Select Committee on International Development Appendices to the Minutes of Evidence


Memorandum submitted by the World Development Movement

  The World Development Movement (WDM) welcomes this International Development Committee inquiry. WDM is an independent research and advocacy organisation with 8,000 members, 20,000 supporters and 100 local groups across the UK. WDM is a democratic membership organisation. WDM's aim is to ensure that the policies of governments, international agencies and companies towards developing countries promote fairness, opportunities for the poor and respect for the rights of vulnerable and disadvantaged people.

  Since its establishment in 1970, WDM has undertaken research, lobbying and campaigning on a number of crucial issues that underlie globalisation. On trade, WDM has campaigned for phase out of EU's restrictions of the export of textiles and garments from the poorest countries, access to the EU for commodity exports and a fairer deal for developing countries at the Ministerial Conference in Seattle. On investment, WDM has opposed to the Multilateral Agreement on Investment (MAI) and proposed investment rules that would aim to create a stronger link between foreign investment and poverty reduction. On debt, WDM has campaigned since the mid 1980s for comprehensive debt cancellation and reform of the policies of the IMF and World Bank to prioritise poverty reduction.

  WDM submitted evidence to the White Paper in the form of a paper titled "Making globalisation work for people", with additional references on recent research, and attended consultations with the Secretary of State and DFID officials.

  The focus of this submission is on policies that are vital to meet the challenge of harnessing globalisation to benefit the poor: international trade policy; international investment and regulation of the global economy; and international debt and the conditions imposed by the IMF and World Bank.


  1.  WDM welcomes the inclusion of a number of important policies and statements in the White Paper. In particular, we congratulate the Secretary of State for International Development for having changed government policy of tied aid. The unilateral untying of all aid and promotion of local procurement is an important step forward.

  Other important policy changes include a commitment to increase aid spending and measures to reclaim money illicitly banked in London, a commitment to increase the aid budget and a commitment to introduce a new Development Bill to ensure that the development programme continues to be focused on the reduction of poverty.

  2.  The White Paper also includes some important changes to the overall positioning of government policy on a number of issues. The clear statement by the Prime Minister in the Foreword that the elimination of world poverty is in the UK's national interest provides an important benchmark that can be used to clarify priorities, particularly where there is a conflict between promoting the commercial interest of British companies and promoting the interests of the world's poor.

  3.  There is also evidence of change in the Government's thinking on how poverty elimination can be achieved. This is important, because there has been little disagreement on the aims, in that globalisation must deliver real benefits to the poor—disagreements have generally been over the policies that will achieve this aim. The White Paper helpfully calls states that:

    —  "development strategies must be adapted to local circumstances and owned and nationally led by developing and transition countries" (Para 8)

    —  "all developed country policies towards the world's poorest countries should be consistent with a commitment to sustainable development and poverty reduction." (Para 43)

    —  "we will also urge the WTO to commit itself to achieving the International Development Targets. This would send a powerful signal of its commitment to poverty reduction and acknowledge that trade is not an end in itself." (Para 229).

  This submission from WDM identifies ways in which the British Government can implement those aspirations through specific policy changes.


  4.  The White Paper fails to clearly identify the conditions required for pro-poor growth. This is a major weakness, not only for this White Paper, but also for international institutions (such as the IMF) that now have a mandate to promote poverty reduction. The evidence of the past two decades shows a dramatic slowing of growth, particularly in the poorest countries. This is giving rise to widespread recognition that current policies are not working, and new thinking is required if the International Development Targets are to be achieved. As a result, there is little consensus internationally on the types of policies that will achieve equitable patterns of growth.

  WDM recommends that the Government re-assess the evidence of links between specific policies and poverty reduction, through a participative process involving developing country governments and civil society. The aim should be to build a shared understanding of the types of policies that can promote pro-poor development.

  5.  WDM welcomes the recognition in the White Paper that the diversity of countries should be respected in the types of policies that the Government advises developing countries to adopt.

  WDM recommends that the Government ensures that its policy advice to developing countries and its role in international institutions, such as the IMF and WTO, recognises the differing needs of developing countries and respects their rights to democratically determine their own development path.

  6.  The Secretary of State for International Development has played an inspiring role in encouraging governments and the international community to adopt the International Development Targets. However, the achievement of these targets involves a wide range of actors, most centrally being the people of the developing countries. The Globalisation White Paper should define targets for the UK Government to achieve in support of the IDTs. The most important of those are to address its own responsibilities for policies that affect the poor.

