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7 Policy Considerations

Introduction

This era of globalisation is opening many opportunities for millions of people around the world through increased trade, new technologies, foreign investments, expanding media and internet connections, and fuelling economic growth and human advances. There is more wealth and technology, and more commitment to a global community than ever before. All this offers enormous potential to continue the unprecedented progress of the twentieth century and eradicate poverty in the twenty-first century. The growing interdependence of people’s lives calls for shared values and a shared commitment to the human development of all people. Global markets, global technology, global ideas and global solidarity can enrich the lives of people everywhere, greatly expanding their choices.

Yet, it is also evident that these agents of advancement are also the same instruments for potential environmental derailment, increased North-South divide, growing human insecurity and consequently potential stimulants of unsustainable development, particularly, in the developing countries.

Usually, government policies on FDI need to counter two sets of market failures. The first arises from information or co-ordination failures in the investment process, which can lead a country to attract insufficient FDI, or, the wrong quality of FDI. The second arises when private interests of investors diverge from the economic interests of host countries. This can lead FDI to have negative impacts on development, or it may lead to positive, but static benefits that are not sustainable over time. Private and social interests may, of course, diverge from any investment, local or foreign. Policies are then needed to remove the divergence for all investors. However, some divergence may be specific to foreign investment. While TNCs offer the potential for developing countries to access capital, technology, management techniques and external markets, this does not necessarily mean that simply opening up to FDI is the best way of obtaining or benefiting from them. The occurrence of the aforementioned market failures means that governments may have to intervene in the process of attracting FDI with measures to promote FDI generally or measures to promote specific types of FDI. Furthermore, the complexity of the FDI package means that governments face trade-offs between different benefits and objectives. For instance, they may have to choose between investments that offer short as opposed to long-term benefits. The former may lead to static gains, but not necessarily to dynamic ones. FDI may differ from local investment because the locus of decision-making and sources of competitiveness in the former lie abroad, because TNCs pursue regional or global competitiveness-enhancing strategies, or because foreign investors are less committed to host economies and are relatively mobile. Thus, the case for intervening with FDI policies may have a sound economic basis. In addition, countries consider that foreign ownership has to be controlled on non-economic grounds, i.e. to keep cultural or strategic activities in national hands. Consequently, the role of FDI in countries’ processes and efforts to meet development objectives can differ greatly across countries, depending on the nature of the economy and the government.

This implies that there is no ideal universal strategy on FDI. Any strategy has to suit the particular conditions of a country at any particular time, and evolve as the country’s needs and its competitive position in the world change. Increasingly, it also has to take into account the fact that international investment agreements set parameters for domestic policy making. Governments of developing countries need to ensure, therefore, that such agreements do leave them the policy space they require to pursue their development strategies. Formulating and implementing an effective strategy requires above all a development vision, coherence and co-ordination. It also requires the ability to decide on trade-offs between different objectives of development. In a typical structure of policy making, this requires the FDI strategy-making body to be placed near the head of government so that a strategic view of national needs and priorities can be formed and enforced (Ribeiro, 2000).

Whereas it is now widely recognised that globalisation can engender both positive and negative effects on the growth process, the focus on positive effects has often overshadowed the negative effects. This has been particularly true in the case of FDI. Consultants, from UNCTAD for example, have in the recent past offered comprehensive packages of information on which policies and strategies developing countries should undertake in order to maximise the stimulation of FDI inflows. However, extensive specific policies and strategies on how to eliminate or at least minimise the negative effects of FDI are often overlooked. Yet, it is this maximisation of the positive effects compounded with the minimisation of the negative effects that eventually lead to sustained development.

This chapter is meant to correct this ‘traditional’ trend, which has occurred in the past either by design or accident. The first section concentrates on policy issues relating to the positive effects of a key factor of globalisation. It focuses on how developing countries can maximise the benefits generated by the positive spillovers of FDI and therefore engender their economic growth rates. In the second section focus shifts to policy issues that relate to how the negative globalisation effects can be contained, so that the economic growth is translated into sustainable development.

Policies for Maximising the Positive Effects of Globalisation

Overview

The foregoing chapters have highlighted the fact that FDI can indeed complement the economic growth enhancing factors of developing countries. In addition, they have presented evidence indicating that the more advanced developing countries are doing comparatively well in translating FDI spillovers into economic growth. In view of this, this chapter concentrates on policy issues that relate to FDI. Its objective is to explore policy issues that a given developing country can pursue including lessons, if any, which it can learn from any country that has been comparatively more successful than it in attracting FDI and in maximising the positive FDI spillovers.

Although the discussion focuses on policy issues pertaining to developing countries in general, in most cases it relates to the less advanced developing countries. It is worthwhile noting that the phrase ‘developing countries’ is in most cases adopted in this chapter not in a true economic definitional sense, but merely to represent countries at a lower level of economic development than the OECD countries, including the least developed countries. In addition, it is instructive to first highlight the current state of affairs of developing countries.

The economic situation of most less advanced developing countries (48 of which are in an economic definition group of ‘least developed countries’) has continued to deteriorate, with virtually all major economic indicators reflecting poor performance. Among the many reasons given for this poor performance, UNCTAD (1994) identified the problem of relying on export of primary commodities, and particularly on agriculture. Additional factors include civil unrest, wars and hence mounting social problems. Poor economic performance causes a vicious circle of problems including poor nutrition, increased mortality, lower school enrolment ratios, and lower productivity. These factors then jointly impact directly on the human development conditions and disrupt the country’s development, which is based on the capacity to work and, hence, to be productive.

Two issues are of critical significance to developing countries namely, political stability and corruption. Developing countries continue to be characterised by armed conflicts both within and between individual countries. For this reason, the largest share of the already small budgets is allocated to defence, leaving the economic growth-enhancing sectors grounded. Then there is the chronic problem of corruption, which is now almost institutionalised. These require immediate reversal.

The literature review demonstrated that FDI facilitates the economic growth process of developing countries most particularly, through its positive spillover effects. Therefore, FDI is a justified channel through which economic growth can be pursued. However, this can only be effective within certain policy bounds. To begin with, developing countries require to make the environment conducive for FDI and this involves a great effort of liberalisation of the FDI regime. Nonetheless, there is need to safeguard against liberalisation that promotes economic devastation or technological stagnation.

The most effective means of improving economic performance and, hence, revitalising economic growth in developing countries is through industrialisation. However, it is almost impossible to undergo industrial growth without a significant rise in the level of literacy and skills, which help to stimulate productivity. Therefore, policies should be directed at mobilising resources particularly human capital and utilising them efficiently. Unfortunately, developing countries under-fund and provide poor quality services in these sectors. For example, they have low budget expenditure ratios in national budgets, and low absolute levels of funding. Hence, adequate finances, competent management and skilled personnel for primary education are essential in the short-run. In the medium- to long-run, however, middle level and higher education, and better health facilities have to be planned for.

Technology was, and still is, transferred through the movement of men and goods in developing countries. It flows across economies in many ways, disembodied and embodied. The rapid changes in information technology, and the abilities needed for technology transfer have become more varied and skill-intensive. The necessary conditions and factors of useful application cannot, however, be transferred from one place to another, implying that the mere transfer of knowledge and know-how does not by itself ensure successful application. Consequently, necessary conditions are required to capture and diffuse technology, otherwise it slips away. These include the need to strengthen the scientific and technological capacities, and to restructure the existing patterns of international scientific and technological relations. For these reasons, there is a necessity to link the world of technical education to the world of practical work.

The infrastructural services in developing countries have remained comparatively poor and inefficient and consequently deterred the inflow of FDI. But, infrastructure plays an instrumental role by facilitating the production and distribution of goods and services. Therefore, governments require to improve their countries’ competitive edges by putting more emphasis on infrastructural development and treating them as necessary conditions for the enhancement of the profitability of business enterprises.

The capacity of developing countries to have sustainable growth also depends on the nature of its trade links with the rest of the world. In addition, sustained economic growth increasingly calls for not only the application of new technology, but also a shift in the production structure from low- to high-technology activities. Unfortunately, most of the developing countries’ export bases remain concentrated in natural resource-based products. Therefore, there is a necessity to diversify the export base through the identification of the most competitive industries and stimulation of Small and Medium Sized Enterprises (SMEs). Furthermore, it is instrumental to build a dynamic comparative advantage, whose short-term focus is to move up the next level of technological complexity. Its long-run strategy would then be to deepen the content of export activity and to build the capacity to sustain such a shift across a range of activities in response to the changing world demand and technologies. An institutional environment conducive to exporting can complement the above strategies.

Developing countries’ weak economic performance and less sound macroeconomic control have hindered large capital inflows. This situation needs to be reversed by implementing macroeconomic policies that lead to the stability of the currencies in real terms and, therefore, promote the competitiveness of production and, hence, confidence of investors.

A regional economic integration scheme among proximate developing countries, if based on an economic rather than a political foundation, can contribute towards introducing peace and political stability, inducing economic stability, creating a larger resource base, and creating a large economic bargaining unit. It can also lead to maintaining lower relative wage rates, facilitating joint project development, creating a complementary manufacturing region and, hence, attracting FDI and consequently stimulating the growth process. The sections that follow discuss these issues in detail.

Political Stability and Corruption Culture

Political stability Developing countries continue to be characterised by armed conflicts both within and between individual countries. For this reason, the largest share of the already small budgets is allocated to defence, leaving the economic growth-enhancing sectors grounded. There may be several reasons for armed conflict between two or more developing countries. However, in many cases, the persons involved have had hidden agendas of externalising internal problems, accruing economic benefits or attaining political power/authority/influence. Externalising internal problems often comes about when the incumbent leader senses public or military unease or instability within the country, significant enough to undermine leadership creditability. The strategy then is to divert attention elsewhere, in this case by entering armed conflict with another country. The other two cases are straightforward in the sense that they relate to generating wealth or raising one’s magnitude of ‘political power’. Angola, Namibia, Rwanda, Uganda and Zimbabwe’s involvement in Congo can for instance to some extent be linked to the mineral wealth in the disputed area. Nonetheless, it also has a blend of the other two factors. Similarly, Namibia, Sudan and Sierra Leone’s internal conflicts are linked to mineral wealth. Likewise, the economic reason can be extended to Liberia’s involvement with one of the conflicting parties in Sierra Leone. However, some conflicts including those experienced by the Philippines, Indonesia, China, Israel, Palestine, Eritrea/Ethiopia, Rwanda and Burundi relate more to the desire by the ethnic groups to establish their own sovereign states, or rather self-governance. Therefore, they are often a ‘perpetuation’ of historical conflicts. The reason for most of the internal conflicts can be summarised into ‘selfish’ interests. Although, the leaders of the warring factions often claim they take-up arms in the national interest, this is not the case. What they fight for is power, and personal power at that. The simple solution for developing countries is to resolve conflicts at round table discussions, and not through armed confrontations. Moreover, they have to do so by themselves without the expectation of much assistance from the developed countries, which have their own strategic agendas. For instance, the West argues that Africans should solve their problems. No wonder then that they for example stood aside and watched the genocide committed in Cambodia and Rwanda, and are merely watching the other conflicts in Africa. In contrast, the response to the conflict in the former Yugoslavia and in the Middle East (Israel/Palestine and Iraq/Kuwait), particularly on the side of the US was not only swift, but its presence there is now perpetual. Of course one could likewise argue that the Yugoslav problem was a European issue, while the Middle East problem is for the Arabs to sort out. Therefore, following their ‘norm’ of argument, there is no justification for the US to intervene. Obviously, the fundamental factor is that while Eastern Europe and the Middle East are of strategic importance to the West, particularly to the US, Africa is of little significance. Worse still, when the dictatorial regimes they support collapse, they are very fast to offer safe custody to the ousted leaders. Such was the case when the West kept friendly relations with Zaire’s heavy-handed ruler Mobutu Sese Seko, and eventually offered him safe passage to Belgium after the collapse of his regime. Developing country governments must bear in mind the fact that on top of the other negative effects it causes on their economies, political instability erodes the foreign investors’ confidence in the host country, and therefore deters FDI.

The developed countries also have a role to play here since in most cases they act as supply sources (directly or indirectly) of the destructive heavy artillery used in most of the aforementioned conflicts. In fact, one may wonder whether some developed countries do not indeed pursue deliberate strategies of destabilising certain developing countries. Alternatively, this comes as a by-product of the developed countries’ desire to promote their own interest (i.e. international trade) irrespective of the consequences on the developing countries. This is exemplifies by the controversial British arms sells to Iraq, China, Indonesia and Sierra Leon. Moreover, the so-called commissions of enquiry have acted as convenient channels to silence the critics. Likewise, one can confidently argue that the current problems in East Timor were in effect engineered by the British when they advised Indonesia to colonise those Islands a few decades ago, allegedly to avoid Russia ‘communising’ them.

Corruption culture The irony in developing countries is that when a typical village person (‘villager’) is found guilty of stealing for instance chicken worth $1 to $5, (s)he may face mob justice death. By contrast, high-ranking civil servants and politicians get away with stealing millions of dollars from their respective government departments. Moreover, should they be found out, then the word changes from ‘stealing’ to ’embezzling’. The political fall out in early-2001 in Peru, Indonesia and the Philippines, and the bitterness expressed by the citizens of other developing countries exemplifies this. Despite this, events in developing countries continue to amaze onlookers. For example, in Uganda, one person alleged to have embezzled for several years was instead given a promotion amidst a public outcry to investigate how he amassed his wealth in such a short time. In addition, at the time of writing (2001), there is an unnecessarily expensive commission of enquiry in the purchase of military helicopters. It has emerged that the second hand helicopters were bought for close to $300,000 but sold to the government for over $9 million! The two most immediate questions that arise here are (i) why should government pass through a third party in order to purchase (classified) helicopters? (ii) doesn’t any one in the ministry of defence (including military officers and even the president himself) know roughly how much a military helicopter should cost? A disgruntled Ugandan resident in Canada writes:

‘The Ssebutinde Report on corruption in police has among its recommendations that, ‘all officers named must be investigated, and explanations of how they amassed their wealth in excess of their income, made.’ I believe that is the single most important recommendation of the report. So important that it should be applied across the board, not only on police officers. A universal audit of wealth for all prominent Ugandans is needed to separate ill-gotten from hard-earned wealth. As a starting point, we could use 1986. Let President Museveni, Maj. Gen. Salim Saleh, cabinet ministers, senior army officers (especially those who have ‘served’ in the Democratic Republic of the Congo), officers of Uganda Revenue Authority, Airport Immigration Officers, among others, all account for how they earned their wealth. In particular, they should account for the part in excess of legitimate income, as well as the difference between what it was in 1986 to the present. I am in no way defending corrupt police officers; I simply feel the same yard stick applied against them should be used on all others of equal merit’…(name withheld).

Developing countries’ leaders should stop playing the hypocrite and lead by example. Persecute the thieves, and make sure those found guilty repay what they have stolen. By doing so, not only will the money end-up in the  good causes but, corruption in the FDI enhancing institutions will also gradually diminish.

Liberalisation

Liberalisation of policy consists of many factors. They include ownership policies, taxes/subsidies (including tariffs and transfer payments), convertibility of currency (including limits on dividends and royalties and fees), price controls, and performance requirements (such as export, local content and foreign exchange balancing abilities). Unfortunately, it is beyond the scope of this book to unbundle all these policies and assess their individual impacts on FDI flows to individual developing countries. Consequently, liberalisation of policy is analysed as a bundle of all these factors. General policy considerations are, therefore, presented. FDI regime policy liberalisation should cover three major areas, namely entry requirements, operational conditions, and incentives and legal framework.

It is apparent that positive improvement in policies, regulations and administrative practices as seen by foreign investors is a move towards improving the host country’s investment climate. Since factors relating to FDI keep changing with time, it follows that the general investment climate needs constant and consistent improvement for better FDI performance. It is evident from the review that a number of developing countries have come to realise the development benefits of FDI and have responded by liberalising their policies through the institution of new investment laws particularly since the end of the 1980s and the beginning of the 1990s. For example, most developing countries have made a move to improve the investment climate by permitting free transfer of profits and repatriation of capital, providing other incentives to attract FDI, and setting up ‘one-stop’ investment centres. In addition, the reduction of obstacles to FDI inflows is being complemented, at the national level by the strengthening of standards of treatment of foreign affiliates. These may include legal protection, national treatment, fair and equitable treatment and most-favoured-nation treatment. Many of the restrictions that remain are supposed to safeguard the host country from FDI’s potential negative influences. However, there are still some problems. For instance, the FDI trends presented in Chapter 3 demonstrate that FDI particularly in the less advanced developing countries has not responded to liberalisation in the manner their governments had anticipated. Perhaps their expectations have been too high and have been based on a myopic assumption that there is no competition from elsewhere, forgetting that because the less advanced developing countries are not the most favourable locations for FDI, they have to compete with other host countries, including OECD countries, in attracting FDI. In particular, the current image of most developing countries of Africa is associated with civil unrest, war, poverty, diseases and mounting social problems. Subsequently, they are not even listed for consideration by TNCs, let alone make it to the short list when it comes to locational decisions for FDI, despite offering a number of investment incentives. This has raised the question of what additional measures are required to remedy the situation.

