade negotiators are not aware of their national strategy for service delivery. We need to bring together the trade negotiators and those involved in policy making in various service sectors across government ministries. Only countries that have identified their domestic reform agenda consistent with the national goals, can really analyse the proposals on the table in terms of what is in their interest. And that defines also their ability to reap any benefits from the trade negotiations. A country with no clear information on its own service sectors and without a clear domestic strategy would be flying blindly in these negotiations. Ten or 15 years from now, we will be asking why we signed onto a trade agreement that has no meaning for us.

Therefore, it is clear that analysis aimed at prioritization of policy measures and related actions is critical. Benefiting from GATS (North-South Agreements) requires a coherent national development strategy in which trade- and integration-related measures are included as part of a country’s overall agenda."

Water Services: Private sector Fails to Invest in Developing World

Water privatisation in developing countries is an ongoing disaster and the private sector is failing to deliver the investment necessary to meet international targets on water and sanitation, according to a recent report. Prepared by the World Development Movement (WDM) and Public Services International (PSI), the new report ‘Pipe dreams: The failure of the private sector to invest in water services in developing countries ’ shows that most privatisations do not require the private sector to invest in making new connections. It also shows that in cases touted as privatisation successes such as Senegal and Gabon it is in fact the public sector that is funding the cost of new connections, not private investment. While the full report can be seen at the WDM website, following are extracts from a briefing on the report.

The water Millennium Development Goal (MDG) relating to water commits the international community to halving the number of people without access to clean water and sanitation by 2015. Meeting this goal means getting clean water to an extra 440,000 people, every day, every year for the next ten years. This is roughly equivalent to supplying new water connections to a city the size of Birmingham every week for the next decade. Achieving this goal requires a massive injection of funding and it is the private sector that has been championed as the solution to delivering this much needed investment. However, after over a decade of pro-privatisation development policy, less than 1 per cent of private sector investment has been targeted at sub-Saharan Africa and South Asia, the two regions that are home to over half the number of people most in need of connection to a water supply.

Pipe Dreams reveals that in every case in subSaharan Africa where the private sector has committed to invest in extending access to water, it has failed to deliver the promised level of investment. It now seems clear that relying on investment from the private sector, on the scale required to meet the water MDG, is little more than a pipe dream.

The promise of privatisation

Since the early 1990s international water development policy has been based on promises from the private sector; principally that it is more efficient and that it can provide the much needed investment to extend water and sanitation services to the poor.

This approach has been supported by the UK Department for International Development (DfID). In a report commissioned by DfID in 2005 to analyse the funding that the UK government gives to the water sector, the consultants concluded: "This is a key period for the programmes which have been developed over recent years to encourage private sector investment in basic infrastructure services. These may form significant investment mechanisms to leverage investment into the water sector in a way which benefits the poor, if perceived risks to private sector investments can be reduced."

The private sector has been widely viewed as the key mechanism for finding the finance necessary for achieving the water MDG, an amount which is estimated at between US$51 billion to US$102 billion for water supply and from US$24 billion to US$42 billion for sanitation.

As Secretary for State for International Development, Clare Short said: "Privatisation is the only way to get the investment that [poor] countries need in things like banking, tourism, telecommunications and services such as water under good regulatory arrangements."

There is no compelling evidence that private utilities outperform public utilities. For instance, the International Monetary Fund (IMF) concludes: "It cannot be taken for granted that PPPs [PublicPrivate Partnerships] are more efficient than public investment and government supply of services … Much of the case for PPPs rests on the relative efficiency of the private sector. While there is an extensive literature on this subject, the theory is ambiguous and the empirical evidence is mixed."

Research for the World Bank Economic Review says that studies on water utilities in Asia, "show that efficiency is not significantly different in private companies than in public ones". There is also no compelling evidience that privatising water utilities leads to unambiguous improvements in performance. Nor, as Pipe Dreams demonstrates, is there evidence that the private sector can provide the level of investment needed to deliver the number of connections necessary to meet the water MDG.

Types of water supply contracts:

Concession: The company runs the water system on a forprofit basis. It is responsible for all investment including new connections. Concessions normally last between 20 and 30 years.

Lease: The company is responsible for running the distribution system and making investments to repair or renew existing assets. It is not responsible for new connections.

Management: The company manages the water service but does not make any investment. These contracts are riskfree and normally last between one and five years.

Busting the investment myths

Pipe Dreams tackles a number of the key myths used to justify water privatisation:

* Myth 1: Water privatisation increases the number of new connections

Most privatisation contracts do not require an investment in new connections. There are three main types of contract for the distribution of water services and only one of these, concession contracts, requires companies to invest in new connections to the water supply. There have only been five concession contracts in subSaharan Africa, six in residential areas in East Asia outside China, and none in South Asia. Yet these regions are home to 80 per cent of the people who need new connections to meet the water MDG targets.

* Myth 2: The private sector connects the communities in most desperate need of water

Private sector investment is targeted where it has the potential to make the most profit, rather than where it is most needed. Private companies have been in the driving seat for the past decade and have set the agenda in prioritising continents, regions and cities for watersector investment. Because of their need for profit, companies generally avoid rural areas where about 40 per cent of those needing connections live. SubSaharan Africa and South Asia have been the focus of less than 1 per cent of total private sector investment promises. In South Asia, a region with 1.5 billion people, no investments have been made by private water operators in extending water distribution systems. Latin America, on the other hand, has had a disproportionate amount of investment because of its relative profitability. It has a number of middle-income countries, and a relatively small proportion of the population needing connection to water. Yet even there, many contracts are in trouble or have been terminated as a result of public opposition and/or economic instability.

* Myth 3: Private companies bring more money

Private companies do not bring new sources or levels of finance. Much of what is traditionally termed ‘private finance’ is actually available to both public and private operators. Both rely on a mixture of surplus revenue from the water operation; aid from national/donor governments; development bank loans; and/or commercial loans and bonds. The only unique source of finance available to the private sector is equity finance from shareholders. This often leads to confusion about who is actually providing the money. Senegal is often cited as a private sector success story because of the number of new connections provided. The 35 per cent increase in connections between 1996 and 2001 were, however, largely financed through the public authority rather than by the private company (a subsidiary of the French company Saur). The giant leap in new connections came after 1999 when a new injection of public finance –including a World Bank loan – was provided through the public authority. Over the 10 years of the contract Senegal has received $230 million in public and donor finance.

* Myth 4: Private borrowing is better value

Private borrowing for investment is risky. Initial investment for water contracts normally involves some level of borrowing to raise the required capital. Borrowing by private companies is more expensive than public borrowing, because private companies have worse credit ratings than governments. Also, unlike the local private sector, multinationals are exposed to foreign currency exchange risk. If the local currency is devalued against the dollar multinational companies have to find ways of increasing their revenues to be able to pay back their loans, usually resulting in price rises.

Myth 5. Companies meet their investment targets

Water privatisation often fails to deliver the investment promised. There are numerous examples of companies demanding that their contracts are renegotiated, often changing the levels of investment required (See case studies cited below. In subSaharan Africa, every contract awarded to increase the number of connections to water has failed to meet the promised investment levels. 80 per cent of the major water privatisation contracts have been terminated or are the subject of disputes between the public authorities and the operator over investment levels.

Case studies from Pipe Dreams

South Africa, Dolphin Coast The concession (a joint venture including Saur) successfully demanded a renegotiation of their contract after refusing to make contractual payments to the municipality. The revised contract cut the company’s investment commitment over five years by 60 per cent, the annual concession fee to be paid to the municipality was halved, and prices were increased by 19 per cent for connected households, and by 80 per cent for users of standpipes.

South Africa, Nelspruit In Nelspruit, South Africa, Greater Nelspruit Utility Company (GNUC) claims that it made 5,000 new connections between 1999 and 2001. In the same time, however, GNUC also removed 6,000 meters for nonpayment, effectively disconnecting more households from water than it actually connected.

Buenos Aires, Argentina Between 1993 and 1998, Aguas Argentina (a Suez subsidiary) only achieved 54 per cent of the agreed investment in the expansion of the existing supply network. Even after several renegotiations of the investment targets, Aguas Argentina continued to fail to deliver on their commitments. They failed to meet 39 per cent of projected investments in the expansion of the water supply network.

Jakarta, Indonesia In 1997 Jakarta’s water supply was awarded to two concessions, subsidiaries of Thames

Water and Suez. In 2001 both operators failed to meet new connection targets by a third, as well as other targets in their contracts. In 2001 the contracts were renegotiated with much lower targets, in effect giving companies twice as long to reach the original forecasts. Leakage is estimated to be at 50 per cent, one of the highest figures in Asia.

