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UFRGS Model United Nations 2006

United Nations Conference on Trade and Development

Last year’s edition of the UFRGS Model United Nations, among other experiments and innovations, took a firm step towards its aim of becoming a more multidisciplinary model by announcing the simulation of a UN committee concerned with international trade and the economic aspects of development: the United Nations Commission on Trade and Development. Because it brought together in its staff students of Economics, International Relations and Law, and thus proposed a multidimensional approach, the committee offered the delegates an outlet to produce spirited, high-level discussion on two topics of overriding pertinence.

The simulation of the UNCTAD at UFRGSMUN 2005 surpassed all expectations and this new edition follows this trend by gathering once again students from three distinct areas, including a former delegate of last year’s committee. The innovative spirit of the committee is still there and a new round of debates is ready to start. Let us then begin by introducing the staff.

Henrique Brusius Renck is a last-year undergraduate student in Economics. He started modeling at the Legal Committee of UFRGSMUN 2003, when his delegation represented the Republic of Chile. Afterwards he participated in two editions of the Americas Model United Nations (representing the Kingdom of the Netherlands at the Board of Director of the World Bank at the VII edition, and the United States of America in the G-8 Summit at the VIII edition) and in the first edition of TEMAS (representing the Popular Republic of Bulgaria in the Warsaw Pact). He joined UFRGSMUN’s staff in 2004 as Director of Logistics, and assumed the post of the Under-Secretary-General of Administrative Affairs at UFRGSMUN 2005. He was assistant researcher in International Economics for two years, and has especial interest in Development Economics and Public Finances.

Manoel Gehrke Ryff Moreira is a seventh semester Economics student at UFRGS. He represented the Republic of Chile in the Security Council at UFRGSMUN 2003 and the United Kingdom in the International Law Commission at UFRGSMUN 2004. In 2005 he

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joined UNCTAD simulation’s staff as Assistant Director at UFRGSMUN and represented the People’s Republic of China in the Board of Directors of the World Bank at the VIII AMUN. His main interests are Economic Development and International Relations.

Ana Paula Ebeling studies International Relations and is currently at her sixth semester. It is her first time as a staff member of UFRGSMUN but she has already participated twice in the Model as a delegate (in 2004 she represented the Islamic Republic of Pakistan in the Security Council and in 2005 she was the Brazilian delegate in the Commission on Science and Technology for Development). She also went to AMUN in its VIII edition as the representative of the Commonwealth of Australia in the Disarmament and International Security Committee.

Gustavo Meira Carneiro studies Economics and is now at his fourth semester. Although this is his first participation as a staff member of UFRGSMUN, he took part at last year’s edition of the event as the representative of the Republic of South Africa in the UNCTAD. Gustavo’s special interests in economics are Development Economics, Economic History and International Economics — area in which he is currently an assistant researcher.

João Rodrigues Chiarelli studies Social Science and is through his sixth semester. It is his first participation in UFRGSMUN’s staff but he already took part in the Model as a delegate in two previous editions (he represented the Nepali Kingdom in the Commission of Human Rights in 2004 and the People’s Republic of China in the Social, Cultural and Humanitarian Committee of the UN General Assembly in 2005). He is assistant researcher in the history of Japanese colonization in southern Brazil with Prof. Tomoko Kimura and is currently deepening studies in Sociology of Migration within the area of Cultural Studies.

In order to achieve a working format closer to the real UNCTAD, this year's conference will introduce an innovation in its procedures. Right after a topic is set on the agenda, each representative will be entitled to deliver an introductory speech of at most three minutes exposing its country's foreign policy and experience in relation to the chosen topic. The speeches will be ordered accordingly to the ordinary rules for Roll Calls, i.e. a fist country will be chosen randomly and the others follow alphabetically. During the opening speeches no point or motion will be in order, except for a point of personal privilege. Also no yields of remaining time are allowed.

Esteemed delegates, be ready for an extraordinary experience at UFRGS Model United Nations 2006. In addition to all the efforts of UFRGSMUN 2006 staff in providing you an outstanding environment and all the facilities you shall need, the UNCTAD’s team has been dedicating itself to make this simulation an unforgettable adventure to all of us. See you soon, and do not forget to join our e-group at unctad_ufrgsmun2006-subscribe@yahoogrupos.com.

Kind regards,

UNCTAD Staff

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INTRODUCTION

UNCTAD’S BACKGROUND1 “The General Assembly, convinced that sustained efforts are necessary to raise the standards of living in all countries and to accelerate the economic growth of the developing countries, (…) establishes the United Nations Conference on Trade and Development (…).”

GA resolution 1995 (XIX), December 30, 1964

The United Nations Conference on Trade and Development (UNCTAD) was established in 1962, when the General Assembly (GA) approved the Resolution 1785 (XVII), which proposed the objectives and guidelines of the Conference. The first meeting took place in Geneva in the year of 1964, when it was agreed that UNCTAD should become a permanent institution. The Conference is nowadays a subsidiary body of the United Nations General Assembly: it has the same membership as the United Nations (UN) — 192 countries — and its Secretariat is part of the UN Secretariat; since March 2005 the General-Secretariat of the Conference is on the hands of the Thai economist Supachai Panitchpakdi, former Director-General of the World Trade Organization (WTO).

The UNCTAD emerged due to the increased participation of developing countries as members of the United Nations at a time when the role of these countries in international trade was progressively deteriorating. On this context, the Argentinean economist and Nobel Prize awarded Raúl Prebisch played a role of paramount importance as the organization’s first Secretary-General as it progressively evolved into an authoritative knowledge-based institution whose work aims to help shaping current policy debates and thinking on development, with a particular focus on ensuring that domestic policies and international action are mutually supportive in bringing about sustainable development.

The countries to which UNCTAD may bring wider benefits are the least developed ones; therefore it has as its main objectives optimizing trade, investment and development opportunities for those countries, besides assisting their integration into the world economy

1 Mainly United Nations Conference on Trade and Development website. Available at: http://www.unctad.org.

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on an equitable basis. The UNCTAD has no mandate to rule-making, binding rules negotiation, dispute settlement or sanction imposition: these concern the WTO. Differently, the Conference is a pre- and post-negotiation forum with a broader agenda than the WTO. The UNCTAD’s most important decision-making body is a quadrennial conference where issues concerning developmental policies and trade-impacting measures are debated. During the four years between the conferences, UNCTAD’s work is guided by the Trade and Development Board (TDB), which meets yearly in regular sessions and up to three times a year in executive session to deal with ad hoc policies and institutional issues. Subsidiary to the TDB, three Commissions that meet yearly were established to address policy issues in the following specific fields: (i) The Commission on Trade in Goods, Services and Commodities; (ii) The Commission on Investment, Technology and Related Financial Issues; and (iii) The Commission on Enterprise, Business Facilitation and Development. Expert meetings convened at the discretion of the Commissions subsidize the discussions within them.

The Conference has been, for four decades, the focal point within the United Nations for the integrated treatment of trade and development and related issues in the areas of investment, finance, technology, enterprise development and sustainable development. The organization works to fulfill its mandate by carrying out three key functions: by being a forum for intergovernmental deliberations, supported by discussions with experts and exchanges of experience aimed at consensus building; by undertaking research, policy analysis and data collection for the debates of government representatives and experts; and by providing technical assistance based on the concept of capacity development2 with special attention to the needs of the least developed countries and of economies in transition.

2 Capacity development is an evolution of the of the 80’s and 90’s “capacity building” concept. Instead of transferring knowledge to the assisted countries, the idea is to enhance the recipient’s long-term sustainable capacities and ownership by focusing on its specific requirements (demand-driven, tailored assistance) on individual, institutional and societal layers.

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TOPIC AREA A

Impacts of Economic Regionalism on Development

By Manoel Gehrke Ryff Moreira, Ana Paula Ebeling, Gustavo Meira Carneiro.

1 HISTORICAL BACKGROUND

As suggested by some authors, regionalism is a process aimed mainly at the reorganization of limited regional spaces through detailed economic and political lines, supplanting traditional national-states as the primary units of the world society. Regionalization is a social construction between the state and the global level that intends to accelerate integration among particular countries.3

Although global liberalization of markets started to happen before the early decades of the twentieth century, regional economic integration is a phenomenon that was only developed after the end of World War II. Regionalization is nowadays very influenced by the process of globalization but dates back to a former historical period. Globalization is a concept which commonly used to describe the events of the 1980’s and 1990’s and refers to a complex structure of cultural, economic, social and political changes which have caused a “shrinking in time and space” that promoted increased economic interdependence, with important financial and social dimensions. Regional integration had already had its first wave in almost every part of the world during the 1950s, 1960s and 1970s. The process of regionalization was, however, very shallow since the great majority of Regional Trade Agreements (RTAs) signed only involved the reduction or elimination of trade barriers for a small range of products. Besides that, the process did not originate too many RTAs as it can be seen in the statistics provided by the World Trade Organization (WTO).4

3 HETTNE, Björn. Beyond the “New” Regionalism. Available at: http://www.eki.liu.se/content/1/c4/36/46/autumn%202005/h05%20-%20NPE_Hettne_3.pdf. Last accessed: 22 May 2006. 4 In the end of the 1970s decade there were less than forty RTAs in force in the world. World Trade Organization Website. Available at: www.wto.org. Last accessed: 17 May 2006.

