ach country will need to experiment and find the configuration of institutions and conventions that will work best within its national conditions and that will meet the expectations of its population. All such efforts require significant long-term investments (including by the public sector) in physical, human and social capital which can only be achieved through much more active policy interventions.
COMMENTARYoctober 4, 2008 EPW Economic & Political Weekly24many communities and countries to external shocks and pressures.Trade ShocksFew dispute that increased international trade can be a means towards achieving greater national wealth. However, the link is neither predetermined nor automatic; “win-win” outcomes are just one among a range of possibilities in a more open trad-ing system and international market forces, in conjunction with varying national capabilities and policy actions, can pro-duce results that are beneficial for some but detrimental to others. Sensible econo-mists, beginning with Adam Smith no less, have insisted that a system of free inter-national trade is more a utopian ideal than a coherent policy blueprint and that the costs of adjusting to it require that it be done “only by slow gradations, and with a good deal of reserve and circumspection” [Smith, cited in Panic 1988:124]. Recent attention to the downside risks in advanced countries has focused on “off-shoring” manufacturing and service activities to lower-cost locations, leaving only core competencies at home [Samuel-son 2004]. The process has it roots in the early 1970s, but its acceleration in recent years has coincided with the coming on tap of vast new sources of labour in the developing world, particularly in China and India, with falling transport and communication costs and with the proliferation of trade and investment agreements involving developed and developing countries.The evidence does suggest that the cur-rent wave of globalisation has raised worker vulnerability in the industrialised countries [Milberg and Schoeller 2008]. However, deteriorating labour market conditions in these countries predate the recent rise in offshoring and are impossi-ble to explain independently of domestic policy decisions [UNCTAD 1995], including poorly designed macroeconomic policies and the dismantling of effective institu-tional supports to reduce and absorb the risk of sudden employment loss and pro-vide alternative sources of income. More-over, the fact that similar trends can be found in many developing countries, in defiance of the logic of comparative advantage, is a further reminder that international trade is not an independent driver of economic outcomes.The reality for many developing coun-tries in recent years is that they have been exporting much more, but have been earn-ing less from doing so, thanks to a con-straining combination of footloose capital, heightened competition and more flexible labour markets [UNCTAD 2002;UN 2006]. Where production for export has taken place in enclaves the shallowest of linkages have been established with the surround-ing economy, leaving countries exposed to unexpected shocks if firms decide to run down or shift the activity, and all too often stuck with low value-added acti-vities with limited opportunities for technological upgrading. The contrast between east Asia, where the share of primary products, resource-based and low-technology manufacturing in the total exports of east Asia declined from 76 per cent in 1980 to 35 per cent in 2005 and most other regions which have been less successful in transforming the structure of their production for exports, is striking. For many Latin American and African countries, the overall impact of terms-of- trade shocks over the period 1980-2005 was negative, with a brief reversal in the second half of the 1990s when some coun-tries benefited from favourable move-ments, and again since 2003. Inter-national trade, in that sense, continues to be a major source of instability in coun-tries with weakly diversified economies. Moreover, in some of these regions, notably Latin America, capital account liberalisation has greatly amplified trade shocks by attracting pro-cyclical capital flows. Successful integration in east Asia has been built on a fast pace of capital forma-tion and the nurturing of large domestic firms. The strategic policy measures adopted in these countries are well known [Kozul-Wright and Rayment 2007]. How-ever, these were not part of the agenda promoted after the investment slump in many developing countries during the lost decade of the 1980s. Instead, international financial institutions encouraged the rapid opening of capital markets as the most re-liable way to improve their investment climate and the only real hope for closing the income gap on those higher up the development ladder [Camdessus 1997].Unleashed FinanceThe weight