U N I T E D N AT I O N S C O N F E R E N C E O N T R A D E A N D D E V E L O P M E N T

OVERVIEW

TRADE AND DEVELOPMENT REPORT, 2014

UNITED NATIONS CONFERENCE ON TRADE AND DEVELOPMENT

Geneva

TRADE AND DEVELOPMENTREPORT, 2014

OVERVIEW

UNITED NATIONSNew York and Geneva, 2014

SymbolsofUnitedNationsdocumentsarecomposedofcapitalletterscombinedwithfigures.Mentionofsuch a symbol indicates a reference to aUnitedNationsdocument.

The designations employed and the presentationofthematerialinthispublicationdonotimplytheexpressionofanyopinionwhatsoeveronthepartoftheSecretariatoftheUnitedNationsconcerningthelegalstatusofanycountry,territory,cityorarea,orofitsauthorities,orconcerningthedelimitationofitsfrontiersorboundaries.

Materialinthispublicationmaybefreelyquotedor reprinted, but acknowledgement is requested,togetherwithareferencetothedocumentnumber.AcopyofthepublicationcontainingthequotationorreprintshouldbesenttotheUNCTADsecretariat.

TheOverviewcontainedherein is also issued aspartof theTrade and Development Report, 2014(UNCTAD/TDR/2014,salesnumberE.14.II.D.4).

Note

UNCTAD/TDR/2014 (Overview)

OVERVIEW

Fifty years ago this year, and twenty years after a new multilateral framework for governing the post-war global economy was agreed at Bretton Woods, a confident South gathered in Geneva to advance its demands for a more inclusive world economic order. The first United Nations Conference on Trade and Development (UNCTAD) added a permanent institutional fixture to the multilateral landscape, with the responsibility to formulate principles and policies on international trade and related problems of economic development. Moreover, and moving beyond the principles that framed the Bretton Woods institutions (and later the General Agreement on Tariffs and Trade (GATT)), it was agreed that Economic development and social progress should be the common concern of the whole international community, and should, by increasing economic prosperity and well-being, help strengthen peaceful relations and cooperation among nations.

UNCTADs 50th anniversary falls at a time when, once again, there are calls for changes in the way the global economy is ordered and managed. Few would doubt that, during the five intervening decades, new technologies have broken down traditional borders between nations and opened up new areas of economic opportunity, and that a less polarized political landscape has provided new possibilities for constructive international engagement. In addition, economic power has become more dispersed, mostly due to industrialization and rapid growth in East Asia, with corresponding changes in the workings of the international trading system. However the links between these technological, political and economic shifts and a more prosperous, peaceful and sustainable world are not automatic.

Indeed, growing global economic imbalances, heightened social and environmental fragilities and persistent financial instability, turning at times to outright crisis, should give pause for thought and

2further policy discussion. Hunger still remains a daily reality for hundreds of millions of people, particularly in rural communities, with children being the most vulnerable. At the same time, rapid urbanization in many parts of the developing world has coincided with premature deindustrialization and a degraded public sector, giving rise to poor working conditions and a growing sense of insecurity. Where these trends have collided with the ambitions of a youthful population, economic frustrations have spilled over into political unrest.

Back in 1964, the international community recognized that If privilege, extremes of wealth and poverty, and social injustice persist, then the goal of development is lost. Yet, almost everywhere in recent years, the spread of market liberalism has coincided with highly unequal patterns of income and wealth distribution. A world where its 85 wealthiest citizens own more than its bottom three and a half billion was not the one envisaged 50 years ago.

There is no fast or ready-paved road to sustainable and inclusive development; but the past three decades have demonstrated that delivery is unlikely with a one-size-fits-all approach to economic policy that cedes more and more space to the profitable ambitions of global firms and market forces. Countries should ultimately rely on their own efforts to mobilize productive resources and, especially, to raise their levels of domestic investment (both public and private), human capital and technological know-how. However, for this, they need to have the widest possible room for manoeuvre to discover which policies work in their particular conditions, and not be subject to a constant shrinking of their policy space by the very international institutions originally established to support more balanced and inclusive outcomes.

Insisting on the importance of domestic institutions and policies does not mean adopting a closed or insular attitude to the many development challenges. On the contrary, access to external financial resources and technological know-how is still critical to unlocking the development potential of many poorer and vulnerable countries. Moreover, long-standing development issues from sovereign debt problems to improved market access in a fairer international trading system, and from commodity price stabilization to financial markets that serve the real economy can only be addressed through effective multilateral institutions supported by (and this is no small proviso) sufficient political will on the part of the leading economies. Added to these persistent

3challenges, todays interdependent world has thrown up a variety of new ones, such as health pandemics, food insecurity, and global warming, which require even bolder multilateral leadership and collective action.

Pursuing bold international collective action to correct the deep inequities of the world, along with determined and innovative domestic policy initiatives, was what motivated the participants at Bretton Woods 70 years ago and in Geneva 50 years ago. Henry Morgenthau, the United States Secretary of the Treasury, was on the mark when he insisted at Bretton Woods that Prosperity like peace is indivisible. We cannot afford to have it scattered here or there among the fortunate or to enjoy it at the expense of others. Poverty, wherever it exists, is menacing to us all and undermines the well-being of each of us. As the international community frames an ambitious development agenda beyond 2015, the moment is right to propose another international New Deal that can realize the promise of prosperity for all.

The world economy in 2014 still in the doldrums

Theworld economyhas not yet escaped the growthdoldrumsinwhich ithasbeenmarooned for thepast fouryears, and there isa growingdanger that this state of affairs is becoming accepted asthenewnormal.Policymakerseverywhere,butparticularlyin thesystemicallyimportanteconomies,needtoassesscurrentapproachesandpaycloserattentiontosignsofinclementeconomicweatherahead.

Growthintheworldeconomyhasbeenexperiencingamodestimprovementin2014,althoughitissettoremainsignificantlybelowitspre-crisishighs.Itsgrowthrateof2.3percentin2012and2013isprojectedtoincreasemoderatelytobetween2.5and3percentin2014.Thisimprovementisessentiallyduetogrowthindevelopedcountriesacceleratingfrom1.3percentin2013toaround1.8percentin2014.Developingcountriesasawholearelikelytorepeattheirperformanceofthepreviousyears,growingatbetween4.5and5percent,whileinthetransitioneconomiesgrowthisforecasttofurtherdeceleratetoaround1percent,fromanalreadyweakperformancein2013.