Entry requirements Of the various activities of one-stop shops, or other organisations designed to deal with foreign investors, the screening function generally receives the most attention. Screening may be used to decide which foreign investments should be allowed to enter the country. Alternatively, for countries that offer incentives, screening may be used to decide which investment projects qualify for these incentives. A government may, of course, elect not to carry out screening. Instead, it can allow all (or no) foreign investors to enter, or it can grant incentives to all (or no) investors. The rationale for screening is to protect the country from investors who might pursue projects that would be injurious to the economy or from wasting incentives on projects that are not the most beneficial or the most needed (Ribeiro, 2000).

To the governments of most developing countries, the case for screening seems so compelling that few governments are completely open to foreign investment. Most have some mechanism to admit foreign investors selectively or to exercise some choice in allocating incentives. Countries vary widely, however, in the stringency of their entry regulations. Most have general laws or regulations that prohibit foreign investment in certain industries, such as the distributive trade, local transportation, and utilities. Others prohibit substantial foreign ownership of firms or industries that are critical to the nation’s defence. Some countries have only general rules in place, others have an active policy of screening each investment (although the applicable criteria governing the decisions that are made may not be at all transparent) (Ribeiro, 2000).

The project-by-project approach to screening seems, on the surface, to be more appealing to a country, given that reliance on general laws might allow the entry of damaging investments. The strongest case for the project-by-project approach is made by countries with tariff and other protection against competition. But even though their governments have relied on screening to reject harmful projects, the skimpy data that exist (largely from one study and considerable casual evidence) suggest that such screening has not been very effective. Indeed, in some cases, it seems that harmful projects have about the same chance of passing through the screen as beneficial ones (Ribeiro, 2000).

Most developing countries have already established ‘one-stop shops’ which facilitate the processing and approval of investment proposals. Studies by UNCTAD (1995) have, however, revealed that these agencies are not only costly, but have also instead become ‘additional’ stop points, on a route that still involves a range of government departments often with different perceptions of a given project. Moreover, some of them go beyond the initial objectives, such as screening for compliance with legal requirements or incentive qualification and screening potential investments for financial viability. This is a major mistake. FDI is by definition financed from abroad, implying that foreign firms that go to developing countries take investment capital along with them. Besides having their own capital, it is of no administrative concern to such agencies whether the potential investments are financially viable since it is the firms themselves that suffer losses should the investments not be financially viable.

Investors need to take rapid investment decisions while the money is still available since in most cases there is competition elsewhere from alternative equally fruitful investment ventures. These agencies should, therefore, focus on improving the speed of the investment approval process rather than concentrating on screening and, hence, slowing it. It may prove more productive if they set a target time within which investment approvals should be made, periodically evaluate it by comparing it with actual performance times, and consequently revise/reset it to achieve an optimum performance. The efficiency of processing investment approvals, if good, will earn them credit from the investors and probably even draw in more investment since it will be judged comparatively with the performance of the investment agencies elsewhere. Thus, the efficiency and efficacy of the administrative system that impinges on the entry and operation of TNCs can influence the inflows of FDI. Alternatively, screening and authorisation requirements can be replaced by simple registration on the basis of minimum and generally-applicable requirements. However, for purposes of minimising the negative effects of FDI, there may be a case for screening to continue in specific strategic industries, especially in sensitive activities, or where FDI entry takes place through mergers and acquisitions.

The other problem results from the ‘political’ appointments of ‘loyal partisans’ to the top positions in such agencies, who are non-representative of the ministries that they are meant to represent and who are incompetent in handling the technical matters that may arise. This results in all sorts of problems including inefficiency and corruption. Amalgamating party politics with any process such as the FDI process, that acts, as an engine of economic growth can prove counter productive. Hence, the need to make appointments on merit and strictly avoid this kind of cronyism.

Operational conditions Liberalisation is considered to be effective when perceived as positive from the TNCs’ point of view. If developing countries want to benefit from the spillover effects of FDI, then they should not only set strategies and conditions for attracting as much of it as possible, but also find the best ways of capturing the spillover effects. Introducing and imposing the at times restrictive performance requirements such as the requirement to create and maintain a certain number and type of jobs, to achieve export targets, or to meet a given local content level can prove counter productive. That is, liberalisation that embraces all policy categories can be countered by tightening performance requirements. Developing countries can attain these same objectives through human skills development, the promotion of SMEs, and export diversification. Nonetheless, some countries are relaxing some operational requirements including, restrictions on the entry of professional and managerial personnel subject to emigration law requirements.

Foreign firms want to maximise their profits and this can partly be achieved by keeping production costs, particularly wages, as low as possible. For a given foreign firm, employees from its parent or other foreign country cost it dearly due to the remuneration and additional incentives they demand. As exemplified by Singapore, under normal circumstances, if the host country has well qualified managerial and technical personnel, then the foreign firms do not hesitate to employ them since they are less expensive. This arises from the differentials in wage rates and the currency exchange rates between the host developing countries and the major investing countries. Similarly, due to transport and time related costs, if there exists local firms that can produce the right quality production inputs including components and parts needed for the final assembly process, or any other inputs required for the production process, then the investors prefer to procure them locally instead of importing them from parent or third countries. Likewise, in the presence of small markets, that are characteristic of developing countries, which are not large enough to provide opportunity for scale economies, the investors automatically target the external market and, hence, produce for export in order to reap the benefits of scale economies. Therefore, there is indeed no necessity to put emphasis on these restrictive performance policies. However, it does no harm if developing countries propose a periodic package of rewards to those firms that attain an outstanding performance in exports, local employment, and local content so that other firms which are satisfied with the way they operate without such rewards continue to do so. Alternatively, they can introduce competitions in which interested firms can register and participate.

In this context, it is more important for developing countries to create other conditions that are capable of increasing employment opportunities, exports and local content. Furthermore, they should provide operational conditions that make production competitive and profitable in the global market place and to allow the process of linkage to develop naturally. These conditions are discussed in the later sections of this chapter.

Each country has industries, which it regards as strategic due to various sensitive reasons including the industries’ contribution to GDP. However, for developing countries, such industries are few. For this reason, it is more logical for developing countries to provide short negative lists in which foreign investors cannot participate, instead of long positive lists where private investment is allowed. Moreover, such lists should be with respect to government and, hence, public investment and not give local private investment special status. For instance, the negative list may contain properly defined highly protected industries where the government intends to hold a 100 per cent stake. In this respect, it is more appropriate to introduce a national status treatment (discussed under incentives) for foreign investors. Governments can then help local investors (particularly the SMEs) in other ways such as those discussed under diversification.

Some developing countries have still got deregulation wrong by maintaining barriers allegedly in the ‘national interest’ in areas which are key determinants of FDI inflows. For instance, most developing countries still maintain the operation of departments such as water and sewerage, electricity power generation and supply, and telecommunication services as public utilities often under the names of parastatals. These parastatals, besides being a source of corruption within the investment machinery, are marred with inefficiency and, hence, very little profitability, if any. Moreover, instead of having a progressive improvement that can lead to the attraction of FDI, they are associated with progressive deterioration and consequently form no base in the determination of FDI inflows. These utilities should be run efficiently so that they generate spillover effects of attracting FDI. At the very least, governments should allow joint ventures either between foreign investors and local enterprises; foreign investors and governments; or foreign investors, local investors and governments. Alternatively, they may as well consider management contracts or even unrestricted privatisation.

Incentives and legal framework An appreciation of the benefits that FDI can bring, have resulted in most countries actively seeking FDI, often with the use of incentives. As competition for FDI intensifies, potential host governments find it increasingly difficult to offer less favourable conditions for foreign investment than those offered by competing nations. Investment incentives can be classified into:

  • Financial incentives, involving the provision of funds directly to the foreign investor by the host government, for example, in the form of investment grants and subsidised credits.

  • Fiscal incentives, designed to reduce the overall tax burden for a foreign investor. To this category belong such items as tax holidays, and exemptions from import duties on raw materials, intermediate inputs and capital goods.

  • Indirect incentives, designed to enhance the profitability of FDI in various indirect ways. For example, the government may provide land and designated infrastructure at less-than-commercial prices. Or it may grant the foreign firm a privileged market position, in the form of preferential access to government contracts, a monopoly position, a closing of the market for further entry, protection from import competition or special regulatory treatment (Ribeiro, 2000).

Nonetheless, one can pose the following question. What are the deeper reasons responsible for investment incentives? The arguments for this can be broadly grouped into four categories (adopted from Ribeiro, 2000):

  • Distributional considerations Investment incentives transfer part of the value of FDI-related spillovers from the host countries to TNCs. The more intense the competition among potential hosts, the greater is the proportion of potential gains, which are transferred to the TNCs. If the total stock of FDI available for investment in a region is largely insensitive to the amount of incentives being offered, host countries may find themselves providing incentives that simply neutralise other countries’ incentives, without actually increasing the amount of FDI they
    obtain. Such incentives are nothing more than a transfer of income from these countries to the investing firms.

  • Knowledge considerations Arguments in favour of incentives rely heavily on the assumption that governments have detailed knowledge of the value/size of the positive externalities associated with each FDI project. In practice, it would be an almost impossible task to calculate these effects with any accuracy, even with the aid of well-trained specialists. In reality, getting drawn into competitive bidding for an FDI project is like sending government officials to an auction to bid on an item whose actual value to the country is largely a mystery. As the winning host country generally is the one with the most (over-) optimistic assessment of the project’s value to the country, incentive competition can give rise to over-bidding, the so-called ‘winner’s curse’. If a country offers $200 million in incentives to obtain an FDI project that brings $150 million in total benefits, the country as a whole is $50 million worse off with the FDI.

  • Political economy considerations Lack of knowledge is not the only reason that can lead a government to offer an amount of incentives that exceeds the benefits of the FDI. The benefits from a particular FDI project are likely to accrue to certain groups within the economy (for example, to a particular region or to workers fortunate enough to get jobs with the affiliate), while the costs of the investment incentives are likely to be spread more equally across the society. This different incidence of benefits and costs among groups in the host country opens the door for politically influential special interest groups to lobby the government to provide investment incentives which primarily benefit them, but which are largely paid for by other groups. The previously mentioned knowledge limitations simply open this door even wider.

  • Introducing new distortions The discussion has assumed that the cost to a host country of providing a million dollars worth of incentives is just a million dollars. This is overly optimistic. Financial incentives must be financed, and taxes create their own inefficiencies. Fiscal incentives are no better, and non-pecuniary (indirect) incentives can be even worse. For example, granting a monopoly position to a foreign firm allows the host government to escape direct budgetary outlays by shifting the cost onto consumers in the form of higher than necessary prices. Developing countries, in particular, may for budgetary or balance-of-payment reasons feel compelled to utilise highly distorting incentives, such as monopoly rights and guarantees against import competition to foreign investment
    projects. In contrast, developed countries with ‘deeper pockets’ may offer straightforward financial grants with less distorting effects. This asymmetry puts developing countries at an extra disadvantage when competing for FDI, beyond a simple lack of deep pockets. Once the realities of using investment incentives to compete for FDI are taken into account, one may be tempted to conclude that the world economy (and the vast majority of individual countries) would be better off with a multilateral agreement that included limitations on the use of investment incentives. Such incentives are no different from any other kind of subsidy program and, as with most other kinds of subsidies, developed countries (and in this case the largest developing countries) can out-spend the vast majority of other countries. Under very stringent conditions, investment incentives can correct for market imperfections. But the reality is that the necessary knowledge is missing, the programs are very vulnerable to political capture by special interest groups, and there is considerable scope not only for introducing new distortions, but also for redistributing income in a regressive way. The latter effect is a particular concern since developing countries as a group are net recipients of FDI. A country’s attractiveness to FDI is quite closely linked to the degree of transparency of their policies. The more transparent are the policies, the more attractive the country concerned is to foreign investors (Ribeiro, 2000).

Most developing countries have attempted to provide investment codes that mainly comprise a tax related comprehensive investment-incentive system for private investment. Such schemes are, however, counter productive especially when there is conflict between different government departments, and therefore end up as a form of ‘giving with one hand and taking with the other’. For example, a tax concession may be provided in an incentive code (prepared by the investment agency) in order to offset the negative effect of unusually high tax rates (put forward by the Finance Ministry/Treasury Department) that would escalate production costs.

In view of this, giving foreign firms national status treatment may act as a better incentive for foreign investors than tax related incentives. A development oriented government endeavours to promote productivity, industrialisation and international trade by providing any possible assistance to its local industry and thus its local investors. Therefore, its tax rates and any other requirements ought to be fair even from the point of view of the investors. That is, such a government does not penalise the goose that lays the golden egg. If the foreign investors are given the same treatment, then it amounts to regarding them as geese that lay golden eggs and subjecting them to similar conditions. For instance, developing country governments can introduce similar investment codes governing both local and foreign private investment. This treatment may also act as a control measure within the investment mechanism since no party can blame government for favouring the other. It may then bring about more collaboration between the local and foreign investors, create linkages and, hence, promote the spillover process in a more natural way. UNCTAD (1999) reports that during their liberalisation processes, many host countries have adopted FDI-specific laws that spell out the main features of their FDI regimes. As the global economic environment changes, these laws have been adopted to reflect policy changes. For this reason, there has been a move towards treating foreign investors in a similar manner to domestic companies.

Nonetheless, there may be situations that provide a strong case for giving incentives. In this case, it is essential that the host country first carefully weighs the benefits and costs for offering such incentives before choosing the most appropriate incentives. For instance, whereas financial incentives are given up-front irrespective of whether the investment project will be fully realised, fiscal incentives only come into play once the project is successful. The rule of the thumb is to safe guard against engaging a financial incentive-competition race towards the sky, a fiscal incentive-competition towards zero or a policy-competition race towards the bottom (UNCTAD, 1999). Moreover, incentives may play a significant role in luring specific investments if they are target-oriented. For example, a strategy targeting specific technology could offer foreign investment incentives to projects whose products or processes are new to the country. Alternatively, they can offer incentives to existing investors to move into more complex technologies and where appropriate, to increase or upgrade the technological R&D undertaken locally. In relation to incentives, UNCTAD (1999) has suggested the development of industrial parks (as public or private utilities) with high quality infrastructure to attract high technology investors. These parks can either be general or for specific technologies as was the case of India’s Software Technology Park reported in Chapter 5.

The progress of attracting FDI particularly into the less advanced developing countries has been slow and may continue to be slow. Hence, the need for a vigorous promotion activity. Foreign investors can only learn about potential investment opportunities and the associated incentives through promotion activities. In addition, promotion helps improve the image of the potential host country as a favourable location for FDI projects. Furthermore, it puts the country on the map and hence, in a position to be short-listed. Therefore, increased marketing strategies aimed at attracting FDI in potential principle home countries and in other centres of investment financing has to be taken as an ongoing strategy. Investment promotion is defined to include certain marketing activities through which governments try to attract foreign direct investors. Promotion excludes the granting of incentives to foreign investors, the screening of foreign investment, and negotiation with foreign investors, even though many of the organisations responsible for conducting investment promotion activities may also conduct these other activities. Investment promotion includes the following activities: advertising, direct mailing, investment seminars, investment missions, participation in trade shows and exhibitions, distribution of literature, one-to-one direct marketing efforts, preparation of itineraries for visits of prospective investors, matching prospective investors with local partners, acquiring permits and approvals from various government departments, preparing project proposals, conducting feasibility studies, and providing services to the investor after projects have become operational.

Promotion involves the provision of precise information on economic data, industry profile, lists and descriptions of potential joint venture partners, privatisation programmes, suppliers, legal framework, investment incentives, and administrative procedures providing information to potential investors. It is also responsible for creating an attractive image of the country as a place to invest, and providing services to prospective investors. Although attracting foreign investment requires efforts in many areas, promotion techniques provide an important mechanism for communicating all these efforts to potential investors.

