In preparation for the Human Development Report every year, the HDRO commissions a number of experts to write papers on issues related to the theme of the Report. The following is a compilation of selected Occasional Papers written since 1992. Individually, each paper brings to light a key facet of human development in different parts of the world. Together, they help establish a framework of tools, concept and action to address the issue of human development worldwide.

Occasional Paper 32

Globalisation and liberalisation: Implications for poverty, distribution and inequality

Section Two - Trade, poverty and employment: issues for the industrialised world

Part 3 - Social clauses and trade agreements

Section Three - New policies for new challenges

References

Part 3: Social clauses and trade agreements

Debate over the impact of imports from developing countries on Northern labour markets will continue. But wherever the consensus finally emerges, there is little doubt either that globalisation is integrating labour markets at an extraordinary rate; or that it will continue to do so. As the volume of world output which is traded continues to rise, and as foreign-investment activity creates ever more complex and closely integrated global production structures, an increasing proportion of the world's labour force will be linked in a competitive market place.

It is unsurprising that this prospect should have generated a political response in the industrialised countries, where wages and conditions of employment are highest. For trade unionists in those countries, globalisation has raised the spectre of "jobs and investment going to those whose wage rates are low and whose environmental and labour standards are either soft or non-existent" (Donahue AFL-CIO 1996). The alternative, now strongly advocated by the EU and the USA as well as by Northern trade unions, is a social clause in the WTO. This would oblige all member states to comply with internationally recognised standards, or face the prospect of trade sanctions. As the Trade Union Advisory Committee of the OECD puts it: "the increasing integration of the world's economies demands that...core standards should be applied by all countries regardless of their level of development or social priorities." According to the EU Commissioner responsible for trade policy, 'fair trade' is now a precondition for restoring popular support behind the advancement of free trade (Brittain 1995).

In contrast, the vast majority of Southern governments regard demands for 'fair trade' as a euphemism for institutionalised protectionism, with Northern governments using the WTO to penalise the lower standards of employment and environmental protection associated with poverty. Governments in Asia have been particularly critical of the demand for a social clause in the WTO, which they see as a potential threat to their export competitiveness. They reject the argument that labour standards can be universalised like other human rights, claiming that the former should reflect economic circumstances and culture-specific standards (Bhagwati 1995). At the WTO ministerial meeting in Singapore, the issue emerged as a potential flashpoint, before being referred, in the tried and tested manner, to a working group for further consideration.

The case for a social clause

These debates are not new (de Grey 1992). The Havana Charter of 1948, out of which the GATT eventually emerged, acknowledged that "unfair labour conditions, particularly in production for export, create difficulties in international trade", and called for labour standards which reflected productivity levels (ICFTU 1995). Because the Havana Charter was never ratified, labour rights were not included in the GATT treaty (ILO 1995). However, the issue surfaced at successive rounds of trade talks, with the USA leading efforts to address labour-rights issues. Deadlock in the GATT resulted in the adoption of unilateral approaches, with the US introducing labour-rights conditionalities into its General System of Preferences. Viewed against this background, the Singapore ministerial meeting marks the latest phase in an ongoing debate, but the issue is unlikely to go away.

Concern over 'unfair' trade has become a rallying point for powerful alliances in the industrialised world, stretching from mainstream political parties to domestic anti-poverty groups, trade unions, environmental agencies, consumer associations and development organisations. Nor can the problem be viewed solely in North-South terms. Southern governments may be almost unanimous in their opposition to a social agenda for the WTO. But civil society is highly divided. For instance, some Southern trade unions share the view that a WTO social clause would be a protectionist device; others see it as an opportunity for raising domestic standards. Similar divisions can be found within the wider community of non-government organisations (Khor M 1994 and 1996; LeQuesne 1995). International agencies are also divided. The World Bank, to take one end of the spectrum, has been highly critical of the social-clause proposal, claiming that it would serve to distort labour markets and undermine the legitimate comparative advantage derived from low wages in developing countries. At the other end, the ILO has argued that trade policies cannot be separated from wider human-rights standards without inflicting grave damage on the credibility of the multilateral trading system (ILO 1994).

Two factors have served to exacerbate such divisions. First, arguments for and against social clauses often serve as a convenient smokescreen for the pursuit of vested interest. The demand for a social clause has been forced on to the international trade agenda, in part because of the strength of powerful protectionist lobbies in the industrialised world; and it has met with such powerful opposition partly because many Southern governments continue to regard enforcement of most labour rights as inimical to export competitiveness. Second, social clauses enjoy a wildly exaggerated press. As the analysis presented above makes clear, a WTO social clause would not in any fundamental sense address the problems of mass unemployment and wage inequality in the North, since these are only weakly linked to trade with developing countries. Nor, as some of its more fervent supporters claim, would a social clause eradicate problems such as the abuse of trade union rights, child labour, and discrimination against women. These problems are rooted in domestic poverty and social factors - and they will be resolved only through domestic political processes.

That said, a social clause could, in a limited way, help to distribute more equitably the benefits of international trade. Most obviously, it could provide a point of reference for raising labour standards, as much through the persuasive authority of a set of internationally recognised minimum rules as through the threat of trade sanctions. For trades unions and workers involved in export production, a WTO social clause could act as a powerful force for social change, with a multilateral consensus on carefully defined labour standards providing moral and economic legitimacy to demands for domestic reform. One of the challenges would be to extend such benefits to the non-unionised sector, which in many countries accounts both for the bulk of the work force, and for a growing share of export production (Barrientos S 1996).