Gabon. Between 1997 and 2001, SEEG a subsidiary of Veolia, invested $22 million into water supply across Gabon. Connections rose from 57,000 to 90,000 in an urban population of almost 800,000. In 2004, however, SEEG’s underinvestment was blamed for the failure to connect new homes, long interruptions in supply and poor water quality. And in 2004 Gabon suffered its first ever outbreak of typhoid. In 2005 the contract was renegotiated with the investment programme being funded primarily by $32 million from the World Bank and a loan from local banks .

Pipe Dreams concludes

Ÿ Most private contracts, notably lease and management contracts, involve no investment by the private company in extensions to unconnected households · Concession contracts do involve investment by private companies to extend the network; however, the investment commitments agreed when these contracts are created are invariably revised, abandoned or missed

Ÿ In most privatisation contracts, public finance and/or guarantees, from governments or development banks, are of central importance in delivering actual investment on the ground, particularly in connecting poor households

Ÿ Private water companies do not bring new sources and volumes of investment finance – they rely heavily on the same sources as are available to the public sector.

This evidence debunks one of the most important myths concerning water privatisation, namely that private finance will play an important role in delivering progress towards the water and sanitation MDG. On the contrary, it has not done so up to now, and is unlikely to do so in the future.

It is clear that the emphasis on the private sector over the past 15 years has had a negative impact on progress towards the water and sanitation MDG with major implications for communities of poor people around the world.

In South Asia, no investments have been made by private water operators to extend water distribution systems. Pipe Dreams shows that, in subSaharan Africa, 80 per cent of the major water privatisation contracts have been terminated or are the subject of major disputes between the public authorities and the operator over investment levels. Overall, in subSaharan Africa, South Asia and East Asia (excluding China), 600,000 new household connections have been made as a result of investment by private sector operators since 1997, extending access to around 3 million people. One billion people in those regions are estimated to need a connection to a clean water supply between 2006-2015 in order to meet the water MDG: a rate of 270,000 people a day. Over the last nine years, the private sector has connected just 900 people a day.

Misplaced expectations of the private sector have also led to a massive reduction in the level of aid from donors invested in infrastructure, including the water sector. According to the World Bank "…the expectations of the private sector participation in the financing of infrastructure needs were over optimistic". This reduction has been far greater than the actual investment by the private sector. The total invested by all the development banks and donors in infrastructure fell by one-third between 1996 and 2002. The net contribution of privatisation has thus been to significantly reduce the funds available for poor countries for investment in water. It is likely that donor funds ‘missing’ from the water and sanitation sector runs into billions.

Furthermore, putting private companies in the driving seat in recent years has allowed them to set the agenda in terms of prioritising the continents, regions and cities where investment in the water sector should go. Because of their need to make a profit, companies and donorfunded investment have not concentrated on the areas of greatest need such as: the poorest countries; cities where the poorest people live; and rural areas. In fact, subSaharan Africa and South Asia collectively have been the focus of only one per cent of total promised private sector water investment.

Finally, in order to meet their profit needs, private companies have resorted to tactics in developing countries which are no longer acceptable in the UK such as prepay meters, massive price rises and disconnections for failure to pay.

When the evidence presented in Pipe Dreams – that the private sector will not provide the investment needed – is added to existing evidence that the private sector is no more efficient than the public sector at providing water and sanitation, the argument for privatisation collapses. Yet for the last 15 years donors and private companies alike have continued to peddle the water privatisation myth while the poor have consistently failed to benefit.

Ultimately, all investment is paid for by the public people as opposed to corporations, mostly through a combination of user charges for the service itself and general taxation. The problem with the massive expansion of connections that is needed to achieve the MDGs is that the poor cannot afford to foot the bill. While many poor families are willing and able to pay something for their water supplies the huge cost of the infrastructure is prohibitive.

The real debate is therefore not about a choice between public or private finance, as we know that private finance is to all intents and purposes nonexistent, but about how to structure direct charges in a way that benefits the poor and how to mobilise public finances to plug the gaps and invest in the massive expansion that is required.

Currently about 95 per cent of people with a water supply are served by the public sector. It is this sector that we need to reform and extend. Evidence from successful publicly-controlled water utilities such as Porto Alegre in Brazil and Penang in Malysia, demonstrates that through techniques and processes such as free water supply for the poorest, participatory budgeting, progressive tariff structures and cross-subsidy, reducing leakage rates and improving efficiency, and receiving help from international NGOs (or any combination of these), it is possible to make public systems work. However, the massive investment required to expand networks means that government support, in one form or another – taxation, government loans and bonds, international aid and preferential loans will still be required. In the poorest countries this support will invariably come from international donors. This makes the policies of donor governments and institutions towards financing water and sanitation critical and makes the current dearth of political and financial support for public water a threat to its future.

Pipe Dreams recommends that:

Ÿ Donors and governments must stop perpetuating the myth that the private sector will deliver new connections to meet the water MDG. They must urgently review their emphasis on promoting water privatisation through the use of economic policy conditions. In 2005, the UK government took the important step of committing to stop using economic policy conditions like privatisation in its bilateral aid programme. Nonetheless, the World Bank and the other donor governments continue to attach such policy conditions; the UK continues to be a leading funder of multilateral support for privatisation through World Bank funds such as the Public Private Infrastructure Advisory Facility; and the UK, as witnessed most recently in Sierra Leone, continues to fund water privatisation processes that emerge from such international donor pressure.

Ÿ Donors and governments should reverse the downward trend of financing water and sanitation and urgently make up for the past decade of underinvestment. In 2005, the UK announced a doubling of water and sanitation spending in subSaharan Africa by 200708. This is welcome but a relative ‘drop in the ocean’ compared to what is ultimately required. Significantly more donor funds are needed, but it is important that this money is spent wisely.

Ÿ Pipe Dreams reinforces the importance of public finance in paying for investments in water. Historically, throughout the north and the south, actual extensions and development of water systems have been based on public finance. Donors and governments must recognise this and use the financing system that really works in terms of extending access to water and sanitation to those without. This could include creating mechanisms for issuing investment bonds to finance the development of water systems, processes for attracting international savings to invest in such bonds, and support for stronger and more redistributive systems of taxation in developing countries, and even internationally.

Ÿ More research and analysis is needed to explore public finance and how we can extract the most value out of public finance in order to speed up progress towards the MDG. However, there is no doubt that the emphasis will need to be on supporting public sector reforms of poor-performing utilities which will ultimately enable them to deliver the infrastructure programmes that are required.

Ÿ We must learn from and disseminate the good practice that is already available. There are a range of innovative municipal water utilities and community schemes operating around the world which are successfully extending access to those without. However, it remains the case that while there are many multilateral funding mechanisms that support the private sector’s involvement in infrastructure, we are not aware of any donor-supported funding mechanisms which are aimed at enabling southern public sector utilities to learn from each other and to swap best practice via public-public partnerships.

Goodbye Washington Consensus, Hello Washington Confusion? – (II)

The World Bank’s ‘Economic Growth in the 1990s: Learning from a Decade of Reform’ represents a mea culpa as well as a way forward, says Dani Rodrik in his above titled article. "Coming from the institution that is one of the chief architects of the reforms of the last twenty years, it pushes us to think harder and deeper about the economics of reform than anything else out there. It warns us to be skeptical of top-down, comprehensive, universal solutions - no matter how well-intentioned they may be." The following is the concluding part of the paper prepared for the Journal of Economic Literature earlier this year. The last issue of the South Bulletin carried the first part.

The alternatives, II: foreign aid

Yet another vision of reform strategy is offered by the United Nations’ Millennium Project (2005), led by Jeffrey Sachs. This vision is no less holistic than that of the institutions fundamentalists, although the elements of the package and the weight placed on each differ. The U.N. Project calls for a comprehensive and simultaneous increase in "public investments, capacity building, domestic resource mobilization, and official development assistance," while providing "a framework for strengthening governance, promoting human rights, engaging civil society, and promoting the private sector" (p. xx). But it also abounds in concrete details of what can and should be done. Some of the "quick-win actions" it proposes include free distribution of bed nets against malaria, ending user fees for primary education and essential health services, expansion of school meals programs in hunger zones, and replenishment of soil nutrients on smallholder agriculture through subsidized or free distribution of chemical fertilizers.

The U.N. Millennium Project views current levels of foreign aid to be a significant constraint on the achievement of global poverty reduction. Hence it calls for a significant increase in aid—a doubling of annual official development assistance to $135 billion in 2006, rising to $195 billion by 2015—to finance public investments in human capital and infrastructure and to develop the technologies needed to transform health and agriculture in poor societies. Sachs and his collaborators exhibit a certain impatience with those who argue that the real constraint is poor institutions and weak governance, and that large aid flows are more likely to disappear in the pockets of corrupt officialdom than to foster development. They argue that many of the poorest countries of the world (e.g., Benin, Mali, Senegal) have in fact made significant strides in improving their economic and political institutions, and that in any case the investments in human capital that they advocate would likely foster better institutions as well. In their view, the obsession with governance is often just an excuse for rich countries not doing more to help poor nations.

