By Yilmaz Akyüz
GENEVA, Dec 29 2015 (IPS)

Foreign direct investment (FDI) is perhaps one of the most ambiguous and the least understood concepts in international economics. Common debate on FDI is confounded by several myths regarding its nature and impact on capital accumulation, technological progress, industrialization and growth in emerging and developing economies.

Yilmaz Akyüz, chief economist of the South Centre, Geneva.

It is often portrayed as a long term, stable, cross-border flow of capital that adds to productive capacity, helps meet balance-of-payments shortfalls, transfers technology and management skills, and links domestic firms with wider global markets.

However, none of these is an intrinsic quality of FDI. First, FDI is more about transfer and exercise of control than movement of capital. Contrary to widespread perception, it does not always involve flows of financial capital (movements of funds through foreign exchange markets) or real capital (imports of machinery and equipment for the installation of productive capacity). A large proportion of FDI does not entail cross-border capital flows but is financed from incomes generated on the existing stock of investment in host countries. Equity and loans from parent companies account for a relatively small part of recorded FDI and even a smaller part of total foreign assets controlled by transnational corporations.

Second, only the so-called greenfield investment makes a direct contribution to productive capacity and involves cross-border movement of capital goods. But it is not easy to identify from reported statistics what proportion of FDI consists of such investment as opposed to transfer of ownership of existing firms (mergers and acquisitions). Furthermore, even when FDI is in bricks and mortar, it may not add to aggregate gross fixed capital formation because it may crowd out domestic investors.

Third, what is commonly known and reported as FDI may contain speculative components and creates destabilizing impulses, including those due to the operation of transnational banks in host countries, which need to be controlled and managed as any other form of international capital flows.

Fourth, the immediate contribution of FDI to balance-of-payments may be positive, since it is only partly absorbed by imports of capital goods required to install production capacity. But its longer-term impact is often negative because of high import content of foreign firms and profit remittances. This is true even in countries highly successful in attracting export-oriented FDI.

Finally, superior technology and management skills of transnational corporations create an opportunity for the diffusion of technology and ideas. However, the competitive advantage these firms have over newcomers in developing countries can also drive them out of business. They can help integrate developing countries into global production networks, but participation in such networks also carries the risk of getting locked into low value-added activities.

These do not mean that FDI does not offer any benefits to developing and emerging countries. Rather, policy in host countries plays a key role in determining the impact of FDI in these areas. A laissez-faire approach could not yield much benefit. It may in fact do more harm than good.

Successful examples are found not necessarily among countries that attracted more FDI, but among those which used it in the context of national industrial policy designed to shape the evolution of specific industries through interventions. This means that developing countries need adequate policy space vis-à-vis FDI and transnational corporations if they are to benefit from it.

Still, the past two decades have seen a rapid liberalization of FDI regimes and erosion of policy space in emerging and developing countries vis-à-vis transnational corporations. This is partly due to the commitments undertaken in the World Trade Organization as part of the Agreement on Trade-Related Investment Measures .

However, many of the more serious constraints are in practice self-inflicted through unilateral liberalisation or bilateral investment treaties signed with more advanced economies – a process that appears to be going ahead with full force, with the universe of investment agreements reaching 3,262 at the end of 2014.

Unlike earlier bilateral treaties, recent agreements give significant leverage to international investors. They often include rights to establishment, the national treatment and the most favoured-nation clauses, broad definitions of investment and investors, fair and equitable treatment, protection from expropriation, free transfers of capital and prohibition of performance requirements.

Furthermore, the reach of bilateral investment treaties has extended rapidly thanks to the use of the so-called Special Purpose Entities which allow transnational corporations from countries without a bilateral treaty with the destination country to make the investment through an affiliate incorporated in a third-party state with a bilateral treaty with the destination country.

Many bilateral investment treaties include provisions that free foreign investors from the obligation of having to exhaust local legal remedies in disputes with host countries before seeking international arbitration. This, together with lack of clarity in treaty provisions, has resulted in the emergence of arbitral tribunals as lawmakers in international investment which tend to provide expansive interpretations of investment provisions in favour of investors, thereby constraining policy further and inflicting costs on host countries.

Only a few developing countries signing such bilateral treaties with advanced countries have significant outward FDI.

Therefore, in the large majority of cases there is no reciprocity in deriving benefits from the rights and protection granted to foreign investors. Rather, most developing countries sign them on expectations that they would attract more FDI by providing foreign investors guarantees and protection, thereby accelerating growth and development. However, there is no clear evidence that bilateral investment treaties have a strong impact on the direction of FDI inflows.

(End)

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By Yilmaz Akyüz
GENEVA, Jul 16 2014 (IPS)

Since the onset of the crisis, the South Centre has argued that policy responses to the crisis by the European Union and the United States has suffered from serious shortcomings that would delay recovery and entail unnecessary losses of income and jobs, and also endanger future growth and stability. 

Despite cautious optimism from the International Monetary Fund (IMF), the world economy is not in good shape. Six years into the crisis, the United States has not fully recovered, the Euro zone has barely started recovering, and developing countries are losing steam. There is fear that the crisis is moving to developing countries.

Yilmaz Akyuz

There is concern in regard to the longer-term prospects for three main reasons.

First, the crisis and policy response aggravated systemic problems, whereby inequality has widened. Inequality is no longer only a social problem, but also presents a macroeconomic problem. Inequality is holding back growth and creating temptation to rely on financial bubbles once again in order to generate spending.

Second, global trade imbalances have been redistributed at the expense of developing countries, whereby the Euro zone especially Germany has become a deadweight on global expansion.

Third, systemic financial instability remains unaddressed, despite the initial enthusiasm in terms of reform of governance of international finance, and in addition new fragilities have been added due to the ultra-easy monetary policy.“The external financial vulnerability of the South is linked to developing countries’ integration in global financial markets and the significant liberalisation of external finance and capital accounts in these countries” – Yilmaz Akyuz

The policy response to the crisis has been an inconsistent policy mix, including fiscal austerity and an ultra-easy monetary policy. While the crisis was created by finance, the solution was still sought through finance. Countries focused on a search for a finance-driven boom in private spending via asset price bubbles and credit expansion. Fiscal policy has been invariably tight.