4Themoderategrowthaccelerationexpectedindevelopedcountriesshouldresultfromaslightpick-upintheEuropeanUnion(EU),whereatentativeeasingoffiscalausterityandamoreaccommodatingmonetarypolicy stance, notably by theEuropeanCentralBank (ECB), hashelpedpulldemandgrowthbacktopositiveterritory.Insomecountries(e.g.theUnitedKingdom),householddemandisbeingsupportedbyassetappreciationandtherecoveryofconsumerandmortgagecredit,and in others by some improvement in realwages (e.g.Germany).However,inanumberofotherlargeeuro-zoneeconomies(e.g.France,ItalyandSpain)high levelsofunemployment, stagnantor sluggishrealwage growth, and persistentweakness in the banking sectorcontinuetohindertheexpansionofdomesticcreditanddemand.IntheUnitedStates, the economy is continuing its tentative recoverythrougharelianceondomesticprivatedemand.Thenegativeimpactoffiscalausterityeasedslightlyin2014,theunemploymentratehascontinued to fall, and asset price appreciations are encouraging therecoveryofdomesticborrowingandconsumption.However,averagerealwagesremainstagnant.GrowthinJapanhasalsobeenrelyingondomesticdemand,asprivateconsumptionand investmentbenefitedfrom the expansionarymonetary andfiscal policies ofAbenomics.Theeffectsofpublicspendingforreconstructionfollowingthe2011earthquake,whichhelpedpropeltheJapaneseeconomytohighergrowthin20122013havedissipated,whilerecenttaxincreasescouldhurtconsumerspending,sothatfurtherstimuluspackagesmaybeneededtomaintainpositivegrowthandpricetargets.

Themaindevelopingregionsarelikelytomoreorlessreplicatetheirgrowthperformanceof20122013.Asiaisprojectedtoremainthemostdynamicregion,growingataround5.5percent.Amongthemajorcountriesinthisregion,Chinacontinuestoleadwithanestimatedgrowthrateofcloseto7.5percentin2014,basedondomesticdemand,withsometentativesignsofanincreasingroleforprivateandpublicconsumption.GrowthinIndiaisacceleratingtoanestimated5.5percentasaresultofhigherprivateconsumptionandnetexports;investment,on the other hand, remainsflat.Most countries inSouth-EastAsiashouldkeepgrowingataroundorabove5percent,drivenbyprivate

5consumptionandfixedinvestment,withlittleornocontributionfromnetexports.EconomicperformanceismorevariedinWestAsia,whereseveralcountrieshavebeendirectlyor indirectlyaffectedbyarmedconflicts.Turkeyhasbeenexposedtofinancialinstabilityandmaynotbeabletosustainagrowthratethatisheavilydependentondomesticcreditexpansion.

GrowthinAfricaalsoshowswidecontrasts.ItremainsweakinNorthAfricaduetoongoingpoliticaluncertaintyanddisruptionsinoilproduction.IthasalsoremainedsubduedinSouthAfrica,ataround2percent,owingtoaweakeningofdomesticdemandandtostrikesintheminingsector.Bycontrast,severallargesub-Saharaneconomieshave postedhighgrowth rates, leading to projected growth for thesubregionofalmost6percentin2014.Inseveralcases,historicallyhighcommoditypriceshavebeensupportingthisgrowththathaspersistedformorethanadecade.

After a strong rebound in 2010, economic growth in LatinAmericaandtheCaribbeanhassloweddowntoanestimated2percentin2014.Thisweakperformancemainlyreflectsslowgrowth in thethreemaineconomies,Argentina,BrazilandMexico,wheredomesticdemand(theirmaindriverofgrowthaftertheglobalcrisis)haslostmomentum.Externalfinancialshocksinmid-2013andearly2014alsoaffectedthoseeconomies,leadingtomacroeconomicpolicytightening.Furtherfinancial instabilitymight result from legalobstacles to thenormalservicingofArgentinassovereigndebt.However,Argentinassolvencyandsoundmacroeconomicfundamentalsinmostcountriesintheregionshouldpreventthisshockfromdevelopingintoaregionalfinancialcrisis.Severalcountriesexportinghydrocarbonsormineralshaveexperiencedsignificantlyhighergrowthrates,pushedbystrongdomesticdemand.

TheEuropean transition economies are likely to experience afurtherslowdownofgrowththisyear,withstagnantconsumptionandinvestmentdemandintheRussianFederationexacerbatedbyfinancialinstabilityandrenewedcapitaloutflows.Ontheotherhand,theCentral

6Asiantransitioneconomies,mostofwhichareoilormineralexporters,seemsettomaintainfairlyrobustgrowthratesasaresultofhistoricallyhightermsoftrade.

Trade winds not picking up

Sixyearsaftertheonsetoftheglobalfinancialcrisis,internationaltraderemainslacklustre.Merchandisetradegrewatcloseto2percentinvolumein20122013andthefirstfewmonthsof2014,whichisbelowthegrowthofglobaloutput.Tradeinservicesincreasedsomewhatfaster,ataround5percentin2013,withoutsignificantlychangingtheoverallpicture.Thislackofdynamismcontrastssharplywiththetwodecadesprecedingthecrisis,whenglobaltradeingoodsandservicesexpandedmorethantwiceasfastasglobaloutput(atannualaveragesof6.8percentand3percentrespectively).During thatperiod, theshareofexportsandimportsofgoodsandservicesinGDP(atconstantprices)virtuallydoubled,fromaround13percent to27percent indevelopedcountries,andfrom20percenttocloseto40percentindevelopingcountries.

Giventheinsufficiencyofglobaldemand,itishighlyunlikelythatinternationaltradealonewillbeabletokick-starteconomicgrowth.Facilitating tradeflowsbymodernizingcustomsprocedureswillbehelpfulinmakingthetradingsystemmoreefficientoverthelongerterm,butitwillnotaddressthemainconstraintsontradetoday.Internationaltrade has not slowed downor remained quasi-stagnant because ofhighertradebarriersorsupply-sidedifficulties;itsslowgrowthistheresult ofweakglobal demand. In this context, a lopsided emphasisonthecostoftrade,promptingeffortstospurexportsthroughwagereductionsandaninternaldevaluation,wouldbeself-defeatingandcounterproductive,especiallyifsuchastrategyispursuedbyseveraltrade partners simultaneously.Theway to expand trade at a globallevelisthrougharobustdomestic-demand-ledoutputrecoveryatthenationallevel.

7Althoughthereisanoveralllackofdynamismintradeatpresent,insomecountriesandregionsimportshavebeengrowing(involume)atrelativelyhighrates:between8and9percentin2013.Thishasbeenthecaseinsub-SaharanAfricaandWestAsiathatcontinuetobenefitfromhighcommoditypricesbyhistoricalstandards,andinChina,whichremainsastrongmarketforseveralprimarycommodities.

Thatsaid,withafewbutimportantexceptions,mostcommoditypriceshavebeendecliningpersistentlysincetheirpeaksin2011,althoughtheirdownwardtrendseemstohavebeenslowingdownin20132014.Themainexceptionstothistrendareoil,thepriceofwhichhasremainedremarkably stable at high levels since2011, and tropical beverages(coffeeandcocoa)andsomeminerals (mostnotablynickel),whichexperienced sharpprice increases in 2014due to supply shortages.Despiteanoveralldecliningtrend,commoditypricesinthefirsthalfof2014remained,onaverage,closeto50percenthigherthanduringtheperiod20032008.

Whilerecentdevelopmentsincommoditypriceshavedifferedbycommoditygroupandforparticularcommodities,acommonfeatureinthephysicalmarketsisthatsupply-sidefactorshaveplayedamajorrole.Thisisreflected,forinstance,inthelowerpricesofminerals,asinvestmentsmadeduringtheperiodofrapidlyrisingpriceseventuallytranslated into increased supplies.By contrast, changes in physicaldemand had only aminor impact on the evolution of commodityprices in2013andearly2014.Ingeneral,demandforcommoditieshascontinuedtogrowinlinewiththemoderateeconomicgrowthoftheworldeconomy.