The theory underlying the U.N. Millenium Project’s view of the world is that low-income countries in Africa (and possibly elsewhere) are stuck in a low-level equilibrium, a "poverty trap" (Sachs et al, 2004). The neoclassical production function assumes that the marginal product of capital is high at low levels of development (when the economy has low levels of capital). But if there are some increasing returns to scale (e.g., setting up a modern factory requires a minimum investment to be made), complementarities (e.g., running a modern factory needs an adequate supply of educated workers), or negative feedback effects (e.g., an increase in incomes raises population growth), the marginal return to capital is initially low rather than high. Small increments to capital yield very little fruit, and the economy can have multiple steady states, one of which involves a poverty trap. Since it does not pay to invest, households do not save and the economy remains poor. This very old idea (going back at least to Rosenstein- Rodan (1943) and Nelson (1956)) can be used to justify a "big push"—i.e., a large-scale, simultaneous effort to raise the capital stock (public, private, human) to levels where the neoclassical forces of convergence begin to operate and the economy breaks free of the poverty trap.

Several questions are raised by this take on African poverty. First, what do we make of the fact that historically few low income countries have embarked on high growth in this bigpush fashion or through the infusion of large amounts of foreign aid? As Sachs’ critics love to point out, there has not been a shortage of foreign aid in Africa, and some of the most rapidly growing countries of the past have done so without relying much on Western aid. Sachs and his collaborators counter that Africa is special because it suffers from high transport costs, lowproductivity agriculture, a very heavy disease burden, adverse geopolitics, and slow diffusion of technology from abroad (Sachs et al., 2004, 130-31), all of which make the region particularly prone to a poverty trap. But couldn’t one have said much the same of Vietnam, a war-torn, impoverished country facing economic sanctions from the United States, which took off in the late 1980s even though it did not receive much aid from Western nations until the mid-1990s? Or what do we make of the fact that economic growth is actually not uncommon among Sub-Saharan African nations themselves? The theory of poverty traps suggests that these countries are stuck in low-level equilibria from which they find it very hard to extricate themselves. The reality seems to be somewhat different. Most African countries have shown themselves capable of producing economic growth over non-trivial time horizons. A telling statistic produced by Jones and Olken (2005) is that three-quarters of Sub-Saharan African countries have grown fast enough to experience some convergence with U.S. income levels over at least one 10-year period since 1950. Similarly, in Hausmann, Pritchett, and Rodrik (2005), where we studied growth accelerations since the 1950s, we found such accelerations to be quite frequent in low-income countries, including among those in Africa. In fact, growth accelerations turned out to be more common in low-income countries than in middle- or high-income countries, in line with the neoclassical growth model. The trouble seems to be not that poor African countries are unable to grow, but that their growth spurts eventually fizzle out. This suggests a rather different remedy, one that focuses in the short run on selectively removing binding constraints on growth (which may well differ from country to country), and in the medium- to longer-run on enhancing resilience to external shocks.[12] I will elaborate on this remedy below.

Ultimately, where the U.N. Millennium Project differs most from Learning from Reform is in the extent of knowledge that it assumes we have and consequently in the degree of selfconfidence exhibited by its authors. The U.N. Millennium Project is based on the view that we basically know enough to mount a bold, ambitious, and costly effort to eradicate world poverty. We have successfully identified all the margins that matter, and we better move on all of them simultaneously. Learning from Reform, by contrast, is an ode to humility. What we have learned, it says implicitly, is the folly of assuming that we know too much. We need to downplay grandiose claims, move cautiously, and concentrate our efforts where the payoffs seem

the greatest.

A practical agenda for formulating growth strategies

But what is the operational content of such a cautious, experimentalist approach? If we adopt the path recommended by Learning from Reform, can we say anything more than "different strokes for different folks" or avoid a nihilistic attitude where "everything goes"? Learning from Reform says little that is useful on this, but I think the answer is "yes" to both questions. Let me briefly outline here a way of thinking about growth strategies that avoids some of the obvious pitfalls.

This approach consists of three sequential elements. First, we need to undertake a diagnostic analysis to figure out where the most significant constraints on economic growth are in a given setting. Second, we need creative and imaginative policy design to target the identified constraints appropriately. Third, we need to institutionalize the process of diagnosis and policy response to ensure that the economy remains dynamic and growth does not fizzle out.

Step 1: Growth diagnostics. Policy reforms of the (Augmented) Washington Consensus type are ineffective because there is nothing that ensures that they are closely targeted on what may be the most important constraints blocking economic growth. The trick is to find those areas where reform will yield the greatest return. Otherwise, policy makers are condemned to a spraygun approach: they shoot their reform gun on as many potential targets as possible, hoping that some will turn out to be the ones they are really after. A successful growth strategy, by contrast, begins by identifying the most binding constraints.

But can this be done? In Hausmann, Rodrik, and Velasco (2005), we develop a framework that we believe suggests a positive answer. We begin with a basic but powerful taxonomy. In a low-income economy, economic activity must be constrained by at least one of the following two factors: either the cost of finance must be too high, or the private return to investment must be low. If the problem is with low private returns, that in turn must be due either to low economic (social) returns, or to a large gap between social and private returns (low private appropriability). The first step in the diagnostic analysis is to figure out which of these conditions more accurately characterizes the economy in question. Fortunately, it is possible to make progress because each of these syndromes throws out different sets of diagnostic signals or generate different patterns of co-movements in economic variables. For example, in an economy that is constrained by cost of finance we would expect real interest rates to be high, borrowers to be chasing lenders, the current account deficit to be as large as the foreign borrowing constraint will allow, and entrepreneurs to be full of investment ideas. In such an economy, an exogenous increase in investible funds, such as foreign aid and remittances, will spur primarily investment and other productive economic activities rather than consumption or investment in real estate. This description comes pretty close to capturing the situation of countries such as Brazil or Turkey, for example. By contrast, in an economy where economic activity is constrained by low private returns, interest rates will be low, banks will be flush in liquidity, lenders will be chasing after borrowers, the current account will be near balance or in surplus, and entrepreneurs will be more interested in putting their money in Miami or Geneva than in investing it at home. An increase in foreign aid or remittances will finance consumption, housing, or capital flight. These in turn are the circumstances that characterize countries such as El Salvador and Ethiopia.

When we identify low private returns as the culprit, we will next want to know whether the source is low social returns or low private appropriability of those returns. Low social returns can be due to poor human capital, lousy infrastructure, bad geography, or other similar reasons. Once again, we need to be on the lookout for diagnostic signals. If human capital (either because of low levels of education or the disease environment) is a serious constraint, we would expect the returns to education or the skill premium to be comparatively high. If infrastructure is the problem, we would observe the bottlenecks in transport or energy, private firms stepping in to supply the needed services, and so on.

Appropriability problems - i.e., a large gap between private and social returns - can in turn arise under two sets of circumstances. One possibility has to do with the policy/institutional environment: taxes may be too high, property rights may be protected poorly, high inflation may generate macro risk, labor-capital conflicts may depress production incentives, and so on. Alternatively, the fault may lie with market failures such as technological spillovers, coordination failures, and problems of economic "self-discovery" (i.e., uncertainty about the underlying cost structure of the economy; see Hausmann and Rodrik 2003). As usual, we look for the tell-tale signs of each of these. Sometimes, the diagnostic analysis proceeds down a particular path not because of direct evidence but because the other paths have been ruled out.[13] It is possible to carry out this kind of analysis at a much finer level of disaggregation, and indeed any real-world application has to be considerably more detailed than the one I have sketched here. But I hope this summary conveys the value of an explicitly diagnostic framework. Even a rudimentary application of these principles can sometimes reveal important gaps or shortcomings in traditional reform packages. For example, when the cost of finance is an important binding constraint (as seems likely in Brazil), institutional improvements aimed at improving the "business climate" (i.e., reducing red tape, lowering taxes, and so on) will be not only ineffective (since the problem does not lie with investment demand), but it can also backfire (since an increase in investment demand will put further upwards pressure on interest rates).

Step 2: Policy design. Once the key problem(s) are identified, we need to think about the appropriate policy responses. The key in this step is to focus on the market failures and distortions associated with the constraint identified in the previous step. The principle of policy targeting offers a simple message: target the policy response as closely as possible on the source of the distortion. Hence if credit constraints are the main constraint, for example, and the problem is the result of lack of competition and large bank spreads, the appropriate response is to reduce impediments to competition in the banking sector. Simple as it may be, this first-best logic often does not work, and indeed can be even counter-productive. The reason is that we are necessarily operating in a second-best environment, due to other distortions or administrative and political constraints. In designing policy, we have to be on the lookout for unforeseen complications and unexpected consequences.