  WDM recommends that the Government prepares a full list of those policies of the UK Government, the EU and those international institutions within which the Government has influence to identify those that inhibit poverty reduction. Many of these policies, such as tariff escalation, protectionism in agriculture and fisheries and anti-dumping, are included in the White Paper. The Government should prepare targets and timetables to reform those policies so to ensure the Government can play its part in supporting poverty reduction.

  7.  WDM welcomes the initiative to remove barriers on exports from the Least Developed Countries and the recognition that further reform of certain EU trade policies is important for poverty reduction. In order to take action on such policies, WDM calls on the government to elevate the political priority of removing barriers to exports from developing countries, and press for them to be instituted prior to any negotiations that would require liberalisation of trade by developing countries.

  8.  WDM welcomes the government's commitment to urge the WTO to adopt the International Development Targets.

  WDM recommends that this be implemented through pressing WTO members to re-negotiate existing trade agreements in order to create poverty reduction as an over-arching objective. The enforceable provisions of each of the trade agreements should be subordinated to their conformance with this aim.

  9.  WDM is concerned that there is little attention paid to the General Agreement on Trade in Services (GATS) in the White Paper, considering its potential impact on the delivery of vital services to the poor.

  WDM recommends that the UK Government ensures that there is a comprehensive and independent assessment of the impacts of past liberalisation of service sectors on the poor and assessment of the likely impact of GATS commitments before undertaking further negotiations. Further, the structure of the GATS should be reviewed and GATS reformed to accord priority to poverty reduction over liberalisation.

  10.  The White Paper includes reforms in WTO decision-making and calls for extensive capacity building to enable developing countries to fully participate in trade negotiations. This follows previous commitments from the Government to press for fundamental reform of the WTO.

  WDM recommends that the Government presses for such reforms be undertaken as soon as possible, and that they should proceed the initiation of a new Round—otherwise the imbalance of power in the WTO will further disadvantage the poor in new agreements.

  11.  The White Paper continues to call for an investment agreement in the WTO. This is opposed by many developing country governments and civil society organisations.

  WDM recommends that the Government work with UNCTAD, other international institutions, developing country governments and civil society organisations to build consensus on the aims for an international agreement on investment and a broader framework for the regulation of international business. This consensus-building should replace the EU's political lobbying to have investment negotiated in the WTO.

  12.  WDM welcomes the Government's leading role in replacing aid and debt conditionality to an approach that supports country-led poverty reduction strategies.

  WDM recommends that developing countries are enabled, encouraged and supported in developing their own Poverty Reduction Strategy Plans (PRSPs), with strong involvement from civil society groups and Parliamentarians. WDM urges the Government to ensure that the IMF demonstrates far greater flexibility in assessing what constitutes pro-poor macro-economic stability.


  13.  Perhaps the weakest point in the White Paper is an inadequate analysis of three vital starting points:

    —  What government policies have worked in the past to reduce poverty and to what extent are the policies achieving poverty reduction?

    —  What different types of policies might be appropriate to the wide range of economic, social, environmental and cultural circumstances of developing countries?

    —  What is the impact on Third World poverty of the policies over which the Government has responsibility, including policies of the UK Government, EU and international institutions?

  Answers to these three questions should form the heart of the White Paper.


  14.  The crisis of poverty experienced by the world's poor is included in the White Paper (especially Chapter 1). But a crucial aspect of the problem has not been sufficiently highlighted. The policies of the recent past are not working - a change in policy direction is urgently required.

  Most regions of the world are suffering from increasing poverty. Not only are the numbers of people living on less than $1 per day rising in South Asia, Latin America and sub-Saharan Africa, but the numbers of people living on less than $2 per day has risen from 2.55 billion to 2.8 billion since 1990. Increasing poverty on this scale does not result from a few countries failing to follow IMF programmes, as is sometimes claimed—it results from inequities in the structure of the global economy.

  15.  The only areas of the world that have significantly reduced poverty over the past decade are China and East Asia. These countries have been noteworthy for not following the prescriptions set out by aid donors and the IMF in the past. They have consistently pursued policies of building their domestic capabilities until they have been able to compete in international markets, and then liberalising according to their own schedule and priorities.

  This is a vital point. The White Paper fails to adequately analyse experience from the past to understand the policies that have been successful in promoting poverty reduction and those that have failed.