Short-termdevelopments incommoditypricescontinued tobeinfluencedby thesubstantialfinancializationofcommoditymarketsduring2013andthefirsthalfof2014.However,regulatorychangesincommodityfuturestradinghaveencouragedashufflingofparticipantsfrombankstowardsotherfinancialoperatorssuchascommoditytradingcompanies,whichoftenoperateinalesstransparentandlessregulatedenvironmentthanmoretraditionalfinancialinstitutions.

8Froma longer termperspective, theconclusionof theanalysisofTDR 2013 that commodity prices are set to remain at relativelyhighlevelsinhistoricaltermsinthecomingyears,withsomeshort-termcorrections,remainsvalid.Thisdoesnotsuggestthatproducingcountries should be complacent; rather they should try as far aspossibletousetherentsgeneratedinthesemarketstofinancestructuraltransformation, particularlywith a view to production and exportdiversification.

A new normal?

Theapparentstabilizationofrelativelylowgrowthratesacrossdifferent groups of countries in theworld economymay give theimpressionthatithasreachedanewnormal.However,toassessthesustainabilityofthepresentsituation,itisnecessarytoexaminenotonlytheratesofGDPgrowth,butalsoitsdrivers.

Afterabriefexperimentin2009andthefirsthalfof2010withexpansionaryfiscalmeasuresinresponsetotheimmediatethreatofa globalfinancialmeltdown, the policymix used in the developedeconomies comprised, to varying degrees, a combination of fiscalausterity,wage containment andmonetary expansion in the hopethat increased investor confidence, labourmarketflexibility, greatercompetitivenessandtheexpectedrehabilitationofbanksbalancesheetswouldorchestratearapidandsustainedrecovery.However,withfiscaland labourmarket policies dampening domestic demand, liquidityexpansionbymonetaryauthoritieswaschannelledmostlytofinancial,rather than productive, investments.This in turn led to significantincreasesinassetprices,despiteanaemiceconomicgrowth,andtolargecapitaloutflows,muchofthemtoemergingmarkets.Consequently,thispolicymixonlyindirectly(andwithasignificantdelay)supportedademandrecoveryinthosecountrieswhereassetappreciationgeneratedasufficientlystrongwealtheffectandencouragedrenewedconsumerborrowing.Assuch,thenewnormalhassomeobviousparallelswiththeconditionsthatledtotheglobalfinancialcrisis.

9In the case of emerging economies, the extent towhich theexpansionofdomesticdemandwasbeingsupportedbygenuineincomeexpansionorbyunsustainableassetbubblesandexcessiveconsumerborrowing (with likely significant variations across countries) isstillunclear.However, thepotentialvulnerabilityofdevelopingandemerging economies in the newnormal is heightenedbypersistentweaknesses in the international financial architecture.Under thesecircumstances, capital flows can have significant, and not alwayswelcome,effectsontherealeconomyandontheabilityofpolicymakerstorespondtounforeseenshocks.

Somedevelopingcountriesalsoremainexposedtonegativeshocksoriginatingfrominternationaltrade,particularlyincountriesthatrelymainlyonexportsofonlyafewprimarycommoditiesoronlow-skill,labour-intensivemanufactures.Diversificationoftheirproductiveandexportactivitiesisapendingtaskformanytransitionanddevelopingeconomies.TheUNCTADMerchandiseTradeSpecialization Indexconfirms that, despite the rapid rate of growth of trade inmanydeveloping economies over the period 19952012, the degree ofspecializationintheirexportstructureshasnotvariedsignificantly.

There is, in fact, nothingparticularly new about the currentfinancialcycleaffectingdevelopingandtransitioneconomies.Theseeconomies are now experiencing their fourth such cycle since themid-1970s;and,muchasbefore,becausethepresentcycleismainlydriven by developed countries economic conditions andmonetarypolicy decisions, the resulting international capitalmovements donotnecessarilycoincidewiththeneedsofdevelopingcountries.Onthecontrary, if recenthistory is anyguide, theycouldhave seriousdisruptivemacroeconomic andfinancial effects. In order to createandmaintaindomesticmacroeconomicandfinancialconditionsthatsupport growth and structural transformation, governments shouldhaveattheirdisposalsuitablepolicyinstrumentsformanagingcapitalflows,andforpreventingorcopingwiththerecurrentshocksthesecanprovoke.MultilateralrulesintheIMFsArticlesofAgreementandintheGeneralAgreementonTradeinServices(GATS)oftheWorldTrade

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Organization (WTO)doallowgovernments tomanage their capitalaccounts,includingaresorttocapitalcontrols.However,theemphasishasbeenontheiruseonlyforprudentialreasonsorcrisismanagement.Instead, capitalmanagementmeasures should be seen as a normalinstrumentinpolicymakerstoolkit,ratherthanasanexceptionalandtemporarydevicetobeemployedonlyincriticaltimes.

Somenewbilateralandplurilateraltradeandinvestmentagree-mentsthathavebeensigned,orarebeingnegotiated,introduceevenmore stringent commitmentswith respect tofinancial liberalizationthanthosecontainedinmultilateralagreements,whichmightfurtherreducepolicyspaceinthiscontext.Therefore,governmentsthataimtomaintainmacroeconomic stability andwish to re-regulate theirfinancialsystemsshouldcarefullyconsidertherisksintakingonsuchcommitments.

The case for coordinated expansion

UNCTAD,usingitsGlobalPolicyModel,hasassessedanalternative,balanced-growthscenario,whichcouldofferawayofescapingfromthecurrentglobaleconomicdoldrums.Thetwoscenariosusedinthemodelhavethevaluenotofforecasting,butofdemonstratingthedirectionofchangethatcouldbeexpectedfromageneralshiftinpolicyorientation.The balanced-growth scenario introduces the following elements:incomespoliciestosupportgrowthofdemandonasustainablebasis;growth-enhancingfiscalpolicies;industrialpoliciestopromoteprivateinvestmentandstructural transformation; regulationof systemicallyimportantfinancialinstitutionsandcapitalcontrolstostabilizeglobalfinancialmarkets;anddevelopment-orientedtradeagreements.Thisiscontrastedwithabaselinescenario,whichbroadlycontinueswithbusiness-as-usualpolicies.

The simulations for the baseline scenario show that structuralimbalanceswill keep on growing, evenwith continuedmoderate

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growth,withcountriesbecomingincreasinglyvulnerabletoshocksandfinancialinstability.Thelongersuchimbalancesremainunresolved,theharshertheconsequenceswillbe,inthefaceofanotherseriouscrisis.Thebalanced-growthscenario,ontheotherhand,showsconsiderableimprovements in growth rates, and,most importantly, a gradualresolution of global imbalances.The average growth of theworldeconomyissignificantlyfasterthanitisunderthebaselinescenario.Thefastergrowthratesforallregionsaretheresultnotonlyofindividualstimuli,butalsoofstrongsynergiceffectsfromthecoordinationofpro-growthpolicystancesamongthecountries.Finally,theresultsconfirmgreatergrowthconvergenceinthebalanced-growthscenario,aswellasimprovedfinancialstability.