Promotion efforts are the result of competition by governments in the effort to attract FDI. This competition is not entirely new. What is new is its aggressiveness and intensity. Competition for FDI has also increased because of the entry of new players. Developing countries that traditionally, because of their large domestic markets or significant reserves of natural resources, did not think it necessary to compete for foreign investment have begun to compete seriously for export-oriented investment. This phenomenon appears to be the result of, among other things, changes in the international economic environment that have characterised the period of the late-1970s and the 1980s. During this period, raw material prices seemed more unstable than usual. At the same time, import-substituting policies seemed to be running out of steam. As a result, an increasing number of developing countries eschewed resource-driven and import-oriented growth strategies in favour of growth strategies that emphasised the export of manufactured goods. Further, during the same period, industrial countries became even more active as they began to court not only firms from other industrial countries but also firms from developing countries that were beginning to spawn their own multinational enterprises (Ribeiro, 2000).

The rationale for public programs to promote FDI in developing countries is built on the need to overcome the effects of the market imperfections on investment decisions. For example, it is thought that information about investment opportunities in unfamiliar environments is either unavailable to outside investors, or may be too difficult to find under normal circumstances. It is also sometimes thought that the factors constraining FDI are particularly acute for smaller firms in industrial countries because they have less capacity than larger firms to search for information. Smaller firms also may have less experience with international business and thus may be more prone to overestimate risk in foreign environments. The need for investment promotion is bolstered by what is known about investment decision processes. Studies of foreign investment decisions show that even the largest firms do not systematically search the environment for investment opportunities. Rather, such a search is often a response to problems from the external environment. While firms follow strategies that can include foreign involvement, these strategies are usually shaped within a narrow range of options. As a result, some foreign investors tend to exhibit follow-the-leader behaviour. That is, they respond to the actions of competitors rather than acting as independent decision-makers searching the whole environment for the best investment opportunities. In these circumstances, promotional activities may have an impact on a firm’s decisions.

With trade liberalisation becoming increasingly popular and new attitudes toward foreign investment taking hold across much of the world, the approaches governments use to attract, screen, service, and monitor foreign investment are undergoing change. Thus experience is necessary and it shows that investment promotion requires functional expertise in certain key areas. National circumstances can guide the degree of emphasis these functions should receive relative to one another and how that emphasis might change over time. To one degree or another, however, each of the key functions is present when investment promotion is conducted according to international best-practice standards. The key functions of investment promotion include the following:

  • Image-building It is the function of creating the perception of a country as an attractive site for international investment. Activities commonly associated with image building include focused advertising, public relations events, and the generation of favourable news stories by cultivating journalists.

  • Information A key function of any investment promotion agency is to gather and distribute the information that prospective investors need to evaluate the attractiveness of a country as an investment site. Potential investors will require accurate answers to questions across a wide range of topics, including current macro-economic data, domestic laws and regulations pertaining to investing and conducting business, the local costs of land, labour, energy and other factors of production, and information pertaining to specific business sectors.

  • Investor facilitation It refers to the range of services provided in a host country which can assist an investor in analysing investment decisions, establishing a business, and maintaining it in good standing.

  • Policy feedback Investment promotion generates market-based information on a country’s strengths and weaknesses relative to other investment locations. Governments can use this information to adjust, maintain or strengthen competitiveness.

  • Investment generation It entails targeting specific companies and persuading them to choose your country as an investment site (Ribeiro, 2000).

A promotion agency that engages in investment generation may need to employ senior and more experienced staff members. In most cases, the necessary level of expertise already exist in the industrial community and in other parts of government. A collaboration with all parties could be used by the investment promotion agency to draw on their inputs. In other cases, part-time consultants rather than full-time staff can most effectively provide technical expertise. A good strategy provides a frame of reference and a program of work for the investment promotion agency. In developing an investment promotion strategy, it is necessary to determine the short- and long-term objectives of investment promotion and to find the appropriate balance between investment promotion activities, taking into account important factors such as the investment environment, the comparative advantages of the country, and global developments and recognising that these factors change over time. The development of a strategy also entails understanding what to promote, where to promote, and how to tailor and time the message to achieve maximum impact. Effective promotion should go beyond simply ‘marketing a country’, into co-ordinating the supply of a country’s immobile assets with the specific needs of targeted investors. This addresses potential failures in markets and institutions (for skills, technical services or infrastructure) in relation to the specific needs of new activities targeted via FDI.

A developing country may not be able to meet, without special effort, such needs, particularly in activities with advanced skill and technology requirements. The attraction of FDI into such industries can be greatly helped if a host government discovers the needs of TNCs and takes steps to cater them. The information and skill needs of such co-ordination and targeting exceed those of investment promotion per se, requiring investment promotion agencies to have detailed knowledge of the technologies involved (skill, logistical, infra-structural, supply and institutional needs), as well as of the strategies of the relevant TNCs. This way, the first steps could be the following:

  • A survey of existing and potential investors to get their views on the FDI environment in a given country and the comparative advantages of that country.

  • Development of a recommended strategic mix of investment promotion activities, taking into account the quality of the business environment, the country’s overall development objectives (if articulated, factor endowments, and investors’ perceptions).

  • Identification of the key sectors that may be candidates for targeted promotion.

  • Making clear distinction needs in promotion between different categories of FDI. For instance between location-specific investment, which is restricted to a particular location (e.g. to get access to natural resources or the acquisition of a specific company) and mobile investment (in establishing plants or expansion projects), which can locate in any one of numerous countries.

  • Recognising alongside unprecedented growth in the volume of FDI, the changing pattern of FDI driven by globalisation and the impact of technology, e.g. new sectors.

  • Establishing meaningful relationships with identified target sectors and companies and providing strategic solutions to such companies.

Closely linked to incentives and promotion is the idea of targeting. Investment promotion is like selling a product. Product marketing entails targeting specific market segments. Likewise, investment-attraction programmes should target specific types of investors in accordance to the factor endowments the host country possesses. This initially requires some research to identify the best candidates. The first step is to analyse the trends of investment in either the host country or in a country with identical locational advantages. This gives a clue to the fastest growing type of investment vis-à-vis the host country’s factor endowments. The host country can then utilise the locational advantages it possesses as strategic tools for the promotion of that specific type of investment. In this respect, a regional grouping may be good for targeting complementary intra-industry activity. For instance, the Toyota automobile networks in Southeast Asia involve the production of petrol engines and stamped parts in Indonesia; diesel engines and electrical equipment in the Philippines; transmission parts in Thailand; and steering parts and electrical equipment in Malaysia, while co-ordination is undertaken in Singapore. Embassies, high profile magazines, web sites and international organisations including UNCTAD can be used to provide the information required by potential investors.

As discussed earlier, most developing countries only started the liberalisation process in the late-1980s and early-1990s. Their legal infrastructure is, therefore, in its ‘infant’ stage. Such an infrastructure consists of policies involving issues such as private ownership and transfer of property, technology and industry property protection, assessment and payment of taxes, and foreign exchange dealings. The more advanced economies have already passed through several stages of this legislation. The most practical method for a given developing country is to appoint a team of experts in this area who can analyse what has been done in countries that have been more successful in attracting FDI inflows. It can then take on board (with some adjustments if need be) only what is good and relevant to the host country’s investment environment. Otherwise, developing countries (most particularly the less developed ones) will continue to be disadvantaged in this area particularly during the bargaining process with foreign investors. For example, when it comes to the question of the transfer of technology, ignorance and often lack of bargaining power has often led to the holders of the technology to include many restrictive clauses, which inhibit the full benefits accruing to the recipient country. Abdel Rahman (1979) has rightly suggested that such negotiations should be held by a group of competent people in order to import the type of technology that is capable of strengthening the local technological base in a country. Such technology should be in line with the technological capability of the country that arises from the possession of assets such as trained personnel at all levels, especially technicians, research equipment and institutes, libraries and reference facilities, scientific and technological publications and discussion forums, pilot and semi-industrial plants, patents and technology transfer rules and regulations, design and consulting services, and appropriate financing and management capacities (Abdel Rahman, 1979). It may also be worthwhile if developing countries maximise the participation of local consultants in engineering contracts to develop basic process capabilities. However, a balance of legal know-how is essential for purposes of avoiding potential future conflicts. Thus, it is important that host developing countries get proper legal advice particularly during negotiations, in which they are often legally disadvantaged. Such advice can be sought from international organisations such as the World Bank, or even from the investing TNCs themselves. Developing countries should revise and introduce more transparent legislation from time to time, avoiding conflict with existing laws as much as possible. UNCTAD (1999) argues that the key to attracting FDI is not only to design appropriate regulatory framework, but also to have timely reviews and constant monitoring of the results, and the ability to change policies and adapt them to new circumstances. One way is through investment policy reviews undertaken by UNCTAD. Moreover, consultation with the relevant stakeholders is crucial before any changes are implemented. No doubt, this requires a strong national commitment, and a strong administrative infrastructure and skill base, able to select technologies, target and bargain with TNCs, and handle incentives efficiently.

Investment agencies Of course, the discussion of screening, promotion, incentives and legal framework would be incomplete without examining some issues pertaining to the organisations responsible for the formulation and implementation of the policies.

A host governments’ side of relations with foreign direct investors in general consists of a the following steps (adopted from Ribeiro, 2000).

  • Attracting FDI through a marketing mix of product, promotional, and pricing strategies.

  • Screening foreign investment proposals to identify those that are desirable and deserve support.

  • Monitoring foreign investment to ensure that the investment conforms to expectations.

  • Intervening in FDI if the operations can be made more favourable.

Therefore the following four important features need consideration when formulating agencies:

  • The joint involvement of the private sector where possible (e.g. on promoting missions, in meeting new investors and on agency boards where such exist, etc.) seen as beneficial.

  • The creation of the one-stop-shop agency insofar as possible.

  • The need to have focused strategies in investment promotion aimed at relevant target sectors and companies with good prospects for high-value added products.

  • Ensuring that agency staff have the necessary business and sectoral skills to be competent discussion partners with potential investors.

Indeed, one of the most widely recommended and widely instituted changes has been the move to some kind of ‘one-stop shop’ approach to the management of a government’s relations with foreign investors. The one-stop shop takes various forms in practice. The expectation that typically lies behind such a title, however, is that a single organisation in a country is to have responsibility for conducting or co-ordinating various matters related to the entry or supervision of foreign investment. Thus, a would-be foreign investor would have to deal only with this one organisation to obtain all the permits needed to invest in the country. One organisation with responsibility for all investment matters could achieve several goals. In its evaluation of proposed investments, such an organisation could weigh rationally all the advantages and disadvantages of a proposed investment because of its broad perspective and its ability to assemble expertise on a variety of matters in one place. In addition, it could capture the learning benefits to be derived from frequent negotiations with foreign investors. Finally, and usually most important, such an organisation could reach decisions relatively quickly and predictably because only one entity would be involved. Speed and predictability of decisions are thought to be important elements in a program designed to encourage foreign investment. The advantages of one-stop organisations are also believed to extend to other government activities during an investment’s life, such as promoting the investment, providing services to investors, and monitoring investment projects.

Nonetheless, it has to be recognised that one-stop organisations are not without downsides. For instance, they may lack the industry expertise that an industry-specific agency could provide, as well as the functional expertise of a line ministry. The national oil-company, for example, is likely to know the oil industry better than any one-stop investment authority. Similarly, a country’s department of revenue is the agency most likely to be conversant with the intricacies of corporate taxation. Nevertheless, for the management of most categories of foreign investment in a country, the advantages of these one-stop organisations seem to outweigh any disadvantages.

The first step for most countries that have made the decision to open their borders to foreign investment is to set up an agency to attract potential investors. And while significant intellectual resources have been dedicated to understanding management and decision making systems in multinational enterprises, there is only diffuse knowledge of the activities promotion agencies perform and how they should be organised. There are three basic types of organisations: a government agency dependent on a Ministry, an independent government agency, or a private agency.

Most of the times, the central issue that host governments face in carrying out their investment promotion efforts relates to the nature of the institutional framework that will execute these efforts. In principle, there are two ways to structure an investment promotion agency. The first option is for a government to carry out investment promotion itself (directly as a part of its administrative structure), but this approach has the disadvantage that the government organisation may be unable to acquire the skills required to manage the activity properly. The required skills may reside in the private sector and attracting them to the public sector may prove difficult, especially with the salary constraints typical of the public sector. Another option is the creation of a ‘quasi-governmental’ organisation. This involves an independent agency, funded (in total or to a large degree) by the government but separated from the government ministries and public financial institutions. This separation would create the image of an independent organisation that is dedicated to serving the interests of investors. An alternative approach is for the government to delegate the management of investment promotion activities to the private sector. This approach often has the disadvantage that the private sector may not execute effectively those related activities, which are traditionally government responsibilities.

Regardless of the approach that is chosen, there will be management issues with respect to how the inherent disadvantages of either approach are to be overcome. In an attempt to overcome these disadvantages, governments may search for the organisational approaches that combine most effectively, the skills and resources of both the public and private sector. The effort in the development/strengthening of an institution capable of carrying out an investment promotion strategy should then focus on two aspects namely, the institutional framework of the agency, and its internal structure and capacity. An ‘ideal’ investment agency will adhere to the following critical issues:

  • Act like top-class commercial service businesses, with a highly professional and efficient approach.

  • Act as development agency by seeking not just to undertake promotion but to improve the wider environment for investors while liasing and instigating change with relevant authorities, and by displaying innovation in seeking investment in new emerging sectors.

  • Have the mandate and resources to undertake work.

  • Be central to national industry policy.

  • Recognise a clear ‘best practice’ agency model. Key elements of this ‘best practice’ model include having a clear service management system which spells out the service they offer, target segment, and delivery method; uses customised marketing to target clients; pursues FDI in all elements of the value chain; roots FDI through linkage with local suppliers; achieves a high volume of repeat investment; and is focused also on opportunities in new sectors such as e-commerce, software, biotechnology and multimedia.

It may be difficult to staff a promotion agency with appropriate people. Nonetheless, the agency must successfully interact with government, if it is to be of service to investors when they are implementing their projects and if it is to influence policy and the bureaucracy. On the other hand, it must have people who are oriented toward sales. These kinds of marketing people are rare in the public sector and they earn high salaries in the private sector.

Infrastructure

Excellent telecommunication, transport and other facilities such as water, gas, and electricity services which facilitate the production and distribution process of goods and services need to run efficiently in order to facilitate the competitiveness of and for FDI in the global economy. Unfortunately for developing countries, these facilities are often included in the negative list and are, therefore, run as public monopolies. Unsurprisingly, they are inefficient and unproductive, not to mention the corruption riddled within them. To make it even more ironical, the political leaders know of the existence of corruption but take no major steps to combat it! Such is the case in Uganda according to the following extract:

‘…Museveni said the Asians had continued to bribe government officials thereby entrenching a culture of corruption. ‘You’re the ones letting us down in the battle against corruption because you’re the ones who pay the bribes.’ He said the Uganda Investment Authority, Uganda Electricity Board, Uganda Posts and Telecommunication, Immigration and Land Offices were rackets of thieves who are crafty enough to hide the deals from him..’ (Bende-Nabende, 1995).

Infrastructure is an economic activity, which requires to be competitive and, hence, to operate efficiently. Since the local private sector often lacks the financial, technical and management capabilities for operating such facilities, they ought to be open to foreign companies either through full privatisation, foreign/government joint ventures, foreign/local/government joint ventures or through other schemes such as management contracts.

Of course, there may be a danger of turning a public monopoly into a private monopoly. However, such a danger may be overcome by creating conditions for competitive entry and regulations that hinder the creation of market imperfections. For instance, these utilities can be privatised in such a way that they operate on a divisional level basis, such as regions or districts depending on the most convenient and economical administrative unit at hand.

With respect to telecommunications, the World Bank (1995) observed that governments traditionally held on to the provision of telecommunication services on the grounds that the fixed costs of establishing an operational network were too high for the private sector (mainly local) to handle. However, new technologies and falling costs in telecommunications equipment have greatly increased contestability in this industry. Therefore, governments are finding it increasingly difficult to enforce regulatory barriers to entry. Moreover, developing countries with the minimum necessary telecommunications infrastructure can now leapfrog stages of development by adopting new technologies, such as cellular telephony.

However, it is worthwhile noting that foreign investors will not just automatically participate in any privatisation. In order to design an attractive privatisation program, developing country governments have to take into consideration investor concerns. Political commitment, business orientation, and transparency are fundamental principles of any successful privatisation program. Only if every element of the process, from the design of the general political, legal, and institutional framework down to every single step in the actual sales procedure is based on these principles, can a government expect strong participation by foreign investors.