The ultra-easy monetary policy created over one trillion dollars in fiscal benefits in the United States – which was more than the initial fiscal stimulus; the entire initial fiscal stimulus was limited to 800 billion dollars.

There was reluctance to remove debt overhang through comprehensive restructuring (i.e. for mortgages in the United States and sovereign and bank debt in the European Union). Thus, the focus was on bailing out creditors.

There was also reluctance to remove mortgage overhang and no attempt to tax the rich and support the poor, particularly in the United Kingdom and the United States – where marginal tax rates are low compared with continental Europe. There has been resistance against permanent monetisation of public deficits and debt, which does not pose more dangers for prices and financial stability than the ultra-easy monetary policy.

The situation in the United States has been better than in other advanced economies. The United States dealt with the financial but not with the economic crisis, whereby recovery has been slow due to fiscal drag and debt overhang. And employment is not expected to return to pre-crisis levels before 2018.

As for the Euro zone, Japan and the United Kingdom, all have had second or third dips since 2008. None of them have restored pre-crisis incomes and jobs.

Meanwhile, trade imbalances have not been removed, but redistributed. East Asian surplus has dropped sharply and Latin America and sub-Saharan Africa have moved to large deficits. Developing countries’ surplus has fallen from 720 billion dollars to 260 billion dollars. On the contrary, advanced economies have moved from deficit to surplus, whereby U.S. deficits have fallen and the Euro zone has moved from a 100 billion dollars deficit to a 300 billion dollars surplus.

As tapering comes to an end and the U.S. Federal Reserve stops buying further assets, the attention will be turned to the question of exit, normalisation and the expectations of increased instability of financial markets for both the United States and the emerging economies.

This exit will also create fiscal problems for the United States because, as bonds held by the Federal Reserve mature and quantitative easing ends, long-term interest rates will rise and the fiscal benefits of the ultra-easy monetary policy would be reversed.

Developing countries lost steam as recovery in advanced economies remained weak or absent due to the fading effect of counter-cyclical policies and the narrowing of policy space. China could not keep on investing and doing the same thing. Another factor contributing to the change of context in developing countries has been the weakened capital inflows that became highly unstable with the deepening of the Euro zone crisis and then Federal Reserve tapering. Several emerging economies have been under stress as markets are pricing-in normalisation of monetary policy even before it has started.

The external financial vulnerability of the South is linked to developing countries’ integration in global financial markets and the significant liberalisation of external finance and capital accounts in these countries. These include opening up securities markets, private borrowing abroad, resident outflows, and opening up to foreign banks. While developing countries did not manage capital flows adequately, the IMF did not provide support in this area, tolerating capital controls only as a last resort and on a temporary basis.

Several deficit developing countries with asset, credit and spending bubbles are particularly vulnerable.  Countries with strong foreign reserves and current account positions would not be insulated from shocks, as seen after the Lehman crisis. When a country is integrated in the international financial system, it will feel the shock one way or another, although those countries with deficits remain more vulnerable.

In regard to policy responses in the case of a renewed turmoil, it is convenient to avoid business-as-usual, including using reserves and borrowing from the IMF or advanced economies to finance large outflows. The IMF lends, not to revive the economy but to keep stable the debt levels and avoid default. It is also inconvenient to adjust through retrenching and austerity.

Ways should be found to bail-in foreign investors and lenders, and use exchange controls and temporary debt standstills. In this sense, the IMF should support such approaches through lending into arrears.

More importantly, the U.S. Federal Reserve is responsible for the emergence of this situation and should take on its responsibility and act as a lender of last resort to emerging economies, through swaps or buying bonds as and when needed. These are not necessarily more toxic than the bonds issued at the time of subprime crisis. The United States has much at stake in the stability of emerging economies. (END/IPS COLUMNIST SERVICE)

*   A longer version of this column has been published in the South Centre Bulletin (No. 80, 30 June 2014).

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A water kiosk in Blantyre, Malawi. Activists argue that water and sanitation must be a stand-alone goal in the post-2015 framework. Credit: Charles Mpaka/IPS

By Thalif Deen
UNITED NATIONS, Jul 15 2014 (IPS)

The United Nations is on the verge of releasing a new set of Sustainable Development Goals (SDGs) – perhaps 17 or more – to replace the eight Millennium Development Goals (MDGs) which will run out by the end of 2015.

The proposed new SDGs, which will make amends for the shortcomings of the MDGs, will be an integral part of the U.N.’s post-2015 development agenda which, among other things, seeks to eradicate extreme poverty and hunger from the face of the earth by 2030."Why not have a target to close down all tax havens by 2020?" -- Jens Martens

Neelie Kroes of the European Commission says the new development agenda is being described as “the most far-reaching and comprehensive development-related endeavour ever undertaken by the United Nations in its entire history.”

But Jens Martens, director of the Global Policy Forum, told IPS that in general, the current list of proposed goals and targets is not an adequate response to the global social, economic and environmental crises and the need for fundamental change.

The proposed SDG list, he pointed out, contains a mix of recycled old commitments and vaguely formulated new ones (such as the goal 1.a. to “ensure significant mobilization of resources from a variety of sources to provide adequate and predictable means to implement programmes and policies to end poverty in all its dimensions.”).

According to some development experts, the world’s rich nations have mostly failed to meet their obligations on MDG target 8 which called for a “global partnership for development” between developed and developing nations.

As the Geneva-based South Centre points out, “The SDGs should not be a set of goals for only developing countries to undertake as a kind of conditionality or new obligations.”

The Rio-plus-20 outcome document, adopted at an international conference in Brazil in 2012, specifically said the new goals should be “universally applicable to all countries,” including developed countries.

The 17 new goals, as crafted by an open-ended working group (OWG), include proposals to end poverty, eliminate hunger, attain healthy lives, provide quality education, attain gender equality and reduce inequalities.

The list also includes the sustainable use of water and sanitation, energy for all, productive employment, industrialisation, protection of terrestrial ecosystems and strengthening the global partnership for sustainable development.