While the results of such exercises need to be viewedwith afamiliardegreeofcautionandcare,theirunderlyingmessageisthat,in an increasingly interconnected global economy, policies have tobeconsistentfortheworldasawhole.Takingintoaccountrealandfinancial feedbacks, it should be clear that a sustained and stabledemand-ledgrowthpathhastostartdomestically,ratherthanhavingeachcountryindividuallypushingforcompetitivereductionsofcostsandimportsinordertogenerateanet-export-ledrecoveryaprocesstowhich,admittedly,surpluscountrieshavemuchmoretocontribute.

Theabsenceofeffectiveinstitutionsandmechanismsforinter-national policy coordination can push policymakers into adoptingstrategiesthatmayappeartobeexpedientintheshortterm,butwhichareeffectivelyself-defeatinginthemediumterm.Itisthereforeessentialto continuewith efforts to devise amore effective set of globallyinclusive institutions toregulatemarkets,helpcorrectunsustainableimbalanceswhentheyemerge,andbetterpursue theaimsofglobaldevelopmentandconvergence.

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Challenges towards a new development agenda

Ifmacroeconomicpolicyistackinguncomfortablyclosetothebusiness-as-usualstrategyofthepre-crisisyears,thediscussionsnowunderwayonapost-2015developmentagendaaretendingtobreakwiththepast.Thepushforamoreuniversal,transformativeandsustainableapproachtodevelopmentwillplayakeyroleinthesettingofnewgoalsand targets for policymakers, at both the national and internationallevels.The17goalsandsundrytargetsagreedtoattheUnitedNationsOpenWorkingGrouponSustainableDevelopmentalreadysignalalevelofambitionwellbeyondtheMillenniumDevelopmentGoals.

Theinternationalcommunityfacesthreeprinciplechallengesinfashioningthisnewapproach.Thefirstisaligninganynewgoalsandtargetstoapolicyparadigmthatcanhelpraiseproductivityandpercapitaincomeseverywhere,generateenoughdecentjobsonascaletomeetarapidlygrowingandurbanizinggloballabourforce,establishastableinternationalfinancialsystemthatboostsproductiveinvestment,anddeliverreliablepublicservicesthatleavenoonebehind,particularlyinthemostvulnerablecommunities.Thedominanteconomicparadigmofmarketliberalismhasdisappointedinmostoftheserespects.Inthiscontext,asPopeFrancishasrecentlysuggested,wecannolongersimplyputour trust in the sacralizedworkingsof theprevailing system.Undoubtedly,freshthinkingisneeded.

Thesecondchallengetoconsiderinformulatinganewdevelopmentagenda is themassiverise in inequality,whichhasaccompanied thespreadofmarketliberalism.Thisisimportantbecause,inadditiontoitsmoralimplications,growinginequalitycanseriouslydamagesocialwell-being,threateneconomicprogressandstability,andunderminepoliticalcohesion.PreviousTrade and Development Reports(TDRs)haveinsistedontheneedtolookbeyondsomeoftheheadline-grabbingnumbers surrounding the top one per cent, and examinewhat hasbeen happening to functional income dynamics, in particular, thedivergencebetweenwageandproductivitygrowthandthegrowthofrentierincomes.Heightenedcapitalmobilityhasnotonlyreducedthe

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bargainingpoweroflabour,furtheramplifyingtheadversedistributiveimpactofunregulatedfinancialactivity;ithasalsomadeithardertotaxsomeincomesdirectly,thusincreasingtheStatesrelianceonmoreregressivetaxesandonbondmarkets.Thiscan,inturn,haveaverycorrosiveimpactonthelegitimacyandeffectivenessofthepoliticalprocess.

Thethirdchallengeisensuringthateffectivepolicyinstrumentsareavailabletocountriestoenablethemtoachievetheagreedgoalsandadvancethedevelopmentagenda.Restoringadevelopmentmodelthatfavourstherealeconomyoverfinancialinterests,putssustainabilityaheadofshort-termgainsandtrulyseekstoachieveprosperityforallwill almost certainly require addingmore instruments to thepolicytoolkitthaniscurrentlycontemplatedbyeconomicorthodoxy.

The enduring case for policy space

Anywidening and strengthening of the ambition of nationaldevelopmentstrategieswillneedtobeaccompaniedbyinstitutionalchanges.Marketsrequireaframeworkofrules,restraintsandnormstooperateeffectively.Assuch,themarketeconomyisalwaysembeddedin a legal, social and cultural setting, and is sustained by politicalforces.Howandtowhatextenttheframeworkofrulesandregulationsisloosenedortightenedispartofacomplexpoliticalprocessspecifictoeachsociety,butitcannotbedispensedwithwithoutthreateningabreakdownofthewidereconomicandsocialorder.

Internationalmarkets and firms, no less than their domesticcounterparts,alsorequireaframeworkofrules,restraintsandnorms.And, as at the domestic level, the loosening and tightening of thatframeworkisapersistentfeatureofgovernanceoftheglobaleconomy.Statesmustdecideonwhetherandhowmuchoftheirownindependencetheyarewillingtotradefortheadvantagesofhavinginternationalrules,disciplinesandsupports.Inevitably,inaworldofunequalStates,thespacerequired topursuenationaleconomicandsocialdevelopment

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aspirationsvaries,asdoesthelikelyimpactofanindividualcountryspolicydecisionsonothers.Thechallengesofmanagingthesetrade-offs areparticularlypronouncedat themultilateral level,where thedifferencesamongStatesaresignificant.Whiletheextenttowhichanadoptedgrowthanddevelopmentpathrespondstonationalneedsandpriorities canobviously be limitedor circumscribedbymultilateralregimesandinternationalrules,itcanequallybeaffectedbyeconomicandpoliticalpressuresemanatingfromtheworkingsofglobalmarkets,dependingon thedegree andnatureof economic integrationof thecountryconcerned.

TheinterdependenceamongStatesandmarketsprovidesthemainrationaleforawell-structuredsystemofglobaleconomicgovernancecomprisingmultilateralrulesanddisciplines.Theguidingprincipleofthesearrangementsshouldbetheirabilitytogeneratefairandinclusiveoutcomesbyprovidingglobalpublicgoodsandminimizingadverseinternationalspilloversandothernegativeexternalities,regardlessofwhetherthesearecreatedbynationaleconomicpoliciesortheprofit-makingdecisionsofprivateactors.

Thesevarioustensionsbetweennationalpolicyautonomy,policyeffectiveness and international economic integration are captured,inpart,bytheideaofpolicyspace;thisreferstothefreedomandabilityofgovernmentstoidentifyandpursuethemostappropriatemixofeconomicandsocialpoliciestoachieveequitableandsustainabledevelopmentintheirownnationalcontexts,butasconstituentpartsofaninterdependentglobaleconomy.Itcanbedefinedasthecombinationofdejurepolicysovereignty,whichistheformalauthorityofpolicymakersovertheirnationalpolicygoalsandinstruments,anddefactonationalpolicycontrol,whichinvolvestheabilityofnationalpolicymakerstosetpriorities,influencespecifictargetsandweighpossibletrade-offs.

