Martin Khor Director, Third World Network
A. THE CRISIS OF SUSTAINABLE DEVELOPMENT
It has been almost a decade since the Rio Summit of 1992. At the time it was hailed as an achievement for placing the environment crisis at the top of the international agenda, and for linking environment with development in a new paradigm of sustainable development. There was a hope that the “Spirit of Rio” would carry the paradigm forward into practical programmes and policies that would deal with both the environment and development crises in a new North South partnership.
Today it must be admitted that the process after Rio has largely failed to fulfill the promise and hopes of Rio. The Rio Plus Five Summit (UN General Assembly Special Session to review UNCED) concluded in June 1997 without a political statement because the divide between North and South countries was too wide to bridge. The world’s environment had continued to deteriorate. For example, forests continue to disappear or be degraded at a rate of 14 million hectares a year; Greenhouse Gases are still increasingly pumped in the atmosphere, but the US has pulled out of the Kyoto Protocol and the present targets for emission reductions are clearly inadequate; and there is a looming crisis of water shortages around the world.
The reason is not to be found in the paradigm. Rather, the paradigm was not given the chance of being tested in implementation. Instead, the sustainable development paradigm came under competition from a rival, the paradigm of globalisation. This rival had indeed already been gathering strength even before the UNCED process. But UNCED for a time gave globalisation good competition, and UNCED was even given support by the Copenhagen Social Development Summit of 1995.
However, the globalisation paradigm was given a great boost by the Marakkesh Agreement of 1994 that established the World Trade Organisation. Globalisation found a new institutional house with its many rooms in the WTO’s several agreements. Moreover the WTO’s dispute settlement system based on retaliation and sanctions gave it a strong enforcement capability. The WTO agreements rivalled the chapters of Agenda 21 and the Rio Declaration. The UNCED did not have a compliance system or a strong agency for following up its agreements. As the 1990s drew on, and the WTO agreements became more and more operational, the globalisation paradigm far outstripped the sustainable development paradigm. Marakkesh 1994 overrode and undermined Rio 1992.
Moreover, globalisation was fostered by more than the WTO. Financial liberalisation contributed to the series of new financial crises that began with Mexico, going on to East Asia, Russia and Brazil and now enveloping Turkey and Argentina. This was in addition to the old financial crisis of debt in Africa and other regions that has refused to go away. Globalisation also took the form of the spread of new technologies, including genetic engineering that has the potential of impacting significantly on the environment. The competition between the two paradigms, with globalisation without doubt running away as the winner, and moreover a winner whose speed, direction and effects seem to be uncontrollable, has resulted in a crisis of sustainable development — or rather a number of crises:
- The environment crisis has not been checked. It is getting worse including in the area of biodiversity loss, water depletion and scarcity, climate change, deforestation. The effects are going to be devastating.
- The crisis of development has worsened. The plight of LDCs continues, whilst many of the more successful emerging economies also fell into crisis, and several development options have been diminishing in scope or possibility.
- The conceptual, policy and political link between environment and development which had apparently been made inextricable by the UNCED process seems to have broken all too easily, and “development” as a principle or right seems to be disappearing in the Northern establishment.
- Even on the more narrow arena of environment, there is a backlash from commerce- backed forces, which has resulted recently in weakening of multilateral partnership (as witness a small group of countries almost succeeding in scuttling the Biosafety Protocol, and the US rejecting the Kyoto Protocol).
In short, in the years after the Rio Summit, the environment has dropped many notches down the global and national agendas, whilst “development” is also fast vanishing as a principle and an agenda item, in the countries of the North and thus in the international agenda.
The process of globalisation has gained so much force that it has undermined and is undermining the sustainable development agenda. Commerce and the perceived need to remain competitive in a globalising market, and to cater to the demands of companies and the rich, have become the top priority of governments in the North and some in the South. Correspondingly, partnership for environment and development concerns has been downgraded.
The most glaring weakness at Rio was the failure to include the regulation of business, financial institutions and TNCs in Agenda 21 and the other decisions. These institutions are responsible for generating much of the pollution and resource extraction in the world, as well as greatly contributing to the generation of unsustainable consumption patterns and aconsumer culture. UNCED and the Commission on Sustainable Development, the UN system as a whole and governments have collectively failed to create international mechanisms to monitor and regulate these companies. Instead their power and outreach have spread much more, and this has been facilitated by the implementation of the WTO’s rules.
However whilst sustainable development is at a low ebb, there are also signs of its revival as a paradigm. The limitations and failures of globalisation have caused a major public backlash which may eventually result in some policy changes. Pro-sustainability forces within governments in developing countries are becoming more aware of their right or responsibility to try to rectify the present problems, including changing some of the rules in WTO. The World Summit on Sustainable Development provides a good opportunity to refocus attention of the establishment and the public, not only on the problems, but on the need to shift paradigms. This paper re-states the UNCED principles, reviews UNCED’s weaknesses and the problems of non-implementation of the Rio agreements, gives examples of how globalisation has undermined sustainable development goals, and outlines proposals for dealing with some of the problems in the interface between globalisation and sustainable development.
B. THE BASIC UNDERSTANDING AT RIO
The UNCED was a historic watershed that raised hopes of people around the world of the emergence of a new global partnership. This new partnership, arising from the “Spirit of Rio”, would change the course of international relations, tackle the growing global environment crisis and simultaneously strive for more equitable international economic relations that would be the basis for promoting sustainable development globally and in each country.
The unique achievement of UNCED was that through its long preparatory and Summit processes, the world’s diplomats and highest political leaders recognised not only the environment crisis in its many facets, but how this was embedded in economic and social systems, and that a realistic and long-term solution lay in dealing with both the environment and the development crises simultaneously and in an integrated fashion.
UNCED also involved thousands of non-governmental organisations, which were able not only to champion their particular issues, but through intense interaction among groups from North and South and from the environmental, development and social spheres, were able to develop a much more integrated approach to global and local problems. UNCED was an important landmark for catalysing the development of a “global citizen movement.”
It also provided an opportunity for citizen groups and governments to engage in dialogue on the most pressing global problems confronting humanity and the Earth, and generated an international community, of governmental, non-governmental, and inter-governmental officials, agencies and individuals, who shared an understanding (however tentative) of the integrated nature of environment and development, and a recognition of the need for fundamental changes in economic and cultural systems, to prevent environmental catastrophe and social disorder.
The “compact” or core political agreement at the Earth Summit was the recognition that the global ecological crisis had to be solved in an equitable way, through partnership. This was captured in the principle of “common but differentiated responsibility” in the Rio Declaration. This principle acknowledged that the North has historically and at present, been more responsible for the despoilation of the global environment, has more resources due to the uneven nature of the world economy, and has a proportionately greater responsibility in resolving environmental problems.
The South is being hampered in meeting the basic needs of its people by its unfavourable position in the world economy, and its national resources are being drained through falling commodity prices, heavy debt burdens and other outflows. Development goals, poverty eradication and provision for basic needs are (or should be) their top priorities. Environmental concerns should be integrated with (and not detracted from) these development objectives.
In concrete terms, the North-South agreement, and implementation of the principle of “common but differentiated responsibility” would require that:
(a) The North would change its production and consumption patterns (and its economic/social model). It would take the lead in improving environmental standards, reduce pollution and the use of toxic materials, and cut down the use and waste in natural resources, including through changing lifestyles. By “putting its own house in order”, the North would show an example to the rest of the world that there is a need for a change in economic and social behaviour in order to solve the environment crisis;
(b) The North would help the South with financial aid and technology transfer, and through partnership in bringing about a more favourable international economic environment (for example, through more equitable terms of trade and a resolution of the debt crisis). This would enable the South to have greater resources and a larger “development space” that would in turn facilitate a change in development model that would be more environmentally sustainable;
(c) The South, by having more financial and technological resources, would manage its economy better, give priority to policies that meet people’s needs, improve pollution standards and reduce depletion of resources such as forests.
(d) International agencies and structures would help further this process, for example, by reducing the debt problem of developing countries and reviewing the content of structural adjustment policies, by ensuring that the trade system brings about more favourable results for developing poor countries, by helping to mobilise financial resources and providing technical aid in improving environmental standards.
(e) Issues requiring an integration of economic and environmental concerns (such as the interaction of trade and environment; and the relation between intellectual property rights and environmental technology and indigenous knowledge) should be resolved through North-South partnership in which the development needs of the South would be adequately recognised. If the above principles are to be followed, then the concept of sustainable development would have at least two major components, each balancing the other: environmental protection and meeting the basic and human needs of present and future generations. Thus, sustainable development would not only involve ecological practices that enable meeting the needs of future generations, but a change in production and consumption patterns in an equitable manner whereby resources which are currently being wasted are saved and rechanneled to meeting the needs of everyone today as well as the needs of future generations. In this concept, equity among and within countries in the control and use of resources in ecologically prudent ways is a critical (or even the most critical) factor.
C. SOME BASIC WEAKNESSES OF UNCED
Despite the achievements of the UNCED process, there were, however, basic weaknesses and failures. Among these were:
- The refusal or inability of Northern governments to commit themselves to a reform of international economic relations or structures, or to initiate a new North-South economic dialogue. This meant that there was no commitment to resolve structural economic problems that weigh heavily on a majority of developing countries (particularly the poorer ones).
- As a result of the inability of the UNCED process to place these basic items prominently in Agenda 21, the items that dominated North-South negotiations became the pledge for “new and additional financial resources” (with Northern countries pledging to strive to meet the earlier commitments for aid to reach 0.7 per cent of their GNP) and the pledge for implementing “technology transfer” (at least for environmentally-sound technologies). These two items are a poor substitute for more basic reforms to international economic relations. Given the situation, they however became the “proxies” or symbols of the North’s commitment to help the South in a new global environment-development partnership.
- Even though “technology transfer” was prominently discussed during the UNCED process and is given high profile in Agenda 21, in reality the Northern governments made it clear that the protection of the intellectual property rights of their corporations would not be compromised. This would effectively render technology transfer (even if only of environmentally-sound technology) on favourable terms by and large inoperable. Nevertheless, on the insistence of the South, Agenda 21 does have some reference to the need for technology transfer, and for intellectual property rights not to hinder the process. A similar principle is established in the Convention on Biological Diversity. The language and references in both cases are however guarded and ambiguous and relatively weak, although the acceptance of the principle provides grounds for fuller development in the follow-up of UNCED.
- The downgrading of the need for regulating transnational corporations and big commercial interests. As pointed out prominently by the NGO community, the big corporations are the main actors in generating environmental problems such as pollution, resource depletion and unsustainable production and consumption patterns. The UNCED process sidelined this role, and did not give action proposals for regulating or disciplining the behaviour of big corporations. Thus, the most important action required for sustainable development was omitted, and an opportunity for making the main economic actors more responsible and accountable was missed. This rendered many of the Agenda 21 proposals “toothless” or much less susceptible to implementation.
- The refusal by Northern governments, particularly the United States (whose delegation notably declared “Our lifestyles are not up for negotiations”), to effectively commit themselves to changes in lifestyles as part of the move towards sustainable consumption patterns. Thus a crucial element in the reduction of waste of natural resources was sidelined.
- Despite the many action proposals on environmental problems, there was relatively weak real commitment by both North and South to resolving many of the problems. As a result of not wanting to have constraints put on their growth or development opportunities, Southern governments were not forthcoming in agreeing to disciplines on resource depletion, in particular on deforestation. There was resistance by Northern governments to place effective environmental safeguards on the development of genetic engineering, or to develop better international regulations on the transfer of hazardous products, projects and activities to the South. The commitment by Northern governments (especially the United States) to reduce emission of Greenhouse Gases was inadequate to the task of dealing with climatic change.
- Given these weaknesses, the concept of sustainable development remained controversial. Whilst there was general agreement that progress on the environment had to be accompanied by development, the place and role of equity, the need for reforms towards more equitable international relations and institutions as well as equitable ways of combining environment and economy nationally, were not agreed upon.
Despite these and other weaknesses, UNCED, its products (Agenda 21, the Rio Declaration, the Forest Principles, the Conventions on Biodiversity and Climate Change and an agreement to institute a Desertification Convention) and its processes (governmental, non- governmental and the interaction between the two), produced an intangible but nevertheless valuable “spirit” of partnership that could be built upon.
D. THE FAILURES OF THE POST-UNCED FOLLOW-UP
Almost a decade after Rio, it is clear that the “Spirit of Rio” was not converted into practical action. Instead, it seems to have faltered, and whittled down, if not away. The main features of this development are as follows.
1. Drop in aid volume
Despite the pledges of aid increase at UNCED, the volume of aid instead fell even in the first year after the Rio Summit. The OECD countries’ aid fell from US$61 billion in 1992 to $56 billion in 1993, and 14 of 21 donors decreased the share of aid as a ratio of GNP. Since then, the situation has further worsened. The aid decline is inevitably seen as a lack of commitment and sincerity of Northern governments to implement the Rio agreements, and has robbed the UNCED follow-up processes and institutions of their status and legitimacy.
2. No progress (but the reverse) in technology transfer
There has been no tangible progress in the transfer of technology to the South, either in general or in environmentally sound technology. Instead, since Rio, there has been much greater emphasis on increasing the rights of holders of intellectual property (mainly corporations of the North) and a corresponding downgrading of the rights of the public (and developing countries) in technology transfer and diffusion. This is mainly the result of the Uruguay Round’s TRIPS (Trade-Related Intellectual Property Rights) Agreement which will require member states of the World Trade Organisation to tighten their national IPR regimes in favour of IPR holders, with detrimental effects on technology transfer or local development of technology. There is already evidence of how such patent regimes hinder transfer of environmental technology to the South. There is also a danger that the emerging IPR regime (whose rules favour commercial companies) will also marginalise the interests and rights of communities that developed biodiversity-based knowledge (in farming, medicinal plants, etc) whilst enabling the patenting of this knowledge by commercial companies. Recently there has been public outrage at the high and exorbitant prices of medicines, especially for treatment of HIV/AIDs, as a result of the monopoly conferred through patents granted to drug companies. The stress on IPRs protection at the expense of technology transfer has, like the decline in aid, robbed the post-UNCED process of its legitimacy, since technology transfer was the second plank of what was seen as the North’s commitment to facilitating sustainable development.
3. Downgrading of environment concerns in the north
There have been no significant moves in the North towards basic changes on production and consumption patterns or lifestyles. Despite some efforts on the energy front for reducing emission of Greenhouse Gases (which are generally believed to be still inadequate to arrest adverse effects on climatic change), there has been in many Northern countries a reversal of environmental policies or the lack of progress in critical areas requiring attention. Generally, there has been a downgrading of environmental concerns in thenational agendas, as commercial interests and the need to retain “national economic competitiveness” take precedence.
4. Little improvement on environment in the south.
In most Southern countries, environmental concerns have also not received the kind of special attention that UNCED had promised. The poorer countries remain enmeshed in problems of external debt and low commodity prices and face additional problems caused by aid decline. They are also bypassed by foreign investment flows. As a result, the lack of financial resources continues to hamper progress towards sustainable development. In the industrialising Southern countries, the pressures of urbanisation, industrialisation and high growth have put additional pressures on the environment, concerns for which have remained low compared to the imperatives of growth. Generally, in the South, there is a lack of progress towards sustainable agriculture or in phasing out the use of toxic substances.
5. Erosion of concern for development.
As serious as the downgrading of the environment agenda is the erosion of concern for development as a principle or as a right in the international agenda. This erosion is mainly due to a wave of economic conservatism in many Northern countries and reduced concern in their political establishment for problems of developing countries. More seriously, in the North, the more aggressive commerce-oriented and trade-oriented approach of viewing developing countries as markets (that need opening up) and as potential rivals (whose advantages should be curbed) has replaced the other approach of viewing developing countries as disadvantaged global partners requiring and deserving assistance. As a result, the “development principle” and the “development dimension” which hitherto had been recognised as the cornerstones in North-South relations, have been challenged and eroded, not only through the decline in aid, but also in the much greater reluctance to accord special treatment or advantages to developing countries in UN negotiations.
Of particular importance, the development principle has been eroded in North-South trade relations, especially at the WTO. The “special and differential treatment” for developing countries has been eroded through the Uruguay Round. In the current on-going WTO negotiations, including on new issues, developed countries have sidelined recognition of the development needs and objectives of developing countries and insisted instead on equal treatment for both the weak and strong: for example, “a level playing field” and “national treatment” for their firms. This contrasts with the reaffirmation by political leaders of the world of the appreciation of the development rights and needs of the South, through the Social Development Summit of 1995, and other UN conferences and resolutions. These declarations and processes, which represent the spirit of international cooperation, are being undermined by the more legally-binding and enforceable rules of the trade system. Therefore, instead of allowing the South to have greater development space to facilitate their transition to having a better environment (which was the UNCED understanding), there has been a significant narrowing of that space in the past few years.
6. Persistence of development problems in the south
A major aspect of UNCED was to heighten priority in resolving the pressing development problems in the South. These problems had to be tackled at two levels: improving the negative international economic environment; and improving domestic policies. Although a small minority of developing countries were able to take advantage of external factors to experience high growth (and even then some of these countries were hit by a financial and economic crisis), a majority of developing countries continued to suffer from poverty and social problems, and in some countries the situation worsened. The external environment faced by many developing countries remained negative. The terms of trade for many developing countries continued to deteriorate, with the prices and demand for commodity exports weakening. The debt crisis persisted. Aid volumes declined. This continued to exert a large external drain of resources from developing countries. Resources for the state continued to dwindle in many countries, reducing their capacity to face the development challenges.
Globalisation in trade and investments had uneven results, with few benefits (and probably net losses) accruing to many of the poorer developing countries. Development policy options were further narrowed through the WTO Agreements and structural adjustment. Many of them were unable to gather sufficient resources and strength to overcome their pressing social problems. As a result, there was low or inappropriate growth, reduced social development expenditures, persistence or worsening poverty, higher unemployment and greater inequities.
7. Lack of strong institutional follow-up
The Commission on Sustainable Development was established under the UN Secretariat to oversee the follow-up activity of UNCED. The CSD has played a useful role. Its main annual meetings have provided a regular opportunity for politicians, officials and NGOs involved in sustainable development to meet, and it is a framework within which the cross-cutting issues and specific sectoral issues are reviewed, new initiatives are occasionally taken and where developments can be reported on. However, the CSD secretariat is relatively small and is limited in what it can achieve. The annual meetings, and subsidiary meetings in between, provide too little time for policy makers and NGOs alike to go into depth on the issues on the agenda, whilst there are also many other issues that come onto the agenda only once in several years on a rotation basis, due to time constraints. The lack of a strong institutional “home”, agency or secretariat is thus one of the main reasons for the lack of achievements in the implementation and follow-up of the Rio Summit and its products.
E. THE EFFECTS OF LIBERALISATION AND GLOBALISATION AND THE CLASH OF PARADIGMS
1. The undermining of the sustainable development paradigm by the free-Market approach
Perhaps the most basic factor causing the failure to realise the UNCED objectives was the countervailing trend of globalisation, driven by the industrial countries and their corporations, that has swept the world in recent years.
The UNCED approach represents one paradigm for international relations: that of consensus-seeking, incorporating the needs of all countries (big or small), partnership in which the strong would help the weak, integration of environment and development concerns, the intervention of the state and the international community on behalf of public interest to control market forces so as to attain greater social equity and bring about more sustainable patterns of production and consumption.
The liberalisation “free market” approach represents a very different paradigm. It advocates the reduction or cancellation of state regulations on the market, letting “free market forces” reign, and a high degree of rights and “freedoms” to the large corporations that dominate the market. The state should intervene only minimally, even in social services. On the environment, instead of intervening in or imposing environmental controls, the market should be left free on the assumption that this would foster growth and the increased resources can be used for environmental protection. This approach also sidelines concerns of equity, or the negative results of market forces, such as poverty and non- fulfilment of basic needs. It assumes the market will solve all problems. Extended to the international level, the paradigm advocates liberalisation of international markets, breaking down national economic barriers, rights to corporations to sell and invest in any country of their choice without restraints or conditions. Governments should not interfere with the free play of the market, and social or development concerns (for instance, obtaining grants from developed countries to aid developing countries) should be downgraded. The approach advocates a Social Darwinian philosophy of “each man for himself, each firm for itself, each country for itself.” In this law of the social jungle, it is the right of individuals and companies to demand freedom to seek advantage and profit and to have access to the markets and resources of other countries anywhere in the globe, to implement their right to profit. The advocates of this approach want a free-market system where the strong and “efficient” are rewarded, and the weak or inefficient may suffer losses but in any case should fend for themselves. The paradigm advocates competition, with prizes for the winners and without the supply of a cushion to compensate the losers for their loss. Aid and special treatment for developing countries should be downgraded.
In the decade after Rio, there has been a dramatic clash of these paradigms in international affairs. The paradigm of partnership and cooperation was represented by the United Nations series of world conferences, in which global problems relating to the environment, women, social development, habitat, and food were sought to be discussed and resolved in a framework of consensus-seeking. It was recognised that the market left to itself could not solve the problems and would indeed be a hindrance, and that thus there were critical roles for governments, the inter-governmental community as well as for NGOs and citizen groups, to temper the market with social and environmental priorities and programmes. The need to build the capacity of the weak and poor was accorded priority, and the role of aid and differential treatment for them was recognised.
In contrast, the free-market paradigm was represented by the Bretton Woods institutions, which persisted in promoting structural adjustment programmes based on market liberalisation, and by the GATT/WTO which was dominated by the Northern governments advocating the opening up markets (especially of developing countries) for the exports and investments of corporations and financial institutions. The conclusion of the Uruguay Round in December 1993 heralded a new era where multilateral trade agreements and negotiations would subject countries much greater to the objectives of Northern governments advocating greater and wider “market access” for their corporations. The Uruguay Round agreements of 1993 and the paradigm they represented turned out to be more powerful than the UNCED agreements and products of 1992 and the partnership approach which they promised.
Indeed, in the years since Rio, the liberalisation free-market paradigm, that gained prominence and pre-eminence, has undermined the sustainable development partnership paradigm, which has been sidelined in terms of importance. The market paradigm had strong means of implementation: in the Bretton Woods institutions, structural adjustment can be enforced as conditions for much-needed loans; in the WTO system, the Agreements and rules are enforceable through a powerful dispute settlement system which includes trade penalties and retaliation. In contrast, the partnership paradigm has been deprived of its main means of implementation, which are financial resources and technology transfer.
The main factor for the triumph of the market paradigm is the strong support and aggressive advocacy for it by the powerful countries, and their deliberate marginalisation of the partnership paradigm. Within these countries, the Commerce and Finance departments of government enjoy far greater influence than the Environment or Overseas Aid departments. This has contributed to the far higher priority given in these countries to national and private commercial interests vis-a-vis environment and development concerns.
2. Depletion of UN’s role and the expanding powers of the WTO and Bretton Woods institutions
In recent years, the Northern countries have also successfully organised the downgrading of the role, resources and influence of the United Nations in social and economic affairs and policies, and simultaneously enormously increased the powers and influence of the Bretton Woods institutions and especially the WTO in determining international economic and social policies. This shift in institutional location of authority is due to the fact that the Bretton Woods/WTO institutions represent the paradigm advocated by the North, and also due to the control the North asserts in these institutions in contrast to the UN system where the South is better represented, due to the differences in decision-making in the different organisations.
With the higher status of the market paradigm, sustainable development concerns have been given lower priority. Governments of strong countries have become obsessed with competitiveness of their firms and countries; this has reduced the commitment to improve the environment and change production and consumption patterns. Deregulation has included the weakening of environmental policies (or their enforcement) in many countries. Interest in implementing the development components of UNCED (and of other Conferences such as the Social Summit) has diminished. The means of implementation of the many action proposals have not materialised.
3. Failure to regulate big corporations and the move to widen their rights
A major reason why the UNCED objectives have not been realised is the fact that the behaviour and practices of the main economic players (that determine production and consumption patterns) have not been brought under any kind of effective framework of accountability and disciplines. UNCED was itself partly responsible for this, as it did not propose any measures for regulating big corporations.
In the past few years, the power of big corporations has increased: they control even more of the world’s resources and account for a greater share of production activities, distribution, finance and marketing. There has been no noticeable change in their production patterns. The “business as usual” practice has resulted in continuation or even intensification of environmental pollution and resource depletion. Through globalisation of media, their advertising and sales promotions of consumer products and tastes have had an even much greater impact in spreading the kinds of lifestyles and consumption patterns that are environmentally unsustainable.