and influence of financial mar-kets, financial actors and financial institu-tions have grown dramatically in recent years. This has been accompanied by a massive accumulation of financial assets and by a proliferation of institutional innovations that have supported growing levels of debt in the household, corporate and public sectors; in some countries, both developed and developing, domestic financial debt as a share of GDP has risen four or fivefold since the early 1980s. Financialisation has been accompanied by a drastic narrowing of the macro-economic policy agenda to fighting infla-tionary threats, and has contributed to a shift in business cycle dynamics from the interplay of investment demand, produc-tivity growth and distributional struggles towards debt-fuelled spending, leveraging and asset accumulation. With expecta-tions of asset price changes driving decision-making, risk attitudes of lenders and investors (underestimated in the upswing and overestimated in the down-turn) along with a flurry of financial inno-vations that promise security against downside risks have stretched out the boom-bust cycle and carried the threat of turning financial fragility in to financial breakdown [Kregel 2007].Moreover, these financial booms tend to give rise to lop-sided investment pat-terns, which often involve little more than rearranging existing assets through lever-aged buyouts, stock buybacks and merg-ers and acquisitions, or are in sectors sus-ceptible to speculative influences, such as property markets. Unlike earlier cycles, these booms have delivered fewer benefits in terms of wage and employment growth. Capital flows have played a particularly strong role in reshaping the business cycle in developing countries, many of which opened their capital accounts prematurely in the 1990s. Their effects are often trans-mitted through public sector accounts, especially through the effects of available financing on government spending and through the effects of interest rates on the public debt service. But the stronger effects typically run through private 
ach country will need to experiment and find the configuration of institutions and conventions that will work best within its national conditions and that will meet the expectations of its population. All such efforts require significant long-term investments (including by the public sector) in physical, human and social capital which can only be achieved through much more a ctive policy interventions. Moreover, in an interdependent world, economic security cannot be guaranteed by countries acting alone.
COMMENTARYEconomic & Political Weekly EPW october 4, 200827whether these are best pitched as univer-sal policies or specifically targeted at the poor. The trend in recent years has been towards the latter approach. This has not achieved the right balance. In general, universal systems have a better track record in eliminating poverty. This reflects a combination of a better income distribu-tion (with potentially stronger growth dynamics), a broader political appeal, particularly with support from the middle classes, and some clear administrative and cost advantages.Managing the Business Cycle: Govern-ments can enhance the scope for counter-cyclical policies by improving the institu-tional framework for macroeconomic policymaking. Setting fiscal targets that are independent of short-term fluctuations in economic growth (so-called structural budget rules) can be effective in forcing a counter-cyclical policy stance. Some developing countries, such as Chile, have been able to manage such fiscal rules successfully.The establishment of commodity and fiscal stabilisation funds could also help smooth out fiscal revenues, such as those based on primary export production. They are by no means a panacea, however, and careful management of such funds is re-quired. One complication is the difficulty distinguishing cyclical price patterns from long-term trends, in part because of the increased influence of speculative finan-cial investments in commodity markets. This has made it more difficult for govern-ments to determine the adequate size of stabilisation funds. It is therefore impor-tant that developing countries can also rely on an adequate multilateral system of compensatory financing facilities to pro-tect them against the larger commodity price shocks.Multilateral Responses: A major chal-lenge for the multilateral financialinstitu-tions is to help developing countries mitigate the damaging effects of volatile capital flows and commodity prices and provide counter-cyclical financing mecha-nisms to compensate for the inherently pro-cyclical movement of private capital flows. A number of options are available to dampen the pro-cyclicality of capital flows, provide counter-cyclical finance, and thus help create a better environment for sustainable growth. A