APRIL 2007 Asia Program SPECIAL REPORT No. 136 The Policy Space Debate: Does a JOMO KWAME SUNDARAM Globalized and Multilateral Economy Policy Space? Overcoming Constraints to Pursuing National Development Constrain Development Policies? Strategies EDITED BY BHUMIKA MUCHHALA PAGE 8 ABSTRACT This Special Report asks whether multilateral economic policies constrain the abil- HEINER FLASSBECK Macroeconomic Policy Space ity of developing countries to choose the best mix of economic polices for achieving sustain- and the Global Imbalances able and equitable development. Jomo Kwame Sundaram illustrates the significance of PAGE 17 policy space for national development strategies, and assesses the principal sources of con- straints imposed by international financial institutions (IFIs) on policy space in developing CARLOS CORREA Constraining Policy Space in countries. Heiner Flassbeck contends that intermediate regimes and the Intellectual Property development of a multilateral framework for exchange rates would enable developing coun- PAGE 22 tries to better align their monetary policies with their development priorities. Carlos Correa links intellectual property rights (IPR) rules in the global trade regime to equitable development ELAINE ZUCKERMAN by presenting several counter-arguments to the dominant proposition that IPRs are necessary Policy Space and the Gendered Impacts of International to promote knowledge and innovation, and by providing a historical analysis of IPR policy. Financial Institutions Elaine Zuckerman demonstrates the impact of IFI loans and projects on women and girls PAGE 28 through country case studies, arguing that IFI-imposed conditionalities intensify the feminiza- tion of poverty through, for example, the privatization of essential services.

INTRODUCTION international rules and agreements. In order to bet- BHUMIKA MUCHHALA ter understand such an argument, a working defini- tion of policy space is necessary.One such definition he debate on the importance of policy is that policy space, for developing countries, “is space for national development strategies about the freedom to choose the best mix of policies T has gained significant momentum in recent possible for achieving sustainable and equitable eco- years, particularly among developing country repre- nomic development given their unique and individ- sentatives in international forums.The argument for ual social, political, economic, and environmental policy space states that developing countries need conditions.”1 Policy space refers to the scope a nation the freedom to choose the best mix of policies pos- has for building its own national development strat- sible for achieving sustainable and equitable develop- egy and its relationships with the world economy ment given their specific national conditions. This and markets. argument reflects the idea that governments should The three international law principles that vali- have the ability to evaluate the trade-offs between date the concept of policy space are the sovereign the benefits of engagement in the global economy equality of states, the right to development, and the versus the loss of policy space that often accompanies principle of special treatment for developing coun-

Bhumika Muchhala is program associate with the Woodrow Wilson Center’s Asia Program. The argument tries.2 These principles are reflected in the charter itization of global market considerations over nation- 4 for policy adopted by the United Nations Conference on Trade al development. Developing countries’ call for poli- and Development (UNCTAD) at its first meeting in cy space to carry out their national development space states June 1964. UNCTAD arose from the demands of strategies has struck a controversial chord in devel- that develop- poorer countries to establish a trade and development oped countries, who argue that policy space cannot ing countries body that addressed their needs and concerns. General be used as a roadmap for UNCTAD’s work nor as a need the free- Principle Fifteen in UNCTAD’s 1964 charter states principle in multilateral economic frameworks as it dom to choose that developing countries should receive special and may appear to suggest that developing countries can 5 the best mix of differential treatment according to their particular opt out of international rules and agreements. stage of development.3 When applied to policy space Despite the disagreements between rich and poor policies possi- through its third principle of special treatment, the countries, the UNCTAD XI conference under- ble for achiev- charter’s General Principle Fifteen contends that some scored the need to strike a balance between the ing sustainable international rules and commitments may not be objectives of efficiency and equity, in that both the and equitable appropriate for certain developing countries at their market and the state have crucial roles to play in the development. respective levels of development. Forty years after development process. these principles were first endorsed by UNCTAD, Consequently,global civil society and internation- they have again appeared in public discourse on inter- al development forums, such as the United Nations national development. UNCTAD’s XI conference in (UN) World Summit in September 2005, have rein- Sao Paulo in June 2004 demonstrated that these prin- forced the international development community’s ciples are just as—or even more—relevant today, as commitment towards enabling developing countries multilateral rules for achieving development continue to pursue their own development strategies.The 2006 to fall short of their promises. Trade and Development Report by UNCTAD, titled “Global partnership and national policies for development,” THE NORTH-SOUTH DEBATE highlighted a paradox between the global trading and ON POLICY SPACE financial regimes.6 While multilateral and bilateral trade rules often impose constraints on the ability of The objective of the UNCTAD XI conference was states to manage foreign investment or use perform- to produce a declaration by developing countries on ance requirements such as local-content sourcing, the , trade and development strategies. The absence of a multilateral arrangement in internation- Negotiated Text of the UNCTAD XI conference in al financial liberalization makes it difficult for states to 2004 generated dispute between developed and enforce selective controls, for example. The developing countries. The disagreement focused on UNCTAD report urged maintaining a balance one of the central tenets of the text in paragraph 18, between sovereignty in national - which states that increasing interdependence in a making and multilateral commitments. globalizing world and the emergence of rule-based With the purpose of bridging the gaps between international economic regimes have meant that the various policy alternatives already proposed by eco- space for national economic policy in trade, macro- nomic development scholars and advocates and the economic, and industrial development is now gov- political realities of enacting them in the world econ- erned by international commitments, and the prior- omy, the Woodrow Wilson Center’s Asia Program

THE ASIA PROGRAM The Wilson Center’s Asia Program is dedicated to the proposition that only those with a sound scholarly grounding can begin to understand contemporary events. One of the Center’s oldest regional programs, the Asia Program seeks to bring historical and cul- tural sensitivity to the discussion of Asia in the nation’s capital. In seminars, workshops, ASIA PROGRAM STAFF briefings, and conferences, prominent scholars Robert M. Hathaway, Program Director of Asia interact with one another and with pol- Mark Mohr, Program Associate icy practitioners to further understanding of the Bhumika Muchhala, Program Associate peoples, traditions, and behaviors of the 2 Michael Kugelman, Program Assistant world’s most populous continent.

hosted a symposium on December 14, 2006.The fol- other parts of the world, effective conditional protec- lowing compilation of four essays by the speakers at tion on export promotion was instrumental to the conference aims to offer four analyses on the spurring industrialization. Due to the structural global economic constraints that inhibit national pol- reforms in trade liberalization that have been carried icy space for development goals. out over the last two decades, many lesser developed countries have experienced a significant collapse of FOUR PERSPECTIVES ON POLICY SPACE manufacturing capacity. International financial liberal- ization, Jomo asserts, constrains fiscal space through the The conference keynote speaker, Jomo Kwame adoption of monetary policies that are counter-infla- Sundaram, is the assistant secretary-general for eco- tionary,which often have a deflationary effect on eco- nomic development at the United Nations nomic growth. Instead of generating financial flows Department for Economic and Social Affairs. He from capital-rich to capital-poor countries, interna- stresses the significance of policy space for national tional financial liberalization has resulted in a flow of development strategies, and assesses the principal funds in the opposite direction. Furthermore, Jomo sources of external, global constraints to national pol- posits that financial liberalization has often led to an Jomo argues icy space. He acknowledges the importance of the undermining of institutions that have a developmental that counter- UNCTAD XI meeting in 2004 and the World purpose, such as national development banks.The abil- Summit in 2005 for the international recognition ity of central banks and finance ministries to imple- cyclical macro- of—and commitment to—ensure policy space for ment counter-cyclical instruments and institutions has economic developing countries to pursue their development also been restricted through financial liberalization. policies... strategies. Jomo illustrates that in Jomo argues that counter-cyclical macroeconomic would strength- developing countries during the 1980s and 1990s has policies—which promote growth and employment as en the ability been considerably slower in contrast to the 1960s and objectives of the government—would of the global 1970s. He argues that this is due to a considerable strengthen the ability of the global economy to reduce extent to economic liberalization policies and market global inequality.The conventional approach to one of economy to reforms required by the international financial institu- the most crucial aspects of policy space—that of fiscal reduce global tions (IFIs)—namely the World Trade Organization, space—is to prioritize the ability to service debt above inequality. the World Bank and the International Monetary Fund the ability to increase public expenditures.The imper- (IMF)—that reduce flexibilities for developing coun- ative to promote growth and employment as fiscal tries.The key reforms occur in the areas of trade lib- objectives is undermined by this approach, as the use eralization, financial liberalization, and contractionary of fiscal policy to offset cyclical downturns is often macroeconomic pressures which reduce the role and restrained through the rationale that such fiscal policy fiscal capacities of governments. The privatization of will hurt government solvency. The counter-argu- state-owned enterprises and public services, particu- ment, he asserts, is that growth creates fiscal solvency, larly in the 1990s, has had negative repercussions on and not vice versa. Furthermore, achieving develop- economic development as some essential services and ment goals necessitates medium-term expenditure goods have become harder to access. Jomo contends planning, and thus medium-term commitments to that due to greater market influences, the macroeco- financing, including more stable and predictable aid. In nomic policies that are adopted by developing coun- conclusion, Jomo stresses that if the poverty reduction tries today are pro-cyclical, which increases national strategies of the World Bank are to genuinely address vulnerability to economic crises. poverty, employment generation needs to be included Trade liberalization has not benefited the majority and prioritized in these strategies. of developing countries because the terms of trade Heiner Flassbeck, director of the Division on have moved against developing countries through the Globalization and Development Strategies at UNC- unequal relationships between primary and manufac- TAD, addresses the macroeconomic and financial tured products, and between tropical and temperate policy framework of globalization. Flassbeck situates agricultural products.The strategic use of trade policy, his argument within the context of global economic which is now restricted by global trade rules to a large crises over the last two decades, spurred by financial extent, is crucial for development. Jomo points out and trade liberalization—or the free mobility of pri- that in post-World War II Northeast Asia, as in many vate capital and goods across open borders. Global

THE POLICY SPACE DEBATE 3 trade and financial liberalization in developing coun- In the third essay, Carlos Correa, who is a pro- tries during the 1980s and 1990s was carried out fessor and the director of the Center for under the policy framework of “getting the prices Interdisciplinary Studies of Industrial Property Law right.” However, there is no framework to address and at the University of Buenos Aires, “the most important international price, the focuses on the salient issue of intellectual property exchange rate, and the closely related interest rate.” rights (IPRs) and its links to equitable development. Exchange rates that are either rigidly fixed, or Correa contends that the global regime on IPRs pegged, to the dollar as well as those that are freely needs to integrate a development dimension and floating have encountered monetary instability address critical public policy concerns in order to which substantially affects the health of the economy. enable developing countries to promote and produce Thus, “intermediate” exchange rate regimes have knowledge and innovation, access essential medi- become the preferred option in most developing cines, as well as access the technology and informa- countries with open capital markets. Flassbeck sup- tion necessary to industrialize and develop. ports such intermediate regimes, which “offer more Intellectual property protection creates exclusionary room for manoeuvre” when insta- rights that limit the access to—and the use of—a vast bilities occur as well as enable exchange rate adjust- array of intellectual works, technologies, and prod- ments that better support a country’s development ucts needed for social and economic development in strategy. Such an intermediate regime reflects the developing countries. Correa highlights several implementation of national policy space, while the counter-arguments to the dominant argument that risks and constraints that emerge with financial liber- IPRs are necessary to promote knowledge-creation, alization stimulate a critical debate on the monetary innovation, and creativity through the allocation of and financial policies available for national govern- economic rewards for the producers of knowledge. ments to implement. Flassbeck argues that a multilat- He contends that competition can also lead to inno- eral monetary system for exchange rates is required vations in product and process—such as in the fast- in order for the international financial system to steer paced industry for semiconductors—where IPRs do clear of competitive depreciations and other mone- not play a crucial role as incentives for innovation. tary distortions. Depreciations and distortions impact Another salient point is that non-IPR factors such as the productive functioning of the international trad- lead time, the capacity levels necessary to imitate ing system, on which much of global and national knowledge processes, as well as established customer level economic progress thrives. The rationale for loyalty, impact the ability to replicate knowledge such a multilateral exchange rate system is that the even in the absence of IPRs. exchange rate is by definition “a multilateral phe- A historical comparison of IPR enforcement nomenon,” where any change in its value inevitably reveals that when today’s developed countries were creates multilateral repercussions. industrializing in the 19th century,they had vast flex- Flassbeck explains that the risk of a global deflation ibilities to design their own IPR systems, protecting due to the imbalance in the global economy is a seri- local producers of knowledge, discriminating against ous concern, as the increasing external deficit of the foreign producers through patent fees, avoiding the United States may trigger a strong speculative wave application of medical patents, and mimicking exist- towards dollar depreciation.A dollar depreciation could ing information and technology innovations for their subsequently generate a downwards pressure on other own industrialization. In the current global trade major global currencies. Such a depreciation of the regime the Trade Related Aspects of Intellectual dollar would help re-balance the United States econo- Property Rights (TRIPS) Agreement, under the aus- my.However, given the pattern of global growth—and pice of the World Trade Organization (WTO), har- the dependence that global growth has on American monizes binding IPR rules globally, prohibiting consumption and imports—a marked slowdown in developing countries from designing IPR systems exports to the U.S. would have global deflationary that are in line with their development requirements, repercussions. This has the dangerous potential to and that reflect the flexibilities that today’s industri- unravel the momentum in development progress and alized countries had when they were developing. poverty reduction seen in developing countries in Many developing countries have consistently argued recent times without any fault of their own. that IPR implementation is not conducive to tech-

