Needed Reforms to International Economic Governance for Development
Jomo Kwame Sundaram, Assistant Secretary-General for Economic Development, Department of Economic and Social Affairs, United Nations

Albert Fishlow: Thank you very much, Carol, and I thank you as well for obeying all of those signs that come up on a regular basis here.

Our next speaker is Jomo Kwame Sundaram who is Assistant Secretary-General for Economic Development in the Department of Economic and Social Affairs of the UN. Previously he had a very distinguished academic career, not merely at the National University of Singapore, the Asia Research Institute, and others, but most prominently at the University of Malaysia where he was a professor for many years until 2004. He has taught at a variety of different universities, Harvard, Yale, the National University of Malaysia, the University of Malaysia at Cornell, and was a visiting fellow at Cambridge. Impressively he's authored more than thirty-five monographs, edited more than fifty books, and translated eleven volumes. So I suggest to you that he is someone who will clearly be very interesting to us. Jomo.

Jomo Kwame Sundaram: Thank you, Al, for those very kind words of introduction, and Jeff for this invitation to be here this afternoon.

Al started off by reminding us that the progress as far as economic development is concerned in the last quarter century has actually been slower, both in terms of economic growth as well as improvements in the human condition, compared to the previous two decades, the ‘60s and the 1970s. There's often much concern about the relationship between growth and the improvements in the human condition, particularly for the bottom half of the world's population who happen to be poor. Recent estimates suggest that only about 4% of economic growth actually trickles down to those with less $2 a day, which is slightly under half of the world's population. So far more needs to be done, very clearly, and this I suspect is much of the work which has involved the UNDP, the Millennium Project, and others.

One of the most popular buzzwords in recent years has been the notion of governance. This has been a fad, and perhaps it might be said to be the flavor of the decade, the last decade. Jeff and some of his colleagues in a paper published I think in the last two years showed that there's really very little systematic evidence of a relationship between the usual indicators of governance and economic growth. And I think this is a very important finding which needs to be better appreciated and understood.

My discussion today, however, will focus on a very specific dimension of governance, namely what I term international economic governance and its implications for development. Basically I think that we could start off by distinguishing two different types of governance modes, a democratic and what might be termed a more corporate governance mode. And if we look at the major institutions of international economic governance I would suggest that they are characterized by the latter, corporate governance rather than democratic governance. We all know that the Bretton Woods institutions, for instance, are essentially characterized by a situation of one dollar, one vote, rather than one country, one vote or one person, one vote. The WTO, the World Trade Organization, ostensibly makes its decisions on a consensus basis, but here too I would suggest that the actual relations of policy determination are quite different.

All this I would suggest leads to some degree of lack of accountability, and I'd like to take a few minutes to share with you two important instances of how this lack of accountability has very serious and profound and lasting implications for economic development, and which have adversely affected the developing countries.

First, the whole question of international financial liberalization. Both Bretton Woods institutions and others have been promoting international financial liberalization for the last few decades. Developing countries were basically told that there would be a net flow of funds from the capital rich to the capital poor, that the cost of funds would go down, and there would be greater stability with financial deepening. The converse has actually happened. There have been capital flows, but the net capital flows have actually been from the south to the north. This has been true not only of Latin America and Africa, but also much of Asia. There have of course been episodes, for instance, in the early and the mid-1990s where there has been a flow of funds from the north to the south, but these have of course been reversed with devastating consequences as we saw in ‘97-‘98 in east Asia. There has also not been a decline in the cost of funds, except in the very recent period due to very low interest rates, particularly due to the situation in this country. And this of course has been matched by an increase of what Keynesians would refer to as an increase of financial friends, in other words, excess profits enjoyed by the major financial institutions.

While there has been some degree of decline in volatility associated with some of the old sources of volatility such as exchange rate volatility and interest rate volatility, there has in fact been new systemic elements which have enhanced volatility, and therefore caused greater instability. Not surprisingly therefore we find that there has been an increase in incidence of currency and financial crisis in the last couple of decades. Also very importantly from a developing country's point of view the greater influence of finance has meant that macroeconomic policies in most developing countries have tended to be influenced by influences which might be referred to as deflationary. In other words, countries generally have to adopt much more conservative economic policies which are demanded by financial interests. A fifth consequence, which is very important, is that macroeconomic policy generally speaking has tended to be procyclical, tending to exacerbate the ups and downs of the international financial system. This has meant, for example, that growth has often translated into bubbles, stock market and property market bubbles, and downturns have been more severe than they need to be. Finally, and no less importantly, there have been constraints introduced on the financial institutions which developing countries are able to develop and introduce, such as development banks, for instance. There has been a significant decline in development bank resources in recent decades.

The then IMF Economic Councilor Ken Rogoff, now back as a professor at Harvard, published a couple of papers in the year 2003 where he and his colleagues showed that financial liberalization had not been good for growth, and also had actually not been good for financial stability. Nonetheless the operational side of the Bretton Woods institutions continued to promote financial liberalization, despite its adverse consequences. Who is to be held liable? Middle income countries have therefore been trying to opt out of this system, and this has been at very high cost, because of what might be termed a self-insurance as practiced in much of east Asia has been very expensive. Funds have basically been used to insure companies against possible threats, and this means the reduction of funds which are available for more productive purposes.

