Why I love the UN, aka the battle between policy space and trade/investment agreements

September 30, 2014

     By Duncan Green     

Being a fan of the UN is always a bit of a mixed blessing. Various bits (UNDP, UNICEF, UN Women and many more) churn out some really useful research. UNCTAD at 50For many years, they provided the sole islands of sanity resisting the market fundamentalism of the Washington Consensus. But all too often their publications sink without trace, their use of social media is often lamentable, and they generally struggle to keep up with the times (or their rivals).

So I wasn’t surprised to find I’d missed the 10th September launch of the Trade and Development Report 2014, the annual flagship of the UN Conference on Trade and Development, founded 50 years ago this year, amid all the rhetoric and hopes for a post colonial ‘New International Economic Order’.

Just in case, like me, the TDR passed you by, UNCTAD’s overarching message is ‘the enduring case for policy space’. Sounds dull, but is really important. Here’s why:

‘Since the early 1990s, there has been a wave of bilateral and regional trade agreements (RTAs) and international investment agreements (IIAs), some of which contain provisions that are more stringent than those covered by the multilateral trade regime, or they include additional provisions that go beyond those of the current multilateral trade agreements.

Provisions in RTAs have become ever more comprehensive, and many of them include rules that limit the options available in the design and implementation of comprehensive national development strategies. Even though these agreements remain the product of (often protracted) negotiations and bargaining between sovereign States, there is a growing sense that, due to the larger number of economic and social issues they cover, the discussions often lack the transparency and the coordination − including among all potentially interested government ministries − needed to strike a balanced outcome.

government-not-the-problemPolicy space is not only reduced by free trade agreements, but also when countries sign up to IIAs. When most such agreements were being concluded in the 1990s, any loss of policy space was seen as a small price to pay for an expected increase in FDI [Foreign Direct Investment] inflows. This perception began to change in the early 2000s, as it became apparent that investment rules could obstruct a wide range of public policies, including those aimed at improving the impact of FDI on the economy. Besides, empirical evidence on the effectiveness of bilateral investment treaties and investment chapters in RTAs in stimulating FDI is ambiguous.

Moreover, the lack of transparency and coherence characterizing the tribunals established to adjudicate on disputes arising from these agreements, and their perceived pro-investor bias, added to concerns about their effectiveness.

A range of possibilities is currently under consideration to rebalance the system and recover the needed space for development policies. These include: (i) progressive and piecemeal reforms through the creation of new agreements based on investment principles that foster sustainable development; (ii) the creation of a centralized, permanent investment tribunal; and (iii) a retreat from investment treaties and reverting to national law.

Along with the proliferation of trade agreements and their expansion into trade-related areas, there has been a global revival of interest in industrial policy. Reconciling these two trends is a huge challenge. Many developed countries, especially since the recent financial crisis, have begun to explicitly acknowledge the important role that industrial policy can play in maintaining a robust manufacturing sector. The United States, while often portrayed as a country that takes a hands-off approach to industrial policy, has been, and remains, an avid user of such a policy. Its Government has acted as a leading risk taker and market shaper in the development and commercialization of new technologies, adopting a wide range of policies to support a network of domestic manufacturing firms that have the potential for innovation, exports and the creation of well-paid jobs. By contrast, the experience of the EU illustrates how intergovernmental agreements can constrain the policy choices of national policymakers.

As some developing countries have reassessed the merits of industrial policy in recent years, they have also used some of their policy space to induce greater investment and innovation by domestic firms so as to enhance their international competitiveness. Some of the measures adopted include applying preferential import duties; offering tax incentives; providing long-term investment financing through national development banks or subsidizing commercial loans; and using government procurement to support local suppliers. Various policy measures continue to be used in countries at different levels of development − from Viet Nam to Brazil − in an effort to create a virtuous circle between trade and capital accumulation.’

And with that, the report zooms off into the need to strengthen domestic sources of revenue, including from natural resources and sorting out the international tax system (or lack of it).

I worked on WTO and trade issues from 1997-2005, and saw the UN and academics like Dani Rodrik and Ha-Joon Chang slowly gain traction for ideas of ‘policy space’ as a counterweight to the ‘get the prices right’ language of the more extreme liberalizers. Great to see the UN still going strong – just wish they would sort out their comms a bit.

September 30, 2014
Duncan Green