The regulatory situation relating to TNCs and business in general has worsened greatly in the years since the Rio Summit. The efforts to finalise a Code of Conduct on TNCs were formally killed in 1993, and the agency in charge of the Code, the UN Centre on Transnational Corporations, was closed down. Thus, the main international initiative and institution for establishing guidelines (non-binding at that) for the behaviour of TNCs, and that would lay down a code of obligations and rights of TNCs and states, have disappeared, and many years of work and negotiations have come to nought. Initiatives in other institutions, such as the Code of Conduct on Technology Transfer and the Set of Principles and Rules on Restrictive Business Practices, both at UNCTAD, were marginalised due to the reluctance of the developed countries for their coming into effect.
Instead, there has been a strong opposite trend, which is now dominant, to reduce and remove more and more regulations that governments have over corporations, to grant them increased rights and powers, whilst removing the authority of states to impose controls over their behaviour and operations. The Uruguay Round has already granted far higher standards of intellectual property rights protection to the TNCs, thus facilitating further their monopolisation of technology and ability to earn huge rents through higher prices. There are strong pressures from Northern governments at the WTO to grant foreign companies the right of entry, establishment and national treatment to all WTO member states. Other proposals on competition policy and government procurement would give them further rights of access to business in developing countries. The ability of governments to regulate the operations and effects of TNCs and companies in general is being severely curtailed.
Since it is most unlikely that businesses will voluntarily curb their own practices so as to be in line with sustainable development, especially since there is now an intensification of competition, the removal of the rights of states to regulate business, especially TNCs, is a major and perhaps fatal flaw in the international community’s attempt to arrest environmental deterioration and promote sustainable development.
4. The failure of political leadership.
The recent years have also seen the weakening of political leaders in almost all countries in their attempts or ability to address environment, social and developmentissues. In the North, the political leadership has followed the rationale of the need to maintain competitiveness in a globalising world to place environmental and social concerns much lower on the list of priorities. Instead, these governments are meeting the demands of their corporations to promote liberalisation and to champion their interests domestically and internationally. Thus, at international negotiations, whether at the WTO or at the UN, Northern governments promote proposals that widen the rights of TNCs, whilst blocking or diluting principles and points that are made on behalf of development.
In the international arena, Southern governments, individually and as a group, aregenerally inadequately prepared for negotiations, compared to the Northern governments. Despite the dramatic expansion of the importance of international organisations and processes in determining national policies, the political leadership and bureaucracy in most developing countries have not put adequate human and financial resources in preparations for international negotiations. As a result, they often find themselves at a very weak end of the negotiations. This can sometimes lead to their being unable to effectively promote their points, and to having to agree to other points that are detrimental to their interests. Such a situation is particularly dangerous when the negotiations involve legally-binding agreements, as in the WTO.
Many political leaders and bureaucrats may privately agree that the present state of affairs on environment and development is negative and requires drastic reforms. However they go along with the big tide of liberalisation and of catering to the demands and interests of the business elite. Many have declared that they are unable to change the situation, and that the forces of liberalisation and globalisation are too strong to counter. The political capability and will to fight for environment, development and a cooperative model of international relations seem to be lacking all over the world. This of course leads to the question of who, if not the political leaders, are going to take effective action to promote sustainable development.
F. INTELLECTUAL PROPERTY RIGHTS, TECHNOLOGY TRANSFER AND SUSTAINABLE DEVELOPMENT
1. Technology transfer in the UNCED process
One of the major developments in the field of globalisation after the Rio Summit has been the establishement of global minimum standards for IPRs, under the WTO. This has had a major negative effect on access to technology by developing countries.
UNCED recognised that technology transfer was essential for developing countries’ transition to sustainable development. Indeed, technology transfer was one of the two critical cross-cutting issues in the North-South compact, the other being financial resources. In the UNCED process, the key issue in technology transfer was intellectual property rights. The South argued that IPRs had to be relaxed in the case of environmentally-sound technology (EST), for otherwise IPRs would hinder the South’s access to such technology.
The Northern delegations were very sensitive on this point and refused to concede. Whilst agreeing that concessional terms should be encouraged for the transfer of ESTs, the Northern governments insisted that IPRs (such as patents) be applied and that an exception should not be made in IPR regimes on such technologies.
Finally, the Agenda 21 chapter on technology called for action to promote and finance the access to and transfer of environmentally-sound technologies to developing countries on favourable (including concessional and preferential) terms. But it also says these terms must be “mutually agreed” upon and also take into account the need to protect intellectual property rights.
The full application of such rights would of course be a major barrier to technology transfer, and deprive the commitment to transfer technology of much of its content. There is thus a fundamental tension within the agreement on technology, and room for more discussion on how to operationalise the Agenda 21 proposals on technology cooperation, transfer and capacity building. The Southern countries consider this to be an area where assistance from the North is critically needed.
2. IPRs as obstacle to technology transfer
Since Rio, there has also been little or no progress on facilitating the transfer of environmentally sound technology to the South. Instead, the international IPR regime has become much stricter, especially through the TRIPS Agreement in the WTO, which will have to be translated to policies and laws at national level. Evidence is also emerging that the IPR regime can prevent developing countries from having effective access to environmentally-sound technologies (ESTs).
Holders of the patents to these technologies, which are usually Northern-centred transnational companies, can charge high fees or royalties for the right to use them, or impose conditions that are onerous. Companies in the South may not afford to pay at such prices, and if they do their competitiveness could be affected. As a result, developing countries may find difficulties in meeting their commitments to phase out the use of polluting substances under international environment agreements.
For example, Third World firms find it difficult to have access to substitutes for chlorofluorocarbons (CFCs), chemicals used in industrial processes as a coolant, that damage the atmosphere’s ozone layer. This hinders the South’s ability to meet commitments under the Montreal Protocol, an international agreement aimed at tackling ozone layer loss by phasing out the use of CFCs and other ozone-damaging substances by certain target dates.
Under the Protocol, developed countries originally agreed to eliminate production and use of CFCs by the year 2000, whilst developing countries are given a ten-year grace period to do the same. A fund was set up to help developing countries meet the costs of implementing their phase-out, and the protocol includes articles on technology transfer to the South on fair and favourable terms.
Indian firms that manufacture products (such as refrigerators) with CFCs found it very difficult to phase out the use of these substances because of the lack of access to environmentally acceptable substitutes controlled by Northern multinationals. There are five Indian companies that are major manufacturers of products that depend on the use of CFCs. They face closure if they are unable to meet the dateline of eliminating CFCs use by the year 2010. However, the pledged technology transfer on fair and most favourable terms has not materialised. Three of the Indian companies formed a consortium to commission a local institute of technology to produce a substitute for CFCs, i.e. HFC 134A. However, the patent rights to the substitute are held by a few multinational companies. Some of the Indian companies are willing to pay the market price or even higher for the technology. But a multinational holding the patent has refused to license it unless it can take a majority stake in the companies’ equity. This example shows how much the developing countries have been put on the spot.
On one hand they are persuaded or pressurised to join international environmental agreements and commit themselves to take painful steps to change their economic policies or production methods. Financial aid and technology transfer on fair and most favourable terms are promised during the hard negotiations, to persuade the South countries to sign on. Then, when the agreements come into force, the funds are far from the promised level, and technology transfer fails to materialise.
Meanwhile in another forum like the WTO, other treaties such as TRIPS are negotiated which produce an opposite effect, and that is to block the South’s access to environmental technology. Yet, when the time comes, the developing countries may not be able to meet their full obligations, such as phasing out the use of CFCs (in the Montreal Protocol). There is thus an unfair imbalance. The North does not follow its obligation to help the South, but the South has to meet its commitments, which because of the lack of aid and technology, will cause economic dislocation. One remedy being proposed by some public interest groups and developing countries is to change the international laws on patents so that the full weight of IPRs is not applied to environmentally-sound technology. For example, the Indian government has made out a strong case for amending the TRIPS accord in the WTO in order to recognise developing countries’ need for transfer of ESTs on “preferential and non-commercial terms.” It tabled a paper on the issue of TRIPS and the transfer of ESTs at the WTO in 1996 (see section below).
3. TRIPS and Environment at the WTO
In the WTO’s Committee on Trade and Environment (CTE), the “TRIPS and environment” is being discussed, under two issues: (a) the relationship of TRIPS agreement to access to and transfer of technology and the development of environmentally-sound technology; and (b) the relationship between the TRIPS agreement and MEAs which contain IPR-related obligations.
A key issue, as defined by NGOs and some Southern governments, is an important clause in the TRIPS agreement relating to patentability and non-patentability of biological materials, i.e. the issue of “patenting of life forms.”
An interesting set of proposals on TRIPS and technology transfer has been presented by India to the CTE. The Indian paper (March 1996) states that the five types of intellectual protection (IP) covered in TRIPS are relevant in this context: patents, plant variety protection, layout designs of integrated circuits and undisclosed information. Two types of technologies incorporating IP are distinguished: those that harm and that benefit the environment. The use of the first should be discouraged, the second encouraged, by the international community.
On patents, for technologies harmful to the environment, measures needed to discourage their global use may include exclusion from patentability (so that incentives are not given to generate such technologies) and ban of their use or commercial exploitation. The TRIPS agreement recognises this reasoning in Article 27.2 which allows exclusion from patentability “inventions, the prevention within their territory of the commercial exploitation of which is necessary to protect ordre public or morality, including to protect human, animal or plant life or health or to avoid prejudice to the environment, provided that such exclusion is not made merely because the exploitation is prohibited by their law.”
For environmentally-beneficial technologies, to encourage their global use, and in cases where other measures for technology transfer are not possible, India proposes three points: (a) Members may have to exclude from patentability, to allow free production and use, such technologies as are essential to safeguard or improve the environment. Such an exclusion is not incompatible with TRIPS and may have to be incorporated through a suitable amendment; (b) For currently patented technologies, Members may revoke patents already granted, if this is done in consonance with the Paris Convention and must be subject to judicial review; (c) To encourage the use of environmentally-beneficial technology, Members should be allowed to reduce the term of patent protection from the present minimum of 20 years to say 10 years, “so as to allow free access to environmentally-beneficial technologies within a shorter period.”
Another key aspect of technology transfer and IPRs is the TRIPs provision in relation to biological materials (Article 27.3b). It requires governments to allow patent protection for microorganisms and microbiological processes for producing plants and animals. It also requires that intellectual rights on plant varieties be protected either through patenting or an “effective sui generis system of protection.” This raises concerns: firstly, that TRIPS makes it mandatory for countries to patent some life forms; and secondly, that the knowledge of Third World farmers and indigenous communities that has mainly contributed to the development of crops and the use of plants will not be legally recognised, whilst the corporations which genetically engineer biological resources will be unfairly rewarded. Countries of the South would then have to purchase biotechnology products at high prices (which are facilitated by the patent protection) even though they are the origin of the biological resources (and of the knowledge on their utilisation) used in biotechnology. This is likely to lead to higher cost of seeds and food products in developing countries.
In the TRIPS Council, many developing countries (most notably the Africa Group of countries and India) have raised the above concerns and asked for revisions to TRIPS or clarifications, to the effect that living organisms and processes cannot be patented, and that Members can introduce a sui generis protection system that protects the traditional knowledge of farmers and indigenous communities. However, there has been generally a negative response from developed countries which prefer the status quo to remain, or which want even tighter IPR disciplines in this area.
There are many other issues in TRIPS that are relevant to a discussion on sustainable development, such as the effects of IPRs on affordable medicines, other consumer items, and on technology transfer generally.
G. “TRADE AND ENVIRONMENT” AND ENVIRONMENTAL STANDARDS
“Trade and environment” was established as an issue in WTO due to a Ministerial decision at Marrakesh in 1994. It is discussed at the WTO’s Committee on Trade and Environment.
That thereare links between trade and environment cannot and should not be denied. Trade can contribute to environmentally harmful activities. Ecological damage, by making production unsustainable, can also have negative effects on long-term production and trade prospects. In some circumstances, trade (for example, trade in environmentally-sound technology products) can assist in improving the environment.
What has been most controversial in looking at “linkages” is the advocacy of the use of trade measures and sanctions on environmental grounds. Some environment groups and animal rights groups believe that national governments should be given the right to unilaterally impose import bans or restrictions on products on the grounds that the process of production is destructive to animal life, and that WTO rules should be amended to enable these unilateral actions.
Some groups, and some developed country Members of WTO, go further and have advocated the adoption of a set of concepts linking trade measures in the WTO to the environment. These concepts are processes and production methods (PPMs), internalisation of environmental costs, and eco-dumping. The three concepts are inter-related. When discussed in the WTO context, the implication is that if a country has lower environmental standards in an industry or sector, the cost of that country’s product is not internalised and the prices are thus too low (being unfairly subsidised by the low standard) and thus that country is practising “eco-dumping.” As a result, an importing country would have the right to impose trade penalties, such as levying countervailing duties, on the goods.
This set of ideas poses complex questions relating to concepts, estimations and practical application, particularly as they relate to the international setting and to the WTO. Developing countries are likely to find themselves at a great disadvantage within the negotiating context of the WTO should the subject (which has already been discussed in the Committee on Trade and Environment) come up for negotiations.
One of the main issues is whether all countries should be expected to adhere to the same standard, or whether standards should be allowed to correspond to the different levels of development. The application of a single standard would be inequitable as poorer countries that can ill-afford high standards would have their products made uncompetitive. The global burden of adjustment to a more ecological world would be skewed inequitably towards the developing countries.
This is counter to the UNCED principle of “common but differentiated responsibility” in which it was agreed that the developed countries, which take the greater share of blame for the ecological crisis and have more means to counter it, should correspondingly bear the greater responsibility for the global costs of adjustment.
Given the unequal bargaining strengths of North and South in the WTO, the complex issues relating to PPMs, cost internalisation, trade-related environment measures etc. should not be negotiated within the WTO but if at all discussed, the venue should be the United Nations (for example in the framework of the Commission on Sustainable Development) in which the broader perspective of environment and development and of the UNCED can be brought to bear.
Unilateral trade measures taken by an importing country against a product on grounds of its production method or process are also fraught with dangers of protectionism and the penalising of developing countries. However tempting the route of unilateral import bans may be for the environmental cause, it is an inappropriate route as it will lead to many consequences and could eventually even be counter-productive.
Policies and measures to resolve environmental problems (and there are many genuine such problems that have reached the crisis stage) should be negotiated in international environmental fora and agreements. These measures can include (and have included) trade measures.
The relationship between the WTO and its rules and the multilateral environment agreements (MEAs) is also a controversial subject of debate in the WTO. On one hand there is the fear (of developing countries) that a system of blanket and automatic approval by the WTO of trade measures adopted by a “MEA” (for example by an amendment to Article XX to enable ex-ante approval of MEA measures) could lead to abuse and protectionism. A sticking point here is what constitutes a “multilateral environment agreement” as it may include not only truly international agreements convened by the UN and open to all members and enjoying near-universal consensus, but also agreements drafted by a few countries which then invite others to join (and would then also enjoy exemption under the proposed amended WTO rules).
The fear of protectionist abuse explains the reluctance of developing countries to amend Article XX, which in their opinion is already flexible enough to enable exceptions to accommodate environmental objectives.
On the other hand there is the genuine fear of environmental groups (and also developing country and some developed country Members of WTO) that negotiations in new MEAs can be (and are being) undermined by the proposition of some countries that WTO rules prohibit trade measures for environmental purposes, or that WTO “free-trade principles” must take precedence over environmental objectives. Such arguments were for example used by a few countries in the negotiations for an International Biosafety Protocol. Such arguments are false, as the WTO allows for trade measures agreed to in MEAs through the present Article XX (although not in the ex-ante manner proposed by some countries).
The use of the WTO name by a few countries to turn away the proposals by the overwhelming majority of delegations to establish checks on the trade in genetically modified organisms and products (through a prior informed consent procedure) gave the impression that commercial interests were placed before global ecological and safety concerns and understandably generated outrage among most delegations as well as environmental and social organisations. Negative actions like this, that blatantly use the slogan of “free trade” to undermine vital health and environmental concerns, are part of the reasons for the erosion of public confidence in “free trade” and the WTO system. Thus governments should not wrongly make use of “free trade” or “WTO rules” to counter international agreements that deal with genuine environmental problems, otherwise the credibility of the trading system itself will be eroded even further.
For many NGOs (especially of the South) as well as developing country WTO members, an important “trade and environment” issue is the effect of the TRIPS Agreement in hindering access to environmentally sound technologies and products. (This issue is dealt with in Section F). Another issue is the conflict between objectives and provisions of TRIPS and the CBD and how to resolve them. So far there has not been a solution.
H. SOME OTHER ASPECTS OF GLOBALISATION AND THE ENVIRONMENT
1. Globalisation and ecological deterioration
The post-UNCED record on the environment component of sustainable development has been just as or even more disappointing than the record on economic and social components. A major factor for this is that the powerful commercial and financial interests succeeded in pushing economic liberalisation and the “free market” approach to be the over-riding priority for most governments. Environmental concerns fell several notches. Liberalisation, commercialisation and globalisation together with the logic of the race to retain or gain “competitiveness” have undermined sustainable development as both a principle and a programme. Since the liberalisation/globalisation process is the main source of the increased ecological problems, the key to prevent a further worsening of environmental crises is to create conditions for public intervention in free-market forces. The present reluctance of political leaders (or worse, their belief in the impossibility) to institute policies that alter or temper the present pro-free market approach and to make businesses more publicly accountable and responsible is at the root of the current environmental impasse.
Liberalisation and globalisation are related to the worsening of the global environment in various ways:
* The failure to internationally monitor and regulate transnational corporations, and instead the moves to widen their rights and access, have led to a spectacular rise in their power and authority. TNCs have generally and rapidly expanded the outreach and volume of their activities. This has correspondingly increased the damage caused to the environment in terms of volume and geographical spread.
* Liberalisation policies and global market integration have facilitated the institutions and activities that have led to greater exploitation and depletion of biological diversity and resources such as forests and fishery resources, and havepromoted and expanded environmentally-harmful land-based activities (agriculture and aquaculture), that lead to continued reduction in the status of biodiversity.
* Other resources continue to be depleted beyond sustainable rates, such as water, soil and minerals. Liberalisation has opened up more mining concessions and a new wave of environmentally damaging mining activities.
* The lack of financial flows to and resources in most developing countries (accompanied by continuing debt and commodity price problems), and the persistence of structural adjustment restrictions and policies have meant a great lack of resources or “economic space” in many of these countries to implement or change towards environmentally-sound production.
* There is little improvement in technology. There is no real will to change harmful production methods. The promised technology transfer to the South has not taken place; instead new obstacles have emerged, such as enhanced IPR protection. Harmful technologies continue to be exported to the South and new technologies are being spread before adequate assessment and regulation.
* There is slow progress in reducing the trade in toxic and hazardous substances and products, and the export of these to the South has continued and even increased.
* The emphasis on the need to be competitive has meant slow progress (and in some countries an actual rolling back) in control of pollution and energy use. Big infrastructure projects that are ecologically harmful are proliferating. The race to earn foreign exchange has led to increased tourism promotion and activities, with their side effects.
* With the accelerated spread of information and communications products, the consumer culture has been more widely spread. In the North and among Southern elite, there is little progress in curbing wasteful lifestyles. On the whole, there is an increase in unsustainable consumption patterns. Some details of these interactions between globalisation and the environment are given below.
2. The rise of TNC power and the environmental implications
On the eve of the Earth Summit in 1992, the Third World Network made the assessment that the “biggest gap in the UNCED documents being signed in Rio is the absence of proposals for the international regulation or control of big businesses and transnational corporations to ensure that they reduce or stop activities that are harmful to the environment, health and development.” (TWN 1992). This was because the TNCs account for the largest part of global economic activity and are the main entities responsible for the global environment crisis. TWN expressed concern that the UNCED secretariat had downgraded the need to strengthen regulation of TNCs (for example, by shelving the UN Centre on TNC’s recommendations, requested for by the ECOSOC) and instead promoted self-regulation through a Business Council for Sustainable Development. “A voluntary set of principles cannot be an adequate replacement for multilaterally agreed codes and regulations which states oblige industry and TNCs to follow,” the TWN concluded.
Following the Rio Summit, the trend of deregulation of TNCs and of granting to them more rights and freedoms, without corresponding accountability, has greatly accelerated, particularly with the conclusion of the Uruguay Round agreements. This trend is likely to spurt ahead further if the proposals before the WTO on investment, competition and government procurement succeed.
That TNCs are the most important players and factors involved in environmentally damaging activities can be gauged from the following:
* TNC activities generate more than half of the Greenhouse Gases emitted by industrial sectors with the greatest impact on global warming.
* TNCs have virtually exclusive control of the production and use of ozone-destroying CFCs and related compounds.
* In mining, TNCs still dominate key industries and are intensifying their activities. In aluminium, for example, six companies control 63% of the mine capacity.
* In agriculture, TNCs control 80% of land worldwide cultivated for export crops; and 20 firms account for 90% of pesticide sales.
* TNCs manufacture most of thw world’s chlorine, the basis for some of the most toxic chemicals including PCBs, DDT and dioxins.
* TNCs are the main transmitters of environmentally unsound production systems, hazardous materials and products to the Third World. For example, 25% of pesticide exports from the US in the late 1980s were chemicals banned or withdrawn in the US itself.
* TNCs dominate the trade (and in many cases the extraction or exploitation) of natural resources and commodities, that contribute to depletion or degradation of forests, water and marine resources and, toxic wastes and unsafe products. * Through advertising and product promotion, they also promote a culture of unsustainable consumption.
Case studies of the recent performance of twenty TNCs by Greer and Bruno (1996) show that despite the improved public relations exercise claiming greater environmental responsibility and despite more and more voluntary codes of conduct by industry, there has been little change and much “business as usual”, with the corporations continuing with activities that are environmentally-harmful.
With the growth in production volume and geographical scope of big companies, based largely on the continuing use of unsustainable production systems (and promotion of wasteful lifestyles), and in many cases displacing more sustainable systems or lifestyles, more environmental degradation worldwide must be expected.
Because of their far greater technological capacity, the use of production techniques or substances that are often more ecologically damaging, and the larger volume of production that they characterise, TNCs usually have a negative effect on the environment when they newly produce in or export to (or increase their activities in) an area. With the increasing spread and market penetration and share of TNCs and big business concerns, the damaging environmental effect has increased. This effect is not confined to Northern-based companies. In recent years there has been a significant increase in overseas investment and activity of companies based in developing countries, especially in East and Southeast Asia. For example, these companies are accounting for a large part of new and increased forest logging and deforestation in Indochina, the Pacific and South America.
3. Liberalisation policies and their environmental implications
Within countries, the processes of liberalisation, commercialisation and deregulation have generally had adverse implications for the environment. This is true in the North as well as the South. In developing countries, whilst much of the research on structural adjustment programmes (SAPs) has focused on the development aspects of sustainability, there is a growing body of evidence that it has also contributed to the process of environmental deterioration.
In the designing of SAPs, environmental concerns have not been explicitly taken into account. The deregulation, privatisation and liberalisation measures that lie at the heart of SAP have accelerated the development of environmentally harmful patterns of production and consumption, whilst the reduction of government budgets has affected the state’s capacity to deal with environmental problems.
By promoting external liberalisation, SAP has encouraged an increase in the extraction and export of raw materials in many countries, thus contributing to resource depletion and degradation. The growth of poverty and inequities resulting from debt and SAP has also pushed poor farmers and communities to open up forests to eke a living from the land.
According to Walden Bello (1994), most of the top 15 Third World debtors have tripled the rate of exploitation of their forests since the late 1970s. This is related to the survival imperative of poor, landless people and the pressing need of nations to gain foreign exchange for debt servicing. Bello has also summarised detailed case studies of four countries that underwent SAP (Chile, Costa Rica, Ghana and the Philippines), demonstrating the dynamics and interrelations between structural adjustment, poverty, market liberalisation and environmental degradation. In these countries, the overriding need to service debts led to an emphasis on expanding exports of natural resources and commodities (such as timber, fish, bananas, cocoa and minerals). Moreover, SAP-induced increased poverty resulted in a situation where landless farmers had to exploit forest, land and fishery resources. The result was rapid depletion and degradation of the fragile natural resource base in these countries.