Human Resources Development

The empirical review highlighted cases where the spillover process was found to be highest via the ‘human factor’, suggesting that emphasis be put on human resources development in order to increase the economic growth process. Thus, in an ever-changing competitive environment, one of the most important assets for a nation is undoubtedly human skills at all levels. Moreover, a skilled labour-force acts as one of the main determinants of technology transfer and diffusion. Therefore, any country that wants to sustain its development process has to develop a productive and efficient workforce, which is flexible and adaptable to the changing technology. Unfortunately, the workforce in most developing countries is short on technical skills. Moreover, those few people with technical skills that could set the industrialisation process rolling have been forced to look for ‘green pastures’ elsewhere because of the poor remuneration, and the unstable political and economic conditions their countries offer. To make matters worse, the industrialisation process may start off by utilising an unskilled labour force and then gradually graduates into employing a technically skilled labour-force. However, the supply side of the developing countries is not in a position to cope since it is not science oriented and government funding remains low. Therefore, there is justification for the need to re-plan and refocus the direction of the human resources development process in developing countries. Consequently, there are two important areas that should be examined when considering human skills development, namely pre-employment and post-employment skills development.

Pre-employment skills development UNCTAD (1994) reported that whereas primary schooling in other developing countries was close to being universally provided, by 1991 only Botswana, Cape Verde and Togo had universal school enrolment among the less advanced developing countries. In problem-ridden countries such as Ethiopia, Mali, Niger, and Rwanda, up to 70 per cent of the children did not attend school. Enrolment ratios have remained low and when they rise, they do so at a rate lower than the population growth, indicating a potentially persistent problem of illiteracy in the years to come. The situation is worse at secondary school level where enrolment ratios are as low as 4 per cent in the less developed developing countries such as Malawi, and The United Republic of Tanzania. A UNESCO (1993) report concluded that as a whole, the less advanced developing countries’ enrolment ratios were half those for the other developing countries and even declined slightly between the late-1980s and early-1990s. The picture is grimmer at the tertiary level where enrolment ratios average at a low 2 per cent and are even lower than 1 per cent for a number of countries. The 1991 figures for government budget expenditure devoted to education on average ranged between 2 and 8 as a percentage of Gross National Product. UNESCO statistics also show that the level of enrolment in private secondary schools has been growing, indicating that there is a high level of demand for secondary schooling which governments are not keeping abreast with. The private sector involvement is only marginal although significant at the primary level.

The current education curriculum in most developing countries focuses on an area that produces a human skills base that is unemployable. For example, UNESCO statistics show that the current university enrolment in most developing countries stands at an average of about 30 per cent for science oriented courses at the first and second degree level although the actual levels vary from country to country. Emphasis is put on arts subjects probably because the unit costs are much lower since equipment and laboratories are hardly essential. At the end of its training process, such a labour force finds itself unemployable. It then joins the ‘army’ of the unemployed, gets frustrated and, hence, blames government for not creating jobs. No doubt, it forms a potential ‘elite guerrilla warfare force’ and, hence, a potential threat to the peace of the nation and stability of the government of the day should such an opportunity arise. Then there is the problem of the brain drain. Abdel Rahman (1979) has observed that a developing country attempts to build a strong and qualified ‘human base’ of highly educated personnel in the different branches of science and technology. But, once qualified, many fail to find jobs corresponding to their training. The level of remuneration and availability of equipment and facilities are such that they are lured back to their sophisticated training grounds abroad or shift to administrative or other professions including politics for which their sophisticated training is unnecessary. Those who stay at the universities and local research institutes are forced to lower the
standards of their scientific activities. This process erodes the country’s limited precious resources.

Vocational training provides an opportunity for individuals to enhance productivity and disseminate newer technologies. It is capable of enhancing the formal and informal sectors and can be implemented on-the-job or be school based. The provision of technical and vocational training modifies peoples’ attitudes towards work, promotes links between theoretical technical education and the world of practical work. Therefore, it provides a strong link between technical institutions and practising enterprises. However, due to various reasons, this programme is currently underdeveloped in most developing countries. For example, the industry and business communities may in principle want to benefit from the national research and development centres, but then find them inadequate to handle the current jobs of designing an industrial process, or building infrastructural services such as large dams and bridges. Business and industry invariably play safe by seeking the experience of international experts and firms. By-passed in this way time after time, the national institutes never gain enough experience to mature and end up by becoming incompetent for even their own economic industrial community (Abdel Rahman, 1979).

In view of these shortcomings, four major policy considerations can be explored. These are, the curriculum, vocational training, school enrolment and governments’ funding, and employment opportunities.

The product life cycles of scientific techniques and innovations are becoming shorter and are now likely to become obsolete more rapidly. The implication here is that the curriculum should in general focus on the ‘dynamic’ ability to access and apply knowledge and technology, rather than only on some particular ‘static’ (replaceable) state-of-the-art. A special effort is therefore, required to expand and improve the teaching of sciences and technology at all levels by laying greater emphasis on the understanding of scientific concepts, observations, experiments and guidance towards the solution of practical problems (Abdel Rahman, 1979). Moreover, the content of the curriculum should be dynamic in the sense that the science and technology teaching is in keeping with the latest advances in scientific research and technological innovation and takes into account the characteristics of the local environment.

Human skills development begins with driving away illiteracy and, hence, giving a key to the ability to benefit from the accumulated wealth of knowledge and know-how. Thus, the enhancement of literacy and numeracy at the lower-primary level is paramount. Further improvement in education particularly in terms of strengthening the foundation in mathematics and science is then crucial from mid-primary level onwards. Increasing emphasis on technical areas is of relevance at the secondary and tertiary levels. In a nutshell, a special effort is required to expand and improve the teaching of sciences and technology at all levels. During this process, greater emphasis may be put on the understanding of scientific concepts, observations, experiments and guidance towards the solution of practical problems. Consequently, the curriculum should consistently develop to ensure that the focus on specialist areas needed for the country’s technology thrust is maintained. A strong national commitment, a strong administrative infrastructure and skill base are the basic ingredients for the achievement of this strategy.

Industrial training can spearhead and complement the industrialisation drive. Therefore, it is essential for investment promotion and economic growth. Linking educational policies and employment policies through vocational training can strengthen the liaison between technical education and the world of work. For example, technical students could be required to work in industries during their vocations preferably under close supervision of the teaching staff.

If education in developing countries is eventually left to the private sector, then only the privileged few, who have the capability to finance it will benefit from it. Therefore, it is essential that respective governments make an effort and increase the levels of budget contributions to this sector. Since their financial handicaps mean that they cannot possibly afford to provide free education for all at all levels, the following recommendations need consideration. The primary education level constitutes low unit costs. Developing countries should in principle be capable of affording to finance it. This level of education should, therefore, be made compulsory and free for all. Uganda has for example undertaken this under the Universal Primary Education (UPE) programme. There is no doubt that UPE is a brilliant idea. However, instead of fulfilling its objectives, the politicians use it as a political weapon for attaining cheap popularity. For instance, it is inconceivable how the pupils can benefit from this programme when class numbers increase to challenging levels of 100 or more, all under the instruction of one teacher! To put this into context, the Ministry of Education regulations recommend one teacher for every 27 pupils. The teachers therefore, end-up by lecturing, and not teaching, and indeed lecturing to infants! In fact, as one headmistress pointed out when interviewed by a British Broadcasting Corporation corresponded, instead of laying the foundation for literacy at the primary level, UPE is in effect a potential ingredient for promoting illiteracy! She rightly attributed this to the practical impossibility for a single teacher to conduct an effective supervision in writing and numeracy under such circumstances. No doubt, then that she concluded that UPE is instead effectively developing a ‘bomb’ of unemployment resulting from lack of basic education, which is bound to explode any time! Moreover, when it comes to accommodation, those students who are lucky get cramped in classrooms that were originally designed to accommodate 40 pupils. The unlucky ones find themselves using tree sheds as substitute classrooms, which are unfortunately prone to weather disruptions. Then there are side factors including sitting arrangements, which range from crowding on small desks, using stones as substitutes for desks, or even sitting on dusty floors that are characteristically infested by jiggers. For the poverty ridden in the rural areas, there is nothing better than seeing notorious children away from home for most of the week, more so on free education. Consequently, there is no better government regime than the one promoting this programme. However, those who have had some exposure on the requirements of education and who have financial capability, have realised the hidden ‘taboos’ associated with the programme. Unsurprisingly then, they opt for private schools. So, the government plays the quantity game at the expense of quality. Surprisingly enough, even the donor agencies including Britain’s Department for International Development, join in this quantity game by unreservedly showing their gratitude on how ‘well’ their money is being spent! The end result is that a brilliant idea ends-up as a joke. One wonders what will happen when this UPE ‘reserve army’ qualifies to advance to the secondary level. Converting an idea into tangible results requires proper planning, funding, and most preferably a pilot project and should not be driven by cheap politics.

The unit costs increase with an increasing level of education, thus making it more difficult to finance. In order to encourage mathematics and sciences (often perceived to be difficult by the majority of students) for reasons discussed above, it is logical to make them compulsory and free for all students for the initial years at secondary (probably 2 years). Free education can then be offered to those students capable and willing to continue pursuing them as core subjects from then onwards. The other students can then only be subsidised by government. However, this also necessitates increasing the funding for the associated facilities such as the laboratories and equipment not to mention the teachers who provide the instruction. The secondary level policy can also be implemented at the tertiary level. However, in addition, loans that have to be paid back at a certain time after qualification can be arranged for those students in the paying group. Vocational training needs to be promoted at all costs. Therefore, it should be free for all. Countries facing financial constraints can seek official development assistance grants to alleviate the problem.

In addition, governments can initiate public-private training partnerships to complement publicly-funded or TNC based training. The idea of whether managers are born or whether they are taught has divided specialists in human resources management. However, given the growing complexity of the global business environment, a modern manager may require a blend of both assets. In view of this, developing countries should encourage management courses by initiating Business Schools. The private sector, including TNCs can be called upon to undertake these programmes if resources curtail the public sector’s participation.

Of what value is it for a government to spend so much on educating an individual who, upon completing the formal education process, seeks green pastures elsewhere or becomes a potential threat to its political stability? A mechanism for improving employment opportunities and conditions and, hence, retaining the skilled labour force is required to combat the brain drain. First and foremost, developing countries should provide the green pastures within their countries themselves by offering competitive salaries. After all, in the absence of the local skilled manpower, they often employ expatriate staff who may not even be well conversant with the country specific characteristics. Moreover, they pay them far more than they could have spent on the local staff. However, the long-term solution lies in the curriculum which should be designed to create a labour force that is employable, and also in the stimulation of both local and foreign investment which should provide the employment base for the labour force. In the field of technology for example, governments can follow the example Kwami (1983) has reported on Ghana. That is, by encouraging and assisting the education institutions to establish consultancy centres, thus forming a type of technical transfer. Such a centre can then collaborate with all departments of the institution concerned to keep the outside community, particularly the business community, informed of their resources and expertise and to help them to develop technologies of use to the nation as a whole. They can then co-ordinate the consultancies by channelling the outside requests to the relevant departments. Of course, to be able to achieve this, they have to indulge in collecting, organising and disseminating information about the technical, research and training facilities in the country. In sum then, governments should reform research institutions and induce them to sell their services to international standards. In this way, the specialists involved can earn not only money for the institution, but also an extra income for themselves over and above the official salary.

Governments can also improve the financial conditions of academicians by recommending and/or appointing them as members of Board of Directors of the various institutions. Here they can then offer their expertise, skills and knowledge in terms of professional advice and earn a wage in return. They can also be allowed to attend international seminars and conferences from which they can draw some allowances. These extra official incomes from here and there can then raise morale and consequently act as ‘retaining’ incentives.

Because of political persecution and poor remuneration, all developing countries have a number of skilled personnel abroad. It is important to have a policy directed at convincing these people to get back home. However, this depends upon the provision of good labour policies, good remuneration, and a politically and economically stable environment. Some countries are already making an effort towards combating the brain drain problem. For example, a Return and Reintegration of Qualified African Nationals (RQUAN) Program has been designed and developed by the International Organisation for Migration in co-operation and with funding from participating OECD countries. Countries in other continents have similar arrangements, comprising a total of 61 countries by 31 May 1998. RQUAN for example, promotes the return and long-term reintegration to or relocation within Africa of trained and experienced African nationals by encouraging them to take up key positions of employment or to enter self-employment. It is, therefore, advisable for non-member countries to join and take full advantage of this programme.

Post-employment skills development There is a tendency for firms in developing countries to over-invest in equipment and under-invest in skills development. But companies require workers to keep abreast with the latest technology in order to remain competitive and productive. Subsequently, as economies become more industrialised, there is need to retrain workers more frequently over their employment life cycles as their performance becomes more dependent on the availability of new technology. Thus,  skills upgrading and retraining of the workforce has to be undertaken as an ongoing exercise to update and enhance the skills of employees.

But, developing countries face a constraint on the quality and relevance of the training of their workforce. For instance, the working population is in most cases not prepared to be receptive to technological change. This can be achieved through the in-house training, which can partially compensate for the shortcomings of the formal education system in preparing workers to use technology. Alternatively, manpower development units and staff skills development programmes can be established. Thus, companies can be encouraged to train their staff and upgrade their skills over their employment life cycle. Industrial training with the long-term aim of developing a core skilled workforce for future potential investors and providing assurance of the country’s technical capability would be the principle objective in this instance.

In order to improve literacy and numeracy for all, adult education is also important. Adult literacy education enables compensation to be made for certain social-economic and social-cultural disadvantages. This programme can be designed in such a way that besides improving the literacy and numeracy of the older population, it also aims at eroding the negative perceptions from the older cohort and population as a whole. After all, they are looked upon as the ‘granary’ of knowledge in the informal arena and, hence, have a strong influence on the community.

Skills are an infrastructure in a way and require long-term planning. Therefore, investment in human skills, particularly in the formal sector requires patience. Its duration may take up to twenty or more years depending on what type of skills are being developed, for what purpose they are being developed and, hence, the intensity and technicality of the training. This is reflected in Chan Chin Bock’s (Singapore’s Economic Development Board Chairman 1972-1974) following statement:

‘… One of Singapore’s 1992 (sunrise) industries will be the state-of-the-art computer disk drives. We produce more than $5 billion worth hard disks a year and have earned the reputation of being the world’s largest exporter of it. But do you know when we started training skills for such work? 1972 – almost twenty years ago!’ (Singapore Economic Development Board, 1996).

In summary, learning is a never ending process. What seems to matter is the quality of education and training, and how effectively it can be employed for productive investment. Investment should, therefore, be made in training that improves skills of employees; develops their ability to  adjust to changing technology; and meets growth requirement, replacements, retirements and departures from the enterprises. These will then collectively stimulate economic growth.

Export Production Diversification

The World Bank (1995) reported a rising output share of services, a decline of manufacturing in developed countries and associated decline of imports of industrial raw materials from developing countries. It suggested that much as technology is developing at a very fast rate and international trade is making trade in services a lot easier, FDI remains the main mode of supplying foreign markets. As trade dominance shifts from the manufacturing sector to the services sector in the developed countries, these shifts imply increasing opportunity for export of traditional manufactures by developing countries. After all, industrialised countries are creating more room in the markets for these goods to imports from developing countries.

As stated earlier, heavy dependence on primary commodities is one important reason for the slow growth of developing countries’ exports and of their economies in general. Needless to say, there is not only a need but also a chance for these countries to embark on programmes to transform and diversify their economies from those, which rely on natural resources (extractive, or processing type of investment) into modern industrial economies which are internationally oriented.

Expansion of exports requires the development of supply capacities and diversification into production and exports of manufactures, which in turn necessitate increased investment and imports. However, resources are scarce and not all industries possess the same linkages and externalities. UNCTAD (1994) proposed the need for establishing clear criteria in selecting those industries destined for development, upgrading and export expansion particularly where, as in developing countries, the initial industrial base is very small. To achieve this, governments have to provide an institutional environment conducive for exporting. This may involve the provision of trade-related physical and institutional infrastructure including transport and telecommunications, standardised bureaus, efficient procedure for implementing customs procedures, and access to export finance and insurance. The strategy is therefore highly influenced by the national capabilities, government policy and the extent of the TNCs’ participation.

Such a program requires a strong backing of the individual countries. Some countries have initiated such programmes but failed to supportively follow them up. The National Resistance Movement government of Uganda, for example, embarked on an agricultural oriented campaign to diversify into what it called ‘non-traditional’ cash crops in the late-1980s. This included the production of products such as beans, maize and other cereals, traditionally renown for subsistence and, hence, domestic consumption. When the people took up the call and produced far in excess of domestic consumption, the government had not laid any logistics to facilitate the purchase and exporting of these products. The local private sector was also not prepared since it thought that the government had it all planned. The produce remained in the granaries and deteriorated, much to the joy of rodents, and the campaign, therefore, lost meaning.

