Outcomes

ICTSD Latin American Policy Dialogue on
Globalisation, Liberalisation and Sustainable Human Development

With a view to providing recommendations specifically on how to promote SHD and the sequencing of policy reform, three types of policies were addressed during the meeting: income growth policies; global integration policies through trade liberalisation and opening to foreign direct investment (FDI); and sustainable human development policies, including health and educational programmes, poverty alleviation, income distribution, environmental protection and gender balance.  Participants highlighted the fact that there is no automatic empirical link between these three types of policies meaning, for example, that export-led growth does not necessarily result in SHD, or that trade liberalization per se does not always result in GDP growth.  The meeting agreed on the need for complementary policies, which will assist countries in crafting the right policy mix that enables them to engage in the globalisation process and achieve SHD objectives, simultaneously.

Diagnosis

As a result of the debt crisis in the 1980's, most Latin American countries have undertaken structural reforms of their economy. These reforms were designed to achieve macroeconomic stability, economic growth and better integration in the world economy. They were essentially based on the so-called Washington consensus, which consists of various policy instruments including fiscal disciplines, public expenditure reduction, tax reform, market-determined interest rates and exchange rates, trade liberalisation, opening to FDI, privatisation, and protection of intellectual property rights. As a result of these reforms, the region was able to control inflation and improve management of public deficits. However, these reforms have not produced a new era of rapid economic growth. In fact, with an average yearly growth rate of 1.4%, per capita GDP in the region would barely compensate the "lost eighties" when the yearly rate fell by 0.9 %.   Moreover, in the process of introducing substantial policy reforms, including greater liberalization of the capital account, several economies (and their currencies) have become highly vulnerable to international speculative raids, in part caused by the enhanced volatility of financial flows.   The deepening of policy reforms and greater access to information showed that the globalisation process, while it increases exposure of domestic currencies to greater volatility, it also enables quick recovery as in the case of Mexico and Brazil.

Participants argued that the reason why structural reform based on the Washington consensus did not result in rapid growth was probably linked to the fact that most countries articulated it as an end in itself and not as a means to achieve their "own development objectives". The question of "ownership" of reform policies was considered essential towards the introduction of truly effective SHD policies. In that context, participants stressed the need for each country to set its own agenda according to its own development strategy and objectives.

  Recommendations

·          Trade liberalisation and diversification: how to sequence policy reform. Most Latin American countries have promoted export-oriented growth through trade liberalisation with a view to sustain economic growth and promote human development. However, as opposed to South East Asian countries, Latin American countries have liberalised trade before having a strong export capacity. As a consequence, imports increased more rapidly than exports, contributing to growing trade deficits. Participants recommended that export-led growth policies be complemented with export diversification measures so that country exports can move up the ladder of comparative advantages and achieve more value-added production. Trade liberalisation in itself has not lead to export diversification but to specialisation and increased dependency on a few sectors and natural resources for export promotion. As a result, Latin American countries have on average been constrained to reallocate resources towards a few primary commodities. In that context, recommendations stressed the importance of realistic exchange rate policies, temporary export subsidies (especially WTO non-actionable subsidies on R&D) and supply-side policies (technical assistance to SMEs, educational policies, etc.) to increase competitiveness, enhance export diversification and promote value-added exports in dynamic sectors.

·          Foreign direct investment: the role of the State. The substantial increase in the inflow of foreign investment had a strong impact on the trade structure in the region but didn' t lead to economic growth and better income distribution. According to participants, while FDI can potentially contribute to the reduction of the current account deficit and the modernisation of the economy through the transfer of capital, management skills and technology (including environmental technology), these positive impacts are not automatic. Three major types of FDI went to the region. Efficiency-seeking FDI, especially in the textile sector in Maquiladoras in Central America; market-seeking FDI, particularly in the telecommunication, banking and other service sectors; and resource-seeking FDI (mining, forests, fisheries, etc.). In general, recent FDI has not contributed to the industrialisation and export diversification process and has resulted sometimes (as in Maquiladoras) in labour rights violations and environmental degradation. In many countries FDI have displaced investment by domestic firms (crowding out effect). In the telecommunication and service sector, multinational corporations (MNCs) have been particularly interested in the domestic market potential and therefore imported more inputs than they export, which in some instances has contributed to BOP problems. Finally, with regard to resource-seeking FDI, countries have not always been able to mitigate the negative environmental impacts and move to more value-added production. Participants recommended that current FDI promotion policies be complemented with measures to promote technology spillover in targeted sectors. Participants also strongly discouraged liberalisation in other capital flows including volatile portfolio investments.

·          Sustainable human development as an engine for growth: On the SHD front, participants highlighted progress achieved in terms of life expectancy, women's incorporation in the formal labour force and the consolidation of democratisation and peace processes in the region. However, while many countries were able to reduce the percentage of poor and indigent households, in absolute terms, the number of persons living below the poverty line in 1997 was 50% higher than in 1980. Participants also pointed out the need to address the highly unequal income distribution structure prevailing in the region. With respect to the environment, the economic reforms altered the export structure and had three types of impact on the environment. The scale effect, which relates to the fact that if trade and investment grow, then the total pollution load to be borne by the environment will also grow. Second, the composition effect, meaning that as a consequence of trade liberalisation and opening to FDI, countries tend to reallocate resources according to their comparative advantage. For many countries in the region, this has meant an incentive for natural resource intensive industry. Third, the technological effect. Despite the increased flow of FDI and modern technology, the average pollution load per unit could not be reduced. Participants agreed to the need of incorporating the environment as natural capital in production functions and sustainable environmental management to be effectively integrated in the formulation of export-led growth and SHD policies.

Participants also stressed the importance of active health, education and demographic polices, arguing that they contribute to both SHD and economic growth. Healthy people save more, live longer and are more productive. An increase in life expectancy implies a greater return of investment in education. The need to create human capital through educational policies well adapted to a country's economic needs was also stressed as a means of promoting both economic growth and SHD. Education should be a tool to promote export diversification, add value to manufacturing sectors and foster technology intensive production.

·          The evolving multilateral trading system as an opportunity .    Rules and disciplines established at the multilateral level, and particularly those adopted at the World Trade Organisation, should facilitate countries' integration in the world economy through increased market access, while enabling these countries to implement their own sustainable human development strategies. The special and differential treatment provisions for developing countries as well as new "spaces for development policies" as suggested by Venezuela should therefore be created or reinforced within the WTO.   Participants recommended that:  (i) further liberalization be promoted for agricultural goods, textiles and footwear, (ii) protectionism should be avoided by way of sound proposals against the use of anti-dumping measures, (iii) special and differential treatment should be consolidated in general and extended to export subsidies, (iv) regional trade integration schemes should be used as building blocks towards creating new comparative advantages in world markets.

·          Globalisation:  risks, responsibilities and rewards .     The globalisation and trade liberalisation process creates new opportunities but also challenges. In order to take full advantage of the globalisation process and of their increasing insertion into the world economy, Latin American countries will need to:  (i) assess risks associated with globalisation, (ii) clearly assign responsibilities for managing such risks and (iii) distribute the rewards more equally. Risks associated with globalisation include macro-economic instability risk, public debt risk, social risk and environmental risk. Responsibilities will have to be identified for assessing and managing these risks at the national, regional and local levels.  Responsibilities will need to be shared among government levels, the private sector and civil society. Managing these risks is only possible if there is a broad consensus around national and regional priorities. This requires increased transparency and public participation, institutional capacity building for governments and civil society and better coherence between the various institutions and ministries in the policy-making process.