The environment and health condition in many Third World countries has also been adversely affected by import liberalisation promoted through SAP as well as through trade measures of the U.S. administration (through its Super and Section 301 laws) and GATT. For instance, there has been a significant increase in the incidence of smoking in several Asian countries that were compelled to facilitate the increased importation of cigarettes. Import liberalisation has also resulted in the proliferation of modern consumer products (aimed initially at the higher-income groups that have benefited from SAP) and which promotes environmentally unsustainable consumption patterns. There is a danger these imported and well-advertised products may replace and displace more socially appropriate and environmentally-friendly local products, including those now used by ordinary people.
According to UNRISD (1995), the effectiveness of policy responses to environmental degradation is often curtailed by adjustment: “In general terms, there are three main variants of environmental policy approaches; conservationism, primary environmental care and environmental economics. The potential of all of these to alleviate environmental problems has been limited by the economic and social changes that have accompanied economic restructuring.” For example, SAPs-induced agricultural export growth often has negative environmental effects, especially where ecological conditions are such that export crop cultivation is less sustainable than that of traditional food crops. Conservation programmes and environmental protection agencies are also most vulnerable to government spending cuts. Also, SAPs undermines the potential for community-based action and weaken the capacity of communities to adapt to changing ecological conditions, thus reducing the possibility of implementing the community-based “primary environmental care” approach.
The environmental effects of trade and trade liberalisation in the transfer of inappropriate technologies, production methods and consumption patterns havebeen examined in Khor (1996). The view that “free trade” is the best route to environmental protection (because it generates wealth to pay for protection measures) ignores the role that trade liberalisation plays in facilitating resource depletion and unsustainable production and consumption patterns. The present pattern of trade has in fact helped accelerate environmental degradation worldwide.
Investment liberalisation, without corresponding tightening of regulation but instead accompanied by further deregulation, can be predicted to accelerate the process further. The higher flows of FDI in recent years to developing countries are increasing the tempo of ecologically damaging activities. The proposed multilateral agreement on investment (developed in the OECD, but negotiations there have stalled indefinitely) and similar moves in the WTO to liberalise investment rules will have very wide environmental implications, and have raised serious concerns with many environmental groups.
4. Regulating New Technologies: The case of genetic engineering and biosafety
Globalisation is also facilitating the spread of new technologies. A major weakness of UNCED is the absence of a systematic approach to risk assessment and regulation of the introduction and spread of new technologies that may be harmful to the environment or human health. There is no systematic mechanism or agency that examines and regulates new technologies for their environmental and social impacts. An example is the rapid development of the new biotechologies, especially genetic engineering and their application in agriculture and medicine. These rapid developments have generated increasing public concerns about the potential environmental and safety effects of the use of genetically modified organisms (GMOs) and about safety aspects of genetically-engineered foods.
The development of biosafety disciplines was not due to any systematic arrangement, but to: (a) the initiatives of some countries in placing the biosafety issue in the CBD and then pushing for a protocol, whilst facing tremendous opposition from a few countries; (b) the determination of NGOs and independent scientists that campaigned for a protocol and national regulation, and they also faced tremendous opposition from the industry and some governments.
In the biosafety protocol negotiations, a few countries attempted to use “scare tactics” by putting out the argument that some aspects being proposed would violate WTO rules. Presently the US is also putting pressure on some developing countries (and also the EU) not to place restrictions on imports containing GMOs. The misuse of the “free trade” principle by a major country can have a “chilling effect” on other countries, i.e. making them fearful of taking legitimate environmental or safety measures as they could face bilateral or multilateral pressures or sanctions. 5.Lack of progress on sustainable agriculture
5. Lack of progress on sustainable agriculture
In the past decades, the globalisation process has spread environmentally unfriendly agriculture technology to many parts of the South. In recent years, the harmful effects of this model have been recognised. UNCED has agreed that in its place, “sustainable agriculture” should be promoted. Unfortunately, little has been done at the international level to implement sustainable agriculture. This lack of commitment is probably related to the fact that the current dominant models of chemical-based agriculture are relied upon by commercial agribusiness corporations for generating their revenues, whereas ecological and organic forms of agriculture rely on low inputs and are thus not in the interests of commerce.
In the past, most agricultural aid has been for promoting the Green Revolution model, which uses seeds with a high response to big doses of inorganic fertiliser and chemical pesticides. These few seed varieties have displaced a wide range of traditional seeds, thus eroding crop biodiversity. There is also mounting evidence of other ecological problems, such as increasing soil infertility, chemical pollution of land and water resources, pesticide poisoning, and pest infestation due to growing pest immunity to pesticides. These are symptoms of a technological system in decline and the system’s main claimed benefit, high productivity, is itself now in question.
With disillusionment setting in on the Green Revolution, commercial resources are now turning to the new biotechnologies. There is need for great caution in this regard, for the claimed benefits of genetic engineering are far from being proven, whilst there is increasing evidence of real and potential risks.
Given the concerns about biosafety, aid resources should not be channeled to developing the new biotechnologies as a new technological panacea. Instead, priority should be given to support research and projects on ecological and community-based farming practices and systems. So far, relatively little resources have been made available for this. There is a premise that whilst “sustainable agriculture” may be ecologically good, it is inferior and inadequate in terms of productivity. This premise could actually be a prejudice, for there is evidence that ecological farming can be high yielding as well, higher yielding in fact that the Green Revolution method.
Since UNCED in 1992, there has been little coordinated official action at global level to phase out chemical-based agriculture nor to promote sustainable agriculture despite a tremendous increase in public demand for organic foods. As a result of lack of support, sustainable agriculture today remains at the level of anecdotes and case studies and the biases against it are deep-seated.
A positive recent development is the shift in policy in some European countries (especially Germany) towards promoting organic farming. This is the result of the series of problems linked to conventional farming, biotech farming and livestock rearing, including BSE, foot and mouth disease and the public unpopularity of biotech agriculture. However much more needs to be done at the scientific, field and training levels to promote sustainable agriculture.
6. Mining activities
Mining is closely linked to globalisation as much of the products are internationally traded. The extraction of minerals, including fossil fuels, was conspicuously absent from the UNCED negotiations, and thus from Agenda 21. It is a serious anomaly and deficiency in Agenda 21, which should be rectified. Perhaps it was an admission that mining cannot be sustainable: the destabilisation of local environments caused by mining is undeniable, with forests stripped bare, soils degraded and water channels polluted. Besides suffering the ecological effects, millions of people also find their land rights and livelihoods are threatened by mining activities.
In recent years there has been an escalation of mining projects. Massive projects are underway or proposed in every continent, accompanied by violent protests in a number of cases. As technology advances, and the more accessible deposits are exploited, mining companies are penetrating more remote areas. These are usually remaining forests, watersheds and mountainous regions. To mine these areas would be to cause more devastating environmental damage. Most of these areas are also indigenous peoples’ lands, recognised or claimed.
At the same time, many developing countries have been attracting foreign investments in mining, and introduced or amended mining laws that have enabled more generous concessions and licenses to foreign firms. Investment liberalisation in mining is likely to damage the environment and result in widespread dislocation of communities.
In a study of recent trends in the global mining industry, Corpuz (1997) concluded: “In the mid‑l990s technological advances coupled with the fast globalization and liberalization of the mining industry, which is called the “the mining sustainability framework”, allowed the transnational mining corporations to temporarily ease themselves out of a crisis (that they faced in the 1980s due to low prices). The higher profits by the mining TNCs, however, meant higher sacrifices on the part of the majority who are marginalized and greater devastation for the global environment. Among those who have suffered the most from the liberalization of mining are indigenous peoples, the women, and even the workers, despite the promise that this will increase employment.”
I. SOME PROPOSALS
Given the unequal economic effects of the present process of globalisation, and its adverse social and environmental costs, there is a need for fundamental reforms of policy and practice, at both the international and national levels. The following are suggestions for changes to enable conditions for sustainable development.
2. NEED FOR APPROPRIATE AND DEMOCRATIC GLOBAL GOVERNANCE
In order to have a favourable international environment for sustainable development, it is vital for the democratisation of international relations and institutions, so that the South can have an active role in decision‑making whilst civil society can also have its concerns taken into account. The role of the United Nations should be strengthened whilst the IMF, World Bank and WTO should be made more accountable to the public and to the poor. Democratisation in global governance structures is a pre-requisite to reforms in content of policies, which can then result in more equitable sharing of benefits and costs.
The major global economic actors are the transnational corporations, the international banks, the World Bank, IMF and the WTO. The operations of the corporations and financial institutions should be made much more accountable to the public, and indeed to the governments. The decision‑making processes in the Bretton Woods institutions and the WTO are mainly controlled by the industrialised countries. The procedural and legal aspects of decision-making should be democratised so that developing countries can have their proper share of participation. These institutions must also be more open to public participation and scrutiny.
3. REBUILDING THE ROLE OF THE UN
As it is the most universal and democratic international forum, the United Nations and its agencies should be given the opportunity and resources to maintain their identity, have their approach and development focus, reaffirm and strengthen their programmes and activities. The recent trend of removing the resources and authority of the UN in global economic and social issues, in favour of the Bretton Woods institutions and the WTO, should be reversed.
In particular, those Northern countries that have downgraded their commitment to the UN should reverse this attitude and instead affirm its indispensable and valuable role in advocating the social, equity, developmental and environmental dimensions in the process of rapid global change. The UN could at least be a counterweight to the similar laissez-faire approach of the IMF, World Bank and WTO.
Strengthening the UN will allow it to play its compensatory role more significantly and effectively. But of course a complementary “safety net” function is the minimum that should be set for the UN. The UN must be able to make the leap: from merely offsetting the social fallout of unequal structures and liberalisation, to fighting against the basic causes of poverty, inequities, social tensions and unsustainable development. The more this is done, the more options and chances are there for developing countries and for sustainable development.
There is a danger that some UN agencies (and the Secretariat itself) may be influenced by conservative political forces to join in the laissez‑faire approach or merely be content to play a second‑fiddle role of taking care of the adverse social effects of laissez‑faire policies promoted by other agencies. The UN should therefore keep true to its mission of promoting sustainable development and justice for the world’s people, and to always advocate for policies and programmes that promote this mission, otherwise it would lose its credibility and its reason for existence.
4. REFORMING GLOBAL ECONOMIC SYSTEM TO BENEFIT THE SOUTH
Reforming the inequitable global economic system is needed as part of the battle for sustainable development. The substance of the demands for a new international economic order should be seriously addressed instead of being ignored or treated as extremist. Due to the imbalances, the outflow of real and financial resources from South to North far exceeds the flow of aid from North to South. The transfer of resources from the South makes it extremely difficult, if not impossible, for Third World countries to adequately implement sustainable development policies, even if they wanted to. Thus, of major importance is the reversal of these South‑to‑North flows of resources.
A major area of reform is in the terms of trade between Northern and Southern exported products. The poor and deteriorating terms of trade for Third World commodity exports vis‑a‑vis Northern manufactured exports has been a major source of the lack of foreign exchange and income in the South. The low prices of raw materials have also contributed to the high volume of extraction and production (to maintain export earnings); and thus become a big factor in natural resource depletion. To rectify the unfair economic trade terms as well as reduce resource depletion, the prices of raw materials could be significantly raised to reflect their real and ecological costs. This may require a new round of commodity agreements or other mechanisms.
An enlarged role should be given to a revitalised UNCTAD and other UN agencies to assist developing countries in areas such as improving commodity prices, building supply capacity, and formulating trade, production and development policies.
Another area for reform is the resolution of the external debt burden of poor and middle-income developing countries. Debts of LDCs and other poor countries should be written off so that they can make a fresh start. The recent financial crisis involving high external debts in East Asian countries again highlights the need for countries of the South to guard against falling into a debt trap. A fair resolution to the existing debt problem, that would not continue to squeeze Third World economies, is important to widening the options of developing countries for the future.
In the area of investment and technology, the South and the UN had in earlier decades tried to establish codes of conduct for TNCs and for the transfer of technology, but eventually these efforts were abandoned in the early 1990s. Instead the Northern countries are attempting to establish a multilateral agreement on investment rules, under the WTO (since their efforts to create one under the OECD failed). The investment policy rules sought by the North would largely prevent the developing countries from having meaningful options for policy‑making over strategic investment and development issues. Developing countries should therefore exercise their membership rights and not allow the WTO to negotiate investment rules. Instead, the right of Third World countries to determine their own economic policies, and to have control over their natural resources, should be recognised in practice as well as in principle. This would include the right to determine the terms under which foreign companies can invest in a country.
New efforts should be made for codes or arrangements to regulate TNCs, to regulate restrictive business practices and to foster technology transfer to developing countries.
5. REVIEWING THE BRETTON WOODS INSTITUTIONS AND THEIR POLICIES
The “globalisation” of a particular set of macroeconomic policies was achieved through the structural adjustment programmes (SAPs) which the World Bank and IMF designed and exported to more than 80 developing countries. The SAPs led to widespread public discontent, including street riots and demonstrations, in many countries undergoing adjustment, and opposition by several people’s organisations and NGOs in both the South and the North. The most important issues voiced by developing country governments and especially by a wide range of Southern and Northern NGOs were the negative economic and social effect of structural adjustment policies, the non‑accountability of the Bretton Woods institutions and the need to resolve the South’s debt crisis. They have argued that debt and structural adjustment were the most important impediments to social and sustainable development in developing countries.
These are indeed the key issues in the required reform of the Bretton Woods institutions and their policies. The external debt overhang of highly indebted developing countries should be resolved as soon as possible (as earlier mentioned). And in light of the new round of debt and structural adjustment problems arising from the Asian crisis, it is urgent that a process of reform or revamp be initiated on the IMF and World Bank, including on their processes of decision‑making and on their inappropriate economic policies. Unless this is done, many developing countries that are still under structural adjustment programmes would find it very difficult (and more difficult as well) to maintain the right to make policy choices.
A serious search for the elements of an appropriate approach to macroeconomic policies and development strategies, including the proper balance of roles between the state, the public sector and the private sector, is essential.
6. REFORMING THE WTO
The WTO should be made more transparent and accountable to the larger international framework of cooperation and sustainable development. This is critical because the rapid developments in the WTO have such major ramifications for sustainable development and yet there is a lack of information and participation from the public, from many sections of national governments and Parliaments, and from other international institutions. There should also be greater internal transparency within the WTO and developing country Members must have full participation rights in discussions and decision-making.
There is a need to assess the implications of existing WTO agreements and to address the imbalances and deficiencies that lead to unequal outcomes at the expense of developing countries. The WTO agreements have on the whole benefited the stronger trading countries much more, and many weaker countries are likely to suffer net losses in many areas. The inequities should be redressed during the review of the agreements that is mandated to take place in the WTO in the next few years.
In particular, the WTO agriculture agreement has not taken into account the needs and interests of small farmers, especially the non‑commercialised farmers in developing countries that form a large section of the population. The Agriculture Agreement should thus be reviewed and reformed to take into account its impact on small farmers and in the context of food security and sustainable agriculture.
A review and reform of TRIPS is urgently needed (see Sub-Section 8 below).
The problems of implementation facing developing countries should be dealt with as a matter of top priority, and a strengthened special mechanism should be set up to satisfactorily resolve the problems (including through amendments of agreements) as soon as possible.
The special and differential rights of developing countries should be strengthened and operationalised. In this context, the main operational principle of the WTO, which is liberalisation and “national treatment” for foreign products, should be reviewed in the light of the experiences of many developing countries, which have suffered adverse effects from liberalising their imports too rapidly, whilst not being able to increase their export capability, access and earnings. Developing countries that encounter problems arising from liberalisation should be able, in practice, to make use of their right to special and differential treatment, so that they can have the option of having the right balance between opening to the world market and promoting the interests of local firms and farms. The main goal of WTO is sustainable development, whilst liberalisation is only a means (and should be done appropriately) and this central theme should be operationalised in the workings of the WTO.
Finally, the WTO should not take up issues that are not trade-related. The attempts by some countries to introduce such new issues as investment rules, competition policy, government procurement and labour standards should not be accepted, as developing countries will be disadvantaged by the way the WTO is likely to treat such issues, and moreover the WTO would be seriously overloaded with such an expanded portfolio when most developing countries are already unable to cope with the current set of agreements and with the present volume of negotiations.
7. TRADE AND ENVIRONMENT
Discussions within the WTO entailing the environmental effects of WTO rules can be beneficial, provided the environment is viewed within the context of sustainable development and the critical component of development is given adequate weightage. The principle of “common but differentiated responsibility” derived from UNCED should guide discussions on trade and environment in the WTO and elsewhere.
The Committee on Trade and Environment should orientate its work to the more complex but appropriate concept and principles of sustainable development. But there should not be any move to initiate an “environment agreement” in the WTO that involves concepts such as PPMs and eco-dumping. Thus, there should not be the linking of environmental standards (and the related issues of PPMs and eco-dumping) to trade measures.
8. INTELLECTUAL PROPERTY RIGHTS
There should be an urgent review of the current international IPR regimes, particularly the TRIPS Agreement, to assess the impact on sustainable development. The mandated reviews of Article 27.3b and of the overall TRIPS agreement are occasions to undertake such an assessment and based on the assessment appropriate changes should be made.
In the review of TRIPS, serious consideration should be given to the following:
- In Article 27.3b, changes should be made to enable Members to exclude all living organisms and biological materials as well as living processes from patentability; and it should be clarified that Members can have the option of a sui generis system for plant varieties that protects traditional knowledge, farmers’ rights and local community rights.
- It should be clarified that nothing in TRIPS prevents Members from taking measures needed to protect and promote public health; moreover, Members should be enabled to exclude from patentability medicines needed to treat life-threatening diseases and diseases related to poverty.
- Measures should be allowed for the effective transfer of environmentally sound technology, including exclusion from patentability.
- Measures for technology transfer to developing countries should be made operational and binding.
9. REFORMING THE GLOBAL FINANCE SYSTEM
Reforms are needed in the global finance system. There should be regulation of capital flows to prevent the disruptive effects and avoid financial crises. Countries that face debt default should be able to have access to debt standstill and debt workout under an international debt arbitration institution. A more democratic system of governance and decision-making on international financial matters is also needed.
10. TECHNOLOGY ASSESSMENT AND PRECAUTIONARY PRINCIPLE
UNCED did not deal with the theme of assessment and regulation of environmentally unsound technology in a systemic manner. What is required is a competent international centre or agency, under the UN, that carries out sustainable development assessments of technologies, especially new and emerging technologies. The centre should establish systems for governing and regulating technologies. The precautionary principle should be applied in technology policy.
11. INTERNATIONAL ENVIRONMENT GOVERNANCE
There are many gaps in the current system of international environmental governance (IEG). The World Conference on Sustainable Development should reach some conclusions about the future evolution of IEG. There should be better coordination and rationalisation among the various multilateral environment agreements, and between these and UNEP as well as CSD. Future initiatives on environment regulation, and on IEG, must place the environmental issues within the context of sustainable development, so that the development dimension is streamed into environmental policy.
12. THE SEARCH FOR ALTERNATIVE DEVELOPMENT STRATEGIES
As the UNCED process realised, a reconceptualisation of development strategies is required. For example, the recent Asian financial crisis makes it crucial to reflect on the dangers to a country of excessive openness to foreign funds and investors.
An important issue is whether developing countries will be allowed to learn lessons from and adopt key aspects of these alternative approaches. For this to happen, the policy conditions imposed through structural adjustment have to be loosened, and some of the multilateral disciplines on developing countries through the WTO Agreements have to be reexamined.
In the search for alternative options for developing countries, approaches based on the principles of sustainable development should be given high priority. The integration of environment with economics, and in a socially equitable manner, is perhaps the most important challenge for developing countries and for the world as a whole in the next few decades. So far there has been a recognition that something should be done but the real work has only now to begin.
It is crucial that the research in this area is increased. It would be very useful if economic arguments could be put forward to show policy makers that it makes better economic and financial sense to take care of the environment now, even as the country progresses, rather than later. More work needs to be done, including at regional and national levels in developing countries, to produce evidence and to make both the public and policy makers aware that environmental damage is economically harmful, and that environmental protection and eco‑friendly technology and practices are themselves economically efficient ways of conducting development. It would also be very useful to highlight examples of components of successful implementation of sustainable and human development policies and approaches and to draw lessons from these. The emerging “sustainable and human development” paradigm could then contribute to the debate on appropriate macroeconomic policies; the appropriate relations between state, markets and people; and appropriate development styles and models.
In the ecological sphere, the series of negotiations initiated by UNCED is an opportunity for all countries to cooperate by creating a global framework conducive to the reduction of environment problems and the promotion of sustainable economic models. However, international discussions on the environment can only reach a satisfactory conclusion if they are conducted within an agreed equitable framework. The North, with its indisputable power, should not make the environmental issue a new instrument of domination over the South. It should be accepted by all that the North should carry the bulk of the burden and responsibility for adjustment towards more ecological forms of production. This is because most of the present global environmental problems are due mainly to the North, which also possesses the financial resources and the economic capacity to reduce their output and consumption levels. There should be much more focus on changing economic policies and behaviour in order that the patterns of consumption and production can be changed to become environmentally sound. What needs to be discussed is not only the development model of the South but even much more the economic model of the North, and of course the international economic order. Key issues to resolve include:
- How to structurally change the Northern model of production, and consumption or lifestyles;
- How to promote ecologically-sound and socially-just development models in the South;
- How to structurally adjust the world economic institutions so as to promote fairer terms of trade and reverse the South North flow of financial resources;
- How to come towards a fair distribution of the sharing of the burden of adjustment necessitated by ecological imperatives, as between countries and as within countries.
Whilst the international elements of a fair and sustainable global order are obviously crucial, there must also be substantial changes to the national order as a complement. In both North and South, the wide disparities in wealth and income within countries have to be narrowed. In a situation of improved equity, it would be more possible to plan and implement strategies of economic adjustment to ecological and social goals.
In the South, the policy option can be taken to adopt more equitable and ecological models of development. With more equitable distribution of resources such as land, and greater access to utilities and housing, the highest priorities of the economy should be shifted to the production of basic goods and services to meet the needs of the people. Investments (including government projects) should be channeled towards basic infrastructure and production, in contrast to the current bias for luxury projects and status symbols of progress. Social investment in primary health care, education, housing for people, public transport and popular cultural activities should also be emphasised, rather than the high‑level luxury services that now absorb a large portion of national expenditure. In this social context, changes also have to be made to make the economy follow the principles of ecology. There should generally be a reduction in the extraction and production of primary commodities: this would reduce the problem of depletion of natural resources such as forests, energy and minerals.
The decline in output and export volume could be offset if commodity prices were to rise, thereby providing a fair value of export earnings. In agriculture, the ecological methods of soil conservation, seed and crop diversity, water harnessing and pest control, should replace the modern unecological methods. With a reduction in production of agricultural raw materials, more land can also be allocated for food crops. There should be as much conservation of primary forests as possible; and the destructive methods of trawler fishing should be rapidly phased out whilst fishery resources are rehabilitated and the environmentally‑sound fishing methods of small fisherfolk are promoted. In industry and construction, ecologically‑appropriate forms of production should be given priority. There should be strict limits on the use of toxic substances or hazardous technologies, a ban on toxic products and the minimisation of the volume of toxic waste and of pollution. Of course, to make this move towards a better global order possible, there must be people’s participation, because the radical changes being called for can be realised only when there is popular will. It is crucial that information be provided to the people through the media and popular education methods, and that the people be given the freedom to make their views known to the policy makers and to others.
It should be stressed that the elements proposed here for a fair and sustainable global order have to be taken together, as a package. Social justice, equity, ecological sustainability and people’s participation are all necessary conditions for this order, and the change must apply at both national and international level. Policies that promote equity alone would not necessarily result in a more environmentally‑sound world. On the other hand, measures to solve the ecological crisis without being accompanied by a more equitable distribution of resources could lead to even greater inequity and injustice.
(NOTE: This paper draws heavily on some other papers written by the author, especially “Globalisation and its Effects on Sustainable Development” (Khor 1996); and “Responding to the Challenges of Globalisation.” (Khor 2000).)
(Paper presented at UNU Meeting on Interlinkages, Tokyo, Japan, 3-4 September 2001.)
By Martin Khor
Third World Network
The East Asian economic crisis is probably the most important economic event in the region of the past few decades and will probably be so for the next few decades as well.
Beyond this, there is as yet no unanimity about its root causes nor about the solutions. The differences of view are being debated in academic circles and reflected in the media.
One thing though is certain: the earlier optimistic expectation that it would last only some months has been proved wrong. Instead the financial crisis has been transformed into a full-blown recession or depression, with forecasts of GNP growth and unemployment becoming more gloomy for affected countries. Moreover the threat of depreciation has spread from a few countries to many in the region, and has also affected other areas such as Russia, South Africa, South America and Eastern Europe.