The OWG is currently holding its 13th – and perhaps final – round of negotiations ending Friday, after which a report is to be submitted to the General Assembly in August.

The final set of goals is to be approved by world leaders in September 2015.

Until then, said one senior U.N. official, “there may be plenty of deletes and inserts.”

Martens told IPS governments should not repeat the mistake of MDG 8 on “global partnership”, which was formulated so vaguely it did not imply any binding commitments for the North.

“What we need instead are measurable goals for the rich,” said Martens, who has been monitoring the last 12 sessions of the OWG.

He said any post-2015 agenda must address the structural obstacles and political barriers that prevented the realisation of the MDGs, such as unfair trade and investment rules (including the investor-state dispute settlement mechanism) and the problems of tax evasion and tax avoidance by TNCs and wealthy individuals.

“Why not have a target to close down all tax havens by 2020?” he asked.

Among activist groups, there was widespread criticism that water and sanitation was not a “stand alone goal” in the current MDGs but only a secondary goal under Goal 7 on “environmental sustainability.”

Nadya Kassam, global head of campaigns at the London-based WaterAid, told IPS, “We believe water and sanitation must be a stand-alone goal for the post-2015 framework, and we are encouraged by what we’ve seen so far.”

She said it is unthinkable that water, sanitation and hygiene could not be included – they are critical to so many other outcomes such as good health, education and economic growth.

U.N. Deputy Secretary General Jan Eliasson has made the importance of sanitation clear, with his campaign to end open defecation, which WaterAid strongly supports.

After nearly 15 years on from the MDGs, the original goal on water to halve the proportion of people without has been reached globally. Yet coverage in sub-Saharan Africa remains poor, with 36 percent of the population still living without this essential service.

Kassam said access to sanitation is lagging the furthest behind, and at the current rates of progress, it would take sub-Saharan Africa, as a region, over 150 years just to reach the existing goal of halving the proportion of people without.

“So water, and in particular sanitation, need to be of central importance going forward,” she said.

Martens said it is a positive signal that the current draft list of proposed SDGs contains a goal on reducing inequality within and between countries.

“It will be of utmost importance that this goal does not get lost in the final phase of the negotiations,” he stressed.

However, it would not be sufficient to just have a single goal on inequality — each SDG should have targets and indicators on distribution and inequality, Martens said.

Meanwhile in a statement released Monday, Reporters Without Borders said there was “heated discussion and opposition from certain OWG members such as Russia, Cuba and China” on a proposed SDG covering media and information.

The protection of the right to information is in danger of being weakened or disappearing altogether, to be replaced by a vague reference to freedom of expression, the statement added.

At the Millennium Summit held in New-York in September 2000, 189 U.N. member-states adopted the Millennium Declaration based on the outcomes of several international conferences of the 1990s, including population, human rights, the environment, habitat and social development.

A year later, in August 2001, the U.N. Secretariat released the eight MDGs.

But the goals were devised not by governments through an open debate but by a working committee drawn from several U.N. bodies, including the World Bank, the International Monetary Fund (MF), the U.N. children’s agency UNICEF, the U.N. Population Fund (UNFPA), the World Health Organisation (WHO) and the Organisation for Economic Cooperation and Development (OECD)

The goals were not the object of a formal resolution of the U.N. General Assembly.

The eight MDGs included eradication of extreme poverty and hunger, achieving universal primary education, promoting gender equality, reducing child mortality, improving maternal health, combating HIV/AIDS, malaria and other diseases, ensuring environmental sustainability and developing a global partnership for development.

By Martin Khor
GENEVA, Apr 10 2014 (IPS)

The growing crisis of antibiotic resistance is catching the attention of policy-makers, but not at a fast enough rate to tackle it. More diseases are affected by resistance, meaning the bacteria cannot be killed even if different drugs are used on some patients, who then succumb.

We are staring at a future in which antibiotics don’t work, and many of us or our children will not be saved from TB, cholera, deadly forms of dysentery, and germs contracted during surgery.

Martin Khor

The World Health Organisation (WHO) will discuss, at its annual assembly of health ministers in May, a resolution on microbial resistance, including a global action plan. There have been such resolutions before but little action.

This year may be different, because powerful countries like the United Kingdom are now convinced that years of inaction have cause the problem to fester, until it has grown to mind-boggling proportions.

The UK-based Chatham House (together with the Geneva Graduate Institute) held two meetings on the issue, in October and last month, both presided over by the Chief Medical Officer for England, Dame Sally Davies.

This remarkable woman has taken on antibiotic resistance as a professional and personal campaign. In a recent book, “The Drugs Don’t Work”, she revealed that for her annual health report in 2012, she had decided to focus on infectious diseases.

“I am not easily rattled, but what I learnt scared me, not just as a doctor, but as a mother, a wife and a friend. Our findings were simple: We are losing the battle against infectious diseases. Bacteria are fighting back and are becoming resistant to modern medicine. In short, the drugs don’t work.”

Davies told the meetings that antibiotics add on average 20 years to our lives and that for over 70 years they have enabled us to survive life-threatening infections and operations.

“The truth is, we have been abusing them as patients, as doctors, as travellers, and in our food,” she says in her book.

“No new class of antibacterial has been discovered for 26 years and the bugs are fighting back. In a few decades, we may start dying from the most commonplace of operations and ailments that can today be treated easily.”

At the two Chatham House meetings, which I attended, different aspects of the crisis and possible actions were discussed. In one of the sessions, I made a summary of the actions needed, including:

– More scientific research on how resistance is caused and spread, including the emergence of antibiotic-resistance genes as in the NDM-1 enzyme, whose speciality is to accelerate and spread resistance within and among bacteria.

– Surveys in every country to determine the prevalence of resistance to antibiotics in bacteria causing various diseases.

– Health guidelines and regulations in every country to guide doctors on when (and when not) to prescribe antibiotics, and on instructing patients how to properly use them.

– Regulations for drug companies on ethical marketing of their medicines, and on avoiding sales promotion to doctors or the public, that leads to over-use.

– Educating the public on using antibiotics properly, including when they should not be used.