  16.  The evidence that the White Paper quotes in Paras 28-30 and 218 is primarily based on a selective use of statistical correlations that aim to demonstrate a relationship between economic liberalisation and economic growth, and between economic growth and poverty reduction. This evidence is contested. Some studies show evidence of a weak link, others show no relationship, while still others (including World Bank analysis) show that costs of liberalisation fall most heavily on the poor. Most are based on inadequate and unreliable statistics and are inconclusive. Despite numerous studies that have attempted to show that greater openness to trade and investment is good for growth, a synthesis of the research undertaken for DFID shows that there is no systematic relationship between openness and growth.[13]

  17.  To the contrary, there is increasing evidence that points to a dramatic slowdown of growth and poverty reduction in the period that the IMF policies of liberalisation have dominated decision-making in most developing countries. Growth rates over the past 18 years, a period marked by adherence to IMF prescriptions of opening trade and reducing government involvement in the economy, are significantly worse than the previous 20 years, from 1960-1980.

  Analysis of IMF data by the Center for Economic and Policy Research[14] shows that per capita income growth of Latin America and the Caribbean countries fell from 75 per cent in the period 1960-1980 to 6 per cent in the period 1980-1998; sub-Saharan Africa fell from growth 36 per cent to a decline of 15 per cent; even South Asia fell from 80 per cent to 60 per cent.

  The data shows that, of the survey of 89 developing countries for which there was consistent data, 77 countries experienced a fall in growth rates and only 14 experienced a rise. This is one of the reasons that there has been an increasingly difficult search for "success stories". Even the latest country quoted as an example, Uganda, still has per capita income 30 per cent lower than it was in 1983.

  18.  Disappointingly, the White Paper repeats the conventional wisdom about poor performance in the previous era of more extensive government intervention, ascribing the success to China and East Asia to their openness to the global economy (Paras 31 and 219-221). However, the governments of East Asian economies restricted trade and investment in key sectors and intervened heavily to build internationally competitive domestic industries. China is still one of the most heavily regulated economies in the world. The real lessons are that good government policy can make a difference in making markets work for the benefit of the economy and for the benefit of the poor.

  Instead, the White Paper consistently insists that developing countries need to drop their remaining restrictions and open up to the global economy. This misses the point. Most of the poorest developing countries are already heavily dependent on trade. For example, exports from Africa are around 30 per cent of their GDP, while the comparable figure for OECD countries is 19 per cent. It is the terms of trade and the composition of exports that are critical to successful trade.

  Similarly, the level of foreign investment as a proportion of gross capital formation in many of the poorer developing countries exceeds that of the OECD countries (this is acknowledged in Para 151), and significantly exceeds that of South Korea during its growth phase. Again, the problem is not that developing countries are closed to foreign investment—far from it. According to UNCTAD, 94% of the regulatory changes in developing countries over the 1990s have been in the direction of greater liberalisation of rules on foreign investment. Most spend excessive amounts of public funds, which they can ill afford, to subsidise foreign investment.

  The challenge is to attract more investment that can create the conditions for a virtuous cycle of growth and development. This means investment that has strong links into the domestic economy and which creates jobs, opportunities for local suppliers and builds skills and capabilities for all. Governments have an important role in promoting these forms of investment and restricting the types of investment that risk creating instability or excessive costs.

  19.  Therefore, the problem is a lack of attractive business opportunities, not that developing countries are closed and need to liberalise even more in order to trade more and attract foreign investment. This is an assumption behind current policies, as outlined in Para 186 (on investment) and Para 247 (on trade). WDM considers that liberalisation should not be pursued by the Government as an aim in itself. The White Paper's policies of persuading or pressuring all developing countries to open up to foreign exports and investment needs to be reviewed, to recognise the specific circumstances and needs of different developing countries at different levels of development.


  20.  Just as there is little evidence of a relationship between liberalisation and growth, there is also considerable uncertainty over the determinants of pro-poor patterns of development. For example, the widely quoted World Bank study authored by Dollar and Kraay[15] (cited in Paras 27-34) attempted to analyse the determinants of pro-poor growth. They were unable to derive any statistically significant relationships that can guide policy-makers.

  21.  The implication for British government policy in the face of uncertainty over the evidence should be to introduce greater flexibility into the policy prescriptions that the developing countries are called on to adopt. Yet the White Paper makes a number of wide-ranging recommendations on the types of economic policies that should apply to a wide range of countries with different histories, cultures, environments, economic capabilities, governance and potentials. Those policies increasingly constrain the abilities of governments to pursue democratically defined paths of development.