There is another point which merits more serious consideration, especially on the part of developing-country governments. Most of these governments see the social clause as a precursor to yet more unilateralism in the multilateral trading system (Harvey 1995). Yet the absence of a social clause is at least as likely to generate political pressure for unilateral action, with the perceived inequity of a trading system not governed by common minimum standards eroding support for multilateralism. This is not an abstract threat. The EU is currently considering reforms to its GSP system which would link trade preferences to adherence to ILO conventions on labour rights, with a decision expected in 1998. Meanwhile, the 1992 US Child Labour Deterrence Act sets out to ban foreign goods manufactured with the use of child labour (Amato 1994). Such initiatives will be given a decisive impetus by the failure to adopt a social-clause issue in the WTO. The problem is therefore to identify core standards and mechanisms for implementation which are practical, which offer tangible benefits in terms of enhanced equity, and which are capable of breaking the current North-South impasse.

Problems with existing approaches

The current positions of the US, the EU, and Northern-dominated international trades union federations would not appear to be a good starting point. While there are some differences in emphasis, each of these actors envisages a social clause enshrining a wide range of core labour standards. For instance, the International Confederation of Free Trade Unions (ICFTU) has identified seven ILO conventions for inclusion. These include standards aimed at protecting the right to freedom of association and the right to bargain collectively (Conventions 87 and 98), securing the abolition of forced labour (Conventions 29 and 105), enforcing non-discrimination (Conventions 111 and 100), and abolishing child labour (Convention 138). In effect, these are the core standards for workers' rights included in the US GSP conditionality criteria (Freeman 1994, US Dept of State Public Hearing 1994).

The difficulty with this approach is rooted partly in the breadth of its ambition. Consider for instance the use of a social clause in addressing the problem of child labour. Worldwide there are over 200 million children under the age of fifteen (the minimum working age stipulated by the ILO) in employment (ILO 1996a). Competition between child labourers in the South and Northern workers is widely seen as one of the starkest threats posed to standards in the industrialised world, not least because child labour is extensively used in some of the developing world's most successful exporting nations. To take one commonly cited example, child labour is extensively used in the garment and toy industries in China's special economic zones. Between them these industries account for almost $9bn in exports to the USA alone. In the Philippines, at least five million children are estimated to be at work in industry and commercial agriculture (Government of the Philippines, 1995; UNICEF, 1995). In the textiles sector, which is a magnet for foreign investment, children are extensively employed in sewing, making button holes and embroidering, generally working long hours in unhealthy and crowded conditions. Nor is it only the industrial sector in which child labour is extensively used for export production. In Mexico's Bajio valley and Baja California, children as young as eleven pick broccoli, strawberries, and snow peas for export to the USA, helping to generate $1bn in foreign-exchange earnings in 1994 (US Dept of Labor, 1994). From Colombian flowers to Brazilian oranges and grapes and Guatemalan cotton, the Mexican example could be multiplied many times over across Latin America, with children working under forced-labour conditions competing directly with workers in the USA.

Viewed from the industrialised world, this appears as exploitation of the worst kind. The question is, how would a social clause improve the situation? Whatever threats it may pose to workers in the industrialised world, children's work is an unavoidable consequence of poverty - and a worldwide ban on child labour enforced through the WTO would make matters worse by further impoverishing hard-pressed families. Recognition of this fact has led international agencies to develop a wide range of approaches to the eradication of child labour, combining financial incentives with wider reforms. A recent example is the cooperation between employers, governments, and unions, working with UNICEF and the ILO, to reduce the incidence of child labour in the Bangladeshi textile industry. Under this arrangement, children will be paid the equivalent of their wages to remain in school and their jobs transferred to other family members. Financial support is being provided by the US government, the Bangladeshi government, and UNICEF. While it is true that this arrangement was made after the US had threatened trade sanctions, enforcement of such sanctions would have carried a very high social cost, and is clearly a second-best option for achieving human welfare gains.

The case of child labour draws attention to a wider problem. The WTO is mandated to deal with disputes involving production and marketing for trade. It has no authority or competence to deal with the wide-ranging domestic social problems addressed by some of the ILO conventions outlined above. How, for example, would the WTO address problems of child labour in areas where this was directed towards production for the domestic market, rather than export? The same question applies to issues of discrimination and forced labour.

An additional problem is that existing WTO approaches to trade disputes are not geared towards the effective implementation of social provisions. Under existing dispute-settlement procedures, the aim is to compensate countries which can prove identifiable damage as a consequence of specific trade policies, such as WTO-inconsistent quantitative restrictions or export dumping. Where evidence of such damage is accepted by a dispute panel, governments are entitled to impose restrictions on markets for specified products, which will result in costs to the exporter commensurate with the initial injury. There is no provision for the implementation of general sanctions by all WTO members, as the ICFTU approach envisages. Moreover, the entire arrangement as presently constructed rests upon agreed methodologies for calculating the economic costs of trade policies. In the social field, it would be virtually impossible to calculate such costs, however reprehensible the policies in question. Some have argued that 'abnormally' poor social conditions could be treated as a form of dumping, which in WTO terms means the marketing of a product at "less than the normal value of production". But there is no obvious way of determining the price effects of inadequate protection of collective bargaining rights, the use of forced labour in upstream supply industries, or discrimination.

Finally, any social-clause arrangement in the WTO will have to face the problem of distinguishing between legal entitlement and actual practice in employment law (Sapir A 1995). Most WTO members have legislation providing in principle for the protection of workers' rights, with around one hundred countries having ratified at least five of the seven conventions mentioned above. But there is a divergence between espousal of principles and policy practice - and not only in the developing world. In the US, the prime mover of the social clause, migrant labour is mistreated to the point of forced labour in agriculture as a consequence of grossly inadequate enforcement. In the US textile sector, sweatshops exploiting female labour in violation of the most basic labour laws have been widely documented. One recent survey by the Department of Labor found extensive evidence of child labour and the violation of civil liberties (ILO 1996d). Yet such domestic practices attract conspicuously less political interest than that displayed by successive US governments in promoting social clauses applicable to other countries. Even the right to organise trade unions is more circumscribed in industrial democracies than is often imagined. Only about 12 per cent of the US labour force in the private sector is unionised, and all industrial countries - notably the USA and the UK - curtail the right to strike in a variety of ways (Bhagwati J 1995). For instance, current employment law in Britain entitles workers to strike - and it allows employers to replace striking workers with ununionised labour. Similarly, the US restricts union activity in areas regarded as inappropriate. It would be unlikely to respond favourably to WTO trade sanctions imposed because of objections over the treatment of air-traffic controllers.