– A ban on the use of antibiotics in animals and animal feed for the purpose of inducing growth of the animals (for commercial profit), and restrictions on the use in animals to the treatment of ailments.

– Promoting the development of new antibiotics and in ways (including financing) that do not make the new drugs the exclusive property of drug companies.

– Ensuring that ordinary and poor people in developing countries also have access to the new medicines, which would otherwise be very expensive, and thus only the very rich can afford to use them.

On the first point, a new and alarming development has been the discovery of a gene, known as NDM-1, that has the ability to alter bacteria and make them highly resistant to all known drugs.

In 2010, only two types of bacteria were found to be hosting the NDM-1 gene – E Coli and Klebsiella pneumonia.

It was found that the gene can easily jump from one type of bacteria to another. In May 2011, scientists from Cardiff University who had first reported on NDM-1’s existence found that the NDM-1 gene has been jumping among various species of bacteria at a “superfast speed” and that it “has a special quality to jump between species without much of a problem”.

While the gene was found only in E Coli when it was initially detected in 2006, now the scientists had found NDM-1 in more than 20 different species of bacteria. NDM-1 can move at an unprecedented speed, making more and more species of bacteria drug-resistant.

Also in May 2011, there was an outbreak of a deadly disease caused by a new strain of the E Coli bacteria that killed more than 20 people and affected another 2,000 in Germany.

Although the “normal” E Coli usually produces mild sickness in the stomach, the new strain of E Coli 0104 causes bloody diarrhoea and severe stomach cramps, and in more serious cases damages blood cells and the kidneys. A major problem is that the bacterium is resistant to antibiotics.

Tuberculosis is a disease making a comeback. In 2011, the WHO found there were half a million new cases of TB in the world that were multi-drug resistant (known as MDR-TB), meaning that they could not be treated using most medicines.

And about nine percent of multi-drug resistant TB cases also have resistance to two other classes of drugs and are known as extensively drug-resistant TB (XDR-TB). Patients having XDR-TB cannot be treated successfully.

Research has also found that in Southeast Asia, strains of malaria are also becoming resistant to treatment.

In 2012, WHO Director General Margaret Chan warned that every antibiotic ever developed was at risk of becoming useless.

“A post-antibiotic era means in effect an end to modern medicine as we know it. Things as common as strep throat or a child’s scratched knee could once again kill.”

The World Health Assembly in May is an opportunity not to be missed, to finally launch a global action plan to address this crisis.
(END/COPYRIGHT IPS)

Excerpt:

By Martin Khor
GENEVA, Oct 1 2013 (IPS)

A fight taking place in the World Trade Organisation (WTO) negotiations towards the Bali Ministerial Conference shows how the rules on agriculture allow developed countries to continue to shell out huge subsidies while penalising farmers in developing countries.

Food security is one of the key issues now being negotiated at the WTO as part of its preparations for the Bali Conference in December. For developing countries, food security and the livelihood and incomes of small farmers are top priorities.

Reducing and eventually eliminating hunger worldwide is one of the key Millennium Development Goals (MDGs) adopted by governments at the United Nations. In the present negotiations in New York on formulating Sustainable Development Goals in the U.N., food security, nutrition and agriculture make up one of the key clusters of issues.

Against this background, there is a remarkable discussion now taking place at the WTO as part of the preparations for Bali. Developing countries grouped under the G33 are asking that their governments be allowed to buy food from their small farmers and stock the food without this being limited by the WTO’s rules on agricultural subsidies. Some governments plan to provide food to poor households free or at subsidised rates.

Martin Khor

However their proposal is facing resistance, mainly from some major developed countries, especially the United States, whose official position is that such a move would “create a massive new loophole for potentially unlimited trade-distorting subsidies”.

This clash is an outstanding example of how the agriculture rules of the WTO favour rich countries while punishing developing countries, including their poorest people.

It is well known that the greatest distortions in the trading system lie in agriculture. This is because the rich countries asked for and obtained a waiver in the 1950s from the liberalisation rules of the General Agreement on Tariffs and Trade (GATT), the predecessor of the WTO.

They were allowed to give huge subsidies to their farm owners, and to have very high tariffs. This was at the expense of developing countries, which have a comparative advantage in agriculture.

When the WTO was set up, it had a new agriculture agreement that basically allowed this strong farm protection to continue. The rich countries were obliged only to reduce their “trade-distorting subsidies” by 20 percent but could change the nature of their subsidies and put them into a “Green Box” containing subsidies that are termed “non trade-distorting or minimally trade-distorting”.

There is no limit to the Green Box subsidies. And several studies have shown that many of the Green Box subsidies are in fact trade-distorting as well.

With this shifting around, the rich world’s agricultural subsidies have been maintained, or have actually soared. For instance, WTO data show that total domestic support in the U.S. grew from 61 billion dollars in 1995 to 130 billion dollars in 2010.

A broader measure of farm protection, known as total support estimate, which is used by the Organisation for Economic Co-operation and Development, shows that the agriculture subsidies of the developed country members climbed from 350 billion dollars in 1996 to 406 billion dollars in 2011.

The effects of continuing developed-country subsidies have been devastating to developing countries. Food products selling at below production costs are still flooding into the poorer countries, often eating into small farmers’ incomes and livelihoods. Ironically most developing countries are in a situation where they are not allowed to have the same huge subsidies.

The reason is that the agriculture rules say that all countries have to cut their trade-distorting subsidies. So if a developing country has not granted subsidies before, it is not allowed to give any, except for a small minimal amount (10 percent of total production value) known as “de minimis” support. Most developing countries had no, or few, subsidies when they joined the WTO due to lack of funds.

This is where the present WTO controversy comes in. The developing countries under the G33 are asking that food bought from poor farmers and stocked by the government should be considered part of the Green Box without conditions.

The present rule sets an unfair condition. Even if governmental stockholding programmes for food security purposes in developing countries are placed under the Green Box, there is a provision that the ‘subsidy’ element in such a national purchase scheme should be accounted for in the country’s AMS (aggregate measure of
support), which is the main category of subsidies considered to be trade-distorting, and which for most developing countries is limited to de minimis amount.