  22.  For example, the White Paper advocates in Para 164 that developing countries remove any restrictions on their capital account. In the past, the IMF has required such changes as part of Structural Adjustment Programmes and has proposed that it become a requirement for all members of the IMF under its Articles. However, the financial crisis in 1997-98 demonstrated the danger of such a policy, especially given the lack of controls on the activities of international speculators. The World Bank and IMF have recently accepted that well-designed capital controls, adopted by countries such as Malaysia and Chile, can be beneficial.

  The recommendation in the White Paper needs to extend beyond recognising that developing countries should be allowed to sequence domestic regulation before capital account liberalisation (Para 162), to support developing countries that choose to introduce capital controls to deal with the inherent instability of a largely unregulated international financial system.

  23.  As WDM's input to the White Paper pointed out, the policies that are being advocated by the British Government increasingly restrict the policy options available to developing countries. Policies on trade, investment, financial flows, state involvement in the economy and domestic regulation have the effect of preventing developing countries from pursuing policies that have been used by OECD countries during their development.

  Such policies that promoted the development of domestic industries, diversified the economy and assisted the transition to higher skill production have also been used by most of the successful developing economies of the past century, including the East Asian economies. These are the countries that have been able to couple economic growth with a relatively equitable pattern of income distribution.

  24.  Yet these policies are being prohibited under international agreements on finance, investment and trade, and through the conditions applied by the World Bank and IMF. In Chapters 2, 4 and 5 of the White Paper, the Government has committed to continue its current policies that aim to ensure that such policies cannot be used by developing countries.

  It is particularly hard to justify a denial of such policies to developing countries while many of those policies are still being used by the industrialised countries themselves, for example trade barriers and subsidies are extensively used in the EU Common Agriculture Policy. These policies are justified by the European Commission on the basis of "externalities"—benefits from such a policy that justify intervention, for example, to support small farmers. The strongest justification for developing countries to use such interventionist policies is to prioritise poverty reduction over liberalisation. Yet this is not allowed under WTO agreements and other international policies.

  25.  The influence of the British Government over developing country policies should not be underestimated. Strong conditionality is exercised through the British aid programme, its governance over the IMF and World Bank and its powerful voice in the WTO. The policies that the British Government tries to persuade developing countries to adopt are crucial in the policy-making process of many developing countries.

  26.  A high standard of evidence should be required before the British Government restricts developing countries from adopting specific policies. This is particularly the case where the reason that countries have used such policies in the past has been to encourage broad-based development (such as providing support for domestic industries to diversify their economy away from dependence on primary commodities or to nurture "infant" industries). The history of development economics is littered with deterministic theories about how countries develop—most have subsequently been proven to have been ineffective or even harmful. It is usually the poor that have suffered from the application of such ideologies.

  27.  This is one of those eras when there is mounting evidence that the policies pursued over the past 20 years have not worked and have, in many cases, harmed the poor. It is time for the Government to retreat from an assumption that they know what is best for developing countries and acknowledge that they neither have the knowledge nor the right to exercise such a heavy influence over the economic decisions that are taken in democratic countries.


  28.  As the Secretary of State for Trade and Industry, Stephen Byers, said in Seattle, expressing concern about the way in which the developing countries were treated: "The WTO will not be able to continue in its present form. There has to be fundamental and radical change in order for it to meet the needs and aspirations of all 134 of its members."

  This should have set a major challenge for British Government policy to be addressed in the White Paper. One of the most fundamental of the changes referred to by Stephen Byers to the need to make trade rules fairer to developing countries. This is an example of the policies over which the UK government has considerable influence. The starting point for the White Paper should have been a systematic analysis of the ways in which British Government policy affects poverty abroad.

  29.  The White Paper could then have set targets, not only on the ultimate outcomes in terms of poverty reduction (as in Figures 1.1 and 1.2), but most importantly in the policies over which it has influence and responsibility. A tangible outcome of the White Paper should have been a clear analysis of those policies that inhibit poverty reduction, and timetables and targets for policy reform.