A diversification programme needs proper planning. If the countries do not know how to transform and start industrialisation, then help can be sought from experts abroad, including the UN (UNIDO and UNCTAD), to tailor a plan for an individual country bearing in mind all its economic and social characteristics. Diversification involves stimulating new free enterprise industries, which are efficient. To begin with, since developing countries have massive unemployment problems, the most immediate strategy should be to stimulate labour-intensive industries with export potential in accordance with their sources of comparative advantages. Productivity and consequent economic growth will then be promoted through gradual upgrading and through the learning-by-doing knowledge spillovers.

The import-substitution industrialisation strategy which the more advanced developing countries pursued in the mid-twentieth century is, however, not appropriate for the less advanced developing countries since their markets are too small to make it viable. Export promotion in developing countries with little technical and managerial know-how and financial handicaps can be accelerated by investment promotion and industry development. The latter requires a comprehensive package of development assistance programmes to help local enterprises to expand and upgrade. It can be achieved through incentives such as financing schemes particularly targeted at SMEs. These schemes can include low investment loans for SMEs for equipment and upgrading programmes. This alone is, however, not sufficient. There is further need for co-ordination at all levels. This can be achieved for example, by organising workshops bringing together relevant government agencies, academia and private sector organisations to brainstorm the issues of SMEs. In addition, it may involve creating a body with responsibility for establishing SMEs, examining their problems and needs, and eventually helping them to evolve into efficient, well managed, technically competent and professionally operated utilities. This co-ordination has two advantages. First, it places both TNCs and SMEs in the industrial policy-making process. Second, it creates a direct link between the public sector and the private sector. Eventually, it may lead to the initiation of training programmes for domestic companies aimed at upgrading their product quality and productivity. The main objective of such a scheme is to encourage SMEs to provide support services for TNCs, establishing linkages and, hence, integrating into the value chain of the international division of labour. Thus, support has to be given to local domestic exporters and encourage efficient supplier networks. It should also encourage TNCs to upgrade local functions, promote conditions that promote subcontracting, and promote technology alliances between domestic firms and TNCs. There is no better way of deepening linkages than by raising the capabilities of potential suppliers. In addition, the promotion of SMEs neutralises the long-term vulnerability of relying on FDI alone. The long-run objective is that the SMEs develop into large enterprises capable of pursuing foreign investment ventures elsewhere. Additionally, developing countries should institute policies aimed at enhancing exports through upgrading and make sure that they upgrade their sources of comparative advantages on a continuous basis. This will assist in reducing trade deficits and balance of payments problems. Other export-oriented strategies that can be pursued include targeting FDI conducive to export competitiveness and upgrading. This involves providing information to the promotion department in areas where potential exists. UNCTAD (1999) suggests that a special effort could be made to draw FDI into industries in which the host country has a revealed comparative advantage. That is, where its exports of a product are growing faster than exports of that product world-wide.

There is no doubt that the external environment has influenced and will continue to influence the growth prospects of developing countries, although in a less favourable way particularly in Africa. For instance, the commodity boom is not as good as it was during the early-1970s, and the entrepreneurial capability has remained low in most developing countries apart from in Asia (to a small extent). Policies should change accordingly, be flexible and take advantage of any factors that result from the external environment such as the growth of the OECD countries that results in increased demand and, hence, international trade.

Even if the above recommendation stresses the need for developing countries to take advantage of the shift of investment from the manufacturing to the services sectors in the more developed countries, it should not be taken primarily and exclusively as if they must follow the ‘footsteps’ of the more developed countries’ development process. Developing countries with comparative advantages in the service sector, particularly the tourism industry, can also take advantage of the current focus and exploit the benefits that may accrue from this industry by treating it as a special ‘niche’. That is, they should allow niches within the service sector to also take over from the primary and secondary sectors. They can also attract FDI into natural resource processing and induce a greater value added in resource-based exports. In fact, developing countries should try as much as possible to avoid exporting raw materials, which are then processed in developed countries and resold to them at a multiple price. For example, instead of exporting raw hardwood timber, why not produce plywood, furniture and floor tiles? Likewise, instead of exporting iron and copper ore, why not export steel bars, copper pipers, and copper wire? Surely, the type of technology required for these activities should be fairly standard and therefore affordable. Besides creating more wealth, this strategy leads to both increased domestic value added and to considerable technology transfer. UNCTAD (1997c) reports that there is a risk of converting valuable natural resources into less valuable finished products. However, if this is the case, then developing countries should make provisions for processing the raw materials for domestic consumption and make sure that the raw materials that are exported are not re-imported in a processed form. This was originally a colonial strategy, which repressed local manufacturing so that processed goods were bought from the colonial masters. It should not be allowed to continue.

Foreign Exchange Rates and Macroeconomic Controls

Owing to developing countries’ weaker economic performance and less sound macroeconomic response to large capital inflows, the likelihood of the capital inflows is still quite low for these economies. The fleeing of both physical and human capital can only be averted if confidence exists in domestic markets. Such performance will depend on the effectiveness of their policies in maintaining macroeconomic stability, encouraging domestic savings and investment, and providing an incentive structure that promotes competitiveness and attracts FDI. This involves providing investors and exporters with a stable financial environment reflected by low inflation, and low variability in inflation and real exchange rates, thereby protecting external competitiveness. There is also need to improve budget deficits, current account deficits, private capital inflows, government consumption, national savings and investment. The good news is that the problem of transferring/repatriating funds has so far been overcome by many developing countries through the establishment of open market Foreign Exchange Bureaus where currencies are freely transacted. However, countries may reserve the right to impose temporal exchange control restrictions in the event of balance-of-payments crises.

Moreover, lessons can be learnt from the 1997/98 Southeast Asian financial crisis, which originated in Thailand. This is how it developed. The indigenous population initially dominated Thailand’s labour force. However, the recent rises in labour costs forced it to rely increasingly on immigrant cheap labour. Evidently, Thailand came to the end of the easy stage of export-orientation and started losing competitiveness. Having benefited from the flying-geese model of development, it failed to upgrade its activities including infrastructure, education and R&D in order to keep abreast with it. Thus, in a nutshell, government policy was limited in its involvement in upgrading its created assets. Moreover, it found itself locked between two strong competitors. At the upper end was Malaysia with a superior infrastructure, while at the lower end were several countries including China, Indonesia and Indochina whose relative wage rates were more competitive. This together with the over valued baht prompted the loss of competitiveness to the neighbouring less developed countries. Inadequate upgrading made it highly vulnerable to interruptions of capital inflows. As a consequence, the inflows started slumping, exports decreased and its trade deficit increased, maximising the risk of serious balance of payments problem and a sharp slow down in growth.

Furthermore, Thailand has not relied exclusively on foreign capital since its domestic investment has remained strong for a long time. However, its degree of reliance increased as time went by. Its persistent high growth rate lured investment worth billions of dollars even in the unsustainable real estate industry. No doubt, there was strong need for more liberal policies particularly in the financial sector. The liberalisation of foreign exchange controls since 1991 and the promotion of overseas corporate bond issues, encouraged speculative movement of capital. Financial liberalisation increased domestic lending and eventually slipped over from the financing of safe and productive investments to risky speculative assets. Furthermore, the liberalisation of the financial sector gave the private sector access to large amounts of cheap foreign capital. This put excess risks on banks followed by wide spread defaults and hence bankruptcy. Moreover, as the indigenous firms grew and became foreign investors themselves, their activities became less transparent and more difficult to monitor leading to problems of over-borrowing, over-investment and indulgence in risky financial operations. This then led to a very rapid expansion of the inflow of short-term ‘hot money’. As a consequence, Thailand’s short-term debts started exceeding its short-term foreign reserves. This was made worse when the government at first took no action to regulate matters, and further when it squandered more of the country’s foreign exchange reserves in a misguided attempt to defend the over valued baht. Domestic interest rates were increased to slow down the economy and improve external payments by attracting additional capital inflows and expanding bank liquidity and further lending. However, the loans became non-performing and the banks were weakened further. Further, in July 1997 the government abandoned baht’s exchange rate peg to the dollar by devaluing its currency. Between May and September 1997, the baht and Thai asset prices had lost about 50 per cent of their original value. When investors realised this, they lost confidence in the economy and gradually started withdrawing their investment. The investment withdrawal eventually developed into a stampede, which the local banks could not cope with without defaulting. Even when the IMF made provision of emergency funds, this did not solve the problem but encouraged the stampede particularly when the IMF insisted that dozens of financial institutions be closed. Other creditors then withdrew their savings. The stampede then spread to the neighbouring countries. Thus, prudential limits on bank lending, capital adequacy requirements were improperly enforced since financial liberalisation meant abandoning the necessary checks.

Because of the aforementioned factors, developing countries need to provide effective prudential regulation and supervision of the banking system. Even this may not be sufficient. There is further need to create instruments to restrict and/or monitor the level of capital inflows in order to contain their impact on macroeconomic and monetary conditions.

The Role of Regional Economic Integration

Most of the economic blocs comprising developing countries have been established with a major focus on political than economic considerations. Political differences have occasionally triggered off misunderstandings that have been so bad as to bring about de-integration, as was the case for the EACM in 1978. Regionalism among developing countries can only be of economic significance if its foundation is based more upon economic than political arrangements. Nonetheless, a ‘political will’ is instrumental for its survival.

The low share of intra-regional trade in these blocs, however, indicates that the capacity to progress towards a viable economic integration is quite low. Because of their poor economic performances, developing countries have very low per capita incomes and, hence, market sizes, low financial bases, low technological capacities and capabilities, poor infrastructure, and lack of a comprehensively skilled labour-force. Earlier observation revealed that the economic benefits, which developing countries can accrue from the regionalism effects are minimal most particularly because of their low per capita incomes. The short-run recommendation would therefore, be to discourage any attempts towards such collaboration. Needless to say, it is the long-run benefits that are at stake. Time will come when developing countries’ markets will grow. Moreover, there are some advantages that can be derived even at this level. Thus, it is worthwhile laying the foundation sooner than later. Besides, as illustrated below, there indeed are reasons why regional economic integration can be useful to developing countries. These include scale economies, macroeconomic and political stability, bargaining power, technology transfer, wage inflation, investment relocation, joint project development and investment targeting.

Scale economies This is no doubt the oldest argument. Developing countries’ markets are often too small to realise scale economies. The combined market size of a regional bloc may create a market capable of realising scale economies for particular goods and services. Consequently, FDI can be attracted, when the TNCs look at the whole region as a single unit and not as individual segments as before. The combined skilled labour base can also then be equally capable of attracting FDI.

Macroeconomic stability Macroeconomic stability is critical to the continued success of any development strategy. Regional economic integration can help support stable macroeconomic policies. Real-financial links pertinent to regional economic integration agreements require stable macro-economic policies if the agreements are to function smoothly. In order to ensure a stable partnership, countries must share information, co-operate in advocating stable fiscal and monetary policies, and engage in strong ‘peer pressure’ against unstable policies (Plummer, 1997). In most advanced regional agreements, countries find that they must focus on non-traditional areas affecting trade and investment, including competition policy and government procurement if they are to advance economic integration. These ‘non-border’ measures force a stronger market-orientation, inject more microeconomic competition by reducing the power of domestic monopolies or ‘rent-seeking’, and place constraints on government spending through, for example the abolition of export subsidies and restrictions on industrial policies (Plummer, 1997). Furthermore, the influence of special interest groups seeking protection may diminish, leading to more openness in the trading and investment environments. As these policies exacerbate transparency problems and make micro and macro reform difficult, they are often the greatest culprits when instability and/or economic stagnation is in evidence in developing countries. Thus, such forced macroeconomic stability could be highly beneficial to the economic development strategies of participating countries (Plummer, 1997).

Political stability If properly planned, regionalism may contribute to the political stability which, is a baseline requirement for FDI activities in any given country/region. In an economic bloc, a member country would reconsider antagonising another member country because of the possible combined repercussions of the other member countries. For instance, since guerrilla war activities against a given country are often launched in neighbouring countries whose relationship with the target country is not good, this could be minimised under an integration scheme. Regional economic blocs are, therefore, good for the consolidation of peace. Economic co-operation in Southeast Asia was for example, seen as an important vehicle for political stability goals in the region. To the extent that regional economic integration agreements add to the political stability of the region, they do service to economic development in general and the goal of policy reform in particular, even if the agreements have very weak substance to them (Plummer, 1997).

Bargaining power The combined effort of regional economic integration can improve the member countries’ bargaining and manipulative power with both the TNCs and other regions or countries. This then gives developing countries an opportunity to not only use their country specific characteristics to attract the offensive import-substitution and rationalisation type of investment, but also to use the regionalism effects, i.e. market growth, and tariff-discrimination to attract the defensive import-substitution investment.

Technology transfer and FDI Regional economic integration accords can promote FDI inflows through reductions in transaction costs, and in doing so, they are able to establish an attractive business environment within which TNCs can easily benefit from the vertical division of labour. In addition, member countries will, at the margin, gain more technology transfer, in view of the greater technological gap. Moreover, formal regional integration agreements can help in creating a strong underlying framework for the protection of intellectual property and put pressure on the implementation of associated laws. This further strengthens the attractiveness of the environment in which the TNCs like to operate. Furthermore, a regional economic bloc can be used by the member countries in jointly devising means to import appropriate technologies.

Wage inflation Wage inflation can also be held back under regionalism by a wide use of intra-regional labour flows, thus keeping the relative wage rates lower than the other competitive countries and, therefore, attracting FDI.

Relocation of production Even if the relocation of production can still be implemented in the absence of regionalism, its presence would facilitate such relocation since it would imply that there are fewer obstacles to be overcome. Similarly, even if regionalism would make the more developed member countries to benefit from the FDI inflows at the expense of the less developed member countries as Bende-Nabende’s (1999) results suggested in the case for the ASEAN-5 after the formation of the APTA, the less developed member countries would ceteris paribus benefit in the long-run through the relocation of production under the flying-geese concept. However, this requires the presence of at least two relatively developed countries, one to act as the ‘lead goose’ (such is the case of Japan in Asia and the US in America) and the other to act as the ‘support goose’ (such is the case of the NIEs of Asia and America). The lead goose, in the course of its own development process, constantly develops new industries and passes on to the next-tier countries those in which it has lost competitive advantage. Bearing in mind that most of the relocation of production takes place on a regional basis, it would require these countries to either be within the organisation or be geographic neighbours. It is evident that Africa is still disadvantaged on this basis. For instance, South Africa (the ‘lead goose’) has more Anglo-economic links than Afro-economic links. However, the Asian and American developing countries could respectively benefit from spillovers from Japan and US. Of course, the shortcomings of the role of South Africa as a development engine for the sub-Saharan African region have to be appreciated. The economic circumstances behind the growth of the Southeast Asian countries for instance vary considerably from those of Africa. To begin with, South Africa has to contribute to capital formation of the neighbouring host countries through FDI. Although this has started happening, the future extent of its operations might be quite limited. This is because South Africa itself has serious unemployment problems to address, and these will take quite a while to solve. In addition, an untapped reservoir of labour in South Africa suggests that the potential for labour-intensive production in that country has not been exhausted. Therefore, any deliberate attempt to restructure by relocating production to the neighbouring countries can come under strong opposition. Moreover, compared to the lead geese in other regions, South Africa’s innovation capabilities are comparatively lower. However, its relatively rich endowment of human capital is conducive to the development of new industries, which could gradually replace those that are based primarily on an abundant supply of cheap labour. Specifically, this flying-geese model is workable if the countries are at different levels of development; have the ability to restructure; posses sufficient demand and markets; have market verification of restructured industries through internationally competitive exports; posses enabling framework for the transmission of TNC assets; and have a favourable investment climate (UNCTAD, 1997). UNCTAD (1997) observes that of these conditions, only the first is satisfactorily met by the Southern Africa region. However, although there is a move towards containing the other factors, most of the conditions necessary for the initiation of intra-regional restructuring are still far from being in place.

Joint project development There is the potential for collaboration in project development and implementation, which would be too expensive to be undertaken by individual countries. Together they can plan projects involving foreign private investors such as improving infrastructural facilities, in transportation, telecommunication, common investment negotiation and promotion for the whole region.

Investment targeting A regional grouping may be good for targeting complementary intra-industry activity. This has for instance, been successfully achieved by Toyota in Southeast Asia. Toyota’s automobile networks in Southeast Asia involve the production of petrol engines and stamped parts in Indonesia; diesel engines and electrical equipment in the
Philippines; transmissions in Thailand; and steering parts and electrical equipment in Malaysia, while co-ordination is undertaken in Singapore.