first set of meas-ures would include improved international financial regulation to stem capital flow volatility and provide advice in designing appropriate capital controls, including on a counter-cyclical basis. At the same time, there is a need for enhanced provision of emergency financing in response to external shocks, whether to the current or capital accounts, so as to ease the burdens of adjustment and reduce the costs of holding large reserve balances. Current mechanisms are limited in cover-age, too narrowly defined, or subject to unduly strict conditionality.IMF facilities should be significantly simplified and in-clude more automatic and quicker dis-bursements proportionate to the scale of the external shocks. Lending on more con-cessional terms is highly desirable, espe-cially for heavily indebted low-income countries. A new issuance of SDRs could be one option to finance a significant increase in the availability of compensatory financing. The interest of developing countries in the stability of the international financial system is underpinned by the wish that it allow greater participation in global trade through a full exploitation of their deve-lopment potential. Despite the general acceptance of the benefits of freer trade, the international division of labour is still heavily influenced by commercial policies that favour products and markets in which more advanced countries have a dominant position and a competitive edge. The recent collapse of the Doha trade talks should provide breathing space for a much needed assessment of the rules and norms governing international trade.4 ConclusionsThe simple message conveyed by the 2008 edition of the United Nations’World Eco-nomic and Social Survey is that markets cannot be left alone to deliver the appro-priate and desired levels of economic security. This is not a novel conclusion. Against the growing backdrop of increas-ing economic and political insecurity in interwar Europe, John Maynard Keynes called for “new policies and new instru-ments to adapt and control the workings of economic forces, so that they do not intolerably interfere with contemporary ideas as to what is fit and proper in the interests of social stability and social justice”. Those words resonate just as strongly today. The responsibility for the choice and mix of policies required to guarantee prosperity, stability and justice, remains, of course, with national institu-tions and constituencies, but in an increas-ingly interdependent world and on a frag-ile planet, building a more secure home is a truly international undertaking.Notes1 For further discussion of these trends see UN 2005 and 2006; Kozul-Wright and Rayment 2007; Jomo and Baudot, 2007; Ocampo et al 2008.2Not surprisingly, as concerns have grown, the theorists of the self-destructive market from Keynes and Polanyi to Minsky and Myrdal have come back into fashion.ReferencesAkyuz, Y (2008): ‘Financial Instability and Counter-cyclical Policy’, UNDESA Discussion Papers Series, forthcoming.Camdessus, M (1997): ‘Global Capital Flows: Raising the Returns and Reducing the Risks’, speech to Los Angeles World Affairs Council, June 17.Chang, H J and R Rowthorn (eds) (1995): The Role of the State in Economic Change, Clarendon Press, Oxford.Greenfeld, E (2000): The Spirit of Capitalism, Harvard University Press, Cambridge.ILO (2005): Economic Security for a Better World, International Labour Office, Geneva.Jomo, K S and J Baudot (eds) (2007): Flat World Big Gaps: Economic Liberalisation, Globalisation and Inequality, Orient Longman, New Delhi.Kozul-Wright, R and P Rayment (2007): The Resistible Rise of Market Fundamentalism, Zed Press, London.Kregel, J (2007): ‘The Natural Instability of Financial Markets’, Levy Economics Institute Working Papers Series, December, Bard College, New York.Lamy, P (2006): ‘Humanising Globalisation’, speech, Santiago de Chile, January 30.Milberg, W and D Schoeller (2008): ‘Globalisation, Offshoring and Economic Insecurity in Advanced Countries’, UNDESA Discussion Papers Series, forthcoming.Mkandawire, T (ed) (2004): Social Policy in a Develop-ment Context, Houndmills, Palgrave.Ocampo, J A et al (2008): Growth Divergences: Explaining Differences in Economic Performance, Zed Books, London.Panic, M (1988):National Management of the Inter-national Economy, Macmillan, London.Samuelson, P (2004): ‘Where Ricardo and Mill Rebut and Confirm Arguments of Mainstream Econo-mists Supporting Globalisation’,Journal of Economic Perspectives, Vol 18, No 3.UN (2005):Report on the World Social Situation 2005: The Inequality Predicament, United Nations, New York. – (2006): The World Economic and Social Survey 2006: Diverging Growth and Development, United Nations, New York.UNCTAD (1995):Trade and Development Report 1995, United Nations, Geneva. – (2002): Trade and Development Report 2002, United Nations, Geneva.