Let me return to an example from China. Formal ownership rights in China’s township and village enterprises (TVEs) were vested not in private hands or in the central government, but in local governments (townships or villages). From the lens of first-best reform, these enterprises are problematic, since if our objective is to spur private investment and entrepreneurship, it would have been far preferable to institute private property rights (as Russia and other East European transition economies did). But the first-best logic is not helpful here because a private property system relies on an effective judiciary for the enforcement of property rights and contracts. In the absence of such a legal system, formal property rights are not worth much, as minority shareholders in Russia soon discovered to their chagrin. Until an effective judiciary is created, it may make more sense to make virtue out of necessity and force entrepreneurs into partnership with their most likely expropriators, the local state authorities. That is exactly what the TVEs did. Local governments were keen to ensure the prosperity of these enterprises as their equity stake generated revenues directly for them. In the environment characteristic of China, property rights were effectively more secure under direct local government ownership than they would likely have been under a private property-rights legal regime.

Such examples can be easily multiplied (Rodrik 2005a). As an additional illustration, consider the case of achieving integration with the world economy. Policy makers in countries such as South Korea and Taiwan in the early 1960s and China in the late 1970s had decided that enhancing their countries’ participation in world markets was a key objective. For a western economist, the most direct route would have been to reduce or eliminate barriers to imports and foreign investment. Instead, these countries achieved the same ends (i.e. reduce the anti-trade bias of their economic policies) through unconventional means. South Korea and Taiwan employed export targets and export subsidies for their firms. China carved out special economic zones where foreign investors had access to a free-trade regime. Policy makers chose these unconventional solutions presumably because they created fewer adjustment costs and put less stress on established social bargains.

Step 3: Institutionalizing reform. The nature of the binding constraint will necessarily change over time. For example, schooling may not be a binding constraint initially, but as investment and entrepreneurship pick up, it will likely become one unless the quality and quantity of schools increase over time. In Hausmann, Rodrik, and Velasco (2005), we illustrate this issue using the example of the Dominican Republic. This country was able to spur growth with a number of sector-specific reforms that stimulated investment in tourism and maquilas. But it neglected making the institutional investments required to lend resilience and robustness to economic growth—especially in the area of financial market regulation and supervision. When September 11 led to the drying of tourist inflows, the country paid a big price. A Ponzi scheme that had developed in the banking sector collapsed, and cleaning up the mess cost the government 20 percentage points of GDP and led the economy into a downward spiral. It turned out that the economy had outgrown its weak institutional underpinnings. The same can be said of Indonesia, where the financial crisis of 1997-98 led to total economic and political collapse. It may yet turn out to be case also of China, unless this country manages to strengthen the rule of law and enhance democratic participation.

What is needed to sustain growth? Two types of institutional reform seem to become critical over time. First, there is the need to maintain productive dynamism. Natural resource discoveries, garment exports from maquilas, or a free-trade agreement may spur growth for a limited of time. Policy needs to ensure that this momentum is maintained with ongoing diversification into new areas of tradables. Otherwise, growth simply fizzles out. What stands out in the performance of East Asian countries is their continued focus on the needs of the real economy and the ongoing encouragement of technology adoption and diversification.

The second area that needs attention is the strengthening of domestic institutions of conflict management. The most frequent cause for the collapse in growth is the inability to deal with the consequences of external shocks - i.e., terms of trade declines or reversals in capital flows. Endowing the economy with resilience against such shocks requires strengthening the rule of law, solidifying (or putting in place) democratic institutions, establishing participatory mechanisms, and erecting social safety nets. When such institutions are in place, the macroeconomic and other adjustments needed to deal with adverse shocks can be undertaken relatively smoothly. When they are not, the result is distributive conflict and economic collapse (Rodrik 1999). The contrasting experiences of South Korea and Indonesia in the immediate aftermath of the Asian financial crisis in 1997-98 are quite instructive in this regard. Institutional reforms in these areas are difficult to implement and they take time.

Economic science typically provides very little guidance on how to proceed (Dixit 2004). But the point is that these difficulties do not need to stand in the way of formulating less ambitious, more selective, and more carefully targeted policy initiatives that can have very powerful effects on igniting economic growth in the short run. What is required to sustain growth should not be confused with what is required to initiate it.

Concluding remarks

It is now time for a confession. As the preceding discussion ought to have made clear, I find Learning from Reform a useful and important document in no small part because its central themes parallel those that I have been advocating for some time along with a number of my colleagues at the Kennedy School (see in particular Rodrik 2005a, Hausmann, Rodrik, and Velasco 2005, and Hausmann, Pritchett, and Rodrik 2005). It is gratifying to see one’s ideas being taken seriously, particularly by an institution that has frequently served as a target for one’s criticisms.

The report pays me compliments in other ways too: one of its two opening quotes is taken from my work (the other is from Al Harberger). And I return the compliment by acting as one of the endorsers on its back cover. [14] Had the editor of this Journal not insisted, I would not have found it proper to write this review essay. But I would like to think that the laudatory note I have struck above has to do not just with an ego that is being stroked. Coming from the institution that is one of the chief architects of the reforms of the last twenty years, Learning from Reform is a genuinely interesting document: it represents a mea culpa as well as a way forward. It pushes us to think harder and deeper about the economics of reform than anything else out there. It warns us to be skeptical of top-down, comprehensive, universal solutions - no matter how well-intentioned they may be. And it reminds us that the requisite economic analysis - hard as it is, in the absence of specific blueprints - has to be done case by case.

These should be music to any economist’s ears. After all, what distinguishes professional economists from ideologues is that the former are trained to make contingent statements: policy A is to be recommended only if conditions x, y, and z obtain. [15] Sensible advice consists of a well-articulated mapping from observed conditions onto its policy implications. This simple, but fundamental principle seems to have gotten lost in much of the thinking on economic reform in the developing world, which has often taken an a priori and mechanical form. Its rediscovery is therefore good news not just for poor nations, but for the economics profession as well.


[9] But even within the IMF, there are divergent views. The IMF’s Evaluation Office (nominally independent and headed until recently by a distinguished outsider, Montek Ahluwahlia, but staffed largely by IMF economists) has produced reports that often reach different conclusions.

[10] A mea culpa here: My article on "Institutions Rule" (Rodrik et al. 2004) is frequently seen as being in the frontline of institutions fundamentalism (although there are important caveats in the second half of the paper).

[11] The most serious challenge to institutions fundamentalism has been launched by Glaeser et al. (2004) who find the empirical approach in the institutions-cause-income literature flawed and think it is human capital (and dictators) that cause growth.

(Notes 9 - 11 refer to the first part of the article)

[12] For an empirical analysis which emphasizes the role of external shocks (in interaction with weak institutions) as the culprit for growth collapses, see Rodrik (1999).

[13] So in the case of El Salvador we concluded that lack of self-discovery was an important and binding constraint in part because there was little evidence in favor of the other traditional explanations (Hausmann and Rodrik, forthcoming).

[14] To add to the incestousness of the relationship, Lant Pritchett, my co-author on Hausmann, Pritchett, and Rodrik (2005), served as the principal author of two of the chapters of Learning from Reform.

[15] As a trite, but still useful illustration, consider trade liberalization, which is one of the most common policy reforms recommended to developing countries (typically unconditionally) (Rodrik 2005a). Economic theory says that trade liberalization is guaranteed to enhance welfare only under a long list of conditions: The liberalization must be complete or else the reduction in import restrictions must take into account the potentially quite complicated structure of substitutability and complementarity across restricted commodities. There must be no microeconomic market imperfections other than the trade restrictions in question, or if there are some, the second-best interactions that are entailed must not be adverse. The home economy must be "small" in world markets, or else the liberalization must not put the economy on the wrong side of the "optimum tariff." The economy must be in reasonably full employment, or if not, the monetary and fiscal authorities must have effective tools of demand management at their disposal. The income redistributive effects of the liberalization should not be judged undesirable by society at large, or if they are, there must be compensatory tax-transfer schemes with low enough excess burden. There must be no adverse effects on the fiscal balance, or if there are, there must be alternative and expedient ways of making up for the lost fiscal revenues. The liberalization must be politically sustainable and hence credible so that economic agents do not fear or anticipate a reversal. And an even longer list of requirements would have to be present for trade liberalization to generate economic growth, i.e., go beyond static Harberger triangles. While the theory of the second-best should not paralyze us, neither should we hand-wave it away as easily as we seem to do in our role as policy advisors


& Acemoglu, Daron, Simon Johnson, and James Robinson, "The Colonial Origins of Comparative Development," American Economic Review, 2001.

& Ancharaz, Vinaye D., "Determinants of Trade Policy Reform in Sub-Saharan Africa," Journal of African Economies, 12(3), 2003, 417-443.