One thing though is certain: the earlier optimistic expectation that it would last only some months has been proved wrong. Instead the financial crisis has been transformed into a full-blown recession or depression, with forecasts of GNP growth and unemployment becoming more gloomy for affected countries. Moreover the threat of depreciation has spread from a few countries to many in the region, and has also affected other areas such as Russia, South Africa, South America and Eastern Europe.
2. THE CAUSES, PROCESSES AND SOME ECONOMIC EFFECTS OF THE CRISIS
The great debate on causes centres on whether the blame should be allocated to domestic policies and practices or to the intrinsic and volatile nature of the global financial system.
In the first phase of the crisis, as it spread from Thailand to Malaysia, Indonesia, the Philippines, then to South Korea, the international establishment (represented by the IMF) and the G7 countries placed the blame squarely on domestic ills in the East Asian countries. They cited the ill judgment of the banks and financial institutions, the over-speculation in real estate and the share market, the collusion between governments and businesses, the bad policy of having fixed exchange rates (to the dollar) and the rather high current account deficits. They studiously avoided blaming the financial markets, or currency speculation, and the behaviour of huge institutional investors.
This view was difficult to sustain. For it implied that the “economic fundamentals” in East Asia were fatally flawed, yet only a few months or even weeks before the crisis erupted, the countries had been praised as models of sound fundamentals to be followed by others. And in 1993 the World Bank had coined the term “the East Asian Miracle” to describe the now vilified economies.
However, there rapidly developed another view of how the crisis emerged and spread. This view put the blame on the developments of the global financial system: the combination of financial deregulation and liberalisation across the world (as the legal basis); the increasing interconnection of markets and speed of transactions through computer technology (as the technological basis); and the development of large institutional financial players (such as the speculative hedge funds, the investment banks, and the huge mutual and pension funds).
This combination has led to the rapid shifting of large blocks of short-term capital flowing across borders in search of quick and high returns, to the tune of US$2 trillion a day. Only one to two percent is accounted for by foreign exchange transactions relating to trade and foreign direct investment. The remainder is for speculation or short-term investments that can move very quickly when the speculators’ or investors’ perceptions change.
When a developing country carries out financial liberalisation before its institutions or knowledge base is prepared to deal with the consequences, it opens itself to the possibility of tremendous shocks and instability associated with inflows and outflows of funds.
What happened in East Asia is not peculiar, but has already happened to many Latin American countries in the 1980s, to Mexico in 1994, to Sweden and Norway in the early 1990s. They faced sudden currency depreciations due to speculative attacks or large outflows of funds.
A total of US$184 billion entered developing Asian countries as net private capital flows in 1994-96, according to the Bank for International Settlements. In 1996, US$94 billion entered and in the first half of 1997, $70 billion poured in. With the onset of the crisis, $102 billion went out in the second half of 1997.
The massive outflow has continued since.
These figures help to show: (i) how huge the flows (in and out) can be; (ii) how volatile and sudden the shifts can be, when inflow turns to outflow; (iii) how the huge capital flows can be subjected to the tremendous effect of “herd instinct,” in which a market opinion or operational leader starts to pull out, and triggers or catalyses a panic withdrawal by large institutional investors and players.
In the case of East Asia, although there were grounds to believe that some of the currencies were over-valued, there was an over-reaction of the market, and consequently an “over-shooting” downwards of these currencies beyond what was justifiable by fundamentals. It was a case of self-fulfilling prophecy.
It is believed that financial speculators, led by some hedge funds, were responsible for the original “trigger action” in Thailand.
The Thai government used up over US$20 billion of foreign reserves to ward off speculative attacks. Speculators are believed to have borrowed and sold Thai baht, receiving US dollars in exchange. When the baht fell, they needed much less dollars to repay the baht loans, thus making large profits.
A report in Business Week in August 1997 revealed that hedge funds made big profits from speculative attacks on Southeast Asian currencies in July 1997. In an article titled “The Rich Get a Little Richer,” the business weekly reported on the recent profit levels of US-based “hedge funds”, or investment funds that make their money from leveraged bets on currencies, stocks, bonds, commodities. According to Business Week, in the first half of that year, the hedge funds performed poorly. But in July (the month when the Thai baht went into crisis and when other currencies began to come under attack) they “rebounded with a vengeance” and most types of funds posted “sharp gains”. The magazine says that a key contributing factor for the hedge funds’ excellent July performance was “the funds’ speculative plays on the Thai baht and other struggling Asian currencies, such as the Malaysian ringgit and the Philippine peso.” As a whole, the hedge funds made only 10.3 percent net profits (after fees) on average for the period January to June 1997. But their average profit rate jumped to 19.1 percent for January-July 1997. Thus, the inclusion of a single month (July) was enough to cause the profit rate so far that year to almost double. This clearly indicates a tremendous profit windfall in July.
In some countries, the first outflow by foreigners was followed by an outflow of capital by local people who feared further depreciation, or who were concerned about the safety of financial institutions. This further depreciated the currencies. The sequence of events leading to and worsening the crisis included the following.
(a) Financial liberalisation
Firstly, the countries concerned carried out a process of financial liberalisation, where foreign exchange was made convertible with local currency not only for trade and direct-investment purposes but also for autonomous capital inflows and outflows (i.e. for “capital account” transactions); and where inflows and outflows of funds were largely deregulated and permitted. This facilitated the large inflows of funds in the form of international bank loans to local banks and companies, purchase of bonds, and portfolio investment in the local stock markets. For example, the Bangkok International Banking Facilities (BIBF) was set up in March 1993 to receive foreign funds for recycling to local banks and companies, and it received US$31 billion up to the end of 1996. South Korea recently liberalised its hitherto strict rules that prohibited or restricted foreign lending, in order to meet the requirements for entering the Organisation for Economic Cooperation and Development (OECD). Its banks and firms received large inflows of foreign loans, and the country accumulated US$150 billion of foreign debts, most of it private-sector and short-term. In Indonesia, local banks and companies also borrowed heavily from abroad.
(b) Currency depreciation and debt crisis
The build-up of short-term debts was becoming alarming. What transformed this into crisis for Thailand, Indonesia and South Korea was the sharp and sudden depreciation of their currencies, coupled with the reduction of their foreign reserves in anti-speculation attempts. When the currencies depreciated, the burden of debt servicing rose correspondingly in terms of the local-currency amount required for loan repayment. That much of the loans were short-term was an additional problem. Foreign reserves also fell in attempts to ward off speculative attacks. The short-term foreign funds started pulling out sharply, causing reserves to fall further. When reserves fell to dangerously low levels, or to levels that could not allow the meeting of foreign debt obligations, Thailand, Indonesia and South Korea sought IMF help.
(c) Liberalisation and debt: the Malaysian case
Malaysia also went through a process of financial liberalisation, with much greater freedom for foreign funds to invest in the stock market, for conversion between foreign and local currencies, and for exit of funds abroad.
The Central Bank however retained a key control: private companies wanting to borrow foreign-currency loans exceeding RM5 million must obtain the Bank’s approval. This is generally given only for investments that would generate sufficient foreign exchange receipts to service the debts. Companies are also not allowed to raise external borrowing to finance the purchase of properties in the country (Bank Negara Annual Report 1997, pp.53-54). Thus there was a policy of “limiting private sector external loans to corporations and individuals with foreign exchange earnings” which according to Bank Negara “has enabled Malaysia to meet its external obligations from export earnings.” According to a private-sector leader, this ruling saved Malaysia from the kind of excessive short-term priavte-sector borrowing that led the other three countries into a debt crisis.
As a result of these controls, Malaysia’s external debt has been kept to manageable levels. Nevertheless the debt servicing burden in terms of the local currency has been made heavier by the sharp ringgit depreciation. The relatively low debt level, especially short-term debt, is what distinguishes Malaysia from the three countries that had to seek IMF help. The lesson is that it is prudent and necessary to limit the degree of financial liberalisation and to continue to limit the extent of foreign debt, and moreover to in future keep the foreign debt to an even much lower level.
(d) Local asset boom and bust, and liquidity squeeze
The large inflows of foreign funds, either as loans to the banking system and companies directly, or as equity investment in the stock markets, contributed to an asset price boom in property and stock markets in East Asian countries.
With the depreciation of currencies, and expectations of a debt crisis, economic slowdown or further depreciation, substantial foreign funds left suddenly by withdrawing loans and selling off shares. Share prices fell. Thus the falls in currency and share values fedoff each other. With weakened demand and increasing over-supply of buildings and housing, the prices of real estate also fell significantly.
For the countries afflicted with sharp currency depreciations and share market declines, the problems involved:
** The much heavier debt servicing burden of local banks, companies and governments that had taken loans in foreign currencies;
** The fall in the value of shares pledged as collateral for loans by companies and individuals, and the fall in the values of land, buildings and other real estate property. This has led to financial difficulties for the borrowers;
** The higher interest rates caused by the liquidity squeeze and tight monetary policies have brought about added financial burdens on all firms as well as on consumers that borrowed;
** As companies and individuals face difficulties in servicing their loans, this has increased the extent of non-performing loans and weakened the financial position of banks, and
** Higher inflation caused by rising import prices resulting from currency depreciation.
Moreover, in order to reduce the current account deficit, or in following the orthodox policies of the IMF, governments in the affected countries reduced their budget expenditure. The main rationale was to induce a reduction in the current account deficit, which had been targetted by currency speculators as a weak spot in the economy. Added to the higher interest rate and the tightening of liquidity, this budget cut also added to recessionary pressures.
(e) The fall in output
In the region, the financial crisis has been transformed to a full-blown recession in the real economy of production. Worst affected is Indonesia, with a 6.2% fall in GDP in the first quarter of 1998, and a newly projected negative growth for 1998 of 15%, inflation of 80% and expected unemployment of 17% or 15 million. South Korea’s GDP fell 3.8% in the first quarter of 1998. Thailand’s 1998 GDP is expected to drop 4 to 5.5% in 1998. Hong Kong’s GDP fell 2% in the first quarter. Singapore enjoyed 5.6% growth in the first quarter but is expected to slip into negative growth sometime in the second half of 1998. In Malaysia, real GDP fell 1.8% in the first quarter of 1998 (compared to 6.9% strong growth in 4th quarter-1997).
A bright spot for the region is a turnaround in the current account of the balance of payments. However this improvement came with a heavy price. The increased trade surplus was caused more by a fall in imports than by a rise in exports, especially in real (or volume) terms. Thus the trade surplus indicates the effects of recession on falling imports, rather than an expansion of exports. Another point to note is that an improvement in the current account need not necessarily mean a healthy overall balance of payments position unless there is also a positive development in the capital account. A possible weakness here could be an outflow of short-term funds, by either foreigners or local people. To offset this, a repatriation of funds owned by local companies or people back to the country should be encouraged.
(f) Easing of fiscal and monetary policy
Recently there has been an easing of fiscal and monetary policy in the affected countries in response to the depth of the recessionary conditions. These actions would hopefully have the effect of improving economic conditions and ease recessionary pressures.
3. THE RECENT DEBATE ON THE ROLE OF THE IMF
As the East Asian crisis continues to deepen, the debate on the role of the International Monetary Fund’s policies has heated up. The IMF’s top officials continue to defend their macroeconomic approach of squeezing the domestic economies of their client countries through high interest rates, tight monetary policies and cuts in the government budget. Their argument is that this “pain” is needed to restore foreign investors’ confidence, and so strengthen the countries’ currencies.
However, some economists had already warned at the start of the IMF “treatment” for Thailand, Indonesia and South Korea that this set of policies is misplaced as it would transform a financial problem that could be resolved through debt restructuring, into a full-blown economic crisis.
The prediction has come true, with a vengeance. The three countries under the IMF’s direct tutelage have slid into deep recession. Partly due to spillover effects, other countries such as Malaysia and Hong Kong have also suffered negative growth in the year’s first quarter. Even Singapore is tottering on the brink of minus growth.
The three affected countries had faced initial problems resulting from currency depreciation and stock market decline, such as debt repayment and a great financial weakening of the corporate and banking sectors. But then came a second set of problems resulting from the high interest rates and tight monetary and fiscal policies that the IMF imposed or advised.
For companies already hit by the declines in currency and share values, the interest rate hike became a third burden that broke their backs.
But even worse, there are many thousands of firms (most of them small and medium-sized) that have now been affected in each country. Their owners and managers did not make the mistake of borrowing from abroad (nor did they have the clout to do so). The great majority of them are also not listed on the stock market.
So they cannot be blamed for having contributed to the crisis by imprudent foreign loans or fiddling with inflated share values.
Yet these many thousands of companies are now hit by the sharp rise in interest rates, a liquidity squeeze as financial institutions are tight-fisted with (or even halt) new loans, and the slowdown in orders as the public sector cuts its spending.
In Thailand, “domestic interest rates as high as 18 percent have been blamed for starving local businesses of cash and strangling economic growth,” according to a Reuters report of 3 June. In South Korea, thousands of small and medium companies have gone bankrupt as a result of high interest rates. Although the country has about US$150 billion in foreign debts, its companies in January also had double that (or more than US$300 billion) in domestic debt. According to the Wall Street Journal (9 Feb), the Korean economy was facing fresh agony over this huge domestic debt as thousands of companies file for bankruptcy as they find it harder to get credit. “To blame for the tighter liquidity are higher interest rates, a legacy of the IMF bailout that saved Korea’s economy from collapse, and a sharp economic slowdown.” In Indonesia, whilst top corporations with foreign currency loans have been hit hardest by the 80 percent drop of the rupiah vis-a-vis the US dollar, the majority of local companies have been devastated by interest rates of up to 50 percent. The rates were raised as part of an IMF agreement and were aimed at strengthening the rupiah. However the rupiah has not improved from its extremely low levels, whilst many indebted companies are unable to service their loans.
In Malaysia, which has fortunately not had to seek an IMF loan package, interest rates are lower than in the three IMF client countries.
Nevertheless, the initial interest rate hike and the reluctance of many banks to provide new loans caused serious difficulties for many firms and consumers. This led to open complaints against the financial institutions by the business sector, and to calls by political leaders, including the Prime Minister, to find measures to reduce the lending rates.
In this matter, countries subjected to currency speculation face a serious dilemma. They have been told by the IMF that lowering the interest rate might cause the “market” to lose confidence and savers to lose incentive, and thus the country risks capital flight and currency depreciation.
However, to maintain high interest rates or increase them further will cause companies to go bankrupt, increase the non-performing loans of banks, weaken the banking system, and dampen consumer demand. These, together with the reduction in government spending, will plunge the economy into deeper and deeper recession. And that in turn will anyway cause erosion of confidence in the currency and thus increase the risk of capital flight and depreciation.
A higher interest rate regime, in other words, may not boost the currency’s level but could depress it further if it induces a deep and lengthy recession.
It is also pertinent to note that a country with a lower interest rate need not necessarily suffer a sharper drop in its currency level. Take the case of China. Since May 1996, it has cut its interest rates four times and its one-year bank fixed deposit rate was 5.2 percent in May (according to a Reuters report). But its currency, which is not freely traded due to strict controls by the government, has not depreciated.
It has also been pointed out by the United Nations Conference on Trade and Development’s (UNCTAD) chief macroeconomist Yilmaz Akyuz that “although Indonesia and Thailand have kept their
rates higher than Malaysia, they have experienced greater difficulties in their
currency and stock markets.”
According to Akyuz, there is not a strong case for a drastic reduction
in domestic growth (as advocated by the IMF) to bring about the adjustment
needed in external payments.
Indeed it is very strange that the IMF as well as the leaders of Western countries are shrilly criticising Japan for not doing more to reflate its ailing economy. They are calling for more effective tax cuts so that Japanese consumers can spend more and thus kick the economy into recovery.
The yen had been sharply dropping, causing grave concerns that this would trigger a deeper Asian crisis or world recession. These concerns led the United States to intervene in the foreign exchange market to stop the yen’s further decline.
Yet neither the IMF nor the Western leaders have asked Japan to increase its interest rate (which at 0.5 percent must be the lowest in the world) to defend the yen. Instead they want Japan to take fiscal measures to expand the economy.
This tolerance of low interest rates in Japan as well as the pressure on the Japanese government to pump up its economy is a
very different approach compared to the high-interest austerity-budget medicine prescribed for the other ailing East Asian countries.
Could it be that this display of double standards is because it is in the rich countries’ interests to prevent a Japanese slump that could spread to their shores, and so they insist that Japan reflate its economy whilst keeping its interest rate at rock bottom? Whereas in the case of the other East Asian countries, which owe a great deal to the Western banks, the recovery and repayment of their foreign loans is the paramount interest?
In the latter case, a squeeze in the domestic economy would reduce imports, improve the trade balance and result in a strong foreign exchange surplus, which can then be channelled to repay the international banks.
This is in fact what is happening. The main bright spot for Thailand, South Korea, Indonesia and Malaysia is that as recession hits their domestic economy, there has been a contraction in imports resulting in large trade surpluses.
Unfortunately, this is being paid for through huge losses in domestic output and national income, the decimation of many of the large, medium and small firms of these countries, a dramatic increase in unemployment and poverty, and social dislocation or upheaval. A price that is far too high to pay, and which in the opinion of many economists (including some top establishment economists) is also unnecessary for the people of these countries to pay.
They argue that instead of being forced to raise interest rates and cut government expenditure, the countries should have been advised by the IMF to reflate their economies through
lower interest rates and increased government spending.
Recently the Financial Times (London) carried a strongly worded opinion article entitled “Asian water torture” with this sub-heading: “Unless the IMF allows the region’s economies to reflate and lower interest rates, it will condemn them to a never-ending spiral of recession and bankruptcy.”
Written by Robert Wade, professor of political economy in Brown University (US), the article notes that the IMF imposed very high interest rates on the basis that a sharp rise in rates would stabilise currency markets, dampening pressures for competitive devaluations and making it easier for client governments to repay foreign creditors. The argument has a theoretical basis, says Wade, but it assumes conditions not present in Asia. When financial inflows did not resume, the Fund’s response was to give it more time and make the pain sharper.
“Investors on the contrary took the high rates as a signal of great dangers ahead, making them all the more anxious to get out and stay out,” says Wade. “High rates and the associated austerity policies have caused so much damage in the real economy as to validate the perception of great dangers.”
Wade blames the IMF for failing to grasp the implications of imposing high interest charges on Asian companies that are typically far more indebted than Western and Latin American companies. “High rates push them much more quickly from illiquidity towards insolvency, forcing them to cut back purchases, sell inventories, delay debt repayment and fire workers. Banks then accumulate a rising proportion of bad loans and refuse to make new ones. The IMF’s insistence that banks meet strict Basle capital adequacy standards only compounds the collapse of credit. The combination of high interest rates and Basle standards is the immediate cause of the wave of insolvency, unemployment and contraction that continues to ricochet around the region and beyond. The uncertainty, instability and risk of further devaluations keep capital from returning despite high real interest rates.”
Wade finds the IMF’s contractionary approach “puzzling” as the United States authorities after the 1987 stock market crash had acted to keep markets highly liquid whatever the cost, yet in Asia the Fund acted to contract liquidity.
“Is this because it knows only one recipe? Or because it is more interested in safeguarding the interests of foreign bank creditors than in avoiding collapse in Asia?”
Concluding that the IMF’s approach is not working, Wade calls on governments in the region to change tack away from the current approach of very low inflation, restrained demand and high real interest rates as the top priorities. “They need to take a tougher stance in the rescheduling negotiations with the creditor banks, lower interest rates to near zero, and step on the monetary gas,” he says.
This proposition might be found by many to be too bold. What if the markets react negatively and the local currency drops further? To take this into account, Wade complements his proposal with another: that the governments have to reintroduce some form of cross-border capital controls. They should then channel credit into export industries, generate an export boom, and let the ensuing profits reinforce inflationary expectations and reflate domestic demand.
The West, meanwhile, should stop pushing developing countries to allow free inflow and outflow of short-term finance as they are simply not robust enough to be exposed to the shocks that unimpeded flows can bring. There should also be reconsideration of the constitution of money funds (whose priorities are short-term results) and over-guaranteed international banks, which lie at the heart of the problem of destabilising international financial flows.
“Until Asian governments lower interest rates, take control of short-term capital movements, and cooperate within the region, the crisis will go on and on like water torture. That will bring poverty and insecurity to hundreds of millions and turn parts of Asia into a dependency of the IMF and the US, its number one shareholder.”
The Wade article is the latest in a growing series of academic articles calling for a change in IMF policies.
The Harvard professor, Jeffrey Sachs, has been attacking the IMF ever since early November 1997, when he predicted that the bailout packages for Thailand and Indonesia, if tied to orthodox financial conditions like budget cuts and higher interest rates, could “do more harm than good, transforming a currency crisis into a rip-roaring economic downturn.”
The predicted downturn has now turned out to be much worse than anyone imagined.
Another prominent critic is Martin Feldstein, economics professor at Harvard University, president of the National Bureau of Economic Research and formerly chief economic advisor to the US government.
In the Foreign Affairs journal (March/April 1998), he says the IMF’s recent emphasis on imposing major structural and institutional reforms, rather than focusing on balance-of-payments adjustments, will have short-term and longer-term adverse consequences.
The main thrust of his article is that the IMF has strayed from its mandate of helping countries resolve their balance of payments problems (which could be best done by organising debt rescheduling exercises between the countries and their foreign creditors) and instead has been imposing conditions relating to their economic, financial and social structures which are not relevant to resolving the debt and balance of payments problems at hand.
This is a subject that needs separate treatment.
However, Feldstein also criticises the IMF’s short-term macroeconomic policies for Korea, which call for budget deficit reduction (by raising taxes and cutting government spending) and
a tighter monetary policy (higher interest rates and less credit availability), which together depress growth and raise unemployment.
Asks Feldstein: “But why should Korea be required to raise taxes and cut spending to lower its 1998 budget deficit when its national savings rate is already one of the highest in the world, when its 1998 budget deficit will rise temporarily because of the policy-induced recession, and when the combination of higher private savings and reduced business investment are already freeing up the resources needed to raise exports and shrink the current account deficit?”
Feldstein notes that under the IMF plan, the interest rate on won loans was 30 percent whilst inflation was only 5 percent (at the time the article was written, earlier this year).
“Because of the high debt typical of most Korean companies, this enormously high real interest rate of 25 percent puts all of them at risk of bankruptcy,” he says.
“Why should Korea be forced to cause widespread bankruptcies by tightening credit when inflation is very low, when the rollover of bank loans and the demand for the won depend more on confidence than on Korean won interest rates, when the failures
will reduce the prospect of loan repayment, and when a further fall in the won is an alternative to high interest rates as a way to attract won-denominated deposits?
“Although a falling won would increase the risk of bankruptcies among Korean companies with large dollar debts, the overall damage would be less extensive than the bankruptcies caused by very high won interest rates that would hurt every Korean company. Finally, why should Korea create a credit crunch that will cause even more corporate failures by enforcing the international capital standards for Korean banks when the Japanese government has just announced that it will not enforce those rules for Japanese banks in order to avoid a credit crunch in Japan?”
The questions raised by the IMF’s policies, and now about the severe effects they are having in the region, are very serious indeed, as they relate to the shape of the national economies of East Asia and the very future of the countries.
Fortunately, Malaysia has not been forced by circumstances to seek an IMF rescue package, and thus we have more degrees of freedom to determine short- and longer-term policies to get out of the crisis.
For those countries already taking IMF loans, it is most difficult (if not almost impossible) to make or modify policies or to change course if things go wrong, as the IMF is always ready to threaten to stop its loans (which are given in small instalments) if these countries try to veer even a little from the IMF path. Malaysia’s policy makers have an unenviable task of going through the pros and cons of each policy choice, for each policy option carries both advantages and disadvantages, and thus there are many trade-offs to carefully consider.
4. THE NEED TO REGULATE THE GLOBAL FINANCIAL SYSTEM
The East Asian crisis has shown up the threats of volatile and large short-term capital flows to the economic stability of developing countries. What is urgently needed is greater transparency of how the global financial players and markets operate, and reforms at both international and national levels to regulate these speculative flows.
(a) Lack of Transparency
The workings and movements in the international financial markets and system have played the most important part in the East Asian financial crisis. The crisis is also manifesting itself now in Russia, South Africa and will likely spread to other countries.
It becomes obvious that this global system needs to be monitored and also reformed. Yet there is a great lack of transparency on what constitutes the financial markets, who the major players are, what are their decisions and how money is moved from market to market, and with what effect.