  This may have included policies such as the EU Common Agricultural Policy, the EU Common Fisheries Policy, continued high tariffs on textiles and clothing, tariff escalation and anti-dumping (listed in Para 231, 245 and 246). These targets are important for achievement of the International Development Targets, within the power of the EU to deliver and are heavily influenced by policies and priorities of the British Government. A focus on these targets would provide confidence that the Government is fully committed to coherence in government policy (as stated in the Prime Minister's Foreword) and playing its part in making progress towards poverty reduction. Most importantly, these are targets for which the Government should be accountable.

  30.  In summary, the White Paper has failed to address fundamental challenges in three key areas. WDM recommends:

    —  The Government should re-assess the evidence on poverty reduction, through a participative process involving developing country governments and civil society, to derive clear lessons on policies to promote pro-poor development

    —  The Government should ensure that its policy advice to developing countries, and its role in international institutions, such as the IMF and WTO, recognises the differing needs of developing countries and respects their rights to democratically determine their own development paths

    —  The UK Government provides a comprehensive listing of those policies that currently inhibit poverty reduction (many of which are listed in the White Paper) and prepares targets and timetables to make those policies supportive of poverty reduction.

  31.  In addition to these recommendations, WDM considers that there is a need for re-examination of the White Paper's recommendations in three specific areas:

    —  The policies that developing countries should adopt on trade and the British Government position on international trade negotiations

    —  The international rules that should be developed to regulate foreign investment and operations of international companies

    —  World Bank and IMF conditions for lending or acceptance of Poverty Reduction Strategy Papers

  These issues are addressed in the following sections.


  WDM agrees with the position of the Government in the White Paper that strong multilateral rules and a dispute settlement mechanism are needed to prevent bullying of developing countries by the major industrialised countries (particularly the so-called Quad of USA, EU, Japan and Canada that have exercised a dominant role in the past). Trade, if it is on fair terms, can play an important part in the development process. The problem with current trade rules is threefold:

    —  The rules are not fair to developing countries

    —  The aim is generally defined as removal of all barriers to trade (and increasingly to investment as well) as an end in itself

    —  The process of trade negotiation and dispute settlement is weighted towards the interests of the most powerful trading blocs


  32.  It is now widely acknowledged that current trade agreements and those under negotiation (particularly the General Agreement on Trade in Services—GATS) are unfair towards developing countries. WDM's submission to the White Paper and the IDC report After Seattle called for substantive changes to the British Government's trade policy to address these problems.

  The incoherence of policy positions is shown by the section on Realising Export Potential in the White Paper (Paras 219-225). The example of East Asian countries is used to make the link between their promotion of exports and a dramatic reduction in poverty. Yet many of the policies used by those countries, such as protecting infant industries, requiring foreign investors to form joint ventures or use local suppliers, and targeting support for export industries, are now prohibited for use by developing countries.

  Further, efforts by developing countries to diversify through additional processing of primary products is prevented through tariff escalation and other trade barriers imposed by the EU and other industrialised countries. Exporters of manufactured goods from developing countries already face tariffs four times higher than those applying to exports from industrialised countries, they face trade distortions from agriculture and fisheries policies, and non-tariff barriers from policies such as anti-dumping. Rather than exhorting developing countries to export more (as in Paras 219-225), the first priority of the British Government should be to change the policies that inhibit them from doing so.

  33.  However, the White Paper repeats the formulation that the only way to achieve reforms is for the developing countries to agree a new Round that would require them to undertake further liberalisation. Recent meetings of developing country trade Ministers (particularly the African Trade Ministers' meeting in Libreville) have demonstrated that this argument is not acceptable. Developing countries have strengthened their position that it is up to industrialised countries to redress the imbalances first, since they maintain some of the highest barriers.

  In calling for "flexibility" from Ministers of EU Member States, the EU Trade Commissioner, Pascal Lamy, made it clear that developing countries do not consider the current EU position to be sufficiently in the interests of development. It is disappointing that the White Paper did not show the flexibility called for, particularly in its continued insistence on negotiations on new issues that are primarily in the interests of the EU, such as investment.

  34.  A change in policy is required. WDM welcomes the EU's proposal on "Everything But Arms" (Para 244), provided that real assistance is provided to Caribbean countries and other developing countries affected, and the Government's support for capacity building (Para 239). But far more fundamental changes are required to reduce trade barriers applying to all developing countries.

  35.  WDM calls for the British Government to move beyond the White Paper commitments, to elevate the political priority of removing barriers to exports from developing countries, and press for them to be instituted prior to any negotiations that would require liberalisation of trade by developing countries.