Other Green Box subsidies, including those that developed countries mostly use, do not carry such a condition.

The unfairness of this condition is worsened by the way the subsidy element is calculated in the Agriculture Agreement, as the difference between the acquisition price and the external reference price.

The problem is that the acquisition price is the current price level, while the ‘external reference price’ is defined as the average world price level in 1986-1988 (during a period when the Uruguay Round that led to the WTO was being negotiated).

Since 1986-1988, global and local prices of food items have increased tremendously. The 1986-1988 price is thus obsolete and much too low to be used to determine whether a developing-country government is subsidising its farmers.

Countries that are in danger of exceeding its AMS or de minimis maximum level include India. Its parliament has just passed a food bill that entitles the poor (two-thirds of the population) to obtain food from a government scheme that buys the food from small farmers.

But the estimated 20 billion dollars the government will spend annually may exceed the allowed AMS and de minimis levels, because India was not a big subsidiser before the WTO rules came into force.

Other developing countries that provide subsidies to their farmers and consumers, such as China, Indonesia and Thailand, may also one day find themselves the targets of complaints.

For rich countries that are paying a total of 407 billion dollars a year in subsidies to disallow poor countries from subsidising their small farmers is really an especially bad form of discrimination and hypocrisy.

Whether this controversy can be settled fairly before the WTO’s Bali Ministerial Conference remains to be seen.
(END/COPYRIGHT IPS)

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Women ragpickers in Delhi scavenging through a pile of refuse for recyclable material. Credit: Dharmendra Yadav/IPS

By Thalif Deen
UNITED NATIONS, Sep 25 2013 (IPS)

As world leaders from 193 countries evaluate the successes and failures of the Millennium Development Goals (MDGs) during high-level meetings and special events here, the United Nations claims that extreme poverty worldwide has been cut in half.

The number of people living on less than 1.25 dollars a day fell from 47 percent in 1990 to 22 percent in 2010, five years ahead of the targeted 2015 deadline, according to the latest figures released Wednesday by the world body."The roots of global crisis are the incredible concentrations of wealth and the failure of that money to trickle down." -- Sameer Dossani of ActionAid

But much of the reduction in poverty – amounting to about 700 million people leaving the ranks of the indigent – has taken place in countries such as India, China and Brazil, which have huge populations. There are still 1.2 billion people still living in extreme poverty in most of the world’s poorer nations in Africa, Asia and Latin America and the Caribbean.

But poverty alleviation has also resulted in the rise of a new middle class.

On the negative side, this has triggered mass social protests in Brazil, China, India, Turkey, Egypt and Tunisia. And this may be an unintended consequence of poverty eradication.

Perhaps more importantly, poverty alleviation even in these countries may hit a dead end soon because of the widespread financial crisis worldwide – as currencies collapse and exports shrink.

Martin Khor, executive director of the Geneva-based South Centre, told IPS the analysis on poverty eradication is valid and makes good points.

“The reduction of poverty coincided with exceptional global factors in the first decade of this century that is coming to an end,” he noted.

The credit boom in developed countries fuelled trade and economic growth – a rise in Gross National Product (GNP) – in developing countries, including commodity exports, he said. These countries also recovered from the financial crisis of 2008 to 2009 because of the reflationary policies of rich countries.

“But the Northern economies are in trouble, as they have changed to austerity policies and the U.S. easy money policy will have to taper down sooner or later,” said Khor, a former director of the Penang-based Third World Network.

Developing countries are now vulnerable to lower exports, reduced commodity prices and revenues and capital outflows, he warned.

In the next few years, Khor said, the slowdown of growth and possible recession in some countries and lower commodity prices are likely to impact on jobs and income, while poverty could rise again.

“It’s happening in Greece already and could happen in some developing countries,” he said.

Winnie Byanyima, executive director of Oxfam International, told IPS the MDGs have been an important force for development progress over the last 13 years.

“So many people lifted out of extreme poverty in such a short time is an achievement to celebrate,” she said.

Yet globally, more than a billion people still live on less than 1.25 dollar a day.

She said progress has been slow or non-existent where there has been protracted conflict, or where growth has been highly inequitable. “Global poverty is declining but in country after country, inequality is on the increase,” Byanyima said.

Billions of people are being left behind by economic growth, she noted.

There is an emerging consensus that high levels of inequality are not just morally objectionable, but they are damaging for social stability and to growth itself.

“These challenges must be met head-on,” she added.

Without targeted efforts to reduce gaps between rich and poor, the next set of global development goals will likely be unachievable.

“A focus on reducing inequality was a major omission in the original MDGs. Without it, the next set of global development goals is almost certain to fail,” she warned.

A stand-alone goal to tackle inequality must be included in a future framework for global development, she said.

Sameer Dossani, advocacy coordinator, Reshaping Global Power at ActionAid, told IPS the United Nations, first and foremost, needs to move beyond the 1.25 dollars-a-day definition of poverty.

“The roots of global crisis are the incredible concentrations of wealth and the failure of that money to trickle down,” he said.

One way to address the issue of global inequalities, he pointed out, is through reform of the international tax system. “At the moment we estimate that as much as 300 billion dollars in tax revenue is lost to development through a combination of corporate tax incentives and corporate tax dodging.”

At the country level, he said, countries can move away from the liberalisation policies that the International Monetary Fund (IMF) and other institutions promoted in order to seek some protection.

At the global level, leaders should reform the international monetary system to reduce dependency on the U.S. dollar and ensure stability in the international financial system, said Dossani.

The debate so far has skirted these fundamental issues. A genuine development framework would have tax and international monetary system reform at the top of the agenda, he said, adding that “these issues can’t be brushed under the carpet.”

By Martin Khor
GENEVA, Aug 17 2013 (IPS)

Two new trade agreements involving the two economic giants, the United States and the European Union, are leading a charge against the role of the state in the economy of developing countries.

Attention should be paid to this initiative as it has serious repercussions on the future development plans and prospects of developing countries.