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With the beginning of the discussions under the General Agreement on Tariffs and Trade (GATT), and more specifically with the Uruguay Round of GATT negotiations, regional economic integration gained a new impulse. In the past ten years, directly linked to the forces of globalization, there has been a great acceleration in the trend towards regionalism and the process has not only become wider in scope but also implicated in deeper cooperation among countries which joined an RTA. Furthermore, another important characteristic of this new regionalism is that many of the agreements that entered into force recently, involve a close cooperation between developing and developed countries. In 2003, 184 RTAs were in force in the world and almost every WTO member was engaged in at least one of them.5

2 STATEMENT OF THE ISSUE

Economic regional integration starts when two or more countries gather to negotiate with the intention of creating a new agreement based on the principle of reciprocal interdependence or even to establish a new institutionalized entity, so as to diminish existing barriers to trade and to the free movement of goods, services, capitals and people. The achievement of the last objective, however, is not a mandatory condition for the integration process to happen since countries may engage in RTAs aiming at only a lower level of integration, comprehending just trade.

The main characteristic of integration in the regional level, therefore, is that it is the product of the efforts of sovereign nations to reach an extension of markets as well as to promote a political approximation and alignment. As a direct consequence of this process, countries benefit from the exploitation of scale economies, being able to increase production and to specialize in those sectors where they have advantages. Scale economies have been important to economic development theory since at least Adam Smith, who theorized the positive effects of an increase in the division of labor and specialization. Economies of scale and diseconomies of scale help to determine what the best combination of inputs is and what amount should be produced in order to satisfy certain market dimensions. It is argued that many countries have not industrialized because they have not been able of benefiting from these reduction of costs resulted by larger production because of their limited number of consumers. Regionalization can guarantee a different deal in the division of labor within the region, allowing some different economic sectors to develop because of the extended market dimensions. Furthermore, because of the greater competition within the group, member states are forced to improve the efficiency of their economies.

5 BURFISHER, Mary E., ROBINSON, Sherman, THIERFELDER, Karen. Regionalism: Old and New, Theory and Practice. Available at: www.ifpri.org/pubs/confpapers/2003/burfisherrobinsonthierfelder.phf. Last accessed: 8 May 2006, p. 1.

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There are many levels of economic integration.6 Frequently historical, social, political and economic factors determine whether the process will be shallower or deeper. The lowest level of integration arises when a Regional Cooperation Agreement or a Preferential Zone is established. States negotiate in an attempt to foment some sectors of their economies or specific products without any ambition to liberalize substantially all areas of international trade among them.

Usually, what follows is the foundation of a Free Trade Area (or Free Trade Zone). Members agree to remove existing trade barriers, so as to give preferential access to the markets of each other. Although barriers inside the Free Zone are eliminated, countries party to it still have sovereignty to determine external tariffs to non-member States. Because of this situation it is necessary for the agreements to include detailed rules of origins since this is the only way to “prevent goods that enter the member country with the lower external tariff from being transshipped duty free to members with higher tariffs”.7 It is important to notice that rules of origins may also be used as a non-tariff barrier according to the level of domestic content required for a good to be considered as having been produced locally, and therefore of enjoying duty free rights.

A third step towards deeper integration is the implementation of a Customs Union. Besides liberalizing internal trade, member states also agree to apply a Common External Tariff (CET) in their trade relation with third states. Since a CET is undertaken, there is no need for the use of rules of origins, which diminishes the possibility that the bloc will adopt protectionist measures against the rest of the world.

Common markets are a forth step in this process. Member states merge their fiscal, monetary and commercial policies and the free movement of factors of production – labor and capital – is allowed within the region.

Finally, the last and the deepest step of economic integration occurs when an Economic Union is established. The legislation of member states, as well as commercial and social practices, is harmonized. Moreover, a common currency is adopted.

As provided by WTO statistics8, 70 per cent of regional blocks in force nowadays are Free Trade Agreements. As one can see, the rules of origins necessary for the economic integration process to be successful may become an obstacle to the multilateral trading system. If they are too specific and require a very high level of domestic contents, products from third states are clearly put in disadvantage. In this respect nations should think of solutions in order to create an equilibrium guaranteeing FTAs are in accordance with development goals.

Another common problem is that the integration might result in privileges to countries that possess greater economies, since they already benefit from larger economies of scale, and 6 BURFISHER, Mary E., ROBINSON, Sherman, THIERFELDER, Karen. Regionalism: Old and... p. 4-6. 7 BURFISHER, Mary E., ROBINSON, Sherman, THIERFELDER, Karen. Regionalism: Old and..., p. 5. 8 BURFISHER, Mary E., ROBINSON, Sherman, THIERFELDER, Karen. Regionalism: Old and..., p. 5.

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usually are better prepared to compete, both technologically and in terms of human skills. It may result that smaller nations have their markets invaded by foreign products due to their limited possibility of protecting their industry sectors. The argument for small countries opening their economies is their access to a larger extent of products, which consumers and other sectors can benefit. The crucial aspect lies in the capacity of the economy to achieve and to use trade in its own benefit, adapting strategically to the new circumstances. In many regional arrangements, vulnerable economies or sectors are given a timeframe for adjustment and special treatment since they can be fragile to the effects of a multi-sided liberalization.

As it can be seen, while some partners are benefited from regionalization, others may have their economies harmed as a consequence of the process. Bearing in mind that the main objective of regionalism is to foment an ambience where development may happen and knowing that the formation of economic blocs sometimes works as an antagonist force, since it can pose direct obstacles to economic, political and social growth, one can easily see in some occasions that the objectives of both processes diverge.

On the other hand, one could point out that even though the industries of some countries are put in disadvantage by regionalization, it would be worse for these economies to stand aside from the integration process. As some authors state, although there is a trend towards economic globalization, leading to a greater commercial and financial exchange among countries, the majority of states that are less developed are excluded from this process, with the exception of commodities and raw materials exporters.9

Thus regionalism could be a solution for these countries, since it is easier for them to be inserted in the world economy when a part of an RTA. Regional blocs give weaker states bargaining power in the MTS considering it is harder to ignore complaints posed by small states when these get together and form a single unity.10

In this context, delegates should consider whether it is better for nations to promote a total liberalization inside the blocs to which they belong, or to only have a partial liberalization, establishing restrictions, in an attempt to hinder regionalization from damaging the development process.

Despite all the arguments stating that regionalism may help countries to gradually liberalize their economies so in the future an effective multilateral system can be implemented, nations should have in mind that economic integration, if taken to a radical step, may greatly harm the global economy. In a scenario where regional blocs become so strong as to substitute the current inter-state struggle by an inter-bloc conflict, countries with less power in the international system would still be partly excluded from globalization. This would happen because, they, even as members of a regional bloc, would still not have enough capacity to face, to disagree with and to have more autonomy from blocs composed mostly by 9 For more details see: GILPIN, Robert. The Challenge of Global Capitalism : The World Economy in the 21st Century. Princeton: Princeton University Press, 2000. 10 In this context regional integration could be viewed as a part of the process to reach a greater and a stronger MTS.

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developed nations or by countries with a greater power in the international system. States with less economic and political preponderance would still have to yield in a substantial number of issues since their bargaining power would not rise as expected due to the regionalization process.

Regionalism is a reality and it is very difficult to make it retrocede some steps. Thus it is necessary for UNCTAD and other multilateral forums to create mechanisms which stop regionalization from reaching this step, since in this case the process would not have positive impacts on the development process of small and least-developed nations.

It is also important to notice that the main objective of regionalization is to raise economic growth in the countries participating in it. As it is known, however, this sole fact does not guarantee economic development will happen, since it comprises not only higher levels of production but also a substantial increase in the living standards of the population.

Therefore, the results of the integration process do not necessarily lead to social improvements. For the aims of regionalization to converge with the desires of the society it is necessary to create a mechanism to enhance the establishment of regional blocs and to promote a development process at economic and social levels.