4 ASIA PROGRAM SPECIAL REPORT

nological—and thus industrial—development, and claim are the beneficiaries. IFI financing has resulted that patents have grave implications for accessing in the disproportionate concentration of asset owner- essential medicines. Developing countries contend ship and income distribution gaps that have widened that more flexibility is needed in the implementation in most countries since the late 1980s. A major driv- of IPRs and thus initiated the drafting of the er of poverty, stemming from unequal income distri- Declaration on TRIPS and Public Health at the 2001 bution, has been the negative impacts of IFI policies WTO Ministerial meetings in Doha, which allows for and loans that cater to the interests and priorities of some key flexibilities in the case of public health the political elite and the private sector before they Zuckerman emergencies. However, the advent of regional and contribute to the vast majority of the world’s popula- argues that bilateral agreements with a wide array of tion, living in developing countries. Zuckerman con- countries extends IPR rules and commitments cludes that civil society and governments worldwide conditionalities beyond what is required by TRIPS in the WTO. must hold the publicly-financed IFIs accountable. attached to IFI As president of Gender Action, a non-profit Initiating an end to the ability of IFIs to occupy poor loans and proj- organization dedicated to promoting gender equality countries’ policy space through ending conditionali- ects not only and women’s rights in all IFI investments and transac- ties and debt would constitute important progress. impinge on tions, Elaine Zuckerman illustrates the impact of The four essays presented in this report each high- national sover- IFI loans and projects on women and girls through light a specific set of dynamics that shape and con- country case studies. Zuckerman argues that condi- strain international development. Jomo outlines the eignty... but tionalities attached to IFI loans and projects not only policy frameworks of the IFIs that hinder the full also contribute impinge on national sovereignty by requiring govern- implementation of national development strategies; to the feminiza- ments to comply with their creditors’ notions of how Flassbeck illustrates the detrimental aspects of global tion of poverty. to reform economic, financial, and trade policies, but monetary and financial structures and recommends a also contribute to the feminization of poverty. The multilateral framework for exchange rate regimes that national policy space available to pursue development is more developmental; Correa demonstrates how objectives is impeded through, for example, the priva- intellectual property rights are inextricably linked to tization of services or the requirement to reduce or development; and, Zuckerman highlights the gender- eliminate tariffs without reciprocation by developed specific impacts of IFI policies. A consistent element countries. Consequently, civil society worldwide has across these four essays is the articulation of multilat- criticized IFI policy conditionalities for their harmful eral economic policies and practices which systemat- social and gendered impacts. Zuckerman alludes to ically constrain the potential adoption of develop- the fact that 70 percent of the world’s poor are mental policies. Such analyses may help to target both women, and asserts that these women shoulder a dis- multilateral and country-level efforts to overcome the proportionate amount of the economic and social obstacles to equitable, long-term development. burdens that accompany IFI policy conditionalities. Country-level case studies of gender impacts are POTENTIAL AVENUES OF POLICY drawn from the Democratic Republic of Congo SPACE EXPANSION (DRC), Malawi, Mozambique, Tanzania, Serbia and Montenegro through an array of IFI projects and pol- Recently, several avenues have emerged through which icy reforms.These range from the privatization of the national policy space may be able to expand in new national mining sector in the DRC, the national tex- ways. Large developing countries are speaking out for tile sector in Serbia and Montenegro, the state grain more decision-making power and real policy reform in reserves in Malawi, or public water facilities in the creation of multilateral rules and policy agendas in Tanzania, as well as new labor laws that increase labor the World Bank, the IMF and the WTO.The weaken- flexibilities in Mozambique. Zuckerman contends ing of the IMF’s policy influence, legitimacy and rele- that the country-level examples demonstrate that a vance across many parts of the Global South is one of key function of IFI conditionalities is to open up the most critical changes in the international financial developing country markets to profitable private sec- system. Recently, several major borrowers from the tor investments. In IFI loans the main beneficiaries, IFIs, such as Brazil and Indonesia, have opted to repay Zuckerman states, have been the private sector actors IMF and World Bank loans before they were due. Since that win IFI contracts, not the poor whom the IFIs the Asian of 1997-98, many East and

THE POLICY SPACE DEBATE 5

Southeast Asian countries have built up vast currency and provided subsidies to local firms in order to stim- reserves and achieved current-account surpluses in ulate positive spillovers in the national economy,espe- order to indemnify themselves against the policy influ- cially in technology-driven sectors where the eco- National poli- ence of the IFIs. At the same time, smaller developing nomic value was highest. China has been able to cy space is ulti- countries—particularly in sub-Saharan Africa—do not channel private investment in its township and village mately about have the same level of economic security and bargain- enterprises through partnerships between investors ing power that larger middle-income countries have and local state authorities, rather than through private the freedom and are still recipients of IFI loans and credit and the property rights. One of the key elements of develop- and flexibility policy conditionalities that accompany it.Assessing the mental states is the diversification and dynamism of of development policy space question in lesser-developed countries industrial production that focused on the needs of the policy choice (LDCs) is thus a central development question. real economy. centered on Recent debt cancellations of LDCs are significant When Western industrialized countries were devel- the three inter- because they have the direct potential to expand fiscal oping, they also used active industrial policies, subsi- space from resources saved, providing opportunities to dies and tariff protection in order to spur economic national law craft macroeconomic policies that are coherent with growth. Indeed, it was the first Treasury Secretary of principles of national developmental goals. Debt relief could imply the United States,Alexander Hamilton, who proposed national sover- less problems for LDCs, potential- the argument for infant industry protection.7 The his- eign equality, ly leading to a decreased need for, and dependence on, torical experiences of developed countries could the right to external resources.This opens up possibilities for fiscal potentially open up a comparative analysis on devel- development, policy alternatives, such as expansionary public budgets opment strategies that could allow developing coun- and special and progressive taxation policies. Debt relief could also tries to make more informed choices. diversify the sources and forms of financing for low- and differential income countries. Some possibilities are regional mon- ALTERNATIVE POLICY VISIONS treatment. etary funds, bilateral financing facilities, international financial markets, and a wider pool of official bilateral Real development calls for much more than institu- and multilateral creditors. Such a diversification of tional change and economic policies—it calls for the financing could enable countries to obtain resources on transformation of society towards local ownership, favorable terms, particularly through the decoupling of bottom-up participation, the inclusion of the most financing and policy conditionalities. LDCs could take marginalized members of society, and consensus advantage of this policy space expansion to undertake a building. National policy space is ultimately about the cost-benefit analysis of various financing sources to freedom and flexibility of development policy choice assess what best suits their national priorities. centered on the three international law principles of national sovereign equality, the right to development, REMEMBERING THE “DEVELOPMENTAL and special and differential treatment for developing STATES” countries. However, developing countries also need to strengthen their political will and coordinate In efforts to create and apply alternative economic among different actors across the nation to build their and social policy options, it is important to recall how national development strategy, and to consequently the developed countries of today achieved develop- implement it with accountability and transparency ment. In marked contrast to the reduced role of the mechanisms in place.This involves a collective vision state in today’s market-led development strategies, the of what a nation’s society and economy will look like developmental states of East Asia—particularly Japan, ten, twenty, thirty years down the road and how this Korea, Taiwan, Hong Kong, and Singapore— vision can be achieved over time through the partic- employed strategic and flexible growth strategies ipation of the various groups in society. through a strong national government. East Asian Integration into the global economy can provide the developmental states stressed the role of the govern- benefits of multilateralism to developing countries ment in managing the market. Instead of prioritizing through many ways, however, the precondition is that foreign direct investment (FDI) and tariff reductions, this integration should be based on a nuanced assess- Korea and Taiwan steered their growth through active ment of the trade-offs to national development policies industrial policies where the state set export targets and priorities. Debt cancellation and the decreasing

6 ASIA PROGRAM SPECIAL REPORT need of middle-income developing countries for IMF TD/410, June 25, 2004, http://www.unctad.org/en/docs/ loans are avenues through which national policy space td410_en.pdf. may be able to expand.There is an increasing level of 3. United Nations Conference on Trade and Development (UNCTAD),“UNCTAD XI: Sao Paulo Consensus,” articulation by developing country leadership of the TD/410, June 25, 2004, http://www.unctad.org/en/docs/ importance of the ability to choose and implement the td410_en.pdf. most appropriate economic policies for their national 4. United Nations Conference on Trade and Development development. Given this context, the argument, princi- (UNCTAD),“Draft Sao Paulo Consensus,”TD/L.380, ples, history, and empirical evidence for national policy June 16, 2004, http://www.unctad.org/en/docs/ tdl380_en.pdf. space are only becoming more crucial to achieve equi- 5. Martin Khor,“Debate on policy space dominates table and sustainable development across all developing UNCTAD Review,”Third World Network Information countries in the Global South. Service on WTO and Trade Issues, May 9, 2006, http://www.twnside.org.sg/title2/twninfo409.htm. ENDNOTES 6. UNCTAD,“Trade and Development Report 2006: Global partnership and national policies for development,” August 31, 2006, http://www.unctad.org/Templates/ 1. South Centre,“Policy Space for the Development of webflyer. asp?docid=7183&intItemID=2508&lang=1. the South,” No.1, November 2005, http://www.south 7. Ha-Joon Chang, Kicking Away the Ladder – Development centre.org/ info/policybrief/01PolicySpace.pdf. Strategy in Historical Perspective (London:Anthem Press, 2. United Nations Conference on Trade and Development 2002). (UNCTAD),“UNCTAD XI: Sao Paulo Consensus,”

THE POLICY SPACE DEBATE 7 POLICY SPACE? OVERCOMING CONSTRAINTS TO PURSUING NATIONAL DEVELOPMENT STRATEGIES JOMO KWAME SUNDARAM

INTRODUCTION benchmarks have become very important signaling devices for disciplining governments, with very similar Policy space for national effects as conditionalities. development strategies has been recognized as indispensa- GROWTH DIVERGENCES ble to development by recent events in the international The pattern of development in the second half of the development community. At twentieth century is illustrated by Figure 1 on the fol- the UNCTAD XI meeting in lowing page. National income per capita in developing Sao Paulo in 2004, the inter- countries has generally declined in all regions of the national community strongly affirmed the impor- world, except Asia.If you remove China from Asia, Asia tance of policy space in realizing development aspira- also experienced a relative decline in national income tions, particularly for developing countries. At the per capita. The longest collapse has been in sub- World Summit in September 2005, the international Saharan Africa, which suffered a long-term decline in community once again reaffirmed its commitment the last quarter of the twentieth century. However, the for ensuring policy space for developing countries to collapse in Eastern Europe in the 1990s, and in Latin pursue their own national development strategies. America over the last two decades of the 20th century, This underscores the question of national ownership has also been dramatic. In recent years, however, many in relation to the problems associated with existing countries in Africa have fared reasonably well and this policy prescriptions and packages, particularly with is part of a larger trend of developing countries gener- what are termed “poverty-reduction strategies.”The ally doing quite well since 2001. issue of policy space is framed in this context. However, this is not due to the economic reform Policy space The World Bank’s Independent Evaluation Office policies imposed on developing countries by IFI for national recently released a report acknowledging the develop- loans, credit, and investment. Rather, recent develop- ing country growth results from being able to take development mental consequences of the policy conditionalities of international financial institution (IFI) loans and proj- advantage of higher commodity prices, particularly in strategies has ects.There has been a nominal decrease in the number the second half of the 1970s. Much of Latin America’s been recog- of conditionalities imposed in recent years. However, economic growth was quite rapid for a period, partic- nized as indis- this nominal decrease in conditionalities attached to ularly before World War II.Until the 1970s, Brazil had pensable to loans and projects has been exaggerated by three fac- had one of the highest growth rates in the world for development. tors. First, by using the mid-1990s rather than the more half a century.While a few developing countries have recent period as the base year, the decline seems greater experienced rapid economic growth, most have fared than it actually is. Second, with greater “bunching,” a poorly towards the end of the 20th century. number of conditionalities are packaged as one condi- Figure 2 underscores the significance of China— tion.This means that while there is a superficial nomi- once China is omitted from the analysis a distinctly dif- nal decline in the number of conditionalities, the real ferent trend in world income inequality appears. The number of conditionalities may not have decreased due rapid growth of China in recent years has significantly to such bunching. Thirdly, there has been a shift in affected the world distribution of income. Figure 3 pro- emphasis to “benchmarking.” Consequently, even vides an indication of world inequality in the early though there might not be as many conditionalities, 1960s.The poorest 20 percent of countries had an aver-

Jomo Kwame Sundaram is assistant secretary-general for economic development at the United Nations Department for Economic and Social Affairs at the United Nations headquarters in New York.