  Implementing this recommendation would be the single most important thing that the Government could do to simultaneously meet the International Development Targets and restore confidence in the WTO.


  36.  WDM welcomes the White Paper's commitment to "urge the WTO to commit itself, with the rest of the international community to achieving the International Development Targets" (Para 229). This is an important step towards ensuring that the priority of poverty reduction is elevated above WTO principles of trade liberalisation.

  However, in order to be implemented, this commitment needs to be built into existing and planned trade agreements. This requires a major change to the concept of Special and Differential Treatment to ensure that poverty reduction is elevated above liberalisation principles such as National Treatment or progressive liberalisation.

  37.  More broadly, developing countries are currently precluded from enacting policies or laws that support their domestic industries by requiring them to treat imports (and, in the case of GATS, foreign investment) "at least as well" as domestic industries. Creating a priority for poverty reduction would allow developing countries greater flexibility to pursue policies to reduce poverty, even if they discriminated in favour of domestic business. This may be required in order to provide government assistance for diversification of their economies away from dependence on commodities, or to provide temporary support for domestic industries until they are able to compete internationally.

  38.  WDM recommends that the White Paper's commitment to urging the WTO to adopt the International Development Targets be actioned through the British Government pressing for re-negotiation of existing trade agreements to create poverty reduction as an over-arching objective. Provisions of each of the trade agreements would be subordinated to their conformance with this aim.

  This recommendation would represent a fundamental change to British trade policy and to existing trade law, but it is required if the Government's commitment to prioritising poverty reduction is to be implemented.


  39.  An urgent priority is for the Government to reform the existing GATS so that the aim of the agreement is not to promote progressive liberalisation of service industries, but to promote poverty reduction through trade in services.

  40.  GATS covers issues that are vitally important to developing countries. As the introduction to GATS states: "The agreement on trade in services reached in the Uruguay Round is perhaps the most important single development in the multilateral trading system since the GATT itself came into effect in 1948."[16] GATS covers all forms of services, a range of some 160 services sectors.

  41.  Given its importance, it is surprising that the White Paper is virtually silent on GATS. There has been little public or Parliamentary debate on impacts that GATS is likely to have on developing countries (and on the UK or other industrialised countries). Despite repeated calls from developing countries, there has been no assessment of the impact of past liberalisation of services on developing countries or assessment of the likely impact of GATS on specific service sectors in future.

  42.  WDM has concerns over four key aspects of GATS:

    —  GATS covers the delivery of services that are vital for poverty reduction, and which are accorded importance in the White Paper (such as Chapter 3 calling for increased investment in health, education, skills and people). Services that are exclusively supplied "in the exercise of governmental authority" are excluded from GATS, but services provided on a commercial basis or in competition with one or more service suppliers are included.

    —  An outcome of the conditions imposed by the IMF under Structural Adjustment Programmes is that many services in developing countries have been privatised or are provided by the public sector in competition with the private sector. GATS would therefore apply to these sectors. They include public services to which access by the poor is vital, such as health, education and water supply. A potential problem with GATS is that many of these vital services cannot be delivered to poor communities at a profit.

    —  GATS will prevent developing countries from promoting their industries or protecting their delivery of services in those sectors in which it makes commitments to liberalise. It is generally believed that developing countries voluntarily enter into such commitments. However, in the reality of international negotiations, these decisions may not be made with sufficient information, understanding and voluntary consent:

—  Developing countries may not be fully aware of the implications of their commitments due to the pace of negotiations and the complexity of the agreement. Already, the WTO secretariat has found more than 1,400 errors in country commitments, many of them made by industrialised countries that have extensive research and negotiating resources. The lack of capacity of developing countries to negotiate trade agreements that are in their long term interest is highlighted in the White Paper (Para 239).

—  Developing countries may commit to liberalisation of service sectors, even if it is perceived not to be in their interest, in order to gain benefits from other trade agreements (the GATS negotiations are closely linked to the agriculture negotiations). The EU's draft negotiating position is calling for developing countries to liberalise key sectors of vital interest to the poor, such as water supply. Further, the GATS agreement itself includes the commitment to progressively liberalise (Article XIX of GATS).