Financial crises cannot be prevented or resolved unless this lack of transparency is removed. That is a first step.
After greater transparency, there is the need to improve the system, to remove its worst aspects and excesses, and to put in place a system in which currency and other financial instruments (shares, bonds, etc) are used for legitimate trade or real-investment purposes and not for non-beneficial speculative gain.
Transparency and reforms are needed in the following areas:
** We need to know who the major institutions and players are in the ownership of financial assets, and their behaviour and operational methods, and the markets they operate in.
How do they gain their leverage? From where do they get their funds and credit and on what terms? How do they operate and through which channels? In particular, how do they view emerging markets and what are their methods to derive maximum profits there?
These institutions include hedge funds, mutual funds, pension funds, investment banks, insurance companies, commercial banks and the finance departments of multinational and big companies.
** What is the system by which central banks of the major Northern countries regulate, deregulate (or decide not to regulate) the behaviour of funds, speculators and investors?
How do central banks coordinate among themselves? Do they (or some of them) coordinate among themselves to influence parameters such as exchange rates and interest rates? What is the role (or lack of role) of the Bank for International Settlements?
** The IMF is the major international financial institution, whose policies can determine the finances and fate of nations.
There is lack of transparency on how the staff (who wield considerable power in the institution) set their policies and conditions, globally and for each nation.
How do the staff determine the policy framework and the specific conditions for loans for each client country? Do they come under the political influence of particular countries (especially the US) and of the major shareholders, thus leading to a situation where decisions are not made only or mainly on professional grounds?
How do the major shareholders collaborate among themselves? What is the linkage of interests between the IMF secretariat, the
US Treasury and other major countries’ finance ministries, and the international banks (whose interests they usually serve in getting loans repaid from developing countries)?
There are some studies relating to some of the questions above. However these studies are few. Much more investigation has to be done, so that some basic knowledge of the institutions and system can be gained. On that basis, proposals for changes and reforms can be made.
(b) The Need for Reform
The present system suits the interests of financial owners and speculators. These players have powerful backers in governments or in the U.S. Congress and other Parliaments in the North. Thus getting global reform going is an uphill task.
Nevertheless it is becoming daily more evident that the present system is very unstable and will continue to produce large-scale crises which are becoming too costly for the IMF or the Group of 7 rich countries (G7) to bear. Therefore the question of “a new financial architecture” is being raised by the G7 themselves.
However the G7 approach is to try as far as possible to have business as usual. This means not reforming the present system of free and liberal flows of short-term or long-term capital. They do not want regulation at global or national level.
Their approach is to get national governments in developing countries to strengthen their banking systems so that the banks can withstand more shocks that volatile flows will bring in future.
The G7 countries’ focus is to have “greater transparency” at national level (so that investors will not foolishly put money in weak spots) and tighter banking regulation so that there will be less chance of a systemic bank collapse.
Such an approach may of course be useful in itself, as no one doubts the importance of strengthening national policies and financial systems.
But surely this “national approach” in developing countries is grossly insufficient and needs to be complemented by a global approach to monitor and regulate cross-border financial flows. At national level, governments should also be allowed and encouraged to institute regulations to reduce the power of speculative funds (this needs to be done especially in the rich countries) and to reduce the volatile inflows and outflows of short-term capital.
There is a strong case (getting stronger by the day) for greater international and national regulation of financial flows, players and markets, as well as for reform of the IMF.
At global level, there should be a system of monitoring short-term capital flows, tracing the activities of the major players and institutions, so that the sources and movements of speculative capital can be publicly made known.
There can also be serious pursuit of a global tax on short-term financial flows, such as the well-known Tobin Tax, where a 0.25% tax is imposed on all cross-country currency transactions.
This will penalise short-term speculators whilst it will have only a very small effect on genuine traders and long-term investors. The advantage is that not only will speculation be discouraged, but there can also be far greater transparency in the markets as movements of capital can be more easily traced.
At national level, in the North countries, which are the major sources of international capital flows and speculation, national regulations can be imposed to reduce the power and leverage of funds.
For example, banking regulations can be introduced to limit the amount and scope of credit to hedge funds. Proposals can be made for this and other similar objectives.
At national level, in the South, countries should explore options of regulating and discouraging inflows of short-term speculative capital. The well-known case of Chile where 30% of all incoming foreign capital (other than foreign direct investment) had to be deposited with the Central Bank interest-free for up to one year, can be emulated by other countries.
This device was introduced after an episode of excessive inflows of funds. It helped to reduce short-term speculative inflows and outflows whilst at the same time it was not a disincentive for the inflow of long-term foreign investment.
Another measure worth emulating is the requirement that local companies seek Central Bank permission before securing foreign-currency loans, and permission should be given only if or to the extent that the project being financed is shown to be able to yield foreign exchange earnings sufficient to service the loan.
As already mentioned, this is a requirement established by the Central Bank in Malaysia, and it helped to prevent the country from being saddled with the large and excessive short-term foreign-exchange private corporate loans that flooded other countries like Thailand, Indonesia and South Korea.
Further, countries that face a possible danger of sudden and large outflows of funds can consider some limited restrictions (at least for a limited time when the danger is imminent) on the freedom of residents and resident companies to transfer funds abroad.
Such limitations had in the past been in place in countries that now practise financial liberalisation. Indeed restrictions on capital outflows still exist in many developing countries (such as China and India) and have helped to stabilise their financial situation.
Whilst the institution of regulations on inflows and outflows of short-term capital makes eminent sense, countries that have
already liberalised and are dependent on the “goodwill” of the financial markets are afraid that reintroducing them could generate a backlash from the market and from the G7 countries.
Thus, it is crucial that the G7 countries themselves review their own anti-regulation position, and give the stamp of approval and legitimacy for developing countries to have these measures. Otherwise countries may not be able to institute measures that are good or necessary for their financial stability and their economic recovery for fear of being labelled as “financial outcasts.” Once again, the ball is at the feet of the G7 countries to take the lead in both international-level and national-level reforms.
5. SOME POLICY LESSONS FROM THE ASIAN CRISIS
Whilst the debate on the causes and processes of the Asian crisis goes on, it is time to draw at least some preliminary policy lessons. Developing countries should rethink the benefits and risks of financial liberalisation. In particular, they have to take great care to limit their external debt (especially short-term debt), improve the balance of payments and build up their foreign reserves.
(a) Need for Great Caution About Financial Liberalisation and Globalisation
One of the great lessons of the Asian crisis is the critical importance for developing countries to properly manage the interface between global developments and national policies, especially in planning a nation’s financial system and policy.
In a rapidly globalising world, developing countries face tremendous pressures (coming from developed countries, international agencies and transnational companies) to totally open up their economies.
In some cases and under certain conditions, liberalisation can play and has played a positive role in development. However, the Asian crisis has shown up that in other circumstances, liberalisation can wreak havoc, especially on small and dependent economies.
This is especially so in the field of financial liberalisation, where the lifting of controls over capital flows can lead to such alarming results as a country accumulating a mountain of foreign debts within a few years, the sudden sharp depreciation of its currency, and a stampede of foreign-owned and local-owned funds out of the country in a few months.
Surely then a clear conclusion from the Asian crisis is that it is prudent and necessary for a developing country to have measures that reduce its exposure to the risks of globalisation and thus place limits on its degree of financial liberalisation.
Countries should not open up and deregulate their external finances and foreign exchange operations so rapidly when they are unprepared for the risks and negative consequences. Measures should be adopted to prevent speculative inflows and outflows of funds, and to prevent opportunities for speculation on their currencies.
At the least, the process of opening up to capital flows should be done at a very gradual pace, in line with the growth of knowledge and capacity locally on how to adequately handle the new processes and challenges that come with the different aspects of liberalisation.
This will require policy makers (including in the Central Bank, Finance Ministry, Securities Commission and Planning Unit) to have a proper understanding of the processes at work, the policy instruments to deal with them, adequate regulatory, policy and legal frameworks and the enforcement capability.
Moreover, the private sector players (including banks and other financial institutions, and private corporations) will also have to understand, master and control processes such as inflows of funds through loans and portfolio investment, the recycling of these to the right sectors and institutions for efficient use, and the handling of risks of changes in foreign currency rates.
The whole process of learning and training and putting the required infrastructure in place will take time. Some European countries, which started with already sophisticated financial systems, took more than a decade to prepare for liberalisation, and yet failed to prevent financial failures.
(b) Manage External Debt Well and Avoid Large Debts
At the macro-policy level, a very critical lesson from the Asia crisis is that governments have to pay great attention to external debt management.
They have to take great care to limit the extent of their countries’ foreign debt. It was the rapid build-up of external debt that more than anything else led to the crisis in Thailand, Indonesia and South Korea, and to a smaller extent, Malaysia.
Developing countries should not build up a large foreign debt (whether public or private debt) even if they have relatively large export earnings.
The East Asian countries are big exporters, including of manufactured goods, and perhaps this led them to the complacent belief that the export earnings would comfortably provide the cover for a rapid build-up of external debt. However, a bitter lesson of the crisis is that high current export earnings alone are insufficient to guarantee that debts can be serviced.
For a start, future export growth can slow down (as happened). Then, there can also be a high growth in imports and a large outflow of funds due to repatriation of foreign-owned profits or due to the withdrawal of short-term speculative funds.
In good years these factors can be offset by large inflows of foreign long-term investment. However if the negative factors outweigh the inflows, the balance of payments will register a deficit. Such deficits mean that the country’s foreign reserves are being run down.
When the point is reached when the reserves are not large enough to adequately pay for the interest and principal of the external debt that is due, the country will have reached the brink of default and will thus have to declare a state of crisis requiring international assistance.
That flashpoint was reached in 1997 by
Thailand, Indonesia and South Korea, necessitating their seeking rescue
packages from the IMF. Their problems had been compounded greatly by the sharp
depreciation of their currencies, thus raising equally sharply the burden of
debt servicing in terms of each country’s local currency, and making the
situation impossible to sustain.
Thus, having a large foreign debt puts a country in a situation of considerable risk, especially when that country has liberalised and its currency is fully convertible and thus subject to speculation.
In particular, having too much short-term debt
can be dangerous as it has to be repaid within a short period of months or a
year, thus requiring the country to have large enough reserves at that period
to be able to service the debts. The
structure of debt maturity should also be spread out, keeping in mind the
dangers of “bunching”, or too
much debt coming due at the same time.
It is thus important to watch the relation of levels of debt and debt servicing not only to export earnings but also to the level of foreign reserves. Reserves should be built up to a comfortable level, sufficient to service debt, especially short-term debt.
(c) Manage and Build Up Foreign Reserves
The careful management of foreign reserves has thus emerged as a high-priority policy objective in the wake of the Asian crisis.
Maintaining and increasing foreign reserves is, unfortunately, a most difficult and complex task. There are so many factors involved, such as the movements in merchandise trade (exports and imports), the payment for trade services, the servicing of debt and repatriation of profits, the inflows and outflows of short-term funds, the level of foreign direct investment and the inflows of new foreign loans.
All these items are components of the balance of payments, whose “bottom line” (or overall balance, either as surplus or deficit) determines whether there is an increase or run-down of a country’s foreign reserves.
As can be noted, these items are determined by factors such as the trends in merchandise trade, the external debt situation (in
terms of loan servicing and new loans), and the “confidence factor” (which affects the volatile movements of short-term capital as well as foreign direct investment).
To these must now be added the state of the local currency which in the past could be assumed to be stable but which recently has become a major independent factor that both influences the other factors and is itself influenced by them.
To guard and build up the foreign reserves, the country has thus to take measures in the short and longer term to strengthen its balance of payments, in particular the two main aspects, the current account and the capital account.
The first aspect is to ensure the current account (which measures movements of funds related to trade and services) is not running a high deficit.
It was the fear that East Asian countries’ wide deficits in recent years were unsustainable that gave cause for speculators to trigger a run on their currencies.
One of the only positive results of the recession is that the current account is now swinging strongly into surplus.
The second aspect is to build up conditions so that the capital account (which measures flows of long- and short-term capital not directly related to trade) is also manageable and well behaved.
This can be very tricky, especially in the present volatile circumstances.
On one hand, the country may now need inflows of long-term investment and long-term loans in order to provide liquidity and build reserves. But these must be carefully managed so as not to cause large future outflows on account of profit repatriation and debt repayment.
But on the other hand, there is the difficult problem of how to manage short-term capital flows. In some past years there were excessive inflows, especially of foreign portfolio investment.
In the past year there has been the reverse problem of large outflows of short-term funds caused by the withdrawal of foreign and local funds abroad.
It is important that these outflows be reduced so that the overall balance of payments can be in surplus, and the foreign reserves be built up.
Since the flow of these short-term funds is influenced by intangible factors such as “confidence”, reducing the net outflows is one of the great challenges of the recovery process.
(d) The Market Can Make Big Mistakes and Needs Regulation
Another lesson of the Asian crisis is that the market can make mistakes too, and large or mega mistakes at that.
In recent years, it had become fashionable to think that mistakes are only made by governments, whilst the market knows best.
The debt crises of the 1980s were said to be caused by over-borrowing by the public sector which, being inefficient, had used the loans for unproductive projects, thus plunging their countries into a financial mess.
This led to the conclusion that economic
resources and leadership should be passed on to the private sector, which was
assumed to be much more efficient since corporations operated on the profit
It was assumed that financial liberalisation and private sector borrowing would not pose problems as banks, investors and companies would have calculated accurately their credit, loan and investment decisions.
There was thus the complacent acceptance of the build-up of private sector external debt since it was believed the businesses would make the profits to repay their loans.
The Asian crisis has shattered the myth of the perfectly working market and its efficient use of resources. It shows that markets and the private sector are imperfect, as seen by the huge inflows then sudden outflow of foreign funds, and by the imprudent large external loans taken by the local companies and banks which they are now unable to repay.
When the private sector makes mistakes it can be as costly as (or even more so than) when governments make mistakes. Most top-level companies and many banks in the affected East Asian countries are in trouble or insolvent as a result of having loans and projects gone sour.
Most serious are the loans contracted in foreign currency, for a default in these can bring down the country’s financial standing.
In the case of the unrepayable foreign loans in Thailand, Indonesia and South Korea, the “market failure” was caused not only by their local banks and companies. The blame has to be shared by foreign banks and investors that also erred in assessing the credit-worthiness of the loans.
Thus, the financial deregulation measures taken in recent years by governments on the assumption that markets, companies and banks would behave rationally and efficiently, should be reviewed.
There should be a re-balancing of the roles of the state and the markets. The governments have to at least consider having stronger regulations to prevent private banks, financial institutions and companies from making mistakes, especially in relation to foreign-currency loans.
The Malaysian Bank Negara’s regulation, that private companies have to seek its permission before taking foreign loans, which
will be given only if it can be shown that the projects can earn foreign exchange to finance debt servicing, should be maintained in Malaysia and emulated by other countries.
Indeed, the enforcement of this ruling can be tightened, since many of the companies that obtained permission and borrowed heavily now face difficulties.
(e) Other Issues
The key challenge at present is to adopt the appropriate policy options to steer towards a recovery as soon as possible, whilst recognising the negative and even hostile external environment.
To a significant extent, regional and global developments will continue to provide the backdrop to and a critical influence over future developments in the country. For example, developments like Japan not recovering quickly enough, devaluation of the Chinese yuan, the spread of the currency crisis to Russia, Latin America and Eastern Europe, or a sudden decline in the New York stock market will have a significant externally generated negative effect on recovery prospects.
Affected countries can however attempt to take measures that reduce the risks generated from external factors and at the same time improve the domestic conditions for recovery.
In minimising external risks, it would be wise to retain and strengthen the kind of policies and financial regulations that prevented the country from falling deeper into external indebtedness such as not allowing companies to obtain foreign-exchange loans unless they can show evidence that these will generate the foreign exchange earnings to service the loans.
Other regulations to discourage inflows of speculative short-term funds (such as the Chile example, of requiring a percentage of funds from abroad to be deposited interest-free for a year with the Central Bank) should be studied.
A study could also be made on the optimum extent of reliance on foreign participation in the stock market, so as to discourage excessive volatility or excessive surges of inflows and outflows of portfolio capital.
The financial authorities should also not make it too easy for local funds to exit; for example, there could be conditions placed on local people for opening bank accounts abroad; limits on the amount of currency taken out of the country; and conditions on repatriation of funds (at least by local people) abroad.
In a period of increased possibility of reduced external demand, measures should be strengthened to increase domestic linkages
in the economy, for example between domestic demand and supply.
There should be increased local production (especially through small and medium-sized enterprises) to meet local consumer needs,
in all sectors (food, other agriculture, manufacturing and services and inputs in all these sectors). This should be backed up by a sustained “buy local” campaign.
There should be reduced dependence on foreign savings (loans or capital) in order to strengthen the balance of payments and reduce exposure to foreign debt or volatile foreign capital flows.
East Asian countries normally have a very high domestic savings rate. For example, in Malaysia, gross national savings was 40% of GNP in 1997. The current account was in deficit by 5% of GNP, thus necessitating inflows of foreign funds by that amount in order to maintain balance in the balance of payments.
Since 40% is already one of the highest national savings rates in the world, Malaysia should direct its efforts towards using the national savings in as efficient and productive a way as possible, and reduce or eliminate the need to augment this with a net foreign savings inflow. This would reduce future exposure of the country to foreign loans or short-term and speculative inflows. The same principle can be adopted in other East Asian countries.
On the domestic front, the urgent needs include the resolution of the bad financial situation of private sector companies, and an improvement of the position of the banking system and of banks in relation to non-performing loans. In the process of doing this, fair and proper criteria and procedures should be adopted.
Appropriate fiscal and monetary policies will also be required, balancing the need to revive the economy with the need to have an appropriate exchange rate.
The trade-offs involved in choosing a set of policies will
require a delicate and difficult balancing act, made even more problematic by the unpredictability of reactions of “market forces” and by external factors such as regional and global developments that are largely beyond the nation’s control. For countries that are under IMF conditions, the difficulty of choosing correct policies becomes much more complicated as the policies are mainly chosen by the IMF, and the governments have to bargain intensely with the IMF for any changes to be made.
Third World Network
228 Macalister Road
10400 Penang, Malaysia
(Paper presented at the Forum on the Asian Economic Crisis and the Role of the Church: IMF, Human Rights and the Church, Seoul, Korea, 24-29 August 1997.)
By Martin Khor, Third World Network
There is a distinct trend, starting with the Uruguay Round, to introduce and inject “new issues” and yet another round of more “new issues” into the GATT and the WTO system.
This was initially done through the argument that the particular issue is “trade related.” Thus, in the Uruguay Round, negotiations were undertaken and later Agreements were completed on “trade related intellectual property rights” and “trade related investment measures.” The prefix “trade related” was carefully attached to the new issue to symbolise that it was somehow legitimate to bring under the ambit of the WTO and its principles and rules.
This need of justification by proponents of linking more new issues to the WTO has even recently been reduced, as evidenced by the dropping of the “trade related” prefix to the issues. Thus, we now have only the simple word “and” that is used in attempts to link one new issue after another in the WTO: “trade and environment”, “trade and labour standards”, “trade and investment”, “trade and competition policy”. In the case of government procurement, it is simply “government procurement.”
Of course a justification can always be made that this or that issue is linked in some way to “trade.” But that does not mean that it is justified to link the issue to the WTO and its system. For an issue to be linked to the WTO system in an integral way, it must be made to meet a strict test with clear criteria, and moreover there should be a framework that helps specify in which way the particular issue should be integrated in the WTO. Issues chosen should be for the benefit of Members, especially the developing countries that form the majority, and should be treated in a manner that leads to equitable results.
At present there is no such framework determining whether and how “new issues” should enter the WTO system, nor a way to determine the likely benefits and costs and their distribution among the WTO membership.
Yet there are very strong pressures, emanating from the developed countries, to add more and more items onto the WTO agenda. There is now a clear danger that this could lead to very negative consequences: (a) an overload of the WTO system, making it impossible for developing countries to cope with negotiations and implementation; (b) a distortion of the WTO system, where fairness in the process of trade operations is replaced by protectionism; (c) a failure of credibility as citizens in developing countries perceive the WTO as an instrument by the developed countries to impose unfair and inappropriate rules and policies that are disadvantageous to the developing countries. Moreover it is also unlikely that the intended objectives of the proponents of the new issues will be met. In the light of the already onerous obligations undertaken by developing countries in the existing WTO Agreements, the immense problems of implementation, and the possible serious economic and social dislocation that will result in many countries, it is most inappropriate for the continuing and intensifying pressures to place more new issues onto the WTO.
2. WHY THE PRESSURES FOR LINKAGES TO THE WTO?
Despite the oft-repeated claim that the WTO is a democratic organisation that caters to the interests of all Members who have equitable participation in decision-making, in reality the WTO is essentially a power-based organisation where countries with trade strength and greater economic and political power have an overwhelming influence.
This does not mean that developing countries do not have bargaining power; but most of them are understaffed, as a result they lack the capacity to be adequately prepared in negotiations. Even though many (or even most) of the developing countries may be opposed to the entry of certain new issues, they find it difficult to resist. Eventually even if they agree, it is not because all of them fully understand, appreciate or are in favour of negotiations or Agreements in new areas. Many of them were, and are, just unable to withstand the tremendous pressures exerted on them not to stand in the way of negotiations or Agreements on new issues.
Such was the case with the negotiations and Agreement on TRIPS. Intellectual property rights is not about trade liberalisation, but has the reverse effect in that TRIPS will hinder technology transfer and is likely to maintain and increase monopolisation of technology.
It is in fact a protectionist device that hinders technological development. Yet it entered the WTO system, even though many developing countries tried to resist its introduction into the GATT system, and tried for many years of the Uruguay Round to limit its scope.
On investment, another “new issue”, there were strong pressures during the Uruguay Round by developed countries to have an investment agreement with a wide scope covering investment per se (right to establishment, national treatment, etc). Developing countries were able to narrow the scope of TRIMS to the trade-related measures. But the door called “investment” had been opened, and as could be predicted there are now very strong pressures to pull the whole investment issue per se back onto the WTO agenda. This time the “trade related” prefix has been dropped for the simple (and more wide-ranging) “trade and investment.” As a result of strong opposition from several developing countries, the developed countries were unable to get the Singapore Ministerial 1996 to endorse negotiations for an investment agreement. The Ministerial decided only on establishing a working group to study the trade and investment relationship. But now there are pressures again to have the Seattle Ministerial launch negotiations for an investment agreement.
Some developed country Members are also strongly pushing for trade and competition policy, and for government procurement (firstly an interim agreement on transparency and eventually a full agreement incorporating national treatment).
The pressures for the linkages between WTO and IPRs, investment, competition policy and procurement are generated by the large corporations of the developed countries, whose governments then push for Agreements in the WTO to open up market and investment access for these corporations to the developing world. In the case of IPRs, the WTO was used as a means to protect the technology monopoly of the companies, and to make it difficult for local companies in developing countries to emerge with the technology to rival the established big corporations. I believe that the WTO was chosen as the venue or forum for the introduction and injection of the above new issues for these reasons:
- The dispute settlement system (especially since it is “integrated” to facilitate cross-sectoral retaliation) makes the WTO an institution that can effectively enforce rules (through the mechanism of trade sanctions) and thus the WTO is an ideal institution for creating binding and enforceable rules that can disciplining countries in a certain framework of global governance;
- It is argued by the proponents of the new issues that the core principles of the WTO are trade liberalisation, national treatment and MFN. Thus, issues like investment, competition and procurement are likely to be treated in a certain way, that favours market access for the big corporations, should these issues be discussed or negotiated within the WTO. In contrast, should the issues be the subject of discussion or agreements or codes in for a such as the United Nations, the issues are likely to be treated differently, in a more balanced way, in which the development dimension and interests of developing countries are given higher priority and where the perspective will be more balanced in incorporating the social and development dimensions.
- The proponents of the above linkages are developed countries which by and large have overwhelming influence in the WTO, particularly in negotiations on new issues and in formulating of legal texts. As stated above, developing countries as a whole and individually still lack the capacity to match the developed countries in negotiations. It can thus be predicted that the manner in which a new issue is interpreted and integrated or absorbed into the WTO will be determined by the stronger developed countries. Thus, in the battle of interpretations, the developed countries’ perspective is likely to win out. This is why the WTO is a better venue than for example the United Nations, from the viewpoint of the proponents of linkages.