A step towards free trade Of course supporters of multilateral trade and investment (MTI) may disagree with such protectionism. For instance, the World Trade Organisation (WTO) is advocating for multilateral trade. This is a good idea, albeit only theoretically. For example, MTI would reduce transaction costs to TNCs resulting in greater supply of ‘investible funds’ or lower costs of FDI or both. The agreement would also reduce uncertainty that is typically a major component of investors’ risks. Since the agreement would also most likely include elements that can be seen as ‘prudential regulations’, it would certainly reduce the volatility of capital flows. Moreover, MTI would be an important instrument towards avoiding unilateral restrictions against each country’s exports. Last but not least, since MTI would also include a dispute settlement mechanism, it would give weaker and smaller countries a better chance to protect their rights. Nonetheless, it comes at a time when Europe is pursuing further integration and when America intends to extend its integration with Central America and eventually South America. Thus, whereas the Western countries want to generate benefits from regionalism, they evidently want to intimidate developing countries through such international organisations, which often act as their ‘mouth-pieces’. For instance, whereas the US is against the Asian countries forming a free trade area, the idea becomes palatable when the possibility of an APEC free trade area in which it would be a member is envisaged, no doubt demonstrating the US’ selfish interests. Furthermore, the WTO is rather fragile since the 1999 Seattle Ministerial Meeting failed to launch the anticipated Millennium Round. In large measure, this failure was due to the US insistence on labour and environmental standards which developing countries, in particular Brazil and India, felt would deprive them of their comparative advantage, as well as infringing on their national sovereignty. In addition, larger developing countries (i.e., Brazil, Indian and Indonesia) have been reluctant about services sector liberalisation under the General Agreement of Tariffs and Trade (GATT) because they fear that industrial countries with well developed services sectors, will hinder them from building up their own equivalent services.

Strictly speaking, regional trade co-operation is a breach of the idea of multilateral removal of trade barriers, and is against the principle of non-discrimination. But, who first breached this principle? The significant exemption to the principle of the most favoured nation clause in the GATT rules was Article XXIV of 1947, which allowed countries to form regional arrangements in the form of customs unions and free trade areas. Such regional trade arrangements meant that a given country could discriminate in favour of member countries and against non-member countries. This is a clear breach of the most favoured nation clause, which states that if one country is given preferential treatment, then other member countries of the WTO are entitled to similar treatment. The main reason for the introduction of this exemption to the GATT rules was a need to ease the European reconstruction through a gradual phasing out of protective trade barriers within Europe, but without obliging European countries to liberalise to the same extent vis-à-vis the US. The US supported the enactment of this exemption because of the opportunity afforded to build up Western European regional co-operation, which America had favoured. Most important, was the US’ strategic and political agenda. For instance, an integrated Western Europe would prove a stronger partner and ally against the Eastern bloc. A condition of receiving Marshall Plan aid was for Western Europe countries to start the abolition of import restrictions between themselves. Although Article XXIV was originally tailored for Western Europe, the general acceptance of regional trade associations by GATT was based on the recognition that closer co-operation between neighbouring countries would be of value in its own right. In addition, such co-operation would be hard to establish under the principle of a single-tiered global most favoured nation clause.

Generally speaking, it is easier to liberalise trade when economic conditions are good. If, however, economic problems arise, then those forces that seek to solve them by protective measures gain greater influence in the formulation of economic policy. For instance, when a recession increases unemployment, the most immediate measure is to shield domestic industries in the hope of creating jobs. This generates a negative impact on the outside world, which in turn resorts to increased protectionism.

From this point of view, it is then arguable that developing countries, characterised with increasing debt and balance of payments problems, are comparatively in an economic crisis. If an economic crisis in Western Europe warranted a tailored exemption from most favoured nation clause, then there is no reason why developing countries should not similarly have a tailored exemption under their current economic hardships.

The theory of free trade presupposes the fulfilment of certain assumptions of imperfect competition. These theories include assumptions of scale economies and enterprise specialisation, and of the existence of external economies. If these assumptions are not fulfilled, then protectionism can become an option. That is, normatively applied, these theories clearly demonstrate that there are advantages of intervening, either in form of industrial or trade policy measures. The most notable example is that provided by the argument that it is necessary to protect infant industries by means of import duties. These measures can be made in order to realise scale economies or to achieve external economies.

In fact, rather than being a stumbling block to multilateralism, outward-looking regionalism is an effective stepping-stone towards non-discriminatory global trade. Thus, regional trade arrangements may be seen as a step in the direction of increased global free trade. Needless to say, this may only be true if there is a general lowering of trade protection between the different regional blocs.

Channel of economic growth A major mistake developing countries make is that of trying to emulate European regionalism very fast without first considering the repercussions. For instance, there is this ambitious programme of COMESA that is aimed at an integration towards a fully developed common market extending from Egypt in the north to Lesotho on the south. It happens at the time when on one hand some of its members such as Botswana, Lesotho, Swaziland and the Republic of South Africa are still strongly committed to SACU, and SADC, while on the other hand Kenya, the Republic of Tanzania and Uganda are trying to forget their old differences and revitalise the EACM. This definitely implies that there is a difference in priority. For instance, the ‘hidden’ reason behind Kenya’s pursuit for the revival of the EACM is its rivalry with South Africa. For example, Kenya’s industry is losing its Ugandan and Tanzanian market shares to South African products. Thus, a common external tariff could help alleviate this. What would be more realistic is for the establishment of two independent economic blocs independently (i.e. the EACM and SADC), making sure that they operate efficiently, and then developing trade links between them before finally merging them.

Policies for Minimising the Negative Effects of Globalisation

Overview

In this section, focus now changes to sustainable development-oriented policies and strategies that can be undertaken by both the developed and developing countries to protect the environment, reduce the North-South equity divide and minimise human insecurity.

The Brundtland Report (1987) recommends a new approach to development. An approach which gives developing countries a larger role and greater benefits; and which maintains the balance between economic growth and the ecosystem, so that natural resources can support growth over the long-term. It emphasises the need to revive economic growth, particularly in developing countries, as well as on the qualitative aspects of growth. It proposes that growth should involve lower energy consumption, more equitable sharing of its benefits, and satisfaction of the essential needs of developing countries. Therefore, there is a need to understand and propose new governance structures and mechanisms at the global and local levels, encompassing political and social needs of the State, social movements and NGOs, grassroots movements, the media, multinationals, organised citizens, the science community and religious movements, among others.

Globalisation should be managed properly so that it does not become merely the survival of the biggest, and the most powerful. The current means of management is via global trade rules. If these rules are fair and transparent for all, not just the most vociferous or historically influential, then globalisation can become a road to prosperity for many. Thus, if the interconnected world is to work for everyone, not only should effective multilateral trade rules be applied for open trade, but the international rules countries play by should also be fair.

Social policies and national governance are more relevant today to make globalisation work for human development and to protect people against its new threats. Therefore, new policies are needed to tackle the negative effects. For instance, the world needs market policies that protect elite labour, and promote job-creating growth, invest in workers’ skills, promote labour rights and make informal work more productive and remunerative. Policies should support national cultures, not by shutting out imports but by supporting local culture, arts and artists. All countries need to rethink their social policies for redistribution, for safety nets and for the universal provision of social services. In a nutshell, what is required is an approach that combines human development and poverty eradication with social protection.

Thus, even to the extreme anti-globalisation activists, while some vigilantism may still be required, the way forward in the globalising world should not be to try to prevent change. Rather, it should be about looking for reform that will improve life in the country and provide support for those who are losing out. Anti-globalisation activists’ involvement should now shift away from confrontation to dialogue. It is time to change from being anti-establishment to being proactive.

Although the topics are not mutually exclusive, the policy considerations more or less follow the format presented in Chapter 4. For instance, policy issues are examined under environmental, North-South equity divide and human insecurity sub-topics. The exception is that the role of international institutions is elevated to a major sub-topic. Some of the policy issues discussed have been adopted from Gueneau et al’s (1998) ‘Globalisation and Sustainable Development: 12 fact sheets’; and from Barker et al’s (1999) ‘Alternatives to Economic Globalization: A Preliminary Report’.

Environmental Issues

Company-specific environmental policy instruments The dominant concern in the globalisation debate is not just about economic flows. It is about preserving biodiversity, addressing the ethics of patents on life, ensuring access to health care and respecting other cultures’ forms of ownership. It also goes further to address the growing technological gap between the knowledge-driven global economy and the rest trapped in its shadows.

While organisations of a liberal cast still give international trade a leading role in environmental protection, they recognise the need for environmental policies to accompany trade liberalisation. Producer countries, like the international community, have an interest in seeing international trade play a positive role in the conservation of resources and in having in place market conditions that enable environmental costs to be taken into account.

Environmental degradation (acid rain, global warming and ozone depletion) has transboundary consequences, particularly for poor people and nations. Such emergencies demand global action, with initiatives building on the progress at the global conferences in Kyoto and Buenos Aires, and on proposals for tradable permits and clean development mechanisms.

The potential of the new technologies for human development and poverty eradication should be tapped. For instance, intellectual property rights under the TRIPS agreement need comprehensive review to redress their perverse effects undermining food security, indigenous knowledge, biosafety and access to health care.

Multilateral negotiations on the environment is one way through which the different perceptions these societies have of the environment and the priorities they set themselves are expressed. While the proliferation of international meetings has spread awareness of the worldwide scale of environmental problems, a number of developing countries still think that the environment is essentially a problem for which the countries of the North are responsible. Instead, they are more concerned by the concentration of technical and financial resources in the North, and the fear that their own environmental problems (i.e., desertification and access to drinking water) and especially their development problems (i.e., food security and health) will be neglected as efforts are concentrated on the global problems to which the North gives priority. From the developing countries’ viewpoint then, combating poverty is the most important step that can be taken towards halting the damage being done to the environment (Gueneau et al, 1998).

Regardless of who is to be blamed for the current environmental problems, the best way forward is for both the developing countries and the developed countries to accept that indeed a problem exists and should be addressed. The three policy instruments namely, economic, regulatory and voluntary that can be used to moderate the problem are discussed below.

Economic instruments give individuals and companies an incentive to behave in a way that does not affect the environment. They act directly upon costs and prices in order to establish market trading conditions where these conditions are incomplete or absent.

The first instrument is ‘the polluter-pays principle’ under the taxes and fees scheme. Adopted by OECD in 1972, it states that ‘the polluter should bear the expenses of carrying out the measures (introduced by the public authorities) to ensure that the environment is left in an acceptable state’. It may prove necessary to pay polluter countries to adopt good environmental practices in cases when pollution crosses frontiers. This is the case with acid rain, whose effects on biological diversity, the health of forests and the acidification of lakes are felt beyond the borders of the emitter country. Similarly, river pollution can have harmful effects in countries situated downstream (Gueneau et al, 1998). In such cases, solutions have to be sought through co-operation between the country producing the pollution and the country suffering from it, the latter agreeing to finance part of the clean-up effort. In this latter instance, the polluter-pays principle becomes the ‘victim-pays (contributes) principle’.

These taxes or fees penalise practices or ways of using a good that has a detrimental effect on the community. They seek to correct market mechanisms that do not reflect social costs in their entirety, or otherwise enable external effects to be internalised. Taxes or fees can be used at different stages of polluting production processes. The most common sort are levied against polluting emissions (air, water and noise). Others include usage fees covering the cost of collection and treatment services; and taxes on polluting products at the manufacturing, consumption and disposal stages. Examples are taxes on fertilisers, pesticides and batteries, and environmental taxes on energy.

Gueneau et al (1998) point out that taxes and fees have the advantage of increasing the production costs of polluters, who thereby have an incentive to curtail or halt polluting practices. With the exception of instances where they are so high as to discourage the offender altogether from following polluting practices, taxes and fees generally lead to a rise in tax receipts. Nonetheless, they also have a number of drawbacks. For instance, while this principle has been widely accepted by Governments and aid organisations, its generality implies that it does not always enable the most appropriate and most profitable measure to be chosen. For example, the fact that pollution may cross national boundaries makes it difficult to identify, let alone to monitor the polluters. Moreover, it is almost impossible to ‘allocate’ the level of pollution to individual businesses, and difficult to establish the optimum level of pollution. Particular care has to be taken to ensure that taxes and fees do not have adverse effects on the competitiveness of small businesses. The worst scenario, however, is when they are transferred to the consumers.

The second instrument involves subsidies, which in contrast with taxes and fees, are aimed at promoting consumption of products and services that do not harm the environment. For example, subsidies for commercial fuels other than wood and charcoal for heating and cooking use, subsidies for renewable energy (wind and solar energy), and subsidies for fertilisers to discourage extensive agriculture practices that threaten ecosystems. The obvious problem with subsidies is not only the burden they impose on the public purse, but also the misappropriation and abuse opportunities they create. In fact, in some countries they are just another way of squandering what are already very limited tax resources.

Nonetheless, amalgamating taxes with subsidies sometimes proves effective. In this case, the revenue from taxes levied on polluting firms can be paid out to companies that choose to invest in environmentally sound practices. Competition thus induces the former to change their practices to bring them into conformity with the environmental regulations in force.

The third instrument, which relates to the allocation of global quotas of pollution rights is aimed at spreading efforts to combat pollution among different actors while enabling the public authorities to maintain a global cap on polluting emissions. This cap takes the form of a set number of individual transferable emission rights. The public authority distributes the rights either by sharing them out between the companies concerned on the basis of what they produce, or by putting them up for auction or for sale at a fixed price. Each enterprise is thus authorised to pollute up to the maximum represented by the sum total of the rights it holds. Any additional pollution is penalised, unless the company purchases new pollution rights from another, ‘cleaner’ company, i.e. one that has not used up all its pollution rights. Thus, in any given area, increased emissions by one producer can be made up for by a reduction in the emissions of another one, through the mechanism of permit trading (Gueneau et al, 1998). This approach can, however, be impaired when the ‘clean’ companies refuse to sell their right. For example, when the developing countries refused to sell their pollution quotas to the US, it culminated into a conflict, which eventually led to the Kyoto declaration being undermined.

Regulatory instruments comprise a system of penalties aimed at enforcing environmental quality objectives set by the public authorities. They may set a limit on the quantity of pollutants that producers can emit, or require them to adopt non-polluting systems of production. For these rules to be effective, compliance should be rigorously enforced so that those who contravene the rules are subjected to criminal penalties.

Gueneau et al (1998) have listed four specific regulatory rules that can be implemented. First, are environmental quality rules, which set general quality objectives, based on the capacity of the environment (e.g. maximum carbon dioxide content in the atmosphere). Second, are emission rules that set a maximum authorised level of polluting discharges in a given place. An example is a limit on vehicle noise emissions. Third, are product rules, which specify the characteristics of a product. For example, lead content of petrol. Lastly, are rules on production processes. These specify the technical production methods to be used and the anti-pollution systems to be installed.

Since they do not lead to externalities being internalised in the production process, regulatory instruments are criticised for neglecting the economic component. The four cited by Gueneau et al (1998) are as follows: First, regulatory measures are the outcome of a political decision-making process that is not governed either by a desire to achieve the optimum economic solution or by scientific considerations. Often, they are arrived at by tacit agreement between the Government and polluting industrialists. Second, environmental damage is maintained at exactly the level the rules allow. For instance, concerned above all to preserve competitiveness, companies make no effort to lower their pollution level below the regulatory limit. Third, all users are obliged to make reductions in the same way and to the same extent. Thus, a ban on car use is more costly to taxi drivers and others who earn their living on the road than to those for whom private car use is not an essential part of work, and who can switch to another form of transport. Fourth, in certain cities, for example, rules on vehicle use are undermined by registration fraud. In general however, the regulatory approach can also be curtailed by the aforementioned monitoring problems.

Voluntary approaches are presented as a third generation of environmental policy instruments. They lay emphasis on negotiation, compromise and voluntary agreement between economic sectors and the public authorities, and sometimes NGOs. These mainly fall under three categories. The first one is a unilateral undertaking by a company thereby involving its shareholders, its customers, its employees and the public at large in the implementation of a self-regulatory environmental programme. Thus, it takes the form of a company code of conduct, which can be manifested in its mission statement. The second alternative is a negotiated environmental contract between the public authority and the company, setting out the environmental objectives to be achieved, and a timetable for attaining them. In return for this undertaking by the firm, the public authorities undertake to exempt it from domestic legislation. For instance, they may stop enforcing compliance with any general legislation, and only retain enforcement concomitant with the terms of the contract. Under the third alternative, the terms of reference to which companies can subscribe voluntarily in exchange for accreditation or specific labelling of the products they sell are drawn up by the public authorities. The terms of reference may relate either to environmental performance (an emissions reduction objective, for example) or to the technology or production procedures used. These mechanisms include systems of environmental labelling otherwise referred to as eco-labels.