2.1. Trade creation and trade diversion

According to Viner,11 regional blocs tend to divert a parcel of world trade. This is further aggravated if they extinguish non-tariff barriers. In this situation, a country party to an RTA will have free access on goods produced by other member states. Because those products do not have any restrictions inside the bloc they have a clear advantage compared to products originated in third states.

One can determine the success of regional integration by analyzing if it has promoted trade creation or trade diversion. Trade creation happens when as a result of the reductions of tariffs among member states, one of the countries starts to import goods or services that were not produced in the domestic market. Viner states this situation generates efficiency gains for member states while it also encourages goods to be fabricated in the country with the lowest costs in production.

Therefore, if regionalism enhances an adequate ambience to expand and improve the conditions of production and of consumption in the economies of member states, one can say the implementation of the process is advantageous to the world economy as a whole. Not only levels of production raise, but also the demand for final and intermediary goods increases, benefiting third states due to technological advances and gains from scale economies as well.

11 FINKELSTEIN, Cláudio. O Processo de Formação de Mercados de Blocos. São Paulo: IOB – Thompson, 2003, p. 98–100.

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On the other hand, an economic integrated region may foment trade diversion instead of trade creation. Trade diversion occurs when there is “a shift from a low-cost, more efficient non-member producer to a high-cost, less efficient regional producer”.12 In other words, countries part of an RTA stop trading with third states and start importing from within the bloc even if the goods of the former have a more competitive price or better quality. This happens as a direct consequence of the artificial trade barriers that protect products of member states.

Thus it is necessary to create measures to restrain trade diversion. It is not only prejudicial to the world economy but also harms the economies of countries part of the bloc since they acquire goods which have been made artificially cheaper but are not necessarily of better quality.

2.2. Interaction between Regional Trade Agreements and the Multilateral Trading System

Regionalism advances faster than the MTS since it involves fewer countries in the negotiations. In addition to that, some believe the goals of regional integration are the same as the aims of multilateralism and because of that RTAs would be a way of strengthening the latter.13 Not only do they promote a gradual liberalization of the economies of states participating in the process but they also have positive effects on the integration of developing countries in the world economy.

A common phenomenon observed when analyzing the relations between economic regionalism and the multilateral trading system is the overlapping of RTA membership. This situation happens when individual countries are part of more than one RTA and it creates a circumstance where the preferences and benefits generated by the establishment of a regional bloc are extended to some third states, which, by their turn, are, in many cases, party to other RTAs.14 As one can see, overlapping membership is discriminatory since some of the non-member countries of a specific integration process profit from preferential treatment while others do not. Not only third states which did not sign any treaty with the bloc have to face more restrictions and have to pay more tariffs to enter the regional market than those who signed economic agreements with it, but also an RTA network is formed every time this happens.

Many argue this situation is harmful to the development process around the world. The establishment of these RTA clusters makes it very difficult for countries which are not part of it to get integrated into the regional economy. The preferences granted in some cases are so big that it is almost impossible to compete with the goods from within the RTA network. 12 LEE, Margaret. Regionalism in Africa: a part of problem or a part of solution. 2002. Available at: www.polis.sciencespobordeaux.fr/vol10ns/lee.pdf. Last accessed: 2 May 2006, p. 3. 13 This view is expressed in WTO Secretariat. Regionalism and the World Trading System. Geneva: WTO, 1995. 14 WORLD TRADE ORGANIZATION. Compendium of Issues Related to Regional Trade Agreements. TN/RL/W/8/Rev.1, 1st August 2002, p. 27-8.

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Third states not participating in the scheme are harmed, as well as countries engaged in it since trade diversion happens as a consequence.

Moreover, when countries become part of an RTA they are inserted into a regional legal framework which sometimes differs from the rules of the WTO agreement. To aggravate this fact, recently signed RTAs have a tendency to state that in case of inconsistency between its clauses and WTO rules, the former will prevail.15 This generates a situation where there is conflicting jurisprudence, making the multilateral trading system weaker.

However, one could say the establishments of RTA clusters are positive to the multilateral trading system, fostering an adequate environment for economic and social development to happen. Countries reduce barriers and facilitate trade when they join an integration process. As they become members of more than one RTA they extend the liberalization of their economies to more nations. In doing so, they are strengthening the MTS since they are integrating themselves to the global economy as a whole.

Furthermore, free trade agreements have to establish rules of origins, as said previously. When an RTA network is formed there is a harmonization of rules of origin and a simplification of customs procedures. In this case regionalization aids the MTS as it promotes a greater integration.

In this respect solutions should be thought so as to guarantee the establishment of regional blocs will not diminish the rights countries have under WTO rules, reinforcing the need for harmony between the regional and the multilateral level. More than that, it is fundamental to bring out new alternatives aimed at making sure that the overlapping membership of RTAs will not pose a threat for the development process of third states to any regional treaty.

3 PREVIOUS INTERNATIONAL ACTION

International organizations play a double role in adapting themselves to the new realities and in shaping the construction of these new realities through the suggestion of different patterns or strategies. During the twentieth century, the evolution of the forces leading to regionalization has forced these institutions to reshape their actions, perspectives and prescriptions.

The regulation of international trade was conceived at the creation of the General Agreement on Tariffs and Trade (GATT) in 194716. Although some interpretations on the principles of non-discrimination and of the most-favored-nation might indicate economic regionalism

15 Compendium of Issues Related to Regional Trade Agreements, p. 28. 16 WTO. The General Agreement on Tariffs and Trade (GATT 1947). Available at: http://www.wto.org/English/docs_e/legal_e/gatt47_01_e.htm. Last accessed: 31 May 2006.

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would be forbidden, Article XXIV of the GATT17 as well as Article V of the General Agreement on Trade in Services (GATS)18 allows the existence of regional trade agreements as a special exception to the multilateral trade framework.

A redesign on the rules of the multilateral trade system, which happened at the time of the creation of the WTO, referred to the increasing relevance of regional agreements.19 According to the World Trade Organization (WTO), “if a free trade area or customs union is created, duties and other trade barriers should be reduced or removed on substantially all sectors of trade in the group. Non-members should not find trade with the group any more restrictive than before the group was set up”.20 Furthermore, any new regional agreement among countries has to be reported to the WTO, which is the responsible institution for monitoring them. In adopting these rules, GATT/WTO creates a mechanism which guarantees that countries part of an RTA will not liberalize only sectors where they have advantages. Moreover, this is an attempt to prevent regionalism from threatening the MTS.

While the WTO has the role of defending the multilateral system, other development policy institutions have been major supporters of an increasing regionalization. The World Bank has included in its 2005 Global Economic Prospects a special section entitled “Making Regionalism Complementary to Multilateralism”, which suggests some alternatives of non-conflicting strategies between them.

Moreover, the UN Regional Economic Commissions, specially the Economic Commission for Latin America and the Caribbean (ECLAC), have also promoted the ideals of regionalization,21 since from their stand-point, the process enhances the opportunities for developing countries. The UNCTAD, which was created to challenge the ineffectiveness of international development policies, traditionally drew extensively from these conclusions, whose major arguments were the benefits of creating a larger economic space and of stimulating the growth dynamics. Furthermore, the UNCTAD has continuously supported integration among developing countries and a significant aspect of that was the creation of the Global System of Preferential Trade, agreed in 1988, which allowed developing countries to have a closer relation among themselves, with the objective of improving the development gains promoted by international trade.

17 WTO. Article XXIV: Territorial Application — Frontier Traffic — Customs Unions and Free-trade Areas). Available at: http://www.wto.org/english/docs_e/legal_e/gatt47_02_e.htm#articleXXIV. Last accessed: 31 May 2006. 18 WTO. General Agreement on Trade in Services. Available at: http://www.wto.org/english/docs_e/legal_e/26-gats_01_e.htm#articleV. Last accessed: 31 May 2006. 19 For the new understanding of the GATT article XXIV please see: http://www.wto.org/english/tratop_e/region_e/regatt_e.htm. Last accessed: 02 June 2006. 20 WTO. Regionalism: friends or rivals? Available at: http://www.wto.org/english/thewto_e/whatis_e/tif_e/bey1_e.htm. Last accessed: 26 June 2006. 21 POLLOCK, David, KERNER, Daniel and LOVE, Joseph. Raul Prebisch on ECLAC. Cepal Review 75. December 2001. Available at: http://www.un.org/esa/desa/ousg/articles/pdf/lcg2150i_Pollock.pdf#search=%22ECLAC%20prebisch%22 Last accessed: 26 June 2006.

