Globalization and Liberalization: Effects of International Economic Relations on Poverty - UNCTAD - 1996

Agreed recommendations of the agency participants

1. It is essential that Governments achieve macroeconomic stability and attach importance to institution-building if they are to develop a sustainable approach to globalization. Externally oriented liberalization policies must likewise be carefully planned and monitored as to any possible undesired effects or outcomes. Certain basic principles can be suggested. For one, a sweeping liberalization of import regimes should not precede but should go together with enhanced export capacity and performance. Also, exchange rates should be maintained at realistic levels. An over-appreciation of the exchange rate will reduce the competitiveness of export industries and therefore should be avoided through prudent and credible macroeconomic policies. Liberalization of the capital account may need to be sequenced in line with a strengthening of the capacity for prudential supervision in the financial sector.

2. A more effective international institutional framework for oversight, regulation and compensation is necessary to deal with shocks emanating from the volatility of short-term international financial flows.

3. Further official debt reduction is necessary to reduce the debt servicing obligations of the least developed countries. Such reductions would free up budgetary resources which, in principle, could be directed, among other areas, to basic education, health and nutrition. There is, moreover, usually substantial scope for developing countries to augment resources to primary education and health through intersectoral and intrasectoral re-allocation. In terms of revenue sources, overreliance on regressive consumption taxes should be replaced by a renewed commitment to increasing direct taxes and making their collection more effective.

4. Not only must cuts in basic social services be avoided, but resources to those sectors should be restored at the very least to their earlier levels per head. The 20-20 initiative (a mutually-agreed commitment between interested developed and developing partners to allocate, on average, 20 per cent of ODA and 20 per cent of the national budget to basic social programmes) that grew out of the World Summit for Social Development could serve as a benchmark for donor and recipient Governments with respect to pro-poor social expenditure. Besides increasing the allocation of expenditures to the basic needs requirements of the poor, Governments should also redouble their efforts to make sure that the poor are adequately reached and served. This means increasing the efficiency and quality of public expenditure, and targeting it more effectively to the poorer segments of the population.

5. The practice of applying user charges as a vehicle for cost recovery should be re-examined, with a distinction made between those public services that are used disproportionately by the non-poor, such as public universities, those that are used by both the poor and the non-poor, such as urban primary schools and primary health facilties, and those that are used largely by the poor, such as rural primary schools and health clinics. It is the appropriateness of user charges in the latter instances that particularly needs to be reviewed. For instance, with respect to rural health clinics, provision could be made for the fees of the poorest users to be cross-subsidized by the less poor, and each clinic could be allowed to retain its collected revenue for the purchase of inputs essential to serve the community on a continuous and sustainable basis.

6. As unchecked liberalization may lead to increased income inequality, equity-oriented policies should be included in economic decisions related to globalization and liberalization. In fact, evidence based on time series data shows that there need be no contradiction between equity concerns and rapid growth. It is also important that an appropriate investment strategy be adopted from the start. Experience has shown that if the fruits of growth go mainly to one set of factors of production, such as capital-intensive investment, the conse- quences will be more difficult to undo later on. In this respect, consultations between the main social partners on the appropriate course for economic development to take can contribute to more equitable development.

7. Augmenting the human capital of the poor is essential if they are to contribute to globalization- related national goals and not be further marginalized in an increasingly competitive world. Improved education is also necessary to facilitate the adjustment of the conjunctural poor to liberalization policies by improving labour mobility. The kinds and levels of education needed will depend on many factors, not least of which are the stage of development and degree of insertion in the global economy of the countries in question. As a minimum, a completed primary education is a prerequisite for employment as an unskilled labourer in export-oriented production. In many cases additional technical training will prove necessary for the poor as well as the non-poor. Further research is recommended into the changing requirements of labour markets with respect to education in a globalizing economy.

8. Because globalization and, in particular, liberalization imply a re-distribution of benefits and opportunities, compensatory and safety-net measures will be important for certain population groups. Since trade-affected redundant workers in the formal sector are likely, because of their education, to find other work in the economy, primary emphasis should ideally be given to safety nets that are targeted at the poorest and most vulnerable of the affected poor. "Self-selection" emergency public works schemes can help satisfy the minimum income requirements of the conjunctural poor, while food distribution in peri-urban settlements or vouchers and other forms of subsidies on "inferior" food staples that are primarily consumed by the poor can help them attain their minimum calorie requirements. There are also "cost-free" measures that Governments can adopt, such as facilitating the access of the poor to legal titles on their urban land plots and rural land. Such measures help create gainful work in housing upgrading and, through the incentives they create for smallholders, to increase agricultural output.

9. Governments can also foster the creation of jobs available to the poor by providing support to micro- and small-scale enterprises, including those that are linked to the export sector. Such enterprises are normally more low-skill and labour-intensive than large firms and therefore helpful at directly reducing poverty. Moreover, through the flexibility that they provide in absorbing fluctuations and shifts in demand, micro- and small-scale enterprises augment the competitiveness of large exporting firms by lowering their fixed costs. At the same time, through extended subcontracting chains, such enterprises can also function as a bridge to help integrate the informal sector with the formal sector -- assuming official regulatory harassment of the informal sector is relaxed or eliminated -- thereby enhancing the poverty-reducing role and economic potential of the informal sector in the economy.

10. A critical concern is the question of Sub-Saharan Africa's insertion into the globalization process. As opposed to private investment flows, the principal global flows that the region receives continue to be in the form of official development assistance (ODA). This assistance should be partly re-directed to facilitate Sub-Saharan Africa's incorporation into the globalization process. Besides building up the human and physical capital needed for investment and trade, ODA should focus on institution-building, such as strengthening accounting structures and the legal system, in order to make the recipient countries more robust with respect to the requirements of globalization. For their part, African Governments should emphasize good governance and, as concerns local private investment and foreign capital, be consistent over time in their policy approaches so that investors can be confident of what to expect. Under such conditions, more domestic and foreign investment is likely to be made available to help those countries diversify beyond their existing static comparative advantage.

11. Current understanding is limited regarding the nature and relative strengths of the transmission channels and linkages that determine the effects of globalization and outward-oriented liberalization on poverty. The task is made more complicated by the need to consider the immense diversity of local circumstances, the variations of the globalization and liberalization processes and their economic and social effects over time. It is therefore recommended that further research be carried out on this subject, utilizing a sample of countries that represent a typology of differing initial conditions, in order that pro-poor policies related to the globalization and liberalization process can be more precisely identified and applied.

 Last updated on February 1997.

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