For some countries, signing on tomultilateral disciplines canspurthemtoredoubletheireffortstousetheirremainingpolicyspacemoreeffectivelythanwhentheyhadgreaterpolicyspace;thisseemstobetrue,inparticular,forcountriesemergingfromconflict,aswellas

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formanyformersocialisteconomies.Moreover,thesedisciplinescanoperatetoreducetheinherentbiasofinternationaleconomicrelationsinfavourofcountriesthathavegreatereconomicorpoliticalpower.Thus,suchdisciplinescansimultaneouslyrestrict(particularlydejure)andease(particularlydefacto)policyspace,sinceconstraintsononecountrysbehaviouralsoapplytoothercountries,therebyaffectingtheexternalcontextasawhole.

Buttherearealsovalidconcernsthatthevariouslegalobligationsemerging frommultilateral, regional and bilateral agreements havereduced national policy autonomyby affecting both the availablerange and the efficacyofparticularpolicy instruments. In addition,theeffectivenessofnationalpoliciestendstobeweakenedinsomeinstancesvery significantlyby forcesof globalization (especiallyfinancialglobalization)andbytheinternalizationofmarkets,whichaffectnationaleconomicprocesses.

Inclusive multilateralism: Back to the future

Historyhasatendencytorepeatitself,thoughnotnecessarilyastragedyor farce.Consequently, therearealwayspositive lessons tobelearnedfromexamininghowearliergenerationsofpolicymakersdealtwithbigchallenges.Theneedforreconcilingtherequirementsofpolicysovereigntyatthenationallevelwiththeimperativesofaninterdependentworldeconomymayseemtodaytoberelativelynew.Infact,itisalong-standingchallengethathasbeendiscussedextensively,andfrommanydifferentangles,foralmosttwocenturies,thoughnoneas compelling or significant as those arising from the crises of theinter-warera.

TheprincipalobjectiveofthearchitectsofBrettonWoodswastodesignapost-warinternationaleconomicstructurethatwouldpreventarecurrenceoftheopportunisticactionsanddamagingcontagionthathadledtothebreakdownofinternationaltradeandpaymentsinthe1930s.Accordingly,suchastructurewouldneedtosupportthenew

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policygoalsof rising incomes, fullemploymentandsocial securityin thedeveloped economies.But a prominent groupofRooseveltsNewDealersalsostruggledtoplacedevelopmentissuesfirmlyonthemultilateralagendainthe1930sand1940s.ThisincludedmeasuresthatsoughttoexpandthepolicyspaceforState-ledindustrializationand to increase the level and reliabilityof themultilateralfinancialsupportnecessarytomeettheneedsofdevelopingcountrieseffortsthateventuallymetwithconsiderableresistance.

ThoseresultssetthestagefortheNorth-Southconflictsofthepost-warperiod.Inthatcontext,theconstructionofamoredevelopment-friendly internationaleconomicorderwasamuchslowerandmoreunevenprocessafter thewar thantheBrettonWoodsarchitectshadanticipated.Ittookthegrowingvoicesofnewlyindependentdevelopingcountriesinthelate1950sandearly1960stoshiftmultilateralismontoamoreinclusivefooting.ThisledtothecreationofUNCTADin1964,andtoasubsequentbroadeningofthedevelopmentagendaaroundanewinternationaleconomicorder.TheoftenforgottenBrettonWoodsdevelopmentvisionand thedetailsof itsvariousproposalscanstillprovide some inspiration for those seeking to advance an inclusivedevelopmentagendatoday.

Managing creative destruction

Noneoftodaysdevelopedcountriesdependedonmarketforcesfor their structural transformation and its attendant higher levels ofemployment,productivityandpercapitaincomes.Rather,theyadoptedcountry-specificmeasures tomanage those forces, harnessing theircreativesidetobuildproductivecapacitiesandprovideopportunitiesfordynamicfirmsandentrepreneurs,whileguidingtheminamoresociallydesireddirection.Theyalsouseddifferentformsofgovernmentactiontomitigatethedestructivetendenciesofthosesamemarketforces.Thisapproachofmanagingthemarket,notidolizingit,wasrepeatedbythemostrapidlygrowingemergingmarketeconomiesfromthesmall

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socialdemocraticeconomiesofNorthernEuropetothegianteconomiesofEastAsiainthedecadesfollowingtheendoftheSecondWorldWar.

Weak initial economic conditions and low administrative andinstitutionalcapabilities,aswellaspolicyerrorsandexternalshocksexplain, to varying degrees,why other developing countries havebeenlesssuccessfulinreplicatingtheseearlierexperiences.However,internationaleconomicgovernancehasalsoincreasinglyposedgreaterconstraintsontheoptionsforindividualcountriestopursueeconomicpoliciestoachievetheirdevelopmentobjectives.

Thepost-warmultilateraltraderegimewasessentiallydesignednottocompromisethepolicyspaceofthedevelopedcountriestoachieveanappropriatelevelofeconomicsecuritythroughthepursuitoffullemploymentandextendedsocialprotection.Butitalsosoughttolimitmercantilistpracticesamongitsmembersandprovidepredictabilityin international trading conditions.What emergedwas a regimeofnegotiated,bindingandenforceablerulesandcommitmentswithbuilt-inflexibilitiesandderogations.

SubsequentmultilateraltradenegotiationsundertheauspicesoftheGATTculminated in theUruguayRoundAgreements (URAs),whichenteredintoforcein1995.Thescopeofthosenegotiationswasconsiderablywidened,bothintermsofthecountriesparticipatingandthetariff lines involved.Theyalsoextendedintotrade-relatedareasbeyond trade ingoods,with themost-favoured-nationandnational-treatmentprinciplesbeingappliednotonlytotradeingoods,butalsototradeinawiderangeofservices,suchasfinance,tourism,educationandhealthprovision.Asa result,allWTOmemberStatesacceptedrestrictionsontheirconductofawidersetofpolicies,includingsomedesignedtopromoteanddirectthestructuraltransformationoftheireconomies.Yetsomeofthepolicyspacetheygaveuphadplayedanimportantrole insuccessfuldevelopmentprocesses in thepast.Thefollowingaresomeexamples.

Theuseofsubsidies,circumscribedbytheAgreementonSubsidiesandCountervailingMeasures (SCM), had been a preferred

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instrument to support structural transformation, particularly inEastAsiancountries.

Performance requirementson foreign investorswith respect toexports,domesticcontentandtechnologytransfer,restrictedundertheAgreementofTrade-relatedInvestmentMeasures(TRIMs),had been frequently used to enhance the creation of linkagesbetweenforeigninvestorsandlocalmanufacturers.

Reverseengineeringandimitationthroughaccesstotechnology,curtailed under theAgreement onTrade-relatedAspects ofIntellectualPropertyRights(TRIPS),hadpreviouslybeenusedbymanycountries,includingthenowdevelopedones.