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In 2004, the São Paulo Consensus,22 generated at UNCTAD XI, stated that “given the growing importance of regional and interregional initiatives, we encourage UNCTAD to further develop capabilities designed to assist countries to participate effectively in these initiatives, while ensuring functional and coherent linkages with the multilateral system”.23 Although major investigation24 on this subject has been going on for almost a decade, the fact is there are few universally accepted rules of conduct that are applicable to these processes and the practices of different international organizations to what concerns the process of regionalization are paradoxical in many aspects.

4 BLOC POSITIONS

The United States pursues both multilateralism and regionalism since the two strategies are beneficial to its economy. The American government has always supported the MTS, being one of the signatories of the GATT in 1947. From the early 1980s onwards the country has established innumerous RTAs, adopting a “competitive liberalization” strategy for regional integration with a view towards achieving short-term economic goals.25 Moreover, the U.S. considers regionalism and multilateralism to be complementary processes, both aiming at the further liberalization of markets around the world.

On its turn, the European Union strongly fomented regional integration not only to maintain the importance of the region in the international system but also to encourage investment and competition in the economies of countries party to it.26 Furthermore, member states of the European Union, as well as other developed countries, such as the United States and Canada, pursued regionalism as a way to promote economic development assistance to developing countries.

The general African position over regionalism can be seen as optimistic. For countries with a less preeminent role on the international scenario it is of paramount importance to unite in order to achieve an extensive representation, which can enhance the quest for development. Thus, African states see regionalization as a new tool on their pursuit for the growth of their markets and of their power before other nations. There is also the possibility for the African countries that have already reached some kind of development to help their neighbors on relevant issues, like the improvement of internal institutions. This possibility also helps

22 UNCTAD. São Paulo Consensus. Available at: http://www.unctad.org/en/docs/td410_en.pdf. Last accessed: 26 June 2006. 23 UNCTAD. UNCTAD XI – The Spirit of São Paulo. Available at: http://www.unctad.org/en/docs/tdl382_en.pdf. Last accessed: 26 May 2006. 24 For an example: World Bank (2005) Global Economic Prospects 2005: Trade, Regionalism and Development. Available at: http://siteresources.worldbank.org/INTGEP2005/Resources/gep2005.pdf 25 BERGSTEN, Fred C. Open Regionalism. Available at: www.iie.com/publications/wp/wp.cfm?ResearchID=152. Last accessed: 21 May 2006. 26 BURFISHER, Mary E., ROBINSON, Sherman, THIERFELDER, Karen. Regionalism: Old and..., p. 1.

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increase the environment of common will for the African development, which is preached by the African Union.27

For other developing countries, such as the Latin American ones, regional integration is a great way for diversifying markets. These countries are generally restricted to some international markets, like the United States or Europe, and need to vary them in order not only to gain more economically, but also to reduce their dependence. Another important aspect of regionalism for them is, of course, the growth of power in relation to richer countries.

Also, some developing countries, taking Brazil as a good example, may use regional integration as a way to enforce and enhance its position of leadership in their regions. It is important to notice, though, that economic integration is not so simple for developing countries – free trade agreements are of difficult implementation among these nations. This happens because they gather countries that have sectors that have much to lose with international competition; for that reason, it is always difficult for developing countries to negotiate free trade agreements without having any loss in their economies.

Only recently China, Japan and Korea have joined regional agreements. Regional integration is on the sketch for most Asian countries these days; blocs like ASEAN are growing, and gaining the support of big economies like China and India. This integration process is of great importance to the world economy, since it gathers growing countries and some of the larger economies in the world. For that reason, perhaps, some kind of dispute over which country will lead the process of integration on the region can be sensed.

We can also feel a more active role of China towards regional integration since it is a way for the nation to enhance and widen its influence over a region that is very influenced by the U.S. There is an increasing role from India on the process of integration on the region as well; this growing economy sees the process as a great opportunity to expand markets for their products.

Although Japan is used to having strong bonds with the west, mainly the U.S., since it is the largest market for their products, the country is starting to engage in regional integration as well. Japan is strengthening relations with East Asian countries, participating in the ASEAN Regional Forum, for instance, and even looks further, increasing relations with India and even Australia.

27 AFRICAN UNION COMMISSION. Strategic Plan of the African Union Commission. Available at: http://www.africa-union.org/root/au/AboutAu/Vision/Volume1.pdf. Last accessed: 28 May 2006.

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5 QUESTIONS TO PONDER

5.1 Is regionalization a strategy that leads countries to development? How can countries assure development gains from regionalization?

5.2 How far can economic integration reach without disturbing multilateral commercial relations? Should the regionalization process be exempt from any international regulation?

5.3 What degree of intervention should international organizations such as the WTO have in the regionalization process?

5.3 What policies must be implemented to prevent integration from becoming an obstacle to world economic growth via multilateralism?

5.4 Bearing in mind the invasion of foreign products into small countries and the consequent industrial damages, would the adoption of outright free trade within the bloc be the best alternative?

5.5 What measures should be adopted domestically for every country to benefit from regional integration?

5.6 What can be done to integrate the countries that are not able to follow the globalization process? Is the union in regional blocs the best option, considering the increase in bargain conditions?

5.7 What measures should be adopted regarding the preferential trade agreements that do not follow GATT rules on RTA?

5.8 What can be done to avoid trade diversion? What concrete actions and to which degree should the UNCTAD perform while assisting countries in their integration on RTAs?

6 REFERENCES 6.1 UN and International Organizations/Institutions Documents

AFRICAN UNION COMMISSION. Strategic Plan of the African Union Commission. Available at: http://www.africa-union.org/root/au/AboutAu/Vision/Volume1.pdf. Last accessed: 28 May 2006.

UNCTAD. São Paulo Consensus. Available at: http://www.unctad.org/en/docs/td410_en.pdf. Last accessed: 26 June 2006.

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UNCTAD. UNCTAD XI – The Spirit of São Paulo. Available at: http://www.unctad.org/en/docs/tdl382_en.pdf. Last accessed: 26 May 2006.

WORLD TRADE ORGANIZATION. Compendium of Issues Related to Regional Trade Agreements. TN/RL/W/8/Rev.1, 1 August 2002.

WORLD BANK. Global Economic Prospects 2005: Trade, Regionalism and Development. Available at: http://siteresources.worldbank.org/INTGEP2005/Resources/gep2005.pdf. Last accessed: 28 May 2006.

WORLD BANK. Making Regionalism Complementary to Multilateralism. Available at: http://siteresources.worldbank.org/INTGEP2005/Resources/GEP107053_Ch06.pdf. Last accessed: 25 June 2006.

WTO. Article XXIV: Territorial Application — Frontier Traffic — Customs Unions and Free-trade Areas). Available at: http://www.wto.org/english/docs_e/legal_e/gatt47_02_e.htm#articleXXIV. Last accessed: 31 May 2006.

WTO. General Agreement on Trade in Services. Available at: http://www.wto.org/english/docs_e/legal_e/26-gats_01_e.htm#articleV. Last accessed: 31 May 2006.

WTO. Regionalism: friends or rivals? Available at: http://www.wto.org/english/thewto_e/whatis_e/tif_e/bey1_e.htm. Last accessed: 26 June 2006.

WTO Secretariat. Regionalism and the World Trading System. Geneva: WTO, 1995.

WTO. The Basic Rules for Goods. Available at: http://www.wto.org/english/tratop_e/region_e/regatt_e.htm. Last accessed: 02 June 2006.

WTO. The General Agreement on Tariffs and Trade (GATT 1947). Available at: http://www.wto.org/English/docs_e/legal_e/gatt47_01_e.htm. Last accessed: 31 May 2006.

6.2 Articles from the Internet

BERGSTEN, Fred C. Open Regionalism. Available at: www.iie.com/publications/wp/wp.cfm?ResearchID=152. Last accessed: 21 May 2006.

BURFISHER, Mary E., ROBINSON, Sherman, THIERFELDER, Karen. Regionalism: Old and New, Theory and Practice. Available at: www.ifpri.org/pubs/confpapers/2003/burfisherrobinsonthierfelder.phf. Last accessed: 8 May 2006.

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HETTNE, Björn. Beyond the “New” Regionalism. Available at: http://www.eki.liu.se/content/1/c4/36/46/autumn%202005/h05%20-%20NPE_Hettne_3.pdf. Last accessed: 22 May 2006.

LEE, Margaret. Regionalism in Africa: a part of problem or a part of solution. 2002. Available at: www.polis.sciencespobordeaux.fr/vol10ns/lee.pdf. Last accessed: 2 May 2006.

POLLOCK, David, KERNER, Daniel and LOVE, Joseph. Raul Prebisch on ECLAC. Cepal Review 75. December 2001. Available at: www.un.org/esa/desa/ousg/articles/pdf/lcg2150i_Pollock.pdf#search=%22ECLAC%20prebisch%22. Last accessed: 26 June 2006.