& Chen, Shaohua, and Martin Ravallion, "How Have the World’s Poor Fared since the Early 1980s," World Bank, n.d.

& Collier, Paul, and David Dollar, "Can the World Cut Poverty by Half? How Policy Reform and Effective Aid can Meet International Development Goals," World Development, 29(11), 2001, 1787-2002.

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& Easterly, William, and Ross Levine) "Tropics, germs, and crops: the role of endowments in economic development," Journal of Monetary Economics, 50:1, January 2003.

& Glaeser, E., R. La Porta, and F. Lopez-de-Silanes, and A. Shleifer, "Do Institutions Cause Growth?" Journal of Economic Growth, September, 2004.

& Hausmann, Ricardo and Dani Rodrik, "Economic Development as Self-Discovery," Journal of Development Economics, December 2003.

& Hausmann, Ricardo and Dani Rodrik, "Discovering El Salvador’s Production Potential," Economia, forthcoming.

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& Krueger, Anne O., "Meant well, tried little, failed much: Policy reforms in emerging market economies", Remarks at the Roundtable Lecture at the Economic Honors Society, New York University, New York, March 23, 2004.

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Financing Poverty Reduction Not Indebtedness

The above was the title of a recent communication on ‘Loan negotiations’ issued by jointly by Afrodad and the Southern African Development Community (SADC) Parliamentary Forum. The representatives of the civil society and the Parliamentarians met last month in Namibia and issued a communiqué (reproduced below), bringing out real concerns with respect to conditionalities, transparency, and democratic accountability. The following information was made available by Eurodad on its website.

How can developing countries ensure that aid money (often in the form of concessional loans) reaches poor people? How can developing countries ensure that today’s loans do not contribute to a debt crisis in the future? Many developing countries debts today are viewed to be illegitimate because they were stolen by corrupt leaders/ dictators or used to oppress the rights of the people. How can it be ensured that this is not repeated? What rules, procedures, mechanisms and structures need to be in place to avoid today’s loans becoming tomorrow’s debt crisis?

These were just some of the questions that were discussed last week in Windhoek, Namibia by approximately 50 representatives from Southern African civil society organisations and parliamentarians from the Southern African Development Community Parliamentary Forum in a two day day ‘Dialogue on Loan Contraction and Debt Management and Development in the SADC region’. Parliamentarians were encouraged to be more active in monitoring the activities of International Financial Institutions. Ugandan MP Norbert Mao, a board member of the Parliamentarian Network on the World Bank ( urged MPs and CSOs to help establish a Southern African chapter of the PNoWB in order to play a more effective oversight role of the IFIs and Moreblessing Chidaushe from Afrodad informed MPs of how they could get involved in the International Parliamentarian Petition (

Participants identified several challenges for improving the way loans are approved and debts managed:

First, new loans at present are procured in an extremely non-democratic manner. Uganda was the only example where new loans have to be approved by parliamentarians. Julius Kapwepwe from the Uganda Debt Network outlined the legal framework that regulates this process. The Uganda parliament has managed to reject two proposed loans from IFIs based on insufficient evidence of how they were going to address poverty. Yet even in this case, the executive is more beholden to outside donors than to the legislature or to citizens. The Ugandan parliament on one instance was requested to approve a new loan on one afternoon as ‘World Bank staff had boarded a plane in Washington and the loan had to be approved before they landed in Kampala’!

Secondly, it was agreed that there needs to be greater transparency and participation in how resources are managed and spent. This includes setting up debt management committees, improving management of debt data and institutionalising debt policies as well as improving monitoring systems of how money is invested. Parliamentarians and civil society groups need to be involved in this monitoring process. This will help to reduce corruption and improve the investment of loans in poverty reduction.

Thirdly, donors need to end their practice of imposing economic policy conditions on developing countries. Conditionality is contradictory to the concept of ownership and of supporting nationally owned development strategies. Participants described how countries such as Zambia and Tanzania will benefit from the G8 debt deal for increased aid and more debt relief but at huge social costs to poor people in these countries. In the words of one participant: "the package may look attractive but the contents are toxic."

Communique of the Parliamentary-Civil Society Organisations’

Dialogue on Loan Contraction and Debt Management and Development In SADC Region, 15-16 February 2006, Safari Court, Windhoek, Namibia


i. We, the members of Civil Society Organisations and the Southern Africa Development Co-operation Parliamentary Forum gathered at Windhoek, Namibia on 15 to 16 February 2006, and having deliberated on loan contraction and debt management and development in the SADC region:

ii. Recalling the AFRODAD-facilitated first meeting between members of the SADC Parliamentary Forum and Civil Society Organisations (CSOs) in Harare, Zimbabwe from 24 to 25 August 2004 and reaffirming our commitment to the recommendations made thereof

iii. Agreeing that debt, especially for consumption and its related conditionalities is undesirable and should be avoided at all cost

iv. Noting with serious concern the continued capital flight in the form of annual debt service payments and untaxed corporate profits

v. Reiterating that there is a need to involve parliamentarians as elected representatives of the people and civil society in loan contraction and debt management and in development in general.

vi. Acknowledging that effective debt management and nationally-owned development strategies form the indispensable foundations for sustainable development in the SADC region and that they are the pillars for tackling poverty reduction, gender inequality and HIV and AIDS as well as other challenges.

vii. Emphasizing the urgent need for an effective, comprehensive, durable and development-oriented solution to the debt problems of African countries;

viii. Cautiously welcoming the decision of the G8 countries to cancel 100% of outstanding debts of eligible HIPCs to the IMF, IDA and AfDB, however expressing concern about the attached conditionalities and limited countries that will benefit;

ix. Stressing the need to consider additional measures and initiatives including the fair and transparent arbitration process aimed at ensuring long-term debt sustainability through increased grant-based financing;

We therefore commit ourselves to:

1. Continue with the dialogue, share information and work together on debt management and development.

2. Invest in a stronger Parliamentary-CSO working relationship on debt and other development challenges particularly in the area of information sharing, research and bill sponsoring

We urge our governments to:

1. Set up debt management committees, institutionalise debt policies and improve data management on debt in our countries

2. Involve Parliaments in loan contraction processes as well as in the management of the debt thereof

3. Carefully consider project sustainability before loans are approved

4. Ensure Parliaments and CSOs are included in debt policy formulation and management

5. Allocate adequate expenditure to poverty reduction programmes and projects, HIV and AIDS and gender equality

We urge both our governments and donors to honour their commitments and to put the emphasis on sustainable development rather than sustainable debts.

And we demand:

1. A fair and transparent arbitration process as a mechanism for debt management under the umbrella of the United Nations.

2. Inclusive monitoring and evaluation of the use of all public resources

3. Mutual accountability between donors and aid recipient countries on development outcomes

4. Mutual agreement on loan policy conditions as equal partners with development partners

5. Poverty and social impact assessment on all loans where there is concern regarding impact on the poor

6. More and better and quality aid anchored on clear exit strategies.

Argentina: Recuperated Enterprises Reversing the Logic of Capitalism

Argentina’s worker-run factories are setting an example for workers around the world that employees can run a business even better without a boss or owner. Some 180 recuperated enterprises up and running, providing jobs for more than 10,000 Argentine workers. This new phenomenon taking hold throughout Argentina, Brazil, Uruguay, and Venezuela continues to grow despite market challenges. More than 30,000 Latin American workers are employed at cooperative-run businesses that were closed down by bosses and reopened by employees. Following are extracts from an article by Marie Trigona for the IRC Americas Program (online at posted on 17 March, 2006.

The new phenomenon of employees taking over their workplace began in 2000 and heightened as Argentina faced its worst economic crisis ever in 2001. Nationwide, thousands of factories have closed and millions of jobs have been lost in recent years. Despite challenges, Argentina’s recuperated factory movement have created jobs, formed a broad network of mutual support among the worker-run workplaces and generated community projects.

Argentina’s employee-run businesses are very diverse, each with specific legal standing and forms of organizing production. In almost all cases workers took over businesses that had been abandoned or closed by their owners in the midst of Argentina’s financial meltdown in 2001. The owners usually ceased production, stopped paying wages, and went bankrupt. The workers’ decision to take over their plant was a decision made out of necessity--not necessarily out of ideology. The clear worry of how to safeguard workers’ jobs motivated the act of taking over a factory and making it produce without a boss or owner.

Growing unemployment, capital flight, and industry break-up served as the backdrop for factory takeovers. Argentineans lived through the nation’s worst economic crisis ever in December 2001. Unemployment hit record levels--over 20% unemployed and 40% of the population unable to find adequate employment. Argentina, one of Latin America’s industrial giants, struggled to feed its population between 2001 and 2002, with 53% of the population living below the poverty line. In 2006 unemployment still stands at 12.5%, with over 5.2 million people unable to find adequate paid work to meet monthly needs.