Despitegreaterrestrictionsontheuseofcertainpolicyinstruments,WTOmembersretainsomeflexibilitytosupportstructuraltransformation,includingintariffpolicywheresomelinesarestillunbound,andwherethedifferencebetweenboundandapplied tariffsprovides roomformodulating them in support of development goals.WTOmemberscanalsocontinue tousecertainkindsofsubsidiesandstandards topromoteresearchanddevelopmentandinnovationactivities,aswellasexploitflexibilitiesintheuseofexportcredits.UndertheTRIMsAgreement,policymakersmaycontinuetoimposesector-specificentryconditionsonforeigninvestors,includingindustry-specificlimitations.Theagreementalsoallowssomeflexibilitythroughthemechanismofcompulsorylicensing(wherebyauthoritiescanallowcompaniesotherthanthepatentownertousetherightstoapatent)andparallelimports(i.e.importsofbrandedgoodsintoamarketwhichcanbesoldtherewithouttheconsentoftheownerofthetrademarkinthatmarket).

Weighing the lossofpolicy space in specificareasagainst thepotentialgainsofamorepredictableopenmultilateraltradingsystemisnoeasytask.Inanyevent,themoreimmediatequestionishowbesttousethespacethatremainstosupportmoresustainableandinclusiveoutcomesthanhavebeenachievedbymostdevelopingcountriesoverthepastthreedecades.Inthisrespect,practicesandcapacitieslinkedtotheinstitutionalconstructofadevelopmentalStatearestillkey,as

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UNCTADhaslonginsisted.Butitisalsoimportanttorecognizethatinconsistenciesandgapsacrossthemultilateralarchitecture,particularlyattheinterfaceoftradeandfinancialflows,continuetomakeitdifficultfordevelopingcountriestomakethemostofthespacethatremains.Moreover,manyofthemneedmuchbettersupportfromtheinternationalcommunitytousethecurrentarrangementsinawaythatwillhelptheirtransformationefforts.Inmanyrespectsthatsupporthasbeengivenreluctantly,orhasnotbeenforthcomingatall.UNCTADsproposalforanindependentcommissiontoundertakeadevelopmentauditofthemultilateraltradingsystemtoexaminetheseandothertensionsthatdisturbthesmoothworkingsofthissystemcouldofferawayforward.

The steady erosion of policy space

Since the early 1990s, there has been awave of bilateral andregional trade agreements (RTAs) and international investmentagreements (IIAs), someofwhichcontainprovisions that aremorestringentthanthosecoveredbythemultilateraltraderegime,ortheyinclude additional provisions that go beyond those of the currentmultilateraltradeagreements.

Provisions inRTAs have become evermore comprehensive,andmanyofthemincluderulesthatlimittheoptionsavailableinthedesign and implementationof comprehensivenationaldevelopmentstrategies.Eventhoughtheseagreementsremaintheproductof(oftenprotracted)negotiationsandbargainingbetweensovereignStates,thereisagrowingsensethat,duetothelargernumberofeconomicandsocialissuestheycover,thediscussionsoftenlackthetransparencyandthecoordinationincludingamongallpotentiallyinterestedgovernmentministriesneededtostrikeabalancedoutcome.

Regardlessofthecountriesinvolved,bysigningthoseagreementsdeveloping-countrygovernmentsrelinquishsomeofthepolicyspacetheyhavebeenendeavouringsohard topreserveat themultilaterallevel.Thismayseempuzzling,butitcouldbemainlybecausesome

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governmentsfearexclusionwhenothercountriessigninguptosuchagreementsgainpreferentialmarketaccessandbecomepotentiallymoreattractiveasdestinationsforFDI.Theymayalsoseeparticipationinafreetradeagreementasameanstofacilitatetheentryoftheirdomesticfirmsintointernationalproductionnetworks.

However,asdiscussedinpreviousTDRs,participationininter-national production networks runs the risk of generating adverseterms-of-trade effects on countries, particularly those at the lowerendsofproductionchains,anditcreatesfewdomesticlinkagesandtechnologyspillovers.Moreover,developingcountriesatanearlystageofindustrializationmaybecomelockedintolow-value-addedactivitiesduetostiffcompetitionfromothersupplierstokeeplabourcostslow,andbecausethetightcontroloverintellectualpropertyandexpensivebrandingstrategiesoftheleadfirmblockthemfrommovingupthevalue chain.Even relatively successfulmiddle-incomecountriesdonotfacealevelplayingfieldinmanyofthesenetworks.Chinaisaninterestingcaseinpoint.Considerableattentionhasbeengiventoitsriseasadominantexporterofelectronicsgoods,totheextentthatitnowaccountsforasmuchasone-thirdoftotaltradeinthissector.Butthereare,infact,veryfewChinesefirmsthatcontrolthedifferentpartsoftheelectronicschain.Moretellingstill,Chinesefirms,ononerecentestimate,accountforjust3percentoftotalprofitsinthissector.Thus,developingcountriesneedtocarefullyweighboththecostsandbenefitswhenconsideringanindustrializationstrategythatplacesconsiderableemphasisonparticipationininternationalproductionnetworksifthispushesthemtoaracetoconcludeevermoreandincreasinglystringentagreementswithoutafullandproperunderstandingoftheirdevelopmentpotential.

Policyspace isnotonlyreducedbyfree tradeagreements,butalsowhen countries sign up to IIAs.Whenmost such agreementswere being concluded in the 1990s, any loss of policy spacewasseenasasmallpricetopayforanexpectedincreaseinFDIinflows.This perception began to change in the early 2000s, as it becameapparentthatinvestmentrulescouldobstructawiderangeofpublic

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policies,includingthoseaimedatimprovingtheimpactofFDIontheeconomy.Besides,empiricalevidenceontheeffectivenessofbilateralinvestment treaties and investment chapters inRTAs in stimulatingFDIisambiguous.Moreover,thelackoftransparencyandcoherencecharacterizing the tribunals established to adjudicate on disputesarisingfromtheseagreements,andtheirperceivedpro-investorbias,addedtoconcernsabouttheireffectiveness.Arangeofpossibilitiesiscurrentlyunderconsiderationtorebalancethesystemandrecovertheneededspacefordevelopmentpolicies.Theseinclude:(i)progressiveandpiecemealreformsthroughthecreationofnewagreementsbasedoninvestmentprinciplesthatfostersustainabledevelopment;(ii)thecreationof a centralized,permanent investment tribunal; and (iii) aretreatfrominvestmenttreatiesandrevertingtonationallaw.

Alongwith the proliferation of trade agreements and theirexpansionintotrade-relatedareas,therehasbeenaglobalrevivalofinterest in industrial policy.Reconciling these two trends is a hugechallenge.Many developed countries, especially since the recentfinancialcrisis,havebeguntoexplicitlyacknowledgetheimportantrolethatindustrialpolicycanplayinmaintainingarobustmanufacturingsector.TheUnitedStates,whileoftenportrayedasacountrythattakesahands-offapproachtoindustrialpolicy,hasbeen,andremains,anaviduserofsuchapolicy.ItsGovernmenthasactedasaleadingrisktakerandmarketshaperinthedevelopmentandcommercializationofnewtechnologies,adoptingawiderangeofpoliciestosupportanetworkofdomesticmanufacturingfirmsthathavethepotentialforinnovation,exportsandthecreationofwell-paidjobs.Bycontrast,theexperienceoftheEUillustrateshowintergovernmentalagreementscanconstrainthepolicychoicesofnationalpolicymakers,andhowindustrialpoliciesthatarelimitedtotheadoptionofonlyhorizontalmeasuresmayhampertheachievementofstatedobjectives.