Similar problems apply in developing countries, where export-oriented industries are often subjected to more restrictive labour laws (the following is derived from ILO, 1995; Romero, 1994). In both Pakistan and Bangladesh, textile workers in export-processing zones do not have the right to organise. In Malaysia, workers are not authorised to set up a national union, although they can belong to enterprise based unions. In the Philippines, the right to join a trade union is enshrined in law, but waived during the first five years of operation for enterprises in export-processing zones. In Mexico, workers in maquiladora plants have the same formal rights as other workers. However, only about 10-20 per cent of these workers are organised, compared with as many as 80-90 per cent in other areas. There is extensive evidence of companies establishing 'paper' unions, which exist on paper but without real participation, and of workers being dismissed or blacklisted for engaging in union activity (Coote 1994).

An alternative framework

All of these cases illustrate the formidable difficulties which implementation of social-clause provision would generate. Such difficulties might not be insurmountable if more modest carefully targeted approaches were adopted. Two broad principles should guide such approaches. First, the WTO should not be viewed as a multilateral enforcement agency for implementing broad swathes of human-rights policy. The focus should be upon enforcement of the basic ILO conventions dealing with the right to freedom of association and collective bargaining (i.e. Conventions 87 and 98), with no exceptions for export-processing zones. There is a simple rationale for this starting point. Collective bargaining is a flexible process in which a positive relationship could be established between productivity gains and improvements in wages and social conditions, and in which the income gains generated by trade could be distributed more equitably. Moreover, evidence from several countries shows that collective bargaining rights are among the most effective means of ratcheting up employment conditions.

The omission of other ILO conventions from this framework does not imply that they are of less importance, merely that the WTO is not the body to deal most effectively with problems of child labour, forced labour, and discrimination between men and women. This is for the obvious reason that the WTO has no competence to deal with rights issues which relate to the non-traded sector. In the case of child labour, where nine out of ten children work on family farms, in rural labour, or in the household, the problems of implementation and administration facing the WTO would be of such a scale as to require a new organisation (ILO, 1995). If the political will to create that organisation existed, it would be unnecessary: the existing ILO conventions would be made to work more effectively. Moreover, as the ILO itself has argued, the threat of trade sanctions is an exceptionally blunt - and potentially damaging - instrument through which to address problems of child labour. Multilateral approaches, perhaps endorsed by the WTO, are likely to prove far more effective. That said, the intensive use of child or forced labour in export-intensive industries clearly is a trade issue - and one which the WTO cannot ignore. Systematic and egregious violations of ILO standards in such industries should be regarded as an issue for WTO in the same way as the rights to association and collective collective bargaining.

The NAFTA 'side-accord'

The North American Agreement on Labour Co-operation - more commonly known as the labour side-accord attached to NAFTA - provides one model from which lessons may be drawn. This agreement, which exists to "protect, enhance and enforce basic workers' rights" (NAALC Preamble, 1994), broke new ground. Never before had labour rights been accorded such high priority in an economic pact. However, while it is highly supportive of labour rights in principle, the mechanisms for ensuring that these rights are respected remain weak (Human Rights Watch, 1996).

Briefly summarised, the NAALC establishes three layers of labour rights. The first encompasses the right to organise, the right to bargain collectively, and the right to strike (roughly corresponding to ILO conventions 87 and 98). Violations in these areas lead to a process of review and consultation following investigations by the National Administrative Office (NAO) to which the alleged violation was submitted. The second layer involves forced labour, non-discriminatory pay, and protection for migrant workers. Violations here can lead to reviews, ministerial consultations, and the creation of an expert committee empowered to make non-binding recommendations. The third tier involves child labour, minimum-wage provision, and health and safety. In each of these areas, alleged violations can lead to arbitration and, ultimately, sanctions which escalate from a monetary fine to suspension from NAFTA.

It is too early to reach any conclusion on the effectiveness of this framework. By mid-1996, the US NAO had investigated only three cases, all of which involved alleged violations of the right to organise. The Mexican NAO had heard one case regarding similar allegations for the US. None of these cases resulted in legislative change. However, the US NAO's investigation of violations of the right to freedom of association at a Sony plant in Nuevo Laredo generated an intense public debate on Mexican labour rights, in which a wide range of representative groups from civil society participated. Women's associations have been particularly active in bringing to light violations of women's work rights. This illustrates how even relatively weak structures designed to protect rights can create a wider political dynamic, providing a focal point for popular mobilisation.

The deeper problem, which the NAACL does not address, is that of challenging labour-law provisions which violate the very rights it is intended to uphold. In the Sony case, to take one example, the US NAO found that the union-registration system in Mexico is used to obstruct the development of independent unions, but under the terms of the accord it is up to the Mexican Government to resolve the problem. Similarly, the statutory arbitration and conciliation procedures which all unions are obliged to follow openly discriminate against non-government unions. Thus the ILO's Freedom of Association Committee, which exists to determine whether signatory states are meeting their obligations, found Mexico guilty of violating the principle of the right to organise. In particular, it argued that legal restrictions on the number of unions permitted in any industry were inconsistent with ILO conventions. But there are no mechanisms within NAFTA or other international bodies for imposing punitive sanctions.

