  A farmer harvests rice in Guyana. | Credit: UN
By C. J. Suresh
IDN-InDepth NewsAnalysis
NEW YORK (IDN) - A new report by the United Nations is calling for shifting gears and overhauling the machinery for international finance, aid and trade in order to respond to significant shifts taking place in the global economy.
The World Economic and Social Survey 2010 (WESS) tables a series of far-reaching proposals, pointing out that the food, energy, financial and climate crises have exposed major weaknesses in existing mechanisms designed to manage the process of global development.
Getting 'back on track' is not an option, therefore, "as it would mean returning to an unsustainable path of global development". In fact, sustained and widespread future prosperity will require major reforms in global economic governance and new thinking about global economic development," states the WESS, launched by the UN on June 29, 2010.
WESS proposes a system that is less dependent on the United States dollar and which pools reserve holdings regionally and internationally to provide cheaper insurance to countries coping with economic shocks and payment problems.
The new system would also be able to issue new international liquidity, including for financing development and fighting climate change, argue the Survey's authors. Accordingly, WESS proposes fundamental revisions of the existing institutions for global economic governance.
"But for an effective more sustainable rebalancing of the global economy much closer coordination is needed across the trading system, the new regime for international financial regulation, the global reserve system and the mechanisms for mobilizing and channelling development finance and climate funding," states WESS.
At present, the Group of 20 (G20) is taking on some areas of coordination, but as an informal platform responding to the crisis it has mostly focused on financial reforms. WESS notes that sustainable rebalancing of the world economy will take years, if not decades, and can only be successful if there is greater policy coherence.
To this end, WESS proposes that "the international community consider institutionalizing a global economic coordination mechanism within the more representative multilateral system".
DEVELOPMENT FINANCE
Taking up another significant issue, the report points out that the present aid architecture is highly fragmented and often considered ineffective. For instance, in a single year, Tanzania manages over 700 aid-financed projects and receives more than 500 donor missions.
Over the past decade, the average size of aid projects declined by two-thirds, while the number of projects increased six fold globally.
"Fragmentation is not helping effectiveness. Yet, many poor countries remain in great need of development assistance to have a better chance of overcoming poverty and poor health. Moreover, climate change is especially affecting the poorest of nations and will require at least a hundred billion dollars every year in new investments in the coming decades. More resources will be wasted if additional assistance does not accompany reduced fragmentation and increase effectiveness.
The Survey proposes that developing countries be put in the driver’s seat in identifying financing gaps through well-designed national development strategies. Donors would no longer line up numerous individual projects, with specific conditions and administrative requirements, but instead would jointly support a broad set of development policies for which recipient Governments would be held accountable.
DOHA ROUND
The impasse over the 2001 Doha Round, which aimed at more development-oriented trading rules, reflects the difficulty of striking a proper balance between a level playing field, that is, a common set of rules, and the capacities among countries to competitively engage in trade, says the UN report.
The equal treatment of all states effectively skews international trading against small economies. To make the multilateral trading system more conducive to sustainable development, it needs to both expand and restrict the scope of WTO rules, says the WESS.
On the one hand, trade rules should be more flexible to allow weaker economies time and space to build up their industries to compete in international markets. On the other hand, WTO's rule-setting should be subordinate to principles set elsewhere.
For instance, environmental agreements, such as those related to climate change, should guide trade rules for environment-sustaining products and will require adjustments in intellectual property protections under WTO.
Similarly, WTO rules will require revision in line with efforts that are being undertaken to strengthen financial regulation, including in stemming volatile capital flows. At present, under the WTO's General Agreement on Trade in Services, for instance, participating governments would not be allowed to impose restrictions on the kind of financial assets offered by foreign banks in their domestic financial markets.
The deregulation of global finance played a large role in the current crisis. Developing countries expected that less regulated finance would increase external funding, but instead it made growth more unstable, hampering domestic investment and economic development.
The WESS argues that greater financial regulation by national authorities will only be effective if internationally coordinated.
ECONOMY
The Survey spells out important shifts taking place in the global economy. The rapid growth in developing Asia which is shifting the balance of global economic power is likely to continue, thereby moving further towards a world economy with multiple engines of growth.
Apart from the recent crisis, this has been due not so much to the decline of the economies of the U.S. and the EU as to the growth in strength of the economies of other countries. Brazil, Russia, India and China (the so-called BRIC countries) have become the new economic giants and are already making their presence felt in global forums, such as the platform of G20, and through their own interaction.
Per capita income of developing countries measured in terms of purchasing power parity (PPP) has more than quadrupled over the past half-century. Also in PPP terms, the weight of Brazil, China and India in the world economy increased from 10 per cent in 1950 to 27 per cent in 2008. Russia is adding another 2.5 per cent. Measured this way, the weight of each of today's major economic powers, the United States and Western Europe, has dropped from over one quarter to less than one fifth.
While several developing countries (mostly in Asia) have experienced a significant "convergence" towards the living standards of the now advanced countries, others, especially in Africa, have fallen farther behind. The number of the world's poor living on less than $1.25 per day decreased from 1.8 billion in 1990 to 1.4 billion in 2005, but nearly all of this reduction was concentrated in China.
In sub-Saharan Africa and South Asia, the absolute number of the poor increased. At the same time, with few exceptions, income inequalities within countries have increased since the early 1980s. Aggregate measures for global inequality, which combine within -- and between country income disparities, show clearly increasing trends over the past decades -- trends revealed to be starkly unambiguous when China is excluded."Redressing this trend in global economic divergence, so as to prevent its becoming a source of new tensions and insecurity, will be a major challenge in the decades ahead," warns the UN Survey. (IDN-InDepthNews/30.06.2010)
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