As some developing countries have reassessed themerits ofindustrial policy in recent years, theyhave alsoused someof theirpolicyspacetoinducegreaterinvestmentandinnovationbydomesticfirmssoastoenhancetheirinternationalcompetitiveness.Someofthe

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measuresadoptedinclude,sector-specificmodulationofappliedtariffs,usingthedifferencebetweenboundandappliedtariffrates;applyingpreferentialimportduties;offeringtaxincentives;providinglong-terminvestmentfinancingthroughnationaldevelopmentbanksorsubsidizingcommercialloans;andusinggovernmentprocurementtosupportlocalsuppliers.VariouspolicymeasurescontinuetobeusedincountriesatdifferentlevelsofdevelopmentfromVietNamtoBrazilinanefforttocreateavirtuouscirclebetweentradeandcapitalaccumulation.

Safeguarding policy space while strengthening multilateral mechanisms

UNCTADhas been arguing for some time that if developingcountriesaretomaintainandimprovetheirrecentgrowthtrajectories,they shouldwiden and deepen the structural transformation oftheireconomies.The resultingpolicychallenge isa familiarone incommodity exporters,where a lack of diversificationmakes theireconomies vulnerable to exogenous shocks and policy shifts.Butalso,strongergrowthdoesnotautomaticallytranslateintoimprovedlivingstandards for themajorityof thepopulation.Whilestructuraltransformation is imperativeforalldevelopingcountriesforsimilarreasons, in the coming years they are likely to find amuch lessfavourableglobaleconomicenvironmentthanexistedintheopeningdecadeofthiscentury.Consequently,structuraltransformationwillbeextremelydifficultwithoutgreaterflexibilitiesinpolicymaking.

Thus,strengtheningthegovernanceofglobaltradeinsupportofdevelopmentgoalswillneedtobepartofamorecomprehensiveandintegratedpackagetohelppreservethepolicyspaceforproactivetradeandindustrialpolicies.Suchreformshouldcomplementmacroeconomicandfinancialreforms.Itwillneedtoincludevariouselements,foremostamong thembeing the strengthening ofmultilateralmechanisms.The newmomentum from theWTOsBaliMinisterialConferenceinDecember 2013 shouldbe taken forward to achieve anoutcomeof theDohaRound negotiations that justifies its description as a

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developmentround.Anyrenewalofsuchacommitmentcouldincludeanemphasisonimplementationissuesandmaintainingtheprincipleofasingleundertaking,ratherthanmovingtowardsavariablegeometrywhereby a rangeofmandatory core commitments is supplementedbyplurilateral agreements.Thegreatest benefit from thismaywellbesimplymaintainingthepublicgoodcharacterofmultilateralrules.

A refocusing of trade negotiations onmultilateral agreementswouldimplyreconsideringprovisionsthatgobeyondexistingWTOagreements; but it should also look into greater flexibility in theapplicationof theURAsby responding constructively to a numberofrecentdevelopments.Forexample,theflexibilitiesintroducedintothe systemof intellectual property rights protectionwith respect topublichealthcouldbeextendedtosupporttechnologyadoptionandinnovationatallstagesofstructuraltransformation.Furthernegotiationson industrial tariff reductions could also provide greater flexibilityfor sector-specific public support policies.The latterwould implychangingthesector-specificlevelandstructureoftariffsovertime,whilemaintainingconsiderabledispersionoftariffsacrosseconomicsectors.

Fiscal space in the global context

Fiscalspacegoeshandinhandwithpolicyspace.Evenifgovernmentsareallowedtodesignandimplementthedevelopmentpoliciesoftheirchoicewithintheexistinginternationalframeworkofnegotiatedrulesandacceptednorms,theywillstillneedtofinancetheinvestmentandothergeneralandtargetedexpendituresrequiredforimplementingthosepolicies.Thus,strengtheninggovernmentrevenuesiskey.

Fiscalspaceisbothacauseandaneffectofeconomicgrowthandstructuralchange.Higheraveragelevelsofincome,expansionofthemodernsectorsoftheeconomyandashrinkingoftheinformaleconomybroaden the taxbase and strengthen the governments capacities tomobilize fiscal revenues.This, in turn, allows for higher growth-enhancingpublicspending,bothonthesupplyside(e.g.investment

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in infrastructure, research and development, and education) andon the demand side (e.g. social transfers).Conversely, limited, oreven a diminished, fiscal space is often part of a vicious circle ofunderdevelopment.Theneedforreclaimingandexpandingfiscalspacefaces particular challenges in an increasingly globalizing economy.Officialdevelopmentassistance(ODA)cansupporttheexpansionoffiscalspace,particularlyintheleastdevelopedcountries(LDCs),ascanforeignborrowing,andonamoresustainablebasis if it isusedforexpandingproductivecapacities.However,theunpredictabilityofODAcanmakeitdifficultforlong-termpolicyplanning,anditcanalsodelaytheestablishmentofpoliticalmechanismsthatsupportthedevelopmentalState.Moreover,inmostcases,relyingonotherssavingstofundbasicStateactivitiesraisesquestionsaboutvoiceandlegitimacy.Also,excessiverelianceonforeignsourceshasledtooverindebtednessandchronicdeficitsincountriesfiscalandexternalbalances,therebyreducingfiscal space in the long run.Therefore, expandingfiscalspaceshouldrely,asfaraspossible,ondomesticrevenuesourcesifit is tosustainanationaldevelopmentstrategy.Foreignfinancecancomplement,butnotreplace,suchrevenues.

Amajor problem is that globalization has affected the abilityof governments tomobilize domestic revenues.Their lowering oftariffshasresultedinreducedrevenuesinmanydevelopingcountries,oftensignificantlyso,whiletheincreasedmobilityofcapitalanditsgreateruseoffiscalhavenshaveconsiderablyalteredtheconditionsfor taxing incomebothpersonalandcorporateandwealth.Thedominantagendaofmarketliberalismhasledtoaglobalizedeconomythat encourages tax competition among countries, at times pushingthemtoaracetothebottominofferingincentivesintheformofreduceddirecttaxation.Corporatetaxrateshavebeenonadecliningtrendindevelopedanddevelopingcountriesalike,oftenaccompaniedbysubsidiesorexemptionstoattractorretainforeigninvestment.Inaddition,finance-ledglobalizationhasledtotheproliferationofoff-shorefinancialcentres,taxhavensandsecrecyjurisdictionsthatprovidevariousmeansoftaxavoidanceorevasiononascalethatismeasuredinbillions,ifnottrillions,ofdollars.