The two latest attempts towards this are through the Trans-Pacific Partnership Agreement (TPPA) and the Trans-Atlantic Trade and Investment Partnership (TTIP). A new feature of both, as compared to other FTAs, will be discipline on the operations of state enterprises and a reduction of the state’s role in development.

Martin Khor. Credit: Nic Paget-Clarke

The latter is a subject of long-standing discussion. The immediate post-colonial period saw a tendency towards a strong state, including government ownership of some key sectors, such as industry and banking.

Past decades witnessed a wave of privatisation across both rich and developing countries. But the state still owns or controls utilities, infrastructure, public services, banks and a few strategic industries in many developing countries.

Countries provide incentives for foreign companies, such as tax-free status. However, the state also offers special treatment to local companies, such as grants, cheaper-than-normal credit, subsidies, and government contracts.

The developmental role of the state in developing countries is now coming under attack from developed countries.

This is promoted by the big companies in the U.S., Europe and Japan, which seek to enter the markets of developing countries – the source of their future profits.

The support given by the state to domestic companies is seen by multinational companies as a hindrance to their quest for expanded market share in developing countries.

They are thus seeking to change the worldview and policy framework in developing countries, to get them to reduce the role of state enterprises as well as to curb the governments’ promotion of local private companies.

A sub-chapter on state-owned enterprises is a prominent part of the TPPA, which is being negotiated by the U.S. and Australia, Brunei, Canada, Chile, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam. Japan has just joined too.

The U.S. and Australia are leading the move to have rules to discipline the role of the government in the economy, through a two-pronged approach.

First, to get government or other monopolies to behave in a “non-discriminatory” way, including when they buy or sell goods and services. For example, they are not allowed to give preferences or incentives to local firms.

Second, companies that are linked to the government (including through a minority share) should not get advantages vis-à-vis other firms in commercial activities. Of course, the developed countries that are proposing this are thinking of their companies -how they can get more access to developing countries’ markets.

In the TTIP, a U.S.-European Union agreement, negotiations for which started in July, the EU has prepared a sub-chapter on state-owned enterprises, with rules that seem quite similar to what the U.S. and Australia are proposing in the TPPA.

Although the TTIP only involves Europe and the U.S. directly, the rules it sets are intended to have consequences for other countries.

According to press reports, the two economic giants are planning for the rules they set in the TTIP to become the standard for future bilateral agreements that also include developing countries.

They also hope that these rules will eventually be internationalised in the World Trade Organisation, which has over 130 member states.

The EU position paper on state-owned enterprises says that its aim is to “create an ambitious and comprehensive standard to discipline state involvement and influence in private and public enterprises” and for this to “pave the way to other bilateral agreements to follow a similar approach and eventually contribute to a future multilateral engagement.”

In other words, the constraints on the role of the state, and the reduction of the space for behaviour or operations of state-linked companies, will become the way of the future for all countries, if the U.S. and European plans succeed.

These attempts to curb the role of the state in the economy are worthy of serious study and counter-action.

Developing countries that succeeded in economic development were able to combine the roles of the public and private sectors in a partnership that advanced overall national development.

Asian countries, including Japan, South Korea, Malaysia, Singapore and China, have pioneered this model of public sector collaboration with the private sector.

Those few developing countries that managed to get development going were all driven by the “developmental state”, or the leadership role of government in establishing the framework of economic strategy, and the collaboration between the state, state enterprises, and commercial companies.

Ironically, agricultural subsidies, the main trade-distorting practice of developed countries and regions like the U.S., Europe or Japan, have been kept off the agenda of the FTAs negotiated by the U.S. and EU with developing countries, including the TPPA.

The developed countries are clever not to include what would be more damaging to them. Thus the developing countries are deprived of what would have been the major trade gain for them.

Naturally, there are pros and cons to any agreement, including the FTAs. Any potential gain for a country in exports or investments should be weighed against potential losses to domestic producers and consumers, and especially the loss to the government in policy space and potential pay-outs to companies claiming compensation under the FTAs’ investment rules.

But if developing countries have to come under new international rules that curb the role of the state and that re-shape the structure of their economy, then the prospects for future development will be adversely affected.
(END/COPYRIGHT IPS)

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By Aileen Kwa
GENEVA, Aug 6 2013 (IPS)

The current discourse on Global Value Chains by key proponents and also the World Trade Organisation (WTO) secretariat is that developing countries should liberalise – in goods and services – and conclude a trade facilitation agreement.

Some have also suggested that any restrictions on exports should be eliminated (e.g. export taxes on raw materials). According to this discourse, these strategies would help developing countries more deeply integrate into global value chains as they can import more cheaply and thus export more competitively.

The picture on closer examination, however, is not so simple.

Global value chains are not a new concept. They have been a part of trade since colonisation when developing countries were the providers of the raw materials, sent to the developed countries for use in a variety of ways, including in their production of higher-end goods.

It is true that today, these value chains are expanding, simply because of the expansion of transnational corporations across the globe. Lead firms, mostly based in developed countries, and some developing countries, use suppliers from all over the world to carry out their various functions.

Developing countries, however, are differentially placed along global value chains. Some have a share in higher value added sections of the value chains, but most do not.

Not all players can equally gain from their participation in the value chains. It all depends on where a country is lined up in terms of technological capacities, the depth of their manufacturing capacities, how developed their services sectors are, the size of their enterprises, their managerial expertise and their ability to meet the standards of the international markets – to name only a few criteria.

Due to these and other limitations, developing countries could open up, and they could become more integrated, but the quality of their integration may not be of real benefit.

As Rashmi Banga notes in her paper “Measuring Value in Global Value Chains”, countries may be linked to the chains, but they may not be “gainfully” linked to them.

In today’s value chains the value is captured in the design and conceptual stage where having the technology is important, as well as in the final sales and marketing end. However, this is not where most developing countries are located.

Developing countries are generally located in the lower value manufacturing section of the value chain; and even then, this is true for some, not all, developing countries.

Mere liberalisation will not upgrade countries’ technological or services supply-side capacities. Nor will a trade facilitation agreement – expediting the entry of imports through a range of customs procedures (some of which are very costly and administratively intensive) – be a magic bullet in catapulting developing countries into competitiveness on the global scale.