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which Arthur Lewis, the West Indian , drew industries based on preferential market access have also attention to in the 1950s. Although comparable recent collapsed when subject to the forces of trade liberaliza- research has not occurred since the 1950s, trends for tion. Until 2005 the Multi-Fibre Arrangement (MFA) particular commodities suggest that the decline in the used to provide opportunities for late-comer develop- terms of trade for tropical agricultural products has ing countries to begin industrialization through gar- …There has continued.A good example is the price trend of cotton ments and textile production, traditionally a stepping compared to that of wool. stone in the industrialization process. When the MFA been a critical The third and more recent development is the was phased out, the global economy witnessed the loss shift in the relationship between the prices of manufactured of millions of jobs in the garment manufacturing sec- international goods from developing countries compared to those tor, a sector with a predominantly female workforce. debate on from developed countries. Over the course of the last This is one example of the impact of trade liberaliza- financial liber- two decades of the twentieth century, there has been tion on women, and specifically on the ability of alization in a decline in the prices of manufactures from develop- women in developing countries to attain economic and recent years, ing countries compared to those from developed job security.The loss of jobs is also evident in part of countries. There is no easy explanation for this. the electronics industry in certain parts of the develop- particularly However, this trend might have something to do with ing world that are no longer competitive with the following the the fact that developing countries generally start pro- advent of China as the most cost-competitive location Asian financial ducing manufactured goods where there are no strong for the manufacturing of consumer products. crisis of 1997- barriers to entry into those industries. These generic The judicious use of trade policy has been crucial 98. manufactures include textiles, ready-made garments, for development. In Northeast Asia during the post- and so on. Strong intellectual property rights consti- World War II period, as in many other parts of the tute monopolistic barriers to entry, enhancing market world before that period, effective conditional protec- power in the hands of the corporations.Thus, the pri- tion on export promotion was instrumental to vate sector is able to charge more—thus collecting spurring industrialization. Northeast Asian countries rents—on the manufactures they produce and sell. protected their domestic industries and firms from full There is little downward pressure through price com- competition, on condition that petition. Thus, the terms of trade for manufactures they export their goods within a relatively short peri- from developing countries have declined compared to od of time. Requiring their domestic firms to export those from developed countries.The consequence of ensured that their industries became cost-competitive this is what Jagdish Bhagwati, a great advocate of trade as well as quality-competitive, in order for their prod- liberalization, described more than 40 years ago as ucts to achieve acceptability and demand in foreign “immiserizing growth.” markets. Such devices, only possible through the Another salient factor is the importance of trade strategic use of trade policy, were critical for develop- policy for industrialization. Due to the structural ing countries in Northeast Asia to industrialize and reforms and trade liberalization carried out over the last develop economically. two decades, developing countries have experienced a The basis for the successful industrialization significant collapse of manufacturing capacity.This has process in industrial and trade policies was anticipated been largely associated with the demise of import-sub- and expanded on by Friedrich List. The contrast stituting industrialization, as many infant industries did between his two books, The Principles of the Natural not grow up to become internationally competitive. Economy and The Principles of the National Economy, is The region that has experienced this collapse of man- explained by his discovery of the work of Alexander ufacturing capacity most severely is Sub-Saharan Africa. Hamilton in the United States after his first book was Many African countries attained independence after published, and is an enlightening fact to consider. Asian and Latin American countries. African countries Hamilton’s second work provides the basis for the thus had much less time to develop their industries— strategy of contemporary import-substitution indus- and as a result their manufacturing and commodity trialization (ISI), which involves active industrial poli- industries were disproportionately vulnerable when cies, selectively imposed barriers to trade, and some- trade liberalization was imposed on them. times, that maintains undervalued Export-oriented industrialization has in comparison domestic currencies. List recognized Hamilton’s con- been more successful. However, many export-oriented tribution to the understanding of the significance of

THE POLICY SPACE DEBATE 13

trade protection for industrialization and develop- Rogoff, who used to be the economic counselor for ment. In the second half of the 19th century, as the the IMF, commented at the United Nations in United States recognized its technological backward- November 2006, the United States now has the single ness in comparison to England, trade protection largest foreign aid progra, as a recipient. This is not became an integral part of the American effort to without significance, as the flow of funds is originat- advance national technology and industry. Thus, the ing from the developing countries, even from relative- significance of the policy space that comes with strate- ly poor continents—such as Africa—to the developed gic trade policy cannot be underestimated. countries, rather than the converse. Additionally, the cost of funds has not decreased, THE IMPLICATIONS OF AID FOR TRADE contrary to claims.There have been exceptional peri- ods when the U.S. interest rate was very low,but gen- The discussions on Aid for Trade may provide financial erally speaking, the cost of money has not been cheap. support and technical assistance to some developing While many of the old sources of volatility and insta- countries for adjusting to trade reform and integration. bility have undoubtedly been reduced—as it is now The current discourse recognizes some adverse conse- possible to hedge against exchange rate or interest rate quences of trade policy for developing countries. In risks—new sources of volatility and instability have terms of fiscal space, the Aid for Trade discourse recog- been introduced by the proliferation of financial nizes that developing countries pursuing trade liberal- instruments associated with “financial deepening.” ization have lost a great deal of tariff revenue. For Other effects of financial liberalization, which developing countries with very limited taxation capac- constrain fiscal space, include the following. First, ity the loss of tariff revenue is extremelly important. In developing countries confront an increase in finan- some of the poorest countries, tariff revenue accounts cial pressures, especially on finance ministers, to for almost half of the total government revenue.Thus, adopt monetary policies that are counter-- reducing tariff revenue directly implies a tremendous ary.These counter-inflationary policies often have a reduction in fiscal space by directly shrinking the rev- deflationary effect on economic growth. Second, enue that a state has access to. financial liberalization often leads to an undermining The loss of production and export capacities is of institutions and instruments that have a develop- another grave consequence of trade liberalization.The mental purpose—the demise of national develop- very difficult task and cost of building new interna- ment banks in many countries, for example. Third, tionally competitive and productive capacities and with the state and its institutions being much more capabilities for export is also beginning to be recog- subject to market forces, the ability of central banks nized by the Aid for Trade discourse.Whether or not and finance ministries to adopt and develop count- Aid for Trade programs will actually match these var- er-cyclical instruments and institutions has also been ious sizable costs and losses remains to be seen. Thus constrained.Thus, the ability to respond to pressures far, the indications are that Aid for Trade may simply in financial markets or commodity price collapses, divert existing aid, as some of it is specifically chan- for example, has become much more challenging for neled and earmarked for such purposes. the majority of developing countires. The 2006 Nobel Peace Prize to Mohammed Yunus of the INTERNATIONAL FINANCIAL LIBERALIZATION Grameen Bank in Bangladesh recognized an impor- tant initiative to try to develop what might be In the area of finance, there has been a critical shift in termed “inclusive finance,” which involves making the international debate on financial liberalization in available credit facilities to low-income groups who recent years, particularly following the Asian financial would not otherwise have access to credit. Such crisis of 1997-98. The advocates of international endeavors to make access to credit possible for all financial liberalization, or financial globalization, used levels of society are significantly constrained by to argue that opening up barriers between countries financial liberalization. Overall, trade and financial would generate flows of funds from the capital-rich instruments have been a central part of the develop- countries to the capital-poor countries. However, this ment path in much of the world. Other factors claim has not materialized. In fact, what has occurred include human resource and skills development and is a flow of funds in the opposite direction. As Ken policies promoting technology and innovation.

14 ASIA PROGRAM SPECIAL REPORT

MACROECONOMIC POLICY ferentiates between capital and current account expenditures, and this would constitute not only Macroeconomic policy is far more pro-cyclical today good accounting policy, but also sound macroeco- than in previous times.This trend reflects the volatil- nomic policy.Thus, fiscal and trade policies are crucial ity of financial markets and commodity prices. The for growth and structural change. ability of developing nations to stimulate and stabilize Current fiscal policy emphasizes maintaining gov- growth, and to reduce global inequality at large, ernment solvency and consumer price stability at the requires a much greater emphasis on policy space for expense of promoting the expansion of domestic counter-cyclical . The objectives of demand. The recent emphasis on fiscal solvency and macroeconomic policy should take a broader view of macroeconomic stability has thus been detrimental to macroeconomic stability. There is a tendency in local growth in developing countries. In order to recent discussions to focus on only one aspect of expand and strengthen fiscal space for development, macroeconomic policy: consumer price stabilization. developing countries should shoulder more responsi- This is reflected in the skewed priority placed by the bility for their own national development through international community on inflation targetting, for more effective national resource mobilization. example. In contrast to the focus on a narrow set of Developing countries should be less subject to the macroeconomic indicators, a broader and more pressures of international tax competition, as there has developmental view would emphasize the need for been intense competition among countries to reduce macroeconomic stability in order to generate invest- tax rates in order to attract investors.Achieving devel- ments, growth, and employment in a much more opment goals necessitates medium-term expenditure mutually reinforcing manner.This view of macroeco- planning, and thus, medium-term commitments to nomic policy would also avoid large economic financing, including more stable and predictable aid. swings, which developing countries tend to be much Unfortunately, most development aid today is proj- more vulnerable to, as well as gross external imbal- ect-based aid rather than aid channeled through ances and financial crises. national budgets. The conventional approach to one of the most crucial aspects of policy space, that of fiscal space, is CONCLUSION the view that increases in public expenditures should be undertaken without impairing the ability to serv- The World Bank adopted a number of structural ice debt. This is particularly true with regards to adjustment programs in the 1980s and 1990s which developing countries that are heavily indebted to were subjected to international criticism as the pro- international creditors. This definition and approach grams were increasingly found to have failed to alle- tends to be biased against the imperative to promote viate poverty in developing countries. Since the late growth and employment as fiscal policy objectives. 1990s, the World Bank has switched to what are now The use of fiscal policy to offset cyclical downturns is called poverty reduction strategies. However, at the often eschewed because it will ostensibly curtail gov- 2005 Summit, the international community advocat- ernment solvency. The counter-argument is that ed national development strategies. If the poverty growth creates fiscal solvency, and not vice versa. reduction strategy papers of the World Bank are to Recent OECD experiences challenge the conven- genuinely address poverty, employment generation tional claim that government solvency and macroeco- needs to be included and prioritized in these strate- nomic stability are preconditions for long-term gies. However, less than a quarter of the World Bank’s growth, a relationship that is often presumed but does poverty reduction papers include a serious commit- not stand up to critical scrutiny. Counter-cyclical fis- ment to employment generation, and 80 percent of cal policy should contribute to government solvency the poverty reduction strategy papers for Sub- and to sustaining the mobilization of domestic Saharan Africa do not incorporate any clause on resources. What constitutes good fiscal policy? The employment generation. In addition, the Millennium conventional approach tends to reject adopted fiscal Development Goals (MDGs) of the United Nations targets based on current fiscal balances including do not recognize employment generation as strongly expenditures, particularly structural current balances. as it should.This was corrected by the 2005 Summit The counter-argument is that a careful approach dif- which reiterated international commitments to the

THE POLICY SPACE DEBATE 15

internationally agreed development goals associated of macroeconomic policies, finance, state-owned with United Nations summits and conferences since enterprise reform, trade, investment and technology the 1990s, including the MDGs, but not confined policy, as well as social policy. entirely to them. Thus, the crucial question of employment generation has taken center stage in REFERENCES national development strategies, which are also emphasizing the issues of national ownership and James Davies, Susanna Sandstrom,Anthony Shorrocks, and policy space as means of achieving the MDGs and Edward Wolff. 2006.“The World Distribution of Household Wealth.” United Nations University-World national development goals. Institute for Development Economics Research. In 2005, both the Report on the World Social Available from http://www.wider.unu.edu/ Situation as well as the World Economic and Social research/2006-2007/2006-2007-1/wider-wdhw- Survey discussed the questions of inequality and launch-5-12-2006/wider-wdhw-report-5-12-2006.pdf. divergences. The World Bank came out with Enzo R Grilli and Maw Cheng Yang. 1988.“Primary Development in the 1990s in 2005 as well, a report Commodity Prices, Manufactured Goods Prices, and the Terms of Trade of Developing Countries:What the Long that was self-critical of the World Bank’s role in Run Shows.” The World Bank Economic Review 2 (1). adversely affecting development prospects in much Jomo K. S. and Jacques Baudot, eds. 2007. Flat World, Big of the developing world. This World Bank publica- Gaps: Economic Liberalization, Globalization, Poverty and tion validated the critique that “one size does not fit Inequality. London: Zed Books. all,” and recognized the assertion that policy space is Jose Antonio Ocampo and Maria Angela Parra. 2006. “The commodity terms of trade and their strategic crucial for successful national development strate- implications for development,” in K.S., Jomo, ed. gies. The United Nations’ Policy Notes project pro- The Long Twentieth Century—The Great Divergence: vides an analysis of development policies different Hegemony, Uneven Development and Global Inequality. from the World Bank’s PRSP policies—in the areas New Delhi: Oxford University Press.