There is another set of “new issues” that are knocking on the door to enter the WTO system. These are issues that are advocated not so much by the corporations of the developed countries for market-access reasons, but by social organisations (mainly of the North but also including some in the South) that are seeking (in their view) ways to protect or promote their interests. The environment and labour are presently the key issues in this category of linkages. There may be attempts in future to introduce other issues, such as human rights, gender equity, etc. Indeed, if environment and labour were to enter the WTO system as subjects for agreements, it would be conceptually difficult to argue why other social and cultural issues should also not enter.
The objectives of the social organisations in linking their particular causes to trade measures are different from the aims of corporations who seek linkages (in investment, procurement) to gain greater market access and market share, or (in IPRs) to protect their domination and hinder potential new rivals. The social organisations are looking for more effective ways to protect their interests and believe that the instruments of trade measures or trade sanctions can be very effective. They believe that their causes (to defend animal rights and life and conserve the environment, or to protect jobs and promote higher social standards) can be most effectively promoted if governments of countries that have “low environment and social standards” are faced with the potential threat of trade measures and sanctions on products that are produced using the low standards.
In this, the social organisations concerned are seeking methods similar to the corporations, in that they are pressuring their governments and negotiators to make use of a strong enforcement mechanism (unilateral trade measures, or the dispute settlement mechanism of the WTO backed up with the possibility of trade sanctions). Thus, trade measures have become methods of choice, and the WTO has become a vehicle of choice, for big corporations and some social organisations in promoting their interests.
3. TRADE AND ENVIRONMENT
That are links between trade and environment cannot and should not be denied. Trade can contribute to environmentally harmful activities. Ecological damage, by making production unsustainable, can also have negative effects on long-term production and trade prospects. In some circumstances trade (for example, trade in environmentally sound technology products) can assist in improving the environment.
What is of concern or relevance in looking at “linkages” is the advocacy of the use of trade measures and sanctions on environmental grounds. Some environment groups and animal rights groups believe that national governments should be given the right to unilaterally impose import bans on products on the grounds that the process of production is destructive to animal life, and that WTO rules should be amended to enable these unilateral actions.
Some groups, and some developed country Members of WTO, go further and have advocated a set of concepts linking trade measures in the WTO to the environment. These concepts are processes and production methods (PPMs), internalisation of environmental costs, and eco-dumping. The three concepts are inter-related. When discussed in the WTO context, the implication is that if a country has lower environmental standards in an industry or sector, the cost of that country’s product is not internalised and the prices are thus too low (being unfairly subsidised by the low standard) and thus that country is practising “eco-dumping.” As a result, an importing country would have the right to impose trade penalties, such as levying countervailing duties, on the goods.
This set of ideas poses complex questions relating to concepts, estimations and practical application, particularly as they relate to the international setting and to the WTO. Developing countries are likely to find themselves as a great disadvantage within the negotiating context of the WTO should the subject (which has already been discussed in the Committee on Trade and Environment) come up for negotiations. One of the main issues is whether all countries should be expected to adhere to the same standard, or whether standards should be allowed to correspond to the different levels of development.
The application of a single standard would be inequitable as poorer countries that can ill afford high standards would have their products made uncompetitive. The global burden of adjustment to a more ecological world would be skewed inequitably towards the developing countries. This is counter to the principle of “common but differentiated responsibility” of the UNCED or Earth Summit in which it was agreed that the developed countries, which take the greater share of blame for the ecological crisis and have more means to counter it, should correspondingly bear the greater responsibility for the global costs of adjustment. Given the unequal bargaining strengths of North and South in the WTO, the complex issues relating to PPMs, cost internalisation, trade related environment measures etc. should not be negotiated within the WTO but if at all discussed, the venue should be the United Nations (for example in the framework of the Commission on Sustainable Development) in which the broader perspective of environment and development and of the UNCED can be brought to bear.
Unilateral trade measures taken by an importing country against a product on grounds of its production method or process are also fraught with dangers of protectionism and the penalising of developing countries. However tempting the route of unilateral import bans may be for the environmental cause, it is an inappropriate route as it will lead to many consequences and could eventually even be counter-productive.
Policies and measures to resolve environmental problems (and there are many genuine such problems that have reached the crisis stage) should be negotiated in international environmental fora and agreements. These measures can include (and have included) trade measures.
The relationship between the WTO and its rules and the MEAs is the subject of debate in the WTO. On one hand there is the fear (of developing countries) that a system of blanket and automatic approval by the WTO of trade measures adopted by a “MEA” (for example by an amendment to Article XX to enable ex-ante approval of MEA measures) could lead to abuse and protectionism. A sticking point here is what constitutes a “multilateral environment agreement” as it may be include not only truly international agreements convened by the UN and open to all members and enjoying near-universal consensus, but also agreements drafted by a few countries which then invite others to join (and would then also enjoy exemption under the proposed amended WTO rules).
The fear of protectionist abuse explains the reluctance of developing countries to amend Article XX, which in their opinion is already flexible enough to enable exceptions to accommodate environmental objectives.
On the other hand there is the genuine fear of environmental groups (and also developing country and some developed country Members of WTO) that negotiations in new MEAs can be (and are being) undermined by the proposition of some countries that WTO rules prohibit trade measures for environmental purposes, or that WTO “free-trade principles” must take precedence over environmental objectives. Such arguments were for example used by a few countries in the so-far failed negotiations for an International Biosafety Protocol. Such arguments are false, as the WTO allows for trade measures agreed to in MEAs through the present Article XX (although not in the ex-ante manner proposed by solme countries). The use of the WTO name by a few countries to turn away the proposals by the overwhelming majority of delegations to establish checks on the trade in genetically modified organisms and products (through a prior informed consent procedure) gave the impression that commercial interests were placed before global ecological and safety concerns and understandably generated outrage among most delegations as well as environmental and social organisations. Negative actions like this
that blatantly use the slogan of “free trade” to undermine vital health and environmental concerns are the reasons for the erosion of public confidence in “free trade” and the WTO system. Thus governments must be careful not to wrongly make use of “free trade” or “WTO rules” to counter international agreements that deal with genuine environmental problems, otherwise the credibility of the trading system itself will be eroded even further.
For many NGOs (especially of the South) as well as developing country WTO members, an important “trade and environment” issue is the effect of the TRIPS Agreement in hindering access to environmentally sound technologies and products. There can be “synergy” between liberalisation, environment and development objectives if TRIPS is amended to enable exemptions for environmentally sound technology. Also, Article 27.3b of TRIPS opens the road to patenting of life forms. Adverse effects include facilitation of the appropriation of traditional knowledge on the use of biological resources by corporations who claim to meet the patent test; promotion of environmentally harmful technologies; and promotion of technologies that are against the interests of small farmers (such as the “terminator technology” or “suicide seeds” or seeds engineered not to reproduce themselves so that farmers are prevented from saving seeds).
These are examples of some issues that can and should be taken up in trade and environment reviews of various Agreements.
In short, discussions within the WTO entailing the environmental effects of WTO rules can be beneficial, provided the environment is viewed within the context of sustainable development and the critical component of development is given adequate weightage. The Committee on Trade and Environment should orientate its work to the more complex but appropriate concept and principles of sustainable development. But there should not be any move to initiate an “environment agreement” in the WTO that involves concepts such as PPMs and eco-dumping.
4. TRADE AND LABOUR STANDARDS
The push for incorporating labour standards with trade measures in the WTO has come from labour unions in the North and international trade unions which also have affiliations in developing countries. Some trade unions in some developing countries are however opposed to including labour standards in WTO. The issue of labour standards is also linked to the concept of “social clause” (which is broader than labour standardsn and could include the rights of various groups in society) and supported by some political parties in developed countries.
There may be various strands in the objectives of the advocates. Many trade unions believe that transnational corporations are relocating from countries with higher labour standards to those with lower standards, and that this trend acts to depress labour standards by reducing bargaining power of workers. They also believe that by linking the threat of trade sanctions to labour standards, there will be pressure to upgrade the level of standards in developing countries. They are careful to include only internationally-recognised core labour standards and to exclude the issue of wage levels in the demands for linkage to trade and WTO.
Other advocates believe that the linking of social issues (including but not exclusively labour standards) to the WTO and its sanctions system of enforcement is an effective way of countering the adverse social effects of free-trade free-investment globalisation, by forcing corporations and governments to observe socially responsible policies.
Developing countries fear that the objectives of the Northern and international trade unions, and of developed country governments that back the social clause demand, are mainly protectionist in nature, i.e. to protect jobs in the North by reducing the low-cost incentive that attracts TNCs to developing countries. They argue that low labour costs in their countries are a function not of deliberate exploitation of workers but of the general low standard of living and the lower level of development, and that the low cost is a legitimate comparative advantage. They therefore have opposed the inclusion of labour standards in the WTO, and argued successfully (as reference the Singapore Ministerial Declaration) that the issue belongs in the ILO.
There is of course justification for public interest groups to be concerned about the social consequences of globalisation and liberalisation and to campaign to change the nature and effects of the present globalisation trends. However the issue is whether labour standards and social clauses in trade agreements is or even an appropriate route. There is merit in the argument that labour standards or the “social clause” should not be introduced in the WTO. This is because:
- Such an issue when placed in the WTO context would be linked to the dispute settlement system and the remedy of trade penalties and sanctions. In other venues, there is the option (which many would argue is more appropriate) of linking the improving of labour standards to positive incentives rather than punitive measures.
- Even though most advocates only demand minimum labour standards such as the right of association for workers, there is no certainty that the issue will be so confined in the future. Once the concept of social issues and rights enters the WTO system, it can in future be expanded within the particular issue (eg an extension to social security and wage levels within the issue of labour standards) and extended to other issues (such as the rights of children, women, disabled, human rights in general, the right to education, health, nutrition, etc).
- It is possible or even likely that once rights and social issues enters WTO, the GATT concepts of dumping and subsidies, and the relief of countervailing duties, will bsought to be applied. Thus, countries with low social standards would be deemed to be practising “social dumping” (or unfairly subsidising its products by avoiding to meet social costs) and importing countries could be enabled to impose countervailing duties.
- Developing countries are likely to bear the costs of loss of competitiveness. The low social conditions in the poorer countries are largely related to the low level of development and the lack of resources (although the wastage and mismanagement of resources also do contribute significantly). Lower social standards are thus linked to (though not entirely cuaed by) lower levels of development. It is very possible that the operationalising of linkage between social standards and trade measures in the WTO system would lead to additional pressures being placed on developing countries and that many of their products would become higher cost and uncompetitive or face trade penalties or both.
- It is possible that the firms and products eventually affected are not confined to those involving trade and exports but also the firms (most of them small and locally owned) that cater to the local market. By not being able to remain competitive, some may close.
- It is also possible that the erosion of competitiveness and the higher costs (perhaps beyond what would normally prevail in countries at the existing stage of development) would cause loss of jobs, closure of firms and farms and reduced investment; or movement of some workers to more poorly paid jobs.
- The inclusion of labour standards would open the door to a much wider range of issues relating to social standards, social rights and human rights. Many new “conditionalities” would be introduced not only on trade at the border but production, investment, etc within the domestic economy. The issues will be so complex and complicated that they will tie the WTO system up in knots, and occupy the time and energy of diplomats and policy makers, not to mention the NGOs and social organisations, in an enterprise that is fraught with controversies, dangers and with no clear benefits guaranteed.
- Finally, the efforts of NGOs and social organisations could be directed towards the sources of the social problems within and outside the WTO. For example, to offset problems caused by the WTO, those concerned about human rights and the right of ordinary people to livelihoods and adequate incomes could examine and campaign for changes to aspects of the existing agreements (such as Agriculture, TRIPs, TRIMS, services) that affect farmers’ rights and livelihoods, the viability of small farms, food security, the cost of medicines caused by drug patenting, etc. They could also try to prevent new agreements (such as investment, procurement, industrial tariffs) that would affect the viability of local firms, the livelihood of workers and the people’s right to development. And to counter problems whose sources are beyond the WTO, there can be intensified campaigns for debt relief, reforms to the IMF and structural adjustment programmes, a pro-employment macroeconomic policy (rather than priority to restrictive monetary policy), improved human rights and against exploitative child labour and poor working conditions, etc. But the notion that linking social rights to a trade sanctions regime, though tempting at first sight, is likely to be counterproductive in results.
5 . CONCLUSION
At present the WTO does not have a systematic way of enabling the assessment, introduction (or rejection), and the appropriate incorporation of new issues. As a result, several new issues have been absorbed during the transition from GATT to the WTO through the Uruguay Round. And many more new issues are in various stages of brewing, with advocates in governments (mainly of developed countries) and in social organisations pushing hard to gain entry for their favourite issues.
A system or procedure for assessing potential or proposed new issues should be established. The criterion should not only be whether an issue is “trade related”, because a case can always be made that almost any issue is related in some way with trade. The criterion should be whether the entry of a particular issue would add advantage and benefit to the Members of WTO (especially the majority, ie the developing countries, and to the majority of people in these countries) and to the WTO system, with the ultimate goal of equitable and sustainable development (rather than liberalisation, which is only a means). And given the fact that the WTO is mainly a negotiating body, with the mandate and task of formulating and monitoring the implementation of Agreements, issues should not be allowed to easily enter the system, even for a “study process” in a working group. Discussions on potential new issues should take place in appropriate fora outside the WTO, in a setting more conducive to perspectives broader than the more narrow framework of trade relations. In such discussions the role of trade relations can be placed in the broader context of equitable and sustainable development, and the specific role of the WTO (if any) can be demarcated. Until the discussion is sufficiently “brewed” or “matured” in the appropriate fora, the issue should not be brought into the WTO system, either for discussion in working groups and certainly not for negotiations for new Agreements.
Unless the trend for putting more and more issues into the WTO basket is reversed, the trade system will become overloaded and over-bloated. It will not be able to carry out the tasks which it was originally intended to do, because it would have taken on other tasks it is ill suited to perform, as well as grappling with a host of new and complicated issues which will tie up its Members, diplomats and policy makers with knots too difficult to disentangle from. The Seattle Ministerial Conference can either decide to limit the WTO to the tasks it is supposed to do, and to review its rules and system to put it back on the right track, or it can decide to throw more issues and complications into the system, with unknown and probably dire consequences.
Third World Network
131 Jalan Macalister
By Martin Khor Kok Peng
For Third World Network, June 1990
THE URUGUAY ROUND NEGOTIATIONS ON SERVICES
1. PRESENT SCHEDULE OF GATT SERVICES NEGOTIATIONS: DRAFT FRAMEWORK TO BE COMPLETED BY JULY 1990
It is crucial for developing countries to urgently formulate a strategic position relating to the services issue at the Uruguay Round because negotiations are being rushed in the first half of 1990 so that a draft framework of principles on services can be completed by July 1990. By December 1990 the Uruguay Round is scheduled to end, and the industrial countries very much want an agreement on services to be adopted by then.
The most recent developments in the Geneva negotiations, and the future schedule already planned, are as follows:
- Dec 1989: A paper containing the draft elements of a basis for 1990 negotiations on services was prepared.
- 16 – 19 Jan 1990: The Group of Negotiations on Services (GNS) begin 1990 talks and agree to a timetable for meetings to the end of July. The timetable is as follows.
- 26 Feb – 2 March: The GNS will consider the ‘structure’ of the services framework, the issue of statistics, and the role of other international arrangements and disciplines.
- 26 – 30 March: The GNS will consider the ‘structure’ issue again, and the issue of mechanics of liberalisation including the nature of initial commitments by countries, definition and increasing participation of developing countries, and institutional issues.
- 7 – 11 May: Discussions will be on definition and participation of developing countries, statistics, the role of other international arrangements and disciplines, institutional issues, identification of sectors requiring annotations, and initial presentation of liberalisation undertakings by participants.
- 18-22 June: The same topics will be covered.
- 16 – 20 July: A draft framework of services will be completed and submitted to a legal drafting group.
- December: Final meeting of Uruguay Round in Brussels.
From the above schedule, it is obvious that the Third World countries must grasp and grapple with the issues being negotiated very soon, in order to make strong and informed positions for itself.
In the following sections, we trace the origins of the services negotiations, the main issues of contention, the different views of developed and Third World countries, and the implications for the Third World for accepting an agreement on the industrial countries’ terms.
2. HOW SERVICES WERE BROUGHT INTO URUGUAY ROUND
Up to now, GATT’s jurisdiction has only been in the area of international trade in goods. In 1982, the United States first raised the subject of services in GATT during the preparatory work for the 1982 Ministerial meeting. It expressed the need to study the applicability of GATT principles to trade in services, and suggested negotiations in GATT to establish a framework to regulate such trade. This was vehemently opposed by Latin American and other Third World countries which felt that GATT was an inappropriate forum to deal with services and that it should continue to deal only with goods. They expressed fears that “retaliatory trade measures permitted under GATT would be legitimized in this area, entailing the risk that measures, or threats, of retaliation in respect of trade in goods would be applied so as to obtain modification of existing laws and regulations on services. Any such outcome would be unacceptable to the developing countries.” (Mendoza 1989:60)
Over the next few years, the US administration pursued the issue of services to be included in GATT. It was motivated by the desire of US transnational services companies to expand their markets and operations, and thus to break down barriers especially in the Third World that hinder such expansion. The EC, other European countries and Japan eventually joined the US in pushing for services in GATT.
At the Punta del Este meeting that launched the Uruguay Round in 1986, it was finally agreed that services would be a major topic of negotiations. However, taking into account Third World views, the services negotiations would be conducted outside GATT’s legal framework. Thus, there would be two separate tracks: the negotiations on goods under GATT and the separate services negotiations. (As it turned out, however, the two ‘separate’ sets of talks became integrally linked, as industrial countries use the Third World’s requests for concessions on goods as a bargaining chip to push for Third World concessions on services).
According to the Punta del Este mandate on Services:
- “Negotiations in this area shall aim to establish a multilateral framework of principles and rules for trade in services, including elaboration of possible desciplines for individual sectors, with a view to expansion of such trade under conditions of transparency and progressive liberalisation and as a means of promoting economic growth of all trading partners and development of developing countries. Such framework shall respect the policy objectives of national laws and regulations applying to services and shall take into account the work of relevant international organizations” (emphasis added).
By Martin Khor
The United Nations General Assembly thematic dialogue on climate change (31 July-2 August 2007) and the “Vienna climate talks” (27-31 August 2007) under the umbrella of the UN Framework Convention on Climate Change (UNFCCC) have made gradual headway in clarifying the issues that will be crucial at the Bali meetings this December which will hopefully launch negotiations and a roadmap for global action to combat climate change, especially in the post-2012 period.
At Vienna, participants held a dialogue on the “building blocks” required for such global action, and especially for a framework or regime to guide activities after the expiry in 2012 of the first Kyoto Protocol set of commitments. They also held initial discussions on the range of commitments for developed countries to reduce their greenhouse gas emissions by 2020.
Key among the present Kyoto commitments is the agreement of most developed countries to reduce their greenhouse gas emissions by 5.2% collectively by 2012 as compared to 1990 levels. However, a few developed countries, notably the United States and Australia, have not signed up to the Kyoto commitments.
At this significant moment in the conceptualisation of a climate regime that is equitable and fair, it is important to put forward perspectives that promote the environment and development interests of the developing countries.
From this viewpoint, there are at least four important building blocks towards a post-2012 UNFCCC climate regime – science and targets; relations between developed and developing countries; the need to link development and environment; and policy coherence.
I: SCIENCE AND TARGETS
First, on science and targets. Developments in the science of climate change have progressed recently so that there is broad consensus that the climate problem is real and serious, and that developing countries will be most affected.
There is a need to set targets for global action, such as to limit temperature rise to 2 degrees Centigrade (in fact, well below that), and to prevent greenhouse gas concentration from exceeding 450 parts per million (ppm) of carbon dioxide equivalent. Even at these levels, there will be great damage. At levels higher than these, scientists inform us, the damage will be catastrophic.
However, the establishment of such science-based targets has to be linked to agreement on “burdensharing” principles, particularly as between North and South.
II: NORTH-SOUTH RELATIONS
Second, therefore, is the crucial building block of fair North-South relations in a climate agreement. The UNFCCC and Kyoto principles of equity, historical responsibility, and common but differentiated responsibilities have to be reaffirmed and, more importantly, operationalised in concrete terms and measures to be worked out.
Indeed, these principles must be infused into all aspects of the negotiations and reflected in the agreements to be made.
The implications for developing countries of proposals on global targets should be more explicitly discussed. For example, the European Union has made a proposal for a global emission cut of 50% by 2050 (compared to 1990 levels) and a cut of 60-80% for developed countries.
It is good that the EU has started the ball rolling by putting forward these proposals and figures. Of course, it is only a start and the EU and other developed-country parties must be expected to improve on their proposed commitments.
This is a very deep cut, and whether developing countries should or can take on such cuts should be openly debated. It is insufficient to leave these as implicit targets, as a residue of global and developed countries’ targets.
However, there are also implications for developing countries in such figures, which have thus to be considered seriously. If we assume, for simplicity, that developed and developing countries account 50:50 for total emissions, then a global 50% cut with a 70% developed-country cut implies a 30% emission cut for developing countries. If developing countries’ population doubles in that period (from 1990 to 2050), then the implication is a 65% cut collectively in their emissions per capita.
The above is of course only one aspect, though an important one, in the operationalisation of the principles of equity, common but differentiated responsibilities, etc.
III: INTEGRATING DEVELOPMENT CONCERNS WITH CLIMATE ISSUES
Third, there needs to be more work on the building block of integrating development with environment. Addressing climate change as an environmental crisis requires simultaneously a development solution. The development challenges are enormous, far more than has been generally acknowledged as yet.
As has been effectively argued, if climate change is not addressed, its effects would themselves devastate development prospects. Thus, adequately addressing climate change through mitigation and adaptation is crucial, and is more cost-effective than adopting a “business as usual” attitude.
At the same time, we should also not underestimate the tremendous efforts required to switch to new development pathways that match the new emission-stabilisation pathways required to curb the growth of greenhouse gas emissions.
For example, the Vienna meeting heard presentations that the economic costs of addressing climate change would be only 0.12% of world Gross National Product (GNP) per year, up to 2050.
If this is so, then operationalising this would still be an enormous challenge. It may imply, for instance, that if developed countries are growing at 2.12% a year, they would have to make do with 2%, and if developing countries are growing at 6.12%, they would have to make do with 6%.
(Of course, if developed countries were to agree to reduce their growth rates more than this, developing countries will have more space to grow.)
This may be a relatively small price to pay to address climate change and still enable relatively good growth. But it would be a tremendous challenge indeed for developing countries to be able to grow economically at 6% a year and also be able simultaneously to reduce their per capita emissions by 65% by 2050.
Perhaps it can be done. However, many in-depth studies must be conducted to show how this tremendous transformation can be undertaken, or it would remain at this stage only a vision.
On the issue of finance, there should not be an impression that the sums are small and that the private sector will take care of most of the costs.
The UNFCCC Secretariat paper on investments needed to address climate change (presented at Vienna) has done a good job of stimulating discussions on a complex issue. It has given estimates of an extra investment and financial flow of US$200-210 billion required in 2030 for mitigation and “tens of billions of dollars” for adaptation.
The enormous costs of mitigation and adaptation should be realistically spelt out, and national studies (such as the one presented by India on the immense costs of emission-reducing reforms in industry) and examples of costs of addressing reallife climate-related events would be illustrative.
For example, in the newspaper USA Today (dated 29 August 2007) it was reported that the 2005 Hurricane Katrina caused US$150 billion damage and the costs of reconstruction include US$116 billion allocated by the US Congress as well as many more billions of dollars to be met by private financing including insurance.
The 2004 tsunami would also have cost many billions of dollars in rehabilitation and reconstruction.
Mitigation and adaptation measures would help prevent or reduce such high costs of disasterrelated reconstruction. The high costs of damage and reconstruction also have to be addressed.
At the least, there is a need for a large publicly financed and operated fund to address adaptation. Private finance can only be a supplement, especially since it is difficult for poorer countries to access these funds and on affordable terms. A fund to address costs of damage may also need to be looked into, especially since climate-related damage is already taking place.
On technology transfer, the challenge is also enormous. A key question is the treatment of intellectual property rights (IPRs) over climatefriendly technologies. IPRs confer monopoly rights, and can curb affordable access through higher prices (that usually include monopoly profits) as well as be a barrier to the introduction or upgrading of technology by private industry or public-sector agencies in developing countries.
The lower the cost and the greater the ability of developing countries’ enterprises to make use of or to make existing or new climate-friendly technologies, the faster would be the developing countries’ ability to switch to more climate-friendly technologies and to the new emission-stabilisation pathways as well as new development pathways.
