, TRADE INVESTMENT AND DEVELOPMENT T N E M P S O Policy L E V E D Coherence D N O A Matters N O P I T l i A R C E h P O - O C M C t t I M O N O C E R O F N O I T A S I N O A E C G D R OECD 9 O (cid:211) OECD, 1999. (cid:211) Software: 1987-1996, Acrobat is a trademark of ADOBE. All rights reserved. OECD grants you the right to use one copy of this Program for your personal use only. Unauthorised reproduction, lending, hiring, transmission or distribution of any data or software is prohibited. You must treat the Program and associated materials and any elements thereof like any other copyrighted material. All requests should be made to: Head of Publications Service, OECD Publications Service, 2, rue Andre´-Pascal, 75775 Paris Cedex 16, France. TRADE, INVESTMENT AND DEVELOPMENT: POLICY COHERENCE MATTERS ORGANISATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT ORGANISATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT Pursuant to Article 1 of the Convention signed in Paris on 14th December 1960, and which came into force on 30th September 1961, the Organisation for Economic Co-operation and Development (OECD) shall promote policies designed: – to achieve the highest sustainable economic growth and employment and a rising standard of living in Member countries, while maintaining financial stability, and thus to contribute to the development of the world economy; – to contribute to sound economic expansion in Member as well as non-member countries in the process of economic development; and – to contribute to the expansion of world trade on a multilateral, non-discriminatory basis in accordance with international obligations. The original Member countries of the OECD are Austria, Belgium, Canada, Denmark, France, Germany, Greece, Iceland, Ireland, Italy, Luxembourg, the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, Turkey, the United Kingdom and the United States. The following countries became Members subsequently through accession at the dates indicated hereafter: Japan (28th April 1964), Finland (28th January 1969), Australia (7th June 1971), New Zealand (29th May 1973), Mexico (18th May 1994), the Czech Republic (21st December 1995), Hungary (7th May 1996), Poland (22nd November 1996) and Korea (12th December 1996). The Commission of the European Communities takes part in the work of the OECD (Article 13 of the OECD Convention). Publie´ en franc¸ais sous le titre : E´CHANGES, INVESTISSEMENT ET DE´VELOPPEMENT : POUR LA COHE´RENCE DES POLITIQUES (cid:211) OECD 1999 Permission to reproduce a portion of this work for non-commercial purposes or classroom use should be obtained through the Centre franc¸ais d’exploitation du droit de copie (CFC), 20, rue des Grands-Augustins, 75006 Paris, France, Tel. (33-1) 44 07 47 70, Fax (33-1) 46 34 67 19, for every country except the United States. In the United States permission should be obtained through the Copyright Clearance Center, Customer Service, (508)750-8400, 222 Rosewood Drive, Danvers, MA 01923 USA, or CCC Online: http://www.copyright.com/. All other applications for permission to reproduce or translate all or part of this book should be made to OECD Publications, 2, rue Andre´-Pascal, 75775 Paris Cedex 16, France. PREFACE In 1996, OECD Ministers adopted a “development partnership strategy”, which envisages a reduction of one half, by the year 2015, in the proportion of people living in poverty in developing countries. This objective is based on UN conference outcomes and is widely shared, including by the World Bank. Reducing poverty is seen as vital for peace and stability and social and environmental well-being in developing countries themselves, but also as essential to the common well-being of the global community as a whole. At their 1998 annual meeting, OECD Ministers welcomed the steady progress being made in implementing the OECD’s development partnership strategy. They noted however, that: “The success of the partnership strategy will be based on increased policy coherence, especially to help developing countries secure sustainable development, assemble the necessary financial resources, and integrate successfully into the global economy”. In that light they requested the OECD Secretariat to submit a report to their Meeting in 1999, on: “the links between trade and investment and development, and the role that the OECD might play in promoting greater policy coherence”. This report has been prepared in response to that mandate. It follows the 1996 DAC Report Shaping the 21st Century: The Contribution of Development Co-operation, which is the basis for the OECD’s partnership strategy for development. It also supplements the submission of a Secretariat report in 1998, Open Markets Matter, which assessed the benefits of open markets for the welfare of people in OECD countries and the world generally. Drawing on the extensive literature on trade, investment and development, the report finds that by effectively engaging with the dynamic flows of trade, investment and knowledge in a global economy, developing countries can achieve high rates of growth, and that sustained high growth is effective in reducing poverty. However the report also finds, in line with the evidence, that 3 while opening their economies to trade and investment is a necessary condition for developing countries to achieve sustained high growth through engagement in the global economy, it is by no means a sufficient condition. The three basic foundations for sustained high growth in developing countries are: • Sound, market-oriented economic policies. • Appropriate social policy frameworks, including strong investment in human capital and adequate social safety-nets. • Good governance. Initiating a process of dynamic growth requires a minimum level of performance in each of these domains. Sustainable development over a period of decades requires continuous maintenance of coherent economic, social and environmental policies and fostering the political consensus needed to underpin them, implying a widening participation of the population in economic and political life. This implies, in turn, the development of private and