16 ASIA PROGRAM SPECIAL REPORT MACROECONOMIC POLICY SPACE AND THE GLOBAL IMBALANCES HEINER FLASSBECK

THE CHALLENGE FOR of “getting the prices right.”At the same time, how- For policy- DEVELOPING COUNTRIES ever, a clear concept of how the most important makers in international price, the exchange rate, and the closely developing The ongoing process of global- related interest rate, should be determined or regulat- countries… isation is changing the frame- ed was lacking. Having learned the hard way that work of national macroeco- reliance on supposedly benign capital inflows rarely the role of nomic policy, offering new results in a sustainable development strategy, a grow- exchange rate opportunities, challenges and ing number of developing countries have shifted to movements in constraints for developed and an alternative approach that relies on trade surpluses the overall com- developing countries alike. However, for many devel- as one of their principal engines for investment and petitiveness of oping countries and economies in transition, integra- growth. It is only through the approach of trade sur- their economy tion into the globalizing economy has not been a plus generation that developing countries have had smooth exercise. Many countries with fully open bor- the national policy space to use their policy instru- is a very salient ders to international trade and private capital flows ments effectively. issue for nation- have experienced crises over the last quarter of a cen- Most of the countries affected by the storm of the al growth. tury that were triggered by instability and turmoil in financial crises in Asia and in Latin America decided to the international financial markets and were character- use low valuations of their currencies and the swing ized by the loss of control over domestic policy due to from current account deficit to surplus to unilaterally external constraints.This loss of policy space has trig- fix their exchange rate or—at a minimum—to fre- gered a debate on the available tool kit of national quently intervene in the currency market to avoid the governments in macroeconomics as well as in other rapid return of their currencies to pre-crisis levels.The areas of economic policy.1 most striking example is China, where the national The deregulation of domestic financial markets— authorities—following the traumatic experience of an including the elimination of credit controls, the overvaluation and a large devaluation of the renmimbi deregulation of interest rates and the privatization of in 1994—absolutely fixed the value of the renmimbi banks—was a key element of the global economic against the dollar. reform agenda in the 1980s and 1990s. It was firmly However, the strategy to maintain trade surpluses based on the belief that lifting “financial repression” by defending the competitive positions that were and freeing prices on the capital and money markets achieved in the wake of financial crises presupposes would improve the inter-temporal resource alloca- that at least one country in the global economy tion, enhance the willingness to save and attract addi- accepts to run the corresponding trade deficit. Other tional resources to the banking system. Combining developing countries and transition economies have this with a liberalized capital account, the rationale used the windfall profits of rising revenues for oil and was that developing countries would be able to attract other primary commodities to improve their balance financial savings leading to more capital rich of payments positions as well as to bolster their for- economies, thus overcoming a major barrier to eco- eign exchange reserves. For many of these countries, nomic growth. interventions in the currency markets were intended Consequently, the liberalization of international to stem a strong concomitant rise of the real value of trade and finance in developing countries during the their currencies and to avoid a kind of “Dutch dis- 1980s and 1990s was carried out under the heading ease,” where the loss of competitiveness in manufac-

Heiner Flassbeck is director of the Division on Globalization and Development Strategies at the United Nations Conference on Trade and Development (UNCTAD).

THE POLICY SPACE DEBATE 17 turing is induced by trade surpluses and/or the net or from capital flows.This is indeed a crucial decision inflows of capital, which have the potential to appre- for policy considerations.The argument to address cur- ciate the value of their currency. rent account imbalances through trade flows stresses The accumulation of foreign exchange reserves in the fact that by definition the current account developing countries results from their current account describes the difference between current receipts and surpluses and currency market interventions to avoid expenditures for internationally traded goods and serv- exchange rate appreciation of their currencies.This has ices and income payments.On the other hand,the cap- led to a situation in which developing countries have ital flows view focuses on the fact that from a national become net exporters of capital. The ability of many perspective, the current account balance by definition developing countries to reach the status of being a cap- always exactly equals the gap between national savings ital exporter has powerfully contested mainstream eco- and domestic investments. Although it should be clear nomic thinking, as it is in stark contrast to the expec- from the outset that this tautological relationship does tation of orthodox macroeconomic theory that poor not provide, by itself, any explanation or imply a cer- economies with a low capital endowment will have to tain causality, it is normally taken as the starting point import capital from countries that have an abundant for analysis and policy prescriptions. endowment of capital. According to the latter perspective of capital flows For policy makers in developing countries, how- the decision to save a high share of disposable income ever, the role of exchange rate movements in the leads to a current account surplus and a capital overall competitiveness of their economy is a very account deficit—in other words, net capital out- salient issue for national growth, security and devel- flows—as not all of the savings can be put to produc- opment. The exchange rate in developing countries tive use domestically. In the capital flows argument, impacts the trade performance of the vast majority of the occurrence of an opposite outcome—a current local firms and is a crucial variable for national con- account deficit or a net capital account inflow—is the trol over the balance of payments. Indeed, avoiding result of the domestic propensity to invest being in currency overvaluation is not only a means to pre- excess of the national propensity to save. Trade and serve or improve macroeconomic competitiveness, current account balances are then basically the result but also an insurance against the risk of future finan- of the voluntary decisions of national agents to con- cial crises. In this view, the current account surpluses sume now or at a later stage. Consequently, it is not of most of the developing world and the unwilling- expected that national current accounts will be bal- ness of the developed world to consider a multilater- anced. Rather, in a world of liberalized financial mar- al solution for the exchange rate system—including kets, savings should always flow toward their best use the obligations of developed countries to stabilize the at the global level. exchange rate system in a way comparable to the Through the arbitrage of capital flowing from Bretton Woods Institutions—places the burden of excess-saving countries toward countries with adjustment on the shoulders of the rich surplus coun- greater opportunities for profitable investments, the tries of Japan and Germany as well as on some oil global economy achieves a more efficient allocation exporting countries. Unfortunately, there appears to of resources and higher growth rates than would be be a significant theoretical rift among policy makers possible without the free mobility of capital. and experts on the right theory of global macroeco- However, the theoretically assumed outcomes of nomic imbalances, let alone on the specific policies to financial liberalization do not find sufficient empiri- correct them. cal support even in the “consensus evidence.”Prasad, Rogoff,Wei,and Kose (2003) sum up the existing lit- THE BIG RIFT IN FINANCIAL AND MACRO- erature and assess that “…an objective reading of the ECONOMIC POLICIES result of the vast research effort undertaken to date suggests that there is no strong, robust, and uniform Indeed, general explanations for current account bal- support for the theoretical argument that financial ances are difficult to find. Considering the theoretical globalization per se delivers a higher rate of econom- positions of different schools of thought, there is no ic growth…[and] the volatility of consumption consensus whether current account disequilibria growth has, on average, increased for emerging mar- should be approached principally through trade flows ket economies in the 1990s.”2

18 ASIA PROGRAM SPECIAL REPORT The main theoretical problem with this view is its In the latter view, the global benign outcome is inherent tautological nature and its inability to owed primarily to the pragmatism of macroeco- explain the outcomes of the conflicting preferences nomic policy management in the United States. As of national households or national governments at the U.S. authorities have not attempted to fight the the global scale. In other words, this approach, despite quickly rising current account deficits early on, the being well founded in microeconomic decision mak- systemic deficiencies in the global economic order ing, cannot explain how the autonomous decisions have not led to global deflation yet. However, it has of private households of n countries in the world to led to a very serious global imbalance. However, save more than to invest leads to the necessary result even with U.S. macroeconomic policy pragmatism, that only n-1 countries will succeed in generating a the resulting global pattern of production, trade and current account surplus while one country, although finance has become increasingly precarious. It seems also willing to achieve a current account surplus, that sooner or later the United States will become finds itself possessing a huge deficit. In other words, overburdened by playing the role of the global the fallacy of composition systematically excludes an growth engine and that of the creditor of last resort. unprejudiced, truly voluntary decision of all partici- The U.S. could largely ignore its external imbalance For small open pating players. Moreover, the approach has to rely as no serious conflict with sustaining full employ- economies, extensively on an assumption of “all things being ment domestically has occurred up to this point. and develop- equal,” as it does not systematically consider the However, if the U.S. economy slows down, such a ing countries in effects that changes in the saving decisions of one conflict may soon become a significant risk. But particular, the sector or one agent may have on the savings of the even without a major slowdown in the U.S. econo- company sector whose income is the residual of the my the world economy will have to manage with- exchange rate market process. out the growth stimuli from the U.S. economy, is the most The trade-based explanation of macroeconomic which the world economy has become used to over important imbalances is more substantive in its main message as the past fifteen years. single price. it does not just describe movements of imports and exports as result of voluntary decisions of economic THE SUSTAINABILITY OF THE U.S. agents, but also points out the shocks in trade flows EXTERNAL IMBALANCE induced by large unforeseen changes in the relative prices between tradable and non-tradable goods and International concerns about the sustainability of the services as well as in the international competitive- United States increasing external imbalance are ness of countries. For example, the trade-based increasing among financial market analysts, as it is a explanation stresses commodity price fluctuations to significant and imminent risk. Slow progress in the provide an explanation for two occurrences: the cur- unwinding of the imbalances may trigger a strong rent account swings of producers of key commodi- speculative wave towards dollar depreciation, which ties like oil, and the exchange rate exceeding the fun- could subsequently generate a downwards pressure on damental determinants of overall competitiveness. In other major global currencies. Such a depreciation of this view, the decision of private households to save the dollar would help re-balance the United States less does not affect the trade balance as long as the economy. However, given the pattern of global additional demand can be satisfied by competitive growth—and the dependence that global growth has domestic production. The decline in the private on American demand in consumption and imports— household savings rate can also be compensated by a marked slowdown in exports to the US would have increases in saving of other agents: initially through global deflationary repercussions.This could quite eas- business profits, and consequently by higher govern- ily unravel the momentum in development progress ment savings or higher tax levels.Thus, in the trade- and poverty reduction seen in developing countries in based approach to macroeconomic imbalances, the recent times without any fault of their own. relationship between national savings and the trade The main reason for the United States perhaps balance is much more complex than in the capital increasingly unmanageable global burden is not the account approach, as it involves decisions by all the rising number of developing countries running cur- relevant agents in a society and all agents in other rent account surpluses, rather, it is primarily the fact countries including policymakers. that other key industrial countries have failed to play