We also find that in recent months Latin American countries, Brazil and Argentina, have sought to prepay their commitments to the IMF to basically free themselves from the kinds of obligations which they were previously subjected to. All this has meant that middle income developing countries have chosen to opt out of an international monetary and financial system which they see as being inimical to their own interests. The consequence has been a system where the major players are the rich countries on the one hand, and the poorest countries on the other, the least developed countries, who are subjected to policies very much not of their own making and not of their own choice. And this I would suggest has exacerbated the divide which has been growing in recent decades.

The second example would be from the area of trade liberalization. There has been, as you all know, a significant increase in trade liberalization over recent decades. However, as the World Bank has admitted in a very interest document published last week by the Independent Evaluation Office, this trade liberalization while successful in and of itself has not contributed to growth, and certainly not contributed to the reduction of poverty. Historical evidence reminds us that trade liberalization tends to follow development rather than precede development. We can see this, for instance, it was after Britain had its industrial revolution in the second and third decades of the 19th Century that it began to reform its Corn Laws and adopt other policies favoring free trade. Likewise with the United States it was only after several decades after the Civil War and the emergence of industry, and it was only in the post-war period that the United States very significantly advanced the cause of trade liberalization. One can cite many other examples from the case of Japan and others, but the point I think is quite clear.

Premature trade liberalization undermines the development of economic capacity building, and this I think is very important if we are serious about development. The claims about trade liberalization right now suggest that there are gains to be made from trade liberalization. These I would suggest tend to be one-shot gains, and the recent calculations by the World Bank have suggested that the gains are actually much more modest than previously claimed. In a study published in the year 2002 the claim was that the gains from trade liberalization, the one-shot gains from trade liberalization, would be about 1½%. The recent estimates are of ½ of 1%, in other words, a reduction by about two-thirds.

There is also significant evidence from the entire 20th Century that there has been a decline in the terms of trade for primary commodities vis a is manufacturers. Last month Sirhan Singer passed away. He was one of the pioneering team of members of the United Nations Department of Economic Affairs from the end of the 1940s, and his work for the first half of the 20th Century suggested the decline of the terms of trade of primary commodities. This work has been extended by my colleagues and suggests that there has continued to be a decline in terms of trade for primary commodities in the second half of the 20th Century. Arthur Lewis, the great West Indian economist, pointed out that there has been a decline of the terms of trade of tropical primary commodities compared to temperate primary commodities. Although there have been no comparable studies for the period since the 1960s, anecdotal evidence suggests that this trend seems to continue into the last third of the 20th Century. More recently there also seems to be evidence of a significant decline in the terms of trade of manufactured goods being produced by developing countries, compared to the manufactured goods being produced by the wealthier countries. It's still not very clear what are the reasons for this, but it appears that there is possibly some relationship to the kind of monopoly power that big corporations are able to exert now through the intellectual property rights they hold.

All this basically forces us to think very, very seriously about the trading system in which we find ourselves. This is especially important because recent findings suggest that there will be only five developing countries which stand to gain from trade liberalization. These five countries are Brazil, Argentina and India, from agricultural trade liberalization, and China and Vietnam from manufacturing trade liberalization. And if you look at the case of India, the main advantage of trade liberalization will actually accrue by a change in the terms of trade internal to India itself because of a decline of the prices of agricultural commodities.

Now many of you might have read accounts of the number of suicides which have increased in recent years among Indian farmers who have not been able to deal with the consequences of climate change as well as indebtedness. These are some of the consequences of a change in the terms of trade against agriculture in favor of the urban areas.

Now agricultural trade liberalization would primarily favor the Cannes Group [?]. The Cannes Group are basically the agricultural producers of the world, basically North American countries, Australation [??] countries, and some countries in southeast Asia including my own country, Malaysia. We would stand to benefit from agricultural trade liberalization. The poorest countries in the world, especially in Africa, are not in the position to benefit from trade liberalization because they simply do not have the productive, let alone the export capacities required to benefit from trade liberalization.

I'm emphasizing all this because there is such concern about the failure to make progress in the Doha Round of trade negotiations. Last December, as you know, very little progress was actually made. But I would like to suggest if we look at what is being negotiated very seriously in the Doha Round there is very little which is developmental about it. The so-called ??? sisters of Development Ministers, Clare Short from the UK, Hilde Johnson from Norway, and various others, suggests that this round of trade negotiations be deemed a development round. But if we look at the current negotiations over the non-agricultural market excess and other issues one finds very little which is truly developmental about it.

Now these powerful international institutions which dominate and govern international economic relations are not held accountable in any serious fashion to the population of the world, they are not held accountable for the failures in terms of economic growth, or the failure to improve economic welfare. They are not held accountable for the failure to achieve meaningful economic development. I would suggest to you that this is partly due to the kind of governance which characterizes these institutions. In other words, in order to be able to make serious progress in terms of development, including sustainable development, it is imperative that we seriously transform the governance structures of these crucial international economic institutions which so profoundly determine the future of the Earth, the future of the planet, and the possibilities of development and poverty eradication.

Thank you very much for your attention.