6.3 Books

FINKELSTEIN, Cláudio. O Processo de Formação de Mercados de Blocos. São Paulo: IOB – Thompson, 2003.

FRANKO, Patrice. The Puzzle of Latin American Economic Development. Oxford: Rowman & Littlefield, 2003.

GILPIN, Robert. The Challenge of Global Capitalism : The World Economy in the 21st Century. Princeton: Princeton University Press, 2000.

6.4 Websites Consulted

COMMON MARKET OF EASTERN AND SOUTHERN AFRICA. Available at: www.itcilo.it/english/actrav/telearn/global/ilo/blockit/comesa.htm. Last accessed: 7 May 2006.

Profile: Economic Community of West African States. Available at: www.africa-union.org/root/au/RECs/ECOWASProfile.pdf. Last accessed: 7 May 2006.

Caribbean Community and Common Market Website: www.caricom.org. Last accessed: 20 May 2006.

Common Market of Eastern and Southern Africa Website: www.comesa.int. Last accessed: 7 May 2006.

MERCOSUR Website: www.mercosur.int. Last accessed: 20 May 2006.

Southern African Development Community Website: www.sadc.int. Last accessed: 5 May 2006.

World Trade Organization Website: www.wto.org. Last accessed: 17 May 2006.

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TOPIC AREA B

Labor and employment in open economies

By Henrique Brusius Renck, Gustavo Meira Carneiro, João Rodrigues Chiarelli.

“Employment can be a factor in self-esteem and indeed in esteem by others. (…) To a member of the ‘leisured class’ the fact that one does no work for one’s living may be, in fact, a source of pride, but for those who have to work for a living, lack of ‘employment’ is not only a denial of income, it can also be a source of shame.”

Amartya Sen28

Labor has been playing a central role in economic theory since its inception. The first theory over the origin of value of commodities postulated that the value of different goods could be compared by the amount of work disposed in producing each one of them.29 Labor is therefore considered alongside with capital a factor of production.30 It means both factors must be present somewhere in the production chain of any good, although each product or service demands different amounts of each.31

Just as the capital factor, labor can be dealt with as an ordinary good.32 Nevertheless, each good carries its own idiosyncratic character and labor does not escape this rule. To duly

28 SEN, Amartya. Employment, technology and development. London: Oxford, 1975, p. 5. Sen has been awarded with the Nobel Prize in 1998 for his studies on the field of economic development. Among other significant contributions, he developed the current HDI index algorithm. 29 The Labor Theory of Value was firstly postulated by Adam Smith on his “An Inquiry into the Causes and the Nature of the Wealth of Nations”. He lacked some theoretical refinement, but this was settled with the contributions of David Ricardo and Karl Marx. To date only one theory of value has been consistent enough to confront that one: the Theory of Marginal Utility. 30 Labor regards manpower, while capital comprises every physical or financial facilities — e.g. machines, buildings, raw material, energy, cash needs, liabilities, and so on. 31 If a commodity demands proportionally more labor than machinery on its production, this product is classified as labor-intensive (e.g. agricultural goods). Alternatively, when machinery plays a more relevant role or the product depends on technology development, it is called capital-intensive (e.g. microchips, automobiles, medicines). 32 The term “goods” encompasses products and services.

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understand the mechanisms of the labor market and the nature of its disequilibria, one must be aware of some peculiarities of labor demand and supply.

Firstly, it is important do clarify that workers supply goods to the producers and the necessary manpower to service33 providers; on the other hand, employers demand labor. Secondly, labor demanded directly by final consumers is not considered for analytical purposes. Although one shall hire an independent lawyer for one’s testament, it is considered that one has actually contracted the law firm that employs that single lawyer. There are thus only two economic agents that demand labor: private firms and the government. However, the final consumer plays a leading role in labor demand determination. Firms and government do not hire at their unconditioned will. The labor demand is a derived demand, which originates from the wants and desires of consumers. In other words, employment quantity and quality depends directly on what kind and amounts of goods are being requested.

Furthermore, labor presents declining returns to scale. This means that, although total output increases when more workers are hired, the marginal gain (i.e. the gain the last worker admitted provided) decreases. “The assumption that the marginal product of labor eventually declines follows from the law of diminishing returns”,34 which is a very important and comprehensive principle in Microeconomics. Therefore there is a limit of working places which a profit-guided employment will offer.

1 HISTORICAL BACKGROUND

Even though global output has been growing at a robust pace in the last decade, according to current estimates, in 2003 almost 1.39 billion workers in the world (49.7 per cent of world’s workers, and over 58.7 per cent of the developing world’s workers) still do not earn sufficiently to step out of the US$2 a day poverty line, and the situation of surviving with less than US$1 a day for each family member is a reality for 550 million of them (19.7 and 23.3 per cent, respectively). Despite the fact that the world economy has been recovering from the 2001-2002 slowdown, 185.9 million people in the world remain unemployed.35

In the last ten years, women participation in labor market decreased and the youth labor force participation declined; general global unemployment rate has stopped diminishing for two years now. Inequality in wages and earnings has deepened since the 1980s not only between differently skilled workers, but also among workers with the same skills within and across

33 The term “service” within this Study Guide shall be understood as a non-factor service. It means “service” regards only the most common denotation of the term and does not consider transfers related to the use of factors of production (e. g. profit remittances or interest payments — the so-called factor services). 34 BORJAS, George J. Labor economics. New York: McGraw-Hill, 1996, p. 104. 35 INTERNATIONAL LABOUR ORGANIZATION. World Employment Report 2004-05. Genebra: ILO, 2005, p. 24.

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countries.36 Those are surely alarming figures, especially in the contemporary context of global urgency to economic overture that often neglects the social cost of the impacts of this process over domestic labor markets.

It has recently become clear that economic growth alone cannot reduce worldwide unemployment in a globalized economy, although wage and employment conditions presented different behaviors in different circumstances: depending on which countries are considered, this tendency may show up as a reduction in employment perspectives for workers (e.g. Europe, United States and Latin America), while disguised unemployment37 and wage inequality have been falling in many Asian countries.38 Such disparities in the late evolution of the employment situation in different countries and regions may suggest policymakers and the international community should search for tailored solutions for unemployment in each economic region.

In the last years economic growth has been able to keep up only with the growing number of people entering the labor market. This explains why the world’s unemployment rate has assumed a constant behavior lately, not varying beyond the 6 to 6.5 per cent threshold. Over the past ten years, only the developing countries have enjoyed falling unemployment rates; transition economies experienced a sharp increase in that ratio (from 6.3 to 9.2 per cent), except South-Eastern Asia, which has witnessed a bit lighter increase.

2 STATEMENT OF THE ISSUE

Many questions regarding the consequences of economic openness over labor markets under the mandate of UNCTAD are worth being carefully analyzed and debated. However, seven of them have revealed lately to be both specially relevant and determinant to the settlement of coming disequilibria that might threaten the world economy.

2.1 Open market effects

In the end of the twentieth century, the world watched the consolidation of the globalized economy. Most developing countries experienced a large cut on both imports and exports tariffs in the 80s and 90s; the effects of this liberalization are various and this is still a point of disagreement: some say that it contributed largely to economic growth and development, others contest it by saying it only increased dependency on the developed world. The

36 INTERNATIONAL LABOUR ORGANIZATION. World Employment Report 2004-05. Genebra: ILO, 2005, p. 25. 37 Disguised unemployment refers to subemployment, i.e. people who work in the family business without a regular wage or that survive from small occasional services: they are neither strictly unemployed nor employed. 38 UNITED NATIONS CONFERENCE ON TRADE AND DEVELOPMENT. Globalization and the labour market. Genebra: UNCTAD, 2001, p. 2.

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mobility of capital provided by this process allowed companies to start reducing costs on manpower by hiring employees in countries that have lower salaries (which are usually undeveloped ones) rather than in their home countries (usually developed ones), which have higher salaries and insurance costs.

The liberalization, however, did not restrain to capital and commerce: employment and wages have been experiencing a very similar process. The outcome of this second dimension of liberalization is another point of controversy. Some theories say globalization will cause an increase on wages for skilled workers and a decrease on the wages of unskilled ones in countries with low wage and high proportion of unskilled workers39 because of the exposure of domestic labor market to international competition. Another view proposes wages are not affected because they reflect objectively the worker’s productivity.40

In spite of this, some other consequences of globalization that affect only indirectly the workers’ situation must be taken into account before condemning the process. For instance, besides the rise of trade on goods, globalization seems to cause a growth on foreign direct investments (FDIs). Those resources are designated to long-term investments and expand the capacity of the receiver economy; they are, therefore, always welcome. Furthermore, the hardening of international competition is expanding markets for cheap commodities that come from developing countries.