In sum: there are no shortcuts.

In any case, the central question for developing countries is not about entering value chains at any cost. The real question for developing countries is how they can deepen their production capacities, so that they can garner a bigger share of the value added.

To do so, the path of industrial development, agriculture and services development must be undertaken. We need structural transformation in industry if we want our manufacturing capacities to move beyond being assembly lines, increased production capacities in a range of services sectors, and a more vibrant agricultural sector, especially in countries with large rural populations.

The agricultural sector cannot be overlooked or bypassed if a large section of the population is engaged here and depends on agriculture for employment. Just like jobs in manufacturing, people must be provided with fair prices and wages. This is critical to create domestic purchasing power, and to fuel domestic demand and thus the demand for the growth of local industries.

Failure to engage in structural transformation and deepening of production capacities could mean that countries get caught in supplying raw materials and being sites for low value added manufacturing tasks.

Very often, the domestic or regional markets offer better opportunities than global value chains for developing countries in terms of obtaining a larger share of the value added.

Trade policies must be used strategically to support industrial development of key sectors, and should be approached dynamically, changing over time as some industries mature and new ones develop. In that context, across-the-board liberalisation will not help.

In conclusion, the global value chains, as noted by South Africa’s ambassador to the WTO Faisal Ismail, do not provide a framework for helping developing countries develop beyond their current comparative advantages. UNCTADs latest analysis of the value added trade data also shows that more exports do not mean more value-added exports.

The global value chains discourse comes from the place of wanting to further ease the operations, movement and access of transnational corporations across global markets, with real dangers for developing countries’ firms and industries.

The priority for developing countries is building their production capacities. To this end, the flexible and dynamic use of trade policy instruments (tariffs, government regulations) that support industrialisation, agricultural and services development, complemented by fairer trade rules, are necessary.

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Children of a generation that fought for basic rights like having enough to eat, learning to read and being treated in safer hospitals, the over 300,000 students protesting on the streets of Brazil want more from a democratic and economic system that no longer represents them and is beginning to show its limitations. Credit: Fabiana Frayssinet/IPS

By Thalif Deen
UNITED NATIONS, Jul 17 2013 (IPS)

The rise of the “global middle class” is widely attributed to the gradual eradication of extreme poverty in the developing world, even as the United Nations says that millions of people in countries such as India, China and Brazil have graduated from the ranks of the indigent.

But is there unintended negative fallout indirectly linking poverty alleviation to the current rise in middle class street protests in Brazil, Turkey, Tunisia and Egypt, among others?

Praising Latin America for its success in “lifting millions out of poverty”, Helen Clark, the administrator of the U.N. Development Programme (UNDP), said last week that “protests and events around the world remind us that citizens want a greater say in the decisions which impact on their lives.”

And U.N. Assistant Secretary-General Heraldo Munoz points out that “many of the street protests in Latin America are sparked by a new middle class, increasingly indebted, who aspire for more, and demand quality public services and decent treatment.”

The challenge is to enhance institutions so they can respond to a new high-level intensity, says Munoz, who is also UNDP’s director of Latin America.

The UNDP estimates that more than 80 percent of the world’s middle class will be living in developing countries by 2030. According to the European Union Institute of Security Studies, the estimated size of the global middle class by 2030 will be about 4.9 billion, up from 1.8 billion in 2009.

In an article in the Wall Street Journal last month, Francis Fukuyama, a senior fellow at Stanford University’s Freeman Spogli Institute of International Studies, says in Turkey and Brazil, as in Tunisia and Egypt before them, political protest has been led not by the poor but by young people with higher-than-average levels of education and income.

“The new middle class is not just a challenge for authoritarian regimes or new democracies. No established democracy should believe it can rest on its laurels simply because it holds elections and has leaders who do well in opinion polls,” says Fukuyama, author of ‘the Origins of Political Order: From Prehuman Times to the French Revolution.’

And corporations are salivating at the prospect of this emerging middle class because it represents a vast pool of new consumers, he notes.

Dean Baker, co-director of the Washington-based Center for Economic and Policy Research, told IPS, “I wouldn’t claim to be a great expert on this, but I would expect that as societies become richer and populations more educated, there will be increased demand for democracy.

“I’m sure that is part of what we are seeing in Brazil, Turkey, and Egypt, but in each case I am sure the nature of the discontent is more complicated.”

In any case, he said, an increased democratisation of society goes along with greater wealth.

In Brazil, the recent protests were directed at the rising cost of living (including an increase in bus fares), high-level political corruption and extravagant spending on next year’s World Cup soccer tournament, estimated at more than 13 billion dollars compared to the deteriorating state of schools and hospitals in poor neighbourhoods.

The protests have been described as “the awakening of the new middle class” emerging out of poverty.

Richard Jolly, honorary professor and research associate at the Institute of Development Studies at the University of Sussex, told IPS, “It’s certainly an interesting theme though one to be written about with many question marks, rather than dogmatic certainties.

“I hope you will also consider some reference to the recent rise of ‘assertive religion’ – meaning fundamentalist versions of Christianity and Judaism, as well as Islam, which Emanuel de Kadt has just published a book about, with the same name.

“I think also of a book written decades ago which argued that revolution starts not when the poor are ground down in poverty but after some improvements in living standards which stirs hopes and demands for something more,” said Jolly, a former assistant secretary-general at the U.N. children’s agency UNICEF.

Dr. Yilmaz Akyuz, chief economist at the Geneva-based South Centre, however, remains sceptical.

“I find the rise of the global middle class story not very convincing,” he said.

Akyuz said it is closely linked to the “rise of the South” story – “something I questioned in various papers I have written since 2010 (see e.g. The Staggering Rise of the South? or Waving or Drowning: Developing Countries After the Financial Crisis)”.

It is now increasingly understood that this is a myth, said Akyuz, a former director and chief economist at the U.N. Conference on Trade and Development (UNCTAD).

He pointed to two developments: declines in poverty and increased income and wealth inequality. “But these two do not give us bigger middle class,” he argued. “Bringing the poor above the poverty line would not make them middle class (as conventionally defined).”