THE POLICY SPACE DEBATE 19 their corresponding international role in stimulating The “corner solutions” are based on two distinct global demand. Even worse, they have decisively assumptions.The first assumption is that in the case of added to the global burden of the United States by free-floating exchange rates, international financial improving their overall competitiveness at the markets will smoothly adjust exchange rates to their expense of other countries through deflationary “equilibrium” level.The second assumption is that in macroeconomic policies and real depreciation of the case of a hard peg, product, financial, and labor their currencies. Japan and Germany are two coun- markets will always smoothly and rapidly adjust to a tries in particular that are now being called upon to new equilibrium at the predetermined exchange rate. live up to their global responsibility by reversing their In reality however, exchange rates under a floating past economic trends. The required competitiveness regime have proved to be highly unstable, leading to gains of the U.S. economy should come predomi- long spells of misalignment with dire consequences nantly at their expense. This would compensate for for the real economic activity of the economies the gains in competitiveness that these countries have involved.The experience with hard pegs has not been achieved over the past few years. satisfactory either. As the exchange rate cannot be China can also play a crucial role in the benign corrected in cases of external shocks or misalignment, unwinding of global imbalances, albeit in a different adjustments are expensive in terms of lost output, way. Since the beginning of the 1990s China’s which affects the real sectors of the domestic econo- domestic demand and its imports have grown very my the hardest. strongly, and the country has been a vital actor in Given this experience with both rigidly fixed and spreading and sustaining the growth momentum freely floating exchange rates,“intermediate” regimes throughout the developing world. This is a process have become the preferred option in most developing which must not be derailed. Therefore, renminbi countries with open capital markets. Intermediate …The idea of revaluation should continue gradually rather than regimes provide more room for manoeuvre when a cooperative abruptly, taking into careful account the regional there is an instability in international financial mar- global mone- implications. More recently, oil exporting countries kets.They also enable adjustment of the real exchange tary system is have also acquired a significant position in addressing rate to a level that better supports a country’s devel- as compelling the global macroeconomic imbalances. Oil producers opment strategy.None of the “corner solutions” offer as the idea of should use favourable terms-of-trade practices to these possibilities. a multilateral increase and promote productive investments and For developing countries that are not members of accelerate the diversification of their production and a regional monetary arrangement that enables them trading system. manufacturing sectors. Should elevated oil prices to cope with the vagaries of the global financial mar- persist, oil producers have the potential to contribute kets, they resort to capital controls on short-term to the correction of global imbalances through creat- capital flows or strictly follow a strategy of underval- ing stronger domestic demand and import growth in uation and unilateral fixing.3 In the words of Martin line with higher incomes. Wolf, “By accident the world has found a way to make the crisis-prone world of financial globalization THE CASE FOR A MULTILATERAL EFFORT TO work.”4 This strategy—based on national policy space MANAGE EXCHANGE RATES and control over the relevant monetary instruments such as the exchange rate and the interest rate—can For small open economies, and developing countries only be replaced by a multilateral effort or multilat- in particular, the exchange rate is the most impor- eral surveillance if the rich developed economies are tant single price, as it has a strong impact on the willing to play a more proactive role in the steering domestic price level and on overall competitiveness. of the international monetary system. This would It must be flexible enough to prevent persistent mis- include directly intervening in the international alignments that would harm the competitiveness of monetary system to enable orderly currency depreci- domestic producers and their trade performance. At ations for countries in monetary and financial trou- the same time, excessive volatility of the exchange ble. Past experience has demonstrated that develop- rate must be avoided, as this would heighten the ing countries with strong current account positions risks for long-term investment, increase domestic are able to avoid destabilizing capital inflows and inflation, and encourage financial speculation. outflows, either by taxing those flows or by limiting

20 ASIA PROGRAM SPECIAL REPORT their impact through directly intervening in both iffs and export bounties do, such real exchange rate local and global capital and financial markets. In these changes have to be subject to multilateral oversight cases the hardest choices and the gravest misalloca- and negotiations. Reasons for the deviation from the tions due to erratic exchange rate changes have been fundamentals and the necessary dimension of the avoided. However, neither the resort to capital con- deviation need to be identified by an international trols nor to permanent intervention can be a substi- institution and should be enforced by a multilateral tute for an appropriate exchange rate system at the decision-making body. If such rules apply, the real regional or—preferably—the global level. exchange rate of all the parties involved—including A long run solution for the international finan- their overall competitiveness-will have to remain cial system has to commence with the observation constant, despite permanent structural changes and that the exchange rate of any country is—by defini- huge variations in competitiveness on the level of the tion—a multilateral phenomenon, and that any private sector. change in the exchange rate of open economies pro- duces externalities and multilateral repercussions. ENDNOTES That is why the idea of a cooperative global mone- tary system is as compelling as the idea of a multilat- 1. See a discussion of the various aspects of the policy eral trading system. In the same way that multilater- space debate in United Nations Conference on Trade and Development,“Trade and Development Report al trade rules design a global trading system, the 2006: Global partnership and national policies for devel- global financial system has to create equal conditions opment,”August 31, 2006, http://www.unctad.org/ to all parties involved and help avoid unfair compe- Templates/webflyer.asp?docid=7183&intItemID=2508 tition. Indeed, most of the ideas on which the &lang=1. International Monetary Fund was founded more 2. M.Ayhan Kose, Eswar S. Prasad, and Marco E.Terrones, than 60 years ago are still valid—including the idea “Financial Integration and Macroeconomic Volatility,” (Washington: IMF Staff Papers,Vol.50, Special Issue, of supra-national money replacing the U.S. dollar as 2003), http://faculty.fuqua.duke.edu/~charvey/Spur/ the global medium of exchange. Avoiding competi- Kose_Financial_integration_macro_volatility.pdf. tive depreciations and other monetary distortions 3. United Nations Conference on Trade and that have negative effects on the functioning of the Development,“Trade and Development Report 2004: international trading system are more important in Policy coherence, development strategies and integra- tion into the world economy,” September 16, 2004, today’s highly interdependent world than at any http://www.unctad.org/Templates/WebFlyer.asp?intIte other time in history. mID=3236&lang=1. In a well-designed global monetary system the 4. Martin Wolf,“Beijing should dip into China’s corporate advantages of exchange rate changes in one currency piggy bank,” Financial Times, October 3, 2006, need to be balanced against the disadvantages http://www.ft.com/cms/s/09d39538-5302-11db-99c5- incurred to other affected countries.As changes in the 0000779e2340,Authorised=false.html?_i_location=http %3A%2F%2Fwww.ft.com%2Fcms%2Fs%2F09d39538- nominal exchange rate deviating from the fundamen- 5302-11db-99c5-0000779e2340.html&_i_referer=http tals in terms of inflation differentials affect interna- %3A%2F%2Fwww.google.com%2Fsearch%3Fhl% tional trade in exactly the same way as changes in tar- 3Den.

THE POLICY SPACE DEBATE 21

CONSTRAINING POLICY SPACE IN INTELLECTUAL PROPERTY CARLOS M. CORREA

Intellectual THE ARGUMENTS ON cost of producing a unit of it. In this scenario there is property rights INTELLECTUAL PROPERTY a maximum diffusion of existing products.When the RIGHTS products are essential for life—as with food and phar- (IPRs) may maceuticals—allocative efficiency becomes an impor- affect develop- Intellectual property protection tant objective on both economic and equity grounds. ing countries’ creates exclusionary rights that The static-dynamic efficiency rationale applicable capabilities limit the access to and the use of to a developed society does not necessarily have a to educate a vast array of intellectual works, rationale when strong inequalities exist. High levels of their people, technologies, and products IPRs protection may have significant negative alloca- tive consequences in developing countries, without produce and needed for social and economic development in devel- oping countries. Intellectual property rights (IPRs) may contributing—or even impeding—their social and compete affect developing countries’ capabilities to educate their economic development. For instance, consumers in domestically people, produce and compete domestically and global- developing countries contribute to the research and and globally, ly, as well as to provide essential health services. development (R&D) budgets of pharmaceutical com- as well as to Given the overarching influence of IPR systems on panies. Such companies, however, tend to concentrate, provide essen- national interests, it would seem logical to incorporate for the most part, on research projects that lead to tial health sufficient flexibilities for developing countries to design drugs that address the needs of the rich, neglecting the systems of intellectual property rights in a manner those drugs required for the majoritively low-income services. that is consistent with their development needs. The populations and health epidemics—such as malaria, for forms and levels of IPR protection should correspond example—in developing countries. In addition, since to the characteristics of different countries’ innovation IPRs create a monopoly over information or the systems, taking into account people’s income and needs. expression thereof, the exclusive rights on information Each country and each sector is affected in different can collide with certain fundamental social needs ways by IPRs.Welfare economics examines the impact and/or individual rights, such as the right to education of intellectual property rights on economic efficiency. and health and the right to freedom of expression. There are two main types of efficiency: IPRs have a powerful potential to promote inno- vation and creativity, as the very nature of knowl- • Static efficiency is achieved when there is an edge—as a public good—makes it particularly diffi- optimal use of existing resources at the lowest cult to stop free-riders from enjoying a third party’s possible cost. works or innovations without paying for them. The predominant argument supporting the establishment • Dynamic efficiency is the optimal introduction of strong IPRs is that they are required for preserving of new or better products, more efficient pro- the ability of the creator or producer of knowledge to duction processes and organization, and (eventu- obtain an economic reward.Without the presence of ally) lower prices. economic rewards, there may be little or no incentive to provide public goods privately, leading to the sup- In general, static efficiency is best achieved ply of some public goods becoming scarce. through competitive markets. In terms of consumer However, several refutations can be made on this welfare, competition may lead to allocative efficiency argument. First, competition in the absence of IPRs when the price of a product is equal to the marginal can lead to dynamic efficiencies as it may be a pow-

Carlos Correa is a professor and the director of the Center for Interdisciplinary Studies of Industrial Property Law and Economics at the University of Buenos Aires.

22 ASIA PROGRAM SPECIAL REPORT

erful incentive to introduce product, process, or orga- But genius is actually less likely to flower in this nizational innovations. Many important innovations world, with its regulations, its pervasive surveil- are the result of stiff competition, particularly when lance, its privatized public domain and its taxes different technological options may be pursued. One on knowledge. Even if the system worked well known example is the case of the industry for exactly as specified, it could not solve some of semiconductors, where IPRs play a marginal role as the most important human problems we face, an incentive for innovation. Many studies also indi- and it would likely hamper our most important cate that patent protection is not always, or even usu- communications technology.1 ally, the driving force behind R&D. In the area of software, non-appropriation mechanisms, such as A HISTORICAL ASSESSMENT open source schemes, have proven to promote a vibrant process of innovation. Second, protection In contrast to the current trends towards the expan- from imitation may result from several non-IPRs sion and strengthening of IPRs, when today’s indus- mechanisms, such as lead time, the innovator’s capac- trialized countries were in their process of develop- ity to move on the learning curve before other com- ment they possessed a great deal of flexibility to petitors, the customer loyalty derived from superior design their IPR systems. Mark Twain’s personal sales and services, and from the very structure of the struggle to have his copyright recognized in the market, such as in the case of oligopolistic market United States provides an example of the lack of IPR structures.Third, the exclusionary rights conferred by rules at that time. Twain’s literary works, as well as IPRs can lead to the underutilization of information, those of other British authors, were pirated in the especially for the generation of subsequent innova- U.S. during much of the 19th century. Foreign tion. Cumulative forms of innovation prevail in most authors did not receive copyright protection until sectors of the economy, including the biomedical 1891.Twain even tried to register his name as a trade- field. Since information is both an output and an input mark in order to avoid the free copying of his novels. in its production process, a conflict arises between Charles Dickens toured the USA in 1842 pleading for first and second generation innovators, because the international copyright. He published the American greater the rights (and hence incentives) of the first Notes in 1843, where he expressed his frustration with generation, the greater the costs (and hence the lower the lack of U.S. copyright law. Fifty thousand pirated the incentives) of the second generation producers. copies were sold in only three days within the U.S. Finally,a significant part of innovation takes place as a During that period, A Christmas Carol sold for the result of routine production activities and learning, equivalent of $2.50 in London, whereas in the U.S. it completely unrelated to the existence and scope of sold for merely six cents a copy.2 IPRs protection. The arguments articulated during that period in James Boyle, in his article on the World Intellectual the United States against international copyright laws Property Organization (WIPO) and the future of have a strong parallel to the situation many low- intellectual property, has noted that: income developing countries are in today, where dozens of students chase the only available copy of an Intellectual property policy is in the sway of a educational book. At that time in the 19th century, maximalist “rights-culture” which leads debates the U.S. argued four key points. First, expanding lit- astray.The assumption seems to be that to pro- eracy demanded cheap yet high-quality books. mote intellectual property is automatically to Second, there was no inherent property rights in lit- promote innovation and, in that process, the erature. Third, granting copyrights to foreigners more rights the better. But both assumptions would give them a monopoly at the expense of the are categorically false. Even where intellectual U.S. reading public. Finally, local publishers in the property rights are the best way to promote U.S. and their employees are in need of the de facto innovation, and there are many areas where advantage afforded by the absence of protection.3 they are not, it is only by having rules that set In the case of patents, the United States—as a net the correct balance between the public domain importer of technology between 1790 and 1836— and the realm of private property that we will prioritized the issuing of patents to its own citizens get the innovation we desire. and residents. In 1836, patent fees for foreigners were