Many worker-controlled factories today face hostility and frequently violence from the state. Workers have had to organize themselves against violent eviction attempts and other acts of state violence. This impacts the workers and the enterprises as employees have to leave the workplace, invest energy in a legal battle and fight for laws in favor of worker-recuperated businesses.

In almost all cases the legal fight to form a cooperative and gain recognition of the business’s ownership creates instability. The workers not only have to figure out how to successfully run their business but also worry whether authorities will pass a law to evict the business. In the past year a number of Argentina’s recuperated enterprises, including worker-run BAUEN hotel, Zanon ceramics factory, La Foresta meatpacking plant, and Chilavert print shop, have undergone major legal battles to keep their workplaces. Workers have found out that proving that workers can control production wasn’t enough, they had to also fight for legality. As many of the businesses became profitable once again after the devaluation, many of the old bosses wanted their companies back.

Take the example of BAUEN Hotel, worker self-managed since 2003. Employees rallied throughout December last year to pressure the Buenos Aires city government to veto a law in favor of putting the hotel back into the hands of the former owner. The B.A. government refused to veto the law. If the BAUEN cooperative does not succeed in pushing through a new, favorable law they risk losing their hotel.

For over three years, workers have operated the BAUEN cooperative hotel with no legal standing or government subsidies. Since taking over the hotel on March 21, 2003, the workers have slowly begun to clean up the ransacked hotel and rent out the hotel’s services. The hotel re-opened with 40 employees and now employs some 150 workers.

Rather than providing a national expropriation law, the courts consider the legality of the recuperated enterprises on a case by case basis. This has resulted in fragmentation among Argentina’s 180 recuperated enterprises, which are organized in separate segments. The largest is the MNER (National Movement of Recuperated Enterprises). Over 40 worker-run businesses--among them BAUEN Hotel, Chilavert printing factory, Pismanta Hotel and Spa, La Foresta meatpacking plant, Maderera Cordoba woodshop, and Zanello tractor manufacturer--belong to MNER. The Peronist MNER, led by Eduardo Marua, has been very effective in creating legal tactics for the occupied factories.

A small sector belongs to the MNFR (National Movement of Recuperated Factories), led by Luis Caro. Caro, a procapitalist lawyer, has run as a candidate with the nationalist Christian Democratic party. MNFR functions by capturing and co-opting worker cooperatives when the company faces a legal or market crisis. The most infamous case has been the Brukman suit factory. Many Brukman workers have said that Luis Caro has become their new boss. The worker-run cooperatives belonging to MNFR have become non-political, closing their factory doors to outsiders and following a tendency to go back to the way things were before with the boss. The CTA--as the Argentine workers’ umbrella union is called--represents a smaller and less significant segment. The Zanon ceramics factory represents another segment. The Zanon cooperative, formally named FaSinPat, functions as an autonomous entity but also forms part of the Ceramists Union in Neuquén. The FaSinPat is the only recuperated factory demanding national expropriation of their ceramics plant under worker control.

One of the biggest worries that the workers at Argentina’s recuperated enterprises have is how to self-manage their business. As the largest recuperated factory in Argentina, Zanon now employs 470 workers. Under worker control, no management professional stayed at the factory. Only the workers stayed. The workers had to learn everything about sales, marketing, production planning, and other highly technical aspects. The workers at Zanon regularly work with lawyers, accountants, and other professionals whom they trust, but the professionals don’t make the decisions. The worker assembly votes on technical decisions. Professionals have provided specific skills training for the workers at Zanon. However, for many of the recuperated enterprises there is a deficit of trustworthy professionals.

Planning systematic skills training has been another challenge. While many of the recuperated enterprises have formed informal knowledge-sharing networks, there is a need for specific skills training. In the midst of running a business and fighting legal battles, long-term production planning and training often times becomes a last priority.

The recuperated enterprises have had to re-start production without investment capital, low-interest loans, or subsidies. In many cases, workers took over small- to mid-size businesses with outdated technology. Government and non-governmental entities working with Pymes (small- to mid-size companies) refuse to provide capital for the recuperated enterprises. Because of precarious legal standing, many of the worker-controlled factories and businesses failed to meet requirements to apply for government credits and/or bank loans.

While some recuperated businesses have developed advanced strategies for creating new social relations inside the workplace, several have held on to the old structures left behind by the bosses. Rather than organizing so that all workers participate in the planning and decision-making, some worker run cooperatives have opted to create top-down organizing and adopted an unequal wage scale. Some have organized according to the traditional worker cooperative model, a directive administration that manages the administrative aspects with very little participation from the manual workers. This conservative tendency to close the workplace to outsiders and organize an internal authoritarian organization is most likely influenced by the fear of losing a legal battle in court or failing to successfully run a business.

Beyond legal attacks, Argentina’s recuperated enterprises have had to strategize to overcome market challenges, with no capital support from the state. Due to lack of infrastructure and outdated technology, many of the worker-run cooperatives have little chance of surviving competition in the capitalist market. The best way for the recuperated enterprises to survive is to create an alternative market for products produced inside the recuperated enterprises. Bartering products manufactured by worker-run enterprises among a network of recuperated workplaces would guarantee that a percentage of production becomes profitable. Building a network of support among the recuperated enterprises, autonomous from the state and market, is the biggest challenge facing worker-run businesses.

Despite political and market challenges, Argentina’s recuperated enterprises represent the development of one of the most advanced strategies in defense of the working class and resistance against capitalism and neoliberalism. Worker-run businesses have battled for laws to protect workers’ jobs and opened legal doors for other recuperated enterprises. Many of the recuperated factories have built an extensive international solidarity network among Latin America’s some 300 recuperated enterprises in Argentina, Venezuela, Brazil, and Uruguay. In addition, many occupied businesses like Zanon, Chilavert, and BAUEN have supported community projects and other initiatives for social change.

Alternative Agenda

Recuperated enterprises are creating a movement of democratic alternatives and worker self-determination. Worker self-management in Argentina is helping plant the seeds so that future generations can reverse the logic of capitalism by producing for communities, not for profits and empowering workers, not exploiting them.

Worker Self-Management

The phrase "self management," derived from the Spanish concept of "auto-gestión," means that a community or group makes its own decisions, especially those kinds of decisions that fit into processes of planning and management. Argentina’s recuperated enterprises are putting into action systems of organization in a business in which the workers participate in all of the decisions.

According to James Petras and Henry Veltmeyer, in their essay titled Worker Self-Management in Historical Perspective, worker self-management provides the workers with the decision-making power to 1) decide what is to be produced and for whom; 2) safeguard employment and/or increase employment; 3) set priorities for what is produced; 4) define the nature of who gets what, where and how; 5) combines social production and social appropriation of profit; 6) creates solidarity of class at the factory, sectoral or national/international level; and 7) democratizes the social relations of production.

The recuperated enterprises have developed several long-term demands for worker self-management.

MNER--Occupy, Resist, and Produce. The model of the MNER has been to press for national, provincial, and city legislature to incorporate laws, dictums, and policies in favor of recuperated enterprises. Many of the factories forming part of MNER have at least won temporary expropriation for a minimum of two years. However, the fight for credits and subsidies to invest in machinery, technology, and cultural projects has been largely ignored by government authorities.

Nationalization under worker control: The case of Zanon. The long-term demand at Zanon is for national expropriation under worker control. However, the workers from Zanon have fought a parallel battle in federal court to legally recognize the FaSinPat cooperative. In December 2005, the FaSinPat cooperative won a legal dispute, pressuring a federal court to legally recognize the FaSinPat as a legal entity that has the right to run the cooperative for one year.

BAUEN Hotel, Chilavert, and Zanon have worked together in a coalition for a national expropriation law. The government has offered short-term solutions, giving temporary legal ownership to workers who have recuperated their workplace. This legal permit is usually granted for between two and five years. A definitive expropriation law for factories producing under worker control would provide legal security for jobs.

In September 2004 a delegation of workers from some of Argentina’s roughly 200 re-occupied factories rallied in Buenos Aires to demand that the government permanently legalize the expropriation of factories and other bankrupt enterprises run under direct workers’ control. Workers from Chilavert printing factory, BAUEN Hotel, Brukman suit factory, Conforti printing factory, Renacer electronics from Ushuaia, Junin health clinic, Ados health clinic, Gatic shoe company, Sasetru pasta company, and various unemployed workers’ organizations participated in the march.

Chilavert, a printing factory in Buenos Aires, is one of the occupied businesses that functioned with a temporary permit from 2002 until 2004. The agreement was set to expire October 17, 2004. With the support of the community and other recuperated enterprises the workers of Chilavert won the definitive expropriation of their mid-size print factory in the Buenos Aires neighborhood of Pompeya.