Because of its voluntary nature, the scope of corporate responsibility is currently conceptually unbound. The current key issues relate to human rights, the environment and workers’ rights. Thus, companies are socially responsible for both the direct and indirect negative effects imparted upon the respective stakeholders through their operations. The negative effects can take on any form including employment downscaling, environmental pollution, technology transfer, local labour-force training, promotion of local entrepreneurship and creation of linkages. Thus, negatively affected groups are expected to ask or make protests to companies causing these impacts to take measures to prevent, reduce or rectify such consequences, or otherwise to internalise costs resulting from their activities (UNCTAD, 1999).

Civil society groups have increased their focus on devising monitoring and public reporting programmes that can add enforcement aspects to the implementation of voluntary social responsibility codes. The advantage of the voluntary vis-à-vis legally binding codes is that the former are sometimes more efficient and cost-effective to address technically complex and rapidly changing business operations. Otherwise, negotiating new international legal regulations can be a cumbersome, time-consuming process that can yield results that may be already overtaken by technological or managerial change the day an instrument enters into force (UNCTAD, 1999).

By involving firms in the political planning process, these approaches not only give company heads greater incentives to achieve environmental objectives, but also enable environmental progress to be achieved more rapidly. Moreover, consumers are given a chance to choose products made by companies that can be seen to be making a voluntary effort to protect the environment. Companies that show willingness are rewarded by growing ‘green’ demand.

Gueneau et al (1998) argue that these instruments do not work against the logic of the market, and they appear ultimately to place fewer demands on the public authorities than certain traditional tools. Nonetheless, their effectiveness depends partly on how the public authorities act. They need to ensure that negotiations are democratic by seeing that the broadest possible range of actors (companies, consumers and associations) is represented. In addition, they have to be on their guard against the strategies of polluters wishing to pass on their costs to society. The public authorities also need to be aware of the problems of competitiveness that may arise for SMEs, as the voluntary approach entails a fixed cost that may be proportionally higher for them than for large firms. Green marketing may be seen by big companies as an aggressive sales strategy that smaller and less financially powerful companies cannot match.

International environmental policy instruments International law governing relations between States is the main tool for promoting sustainable development worldwide. Gueneau et al (1998) argue that the provisions of international law should not only establish fundamental principles and rules of conduct, but also create frameworks of co-operation. This enables States to jointly determine their common interests and the sectoral policies needed to preserve them. These policies are then expressed in the form of economic instruments, obligations of trade measures and rights enshrined in multilateral agreements. Ultimately, private regulation initiatives tend to develop on an international scale.

Bilateral rules enshrine the duty of States not to cause damage to the environment beyond their own territory, to co-operate and to inform other States about any pollution or any risk. However, the multilateral approach, which is of very long standing, has been greatly strengthened in three successive stages starting in the 1970s. In the first instance, it was greatly developed to deal with sectoral environmental protection problems, the effects of which were supposed to be felt particularly at the local level. These include for instance, protection for the sea, continental waters and the atmosphere, and conservation of wild flora and fauna. A further stage in the development of international environmental law was marked at the end of the 1970s following growing awareness of the need for transversal rules for substances that were potentially damaging to the environment at every stage in their life cycle (production, transportation, commercialisation and disposal). In these areas, recourse has often been made to codes of conduct or non-binding directives drawn up by the branches of industry concerned. The drawing up of real laws, of a preventive nature, to deal with global problems such as the need to safeguard the ozone layer, preserve biodiversity and combat the greenhouse effect formed the milestone of the beginning of the final stage. In each sector or transversal field, a proliferation of international treaties is developing (Gueneau et al, 1998).

Consequently, the idea behind international environmental law is not so much to harmonise national rules, but rather to prepare the instruments needed to protect interests deemed common to all humanity. It has gradually adapted to the different environmental challenges, transcending the old framework of inter-State responsibilities, through the creation of true global management instruments, most of them economic.

Despite the progress that has been made in terms of both quality and quantity, though, there are still major difficulties in applying international environmental law. According to Gueneau et al (1998), the greatest obstacle to the implementation of international environmental law derives from the economic disparities between States. In particular, what may appear to one Government as merely an administrative formality may be an insurmountable task to another. Merely participating in international negotiations to conclude an MEA can sometimes be a problem. Since MEAs are voluntary agreements that only apply to signatory countries, certain countries can refuse to sign-up, and opt to go it alone. By doing so, they avoid the obligations and constraints dictated by the agreement and at the same time gain certain economic advantages. For instance, they can benefit from a short-term competitive advantage in energy costs since signatory countries are obliged to implement costly policies to reduce the greenhouse effect. In addition, the architecture of the international legal system is also a source of difficulties. Different environmental agreements, be they bilateral or multilateral, are co-ordinated with one another. But, conflicts of authority can still arise in the absence of any ultimate governance, which would require some sort of world environmental organisation. More broadly, there are serious problems of compatibility between MEAs and other international legal provisions, such as the multilateral trade rules of the WTO, particularly in view of the fact that the legal texts that set up the WTO make no reference to the precautionary principle. Recourse to trade instruments on the basis of an MEA can also lead to conflicts with the WTO rules. Lastly, the fact that treaties are in many cases not binding makes it difficult to apply and consolidate them even as the good intentions expressed by States accumulate. Moreover, international regulations are often judged to be ineffective because of their rigidity and the wide scope for evasion and abuse even when they do include legally binding provisions. Liberals criticise them for placing restrictions on the free working of markets. Nonetheless, this position is tending to weaken as economic instruments are increasingly incorporated into MEAs. Indeed, whether they take the form of taxes, subsidies, eco-labels or negotiable permits, the proper functioning of economic mechanisms can only be guaranteed by the legal instrument from which they derive (Gueneau et al, 1998).

Trade policy instruments Many MEAs provide for trade measures, which essentially have the following three objectives:

  • To secure a total or partial ban on trade in products obtained from endangered species, such as ivory or skin and fur products (as with the Convention on International Trade in Endangered Species of Wild Fauna and Flora).

  • To penalise or prohibit international movements of polluting or dangerous products (as with the Bamako Convention).

  • To provide purchaser countries with information as to whether a traded product is ‘environmentally sound’ or harmful (Gueneau et al, 1998).

The measures employed to achieve the first two objectives include trade embargoes, and import or export permits and quotas. Those employed for the third objective on the other hand include prior informed consent procedures (i.e., regarding the hazardousness of a product being traded), and eco-labelling procedures for a product manufactured in accordance with specifications previously negotiated multilaterally. Unfortunately, the eco-labelling instrument is not included in the provisions of any MEA. For it to be applicable, it would require the parties to an MEA to establish sustainability criteria and indicators that companies in the signatory countries would have to comply with to obtain an eco-label for the products they sold. In most cases, negotiations stall when it comes to defining sustainable practices. It is partly for this reason that international convention on the protection of forests has yet to yield any fruits. In effect, eco-labelling is currently being developed primarily at the national and regional levels, raising problems of international competition. Nonetheless, international non-governmental initiatives are now emerging from alliances between industrial groups, environmental movements and social organisations to certify that environmentally sensitive economic activities are being managed sustainably. The ISO 14000 standards approach on the other hand finds less favour among States and international organisations than the one developed by the ISO. The ISO 14000 comes in response to the pressure applied by an ever-growing body of consumers who want to be informed about the environmental quality of products, without having to pay a great deal more for them. This tool also enables companies to improve their environmental performance, and to comply more easily with national environmental legislation. The characteristic features of the ISO 14000 standards apply exclusively to systems for assessing procedures and do not oblige producers to meet any environmental performance criteria in excess of minimum legal requirements (Gueneau et al, 1998).

Measurement of wealth Created in the early 1990s, indicators of sustainability have been developed as another way of responding to the need for environmental information in political and economic circles, and among the public at large. This approach made a strong comeback at the beginning of the 1990s largely because it had the backing of certain international organisations despite being criticised in the 1970s for being incomplete and static, and then abandoned in favour of accounting methods. The objective of green GDP, a strictly macroeconomic approach to environmental accounting is to adapt the SNA by adding a number of elements to it. These include the cost of environmental damage and depletion of stocks of natural resources, environmental management costs, and the value of environmental services. In this way, by treating the consumption, depletion and reconstitution of natural resources as so many types of intermediate consumption, the value added by production can be reduced and GDP figures corrected for damage to the environment (known as green GDP), can be calculated. This method was applied for the first time at the end of the 1980s by the World Resources Institute, which evaluated the disappearance of Indonesian forests in order to include this in figures for net domestic product. However, this demonstration, which was widely covered by the media, was more valuable as a way of alerting environmentalists and economists to the failings of the SNA than as a contribution to the development of a macroeconomic indicator representative of the sustainability of the Indonesian economy. Costa Rica undertook a similar exercise more recently, giving rise to a great deal of debate. A consensus has finally been reached. For instance, it is now being accepted that environmental accounting efforts should concentrate more on the establishment of accounts that can be used to support sectoral decision-making than on the calculation of green GDP. Nonetheless, the intrinsic characteristics of the environment, which is essentially non-tradable has exposed certain discrepancies in SNA adjustments and green GDP calculations (Gueneau et al, 1998).

Gueneau et al (1998) have observed that the satellite accounts approach supplements the economic information appearing in the SNA without altering it. It is used in a number of countries to provide detailed accounting information on a particular activity, such as research, education, transport, social protection or the environment. In this last area, satellite accounts serve to put into perspective the efforts being made by a country to protect the environment. They combine physical data from statistics on the state of the environment and natural resources with the information available from the main body of national accounts, such as expenditure on restoring the environment or the costs of environmental damage. Consequently, they extend the analytical capabilities of the SNA in selected areas. Unfortunately, they do not change the traditional macroeconomic indicators (GDP and GNP) at all, and consequently do not correct their failings.

The most promising uses of environmental accounts are not so much at the macroeconomic level, where the practical applications of these accounts are poorly defined and major problems of methodology remain. Rather, it is at the sectoral level, where demand for such instruments reflects precise needs, such as water or forestry management. The different names used in environmental accounting (satellite accounts, natural heritage accounts and natural resource accounts) do not reflect major differences of principle. These three accounting tools serve the same purposes. However, creating such accounts entails an effort to bring structure and coherence to data on the environment, and to integrate and organise information. By showing the state of natural resources and environments, and the way these change as they are subjected to the pressures of human activity, they provide the kind of knowledge about the environment that is needed for effective management. These accounts provide a picture of the major trends in environmental change and the impact of sectoral economic activities on flows and stocks of resources (and vice versa). Environmental accounts collect together basic data that can be used to produce indicators of sustainability, such as data on the intensiveness of forest use (Gueneau et al, 1998). Therefore, they contribute towards the production of sustainable development policies.

The Role of International Institutions

While multilateral agreements and international human rights regimes hold only national governments accountable, national governance holds all actors accountable within national borders. But, these are being overtaken by the rising importance of supranational global actors (TNCs) and international institutions (IMF, World Bank, WTO and Bank for International Settlements). It is partly for this reason that poor countries and poor people have little influence and little voice in today’s global policy-making forums. For instance, whereas developing countries are a majority of the WTO’s members, its discussions can be dominated by the concerns of older, richer members. The most influential is the G-8, whose members control the Bretton Woods institutions through voting rights, and the UN Security Council by occupying three of the five permanent seats. Moreover, although there have been many efforts to develop collective third world positions through such bodies as the G-15, the G-24 and the G-77, there is no developing country body equivalent to the G-8 or OECD, with similar levels of resources, consultation and policy co-ordination. Consequently, a feeling that their voices are not being heard can frustrate poorer countries. In fact, half of the least-developed countries have no representation at the WTO headquarters in Geneva.

An essential aspect of global governance, as of national governance, is responsibility to people through equity, justice and choice enlargement for all. Therefore, needed are standards and norms that set limits and define responsibilities for all actors. Some of the key institutions of global governance needed for the twenty-first century include, a stronger, broader and more coherent UN to provide a forum for global leadership with equity and human concerns; and a global central bank and lender of last resort. In addition, there is need for a WTO that advocates for both free and fair international trade, with a mandate extending to global competition policy with antitrust provisions. Furthermore, the global era requires a code of conduct for TNCs, a world environment agency, a world investment trust with re-distributive functions, and an international criminal court with a broader mandate for human rights. Even before these long-term changes are initiated or achieved, many actions could be taken in the short-run. For instance, a great deal more work is needed on how to strengthen national labour laws and enforcement of existing laws through national, regional, and global mechanisms. From this point of view then, the principle of subsidiarity, that decision-making should start with strong local institutions and then work up toward regional, national, and global institutions, still requires effective global implementation.

The World Trade Organisation Rather than responding to the ineffectiveness of the trade rules with the scrapping of the WTO, as proposed by some (extreme?) anti-globalisation activists, the better option is to retain the WTO but ensure that the trade rules work for all. But without a rules-based trading system, the powerful countries can bully the rest not least by striking mutual deals, which exclude poorer countries. The WTO needs reform, which enables more effective participation in the WTO and international trading system by developing countries. Hence, the need for an open and rules-based international trading system, equitable trade rules, and an effective voice for developing countries. In addition, there should be a continuing reduction in barriers to trade, both in developed and developing countries, and work to improve the capacity of developing countries to take advantage of new trade opportunities. Furthermore, there is need for the WTO to commit itself, with the rest of the international community, to achieving the International Development Targets. This would be a powerful signal of its commitment to poverty reduction and sustainable development, and acknowledgement that trade is not an end in itself.

The United Nations Although there is now a special body dealing with the subject, the governance of sustainable development within the UN system is complicated by the existence of numerous UN agencies that take a close or passing interest in environmental and development issues. These include the Food and Agricultural Organisation (FAO), the UN Development Programme (UNDP) and the WHO. In addition, there are regional programmes and organisations, not to mention the secretariats of the international conventions on climate change and desertification.

Two fundamental issues need to be addressed. First, rather than engage in embarrassing conflicts, there should be more co-operation between UN organisations. Second, the weight of influence given to the UN organisations should be comparable to that given to the international economic institutions. More generally, there is the need for in-depth reorganisation of the institutional architecture of sustainable development. It is partly for this reason that a number of political actors have put forward the idea of a superstructure, a World Environment Organisation (WEO), as a sort of counterpart to the WTO.

The Commission on Sustainable Development The main function of the CSD is to promote and evaluate implementation of Agenda 21 by strengthening co-operation between States and institutions in all areas. The CSD has concentrated on a number of priority issues including sustainability criteria for development, financial resources and mechanisms, education, science and technology transfers for environmental ends, and decision-making structures and the role of the main actors concerned with the environment.

Since its foundation, the CSD has played an important role in creating a common basis for action between developed and developing countries. Most of these countries have set up a national commission for sustainable development and drawn up national strategies. The CSD has also provided a forum for discussion in which NGOs, and to an ever greater extent companies, have a strong presence. Nonetheless, it currently suffers from two failings. On the one hand, it does not have the real power it needs to enforce the agreements entered into at the Rio Conference. On the other hand, it is basically composed of ministries of the environment from member States. Gueneau et al (1998) argue that if the CSD is to be a place where international policy is really made, its working agenda will also have to include economic issues, and it will need to be able to involve ministers of finance. By taking a stronger position on economic policy, the CSD could provide an institutional basis upon which consensus over policy co-ordination and harmonisation of minimum standards could be built.

International economic organisations Gueneau et al (1998) have observed that in parallel with the changes going on within the UN system, economic organisations, foremost among them the World Bank, are planning to reorganise their activities to take account of the sustainable development principle. However, they are poorly prepared to deal with this new issue. In particular, these attempts at reorientation have been highly criticised so far, specifically by ecologists, who often describe as ‘window dressing’ the way in which these organisations take environmental matters into consideration. Nonetheless, more and more interest is being shown in the idea of establishing international environmental standards that would enable the governance challenges posed by international trade rules and competitive pressures to be identified. For instance, there have been proposals to set up a single multilateral body to deal with international environmental and sustainable development issues. The first relates to co-ordination of the use of economic and financial instruments. As discussed earlier, fiscal and economic instruments are being used more and more to apply environmental agreements. The effectiveness of these instruments would undoubtedly be enhanced if the institutions involved shared their experience with one another. This was the substance of a proposal by UN Environment Programme (UNEP), whose project to set up an intergovernmental panel on the use of economic instruments provided for by conventions unfortunately failed to arouse the interest of the international community. The second relates to integrating the private sector and civil society. Even though a great deal of progress has been made in bringing together NGOs and the private sector in the international decision-making process, NGOs still point to democratic failings, in respect of legal recourse for example. For instance, the idea of giving a central role to the International Court of Justice by creating an Environmental Division has not come to anything. Other proposals include the introduction of an international environmental mediation function, which could enable NGOs to take action to enforce MEA compliance by States. Another proposal is for the creation of international networks with competence over a limited number of issues of worldwide importance, which would bring together representatives of civil society, the private sector and Governments. Such transversal networks could be used to counter institutional inertia.