THE POLICY SPACE DEBATE 23

fixed at ten times the rate for U.S. citizens, exhibiting stantially enhanced, while those of developing a robust protection for and promotion of local countries and Canada considerably dimin- knowledge and products over that of the foreign. ished. Furthermore, accounting for the European countries such as France, Germany, and increase in dead weight loss from higher stan- Switzerland, while being avid proponents of strong dards of patent protection undermines the patent protection today, only recognized pharmaceu- aggregate benefits of the Uruguay Round tical product patents after the 1960s. Similarly, package, with the increase in dead weight loss , and the Nordic countries did not rec- amounting to as much as one fifth of the effi- ognize pharmaceutical patents until the end of 20th ciency gains from trade liberalization.5 century. Furthermore, the most successful cases in recent history of industrial and technological devel- McCalman’s findings have been amply confirmed by opment, in such countries as Japan and South Korea, recent statistics. Although there is no conclusive evi- The Declar- occurred under a flexible framework of IPR protec- dence of an increase in the flows of production tech- ation recog- tion. The development of the Indian pharmaceutical nologies to developing countries, there has been an nized the industry,which has become a major world supplier of impressive rise in global royalty payments, which grew “gravity” of the cheap generic medicines and active ingredients, was from 61 billion dollars in 1998 to 120 billion in 2004, also possible in the absence of pharmaceutical prod- the United States being the main beneficiary thereof.6 public health uct patents.4 Unlike other WTO agreements, the TRIPS problems Agreement does not include a Special and Differential afflicting many THE TRADE RELATED ASPECTS OF Treatment (SDT) for developing countries.The absence developing INTELLECTUAL PROPERTY RIGHTS of SDT also applies to Least Develop Countries countries— AGREEMENT (LDCs)—the poorest countries in the world—whose and LDCs in markets are too small and thus largely irrelevant for particular. Such a flexible scenario, however, has changed dramat- transnational companies (TNCs). However, LDCs have ically with the adoption of the Trade Related Aspects of been permitted to delay their compliance with TRIPS Intellectual Property Rights (TRIPS) Agreement of the obligations and rules until July 2013.7 World Trade Organization (WTO).This Agreement is According to Article 66.2 of the TRIPS Agreement, essentially the outcome of a well-organized campaign developed Member countries are obliged to provide of a few industries, notably in the pharmaceutical, incentives under their national legislation to enterprises entertainment, software, and semiconductors sectors. and institutions in their territories for the purpose of Under the TRIPS rules much of the flexibility that promoting and encouraging the transfer of technology developed countries enjoyed to design their IPR sys- to LDCs “in order to enable them to create a sound and tems is not permitted to developing countries. viable technological base.”8 It has been unclear how this Although many arguments regarding increased technol- obligation is to be effectively implemented. Inter- ogy transfers, foreign direct investment (FDI) to, and estingly, this provision is premised on the concept that innovation in developing countries were made during the implementation of intellectual property protection, the negotiations by the proponents of the TRIPS as required by the Agreement, is not conducive to the Agreement, the Agreement itself is quite clearly intend- technological development of LDCs and that more ed to benefit the industrialized countries and industries flexibility is needed.This is precisely the argument that who already have a greater capacity to generate new developing countries have articulated, during the knowledge and information. TRIPS negotiations and that have thereafter reiterated An early study by Phillip McCalman concluded in different fora, such in the context of the that: “Development Agenda” submitted by a group of devel- oping countries to the World Intellectual Property Patent harmonization has the capacity to gen- Organization.The main argument of this proposal is: erate large transfers of income between coun- tries, with the United States being the major A vision that promotes the absolute benefits of beneficiary…These transfers significantly alter intellectual property protection without the perceived distribution of benefits from the acknowledging public policy concerns under- Uruguay Round, with the U.S. benefits sub- mines the very credibility of the IP system.

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Integrating the development dimension into Ministerial Declaration on TRIPS and Public The quest for the IP system… will strengthen the credibility Health, or the Doha Declaration on TRIPS. The equitable glob- of the IP system and encourage its wider Declaration recognized the “gravity” of the public al development acceptance as an important tool for the promo- health problems afflicting many developing coun- tion of innovation, creativity and development.9 tries—and LDCs in particular—from HIV/AIDS, is not benefit- tuberculosis, malaria, and several other epidemics.11 It ing from, and The constraints imposed by the TRIPS Agreement confirmed some of the flexibilities incorporated is indeed have been highly debated, particularly on the subject into the TRIPS Agreement, such as the possibility of being seriously of patents for pharmaceuticals. The Agreement granting compulsory licenses and of permitting the harmed, by a imposed a number of detailed obligations on patent parallel importation of patented products. A key global IPR creation, application, and distribution with the aim to paragraph in the Declaration stated that: construct a global patent regime (see Table 1). regime. The concerns about the implications of patents We agree that the TRIPS Agreement does not for access to drugs have also been voiced by devel- and should not prevent WTO Members from oping countries and NGOs in various forums, par- taking measures to protect public health. ticularly due to the impact of patents on the prices Accordingly,while reiterating our commitment of essential medicines and the proliferation of to the TRIPS Agreement, we affirm that the patents of low or non-existing inventive steps that Agreement can and should be interpreted and are aggressively used to restrain legitimate generic implemented in a manner supportive of WTO competition.These concerns on the access to medi- Members’ right to protect public health and, in cines were eventually brought to international atten- particular, to promote access to medicines for tion, and subsequently reflected in the Doha all (paragraph 4).

Table 1. TRIPS Obligations Regarding Patent Protection10

• Patents shall be granted for any inventions, whether in the art to carry out the invention.The indication products and processes, provided they are new, of the best mode of carrying out the invention, as involve an inventive step and are capable of indus- well as information concerning corresponding trial application. patent applications and grants, may be required.

• Patents shall be granted in all fields of technology, • Limited exceptions to the exclusive rights can be including pharmaceuticals. No discrimination is defined by national laws (article 30). allowed with respect to the place of the invention, or based on whether the products are locally pro- • Conditions for granting other uses without the duced or imported. authorization of the patent holder (compulsory licenses) are set forth; Member countries can deter- • Member countries can exclude from patentability mine the grounds to allow such uses. diagnostic, therapeutic and surgical methods for treatment of humans or animals, as well as plants • Revocation/forfeiture is subject to judicial review. and animals and essentially biological processes for the production thereof. • The term of protection shall be at least twenty years from the date of application. • Exclusive rights conferred in the case of product and process patents are defined, subject in the case • Reversal of the burden of proof in civil proceedings of imports to the principle of exhaustion (article 6). relating to infringement of process patents is to be established in certain cases. • Inventions shall be disclosed in a manner which is sufficiently clear and complete for a skilled person

THE POLICY SPACE DEBATE 25

BILATERAL AND REGIONAL FREE TRADE opment is not benefiting from, and is indeed being AGREEMENTS seriously harmed, by a global IPR regime that may lead to a dangerous stifling of knowledge-creation, While the adoption of the Doha Declaration on technology transfer, innovation, and access to medi- TRIPS seemed to address the pressing concerns of cines. Such a situation will only perpetuate poverty developing countries, the U.S. simultaneously initiat- and injustice in vast parts of the low- and middle- ed a series of negotiations on bilateral and regional income developing world that will fundamentally free trade agreements (FTAs) with more than twenty deteriorate the quest for equitable and sustainable countries. Bilateral and regional FTAs incorporate global development. what is commonly termed as “TRIPS-plus” require- ments—essentially, IPR rules and commitments that ENDNOTES go beyond that of TRIPS. FTA agreements were pro- duced between the U.S. and a various countries glob- 1. James Boyle,“A Manifesto on WIPO and the future of ally: Jordan, Chile, Singapore, Morocco, the Central intellectual property,” Duke Law & Technology Review 9 (2004), http://www.law.duke.edu/journals/dltr/ American countries and the Dominican Republic, articles/PDF/2004DLTR0009.pdf. Bahrain, Oman, Peru, and Colombia. Some of them 2. S Vaidhyanathan, Copyrights and Copywrongs:The rise of have already been ratified by the US Congress.12 intellectual property and how it threatens creativity (New York: Other FTAs have been signed by or under negotia- New York University Press, 2001). tion between developing countries and the European 3. Ibid. 4. Sudip Chaudhuri, The WTO and India’s Pharmaceuticals Union or the European Free Trade Association. Industry: Patent protection,TRIPS and developing countries, The common pattern of the ensuing FTAs is that (New Delhi: Oxford University Press, 2005). they further elevate the level of protection conferred 5. Phillip McCalman,,“Reaping What You Sow:An virtually in all areas of IPR, most notably copyright Empirical Analysis of International Patent and patents. In the latter case, partner countries are Harmonization,” University of California, Department of obliged, inter-alia, to grant patents on plants, extend Economics Working Paper No. 454, December 1999, http://ssrn.com/abstract=200788. the patent term in certain circumstances, and adopt 6.The World Bank,“World Development Indicators 2000,” the “utility” standard for patentability (in substitution April 2000, http://www.worldbank.org/wdr/2000/fullre- of the narrower requirement of industrial applicabil- port.html; and The World Bank,“World Development ity).They are also obliged to grant exclusive rights in Indicators 2006,”April 2006, http://web.worldbank.org/ respect of test data regarding pharmaceuticals and WBSITE/EXTERNAL/DATASTATISTICS/0,,content MDK:20899413~pagePK:64133150~piPK:64133175~the agrochemicals. In some cases, the protection enforce- SitePK:239419,00.html. able under the FTAs with the U.S. is significantly 7.The term extends to January 1, 2016, with regard to phar- higher than that applicable in the U.S. itself.13 maceutical patents and test data protection. Paradoxically, FTAs do not seem to generate the 8.The World Trade Organization,“Agreement on Trade- same scale of obligations in the U.S., thus leading to Related Aspects of Intellectual Property Rights: a critically skewed situation where U.S. companies Text of the Agreement,Article 66.2”April 1994, http://www.wto.org/english/tratop_e/trips_e/t_agm7 will receive more extensive and deeper IPR protec- _e.htm. tion in FTA signatory countries, including many 9.World Intellectual Property Organization,“Thirty-First poor LDCs, than the same companies will receive in (15th Extraordinary) Session, , September 27 to the United States itself. October 5, 2004,”WO/GA/31/11,Annex 5,August 27, There is no justification—legal or economic— 2004, http://www.wipo.int/documents/en/document/ govbody/wo_gb_ga/pdf/wo_ga_31_11.pdf. for this augmented limitation to the already narrow 10.The World Trade Organization,“Agreement on Trade- national policy space that countries had retained on Related Aspects of Intellectual Property Rights: IPRs after the TRIPS Agreement was first produced. Text of the Agreement,Article 66.2”April 1994, There is an urgent need to thoroughly review the http://www.wto.org/english/tratop_e/trips_e/t_ implications of these developments, particularly for agm7_e.htm. the poor.The IPR agenda, today under the control 11.The World Trade Organization,“Declaration on the TRIPS agreement and public health,”WT/MIN(01)/ of a small but extremely powerful coalition of busi- DEC/2, November 20, 2001, http://www.wto.org/ ness interests, needs to be placed under public English/thewto_e/minist_e/min01_e/mindec1_trips_ accountability.The quest for equitable global devel- e.htm

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12. United States-Jordan free trade agreement (2001); Nicaragua and the United States (CAFTA). United United States-Chile free trade agreement, signed at States-Bahrain free trade agreement, signed at Miami June 6, 2003; entered into force January 1, 2004. Washington Sept. 14, 2004. (Bahrain FTA). (Chile FTA). United States-Singapore free trade agree- 13. Frederick M.Abbott,“Intellectual Property Provisions of ment, signed at Washington May 6, 2003; entered into Bilateral and Regional Trade Agreements in Light of force Jan. 1, 2004. (Singapore FTA). United States- U.S. Federal Law,” United Nations Conference on Morocco free trade agreement, signed at Washington Trade and Development-International Centre for June 15, 2004 (Morocco FTA); entered into force on Trade and Sustainable Development Project on IPRs July 1, 2005. United States-Dominican Republic-Central and Sustainable Development, February 2006, America free trade agreement, signed at Washington May http://www.iprsonline.org/unctadictsd/docs/IP14_ 28, 2004 and Aug. 5, 2004. Parties: Costa Rica, abbott_FTAs.pdf Dominican Republic, El Salvador, Guatemala, Honduras,

THE POLICY SPACE DEBATEPERCEPTIONS 27 POLICY SPACE AND THE GENDERED IMPACTS OF INTERNATIONAL FINANCIAL INSTITUTIONS ELAINE ZUCKERMAN

or over a quarter of a popular non-project-specific sector-wide loans also century,the international inflict IFI conditionalities that squeeze country poli- Ffinancial institutions cy space. (IFIs) have been constraining Over time, IFIs have responded to persistent civil country sovereignty and society and citizen complaints, including popular street national policy space—the abil- protests, which have vociferously criticized IFI policy ity of a country to have options conditionalities for their harmful social and gendered and flexibilities in designing impacts. IFI responses include avoiding using the national policies.1 This protract- names “SALs” and “conditionalities” and claiming that ed process has exacerbated conditionalities have been eliminated.4 IFIs have actu- poverty in the world’s poorest countries, instead of ally increased the number of conditionalities through reducing it, despite IFI claims to the contrary. This bundling several conditionalities into one, and renam- paper first discusses IFI policy space occupation, and ing them, for example by calling them benchmarks. second, its gendered impacts, which are illustrated by country-level case studies. DEBT CANCELLATION AND REDUCTION