The second broad principle on which to build a successful social clause relates to administration. Implementation of the social clause should not be through the dispute-settlement procedure, which is not appropriate for this purpose. Rather, adherence should be stipulated as a prior condition for WTO privileges. One option here would be to amend the original GATT Article (XX), under which countries are permitted to restrict trade for reasons of national public interest, for instance for reasons of health and morality. By extending this provision to international public interest and morality, it could provide a framework for implementing the social clause. Arbitrary implementation and interpretation could be overcome by all countries signing on to a multilateral agreement committing themselves to implementation of the relevant ILO conventions, much as they have done with the Montreal Protocol. Alternatively, the enforcement of the conventions could be stipulated as a condition for membership of the WTO (for instance under Article XXIII, which sets out the conditions under which obligations and privileges may be suspended).

One concern raised by developing countries is that administration of a social clause through the WTO would expose them to review structures which, behind a facade of legal equality, were dominated by the industrialised countries. That concern is hardly surprising. After all, the developed world has applied multilateral trade rules selectively and in its own interest for much of the past fifty years. But while the concerns raised by developing countries in this area may be justified, they have diverted attention from the more pressing task of developing impartial administrative procedures for a social clause. Such procedures could be built upon the main ILO supervisory bodies. For instance, its Committee of Experts on the Application of Conventions and Recommendations, a group of highly qualified independent specialists, could be made responsible for technical examination of compliance with ILO conventions (Plant R 1994). Similarly, its Committee on Freedom of Association, a tripartite body which - as its name implies - examines submissions relating to questions of freedom of association, could be made responsible for investigating compliance in this area. Both committees would report to the Ministerial Conference of the WTO, which is ultimately responsible for all major policy decisions, with their findings published by the Trade Policy Review Body. Annual reviews of compliance with ILO conventions could thus complement existing trade-policy reviews, which focus narrowly on market-liberalisation measures. Such reviews would include an assessment of country performance, recommendations for reform, and yardsticks for measuring progress.

The ICFTU has drawn up a broad framework which could provide a basis for discussion (Socialist Group 1990; ICFTU 1993). This would involve the creation of a joint WTO/ILO advisory body to establish and report on compliance with the above conventions, and to provide recommendations and technical assistance for improving performance. All countries would be required to make progress towards compliance within stipulated time-frames. At the end of these time-frames, the WTO/ILO advisory body would prepare a second report, in which it would investigate whether or not countries were in compliance, achieving acceptable progress towards that end, or failing to implement the earlier recommendations. In the latter case, trade sanctions would be applied as a last resort in the form of increased tariffs by other WTO members. In order to prevent protectionist abuses, it has been proposed that responsibility for investigating violations of ILO Conventions would be pursued through existing ILO procedures.

Whatever the difficulties created by design of a social clause, any agreement which envisages deepening economic integration without the inclusion of a social dimension is likely to carry the seeds of its own destruction. In an embryonic and faltering way, this has been recognised in most of the EU, where as part of the Maastricht Treaty progress economic and monetary union has been reinforced by a Social Chapter (Wise and Gibb 1993). This enforces 13 basic rights, including the core ILO conventions, and seeks to extend worker participation in decision-making. The Chapter is reinforced by a Social Action Plan to improve living and working conditions, and by a wide range of regional development funds. Admittedly, Europe's social dimension remains some way behind the economic project, but there is a deepening recognition that a failure to reduce inequalities and distribute the benefits of growth more equitably will pose a threat to economic integration. In a more limited way, the North American Agreement on Labour Co-operation - NAFTA's labour 'side-accord' - has provided a framework for dialogue on worker's rights between the USA, Canada, and Mexico (see box). That framework precludes anything more than discussion on freedom of association and collective bargaining, and a wide range of abuses - including forced labour and the violation of minimum employment standards - are subject only to non-binding advisory rulings by expert panels. But punitive sanctions are envisaged for the violation of child-labour laws, as well as minimum-wage and health and safety provisions. Neither model provides an obvious framework for the WTO to copy, but there are important lessons to be learnt from both.

The dangers of inaction

Ultimately, the real obstacles to a social clause are political, rather than technical. Many developing countries and some developed countries will continue to argue that enforcement of ILO conventions will undermine their economic competitiveness. Leaving aside the absence of empirical evidence to sustain this view, it might legitimately be asked why governments have signed on to conventions which they do not intend to enforce. More generally, it is difficult to sustain the argument that all human rights - including labour rights - need to be viewed in a culturally specific context, especially where economic issues are involved. As the World Summit for Social Development reaffirmed, human rights are universal in nature, and distinctions between economic, social, cultural, and other forms of rights are not justified.

Turning to the broader question of whether social clauses are, as some claim (Khor, 1996), inherently protectionist and damaging to human welfare in developing countries, it is helpful to reflect on historical experience. In 1938, when the Roosevelt Administration enacted the Fair Labour Standards Act to prevent commerce between States leading to the competitive exploitation of workers and downward harmonisation of standards, nobody claimed that it was protectionist, even though the income gap between rich and poor US states was as wide as the gap parts of the developed and developing world. Opposition to the legislation came principally from corporations, which claimed - in the event wrongly - that improved labour standards would undermine employment and investment. Similar arguments are heard in Britain today in opposition to the demand for a national minimum wage and against the EU social clause. Like the Fair Labour Standards Act, albeit in a much weaker form, the Social Chapter is an attempt to establish a plimsoll line of social standards beneath which governments will not allow their citizens to fall. Once again, this has not created a chorus of 'anti-protectionist' voices, despite the wide divergence in average incomes between EU States.