While international institutions have opened up to NGOs, what is most striking, is the way the great international economic organisations have gradually opened up to civil society. The UN, for example, has granted several hundreds of them observer status in international debates. The positions of NGOs generally seem to be less dogmatic now than they were in previous decades. Consequently, many NGOs have moved from a strictly anti-establishment position to a proactive one. Taken together, these components of civil society are playing a more and more important role in drawing attention to environmental problems and putting them on national and international agendas. Their influence has been brought clearly to light by their participation in several UN conferences. But, this is still not enough. Therefore, NGOs should be given more status in these organisations.

The Kyoto negotiations only reinforced the division between North and South over strategies for combating the greenhouse effect. At previous Conferences of Parties, it was agreed that developing countries did not have to accept binding commitments because it was the industrialised countries that were historically responsible for greenhouse gas emissions. At Kyoto, the US went back on this position. This aroused categorical opposition from developing countries, which believe that rich countries ought to show the way in reducing emissions. However, Gueneau et al (1998) argue that it seems to be indispensable for countries such as China, India and Brazil, whose contributions to the greenhouse effect are increasing, to enter the agreement. Besides, they have every interest in doing so, both for economic reasons and to improve their development models. For this to happen, though, their participation needs to be under conditions that take due account of their core development requirements.

The North-South Equity Divide

Trade and investment All countries need strong and coherent policies for managing their integration into the rapidly changing global economy. Therefore, narrowing the gaps between rich and poor and the extremes between countries should become explicit global goals.

In order to negotiate more favourable provisions in multilateral agreements, poor and small countries need to pursue active participation in the global dialogues on multilateral agreements from their development to negotiations and then implementation. Poor and small countries can gain from collective action to link negotiations on intellectual property rights with rights to emit carbon into the atmosphere, and to link environmental assets, like rain forests, to negotiations on trade, debt and investment. They can also gain in negotiations by pooling resources for policy analysis and developing common negotiating positions. Since regional collective action is a first step in this direction, this is where the role of regional integration could play a paramount role in increasing their bargaining power. Therefore, they should utilise regional solidarity and regional institutions to develop common positions for negotiations. In addition, it would help to maintain policies and practices consistent with economic and financial stability. Furthermore, a regional support fund such as that for financial stability proposed in 1997 would help in crises.

In addition, the West should institute a pro-development negotiating position in a new Trade Round, including substantial cuts in high tariffs and in trade-distorting subsidies, especially to sectors such as agriculture and fisheries, which are important to developing countries. Western Europe should recognise that its CAP is an unfair barrier to the access of developing countries to their markets. Therefore, the recent European Commission proposal which would allow all exports from least developed countries into the EU duty free, except for arms should be implemented.

As consumers reasonably press for more information and higher standards to protect labour and the environment, developing country exporters find it hard to keep up with the proliferation of regulations and standards. They fear the ‘process standards’ on labour, animal welfare or the environment, may be used to keep their products out of developed country markets. While there is need to promote core labour, environmental, social and health standards, the West should deliver information and quality to consumers while still enabling developing countries to export and grow their way out of poverty. Standards should not be used to lock developing countries’ products out of their markets.

Official development assistance Developing countries need help to make their emerging industries conform to global environmental agreements and objectives (such as on emissions of greenhouse gases) as well as their own national priorities for sustainable development. While protecting the fragile resources of the planet, and the people who depend on them, makes globalisation work, richer countries cannot expect developing countries to do this alone. They have to make sure that aid does what it’s supposed to do. That is, not only to reduce poverty by strengthening the arm of the poor, but also to create conditions to attract inward investment and boost economic growth. Donor countries should stop tying aid only to suppliers. In addition, they should work to ensure that aid is more effective and is focused on low income. Aid from developed nations needs to dovetail with realistic strategies to reduce poverty, designed and led by developing countries themselves.

In sum, stronger international action is needed to support growth and accelerate human development in marginalised countries. This requires reversing the decline in flows of ODA, down by almost a fifth in real terms since 1992. Even without increasing resources, ODA can be targeted more to the countries in greatest need, and to achieving key human development goals.

Debt relief Currently, debt payments cripple the ability of many developing countries to invest in development. For several highly indebted poor countries, then, development is dependent on concerted international action to reduce what they owe. Tentatively, the member States of the Paris Club (the main public sector creditors) have cancelled some debts, most of them owed by low-income countries. Conversion solutions for reducing developing country debt were also put forward at the end of the 1980s, including proposals to establish a ‘debt for nature’ trade-off mechanism (Gueneau et al, 1998).

Debt relief for the heavily indebted poor countries whose debt payments have been squeezing spending on education and health should be given priority. Gueneau et al (1998) recommend that any resolution to this crisis should include an expansion of the resources available, and the countries eligible, for bilateral and multilateral debt relief. Moreover, this relief should not be conditioned on IMF and World Bank structural adjustment programs and it should allow countries to dedicate sufficient resources to health care, education, social services, and environmental protection. The IMF should enforce Article 6 of its charter, which highlights the need for it to oversee capital controls, not capital account liberalisation, and to end structural adjustment. In addition, the IMF need only retain minimal capability as lender of last resort, and gather and publish international economic data. Furthermore, decision-making by the IMF board needs greater transparency and accountability. This could be fulfilled, in part, by introducing greater democracy in voting and publicly releasing all information about its operations.

In addition, regional, national and local agendas should be drawn. At the regional level, regional funds should be created outside IMF control to ensure a quick response to crises while maintaining regional sensibilities and interests. At the national level, the rules and institutions of the global economy should allow maximum space for national government policy making to regulate the amount, pace and direction of capital movements. National governments should set regulations and incentives on cross-border transactions so as to eliminate capital flows that are entirely speculative (e.g. gambling on market fluctuations as differentiated from hedging risk) and can undermine the real economy. National governments should strive to reduce the volatility that has characterised exchange rates since the collapse of the Bretton Woods arrangements in the early-1970s. Any international regime should reinforce the ability of governments to maintain this stability. At the local level, local and national regulations and taxes should be structured in such a way so as to encourage local investment and control of local capital. Local education initiatives should also inform citizens about the power of using their assets (Gueneau et al, 1998).

Transinational corporations TNCs influence the lives and welfare of billions of people, yet their accountability is limited to their shareholders, with their influence on national and international policy-making kept behind the scenes. If they were brought into the structures of global governance, their positions would become more transparent, and their social responsibilities subject to greater public accountability. Greater public accountability and more transparency would make their operations more democratic and increase their credibility.

A multilateral code of conduct needs to be developed for TNCs. Today, they are held to codes of conduct only for what national legislation requires on the social and environmental impact of their operations. True, they have in recent years taken up voluntary codes of ethical conduct. But multinationals are too important for their conduct to be left to voluntary and self-generated standards.

The Human Development Report 1994 proposed a world antimonopoly authority to monitor and implement competition rules for the global market. That authority could be included in the mandate of the WTO but with representation from both the developed and developing countries, and also with representatives of civil society and private financial and corporate actors. A joint World Bank-UN task force should be set up to investigate global inequalities and suggest policies and actions on how they can be narrowed over the next two or three decades. The task force should report to the UN Economic and Social Council and to the World Bank Development Committee.

Digital disparity Communications networks can foster great advances in health and education. They can also empower small players. For instance, the previously unheard voices of NGOs helped halt the secretive OECD negotiations for the Multilateral Agreement on Investment, called for corporate accountability and created support for marginal communities. Barriers of size, time and distance are coming down for small businesses, for governments of poor countries, and for remote academics and specialists. Information and communications technology can also open a fast track to knowledge-based growth. This is exemplified by India’s software exports, Ireland’s computing services and the Eastern Caribbean’s data processing.

The governance of global communications especially the internet should be broadened to embrace the interests of developing countries in decisions on internet protocols, taxation, domain name allocation and telephone costs. Public investments are needed in technologies for the needs of poor people and poor countries, in everything from seeds to computers. An international programme should be launched to support this. New funds should be raised to ensure that the information revolution leads to human development. New sources of financing for the global technology revolution could be investigated, to ensure that it is truly global and that its potential for poverty eradication is mobilised. A ‘bit’ tax and a patent tax could raise funds from those who already have access to technology, with the proceeds used to extend the benefits to all. In addition, more connectivity can be achieved not by just individual ownership, but by setting up telecommunications and computer hardware, and focusing on group and, hence community access. Furthermore, more capacity can be realised by building human skills for the knowledge society, and more content by putting local views, news, culture and commerce on the Web. Likewise, more creativity can be seized by adapting technology to local needs and opportunities, more collaboration by developing Internet governance to accommodate diverse national needs, and more cash by finding innovative ways to fund the knowledge society everywhere. The challenge is to connect more people from the world’s poorest countries with the benefits of the new globalisation. Nonetheless, this depends on political will, and on governments and people across the world.

Human Insecurity

Financial volatility The financial crisis in East Asia spot-lighted the inadequacies of national and global governance in managing economic and financial integration. All countries are affected by the swings of the world economy, particularly if they have opened their economies. While countries need to manage their vulnerabilities to these swings, international action is needed to manage and prevent financial instability. Policy should focus on liberalising the capital account more carefully, with less international pressure and greater flexibility for countries to decide on the pace and phasing based on their institutional capacities. Financial institutions should also be subjected to greater transparency and accountability. Developing countries need to strengthen the legal and regulatory institutions in their financial sectors. Macroeconomic management should be integrated with social policies to reduce the impact of financial turmoil on the economy and to minimise the social costs. There is need for strengthening international action to regulate and supervise banking systems, building on the provisions of the G-10 in requiring greater transparent. Since people feel the real losses and risks from financial crises, a parallel funding mechanism should be established to protect them and their rights to development. This can be achieved by establishing an international lender of last resort for people to complement financial packages.

The rules and institutions of global finance should seek to reduce instability in global financial markets. They should discourage all speculation and encourage long-term investment in the real economy in a form that supports local economic activity, sustainability, equity, and poverty reduction. In addition, they should allow maximum space for national governments to set exchange rate policy, regulate capital movements, and eliminate speculative activity. Governments should not absorb the losses caused by private actors’ bad decisions. The rules and institutions of the global economy should seek to decrease private speculative flows while increasing those public flows that support sustainable and equitable activities. In addition, the governments of the world’s major currencies should levy a tax on certain international transactions so as to discourage speculative and herd behaviour in international capital flows.

Criminal security One of the biggest barriers to development is armed conflict. Its threat to investment, stability and security destroys the conditions for growth. Stronger global co-operation and action are needed to address the growing problems beyond the scope of national governments. The fight against global crime requires national police to take co-operative action as rapidly as the crime syndicates do. Dismantling bank secrecy and providing witness protection for foreign investigations would dramatically improve the effectiveness of the global fight against global crime.

International efforts should be stepped up to regulate the trade in small arms. In addition, a licensing system to control arms brokers and traffickers should be introduced, and tighter controls implemented internationally through the UN conference on small arms.

Health security More global action is required to address HIV/AIDS, which is penetrating borders everywhere. Developed countries should work with developing countries and international organisations to help strengthen the international effort to tackle HIV/AIDS. They should seek to increase public and private expenditure on research for development, and the provision of new public health care units. Efforts should be directed at disseminating the benefits of research from developed to developing countries, providing medicines and preventive measures at reasonable cost in developing countries, and strengthening public health systems in the developing world.

Food safety and food security Gueneau et al (1998) have rightly recommended that any new rules of trade should recognise that food production for local communities should be at the top of a hierarchy of values in agriculture. Local self-reliance in food production, and the assurance of healthful, safe foods should be considered basic human rights. Shorter distances and reduced reliance on expensive inputs, which should be shipped over long distances, are key objectives of a new food system paradigm.

Conclusion

This era of globalisation is opening many opportunities for millions of people around the world. Increased trade, new technologies, foreign investments, expanding media and Internet connections are fuelling economic growth and human advance. All this offers enormous potential to eradicate poverty in the twenty-first century, to continue the unprecedented progress in the twentieth century. There is more wealth and technology, and more commitment to a global community than ever before. Global markets, global technology, global ideas and global solidarity can enrich the lives of people everywhere, greatly expanding their choices. The growing interdependence of people’s lives calls for shared values and a shared commitment to the human development of all people.

The post-cold war world of the 1990s has sped progress in defining such values in adopting human rights and in setting development goals in the UN conferences on environment, population, social development, women and human settlements. But today’s globalisation is being driven by market expansion, opening national borders to trade, capital, information outpacing governance of these markets and their repercussions for people. More progress has been made in norms, standards, policies and institutions for open global markets than for people and their rights. And a new commitment is needed to the ethics of universalism set out in the Universal Declaration of Human Rights.

Gueneau et al (1998) note that competitive markets may be the best guarantee of efficiency, but not necessarily of equity; and liberalisation and privatisation can be a step to competitive markets, but not a guarantee of them. And markets are neither the first nor the last word in human development. Many activities and goods that are critical to human development are provided outside the market. But, they are being squeezed by the pressures of global competition. There is a fiscal squeeze on public goods, a time squeeze on care activities and an incentive squeeze on the environment. When the market goes too far in dominating social and political outcomes, the opportunities and rewards of globalisation spread unequally and inequitably, concentrating power and wealth in a select group of people, nations and corporations, marginalising the others. When the market gets out of hand, the instabilities show up in boom and bust economies, as in the financial crisis in East Asia and its worldwide repercussions, cutting global output by an estimated $2 trillion in 1998-2000. When the profit motives of market players get out of hand, they challenge people’s ethics, and sacrifice respect for justice and human rights.

But because globalisation offers both positive and negative effects, its challenge in the new century is not to stop the expansion of global markets. Rather it is to find the rules and institutions for stronger governance local, national, regional and global to preserve the advantages of global markets and competition. Additionally, it is to provide enough space for human, community and environmental resources to ensure that globalisation works for people, not just for profits.

That is why the policy recommendations presented in the foregoing discussion are based on the understanding that for developing countries, which are characterised with vicious circles of problems, FDI as a channel of economic growth is of particular relevance. However, in order to get maximum benefits from its positive spillover effects, governments have to employ several tools. These may include tax incentives and grants; provision of industrial estates, export processing zones, and other infrastructure; and simplification of the bureaucratic procedures facing potential investors. In addition, they may negotiate bilateral tax, trade, and investment treaties with countries from wherever investments might come. Further, governments recognise the importance of political stability, realistic exchange rates, and rapid growth in attracting foreign investment. Therefore, they may attempt to create a favourable environment by guaranteeing repatriation of profits, assuring access to imported components, and promising not to expropriate property without compensation. In addition they may pursue strategies aimed at creating an employable human base founded mainly on scientific and technical norms and continuing to develop it through its useful employment life cycle; upgrading infrastructural services; diversifying and upgrading the export production base through the identification of the most competitive industries and stimulation of SMEs; implementing macroeconomic policies that lead to the stability of the currency, promote the competitiveness of productions and, hence, the confidence of investors; and if possible, establishing regional integration schemes based more on an economic than a political foundation to counter some of their shortcomings.

The message in brief is that if developing countries are to benefit from this channel of economic growth, their governments should first and foremost endeavour to integrate into the value chain of the international division of labour. They need to treat their countries as if they are ‘products’, which they are developing and want to market. This involves the pursuance of all sorts of strategies in the development, promotion and marketing arenas implying that the whole process requires a strategic management approach since there are other ‘products’ in the market place some of which are already superior, which they have to compete with. In addition, developing countries require to set-up a resource base that can facilitate their progressive shifts up the levels of technological complexity. This involves instituting flexible plans for deepening the content of export activity and building the human capital and macroeconomic capacity to sustain such a shift across a range of tradable activities in response to the rapidly changing world demand and technologies.

But that is not the end of the story. The economic effects generated through the aforementioned strategies have to be managed in such a way that they induce sustainable development for all. Specifically, globalisation should be managed so that it leads to economic growth, to less violation of human rights, less disparity within and between nations, less marginalisation of people and countries, less instability of societies, less vulnerability of people, less environmental destruction, and less poverty and deprivation. Hence, besides engendering economic issues, it should also address issues pertaining to ethics, equity, inclusion, human security, sustainability and development. In other words, economic issues should be amalgamated with ecological, and social and political issues so that the debate goes beyond examining just economic growth, to exploring issues in terms of sustainable development for all. To achieve this, the benefits of economic growth should be shared equitably, so that the increasing interdependence arising from globalisation should work for all people, and not just for profits. Additionally, the environment should be treated as a scarce resource so that some of the benefits derived from economic growth are utilised in its preservation. Thus, while sustainable economic growth combined with environmental protection should lead to sustainability, sustainable economic growth coupled with less poverty deprivation should result into development.

 

5 responses to “7 Policy Considerations

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