Legal Tactics: Using the Worker Cooperative and Bankruptcy Laws

Argentina’s recuperated enterprises have developed effective legal tactics, using laws that were set up in favor of businessmen to defend workers. Some of the laws passed in favor of recuperated enterprises were based on regulations and laws set up for worker cooperatives. Historically in Argentina, worker cooperatives have gotten a bad name. Throughout the 90s cooperatives were used as a way to cover up outsourcing and reduced labor standards. The recuperated enterprises are bringing back a renovated tradition of the worker cooperatives.

Workers have also effectively utilized Article 187--a bankruptcy law that was developed for businesses to more easily file for bankruptcy. In the 1990s the social democratic Peronist party voted in favor of the bill, revamping the bankruptcy law following advice from the International Monetary Fund. Article 187 served as a tool to accelerate corporate concentration of privatized businesses. However, the law passed with a special article defining that a judge handling a bankruptcy could consider giving the business to the workers if they form a cooperative. Application of the article is discretionary and considered on a case by case basis.

Direct Political Action

In almost all cases of the factory takeovers the workers used the strategy of direct political action. The first step was to physically take over the workplace through occupations. The workers from BAUEN cut the lock off a side entrance to occupy their hotel. Obviously, these actions directly questioned the notion of private property. The workers then had to rally within their communities to defend their occupied workplaces from violent eviction. In the aftermath of December 19 and 20, 2001 citizens and activists from piquetero groups, popular neighborhood assemblies and human rights organizations supported the recuperated enterprises with different measures. Recuperated enterprises like Chilavert, BAUEN, and Zanon have carried out innumerable political actions to pressure the courts to legally recognize their worker cooperatives. The government’s response to Zanon has been violent, using different tactics to evict the factory workers. The government has tried to evict five times using police operatives. On April 8, 2003 over 5,000 community members from Neuquén came out to defend the factory during the last eviction attempt.

Legality vs. Legitimacy

Many of the recuperated enterprises were forced to start up production without any legal backing whatsoever. Such is the case of the BAUEN Hotel, whose turbulent history combines starlit inaugurations, closures, and worker determination. On December 28, 2001, after the management began systematic firings and emptied out the hotel, 150 workers were left in the street. The hotel was constructed in 1978, during the glory of Argentina’s last military dictatorship, with government loans and subsidies. For almost three decades, the hotel has been emblematic of Argentina’s bourgeois class.

However, all of that changed on March 21, 2003 when the workers decided to occupy the hotel. Some 40 members of the current cooperative met secretly early in the morning on the corner of one of Buenos Aires’ busiest intersections. Along with workers from other recuperated factories and the support of MNER, the group took over the building, cutting the locks on the side entrance and walking into the lobby. The workers found the hotel dilapidated, without electricity, and ransacked. For months the cooperative members stood guard inside the hotel, while they put up a legal fight to form a cooperative. Three years later the BAUEN workers cooperative still functions without any type of legal standing.

In December 2004 they inaugurated a street-front café, an eye-catching space in Buenos Aires’ theatre district. The floor is covered with beautiful, high-quality porcelain tile, a trade between worker-controlled Zanon ceramics factory and BAUEN. On any given night the hotel is bustling with culture: theatre, cocktail parties, tango performances, and radio shows to name a few. Many of the workers say that their cooperative is doing what capitalist employers avoid: securing jobs and paying livable salaries. Since the BAUEN takeover the cooperative has hired over 80 new workers. The cooperative pays a monthly salary of 800 Argentine pesos (US$260) for each worker, regardless of their professional task. In addition, the hotel has expanded services and often has full occupancy.

Democratic Relations Inside the Workplace

In almost all the worker recuperated businesses, a general assembly and coordinators have replaced a hierarchical system of foremen and bosses. Since the workers took over the BAUEN Hotel, the cooperative has hired over 85 workers, almost all former BAUEN workers and family members. The workers all earn the same wage. The BAUEN cooperative has a formal board of directors made up of a president, vice-president, secretary, and treasurer, but political decisions are made in a general assembly.

In the case of Zanon, the hiring of workers and organization of production is based on the ideals of horizontal relations, direct democracy, and autonomy. Everything is decided in an assembly, there is no hierarchy of personnel or administration. Each area, including the production lines, sales, production planning, press, etc, forms a commission. Each commission votes on a coordinator. The coordinator of the sector informs on issues, news, and conflicts within his or her sector to a general assembly of coordinators. The coordinator then reports back to his or her commission news from other sectors. The workers hold weekly assemblies per shift. The factory also holds a monthly general assembly, during which production is halted.

Many of the workers at the recuperated enterprises say that their work rhythm has changed. According to Isabel Sequeira, a maid who has worked at the BAUEN Hotel for over 11 years, when employees reopened the hotel it became her hope for a changed future. "We work with our conscience, we don’t have anyone looking over our shoulders or telling us what to do. We are working so that the hotel is clean and beautiful," she says.

Prior to the workers’ occupation, production inside Zanon was set to maximize the company’s profits, reducing salaries to the minimum possible level, cutting corners on worker safety measures, and pressuring workers to produce at high levels with the least amount of workers necessary. These conditions led to an average of 25-30 accidents per month and one fatality per year. A total of 14 workers died inside the factory. Since Zanon’s occupation by its workers not one accident has occurred inside the factory.

At BAUEN all of the renovations were self-financed by the workers. In the first year of operations, the workers opted to put profits back into their cooperative rather than take home a pay raise. The workers spent $30,000 dollars alone on the new street-front café. In 2006, the cooperative is scheduled to inaugurate a renovated pool area. They’ve also improved safety regulations within the hotel and fire-proofed rooms.

One of the keys to the recuperated enterprises’ success has been the insertion of the workers’ struggle into the community. Along with defending jobs, the recuperated enterprises are also creating a new culture. Both Zanon and BAUEN have held rock concerts and theatre productions open to the community. The massive concerts have been very effective in generating support for the recuperated enterprises. The concerts have received major news attention from media outlets reluctant to publish news about the recuperated enterprises.

Last December, more than 11,000 fans and supporters attended a concert featuring rock veterans La Renga in Zanon’s stock lot. The 460 workers from the worker-controlled factory organized the entire event--building the massive stage, putting up posters, and selling the low-cost tickets.

The workers at Zanon regularly donate ceramic tiles to cultural centers and other community-based organizations. In 2004, the workers built an emergency health care clinic in a neighboring barrio Nueva España.

Local-Global Linkages

"With worker self-management we are in a process of creating workers in solidarity, people who aren’t only worried about a wage," says Marcelo Ruarte, the BAUEN cooperative’s assembly-voted president. He adds, "Instead they’re trying to improve social conditions, culturally and politically."

On a local level, BAUEN Hotel has become a prime example of coalition building and development of a broad mutual support network. In the midst of legal struggles and successfully running a prominent hotel, the cooperative’s members haven’t forgotten their roots. BAUEN has become a political center for worker organizations. Subway workers along with public health employees, public school teachers, telecommunications workers, train workers, and unemployed worker organizations have formed a coalition of grassroots worker organizations in what is known as The Inter-Sindical Clasista (Classist Union Coalition). The Classist Union Coalition regularly meets at the BAUEN Hotel and has proposed forming a union school inside the hotel. These types of actions have helped to form a broad network of support for the recuperated enterprises.

This new phenomenon taking hold throughout Argentina, Brazil, Uruguay, and Venezuela continues to grow despite market challenges. More than 30,000 Latin American workers are employed at cooperative-run businesses that were closed down by bosses and reopened by employees.

Representatives from worker-controlled factories and businesses from Argentina, Uruguay, Venezuela, and Brazil organized the First Latin American Congress on Recuperated Enterprises October 28 and 29, 2005 in Caracas to build coordinated strategies against government attacks and dog-eat-dog markets. Venezuelan President Hugo Chávez inaugurated the event with more than 1,000 self-managed workers present who are putting into practice the slogan: Occupy, Resist, and Produce. The Congress served as an initiative to build an economic and mutual support network among the some 300 businesses and factories currently run by worker self-management in Latin America.

Late this year, the Venezuelan government passed a number of legal decrees expropriating abandoned factories for workers to start up production. During the Congress, Chávez signed a decree for the expropriation of two factories. Recuperated enterprises in other countries look to Venezuela as a model for state-supported laws in favor of worker expropriation.

Many of the employee-run companies had the expectation of signing trade agreements and technological exchange accords during the congress. President Chávez promised to provide support to recuperated enterprises in the form of low-interest loans and bilateral cooperative agreements. However, months after the Congress many of the government-supported initiatives have been delayed or forgotten.

The agreements between recuperated enterprises have had the most concrete impact. Even in the case of Venezuela, Latin America’s recuperated factories have had to learn that workers can’t rely on the state to move a business forward. The occupied factories and enterprises are proving that they are organizing to develop strategies in defense of Latin American workers susceptible to factory closures and poor working conditions.