If there is insistence on the “full protection of intellectual property” in relation to climate-friendly technology, it would be a barrier to technology transfer. The example of how Indian companies were hindered from introducing a new chemical that is not harmful to the ozone layer as a substitute to chlorofluorocarbons (CFCs), because of patents on that chemical, is illustrative.
Thus, a post-2012 regime has to deal with this thorny issue of IPRs and developing countries’ access to technology (existing and new technologies, for mitigation, adaptation and reconstruction).
On new development pathways, there should be more discussion and work done. Stabilisation pathways (aimed at greater energy efficiency and emission reduction) are an important component.
However, there are other key components if developing countries are to explore new ways of looking at economic and social development strategies that meet the requirements of emissionstabilisation pathways.
The pathway of moving from primary production and commodity-based sectors to commodity processing and first-stage manufacturing and services to more mature industrialisation and services, the pathways of addressing sustainable development in agriculture, industry, commercial and social services, the pathways of trade policy, investment policy, financial policy, technology policy and social policy, all have to be thought through. These are massive challenges.
IV: NEED FOR POLICY COHERENCE
Fourth, there should be policy coherence at national and international levels. If climate change is indeed the most pressing challenge of our times, then policies made in other areas and in other fora have to be looked at through the fresh lens of addressing climate change, and made consistent with the aims and measures that we are trying to implement in combating climate change.
For example, at the World Trade Organisation (WTO), there are proposals to consider as a nontariff barrier (which should be removed) the imposition of higher taxes on cars with a higher engine capacity, or the lack of government action to facilitate financing of consumers’ purchase of motor-cars.
Also at the WTO, some developed countries are also pushing developing countries to drastically reduce their tariffs on food products, so that the developed countries’ highly subsidised farm products can penetrate the poorer countries’ markets. At the same time, developed countries are insisting that the developing countries’ markets for industrial products also be opened up very significantly.
Developing countries that take measures, consistent with the WTO Agreement on Trade- Related Aspects of Intellectual Property Rights (TRIPS), to provide cheaper generic medicines for their population are being condemned or punished by the major developed countries like the US or the EU, as the recent case of Thailand and its compulsory licences on three types of medicines shows.
If some of the proposals at the WTO were to be adopted, they would make it far more difficult for developing countries to switch to an emissionstabilisation pathway and a sustainable development pathway.
Similarly, reviews should be made of the provisions of bilateral and regional free trade agreements, and of loan and aid conditionalities facing countries dependent on the international financial institutions and on aid donors.
These are some of the issues that at present could be stumbling blocks that have to be transformed into building blocks towards new goals, frameworks and structures in the cooperative efforts to combat climate change.
Martin Khor is Director of the Third World Network. This paper is partly based on his presentation on behalf of the Third World Network at the UNFCCC meeting in Vienna on 27-31 August.
By Martin Khor, Executive Director, South Centre, 18 March 2015
In the quest for an international climate agreement on actions to address the climate change crisis, three aspects have to be the basis simultaneously: the environmental imperative, the developmental imperative, and the equity imperative. This EDE formula requires that the different pieces of the climate negotiations be seen and addressed as a whole, in a holistic way. In particular, setting the global goal for emission reduction has to take account of the environmental imperative, and also deal with the emission reduction of Annex I and non Annex I parties. Equity is the element and principle that cements the link between environment and development. Indeed, equity is the gateway to environmental ambition.
For example, fixing of a temperature target and of a global emissions reduction goal must be done within a paradigm or framework for the equitable sharing of the atmospheric space and the development space. The sharing of the mitigation efforts, and the support (finance and technology transfer) that must accompany this sharing, is a most critical piece of the jigsaw puzzle.
The UN Climate Convention recognises the equity principle; that developed countries take the lead in emission reduction, and that developing countries have development imperatives, and their ability to undertake climate actions depend on the extent of support they receive from the developed countries. Annex I countries will also meet the agreed full incremental costs of implementing developing countries’ mitigation measures, as well as providing financing on adaptation and technology.
There are competing claims on a national budget or a family budget. The trade-offs and dilemmas are more acute for the poor. A poor family would put greater priority on feeding the children and on health care, and also on adaptation action such as preventing floods and rain from occupying the house, ahead of spending on mitigation. Thus, financial assistance is required if changing to more environmentally sound cook stoves, or having zero-emissions small industry or agriculture, are to be achieved by the family. So too regarding a typical budget making exercise by developing countries. They have to grapple with adaptation problems, loss and damage (and reconstruction after extreme weather events), as well as imperatives of social and economic development (provision of food, health care, education, water, electricity, infrastructure, etc), as well as the new obligations on mitigation. This is what the developing countries mean when they accepted the obligation of ‘enhanced nationally appropriate mitigation actions by developing countries in the context of sustainable development, supported and enabled by technology, financing and capacity building’, in the Bali Action Plan. A similar context is being put forward with regard to the ‘intended nationally determined contributions’ to be submitted in relation to the Paris COP in 2005.
The provision of support in terms of financing, technology and capacity building and the building in concretely of the appreciation of the need for sustainable development are parts of operationalising of the equity principle, which in turn would be a necessary piece of effective global mitigation action. Recognising the gateway role of equity to higher environmental ambition is not a rhetorical but a logical and realistic way of getting to a successful mitigation framework.
According to the latest IPCC reports, total CO2 emissions since 1870 have to remain below about 2900 Gton of CO2 if global warming is to be kept at less than 2 degree C (relative to 1861-80= with a probability of over 66%. However 1900 Gton has been emitted by 2011, leaving the space of only 1,000 Gton between now and the future. Since the emission level was 49 Gton of Co2 equivalent in 2011, the carbon space would be exhausted within 2 or 3 decades at current rates of emission.
This sobering set of figures makes it imperative that we find a solution based on international cooperation. Otherwise various types of conflictual conditions may arise.
The concepts of historical emissions and historical responsibility are important in this context. Of the cumulative global emissions Annex I countries accounted for 72% of the total compared to their share of population of about 25%. Developing countries accounted 28% of the total cumulative emissions, with their 75% share of population. If a “fair share” is defined as share of emissions corresponding to share of population, then it is possible to measure the extent of over-use or under-use of a country’s share of resource, in this case “atmospheric space.” The over-utilisation of the atmospheric space by Annex I in 1850-2008 was 568 Gton, the same as the under-utilisation by developing countries (up to 2009, in my estimation, in a paper on The Equitable Sharing of Atmospheric and Development Space: Some Critical Aspects, South Centre, Research Paper 33, 2010). This is a measure of “climate debt” or “climate credit.” In terms of annual flow, Annex I countries as a group are still exceeding their fair share, as their share of total emissions exceeds their share of world population.
In sharing the remaining carbon space, say for 2015 to 2050 or beyond, two concepts are needed: (1) The allocation of carbon space as according to rights and responsibilities; (2) The actual carbon budget (and related physical emissions reduction schedule) that countries eventually put forward as what they can physically undertake.
There could be a difference between the allocation of responsibilities and rights, and the actual emissions reduction or related budgets. Therefore: Countries that cannot meet their allocated budget or emission cut can compensate for this unmet part of their obligation and countries that do not make full use of these rights, can obtain the funds for their actions, including actions on behalf of the former set of countries.
The WBGU (German Advisory Council on Global Change), in its 2009 paper “Solving the climate dilemma: the budget approach”, was a pioneer in making combined use of the carbon budget approach, the historical responsibility principle, and emissions allocations for countries, and the use of “offsets” through carbon trading by countries that are unable to stay within their meet their allocated emission budget. For example, it found that three countries (USA, Germany, Russia) had already emitted in 1990-2009 their entire allocated budget for 1990-2050 and therefore begin with negative emission allocations for the period 2010-50. In the WBGU model, the countries with high emissions can buy emissions rights from the countries with low emissions and have higher actual budgets than their allocated budgets, and thus stretch out their emissions for more years. The low-emission countries emit less than their rights and receive funds from the high-emissions group through the emissions trading mechanism. Such a model incorporates many concepts and features that are important for the discussion on equity and environment and points to a concrete solutions framework which can also include concrete figures of emissions allocations and actual emissions budgets, etc.
The equity approach has implications for the various topics in the UNFCCC discussion. In a discussion on global mitigation goal, the setting of a global goal for emission reduction should be accompanied by a clarification of the roles of developed and developing countries.
For example, a proposal of a global goal of 50% emissions cut and an Annex I goal of 80% cut, which has previously been put forward by a number of developed countries including Germany, raises several issues. Such targets, combined, in fact, attempts to set a global carbon budget as well as to allocate the shares (of responsibilities and rights) to which two parties — developed and developing countries – are to have. If two figures are given in an equation of three parameters, the third figure, which is the “remainder” responsibility (and right) of the developing countries can be fairly simply worked out.
The issues include the following. Firstly, the 50% global cut is environmentally not ambitious enough, as it would correspond to a carbon budget above what is required. Secondly, the implied distribution of the carbon budget gives Annex I countries a budget share of 30-35 per cent, compared to their 16% share of world population in this period. Thirdly, acceptance of this proposal means accepting not only an unfair distribution of the 2010-50 carbon budget, but also writing off the cumulative debt of developed countries.
Fourthly, accepting these figures (50%, 80%) implicitly accepts a specific emissions cut target for developing countries, and locking in this whole distribution of carbon budget and set of emissions cuts. It implies that in 2050, annex I total and per capita emissions would be cut by 80% while developing countries’ per capita emissions would be cut to 1.5 ton or about half below 1990 levels; and compared to 2005 levels it would be around 40% below in absolute terms and 60% below in per capita terms. The cuts for developing countries would be even much deeper, compared to the ‘business as usual ‘ level of 2050.
For a fairer framework of carbon budgeting, the distinction should be made between the allocated national budget according to rights and responsibilities, and the actual budget to be implemented, with the difference to be made through “offsetting”. Of course there should also be conditions set for offsetting. In this exercise, the concept of “negative emissions” needs to be used. Again, the WBGU’s 2009 paper is a pioneer in this respect. For example, it found countries that had already exhausted their allocated budget for 1990-2050 and therefore begin in 2010 with negative emission allocations for the 2010-2050 period. For example, in the WBGU estimation, the USA has an emission allocation of minus 56 Gton in its 2010-50 budget.
It would be a physical impossibility for even technologically leading countries to meet such high negative emissions targets, at least at the present stage of know-how and technology. The offset mechanism thus comes into play, in the WBGU model, with high-emission countries financing low-emission countries through an offset mechanism. This could be carbon trading or another mechanism such as payment into and drawing from a fund.
In my own estimation, if a target is set for developing countries as a group to only avoid a per capita emission cut by 2050 (compared to 1990 levels), they would retain a level of 3 ton per capita, and correspondingly Annex I countries would have to cut their emission by 147%. If a goal is set for developing countries to double their per capita emission to allow for more development space, Annex I would have to cut its aggregate emissions by 277%. If Annex I cannot realistically meet the targets set, especially at levels higher than 100%, then the mechanism of payment to assist in fulfilling the allocated targets can be used.
This exercise shows how difficult, physically and politically, it will be, to reach solutions. Even if the budget approach cannot be used in the end for lack of consensus, it is useful to illustrate the issues at stake.
In any case, an associated question is whether there can be sufficient technological solutions in fixing the climate crisis. One aspect is whether the developed countries with their know how and innovation capabilities can find solutions that meet the criteria of climate friendliness, environmental soundness, social acceptability and economic efficiency. We do not want solutions whose implementation causes situations worse than the problem itself.
The other aspect is the development pathways of developing countries. To meet both the imperatives of economic development and of environmental soundness, decoupling between emissions and economic growth is needed, through a technological, economic and social revolution we have not seen before. For this decoupling to have a chance, massive infusions of finance and technology, coupled with institutional and human capacity building is required. This is why equity is also embedded in the finance and technology issues.
The enormity of the problem was not lost on the economist Nicholas Stern who has said : “If the allocations of rights to emit in any given year took greater account both of history and of equity in stocks rather than flows, then rich countries would have rights to emit which were lower than 2 tonnes per capita (possibly even negative) The negotiations of such right involve substantial financial allocations: at $40 per tonne CO2e a total world allocation of rights of, say, 30Gt (roughly the required flows in 2030) would be worth $1.2 trillion per annum”.
On estimates on mitigation funds needed, the World Bank estimated that: “In developing countries mitigation could cost $140 to $175 billion a year with associated financing needs of $265 to $565 billion. A study in India (by the CSE) of six sectors to determine India’s low carbon growth options concludes: “There is no real way we can reduce emissions without impacting growth once we cross the current emissions-efficiency technology threshold…It is for this reason that India (and all other late entrants to the development game) must not give up on their demand for an equitous global agreement.” For the power generation sector, a low-carbon strategy could reduce emissions in India cumulatively by 3.4 Gton by 2030-31. The additional cost of generating power from renewable technologies is estimated at US$203 bil or about $10 bil a year or $60 per tonne of CO2 emissions avoided.
On adaptation financing needs, the World Bank estimates up to $100 billion a year, higher than the UNFCCC’s financial flows report (at $27 to $66 bil a year). The most comprehensive estimate is a IIED-Imperial College study led by Martin Parry which found the adaptation cost for developing countries may come up to $450 billion annually.
Financing for technology cooperation and transfer: The UNFCCC’s expert group on technology (EGTT) estimates the total finance needs are $300-1,000 billion a year; with developing countries’ additional funding needs of $182 – 505 billion a year, for deployment and diffusion of technology. This does not include research and development or demonstration costs in developing countries.
IMPLICATIONS FOR NEGOTIATIONS
(a) Global Goal: In the negotiations on global goal, developing countries have argued that a decision on a global goal (whether temperature limit or global emissions reduction) should be in the context of equity and to be preceded by a paradigm for the equitable sharing of the atmospheric space or resource. This should also be the case for the wording on a global peaking year.
This is a correct position because the global goals for temperature and emissions reduction have implications for the responsibilities of developing countries or for their options in their emissions and thus their economic pathways. This principle of equity in the sharing of atmospheric space has to be operationalised with the use of carbon budget and debt concepts. The data on fair shares and actual emissions and thus on debt/surplus also have major implications for the sharing of the carbon space in the 2010-2050 period, and thus of the allocation of emission obligations and rights as would be expressed in the shared vision’s important element of “global goal for emissions reduction.”
(b) Mitigation: The concepts and figures on cumulative emissions and carbon debt/surplus make it clear that Annex I parties must continue to “take the lead” in emissions reduction. If developed countries undertake only weak targets for the next commitment period and their emissions are only reduced a little (or even increases), then there is even less carbon space left for developing countries. The present pledges made either in the Copenhagen Accord/ Cancun pledges or Kyoto Protocol are far from adequate. Various analyses show that the Annex I (including the US) pledges add up collectively to only a 16% reduction (by 2020 compared to 1990) at best and if loopholes (through LULUCF and AAUs) are taken into account there can even be a 6.5% increase in Annex I emissions.
(c) Finance: One way in which the historical carbon debt that developed countries hold may be discharged is through payments into the Green Climate Fund. Besides this, the developed countries have obligations under the UNFCCC to meet mitigation, adaptation and capacity building expenses. The quantum of funds for discharging the carbon debt and for meeting the additional costs are large, but this is to be expected since the financial requirements of adaptation, mitigation, capacity building and technology are massive. The amounts so far announced ($10 bil a year in 2010-12 and $100 bil by 2020) are inadequate. Moreover there is no road map between 2013 and 2020 and beyond.
(d) Technology Transfer: To play their extremely ambitious and difficult role, developing countries need technology at the most affordable rates. The following measures are proposed: (1) They must have the maximum access at least cost to the best technologies; (2) Barriers to technology transfer must be addressed, including the issue of IPRs; (3) Developing countries must be assisted in the development of endogenous technology and to undertake their own R and D and develop innovation, with international support; (4) R and D activities should be financed by UNFCCC funds, and the products from these should be in the public domain; (5) Sufficient funds should be provided for technology development and transfer to developing countries.; (6) A Technology Policy Board or Council should be set up under the UNFCCC to address the technology issues.
It would be useful to have a work programme or research agenda with the objective to examine the various aspects of equity as a principle and how it is to be operationalized in various issues (mitigation, adaptation, finance, technology, global mitigation goal).The recognition and operationalizing of the equity principle will be a major gateway for the raising of environmental ambition, including in facilitating that the means of implementation can be provided in adequate amounts and appropriate forms to developing countries so that they can contribute more to the global mitigation effort as well as to meeting their adaptation needs.
A Note for the Special UN General Assembly Session on Climate Change
by Martin Khor, Director, Third World Network
A. Background and latest scientific information and scenarios
Climate change is a genuine and serious crisis. The latest IPCC reports have done valuable service by placing the scientific and other aspects on the global agenda in a more scientifically clearer manner. It shows that “business as usual” will lead to temperatures rising by 3°C to 6°C, with catastrophic results in the form of rising sea levels, melting glaciers, water shortages, floods and decreased agricultural yields.
It would take only 3% of world income in 2030 to carry out the major changes needed. That works out to a reduction in the growth of gross domestic product (GDP) of only 0.12% per year until 2030.
However major changes are needed changes needed to energy systems, technology, transport, buildings, industry, agriculture, how we treat forests and seas, and to lifestyles, aimed at quickly bringing down the emissions of greenhouse gases.
The IPCC’s third report (May 2007) shows that Greenhouse gas emissions have grown by 70% between 1970 and 2004. The largest growth has come from the energy supply sector (an increase of 145%), transport (120%), industry (65%) and land use, land use change, and forestry (40%). With current policies, global greenhouse gas emissions will continue to grow with carbon dioxide (CO2) emissions from energy use rising by 45% to 110% between 2000 and 2030.
That would be disastrous in the effects it
would have on raising temperatures. The present global temperature is already
0.7°C above the pre-industrial level. There is near scienfitic consensus that
if the global temperature increases by more than 2°C above the pre-industrial
level, there would be irreversible climate changes. With changes above 3°C,
there would be catastrophic changes.
An interesting table in the IPCC report shows what could happen with different scenarios.
In order to keep temperatures from rising more than 2-2.4°C, the greenhouse gas concentration in the atmosphere has to be contained to 445-490 parts per million (ppm). And for that to happen, CO2 emissions must be cut by 2050 to 50-80% below the year 2000 level. And to keep on track to this timetable, the emissions must peak by 2015.
This is the IPCC’s the best scenario, but even then many scientists and environmentalists would claim it is not enough.
In the next scenario, the temperature rise is restricted to 2.4-2.8°C, the greenhouse gas concentration must be contained to 490-535 ppm, and emissions must be cut by 30-60% by 2050.
In the next scenario, temperature rises by 2.8-3.2°C, with gas concentration at 535-590 ppm, and emission changes range from 5% rise to 30% cut.
A worse scenario is where the CO2 emissions rise by 10%-60%, causing greenhouse gas concentration to be 590-710 ppm, with temperatures rising by 3.2 to 4°C, resulting in runaway climate chaos.
In the most disastrous scenario, emissions rise by 25% to 140%, the greenhouse gas concentration rises to 710 to 1130 ppm, and temperatures rise by 4 to 6.1°C. Human life is almost certainly impossible in many parts of the world.
In order to keep to the first and best scenario, the IPCC estimates that 3% of the world’s GDP is required to be spent by 2030, not a very large sum compared to how it would prevent damage worth much more.
Changes required to being down greenhouse gas emissions would include the use of current technology:
·ENERGY supply – improved efficiency, switching from coal to gas, nuclear power and renewable energy (hydropower, solar, wind, geothermal, bioenergy);
·TRANSPORT – More fuel-efficient vehicles, hybrid vehicles, cleaner diesel vehicles, biofuel, shift from road transport to rail and public transport systems, non-motorised transport, and land-use and transport planning;
·BUILDINGS – Efficient lighting and day-lighting, more efficient electrical appliances and heating and cooling devices, improved cook stoves, improved insulation, solar heating and cooling design, and alternative refrigeration fluids;
·INDUSTRY – More efficient end-use electrical equipment, heat and power recovery, material recycling and substitution, control of non-CO2 gas emissions, among others;
·AGRICULTURE – Improved crop and grazing land management to increase soil carbon storage, restoration of cultivated peaty soils and degraded lands, improved rice cultivation techniques and livestock and manure management, improved nitrogen fertiliser application techniques, and dedicated energy crops to replace fossil fuel use;
·FORESTRY – Afforestation, reforestation, forest management, reduced deforestation, wood product management, and use of forestry products for bio-energy; and
·WASTE – Landfill methane recovery, waste incineration with energy recovery, composting of organic waste, controlled waste water treatment, and recycling and waste minimisation.
Some of these proposals are controversial. Environmentalists for example decry the proposed shift to nuclear power, which brings its own massive problems. The role of biofuels, positive and negative, is still to be assessed.
The IPCC report also advocates changes in lifestyle and behaviour patterns so that resource conservation is emphasised. This will contribute to developing a low-carbon economy.
B. The need for major change in developed countries.
The most important contribution to change has to come from developed countries. This is because they have been historically most responsible for Greenhouse Gas emissions; they are still the most important emitters, especially per capita; and they have more financial and technological resources.
The Kyoto Protocol recognized this by requiring Annex I countries to cut their emissions. The Kyoto Protocol requires industrialized countries to reduce greenhouse emissions by an average of 5% below 1990 levels in its first commitment period between 2008 and 2012. However generally the developed countries have not so far made enough progress in meeting up to their targets.
The Greenhouse Gas Data 2006 report by the UNFCCC (UN Framework Convention on Climate Change) secretariat (which was issued in October 2006) reported a “worrying” upward trend in the 2000-2004 period.
Although the overall emissions by these countries dropped 3.3% in the 1990-2004 period, this was mostly due to a 36.8 per cent decrease by economies in transition of eastern and central Europe (EITs). Most worrying was that the other industrialized Parties of the UNFCC registered an increase of 11%.
“The worrying fact is that EITs, which were mostly responsible for the overall emissions reductions of industrialized countries so far, as a group have experienced an emission increase of 4.1% in the period 2000-2004,” UNFCCC Executive Secretary Yvo de Boer said when launching the report in Bonn. “This means that industrialized countries will need to intensify their efforts to implement strong policies which reduce greenhouse gas emissions,” he added.
Emission reductions are urgently required in the transport sector but they seem to be especially difficult to achieve, growing by 23.9% from 1990 to 2004, the report noted.
Thus, the UNFCCC data is really gloomy as it show an overall lack of action on the part of industrialized countries, and even then excluding the US, which itself has one of the poorest records. According to one estimate, the United States’ emission level in 2005 was 12% above the 1990 level and could rise to 30% above that level in 2012.
There is need for action in developed countries to deeply cut their emissions. The mechanisms such as carbon trading and clean development mechanism should not be used as “escape routes” from this. That escape route is for those under-performing developed countries to fund climate-friendly projects in developing countries and thus earn “credits” allowing them to continue emitting Greenhouse Gases above their permitted level.
The recent initiative in the EU to set targets for its emission cuts 2020 is a good start, though many would agree it is not enough. The G8 Summit 2007 also set targets for emission reduction, although it did not bind all G8 members. Those are numbers to be worked further on.
C. The equity perspective and North South relation
Historically and presently the developed countries have been most responsible for Greenhouse gas emissions, and have greater resources and technical capacity, and thus should contribute most in terms of (1) changes in their own countries; (2) assisting developing countries to move onto a sustainable path.
According to United Nations statistics, in 2003 there was a total of 27.5 billion tons of CO2 emissions worldwide. Major emitting countries included the US (5.8b tons, 21% of total), China (4.2b tons, 15%), EU (3.8b ton, 13.7%), Russia (1.5b tons, 5.4%), India (1.3b tons, 4.6%), Japan (1.2b tons, 4.5%).
However, what is more important are the data for per capita emissions. In 2003, according to UN statistics, the CO2 emissions per capita were US 19.8 tons, Australia 18, Canada 17.9, Germany 9.8, Japan 9.7, UK 9.4, China 3.2, Brazil 1.6, Indonesia 1.4, India 1.2, Pakistan 0.75, Nigeria 0.42, Zambia 0.19, Tanzania 0.1 and Chad 0.01.
It is more equitable and fair to consider the per capita emission concept and data. This is because some countries have large total emissions mainly because of their huge population sizes, and not because of the emission intensity.
The principle of “contraction and convergence” would be equitable and thus more capable of winning support by more people. In this principle, the world as a whole has to contract or reduce its total emissions. In doing so, an equitable principle is used. Take the total maximum emission level that is sustainable, i.e. that the world is able environmentally to sustain. Divide this total by the world’s population. That level of emission per capita could be considered the “emission right” or “emission entitlement” per person.