This, together with greater inequality would produce hollowing out since the top would be gaining at the expense of the middle class.

Middle classes in the South are increasingly internationalised in vision and better informed through access to the internet, social media, etc. This is why Turkish Prime Minister Recep Tayyip Erdogan called social media a menace, he said.

At the same time, governments in countries heavily dependent on foreign capital and vulnerable to financial instability are well aware that increased political instability could lead to capital flight and economic collapse, Akyuz said.

“This exerts a restraining influence on them against rioters. Turkey cannot become an Iran or even Malaysia because, inter alia, it lacks natural resources,” he noted. “If middles classes run away with their money, the economy could collapse.”

By Gustavo Capdevila
GENEVA, Apr 5 2013 (IPS)

India’s refusal to grant patent protection for the anti-cancer drug Glivec, developed by Swiss drugmaker Novartis, is a victory for the developing world, which depends on low-cost exports of generic medicines from the Asian giant, said public health specialist Germán Velásquez.

The triumph celebrated by the Colombian expert, who is a special adviser for health and development at the South Centre, was a landmark ruling against Novartis handed down Monday Apr. 1 by India’s Supreme Court.

The Geneva-based South Centre is an intergovernmental organisation of more than 50 developing countries that functions as an independent policy think tank.

Velásquez, who worked for over 20 years in the World Health Organization, explains in this interview with IPS his point of view on the legal battle in the courts in New Delhi and its consequences for developing countries.

Q: How do you interpret the ruling by the Supreme Court of India?

A: There are problems with the information that is being reported. Nearly everyone says that India rejected the patent for Glivec. That’s true, but it’s not all the verdict says.

Q: Could you explain?

A: At the heart of the verdict is the ratification of the criteria set by the Indian law for the approval of drug patents. That is, whether or not it meets the requisite of containing a genuine innovation.

Q: Could you describe the legal battle?

A: It all starts with the adoption of the Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS), one of the treaties established at the same time the WHO was born, in 1995.

India was the only developing country to use the (entire 10-year) transition period to enforce TRIPS, in 2005, when it passed the patent act.

Q: What happened to the patent applications presented during that decade-long transition?

A: They accumulated, until there were around 10,000 applications, and it was not until 2005 that the patent office began to examine them. They included the application for the Glivec patent.

But the new standards turned out to be stricter, such as the one that indicates that the innovation can’t be just a small change to a molecule, but has to be something substantial. In short, the patent for local sales of Glivec was denied in 2006.

Q: How does the story continue from there?

A: Novartis challenged that decision and brought a lawsuit in a court in the city of Madras (the capital of the southern state of Tamil Nadu; the city was renamed Chennai in 1996.) But the High Court of that city, three years later, also rejected the application. That year, 2009, the company appealed the decision – and lost again.

Q: What options are left to the company?

A: This is the aspect that hasn’t been sufficiently reported. In a cynical, perverse and very serious move, Novartis says (prior to the ruling): “If they didn’t give me the patent, I’ll go to the Supreme Court, but to ask this time for the elimination of the strict criterion established in article 3 of the patent act.”

“If more flexible, lower standards are set, then my medicine will be in,” was its reasoning.

Q: So the dispute took on this other face?

A: Yes, because with the intention of introducing its drug by force, the transnational corporation was trying to modify the law of a country – and of a country like India. I think that its executives were being short-sighted when they made that decision. This has been very costly for them in terms of their image.

Q: How do you reach that conclusion?

A: It is clear that it was a misstep to denounce India’s patent law, with the risk of losing. The transnational industry in general had suffered a blunder in South Africa, when it was forced in 2001 to back down from legal action against a law that authorised the patenting of lower-price imported medicines in order to address the AIDS epidemic.

You could suppose that “Big Pharma”, as the major pharmaceutical companies are called, had learned the lesson. Especially knowing that Glivec was patented in 40 countries, including the United States, China and Russia.

Q: Are you insinuating that there may be a domino effect?

A: If Novartis loses in India, as it did on Monday, any of the governments of the 40 countries could ask themselves: “Why don’t I review that patent and revoke it?” That authority is granted by the legislation of all of those countries.

Q: What standing do those 40 countries that recognise the Glivec patent have?

A: Most of them are industrialised states, large markets. But they also include some that are currently experiencing severe economic difficulties, like Greece or Spain, whose authorities could ask themselves why they should pay 2,500 dollars a month per person for a treatment against cancer. They could say: “Why don’t I just have it produced as a generic drug, and invalidate this patent.”

I think the Novartis executives did not take that into account when they launched this legal battle. Obviously, after the first impetus, they continued on to the end, and today they’re going to see repercussions.

Q: What could those consequences be?

A: It should be a lesson for the rest of the countries of the developing South. They should try to follow India’s example and introduce in their legislation clauses like the ones contained in article 3d, which restricts and sets criteria with respect to what amounts to innovation, which is necessary in order to grant a patent. That there can’t just be a small change, which is sometimes merely cosmetic, to a molecule in the medication.

Q: What prospect is there for the spread of that criterion?

A: In India, the Philippines and Argentina, that prohibition already exists, while others are introducing it through alternative routes.

Q: And other consequences?

A: India will be able to continue to make generic versions of all new medicines that are not truly original, and it will continue exporting them without any problem. It’s necessary to take into account the fact that 95 percent of the antiretrovirals consumed in Africa come from that Asian country.

So that means the Indian Court’s ruling is extremely important, with very concrete repercussions for that medicine and some 10,000 others that are on the waiting list in the patent office in New Delhi.

Q: What percentage of those could get patents?

A: In 2010, Argentina approved 2,000 pharmaceutical patents, and China 4,000. But actually, just 40 or 50 products a year are true innovations.

Q: Why that enormous difference between patents that are granted and truly innovative products?

A: The pharmaceutical industry is facing huge difficulties in coming up with innovations.

So it clings to a very short-sighted way of thinking, very short-term, but enormously profitable. This consists of launching incremental innovations, as they are called – in other words, a small product with just a gradual change, but accompanied by a major marketing campaign.

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