Viewed from a different perspective, the argument against the establishment of minimum standards would appear to be based upon flawed premises. For instance, presenting the social-clause debate as a 'North-South' confrontation is a caricature of reality. In much of the developing world, hard-won labour rights and wider social provisions are being eroded by governments claiming that they represent an obstacle to foreign investment and export competitiveness. One recent illustration is the South Korean Government's efforts to enhance labour-market 'flexibility', in this case by strengthening the right of companies to dismiss workers and by weakening trades unions. The unprecedented wave of strikes which followed the unveiling of this initiative suggests that, in contrast to their government, South Korean citizens regard a trade-off between social rights and economic growth as unacceptable. Nor is the problem restricted to South Korea. In Malaysia and Thailand, foreign and domestic companies now cite wage costs and 'unrealistic' social provision as reasons for re-locating to other countries - such as China, Vietnam and Indonesia - where wages are lower and labour rights weaker.

It is similarly misplaced to couch the debate in terms of 'protectionism versus free trade. Just as there are 'protectionist' voices in the social-clause camp, so the opposition to social clauses includes those who want to see corporate actors left free to roam the globe in pursuit of the widest profit margin, even where this means unsafe conditions for workers, unacceptably low wages, and environmental damage. More broadly, global trade rules which make detailed provisions to protect the rights and interests of companies, but deny any rights aimed at safeguarding the interests of those whose only capital is their labour, is a perversion of free trade and of the very principles of multilateralism upon which the post-1945 order was based.

There is an economic, as well as a social, rationale for enforcing basic labour rights. The conventional wisdom holds that as wages and productivity rise, capital will shift to other regions where semi-skilled labour is plentiful and cheap. However, in a world of rapidly changing technology, this emphasis on low-cost - usually low-productivity - labour looks increasingly questionable. One obvious reason is the declining importance of labour costs in modern manufacturing and the concomitant rise in skills intensity. There is a growing body of evidence to suggest that the quality of labour matters considerably more than its cost. Indeed, if this were not the case, sub-Saharan Africa would be a major magnet for foreign investment. The more general point is that no country concerned to advance human welfare into the next century can afford to base its future development upon an economic policy geared towards attracting investors by offering cheap labour.
 

Section three: New policies for new challenges

Looking to the future

Whatever differences there may be in the analysis of globalisation, one fact is clear: we are living through a transformation that will shape the economics and the politics of the world order in the coming century. Flows of capital, technology, and information are accelerating the rate at which countries are being integrated into the global economy, eroding the sovereignty of governments in the process. Reports on the death of the nation state may be premature, but the role of the State is being re-defined. Faced with mounting pressure from above in the shape of global economic forces, and with political demands from below to respond to the insecurities and fears of their citizens, governments are caught in a political no-man's land, unable to respond the people's aspirations, because of their limited capacity to control economic life. At the international level, the post-1945 institutions which were designed to manage relations between national economies have also been overtaken by events.

On both the national and the international stages, governments are relinquishing control to markets and powerful private-sector actors, which are largely unaccountable to the world's citizens. How often today do we hear governments pleading powerlessness in the face of the forces which are shaping the lives of their citizens? This is one of the reasons why, in much of the industrialised world, confidence in politicians has reached an all-time low. New political forces have emerged to fill the vacuum - some positive, and some disturbing. Anti-poverty alliances and the environmental movement are playing an increasingly important role in the North and the South in developing local solutions to global problems. Governments have much to learn from them. At the other end of the spectrum, the sense of powerless and desperation associated with globalisation has fuelled a resurgence of political xenophobia, with extreme nationalism and extreme regionalism seeking to fill the space vacated by mainstream politics.

To put it bluntly, this is the road to anarchy and chaos - and we have been there before. In the 1930s, unregulated markets and the collapse of institutions resulted in economic crisis and fuelled the political tensions which led to war. The rallying call of the post-1945 order was 'never again'. Yet it is difficult to escape the conclusion that we are again heading for a descent into economic Darwinism. Poverty continues to blight the lives of an increasing number of people. Inequalities between countries, and between people within countries, have reached levels which, quite apart from undermining human welfare, threaten political stability. Action is needed at the national and international level to address these problems.

The national level

In many countries, the benefits of growth associated with globalisation are unevenly shared, with large sections of the population either bypassed or victimised. In others, the benefits have been more widely distributed. What are the market mechanisms through which these differential effects are transmitted from the world economy to local markets? Three areas are of obvious importance. Import liberalisation - Import liberalisation can promote employment and increased incomes, for example by improving access to productive technologies and increasing efficiency. It can also undermine livelihoods by exposing vulnerable producers and industries to intensive competition. In the cases of Mexico and the Philippines, which we examined earlier, import liberalisation in the corn sector is driving down prices in local markets and the household incomes of already impoverished producers. Similarly, in much of sub- Saharan Africa and Latin America, rapid liberalisation has undermined employment in labour-intensive manufacturing industries, driving down wages in the process. (Oxfam 1996d)

Foreign investment - Foreign investment can play an important role in the development process, generating employment and improving access to new technologies. But it can also have adverse effects. For instance, foreign investment can have the effect of exacerbating regional inequalities. In China, to take the most obvious case in point, poverty is concentrated in remote, resource-deficient, rural areas in the interior provinces of northern, north-western, and south-western China. Foreign investment is concentrated in the coastal areas. Foreign investment can also add to the vulnerability of the urban and rural poor by driving up land prices. In situations where security of tenure is weak, this creates an incentive for landowners to dispossess residents in order to speculate.