…IFI-mandated THE POLICY SPACE OCCUPATION Another recent IFI policy space issue that has attracted tariff reductions OF IFI CONDITIONALITIES significant press coverage is the cancellation and/or reduction by IFIs of poor countries’ debts. Many civil undermine the This section illustrates IFI policy space occupation society organizations (CSOs) applaud an increasing livelihood of through examining “conditionalities” and debt can- series of IFI debt cancellations, as unconditional debt farmers, the cellation and reduction. cancellation can free up policy space, permitting coun- majority of tries to choose policies that advance human develop- whom are Conditionalities ment instead of spending their national revenues to women in the Since 1980, the primary vehicle that IFIs have used to repay IFI debts. Debt relief can release otherwise debt- world’s poorest squeeze borrowing governments’ policy space is the locked public resources for spending on education, “conditionalities” attached to IFI Structural health, and other critical development programs. countries. Adjustment Loans (SALs) and projects. SALs are an Two types of IFI debt cancellation are being dis- early name for policy-based loans that IFIs have used cussed: those initiated by countries themselves and to impose conditionalities on developing and transi- those resulting from debt cancellation or reduction tion countries.2 Besides financing policy-based loans by the IFIs and other creditors. First, regarding debt that significantly restrict policy space, the World Bank cancellation initiated by countries themselves, and other Multilateral Development Banks (MDBs) Gender Action and many civil society partners cele- also use project loans to impose conditionalities on brate that a cascade of countries have been paying off economic policies.3 Agricultural, rural development, their debts to the International Monetary Fund water supply,sanitation, education, health and virtual- (IMF), and announcing an end to their ties to the ly every type of conventional IFI project imposes IMF. Since 2003, some of the IMF’s largest debtor conditionalities such as requiring developing coun- countries have decided to pay off their IMF debts tries to privatize services and drop tariffs unilaterally ahead of schedule. These countries include without developed country reciprocity. Increasingly Argentina, Brazil, Colombia, Indonesia, Serbia and

Elaine Zuckerman is president of Gender Action, a non-profit organization dedicated to promoting gender equality and women’s rights in international financial institution investments.

28 ASIA PROGRAM SPECIAL REPORT Uruguay. For example, in 2006 Brazil paid its total amounting to US$6.5 billion out of a total of US$15 debt of $15.5 billion, Argentina its debt of $9.5 bil- billion that five Latin American countries owed the lion, and Uruguay its debt of 1.08 billion to the IMF. bank. To become eligible for debt relief, countries Ecuador has vowed to repay, or restructure, its IMF must comply with IFI-imposed policy reforms, fur- debt of $10.28 billion.5 These Latin American coun- ther giving up policy space. tries have found unconditional alternative financing To date, only one country, Bolivia, among the poor from oil-rich Venezuela. Several of these countries countries receiving debt relief, has publicly announced announced that they no longer want, or need, IMF its intention to break with IMF policies. Another low- control over their policy space due to the sharply income country, Ghana, announced that it would not negative impacts of IMF loan conditionality on their renew its Poverty Reduction Growth Facility (PRGF) national growth and development processes. agreement with the IMF upon its imminent expiration. These debt cancellations have placed the IMF in a Following up could open Ghana’s nationally-owned legitimacy, relevancy and budget crisis. The IMF is policy space to determine the design of its economic searching for a new mandate and for ways to survive.6 and social policies, for example, on revenue-raising and IMF supporters, particularly the Group of Eight social sector spending priorities. Most countries want countries (G-8), are attempting to reinvent the IMF and deserve to regain sovereign control of their policy by creating new IMF programs. Taking advantage of space and resources, instead of spending their resources the timing of the IMF crisis, hundreds of CSOs on massive debt repayments to IFI creditors. However, around the world have launched a campaign in 2006 countries receiving debt relief need to be on guard of titled “The IMF: Shrink or Sink It!”7 The involved attempts by the IMF,World Bank, and other IFIs to CSOs believe that the IMF needs comprehensive impose new conditionalities through new arrange- reform at the least, and if that fails, it should close.The ments. Debt-relieved countries must carefully retain campaign aims to eliminate the IMF’s “gatekeeper” their ability to determine national economic policies, function: its powerful role as head of an aid cartel. even after debt relief is implemented. Without the IMF’s “green light,” or signaling power, endorsing a government’s policies, most multilateral GENDERED IMPACTS and bilateral donors and creditors, as well as the pri- vate sector, withdraw aid to that government. Policies This section discusses the gendered impacts of IFI comprising the IMF’s overarching market-driven policy conditionalities through examining poverty development strategy occupy national policy space. reduction strategies and operations and several coun- These policies—imposed as conditionalities—call for try cases. Framed by the above picture of IFIs squeez- deregulation, privatization and public spending ing national policy space and sovereignty, Gender reductions, among other economic reforms. In many Action’s starting point is that the 70 percent of the African countries, these conditionalities have resulted world’s poor who are women bear a disproportionate in annual per capita incomes falling by over 50 per- amount of the burdens of IFI economic reform con- cent in the last two decades. ditionalities. IFI loan conditionalities to poor devel- Anti-IMF campaign recommendations involve the oping countries not only impinge on country-level following points: First, to refuse to sign new loan sovereignty by requiring governments to comply agreements or enter into new programs with the IMF. with their creditors notions of how to reform eco- Second, to conduct citizen, parliamentary, and other nomic, financial and trade policies, but they also con- government audits of IMF performance and impacts. tribute to the feminization of poverty. Not only have The campaign popularizes the option of withdrawing over a trillion dollars of IFI development loans not from the IMF altogether. Citizen pressure has led to reduced poverty, rather the loans have in many the poorest countries receiving IFI debt cancellation, instances deepened poverty, especially among in order to relieve low-income countries that are bur- women.8 For example, IFI-mandated tariff reductions dened by illegitimate IFI debt. In 2005 the G-8 coun- undermine the livelihood of farmers, the majority of tries decided to cancel African Development Bank, whom are women in the world’s poorest countries. World Bank, and IMF debts of 18 Highly Indebted In Africa, most of the 80 percent of farmers who are Poor Countries (HIPC) countries. In early 2007, the women have experienced income drops due to con- Inter-American Development Bank cancelled debts ditionalities such as required tariff reductions.

THE POLICY SPACE DEBATE 29

Until recently, Gender Action monitored Poverty Democratic Republic of the Congo Reduction Strategy Papers (PRSPs) for the gender The Democratic Republic of the Congo (DRC) pro- impacts of economic policies contained within the vides an example of IFI loans that guarantee corporate programs. Both the IMF and World Bank require that investments in mine privatization and restructuring low-income country governments prepare national with tragic incomes for women.The gender dimension development plans called “PRSPs.”PRSPs are a pre- is missing in IFI policy discussions governing mining requisite for accessing virtually all development aid. loan conditionalities and revenues.The major benefici- Although the IMF and World Bank constantly state aries of IFI mining operations are transnational corpo- that PRSPs are country-owned, PRSPs must meet rations and local elites who turn a blind eye to harm- World Bank and IMF specifications and obtain Fund ful gendered outcomes that include forced household and Bank Board approval. Gender Action found that displacements, sexual slavery and mass rape. PRSPs address gender issues unsystematically. Since For example, the World Bank Group’s Multilateral realizing that PRSPs policies are not enforceable, International Guarantee Agency provides political Gender Action stopped engaging in PRSPs, shifting risk insurance to private mining companies operating attention to Poverty Reduction Growth Facilities in the DRC; the World Bank Group’s International (PRGFs) and Poverty Reduction Support Credits Development Association makes loans to the DRC (PRSCs), described below, because they contain to “restructure” the mining sector including laying enforceable conditionalities. PRSPs are aspirational off tens of thousands of workers.11 These reinforcing in comparison. Gender Action also continues to policy conditionalities affect the economic liveli- focus on mandatory IFI sector project loan condi- hoods of women and girls who are involved in labor tionalities—for example conditionalities requiring and services attached to dangerous mining activities, countries to privatize services and/or adopt user fees sometimes involving children as young as seven years in post-conflict reconstruction, health, education, old. Their livelihoods are also undermined by the agriculture and other sector loans. environmental destruction caused by mining. These In 1999 the IMF renamed its macroeconomic sta- environmental effects require local women in sur- bilization loans for the poorest countries, known as rounding communities to have to walk even farther Enhanced Structural Adjustment Facilities, to Poverty to find firewood—an endeavor that increases their Reduction Growth Facility (PRGF) Arrangements. exposure to rape and other forms of violence. The World Bank renamed some of its SALs Poverty Households, and particularly the women and girls in Reduction Support Credits (PRSCs). These name them, face a daunting array of needs for physical safe- changes were intended to announce a greater empha- ty. IFI loans do not address these gendered outcomes sis on poverty reduction. Despite their rhetoric about of their loan operations. reducing poverty, macroeconomic policies in PRSPs, PRSCs and PRGF Arrangements continue two Malawi decades of IMF and World Bank conditionalities that For years, the Bank and Fund have been forcing prioritize decreasing government spending and Malawi to privatize ADMARC—the state marketing increasing government revenue to repay debts owed to board—and the Strategic Grain Reserve (SGR), the IFIs and other creditors over reducing poverty. which used to keep the price of maize affordable. Ironically, the World Bank’s new Gender Action Plan Privatization of ADMARC and the SGR has con- committed the Bank to address gender issues in poli- tributed to a food crisis in Malawi.12 Women, forced cy-based loans.9 However, the World Bank’s paramount to wait into the night in long lines at ADMARC to Operational Policy on Gender and Development buy maize, risk attack on their way home from the waives policy-based loans from its requirement that all queue. When women cannot afford to buy maize, Bank loans promote gender equality.10 women must scavenge for leaves and boil tubers and roots to feed themselves and their families. GENDERED IMPACTS IN COUNTRY- Chronic hunger has also forced desperate rural LEVEL CASES Malawian women and girls into sex work and early marriage, and increased their exposure to HIV/AIDS. The following country-level cases illustrate the fore- The excess supply of sex workers has glutted the mar- going discussion of the gendered impacts of IFI-man- ket; sex workers claim that prior to the food crisis dated policy reforms. they could charge US$8 for unprotected sex and

30 ASIA PROGRAM SPECIAL REPORT

US$1-2 for sex with a condom. Since the food crisis, • In Serbia and Montenegro, women comprise the Women’s pre- rates have sharply plummeted to US$0.80 without a majority of service sector workers providing carious eco- condom.Workers would rather die a little later from finance, education, and health services, and the nomic position AIDS than die from hunger today. majority of textile industry employees.The World Bank Private and Financial Sector Adjustment in these enter- Mozambique Credit required the governments to privatize the prises and gov- Mozambique’s successive IMF PRGF and World textile industry and smaller enterprises and down- ernment jobs Bank PRSCs—the policy-based loans described size the public sector including finance, health, made them above—mandated a new labor law which increases and education without regard for the gender especially labor flexibility in five ways. One, retrenchment impacts. Women’s precarious economic position vulnerable to costs are reduced, including severance pay. Two, in these enterprises and government jobs made wages are paid in the form of piece-rates rather than them especially vulnerable to lay-offs. They con- lay-offs. fixed wages based on hours worked. Three, compa- stituted the majority of the unemployed and ny-led downsizing and the use of short-term labor is informal sector employees with few assets to facilitated. Four, hiring practices become contractu- become self-employed. al rather than secured through long-term employ- ment contracts; and, five, employing foreign nation- • The World Bank Serbia Social Sector Structural als is made easier. It is unexpected for a country that Adjustment Credit reforms pension, labor, and has maintained an average per capita income growth employment laws. It encourages self-employment rate of about ten percent for a decade to be as but fails to acknowledge the barriers that prevent impoverished as Mozambique is, with extraordinar- women from succeeding in small businesses. It ily high rates of illiteracy and HIV/AIDs, especially diminishes protection from discrimination for among females.Although Mozambique did endure a women and other workers in weak positions in the deep civil war, it has achieved a postwar decade of labor market. For example, women lack the collat- high-rate growth. This anomaly exists because a eral to access loans since men own most of the handful of transnational corporations (TNCs) owns property.Serbia’s new labor law eliminates previous- a few large capital-intensive and export-oriented ly required collective bargaining and weakens labor’s projects that employ only a small percentage of power.Women now comprise a larger percentage of Mozambique’s total population and enrich only a the unemployed. Women have been hurt most by minority elite and the TNCs. IFI policies and loans the Bank policy conditions. that support TNCs and elites, rather than the poor, have deepened poverty in Mozambique especially Tanzania among women who compose the majority of the Tanzania has borrowed over US$5.8 billion for 45 poor, the illiterate, and the ill. operations from the African Development Bank, the International Monetary Fund, and the World Bank Serbia and Montenegro since the year 2000. At least half of these operations, Serbia and Montenegro are now two independent comprising over a quarter of loan funds, appear to be republics but when Gender Action reviewed their loans containing potentially harmful components. World Bank policy-based loans in 2004, the two For example, World Bank projects in Tanzania republics were united. In Serbia and Montenegro, include the following: World Bank and IMF structural adjustment loans (SALs) formed the primary response to a devastating • A Secondary Education Development Program decade of civil war. After Serbia and Montenegro approved in 2004 for $150 million, and includes rejoined the World Bank in 2001, at least 80 percent resettlement, administrative decentralization, decreas- of initial Bank operations were SALs.This high pro- ing costs per pupil, and increasing class sizes. portion of adjustment operations characterizes eco- nomic reforms in transition countries more broadly. • The Primary Education Development Program Gender Action’s analysis shows how Serbia and approved in 2001 for $150 million imposes double- Montenegro’s SALs fail to acknowledge or mitigate shift teaching on 50% of primary schools, increasing the harmful impacts on men and women.13 Here are student enrollment but limiting instruction time per a couple of examples: student.