—  Developing countries may make decisions in the short term to commit to liberalisation of sectors without the ability or capacity to predict the outcome. Many developing countries are undergoing major changes in the structure of their economies, and it is difficult to assess the implications in terms of their future needs and the dynamic competitive advantage for new service industries. Sectors that may not currently be important for employment or vital for poverty reduction, may become so in ten years time. The lack of capacity of developing countries to undertake research on the likely impact on their specific circumstances is exacerbated by the lack of any assessment undertaken by the WTO secretariat of other international agencies (such as UNCTAD).

—  Given the potential for developing countries to enter into commitments that are not in their long term interests, GATS makes it extremely difficult to reverse these commitments. Once commitments have been made to liberalise, the threat of action under GATS makes privatisation effectively irreversible and limits the ability of governments to introduce new regulations that might adversely affect imports of services or foreign investors.

—  GATS is not just a "bottom-up" agreement. There are provisions in GATS for which new rules are being negotiated. These will apply to all service sectors, whether or not commitments have been made to liberalise them. Of most concern is Part IV of Article VI on Domestic Regulation, that constrains regulations to be "no more burdensome than necessary to ensure the quality of the service." Current GATS negotiations are defining criteria on how this test would apply, but it may threaten mechanisms such as cross-subsidisation between richer and poorer consumers that are important for ensuring universal access to basic services.

  43.  WDM recommends that the UK Government ensures that there is a comprehensive and independent assessment of the impact of past liberalisation of service sectors on the poor, and assessment of the likely impact of GATS commitments before undertaking further negotiations. Further, the structure of the GATS should be reviewed and reformed to accord priority to poverty reduction over liberalisation.


  44.  Much has been written on the need for reform of the WTO, its negotiating process and the dispute settlement mechanism. The IDC's Tenth Report examined many of those issues. It is disappointing that the White Paper did not include the key recommendations.

  The IDC recommended, in Paragraph 41, that several things must happen before a new Round can be launched which has any chance of success, notably a review of the implementation and impact of Uruguay Round agreements; an immediate and significant increase in technical assistance to developing countries; and adequate preparation for a new Round. These pre-conditions for the launch of a new Round were not included in the White Paper.

  45.  WDM has joined with other UK NGOs to set out a reform agenda in a number of different areas[17]. We reiterate our recommendation that these reforms be undertaken as soon as possible, and that they should proceed the initiation of a new Round—otherwise the imbalance of power in the WTO will further disadvantage the poor in new agreements.


  46.  WDM welcomes the recognition that foreign investment needs to be seen in the context of the overall investment needs for a developing country. In Para 154, it is recognised that ". . . a small proportion of external flows are invested directly in the micro and small enterprise sector, which are the main source of new jobs and incomes for the poor". Para 156 then sets out a challenge to maximise the benefits of increased foreign investment by "creating strong links to the domestic economy." However, some of the policies listed in Box 7 are the measures that would have been prohibited under the draft Multilateral Agreement on Investment (MAI). This change in policy by the Government is welcome, as is the recognition in Para 184 that the OECD was the wrong forum to negotiate such an agreement.

  47.  However, the proposals by the Government on an investment agreement in the World Trade Organisation repeat many of the failings of the MAI. In particular, neither the White Paper nor the investment proposals from the EU clearly define the problem that such an agreement would address. From WDM's analysis, the problem is not insufficient liberalisation of foreign investment, but rather the lack of sound international regulation of investment and the operation of multinational companies.

  48.  WDM's input to the White Paper argued that the contribution of foreign investment towards poverty reduction varies greatly according to the type of investment and the conditions negotiated for investment. This is particularly the case in privatisation, mergers and acquisitions, investments in extractive resources and with regard to short term capital flows. Governments should have the powers to be able to maximise the benefits of foreign investment while minimising the potential costs.

  The framework for an investment agreement put forward by the Government in Paras 186 and 187 prioritises the rights of foreign investors over the need to retain policy flexibility to benefit the poor. For example, Para 187 suggests that support for domestic businesses would only be allowed if it were also offered to foreign investors. This means that government policies to support domestic industries, used by all OECD countries and most of the East Asian countries during their development would be effectively prohibited under such an investment agreement.

    Further, the agreement would not include measures to ensure that foreign investors are regulated with regard to abuses of power, such as ensuring that international companies are not allowed to avoid taxation, operate monopolies, undertake predatory pricing or use other restrictive business practices at the international level.

  Proposals in Para 190, under a Competition Policy agreement focus on domestic measures (primarily for the benefit of foreign investors) rather than urgently-needed regulation at the international level. In order for there to be a balance between the interests of foreign investors and the needs of the host society and host communities, such an agreement should not be negotiated within the WTO, given the WTO's mandate for deregulation, rather than regulation.