2.2 Migration

“One of the major structural changes facing OECD41 economies is population ageing. The proportion of the population of working age will decline, particularly in the years after 2010, when the baby boom generation begins to retire”.42 The impingements of this phenomenon over the developed economies, which are to be affected first, are not very clear yet but are expected to be devastating. The lack of both skilled and unskilled labor force might cause serious disequilibria over the price level and the social security systems could be doomed. Since an increase in birth rates is quite improbable, the only feasible solution seems to rest in immigration.

Nonetheless, labor force restraints are not exclusive to rich countries. Restrictions of financial order and technological advances deeply reorder also the peripheral regions, like the manufacturing process of Asian industry regions and the oil exporting countries in the Middle East.43 Even small economies endure difficulties, since the horizon of job mobility

39 ECKEL, Carsten. Labor market adjustments to globalization: unemployment versus relative wages. North American Journal of Economics and Finance 14 (2003) 173–188. 40 The neoclassical theory claims wages represent the marginal productivity of labor, or else that a worker is paid in accordance to the amount he contributes to the final output. 41 Organization for Economic Co-operation and Development 42 COPPEL, Jonathan; DUMONT, Jean-Christophe; VISCO, Ignazio. Trends in immigration and economic consequences. OECD Working paper No. 284, 2000, p. 20. 43 ORGANIZACIÓN INTERNACINAL DEL TRABAJO Migrantes: de la restricción a la libre opción. In: Revista de la OIT – Trabajo. Ciudad del México: n° 3, 1993, p 8.

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and international competition makes it harder to legislate over labor without considering external influences.

There are two main factors that stimulate emigration. The first one is the search for better working and remuneration conditions. Although developing countries’ investment on education and research has been increasing and international enterprises are installing research and development unities in these regions, working abroad does still seem very attractive to skilful workers. The brain drain process injures greatly the scientific progress perspectives of poor countries, as the gains of the investments on the formal education of those professionals are to be appropriated by another country.44 On the other hand, the flow of specialized workers in the center-periphery direction may also harm the host countries because they reduce the labor posts of national skilled workers. Almost half of software technicians formed in India were “imported” by the United States simply because the costs of hiring a foreign technician are significantly lower than the costs of training a national one. This phenomenon is clearly observed along with the growth of the privatization process that took place in developing countries in the 90s, since private, profit-led enterprises are more likely to reduce costs by not saving work opportunities for national, more expensive workers.

But in many cases the intention of migration is to escape poverty or environmental limitations of the home country. Some economies cannot provide enough working places to their nationals. These are the cases of Latin America and Africa, where the economic growth barely counteracts the population’s growth and creates the conditions for the advancement of informality. The young working force entering the labor market is usually the most severely impacted.

However, “part of the public debate regarding the costs and benefits of immigration has centered on the impact that immigrants have on public finances. The question is often phrased in terms of whether immigration places an additional load on social welfare, education and health systems, which is not compensated by higher tax payments”.45 Migration may impact either positively or negatively in public finances and in aggregate income. In rich countries, unskilled workers immigration rates are higher than those of skilled workers, which frequently imposes new costs over the social security system. Furthermore, these low-profile laborers compete with local unskilled labor force and usually accept lower wages, which pushes down the general income of the class. In poor countries, although emigration might deplete national scientific think tanks, the remittances of emigrants may represent a major component of the national income. In addition, the colony in a foreign country is an opportunity to increase exports and seek entrance gates to traditional markets.46

44 NACIONES UNIDAS Mejoramiento de las estadísticas relativas al éxodo de personal capacitado de los países en desarrollo hacia los países desarrollados (éxodo de intelectuales): informe técnico. New York City. Naciones Unidas – Estudios de Método, serie F n° 30. 1991. 45 COPPEL, Jonathan; DUMONT, Jean-Christophe; VISCO, Ignazio. Trends in immigration and economic consequences. OECD Working paper No. 284, 2000, p. 19. 46 For example, Hungary became the home of Chinese refugees that left the country in late 80’s and today the

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Host countries face additional problems dealing with illegal migration. Although those governments usually blame the developing countries for it, they can also play a substantive role in battling undisciplined migration. Often the domestic markets of the home countries are small and access to foreign markets in the sectors where they arguably have a comparative advantage is restricted. This is notably the case for agricultural products, textiles and clothing. Thus greater market access to developed country markets and openness to foreign direct investment in emigration countries could enhance work opportunities and thereby lower the incentive to move.47

2.3 Fund remittances

Fund remittances from emigrants consist on the amount sent back home by people who left their countries looking for better opportunities abroad. “The migrant population of the world had reached 200 million by the end of the 20th century. The total amount of money these people send back to their countries of origins was second in value only to the global trade in crude oil”.48 Remittances amount to 29% of GDP in Haiti, 18% in Nicaragua, 17% in Guyana and Jamaica and 16% in El Salvador.49 Regarding European and Asian countries, although the remittances-to-GDP ratio is not that significant,50 the remittances-to-exports ratio also achieve high figures: 153.5% in Albania; 42.5% in Jordan; 26.9% in Egypt; 20.7 in India; and 18.9% in Greece.51

Besides being an expressive account at the balance of payments of some countries, unilateral transfers from abroad generally constitute a major source of resources for low-income households, and this flow of funds manifests consistently in the national economy of both countries involved. That means that a negative movement of the labor market in the resources-exporting economy may impact considerably on the receiver country not only by reducing the inner income level but also by enhancing income disparities. According to the United Nations’ Economics Commission to Latin America and the Caribbean (ECLAC),52 alongside with improving economic conditions and increasing social expenditure, remittances played a decisive role in turning around the rising trend of poverty levels in Latin America from 1990 on. “In 2004 remittances flowing into Latin America and the

government of China uses this huge community to export their production, turning Hungary into a door to the European Union. In contrast, a large Japanese-Brazilian community settled in southeastern Brazil sells its products back to their homeland, increasing Brazilian revenues with taxes of production and exportation and benefiting Japan with the entrance of cheap products adapted to national consumers preferences. 47 COPPEL, Jonathan; DUMONT, Jean-Christophe; VISCO, Ignazio. Trends in immigration and economic consequences. OECD Working paper No. 284, 2000, p. 25. 48 Interview to Iyotani, Toshio. In: Asia-Pacific Perspectives – Japan. Tokyo: Jiji Gaho Sha Inc. October, volume 3, nº 6, p. 37-39. 49 CEPAL. Disminuye el número de pobres en América Latina desde 2003. Notas de la CEPAL, n. 43, Santiago, Nov. 2005, p. 3. 50 16.6% in Albania; 19.5% in Jordan; 2.28% in India; 4.0% in Egypt; and 2.3% in Greece. 51 Data from 1998. Remittance figures from COPPEL, Jonathan; DUMONT, Jean-Christophe; VISCO, Ignazio. Trends in immigration and economic consequences. OECD Working paper No. 284, 2000, p. 25. GDP figures from IMF’s World Economic Outlook (available at: http://www.imf.org). 52 CEPAL. Disminuye el número de pobres en América Latina desde 2003, p. 1.

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Caribbean reached an estimated US$45 billion, about the same amount as foreign direct investment and more than official development aid”.53

Something similar happens in Africa. For example, “the importance of migrants remittances in Ghana is demonstrated by their rapid increase and the proliferation of money transfer institutions in Ghana. Data from the Bank of Ghana indicate that remittances to Ghana in 2005 amounted over US$ 4.5 billion, making it the largest source of foreign exchange. One third of this amount, almost US$ 1.5 billion, came from individuals, while the rest were from religious groups and NGOs. These remittances reflect a substantial increase over the years. In 1990 these private remittances were about US$ 400 millions rising to US$ 680 million in 2002”.54 The volume of resources flowing as remittances amounts to much more than the foreign aid. Those remittances correspond to 15% of GDP and more than the 40% of total exports in the Ghanaian case.

In spite of this, attracting back home those emigrants might bring some benefits. The dissemination of new technologies within the home country, the development of new qualifications and skills and the import of brand new techniques learned abroad may have substantial impacts over domestic production methods, increasing the economy’s output quantitatively and qualitatively, thus providing them with special advantages in international markets.