In countries where this level is exceeded, there should be targets and plans to bring down the emissions aimed at reaching the average per capita entitlement level. In countries where this level is not yet reached, there is the possibility to expand up to that level; however this should be done in the most efficient manner so that the level of economic activity can be higher at each per capita emission level.
In fact, there is a strong case that the developing countries should be allowed to exceed the per capita entitlement level, while the developed countries should reach an equilibrium below the entitlement level. This is because of the superior technological level that the latter have reached, and also because of the much extra “space” that they enjoyed since the industrial revolution to grow and to emit. Due to this historical and present reality, the developing countries can argue that they require the extra “space” to catch up especially technologically. As they develop their technology and become more climate-efficient, the developing countries could go down to the average entitlement level.
The principle of “fair shares for environmental space” should be coupled with the principles of “common and differentiated responsibility” and “contraction and convergence.”
D. Guidelines for future action
The UNFCC has been the multilateral forum for global action on climate change. It should remain so, as it has universal membership. The Kyoto Protocol is the main instrument of the UNFCC at present, and a post Kyoto regime should be established within the UNFCC framework. This is the best chance to continue international cooperation on the climate issue.
UNFCC and Kyoto are based on a central principle, that of common and differentiated responsibility (CDR). This should remain the central principle of a post Kyoto regime.
The articulation of this principle in Kyoto called for developed countries (Annex I countries) to undertake emission reduction according to time-bound targets, while all countries would undertake relevant programmes to be less carbon dependent, and report on them. Developed countries would also assist developing countries through financial resources and technology transfer.
In a post Kyoto regime, the CDR principle should remain central. Developed countries should take the lead in contributing most through reduction commitments. Their record has to improve tremendously from the performance so far in this Kyoto period.
The equity principle and the related principles of “fair shares for environmental space”, “emission entitlements”, “contraction and convergence”, should guide the process.
Developing countries for their part should recognize that there is a serious climate crisis, and upgrade the priority they put in mitigating and adapting to this crisis. This calls for high-level coordination between various Ministries and agencies, and a strong implementation plan and capacity.
The developing countries will not be able to undertake this major task themselves. They have to be assisted through financial resources for both adaptation and mitigation.
Since new climate-friendly and energy-efficient technologies are crucial, there must be worked out multilaterally a scheme for equitable sharing of the technologies and the benefits from them.
In this the issue of intellectual property of these technologies is key. The full operation of the IP system can and is likely to hinder the transfer of climate-friendly technology to developing countries. One option is that patents on climate-friendly technologies be exempted. Another is that they be provided in developed countries but that developing countries can exempt them. In any case, the climate crisis should not be seen as a business opportunity to make monopoly profits especially from the developing countries. It should be an occasion to demonstrate the human capacity to cooperate especially in the face of life-threatening phenomena. (Presented at the Informal Thematic Debate of the General Assembly on Climate Change as a Global Challenge, New York, USA, 31 July 2007-1 August 2007.)
By Martin Khor, Director, Third World Network
Presentation at FAO Food Security Summit, Rome 4 June 2008
This statement deals with the crisis of food prices and shortages, and also the issue of agriculture and climate change. The importance of food security and of expanding sustainable agriculture practices in its economic, social and environmental aspects is stressed.
B. FOOD SECURITY CRISIS
The current global crisis of high food prices, and of shortages in some countries, has given prominence once again to food security concerns. In recent years there was complacency about food security and national self-sufficiency, as it was thought that cheaper imports would be always or usually available, and local food production was not so necessary as previously thought. Many developing countries reduced food production, many of them under advice of the international financial institutions.
The rising world prices of many food items in the past couple of years have meant more expensive imports, and inflation of food prices in local markets. There have also been cases of shortages, as some countries placing orders for example for rice have found that the supply is not forthcoming or guaranteed, sometimes because of export restrictions by the exporters of the food items. Many developing countries have been caught in this situation, resulting in street protests as families found it difficult to cope.
Because of this new situation, the paradigm of “food security” has suddenly shifted back to the traditional concept of greater self-sufficiency, instead of prioritizing the option of relying on cheaper imports. It is now recognized that in the immediate period, there is need for emergency food supplies to affected countries, but that a long-term solution must include increased local food production in developing countries. This raises the question of what constitute the barriers to local production and how to remove these barriers.
Factors for this crisis include climatic factors (such as drought for example affecting wheat production in Australia), the rising cost of inputs especially oil and oil-based products, and the switch of land use from production of food to biofuels. However a longer term reason is the decline in agriculture in many developing countries, in most cases due to the structural adjustment policies of the IMF and World Bank. The countries were asked or advised to (1) dismantle marketing boards and guaranteed prices for farmers’ products; (2) phase out or eliminate subsidies and support such as fertilizer, machines, agricultural infrastructure; (3) reduce tariffs of food products to low levels.
Many countries that were net exporters or self-sufficient in many food crops experienced a decline in local production and a rise in imports which had become cheaper because of the tariff reduction. Some of the imports are from developed countries which heavily subsidize their food products. The local farmers’ produce were subjected to unfair competition, and in many cases could not survive. The effects on farm incomes, on human welfare, on national food production and food security were severe.
The case of Ghana illustrates this. The policies of food self-sufficiency and government encouragement of the agriculture sector (through marketing, credit and subsidies for inputs) had assisted in an expansion of food production (for example in rice, tomato, poultry). The policies were reversed starting from the mid-1980s.and especially in the 1990s. The fertilizer subsidy was eliminated, and its price rose very significantly. The marketing role of the state was phased out. The minimum guaranteed prices for rice and wheat) was abolished, as were many state agricultural trading enterprises and the seed agency responsible for producing and distributing seeds to farmers, and subsidized credit was also ended.
Applied tariffs for most agricultural imports were reduced significantly to the present 20%, even though the bound rate was around 99%. This, together with the dismantling of state support, led to local farmers being unable to compete with imports that are artificially cheapened by high subsidies, especially in rice, tomato and poultry.
- Rice output in the 1970s could meet all the local needs, but by 2002 imports made up 64% of domestic supply. Rice output in the Northern region fell from an annual average of 56,000 tonnes (in 1978-80) to only 27,000 tonnes for the whole country in 1983. In 2003, the US exported 111,000 tonnes of rice to Ghana. In the same year, the US government gave US$1.3 billion subsidies for rice. A government study found that 57% of US rice farms would not have covered their cost if they did not receive subsidies. In 2000-2003 the average cots of production and milling of US white rice was US$415 per tonne, but it was exported for just $274 per tonne, a price 34% below its costs.
- Tomato was a thriving sector, especially in the Upper East region. As part of a privatization programme, tomato-canning factories were sold off and closed, while tariffs were reduced. This enabled the heavily subsidized EU tomato industry to penetrate Ghana, and this displaced livelihoods of tomato farmers and industry employees. Tomato paste imported in Ghana rose from 3,200 tonnes in 1994 to 24,077 tonnes in 2002. Local tomato production has stagnated since 1995. Tomato-based products from Europe have made inroads into African markets. In 2004, EU aid for processed tomato products was $298 million euros, and there are many more millions of euros in indirect aid (export refunds, operational funds for producer organisations, etc).
- Ghana’s poultry sector started its growth in the late 1950s, reached its prime in the late 1980s and declined steeply in the 1990s. The decline was due to withdrawal of government support and the reduction of tariffs. Poultry imports rose by 144% between 1993 and 2003, and a significant share of this were heavily subsidized poultry from Europe. In 2002, 15 European countries exported 9,010 million tonnes of poultry meat for Euro 928 million, at an average of Euro 809 per tonne. It is estimated that the total subsidy on exported poultry (including export refunds, subsidies for cereals fed to the poultry, etc) was Euro 254 per tonne. Between 1996 and 2002, EU frozen chicken exports to West Africa rose eight fold, due mainly to import liberalization. In Ghana, the half million chicken farmers have suffered from this situation. In 1992, domestic farmers supplied 95% of Ghana’s market, but this share fell to 11% in 2001, as imported poultry sells cheaper.
In 2003, Ghana’s parliament raised the poultry tariff from 20% to 40%. This was still much below the bound rate of 99%. However, the IMF objected to this move and thus the new approved tariff was not implemented. The IMF representative in Ghana told Christian Aid that the IMF pointed out to the government that the raising of tariffs was not a good idea, and the government reflected on it and agreed. Many farmers’ groups and NGOs in Ghana have protested on this to the government.
Some developments in the trade negotiating arena are also a source of concern. The Doha negotiations at the WTO are mandated to substantially reduce domestic support in developed countries. However, to date, the offers of the US and EU indicate their overall trade distorting support (OTDS) would be reduced at the bound level, but not at the applied level. Also, the figures in the Chair’s latest agriculture text (19 May 2008) would not reduce the actual present domestic support for the US. The maximum or bound OTDS level for the US would be $13 to 16.4 billion, while the actual support in 2007 is reported to be around $7-8billion.
Another source of concern is the new US Farm Bill. According to several analyses, including those made by the US administration, the Bill will continue the present system of subsidies, and in some ways or for several commodities, it will expand the support. For example the Bill guarantees that 85% of the domestic market for sugar will be met by local production. The bill also allows a farm family with an income of up to US$1.5 million to obtain subsidies, compared to the limit of $200,000 per farmer proposed by the Bush administration. The Bill thus “locks in” the US system and levels of subsidies for the next 5 years, and it also constrains what the US negotiators can offer in the WTO’s Doha negotiations.
A major loophole in the WTO’s agriculture agreement is that countries are obliged to reduce their bound levels of domestic support that are deemed “trade distorting” but there are no constraints on the amount of subsidies deemed non distorting or minimally distorting, which are placed in the so-called Green Box. Recent studies have shown however that many of the Green Box subsidies are also trade distorting. The Doha negotiations are unlikely to place new effective disciplines on the Green Box. Therefore, the major subsidizing countries can change the type of domestic subsidies they give, while reducing the “trade distorting subsidies” and continue to provide similar levels of farm subsidies.
Meanwhile the developing countries are being asked to reduce their agricultural tariffs further. The Chair’s proposal at the Doha talks is for a maximum 36% tariff cut for developing countries, and 24% for small vulnerable economies. This is sizable, and compares with the 24% cut in the Uruguay Round. Most developing countries are advocating that the instruments of special products (SP) and special safeguard mechanism (SSM) be set up as part of the WTO talks to promote food security and farmers’ livelihoods and rural development. SPs would exempt important food products from tariff cuts or at least allow for more lenient cuts. SSM would enable a developing country to impose an additional duty op top of the bound rates in situations of reduced import price or increased import volume, in order to protect the local farmers. However there is considerable opposition from some exporting countries to having these instruments that can work in an effective way.
In the bilateral or regional FTAs involving developed and developing countries, the developing countries are asked to reduce or eliminate their tariffs by even more. For example, in the Economic Partnership Agreements between ACP countries and the EU, the ACP countries are asked to eliminate their tariffs on 80% of their tariff lines over different time periods. Agricultural products are among those affected.
Conclusions and Proposals
1. The economic and trade policies followed by many developing countries, often at the advice of international financial institutions, or as part of multilateral and bilateral trade agreements, have contributed to the stunting of the agriculture sector in developing countries. The developing countries must be allowed to provide adequate support to their agriculture sector and to have a realistic tariff policy to advance their agriculture, especially since developed countries’ subsidies are continuing at a high level. The developed countries should quickly reduce their actual levels of subsidy.
2. The agriculture policy paradigm in developing countries must be allowed to change. Countries should have the policy space to expand public expenditure on agriculture. Governments in developing countries must be allowed to provide and expand support to the agriculture sector.
3. Developing countries should place high priority on expanding local food production. Accompanying measures and policies should thus be put in place. The countries should be allowed to calibrate their agricultural tariffs in such a way as to ensure that the local products can be competitive and the farmers’ livelihoods and incomes are sustained, and national food security is assured.
4. The proposals of developing countries (led by the G33) on special products and special safeguard mechanism, aimed at food security, farmers’ livelihoods and rural development, at the WTO should be supported. Effective instruments that can meet the aims should be established.
5. The policies of the World Bank, IMF and regional development banks should be reviewed and revised as soon as possible, so that they do not continue to be barriers to food security and agricultural development in developing countries.
6. The actual levels (and not just the bound levels) of agricultural domestic subsidies in developed countries should be effectively and substantially reduced. There should also be new and effective disciplines on the Green Box subsidies to ensure that this category does not remain an “escape clause” that allows distorting subsidies that are detrimental to developing countries.
7. There should be a review of many of the FTAs between developed and developing countries, including the EPAs between the EU and ACP countries. In light of the food crisis and the changing paradigm on food security, developing countries that have signed or are in the process of negotiating FTAs should ensure that the FTAs provide enough policy space to allow sufficiently high tariffs on agricultural imports that enable the fulfillment of the principles of food security, farmers’ livelihoods and rural development.
C. AGRICULTURE AND CLIMATE CHANGE
Climate change affects developing countries’ agriculture, while agricultural practices also contribute to climate change. These problems need to be addressed urgently.
Effects of climate change
According to various studies, cited in a paper by IFPRI’s Director General, Joachim von Braun (2008), many poorer developing countries are in tropical and sub-tropical regions that are vulnerable to global warming and in semi-desert areas threatened by water scarcity. By 2080, agriculture output in developing countries may decline by 20% due to climate change and yields could decrease by 15% on average. The number of under-nourished people in Sub Sahara Africa may rise from 138 million in 1990 to 359 million in 2050. Responses to climate related threats in agriculture underestimate the problem and there is little work on how the negative effects can be mitigated, according to IFPRI.
According to the recent report of the IAASTD (Independent assessment of agricultural knowledge, science and technology for development), climate change can irreversibly damage the natural resource base on which agriculture depends. Some negative impacts are already visible in many parts of the world. Water scarcity and the timing of water availability will increasingly constrain production. Climate change will require a new look at water storage to cope with the impacts of more and extreme precipitation, higher seasonal variations and increased rates of evapotranspiration in all types of ecosystems.
Extreme climate events (floods and drought) are increasing and are likely to adversely affect food and forestry production and food security. (IAASTD 2008).
On the other hand, agriculture is a major contributor to climate change. Agriculture is the main emitter of nitrous oxides and methane. The total global contribution of agriculture (direct and indirect emissions) is between 8.5 to 16.5 billion tones of carbon dioxide equivalent, representing 17 to 32 percent of all global human-induced Greenhouse Gas emissions, including land use changes (Greenpeace 2008).
Direct contribution to Emissions
According to the IPCC, the agricultural sector annually emits 5.1 to 6.1 billion tonnes of carbon dioxide equivalent in 2005. Of these, (1) methane (which has 20 times more global warming potential than carbon dioxide) accounts for 3.3 billion tonnes equivalent; (2) nitrous oxide (which has 300 times greater global warming potential than carbon dioxide) accounts for 2.8 billion tonnes annually; and (3) carbon dioxide emissions are 40 million tonnes. . (ITC 2007). This represents 10-12% of total greenhouse gas emissions.
Of the direct emissions, the main forms are: (1) nitrous oxide emissions from high nitrogen levels in the soils from synthetic fertilizers (2.128 billion tonnes), which are mainly associated with nitrogen fertilizers and manure applied to soils. Fertilisers are often applied in excess and not fully used by the crop plants, and some of the surplus is lost as nitrous oxide to the atmosphere; (2) enteric fermentation of cattle (1.792 billion tones); (3) biomass burning (672 million tones); (4) rice production (616 million tones), (5) manure handling (413 million tonnes). (Greenpeace 2008).
According to current projections, total greenhouse gas emissions from agriculture will reach 8.3 billion tonnes of carbon dioxide equivalent in 2030, compared to the current level of about 6 billion tonnes (ITC 2007).
Indirect Contribution to Emissions
Agriculture also contributes indirectly to emissions, through the following: (1) The production of fertilizers is energy intensive and adds 300-600 million tonnes of carbon dioxide equivalent per year, or 0.6 to 1.2% of total greenhouse gas emissions. The greatest source of emissions from fertilizer production is the energy required, which emits carbon dioxide. With the intensification of agriculture, the use of fertilizers has increased sharply.
(2) Other farm operations (such as tillage, seeding, applications of agrochemicals and harvesting) also emit 60 to 260 million tones of carbon dioxide equivalent, irrigation emits 50 to 680 million tones while the production of pesticides emits 3 to 140 million tones annually.
(3) Change in land use (from other uses to agriculture) is estimated to be also a major source of emission, about 2.9 to 5.9 billion tonnes annually (or 6-17% of all Greenhouse Gas emissions). (Greenpeace 2008).
Greenpeace (2008) has suggested many mitigation actions. The large mitigation potential can change agriculture from the second largest emitter to a much smaller emitter or even a net sink. The overall mitigation potential is 6 billion tonnes a year, which is close to all of agriculture’s direct emissions. The greatest potential mitigation contribution is from soil carbon sequestration (5.38 billion tonnes annually), followed by reduction of methane emissions (500 million tones) and nitrous oxide emissions (120 million tonnes).
Because there is low carbon concentration in croplands, there is great potential to increase carbon content through beneficial management practices. On agricultural lands, restoration of the carbon content in cultivated organic soils has a high per-area potential and is the area of greatest mitigation potential in agriculture (Greenpeace 2008).
Proposals for mitigation by Greenpeace include: (1) Cropland management (avoiding leaving land bare; using an appropriate amount of nitrogen fertilizer; no burning of crop residues in the field; reducing tillage) (mitigation potential of 1.45 billion tonnes); (2) grazing land management (mitigation potential 1.35 billion tonnes); (3) restoration of organic soils that are drained for crop production and restoration of degraded lands to increase carbon sinks (mitigation potential of 2 billion tonnes); (4) improved water and rice management; (5) set-asides, land use change and agro forestry; (6) increasing efficiency in manufacturing of fertilizer; (7) consumer behaviour change, in eating less meat.
In the Greenpeace analysis, conventional and intensive agriculture characterized by mechanization and use of agro-chemicals (mineral fertilizers, herbicides, pesticides) and reliance on high external inputs (chemicals, irrigation, fossil fuels) have led to high environmental and social costs that may undermine future capacity to maintain required levels of food production.
In April 2008, the IAASTD launched its report in Johannesburg, which was approved by 57 governments. The IAASTD was an inter-governmental process, co-sponsored by FAO, UNDP, UNEP, GEF, World Bank, with over 400 authors involved in drafting the report. It conducted a three-year evidence-based assessment on agricultural science and technology and on the future of agriculture. It made a critique of conventional industrial farming and called for a fundamental change in farming practices so as to better address increasing food prices, hunger, inequities and environmental crises. The report reflects a growing consensus among scientists and many governments that the old paradigm of industrial energy-intensive and toxic agriculture is an outdated concept, while small-scale farmers and agro-ecological methods provide the way forward.
Its conclusion was that the past emphasis on production and yields brought some benefits, this was at the expense of the environment and social equity. While promoting agro-ecological methods, it did not support genetically-modified crops, preferring to highlight the doubts and uncertainties surrounding them, rather than the claimed benefits. The report concluded that for poor farmers, genetically modified crops are unlikely to play a substantial role in addressing their needs, and longer-case assessments of the environmental and health risks and regulatory frameworks are needed. (Lim 2008).
A report by the International Trade Centre and FIBL (Research Institute of Organic Agriculture, Switzerland) provides a detailed assessment of the benefits of organic farming regarding climate change. A summary of the benefits are as follows:
- Organic agriculture has considerable potential for reducing emissions.
- In general it requires less fossil fuel per hectare and kg of produce due to the avoidance of synthetic fertilizers. Organic agriculture aims to improve soil fertility and nitrogen supply by using leguminous crops, crop residues and cover crops.
- The enhanced soil fertility leads to a stabilization of soil organic matter and in many cases to a sequestration of carbon dioxide into the soils.
- This in turn increases the soil’s water retention capacity, thus contributing to better adaptation of organic agriculture under unpredictable climatic conditions with higher temperatures and uncertain precipitation levels. Organic production methods emphasizing soil carbon retention are most likely to withstand climatic challenges particularly in those countries most vulnerable to increased climate change. Soil erosion, an important source of carbon dioxide losses, is effectively reduced by organic agriculture.
- Organic agriculture can contribute substantially to agro forestry production systems.
- Organic systems are highly adaptive to climate change due to the application of traditional skills and farmers’ knowledge, soil fertility-building techniques and a high degree of diversity.
- The study concludes that: “Within agriculture, organic agriculture holds an especially favourable position, since it realizes mitigation and sequestration of carbon dioxide in an efficient way…Organic production has great mitigation and adaptation potential, particularly with regard topsoil organic matter fixation, soil fertility and water-holding capacity, increasing yields in areas with medium to low-input agriculture and in agro-forestry, and by enhancing farmers’ adaptive capacity. Paying farmers for carbon sequestration may be considered a win-win-win situation as (a) carbon dioxide is removed from the atmosphere (mitigation); (b) higher organic matter levels in soil enhance their resilience (adaptation), and (c) improved soil organic matter levels lead to better crop yield (production).
The study recognizes that organic agriculture also has weaknesses, mainly related to productivity and yield losses in some crops and production areas, and this highlights the need for research. Total European research funding for organic agriculture currently represents less than 1% of the total food and agriculture research budget.
Moreover in some areas, organic farming performs better, for example in conditions where there are water constraints. Yields from organic agriculture where water is limited during the growing period, and under subsistence farming, are equal or significantly higher than those from conventional agriculture. The ITC report cites a comparison of 133 studies from developing countries concluded that organic plant and livestock yields were 80% higher than their conventional counterparts, and for crops only the yield increase was 74% (Badgley et al., 2007).
Another review of sustainable agriculture practices, covering 208 projects in 52 countries, show that 9 million farmers have adopted sustainable agriculture practices on 29 million hectares in Africa, Asia and Latin America (Pretty and Hine 2001, cited in Lim 2003). Farmers have achieved substantial increases in food production per hectare: 50-150% for rain-fed crops; 5-10% for irrigated crops. Disaggregated data show:
- Average food production per household rose by 1.7 tonnes per year (up by 73%) for 4.42 million small farmers growing cereals and roots on 3.6 million hectares.
- Increase in food production was 17 tonnes per year (up 150%) for 146,000 farmers on 542,000 hectares cultivating roots (potato, sweet potato, cassava).
- Total production rose by 150 tonnes per household (up by 46%) for the larger farms in Latin America (average size 90 hectares).
Conclusions and proposals
Agriculture both seriously affects climate change and is in turn seriously affected by it. Both these problems should be addressed urgently.
(1) There should be more research and action on adaptation measures in agriculture, especially in developing countries in order to assist farmers in developing countries to reduce the adverse effects of climate change on agriculture.
(2) Action plans for mitigation measures for agriculture should be urgently researched and implemented.
(3) Financing assistance for adaptation and mitigation measures in the agriculture sector in developing countries should be prioritized.
(4) Arrangements should be made for the sharing of experiences and the transfer of good practices in agriculture that can constitute mitigation and adaptation.
(5) Given the many advantages of organic farming and sustainable agriculture, in terms of climate change as well as social equity and farmers’ livelihoods, there should be a much more significant share of research, personnel, investment, financing and overall support from governments and international agencies that should be channeled towards sustainable agriculture. Promotion of sustainable agriculture can lead to a superior model of agriculture from the environmental and climate change perspective, as high-chemical and water-intensive agriculture is phased out, while more natural farming methods are phased in, with research and training programmes also promoting better production performances in sustainable agriculture.
Greenpeace International (2008). Cool farming: climate impacts of agriculture and mitigation potential.
IAASTD (2008). Executive summary of the synthesis report of the international assessment of agricultural knowledge, science and technology for development (IAASTD).
ITC and FiBL (2007), Organic farming and climate change.
Joachim von Braun (2008). “Impact of climate change on food security in times of high food and energy prices.”
Khor, Martin (2008). The impact of trade liberalization on agriculture in developing countries: the experience of Ghana. TWN, Penang.
Khor, Martin (2003). Sustainable agriculture: critical ecological, social and economic issues. TWN briefing paper 5, June 2003).
Lim Li Ching (2003), Sustinable agriculture is productive (TWN briefing paper 8, July 2003).
Lim Li Ching (2008), Overhaul of agriculture systems needed, says new report.
Pretty, Jules and Richard Hine (2001). Reducing food poverty with sustainable agriculture: a summary of new evidence. Centre for Environment and Society, Essex University.
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