  49.  WDM therefore recommends that the Government work with UNCTAD, other international institutions, developing country governments and civil society organisations to build consensus on the aims for an international agreement on investment and a broader framework for the regulation of international business. This consensus-building should replace the EU's pressure to have investment negotiated in the WTO.

  WDM has made detailed proposals on these issues in its input to the White Paper process.


  50.  WDM welcomes the important role that the government has played in achieving progress on debt so far. However, we are concerned that the reduction in the costs of debt servicing are not sufficient to meet the challenges of poverty reduction for Heavily Indebted Poor Countries (HIPCs). The formula for calculating sustainability of debt should start with the country's need for investments that are needed to reduce poverty, including health care, education, infrastructure and other government services, and then calculate the available funds for debt servicing based on the country's ability to pay.

  51.  Debt write-off needs to be applied to other indebted poor countries than those included in HIPC. Countries such as Haiti, Nigeria and Bangladesh urgently need the opportunity to prioritise poverty reduction, and will only be able to do so if there is a reduction in their debt service payments.

  52.  WDM also welcomes the British Government's role in pressing for the introduction of Poverty Reduction Strategy Papers (PRSPs). We support the statement in Para 308 that the process of developing PRSPs should put developing countries in the lead, devising and driving forward their own development strategies. However, the IMF has retained an effective right of veto over a poverty reduction strategy (as confirmed most recently in a statement by Masood Ahmed, the IMF's Director of Poverty Reduction in the Financial Times, 12 January 2001).

  53.  A major problem has been that the IMF has used its power to insist on policies that have little to do with poverty reduction. Over the past year, for example, delays have occurred in debt write-off due to privatisation of electricity (Honduras), cotton (Mali), copper mines (Zambia), financial sector (Tanzania) and telecommunications (Nicaragua). In many of these countries, privatisation has been bitterly opposed by significant numbers of people. WDM's report "States of Unrest" documented over 50 protests in developing countries against IMF conditions, involving over one million people. These conditions were imposed despite a statement by the IMF's Managing Director, Horst Kohler, that privatisation should not be seen as an ideology.[18]

  54.  A major problem is that the IMF has a deterministic view of the "right" policies that countries should adopt and the power of veto should the PRSP process suggest alternatives. An increasing number of critics, including the World Bank former Chief Economist, Joseph Stiglitz, dispute the competence of the IMF to determine the most appropriate policies to achieve poverty reduction.[19] While noting that " . . over-prescriptive aid conditionality has a poor record in persuading governments to reform their policies" (Para 309), the White Paper fails to identify the need for the IMF to step back from applying over-prescriptive powers of veto over PRSPs.

  55.  At the core of the problem is, as identified above, a lack of understanding about what constitutes a pro-poor strategy. It is clear that the IMF's record of determining policy through Structural Adjustment Programmes has failed to restore sustained rates growth to most developing countries. The problem is not only with the process of conditionality, it is also in the types of policies that have been prescribed with remarkable uniformity across most developing countries.

  56.  WDM recommends that developing countries are enabled, encouraged and supported in developing their own PRSPs, with strong involvement from civil society groups and Parliamentarians. WDM urges the Government to ensure that the IMF demonstrates far greater flexibility in assessing what constitutes pro-poor macro-economic stability.

World Development Movement

January 2001

13   See the DFID commissioned paper "A Review of the Empirical Evidence on Trade, Trade Policy and Poverty" A McKay, L Winters and A Mamo Kadir, CREDIT, 1999. Back

14   M Weisbrot, R Naiman and J Kim "The Emperor has no Growth: Declining Economic Growth Rates in the Era of Globalisation", Center for Economic and Polcy Research, Washington DC, September 2000. Back

15   D Dollar and A Kraay "Growth is Good for the Poor" World Bank, March 2000. Back

16   WTO Secretariat "An Introduction to the GATS" WTO, October 1999. Back

17   "Recommendations for ways forward on institutional reform of the World Trade Organisation", a discussion paper compiled by ActionAid, CAFOD, Consumers International, FIELD, Oxfam, RSPB and WDM, 2000. Back

18   Horst Kohler statement at a meeting with NGOs on 11th September 2000. Back

19   Joseph Stiglitz in The New Republic, 17-24 April 2000. Back

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