2.4 Social dumping

Dumping, lato sensu, is a ravening practice of an economical entity that uses an abnormal market power to sell goods under its ordinary price and thus harming the earnings of the other agents. On this context, social dumping shall be understood as the situation where firms produce without respecting international labor standards, what allows a sensitive price reduction, hence an unfair advantage in the competition with other firms. Ordinary dumping actions were condemned under the aegis of the General Agreement on Tariffs and Trade (GATT), and the International Labor Organization’s (ILO) conventions established basic labor standards concerning aspects as freedom of association, collective bargaining, forced labor, child labor and discrimination at work. In spite the fact that some economies naturally present lower labor costs due to population size and labor force skills, some countries have recently taken advantage of their own weakness on working laws and low inspection capacity to attract foreign investments and dump cheap commodities into higher labor costs markets.

Labor unions and human rights activists in developed countries have been arguing that market access in these countries should be conditioned on raising labor standards in the

53 CEPAL. Disminuye el número de pobres en América Latina desde 2003, p. 3. 54 Speech of Hon. Papa Ousuru-Ankmah – Minister of the interior of Ghana, at the 39th Session of the Commission on Population and Development. New York, USA. 4th April, 2006. Title: “Emigration from Ghana: A Motor or Brake for Development”

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developing world in order to prevent social dumping and a competition on wage decreases and benefit cuts. Trade sanctions imposed in response to violations of labor standards are sometimes referred to as a “social clause”.55

On the other hand, even though labor standards are important landmarks for fighting slavery and child labor, they also contemplate some guidelines that are more easily implemented in countries where the general income level is much more comfortable. Developing countries tend to view such regulations as disguised protectionism and therefore the negotiation of such “social clauses” commonly end up in a stalemate. As deregulation of financial markets benefits those countries with good supplies of capital, unrestricted labor laws favor developing countries, which have abundance of the labor factor and export labor-intensive commodities.

2.5 Technology transfers

On its eagerness for technical progress, developing countries have been struggling passionately for technology transferring even by including such clauses in privatization processes and public contracts and acquisitions. The benefits are quite obvious: brand new technologies are supposed to increase the productivity of domestic industries and allow them to accomplish international quality standards that could preclude the access to important markets.

Although such enhancements do occur, some collateral effects56 are also observed. Firstly, the new technology rarely is the newest one: that means the receiving country is still a step behind the provider. Secondly, sometimes the alien technology does not fit local necessities for environmental reasons or else cannot be adapted to the idiosyncrasies of domestic demand. Thirdly, laborsaving technology may not only be unable to increase average productivity, but aggravate the problem of unemployment instead. Such problems are less probable to happen if the technology was nationally developed.

2.6 Outsourcing and offshoring

The role of the services sector has been rapidly increasing in the last decades — the exports of services quadrupled from 1980 to 2002 and its share on total trade grew from 16.2% to 19.4%.57 The international trade of services has been commonly associated with developed countries surplus. Nevertheless, this picture has started to change: the share of the developing countries on this market is growing, and is accompanied by a reduction on its

55 COLUB, Stephen. Are international labor standards needed to prevent social dumping? World Bank Finance & Development, dec. 1997, p. 1. 56 Also called externalities. 57 UNCTAD. Trade in services and development implications. TD/B/COM.1/62, Dec. 2003.

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deficit. This growth of the international services trade can be seen as a consequence of globalization, as this process allows companies to hire and sell their products worldwide.

2.7 Flexibilization58 of labor laws

The beginning of the twentieth century was eccentric for its democratic advances; the growth of trade unions and workers parties, along with the rise of the communist regime of the Union of the Soviet Socialist Republics, opened the eyes of the world to the workers’ class. In this context of growing workers’ class menace to the status quo, governments all over the world created specific laws to regulate labor. The labor laws were therefore a great victory and a real conquest of the workers; these laws are different in every country, but the majority of them establishes maximum working time, minimum wages and the necessity of just causes for discharging; indeed, the labor laws were created to protect the workers from being exploited or to work under precarious conditions.

In the apex of the globalization process, many countries are watching a decrease in formal employment rates and a great increase in informal employment, which causes an enormous variety of problems to these countries – like, for example, a growing deficit on the social security system, since these workers do not contribute to it. So, the hegemonic thought is that the cause of the escalating informal employment rates is the rigidity of labor regulation for formal jobs, which ends up being very expensive to employers. The solution would then be to make labor laws more flexible in order to encourage formal employment.

More flexible labor laws are now in the agenda of many countries and some have already put these changes into effect; but recent events — like the protests and strikes in France — have shown the world that it is not even close to a consensus, and that many workers are not willing to give up their rights for this cause. However, turning labor laws more flexible may enhance employment opportunities and reduce both open and disguised unemployment, which would increase the influence of unions and parties instead of turning out as a privation of rights for workers.

3 PREVIOUS INTERNATIONAL ACTION

Not many multilateral previous actions on this specific issue have been taken. Labor market studies are a very comprehensive branch, which deals with economics, demography, law, sociology and politics, among others; consequently, it remains in a quite interesting intersection of the scopes of many international organizations. The UNCTAD has not 58 It is not consensual what kind of measures does this concept comprehend. It is vaguely understood as deregulation or weakening of law enforcement, but in some cases it is not possible to state clearly whether a specific measure would enhance of weaken the impingements of a law. Nevertheless, it is not hard to apprehend the intuitive meaning of the term, which is the one that shall be considered within this Study Guide.

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dedicated itself yet to discuss the impacts of globalizations and trade liberalization over labor markets. A few joint studies with ILO were developed, but no definitive position on the issue has been settled.

The International Labour Organization formulates recommendations of international labor standards that are generally accepted as guidelines and measures of performance. It produces many studies on labor situation and labor market behavior, but no production is related specifically to the consequences of economic opening over the labor market.

Almost every organ of the United Nations that deals with development or human rights (including migration and gender equality) has produced something in the field. The UN launched in 2006 a Compendium of Recommendations on International Migration and Development,59 a study about the relations of the institution’s development agenda and the conclusions of the Global Commission on International Migration.

4 BLOC POSITIONS

4.1 Developed countries

Although free movement of labor is one of the fundamental freedoms guaranteed by the article 39 of Treaty of Rome, the European Union allowed temporary exemption during the adjustment process after the last membership enlargement. In 2004, only Great Britain, Ireland and Sweden granted full access to their labor markets; every other Western European country raised some kind of barrier to the cheap eastern labor force. Some eastern countries counterattacked by imposing similar, retaliatory measures. As a result, the eastern nations are taking decisive steps towards liberalization of labor markets for European countries. However, each country has been advancing on its own step.60 Nonetheless, Europe is also facing a cruel dilemma: the European welfare state and social protection system seems to be undermining the bloc’s international competitiveness and thus to be responsible for the growing unemployment levels in the region.

The United States of America traditionally has a fairly flexible legal system regarding labor. The USA even chose not to ratify some of the ILO standards. In order to amplify American advantages in international trade, some ancient worker’s conquest were abolished recently, what has been igniting actions by labor unions in the country.61

59 UNITED NATIONS. Compendium of Recommendations on International Migration and Development: the United Nations Development Agenda and the Global Commission on International Migration compared. Geneva, 2006. 60 PRIKRYL, Pavel. Bienvenidos, but still not willkommen: Europe split over labor mobility restrictions. June 2006. 61 SAUBER, James W. USA labor market: not for export! National Association of Letter Carriers, 2005.

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4.2 Developing countries

Because the African continent encompasses many economical blocs, there is no continental agreement on workers right or labor standards. Furthermore, the scourge of severe diseases that reduces both quality and quantity of the labor force — as HIV/AIDS, malaria and tuberculosis — harasses some countries and thus favors labor laws flexibilization. The weakness of the judiciary impairs the implementation of stronger laws in countries where they exist. Some countries have liberalized trade rapidly and comprehensively — such as Ghana and Zambia — while some did it in a sustained but gradual manner — as Mauritius, Uganda, Ivory Coast and South Africa. Some others have failed in opening up seriously until fairly recently, often reversing policies along the way — as Kenya, Nigeria, Senegal and Tanzania. The outcomes suggest that it is possible to liberalize and reduce poverty and inequality, as is the Ghanaian and Ugandan cases, although an approach that takes complementary policies into account, just as Mauritius did, is more sustainable.62

In Asia, several countries have been suspending their labor laws in the so-called Economic Processing Zones in order to foster economic growth and development. The governments in that region have been using the abundant, cheap labor force as a competitive advantage to achieve new markets, and reports of child labor and severe work conditions are not rare. China has been historically reluctant to admit liberalization, and countries such as South Korea, Taiwan, Malaysia and Indonesia opted for some degree of industrial interventionist policies. On the other hand, Thailand and Japan have chosen the path of deregulation.63

In Latin America, governments are stuck in the unsolved question of whether the liberalization of labor markets is the key to development, especially because the first steps towards economic overture were taken during non-democratic regimes. Although income inequalities fell in Chile and Peru after these reforms, Mexico, Argentina and Brazil did not enjoy the same phenomenon. The strength of liberal concepts of development will be tested by the recent process of political inclusion of the poorest layers led by social movements and labor parties, including the access of main, first-layer elective positions.64

5 QUESTIONS TO PONDER

5.1 Does opening markets promote employment? Does it promote wages equalization? Are the effects of this opening in developed and developing countries different and, if so, to what extent?