THE POLICY SPACE DEBATE 31 • The World Bank’s Second Health Sector Develo- in privatizing water monopolies increases poverty and pment Project approved in 2003 for $65 million corporate profits.The programs and loans of the IFIs introduces user fees. have diminished or eliminated opportunities of women and young girls to earn income and attend • The Bank’s Dar es Salaam Water Supply and school, respectively. Sanitation Project approved in 2003 for $62 million Why are such IFI policy conditionalities so persist- includes retrenchment of workers, price increases, ent and so sticky? Why do the IFIs do everything to and resettlement of unauthorized water users. camouflage the continuation of conditionalities? Our Women who already comprise the vast majority case examples demonstrate that a key reason is that of poor Tanzanians are hardest hit by these condi- IFI conditionalities open up developing country mar- tionalities. kets to profitable TNC investments. In IFI loans the main beneficiaries have been the TNCs that win IFI In another operation, to comply with World Bank contracts and local elites, not the poor whom the IFIs Civil society and IMF loan requirements, the Tanzanian govern- claim are the beneficiaries. If the poor were the ben- and govern- ment sold the management of the Dar es Salaam eficiaries of the $100 billion that IFIs disburse annu- ments world- Urban Water and Sewerage Authority (DAWASA) to ally, there would be much less poverty in this world. wide must hold City Water, a joint venture between private compa- In 1989, the World Bank had a task force that laid the publicly- nies based in Germany, Britain and Tanzania.14 After the groundwork for the 1990 World Development financed IFIs City Water took over in 2003, tariffs increased. Report on poverty.15 The task force concluded that accountable. Although women were primarily responsible for reducing poverty requires asset and income redistrib- fetching water in Tanzania, an Action Aid report ution.Asset ownership has become more concentrat- found that the City Water privatization scheme utter- ed and income distribution gaps have widened in ly neglected to consider household gender relations most countries since the late 1980s. IFI policies and or the needs of women and girls in the reform.The loans that cater to TNCs and elites, not the poor primary benefits of high water prices were reaped by whom they claim to serve, help explain why poverty the corporation, City Water, and owners of private and income distribution have worsened. water wells while poor women and girls continued to have to walk often long distances to carry water with- ENDNOTES out remuneration. Women and girls who could not walk long distances for affordable water were forced 1.That the Woodrow Wilson International Center for to spend the majority of their household income on Scholars first invited me to present in 1987 and again almost 20 years later on this topic underscores the long water instead of much-needed food supplies and edu- intractability of IFI occupation of poor countries’ policy cation. Bowing to public complaints, in 2005 the gov- space. ernment of Tanzania was forced to cancel its contract 2. For a description of the many names IFIs use for poli- with City Water. cy-based loans since launching SALs, see Vladisavljevic, Aleksandra and Elaine Zuckerman,“Structural Adjustment’s Gendered Impacts:The Case of Serbia and CONCLUSIONS Montegnegro,” Gender Action, 2004, http://www.gen- deraction.org/images/Gender-SALs-Serbia&Mont.PDF. The burdens on women in accessing essential servic- 3.All IFIs support both SALs or policy-based loans as well es, such as water, show how basic human needs as investment projects except the IMF that only makes remain unfulfilled in Africa. How is it that the IFIs, loans for the former. despite the billions of dollars they have allocated to 4.Vladisavljevic,Aleksandra and Elaine Zuckerman, “Structural Adjustment’s Gendered Impacts:The Case water supply and transportation projects in Africa, of Serbia and Montegnegro.” hardly succeed in relieving poor women and girls 5. Manuela Badawy,“Venezuela:A Financing Center for from having to carry water on their heads barefoot on Latin America-Fitch,” Reuters, February 6, 2007, unpaved roads? First-hand testimonies by African http://www.veninfo.org/news/02-06-07reu.html. women have revealed that carrying water for hours 6.The International Monetary Fund,“Eminent Persons every day significantly diminishes the amount of time Group Outlines Long-Term Revenue Plan to Finance IMF Activities,” IMF Press Release No. 07/18, January that they have for income-generating work. As the 31, 2007, http://www.imf.org/external/np/sec/ Tanzanian example above illustrates, IFI investments pr/2007/pr0718.htm; and “Funding the Fund: Putting

32 ASIA PROGRAM SPECIAL REPORT

the IMF’s own house in order,” The Economist. February insurance to private mining companies operating in 3, 2007. the DRC: http://www.cao-ombudsman.org/html- 7. Gender Action is a founding member of the first con- english/DemocraticRepublicofCongo.htm; the World certed anti-IMF campaign that citizens’ groups Bank Group’s International Development Association launched during the September 2006 annual World makes loans to the DRC to “restructure” the mining Bank-IMF meetings. See the initial campaign docu- sector, including laying off 10,000 workers; informa- ment,“The IMF: Shrink it or Sink it:A Consensus tion on this is available at: http://www-wds.world- Declaration,” July 2006, http://www.genderaction.org. bank.org/external/default/WDSContentServer/WDS 8. Suzanna Dennis and Elaine Zuckerman,“Gender Guide P/AFR/2004/12/15/8793B0DBCBC1CC658 to World Bank and IMF Policy-Based Lending,” Gender 5256F030017596D/1_0/Rendered/PDF/38150DRC Action and the Heinrich Boell Foundation, December 1CONFORMED.pdf and http://www.bicusa.org/ 2006, http://www.genderaction.org/publications.html. Legacy/DRCWorldBank_August_2003.pdf. 9.The World Bank Group,“Gender Equality as Smart 12. Suzanna Dennis and Elaine Zuckerman,“Gender Economics:A World Bank Group Gender Action Guide to World Bank and IMF Policy-Based Plan (Fiscal years 2007–10),” September 2006, Lending.” http://siteresources.worldbank.org/INTGENDER/ 13. Ibid. Resources/GAPNov2.pdf. 14. Ibid. 10.World Bank mandatory Operational Policies have 15.The World Development Report, the World Bank’s precedence over action plans. annual flagship publication, highlights a different 11. For example, the World Bank Group’s Multilateral theme each year and is available at http://www.world International Guarantee Agency provides political risk bank.org/wdr.

THE POLICY SPACE DEBATE 33

RECENT ASIA PROGRAM PUBLICATIONS Fueling the Future: Meeting Roberta Cohen, Bambang Harymurti, Muhammad Qodari, Pakistan’s Energy Needs in the Courtland Robinson, May 2006 21st Century Achilles G.Adamantiades, Mukhtar Education Reform in Pakistan: Ahmed, Saleem H.Ali, Shahid Javed Building for the Future Burki, John R. Hammond, Dorothy Shahid Javed Burki, Christopher Lele, Robert Looney, Sanjeev Candland, Grace Clark, Ishrat Minocha, Bikash Pandey, Sabira Husain, International Crisis Group, Qureshi,Asad Umar,Vladislav Jonathan Mitchell, Salman Vucetic,Aram Zamgochian, 2007 Humayun, Irfan Muzaffar,Tariq Rahman, Michelle Riboud,Ahsan Special Report No. 135 – The Chinese People’s Saleem, Salman Shah, United States Liberation Army: Should the United States Be Agency for International Development,World Bank Worried? (South Asia Human Development Department), 2005 Dennis J. Blasko, Bernard D. Cole, Kristen A.Gunness, Litai Xue, December 2006 Japanese Women: Lineage and Legacies Margarita Estévez-Abe,Takashi Fujitani, Barbara Special Report No. 134 – Six-Party Stall:Are South Molony, Hitomi Tonomura, Chikako Usui, Merry White, Korea and China Part of the Problem or Part of the October 2005 Solution? Sung-Yoon Lee, Kirk W.Larsen, Kerry Dumbaugh, Bojiang Special Report No. 129 — China’s Economy: Yang, November 2006 Retrospect and Prospect Franklin Allen, Loren Brandt, Lee Branstetteer, Donald Special Report No. 133—The Avian Flu Challenge in Clarke, Chang-tai Hsieh, Jikun Huang,Yasheng Huang, Southeast Asia:The Potential of Public-Private Nicholas Lardy, Peter Murrell, Barry Naughton, Jun Parnership Qian, Meijun Qian,Thomas G. Rawski, Scott Rozelle, Tjandra Yoga Aditama, David Reddy,Tracy S. DuVernoy, Susan Whiting, Xiaodong Zhu, July 2005 Peter R. Gourlay, September 2006 Seabed Petroleum in Northeast Asia: Conflict or Special Report No. 132 - Edging Toward Full Cooperation? Empowerment? South Korean Women in the Selig S. Harrison, Zhiguo Gao, Kim Myong Gil, Zhao Workplace and the Political Arena Li Guo, Keun Wook Paik, Choon-Ho Park, Zhang Hai Seungsook Moon, Jean R. Renshaw, Kyung-ae Park, Qi, Kook-Sun Shin, Jilu Wu, Susumu Yarita, 2005 R. Darcy, September 2006 George W.Bush and East Asia:A First Term Special Report No. 131— China and Democracy: Assessment A Contradiction in Terms? Richard W.Baker, Chan Heng Chee, Catharin E. Richard Baum, Merle Goldman, Suisheng Zhao,Yongming Dalpino, Evelyn Goh, Harry Harding, Jia Qingguo, James Zhou, June 2006 A. Kelly, Ilsu Kim, James A. Leach, Koji Murata, Jonathan D. Pollack, Robert Sutter, Nancy Bernkopf Special Report No. 130— One Year After the Tucker, Jusuf Wanandi, 2005 Tsunami: Policy and Public Perceptions

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AsiaSPECIALProgram REPORT WOODROW WILSON INTERNATIONAL CENTER FOR SCHOLARS Lee H. Hamilton, President and Director BOARD OF TRUSTEES Joseph B. Gildenhorn, Chair; David A. Metzner, Vice Chair. Public Members: James H. Billington, Librarian of Congress; Allen Weinstein, Archivist of the United States; Bruce Cole, Chair, National Endowment for the Humanities; Margaret Spellings, Secretary, U.S. Department of Education; Condoleezza Rice, Secretary, U.S. Department of State; Cristián Samper, Acting Secretary, Smithsonian Institution; Michael O. Leavitt, Secretary, U.S. Department of Health and Human Services. Designated Appointee of the President from within the Federal Government: Tamala L. Longaberger. Private Citizen Members: Robin Cook, Donald E. Garcia, Bruce S. Gelb, Sander Gerber, Charles L. Glazer, Susan Hutchinson, Ignacio E. Sanchez ABOUT THE CENTER The Center is the living memorial of the United States of America to the nation’s twenty-eighth president, Woodrow Wilson. Congress established the Woodrow Wilson Center in 1968 as an international institute for advanced study, “symbolizing and strengthening the fruitful relationship between the world of learning and the world of public affairs.” The Center opened in 1970 under its own board of trustees. In all its activities the Woodrow Wilson Center is a nonprofit, nonpartisan organization, supported financial- ly by annual appropriations from Congress, and by the contributions of foundations, corporations, and individu- als. Conclusions or opinions expressed in Center publications and programs are those of the authors and speak- ers and do not necessarily reflect the views of the Center staff, fellows, trustees, advisory groups, or any individ- uals or organizations that provide financial support to the Center.

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