Export promotion - Export growth can play an important role in increasing the household incomes of vulnerable communities, maintaining access to essential imports, and generating the public revenue needed for social investment. But the distribution of benefits reflects the distribution of opportunity. In Zimbabwe, the economic growth strategy adopted by the government and the World Bank focuses on the expansion of agricultural exports such as vegetables and flowers. Yet the vast majority of the rural poor, among whom poverty is concentrated, live on ecologically degraded plots of land in climatic areas where it is not possible to produce these crops. The upshot, as noted earlier, is that the benefits of export growth in this sector will accrue principally to the large-scale commercial farming sector, which is dominated by a small elite of white farmers. Where export promotion results in environmental destruction and the displacement of local communities to make way for commercial agriculture, the conflict between foreign-exchange gains and human welfare is even more apparent.

None of these problems are inherent in globalisation. Fundamentally, globalisation can be viewed as a process of market restructuring, in which local economies are subjected to increased competitive pressures and opportunities. In this respect its impact can be partially analysed in terms of the shifting economic returns to different factors of production, with the price signals being transmitted from the world market through a complex web of trade and finance arrangements down to local markets. The manner in which benefits and costs are distributed will depend upon the structure of local markets. As the 1993 Human Development Report put it: "People enter markets as unequal participants and often leave with unequal rewards...So, for all their efficiency at matching buyers and sellers, markets can also be associated with increasing inequality and poverty, as well as large-scale unemployment." An obvious point perhaps, but it is one which is largely ignored in much of the literature celebrating globalisation.

Part of the answer to the question of how to distribute the benefits of globalisation more equitably is to be found in successive Human Development Reports: namely, make markets work more equitably. How can the increments to growth generated by trade and foreign investment be directed disproportionately towards the poor? Drawing on the evidence presented in this paper, the following conditions would appear to be particularly important, although the precise mix of policy priorities will obviously vary from country to country.

The redistribution of assets: Production for markets requires access to assets. If people are to participate in markets, they need access to the physical and financial resources to do so. One aspect of the East Asian Miracle which has received insufficient attention is that of agrarian reform. Between 1949 and 1953, almost half of Taiwan's land area was redistributed to the poorest rural households. The redistribution of wealth from landowners to small farmers that occurred as a result was equivalent to 14 per cent of GDP. A broadly similar process of asset-redistribution occurred in South Korea. In both cases, land reform contributed to a reduction in poverty, increased savings and investment, and promoted the creation of dynamic economic interlinkages between the urban and rural sectors, with the benefits of growth being spread equitably across society. By contrast, countries such as Zimbabwe, the Philippines, Brazil, and Mexico have built agricultural growth strategies upon the foundation of enclave economies dominated by powerful commercial interests. The vast majority of the rural poor are excluded from participation in global markets, except as labourers on commercial farms. The evidence strongly suggests that, in each of these countries, far-reaching agrarian reform, including land redistribution, is a precondition for optimising the human-welfare benefits of agricultural exports. Such policies would also be good for growth. As recent research by the World Bank has shown, inequality in asset distribution is one of the most potent barriers to economic growth (Squire L and Deninger K 1996).

The redistribution of public spending: For globalisation to make an impact on poverty reduction, it is important for governments to ensure that incremental growth is directed towards the poor by region, social group, and gender. Improved access to marketing infrastructure is particularly important for rural areas, where roads, electricity, and improved water supply can enable people to participate in trade and increased employment opportunities. Such improvements also have important secondary benefits, for instance by making market information more readily available and facilitating the emergence of more competitive trading structures. All too often, communities living in the most marginal areas, separated from markets by inadequate or non-existent roads, face highly monopolistic trading structures which skew the distribution of income towards powerful traders. Adequate funding for credit and research and development of crops produced by poor people is also vital. Once again, the argument that such investment implies a trade-off between growth and equity is misplaced. Research by The International Fund for Agriculture and Development (IFAD) strongly suggests that returns to investment are at their highest in the smallholder sector.

Investment in people: At risk of stating the obvious, to compete effectively and to make productive contribution to development, people need health, education, and skills. Thus investing in the human capital of the poor is one of the keys to reducing poverty and distributing rewards from the market more widely. Many studies have demonstrated the strong links between education, income, and economic growth and equality. In broad terms, the more educated people are, the less likely they are to be unemployed or trapped in low-wage, insecure employment. Moreover, in a global economy where prosperity depends increasingly upon the capacity of populations to engage in knowledge-intensive production, investment in education is the most crucial determinant of future welfare. In this context, achieving universal primary education is of paramount importance. According to the World Bank, differences in investment in this sector are the single most important factor in explaining the divergence in growth rates between the high-performing economies of East Asia and sub-Saharan Africa since the early 1960s. Unfortunately, sub-Saharan Africa, which has adult illiteracy rates of 50 per cent, is now the one developing region in which primary-education enrolment is falling, pointing to another factor likely to widen the income gap in the global economy. All governments face constraints in their public spending. However, for the benefits of globalisation to be spread more widely, it is important that the allocation of public spending is pro-poor, with a focus on primary-level facilities and poor areas.

Selective import and investment controls: The blanket protectionism which went hand-in-hand with the import-substitution models of the 1960s has been rejected, and rightly so. But it has been replaced by the adoption of blanket liberalisation. The removal of import barriers has come to be regarded as an end in itself, regardless of the specific features of particular markets; and without reference to social costs. As the evidence from south-east Asia presented in this paper suggests, this approach is economically short-sighted. Governments in the region have used import and investment controls to acquire a comparative advantage in areas capable of sustaining increases in employment and incomes. While the specific policies varied, all countries in the region actively sought to increase productivity and to climb the value-added ladder. This would appear to be one of the preconditions for combining trade growth with increased equity and human welfare. By contrast, much of Latin America and sub-Saharan Africa has undergone a process of de-industrialisation, with the withdrawal of trade barriers contributing to a process of de-industrialisation and rising unemployment. This suggests that longer time-frames may be needed for liberalisation, along with the development of more coherent trade and development strategies.