62 TSIKATA, Yvonne M. Globalization, poverty and inequality in sub-Saharan Africa: a political economy appraisal. Organization for Economic Cooperation and Development, Nov. 2000. 63 JOMO, K. S. Globalisation, liberalisation, poverty and income inequality in Southeast Asia. Organization for Economic Cooperation and Development, Working Paper no. 185, Dec. 2001. 64 ROBINSON, James A. Where does inequality come from? Ideas and implications for Latin America. Organization for Economic Cooperation and Development, Working Paper no. 188, Dec. 2001.

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5.2 Is flexibilizing labor laws a good measure to enhance employment? To what point will such flexibilization stimulate employment and not turn out as a loss of rights for the workers, making them vulnerable again? Is flexibilizing labor laws a progress, or does it mean going back to a time of exploitation and lack of guarantees to the workers?

5.3 Is it possible that both home and host countries can benefit from migration? Are the flows of skilled workers from developing to developed countries to be controlled? Is it possible to alleviate the burden of immigration over the social system of host countries? Is a joint international effort to tackle migration problems at the sources conceivable?

5.4 Is the dependency on emigrant fund remittances to settle the balance of payments an unsustainable situation? Are there concrete possibilities to change this situation? Should this kind of capital stream be controlled or taxed? Should governments play a more active role on this scenario or should the migrant fluxes be left to adjust themselves?

5.5 Is social dumping really a hazard to international economic stability or is it simply a comparative advantage of developing countries? Is the implementation “social clauses” a severe burden to developing countries? Are there other means of fighting poor work conditions?

5.6 Are technology transfers actually a problem? Is there any way of reducing negative externalities65 and amplifying positive ones?

5.7 Should an economic measure be automatically cast aside if it is unfriendly to labor markets? Are there many other aspects that take precedence over labor concerns?

6 REFERENCES: 6.1 UN and International Organizations/Institutions Documents

COMISIÓN ECONÓMICA PARA AMÉRICA LATINA Y EL CARIBE. Disminuye el número de pobres en América Latina desde 2003. Notas de la CEPAL, No. 43, Santiago, Nov. 2005, pp. 1,3. Available in English at http://www.cepal.org.

INTERNATIONAL LABOUR ORGANIZATION. Global Employment Trends Brief. Genebra: ILO, jan. 2006. Available at: www.ilo.org/public/english/ employment/strat/download/getb06en.pdf.

INTERNATIONAL LABOUR ORGANIZATION. World Employment Report 2004-05. Genebra: ILO, 2005. Available at: http://www.ilo.org.

65 Externality is the economical term for “collateral effect”, but without the negative burden of the latter. Externalities might be either positive or negative.

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ORGANIZACIÓN DE LAS NACIONES UNIDAS. Mejoramiento de las estadísticas relativas al éxodo de personal capacitado de los países en desarrollo hacia los países desarrollados (éxodo de intelectuales): informe técnico. In: Estudios de Método. Cuidad del México:, serie F, n° 30.

ORGANIZACIÓN DE LAS NACIONES UNIDAS. Recomendaciones sobre estadísticas de las migraciones internacionales. In: Informes Estadísticos. Ciudad del México. serie M, n° 58.

ORGANIZACIÓN INTERNACINAL DEL TRABAJO Migrantes: de la restricción a la libre opción. In: Revista de la OIT – Trabajo. Ciudad del México: n° 3, 1993, p. 8.

ORGANIZICIÓN INTERNACIONAL DEL TRABAJO Desplazamiento de las poblaciones: impacto de la globalización sobre la migración. In: Revista de la OIT – Trabajo. Ciudad del Mexico: n° 34, ano 1997

UNITED NATIONS COMMISSION ON TRADE AND DEVELOPMENT. Trade in services and development implications: notes by UNCTAD Secretariat. TD/B/COM.1/62, Dec. 2003. Available at: http://www.unctad.org/en/docs/c1d62_en.pdf.

UNITED NATIONS CONFERENCE ON TRADE AND DEVELOPMENT. Globalization and the labour market. Genebra: UNCTAD, out. 2001. Disponível em: <www.unctad.org/Templates/Download.asp?docid=1604&lang=1&intItemID =152>.

UNITED NATIONS INSTITUTE FOR TRAINING AND RESEARCH. N° 3 1970 – Henderson, Gregory – Emigration of Highly-Skilled Manpower from the Developing Countries.

UNITED NATIONS. Compendium of Recommendations on International Migration and Development: the United Nations Development Agenda and the Global Commission on International Migration compared. Geneva, 2006. Available at: www.un.org/esa/population/ publications/UN_GCIM/UN_GCIM_ITTMIG.pdf.

6.2 Articles from Periodicals

ECKEL, Carsten. Labor market adjustments to globalization: unemployment versus relative wages. North American Journal of Economics and Finance, No. 14, 2003, pp. 173–188.

HEFEKER, Carsten; WUNNER, Norbert. The producer interest in foreign labor standards. European Journal of Political Economy. V. 18, 2002, pp. 429–447.

Interview to Iyotani, Toshio. In: Asia-Pacific Perspectives – Japan. Tokyo: Jiji Gaho Sha Inc. October, volume 3, nº 6, p. 37-39.

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JOMO, K. S. Globalisation, liberalisation, poverty and income inequality in Southeast Asia. Organization for Economic Cooperation and Development, Working Paper no. 185, Dec. 2001.

LOBEL, Orly. Sustainable capitalism or ethical transnationalism: offshore production and economic development. Journal of Asian Economics, No. 17, 2006, pp.56–62.

POLASKI, Sandra. Combining Global and Local Forces: The Case of Labor Rights in Cambodia. World Development, v. 34, No. 5, 2006, pp. 919–932.

ROBINSON, James A. Where does inequality come from? Ideas and implications for Latin America. Organization for Economic Cooperation and Development, Working Paper no. 188, Dec. 2001.

TSIKATA, Yvonne M. Globalization, poverty and inequality in sub-Saharan Africa: a political economy appraisal. Organization for Economic Cooperation and Development, Nov. 2000.

6.3 Articles from the Internet

COLUB, Stephen. Are international labor standards needed to prevent social dumping? World Bank Finance & Development, dec. 1997. Available at: http://www.worldbank.org/fandd/english/1297/articles/041297.htm.

COPPEL, Jonathan; DUMONT, Jean-Christophe; VISCO, Ignazio. Trends in immigration and economic consequences. OECD Working paper No. 284, 2000. Available at: http://www.oecd.org/dataoecd/29/30/1891411.pdf.

O’ROURKE, Dara. Multi-stakeholder regulation: privatizing or socializing global labor standards? World Development, v. 34, No. 5, pp. 899–918, 2006. Available at: http://ideas.repec.org/a/eee/wdevel/v34y2006i5p899-918.html.

PRIKRYL, Pavel. Bienvenidos, but still not willkommen: Europe split over labor mobility restrictions. June 2006. Available at: http://cepa.ncpa.org/digest/bienvenidos-still-not-willkommen-europe-split-over-laborr-mobility-restrictions

SAUBER, James W. USA labor market: not for export! National Association of Letter Carriers, 2005. Available at: www.union-network.org/unicongress2005.nsf/0/8edb62a84ff87fb7c12570880029972b/$FILE/E-USA%20LM%20NFE.pdf

Speech of Hon. Papa Ousuru-Ankmah – Minister of the interior of Ghana, at the 39th Session of the Commission an Population and Development. New York, USA. 4th April, 2006. Title: “Emigration from Ghana: A Motor or Brake for Development”.

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6.4 Books

BORJAS, George J. Labor economics. New York: McGraw-Hill, 1996.

SEN, Amartya. Employment, technology and development. London: Oxford, 1975.

WALKER, Richard A. Putting capital in its place: globalization and the prospects for labor. Geoforum, No. 30, 1999, pp. 263-284.

6.5 Websites Consulted

Committee on Monitoring International Labor Standards Online Database. Available at: http://www.trikat.com/webmils.

International Labour Organization website. Available at: http://www.ilo.org.

United Nations Conference on Trade and Development website. Available at: http://www.unctad.org. Last accessed at: 14 May 2006.

Comisión Económica para América Latina y El Caribe website. Available at: www.cepal.org.