public institutions that are transparent and accountable. As the Asian financial crisis helped to show, weaknesses in these domains make even successful developing economies vulnerable to crisis. The key objective of this report is to identify how OECD countries can provide coherent support for the endeavours of developing countries to achieve sustainable development through effective participation in the global economy. Policy coherence requires the avoidance by OECD governments of policies that undermine other efforts they are making to help the development process (e.g. trade actions which reduce current income and potential growth run counter to aid policies that develop countries’ export capacity). The notion of policy coherence also embraces the broader agenda of consciously taking account of the needs and interests of developing countries in the evolution of the global economy. Part II of the report is devoted to these central issues of policy coherence. It looks at how OECD Members can design policy-making processes at home which systematically build “developmental coherence” into their decision- making across all relevant policy areas. It stresses the need to bring developing countries fully into the evolution and governance of the international trade, finance and investment regimes. These regimes provide the twin public goods of confidence and accountability needed by all actors in a dynamic and stable global economy. They also set international standards that work as a benchmark 4 for the quality of policies and institutions, which can be particularly helpful for developing countries seeking to establish their reputation in terms of their economic and political environment. The report recognises the importance of helping to build the institutional capacity that developing countries need in order to be effective rather than vulnerable and marginal players in the global economy. The outcome of the discussions at the 1999 OECD Ministerial Meeting was an agreement that policy coherence matters. Ministers agreed that policy coherence is an issue that must remain on the OECD agenda. They asked for further work, and for the Secretariat to report back on the results of such work. Producing this report has involved an extensive process of discussion and feedback inside the OECD Secretariat, in a range of OECD Committees and within and among OECD Member governments. The preparation of the report was led by Kumiharu Shigehara, Deputy Secretary-General, with Richard Carey (Deputy Director of the Development Co-operation Directorate), Ulrich Hiemenz (Research Director of the OECD Development Centre) and John West (Secretary-General’s Office) as the main authors. A companion report, Reaping the Full Benefits of Open Markets, which draws on some of the same material, but extends the analysis of the benefits of trade and investment liberalisation for developing countries, is being published simultaneously. This report is published on the responsibility of the Secretary-General. 5 TABLE OF CONTENTS PREFACE ...............................................................................................3 EXECUTIVE SUMMARY.........................................................................9 INTRODUCTION.....................................................................................15 PART I: THE LINKAGES BETWEEN TRADE, INVESTMENT AND DEVELOPMENT................................................................17 1. Accelerating development progress....................................................17 a) Capturing the dynamic potential of the new global economy through open development strategies............................................17 b) The domestic foundations: governance, policy coherence and comprehensive development strategies...................................20 2. Managing the liberalisation process in developing economies: Some specific policy challenges.........................................................25 a) Structural adjustment and social policy in economic development...................................................................................25 b) Strengthening financial systems....................................................27 c) The challenge of environmental sustainability..............................27 3. The role of development co-operation................................................28 PART II: THE DEVELOPMENTAL COHERENCE OF OECD POLICIES...................................................................................31 1. Promoting “developmental policy coherence” in OECD Member countries: Generic issues and approaches...........................31 a) A common vision for formulating and evaluating policies...........32 b) An effective framework of inter-ministerial co-ordination in capitals.......................................................................................32 c) Research and analytical capacities in support of developmental policy coherence............................................................................32 d) Mechanisms for consultation with civil society to promote broad consensus-building on specific issues.................................33 7 2. Promoting developmental policy coherence: Some priority issues....33 a) Strengthening the framework for international trade flows...........33 b) Strengthening the framework for international investment and capital flows............................................................................35 c) Reconciling the environment with trade and investment and development.........................................................36 d) Enhancing access to the global information society......................37 e) Improving the coherence of OECD Members’ development co-operation policies and practices..........................38 3. Promoting developmental policy coherence: The role of the OECD.40 ANNEX 1: TRADE AND INVESTMENT AND DEVELOPMENT LINKAGES: TRENDS AND EXPERIENCES.......................45 ANNEX 2: BACKGROUND BRIEFING NOTES.....................................57 BIBLIOGRAPHY: SELECTED REFERENCES........................................71 8