The agricultural sector: Whatever the general case for market liberalisation, it would appear to be of limited relevance to the agricultural sector, where markets are massively distorted by US and EU subsidies. Where liberalisation and integration into global markets lead to direct competition between smallholder producers in the South and the subsidised, industrial farming system of the North, they are likely to have adverse consequences for poverty and income distribution.

Regional policies: In countries which are attracting large amounts of foreign investment, regional inequalities are emerging as a serious problem. Under these circumstances it is important for governments to use fiscal policy as a means of redistributing income and opportunity. The taxation of land and profits in order to finance rural infrastructure, primary health, and basic education in disadvantaged regions is one option for distributing trade gains more widely.

Protection of workers: Where markets do not produce socially desirable outcomes, governments need to regulate and correct the underlying problems. Abuses of market power are a case in point. Over the past decade there has been a marked shift in power within labour markets away from labour and towards employers. States have actively encouraged this shift by eroding minimum-wage provisions, increasing the rights of employers to hire and fire workers, and promoting the adoption of casual employment practices which deprive employees of what were previously regarded as basic social rights. This picture applies to the developed and developing worlds alike. The result is that, in many cases, workers have been denied a fair share in the wealth which they have helped to create, an increasing proportion of which is traded on global markets. Corrective action is needed on two fronts. First, trade unions should be allowed to organise and protect their members against unacceptable levels of exploitation. Second, governments need to provide through legislation more stable and secure employment contracts and minimum wages, enabling workers to share more equitably in national income.

Creating jobs and sustaining growth: It has been said often enough that economic growth is not an end in itself, but a means to the end of enhanced human development. That said, it is a crucially important means. In much of the developing world, enhanced growth is a necessary condition for a sustained assault on poverty. According to the World Bank, an average growth rate of at last 7 per cent will be needed to make a significant dent in the number of poor people in Africa, but even at that rate it would take 35 years to double average income. In the case of Latin America, only one country (Chile) recorded growth rates for the period 1985-1994 which were higher than for the three decades prior to the debt crisis. In the industrialised world, weak growth, high levels of unemployment, and low wages have become part of a mutually reinforcing process. The weakness of demand is slowing capital accumulation and reducing the rate of technological progress, which in turn reduces employment creation. While there are elements of the 'jobless growth' experience to be found in all countries, these should not detract from the fact that growth remains the main engine for creating jobs. The underlying causes for slow growth vary from country to country. However, the subordination of full-employment objectives to the pursuit of monetary targets, whether under the IMF in Africa or the Maastricht criteria in Europe, has been a important cause.

The international level

Individually, national governments can do far more to distribute the benefits and opportunities created by globalisation more equitably, and to protect the interests of communities which have been victimised by new economic forces. But individual governments cannot address the challenge of losing the already obscene gulf in living standards between the developed and the developing worlds, and within the developing world. Collective action by the international community is the only route to the creation of a more equitable world order. That order needs to be built on a new partnership based upon shared interest and a sense of shared responsibility. It also needs to built with a sense of urgency, since the absence of coherent international management of our increasingly integrated global economy poses a threat to all. Existing institutions and policies are failing in at least five key areas: capital flows and resource transfers, commodity markets, approaches to protectionism, the regulation of transnational companies, and the regulation of financial markets.

Capital flows and resource transfers: Paramount among the issues on which action is needed is that of access to finance. During the 1990s, private investment flows have replaced aid as the main mechanism for transferring financial resources from North to South. The problem is that this transfer is concentrated upon a small group of around ten countries, most of which are achieving growth rates far in excess of the average for developing countries. By contrast, multilateral and bilateral transfers to the rest of the developing world are stagnating or in decline. Left unchecked, this trend will further widen the income-gap within the developing world, as witnessed by recent World Bank projections pointing to a medium-term growth rate of 8 per cent for south-east Asia and 2 per cent for sub-Saharan Africa. Access to finance remains a vital pre-condition for many of the poorest countries to participate in global markets on more advantageous terms, yet there is little sign of this problem being addressed. Private capital markets are bypassing areas of desperate need - and public finance delivered through bilateral and multilateral assistance is not filling the gap.

Official development assistance, which might have helped in this task, has fallen to its lowest level in over a quarter of a century. Meanwhile, the multilateral financial institutions are failing the poorest countries. Net transfers from the World Bank to developing countries reached a peak of around $5bn in 1985. During the 1990s they have averaged less than $2bn. Transfers to the poorest countries from IDA, the Bank's concessional arm, have barely been maintained in real terms, and are now under threat as a result of a reduction in the US contribution. For its part, the IMF has been a net recipient of financial resources from developing countries, including some of the poorest among them. An additional problem in relation to the IMF is that its record lending to Mexico and Russia has pushed its liquidity to the lowest level for five years, reducing the resources available for other developing countries. As an institution partly founded to finance non-deflationary approaches to trade problems, the Fund is failing badly.

Several approaches are needed to restore the multilateral system to its proper role in global finance. Debt reduction is of paramount importance, not only because it would release resources for investment in recovery; but also because it would improve the credit rating of highly indebted countries. Currently, the region most desperately in need of concessional export-credit finance - namely sub-Saharan Africa - faces the highest interest charges. The decline in official aid must also be reversed. Whether as a result of aid fatigue, short-sightedness or pure disinterest, bilateral aid has fallen to 0.28 per cent of the industrialised countries' GDP - the lowest level since aid targets were set. In the case of IDA, it is critical that the USA meets its obligation to repay its arrears to IDA (amounting to almost $1bn), since failure to do so would jeopardise the IDA X1 financing provisions. This would jeopardise the access of poor countries to the concessional finance needed to sustain imports.