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Taxation problems for the international community

Trademispricing, including through transfer pricing (i.e. thevaluation of intra-firm cross-border transactions by internationalcompanygroups),hasbecometheevasionmechanismofchoiceformanycompanies.Iftheintracompanyorintragrouppricedoesnotreflectthepricethatwouldbepaidinamarketwhereeachparticipantactsindependentlyinitsowninterest,profitswithinacompanygroupcanbeeffectivelyshiftedtolow-taxorno-taxjurisdictions,whilelossesanddeductionsareshiftedtohigh-taxjurisdictions.Anotherwayofshiftingprofitsandlossesamongjurisdictionsisthroughthincapitalization,whichoccurswhenacompanyhasahighproportionofdebtinrelationtoitsequitycapital,andmixesandmatchesintragroupdebtsandinterestpaymentsacrossitssubsidiariestominimizetaxpaymentsandgeneratehigheroverallprofits.

Theinternationaltaxarchitecturehasfailed,sofar,toproperlyadapttothisreality,therebyallowingamassivehaemorrhagingofpublicrevenues.Theopacitysurroundingtaxhavensmaypartlyexplainthedifficultiesfacedbypolicymakersincollectingpublicrevenues,butthemainobstacleispolitical:themajorprovidersoffinancialsecrecyaretobefoundinsomeoftheworldsbiggestandwealthiestcountries,orinspecificareaswithinthesecountries.Indeed,offshorefinancialcentresandthesecrecyjurisdictionsthathostthemarefullyintegratedintotheglobalfinancialsystem,channellinglargesharesoftradeandcapitalmovements,includingFDI.

Recently,anumberofdevelopmentsaimedatimprovingtransparencyandexchangeof informationfor taxpurposeshave takenplace.TheyincludeadeclarationbyG20leaderstopromoteinformationsharingwithrespecttoallkindsofabusesandfraudulentactivities,anOECDActionPlanonBaseErosionandProfitShifting(BEPS),increasedmonitoringbyseveralnationaltaxauthoritiesoftaxabusesbyrichindividualsandTNCs,andnumerousbilateraltaxtreaties(BTTs)andtaxinformationexchangeagreements(TIEAs).

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While these initiatives are steps in the right direction, theirimplementationandenforcementhavegenerallybeenveryslow.Thisis particularly sowith regard to transfer pricing abuses,which areextremelyharmfulfordevelopingcountries.BecausetheseinitiativesaremostlyledbythedevelopedeconomiesthemainhomestoTNCsandtosomesecrecyjurisdictionstherearerisksthatthedebatewillnotfullytakeintoaccounttheneedsandviewsofdevelopingandtransitioneconomies. Itwill thereforebe important togiveamoreprominentroletoinstitutionsliketheUnitedNationsCommitteeofExpertsonInternationalCooperationinTaxMatters,andtoconsidertheadoptionofaninternationalconventionagainsttaxavoidanceandevasion.

Althoughtheverynatureof theproblemsuggests theneedforamultilateralapproach,governmentscanalsoapplymeasuresatthenationallevel.Theycan,forinstance,legislatefortheadoptionofageneralanti-avoidancerule(GAAR)sothataggressivetaxschemescanbedeclaredillegalwhenchallengedincourts.Theycanalsobemoreeffectiveincombatingtransfermispricingintheirinternationaltradebyusingreferencepricingforanumberofhomogeneoustradedgoods.

Natural resources for public revenue

Inmanydevelopingcountries,collectinghigherpublicrevenuesthrough rents from natural resources and particularly from theextractiveindustriesisofparticularimportanceforthefinancingofdevelopment.Themaincontributionoftheseactivitiestodevelopmentiswhattheypayingovernmentrevenues,astheyoftengenerateenclaveeconomieswithweakor no linkageswith the rest of the economy.However,astheriseofcommoditypricesduringthepastdecadeorsoledtoatenfoldincreaseintheprofitsoftheworldslargestminingcompanies,itbecameobviousthatthepublicgainsfromresourcerentswerelaggingfarbehind.Corruptionmaybepartlytoblame,butthemainreasonhasbeenoverlygeneroustaxationregimesestablishedatatimeoflowprices,andoftenontherecommendationoftheBretton

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Woodsinstitutions,withtheaimofattractinginternationalfirmsandinvestorstothesector.

As a result,many governments both from developed anddevelopingcountrieshavebeguntorevisetheirpoliciesrelatingtotheextractiveindustries.Thishasincludedrenegotiationorcancellationofexistingcontracts,increasesintaxorroyaltyrates,introductionofnewtaxesandchangesinthedegreeofStateownershipoftheextractiveprojects.HostgovernmentscanalsobenefitfromastrengtheningoftheirbargainingpositionsincontractnegotiationswithTNCsinvolvedintheextractiveindustriesduetotheemergenceofnewmajorplayers,suchascompaniesfromemergingeconomies.However,thesechangingmarketconditionsshouldnotobscurethewiderpolicychallengesfacedbyproducingcountriesinmakingthemostofextractiveindustriesfordevelopment.

A comprehensive policy aimed at improving revenues fromnatural resources needs to incorporate several elements. First,governmentsshouldretain theirright toreviewthe taxregimesandownershipstructureswheneverdeemednecessaryfortheeconomicanddevelopmentinterestsofthecountry.Aminimumleveloftaxationcouldalsobenegotiatedattheregionalorinternationallevelstoavoidaracetothebottom.Second,theyshouldhavethemeanstoenforcetherulesandobtaintheduerevenuesbybeingabletocontrolTNCstransferpricingmanoeuvresandunderreportingofexportvolumes.Third,theyshouldbeallowedtodosowithoutthethreatoflegalretributionthroughtheexistinginvestmentdisputemechanisms.

Mostoftheneededmeasurescanbetakenatthenationallevel,butmultilateralcooperationisstilloftheutmostimportance.Transparencyinitiatives such as theExtractive IndustriesTransparency Initiative(EITI)shouldbemademandatoryandextended:theyshouldnotfocusonly on governments, but also on producingfirms and commoditytradingcompanies.Thereshouldalsobeagreaterfocusonmonitoring,auditing and accountability, aswell as enforcement of the fiscalconditionsandregulationsunderwhichextractiveindustriesoperate.

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Institutionaldevelopmentandcapacity-buildingarecrucial,inparticulartoimprovethecapacitytonegotiatecontracts,butalsotoamelioratethemonitoringofproductioncosts,importandexportprices,volumes,qualitiesandtimeofdeliveryofthenaturalresourcesextracted,aswellasfordatacollectionandprocessing.Givenitsexpertiseintheareaofcommodities,transport,customsandtrade,UNCTADcouldprovidesupportinthisdomain.Regionalcooperationincapacity-buildingcanalso prove very useful.The international donor community has animportantroletoplayinsupportingsuchinitiatives.

Preventing the resource drain caused by illicit financial flowsandtaxavoidancecanhelpprovidethenecessaryrevenuestofinancetheattainmentofnewdevelopmentgoals.Thus,giventheirrelevanceformanydevelopingcountriesandtransitioneconomies,fiscalspaceandrelatedgovernanceissuesshouldbeprominentcomponentsofthepost-2015developmentagenda.

MukhisaKituyi Secretary-GeneralofUNCTAD

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