While these experiences are forced to co-exist within the capitalist market they are forming new visions for a new working culture. The experiences of worker self-management and organization have directly challenged the capitalist structures by questioning private property, taking back workers’ knowledge, and organizing production for objectives other than profits.

Conserving Sacred Sites of Biological Diversity

Curitiba, Brazil, 18 March --- An international initiative to conserve ancient sacred sites is being launched in the belief that these culturally important locations may be a key to saving the world’s declining biodiversity, according to UNEP..

Experts have pinpointed several sites as pilot ecosystems of global importance such as a site in Mexico’s Chihuahuan Desert where it is said the sun was born, up to a network of skull caves in the Kakamega forests in Kenya, revered by Taita and Luhya people.

Other sites are Mount Ausangate in the majestic Vilcanota mountain range of Peru, the ritual area of Puntayachi in the biodiversity-rich Cayanpi region of Ecuador. A group of islands in Guinea Bissau whose beaches and mangroves are used exclusively for rituals.

South Centre News

Meeting with Permanent Representatives from Member Countries

Following the recent meeting of the South Centre Board towards the end of last month, the Executive Director of the South Centre, Professor Yash Tandon invited the Permanent Representatives of the South Centre member countries based in Geneva. At that meeting, held on 23 March, 2006, the ED communicated some of the Board decisions and the financial situation of the Centre. He also introduced the senior staff members of the Centre. The PRs welcomed the new three-year mandate of the ED and suggested ways of putting the South Centre on a sound financial footing.

Enhancing Links with G-77 & China

The South Centre plans to establish closer links with the Group of 77 and China – in New York, Geneva, as well as other G-77 chapters. This was affirmed at a meeting organized by the G-77 and China on 22 March, 2006, to which Professor Tandon was invited as a special guest.

Work Programme Re-organisation

Based on a work programme approved by the South Centre Board, the Secretariat has reorganized itself. The Centre’s Trade and Development Programme will now be called Trade for Development Programme; and two separate programmes – Innovation, Access to Knowledge, and Intellectual Property - and Global Governance for Development have been instituted. Three other programmes – Environment for Development, Human Rights and Social Welfare, and Finance for Development – are planned to be developed during the next three years.

Trade for Development

- Recent research and publications

· Trade Analysis on "Elements for the Architecture of Aid for Trade". Paper prepared for and presented at the Commonwealth Secretariat/UNCTAD meeting on Aid for Trade, held on 21-22 March 2006. The paper presented points for the discussion and suggested institutional framework and elements for the architecture of the Aid for Trade initiative that the recently established WTO Task Force on Aid for Trade need to consider.

- Work with delegations in Geneva

· A meeting with G-33 developing countries to discuss issues related to the progress in the agriculture negotiations and address technical aspects of the negotiations on Special Products (SPs) and the Special Safeguard Mechanism (SSM).

· A meeting with the Small, Vulnerable Economies members of the WTO and several other developing countries to discuss and advise on the GATS negotiations on domestic regulation currently taking place in the Working Party on Domestic Regulation.

- Other meetings

· The fifth annual Workshop on Trade in Services of the South Centre was held at the Palais des Nations from 20-24 March 2006. The workshop brought together over 15 capital based LDC representatives and was open to participation of all developing country and LDC WTO negotiators. It also invited civil society and intergovernmental organizations and other experts.

· With Dr. Sanoussi Bilal of the European Centre for Development Policy Management (ECDPM) to explore areas of possible cooperation between the ECDPM and the South Centre.

· With developing country delegations on 17 March, 2006 to discuss plurilateral negotiations in GATS.

Innovation, Access to Knowledge and Intellectual Property

- Meetings

· WIPO Open Forum on the Draft Substantive Patent Law Treaty 1-3 March, 2006: Prof. Carlos Correa, Special Advisor on Strategy and Research, gave two presentations: one on Prior Art issues (definition of prior art, novelty and inventive step) and another on Sufficiency of Disclosure (enabling disclosure, disclosure of prior art, best mode). Sisule Musungu, Acting Programme Coordinator, gave a presentation on the issue of Exceptions to Patent Rights.

· Sisule Musungu attended the Transatlantic Consumer Dialogue Conference on the "The Politics and Ideology of Intellectual Property" in Brussels, Belgium, on March 20 & 21, 2006. He gave two presentations: one on the "IP and the Knowledge Commons - new political paradigms" panel; the other on the "IP and the Knowledge Commons - Lobbying and Advocacy" panel.

Global Governance for Development

- Recent research and publications

The South Centre Trade Dispute Quarterly for the first quarter of 2006 has been released. This issue contains analyses of two cases that are relevant to the agriculture negotiations on state trading enterprises and the special safeguard mechanism.


Will Access to Water Remain a Pipe Dream?

As the curtain fell on one of the mega conferences just held in Mexico - the 4th World Water Forum - the grim statistics of the lack of access to safe drinking water and to sanitation were once again highlighted. Ten thousand people die each day due to preventable water borne diseases. More than a billion individuals lack basic water supply and 2.4 billion lack access to adequate sanitation. At the current pace, achieving even the Millennium Development Goals with respect to improving the access to water is not possible.

The Ministerial Declaration adopted by the World Water Forum, which itself is not considered an inter-governmental machinery, came in for much criticism by the civil society groups. The Forum is organized by the World Water Council, an international multi-stakeholder platform established in 1996. It was on the initiative of renowned water specialists and international organizations, in response to an increasing concern about world water issues from the global community. It is a consistent refrain of the NGOs that the Forum is weighed in more by the interests of the large multinational companies in the water sector.

"The forum organisers, like the World Water Council and the World Bank, have been determined to keep private sector management on the agenda. There has been no serious assessment of the privatisation debacle, and poor countries continue to be at the mercy of international financial institutions (IFIs) with a strong pro-privatisation agenda" said Vicky Cann of the World Development Movement. The failure of the Ministerial Declaration to mention water as a human right prompted the ire of many in the civil society.

In fact, Bolivia proposed a "complementary declaration" made jointly with Cuba, Venezuela and Uruguay, stating, among other things, that "access to water with quality, quantity and equity, constitutes a fundamental human right" and that "States, with the participation of the communities, shall guarantee this right to their citizens". The Bolivian representative is believed to have added that the document further: "stresses that efforts will be made at the CSD and other UN and international forums to recognize and make this right effective; expresses concern at the possible negative effects that international instruments, particularly free trade and investment agreements, may have on water resources; and reaffirms the sovereign right of every country to regulate its water and all its uses and services." Though this has reportedly been added to the outcome of the Forum, it does not form an annex to the Forum’s Ministerial Declaration.

Billions of people are going to be left in more or less the same predicament as a result of this apparent tussle between the private and the public sector for control over the delivery of water as a basic service. The report ‘Pipe dreams: The failure of the private sector to invest in water services in developing countries,’ by the UK-based World Development Movement and the France-based Public Services International, referred to in this Bulletin, shows that: Just half of one per cent of private sector investment has gone to sub-Saharan Africa the area that needs investment in water services the most; The public purse is repeatedly used to subsidise or bail out the private sector and pay for new connections; In every case where the private sector has been responsible for extending water access in sub-Saharan Africa, it has failed to deliver the promised level of investment; and, that 70 per cent of African water privatisations have either been terminated early or are currently in some form of distress.

The 2nd United Nations World Report on Water: ‘A Shared Responsibility,’ brought out earlier this month, put the accent on ‘a crisis of governance’ as something fundamental in the water crisis. It said that ‘mismanagement, limited resources and environmental changes mean that almost one-fifth of the planet’s population still lacks access to safe drinking water and 40 per cent lack access to basic sanitation.’ It notes that private sector investment in water services is declining. Many big multinational water companies have begun withdrawing from or downsizing their operations in the developing world because of the high political and financial risks. Although their performance has often failed to meet the expectations of developing country governments and donor countries, the report stresses that it "would be a mistake" to write off the private sector.

The private-public conflict notwithstanding, "There is a silent holocaust occurring around the world caused by lack of water and sanitation," as Barbara Frost, chief executive of international charity WaterAid said during the Mexico conference. "If service providers are not held to account, the poor and the socially excluded will never achieve their water and sanitation rights." The enormous challenge of stopping preventable human deaths in millions has to be the guiding principle – not the profit, privatization or the commoditisation of water.

Attached please find the latest issue of the South Bulletin no.121 in pdf
and word formats. 
Focus on WTO Services negotiations.

With best regards,

See attached file: bulletin121.pdf
See attached file: South Bulletin 121Word.doc)

Someshwar Singh

Senior Editor
South Centre
Ch. du Champ d'Anier 17
1211 Geneva 19

web site:

Latest issue of the South Bulletin no.121


bulletin121.pdf (0.22 MB)

SouthBulletin121Word.doc (0.30 MB)

Thursday, March 30, 2006