Turning to the IMF, there are serious questions as to whether the institution should be in the business of providing development finance to the poorest countries on current terms. Even with its concessional ESAF facility, repayment terms are too short, interest rates too high, and the conditions attached unduly deflationary. More generally, there is an overwhelming case for increasing the general allocation of Special Drawing Rights by between $30 and 36bn, as proposed by the Fund's Managing Director. Initially, SDRs were envisaged as a means of maintaining liquidity in the world economy, but they now represent only 2 per cent of global reserves. An increase would substantially enhance the capacity of developing countries to sustain imports, increase employment, and expand output, with virtually no risk of affecting global inflation. Yet the proposal has been blocked for two years by the G7 countries.

Commodity markets: Without measures to stabilise primary-commodity prices at more remunerative levels, many of the world's poorest countries will continue to occupy an marginal position in the global trading system, with volatile and depressed markets consigning many of their citizens to poverty. As suggested earlier, new approaches to supply management are needed. Efforts to operationalise the Common Fund, established under the auspices of UNCTAD, should be intensified. In the long term, however, the most durable solution is to be found in diversification. International support for, rather than continued indifference to, diversification measures would be a step in the right direction, as would investment through bilateral aid in building the physical and human capital needed to achieve this aim.

Approaches to protectionism: As documented in Section Two of this paper, the Uruguay Round has left much unfinished business. Agricultural subsidisation and export dumping by the industrialised world continue to depress world prices, and to undermine the domestic markets in which smallholders operate. While the Multi-Fibre Arrangement is now subject to WTO disciplines, its phase-out has been contrived to delay and minimise the gains to developing countries. Meanwhile, a bewildering array of formal and informal barriers to developing-country exports remain intact. All of these measures serve to reduce incomes and employment, diminish access to foreign exchange, and - in the last analysis - weaken the potential benefits of globalisation. They also serve to erode confidence in the multilateral trading system, which continues to be regarded by most developing countries as a 'rich man's club', in which the industrialised world orchestrates world trade rules to accommodate its own interests. We have outlined some of the specific reforms needed to change this perception. The review of the Uruguay Round scheduled for 1999 will provide an opportunity to measure progress.

Transnational companies: TNCs are among the prime agents carrying the process of globalisation forward. They are also vested with immense economic power, especially in relation to developing countries. Their control over foreign investment, technology, and markets means that they can allocate - or withhold - resources needed for participation in the global market place. As employers of labour, they are directly responsible for around 12 million livelihoods in developing countries and 61 million in developed countries. And as political actors, they influence processes which shape international rules on trade and finance.

That influence is reflected in the rules in question. Globalisation has been accompanied by an unprecedented extension of corporate rights to invest, to profit from patented technology, and to sell. Insufficient attention has been paid to the question of corporate responsibility. Some regulatory mechanisms are needed to prevent abuses of market power. For instance, the absence at the international level of anti-trust legislation to prevent the abuse of monopoly power poses serious threats to developing countries. So, too, does the lack of any international frameworks for combating transfer-pricing, or the evasion of tax through under-invoicing. With a growing share of world trade being conducted on an intra-company basis, this is a serious problem. Even more serious is the current direction of intellectual property protection under the WTO. This is designed to expand the scope, extend the lifetime, and enforce the claims of patent holders, and to enhance royalty transfers. As such, it will have adverse effects for the ability of developing countries to access, absorb, and adapt new technologies by raising the costs of transfer.

A starting point for a new regulatory framework would be the Code of Conduct for TNCs developed under UN auspices in the 1970s. More broadly, the WTO needs to fill the gap left by the absence of anti-trust provisions and measures to monitor transfer-pricing. With regard to intellectual property, developing countries should press for the issue to be transferred to the World Intellectual Property Organisation, where considerable progress had been made towards balancing the South's need for access to technology on reasonable terms and the private claims of Northern patent holders.

Regulating financial markets: Tobin taxes and debt relief: For much of the post-war period, currency transactions have been linked to the exchange of goods and services. That link has been broken. Currency is now a commodity to be traded like any other, with 'bundles' of foreign exchange despatched around the world's financial markets at lightening speed in what amounts to a large-scale gambling exercise. Portfolio investment in equity markets is, for the most part, driven by similarly short-term and speculative motives. In both cases, the destabilisation which financial markets can inflict on currencies has the effect of undermining trade.

It is in the power of governments to address this problem. As we have already pointed out, a Tobin tax on all foreign-currency transactions would make short-term bets on currency very costly, while imposing a trivial charge on long-term investment. Critics claim that the proposal would be impractical because, unless all countries adopted it, trading would shift to tax-free havens. All the more reason for all countries to adopt it - and to find ways of penalising transactions with tax-free havens. Since over 80 per cent of foreign-currency transactions takes place on the exchanges of Europe, the USA, and Japan, governments in these countries have a special responsibility to act.

With regard to portfolio and bond markets, improved regulation and a debt-relief framework are urgently needed. Too many governments in developing countries - among them Vietnam, Thailand, and Malaysia - are turning to volatile money markets to finance current-account deficits. This was the option chosen with such disastrous consequences by the Mexican Government. Far more effective monitoring of capital flows is needed to prevent a re-run of the Mexican debacle. Equally important, in situations where private investors speculate in high-risk markets, they must be expected to share a proportion of the costs which result. In Mexico's case, the IMF was mobilised to provide the largest stand-by loan in its history, in order to re-finance the debt owed to US corporate creditors and the Euro-money market. Meanwhile, the conditions attached to the loan resulted in increased unemployment and a dramatic decline in social provision for the most vulnerable sections of society. This approach is all too familiar from the 1980s, when the IMF uncritically endorsed creditor claims that debt repayments should be met in full, regardless of the social and economic costs incurred in debtor countries.

Today, private capital markets remain the one area in which no provisions have been made for debt reduction. That gap must be filled if, in the event of future crises, the interests of the poor are to take precedence over those of Wall Street.
 

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