II. Elements of the Development Agenda
of Latin America and the Caribbean
and Proposals for Action by UNCTAD

18. The changes introduced in the development strategies of Latin America and the Caribbean since the end of the eighties have entirely changed the face of the region's economy. Although there are still major differences between different countries and economic sectors, regarding the degree of implementation of the paradigms of liberalization and deregulation, sufficient time has gone by to evaluate the results and lessons from that process of transformation. The development agenda of Latin America and the Caribbean for the next few years largely depends on such an evaluation.

19. UNCTAD has huge potential for action in many of the region's economic areas, and a large number of its analyses and co-operation instruments could be used by the countries or subregional schemes in their efforts. Based on the mandates of the UNCTAD IX, and in the light of the experience acquired by Latin America and the Caribbean in the treatment of various items on the international economic agenda, four main procedures for action can be distinguished where UNCTAD has a comparative advantage when it comes to putting forward ideas on development:

• Analyses and studies of the trends of the international economic system and formulation of a "positive agenda" for endogenous development within the context of the globalization process.

• Exchange of inter-regional experiences between international and regional government officials, academics and sectors of civil society, through fora for dialogue aimed at examining the formulation and implementation of development policies.¹

• Technical co-operation on certain topics at the request of countries, taking into account the fact that in Latin America and the Caribbean the subregional integration schemes are looking at issues on the economic agenda from the point of view of their integration process – which involves an additional perspective that goes beyond the national scope (for instance, in relation to competition, investments, industrial and agricultural policy, trade policy).

• Support for multilateral negotiation processes and training of developing countries' human resources.

  Each of these procedures should be part of an integrated whole. For example, the fundamental inputs from the exchange of experience should contribute to the analytical work and technical co-operation programmes and vice versa. Regular participation and co-ordination with international and regional organizations in each area would also be necessary.

20. From the domestic point of view, the first assessment of economic policies introduced over ten years ago refers to the macroeconomic situation. It can generally be said that the goal of stability has been attained, particularly as far as controlling inflation is concerned. Progress has also been made in reforming and modernizing national financial systems, in particular in the supervision of the banking sector, the attraction of foreign investments, in the area of financial services, and in the development of capital markets². It is interesting in that assessment, however, that in recent years the threat of destabilization among the Latin American and Caribbean economies has come from outside the region rather than from within the region or from the region's countries themselves. In other words, the fairly successful structural adjustments were not sufficient to reduce the vulnerability of the region's economies in the face of systemic disturbances. In the short and medium term, reducing external vulnerability will be one of the key topics on the agendas of the countries of the region.

21. The current debate on the future monetary policies of the countries of the region falls within this same order of ideas. It responds to the need to make exchange rates more stable in order to avoid drastic devaluations or overvaluations that become unsustainable, particularly given the risk of a recurrence of the recent international crises. An idea such as "dollarization", which would be tantamount to abandoning national monetary policies and a portion of sovereignty - whose scope goes beyond the financial sphere, and which would have seemed totally unacceptable only two or three years ago - has become a recurring topic in the region and in the hemisphere.³ Concern over reducing monetary vulnerability will be a sensitive topic for many governments of the region, due to a lack of clarity about the costs and benefits of the monetary policies applied since the structural adjustments were put in place.

22. Each country will have to evaluate its options, considering the characteristics of its economy and its national development path. In any case, no formula –be it a currency board, a crawling peg, or a fixed exchange rate regime- seems to be uniformly applicable to all the countries in the region. UNCTAD could provide studies and organize dialogues of experts from different regions in this field, helping to elucidate such matters as economic obstacles and the social costs of fixed versus flexible exchange rates and the optimum levels of international reserves for the developing countries. Along this line of thought, it is fundamental to analyze the subject of exchange rate stability with a perspective covering not only the different interactions within the economy, but also its links to the political and social dimension. It has to be examined, for example, whether measures like "dollarization" are capable of having the desired effect when the rest of the region's conditions and financing differ in so many ways from the one taken as a model.

23. In the light of the external vulnerability, it appears essential for all the subregional integration schemes in Latin America and the Caribbean to speed up their efforts to harmonize (and if possible co-ordinate) macroeconomic policies: it has been seen, above all during Brazil's recent monetary crisis, that integration processes are highly sensitive to changes in the macroeconomic situation of their partners, in both political and economic terms.⁴ It can be assumed that in the next few months the topics of "dollarization", of "sole currencies" inspired by the Euro, and of the dilemma between fixed and flexible exchange rates, will spread from the national sphere to the subregional agendas and to the hemispheric forum of the Free Trade Area of the Americas (FTAA). It is therefore a subject whose domestic and international aspects must be simultaneously addressed by the Latin American and Caribbean governments.

24. If it is impossible to grow fast enough to reduce the poverty rate, the social and political cost - measured in terms of democratic governance - will keep rising, throwing doubt on the strategies designed for entry into the global economy. Growth, conceived as a necessary but insufficient condition for integral development, will continue to be the focus of the economic policies of the region’s countries. It must be a primary concern when choosing, designing and sequencing all the sectoral policies.⁵ It also increasingly affects the focus of internal and external economic policies: they will be less fragmented by areas of ministerial competence, and more interdisciplinary, in favour of integral human development. UNCTAD's contribution must focus in particular on the sequence, intensity and multidisciplinary nature of macroeconomic and sectoral policies, through the exchange of practical experiences and through research centred on the link between growth and development.

25. After abandoning the import substitution model of the eighties, and embracing trade liberalization, privatization and the drastic reduction of state instruments supporting productive activity, industrial policies have changed radically. The vacuum left by the State's withdrawal in favour of the private sector has in many sectors been filled by transnational corporations rather than local or regional firms. Although this has led to the creation of jobs and an influx of direct investments, it has also been responsible for the widespread closure of local companies. It would therefore be useful for the evaluation to include an assessment of the results of the change in model. This should discuss the competitiveness of Latin America and the Caribbean as well as diversification and modernization achieved through state industrial policies that ceased to be active and became reactive. Reference should also be made to the capacity of the private sector of the developing countries to compete in international markets, to attract strategic allies who agree with the need to develop, or to generate employment and technological progress. The structure of the national and regional firms should also be analyzed in this context in order to determine how and in which sectors the small and medium-sized enterprises have benefited from the new industrial policies.

26. The evaluation should not be restricted to the internal aspects of industrial policies, but should also cover the analysis of the role of foreign direct investment and trade agreements on industrial development, linking internal instruments to external economic policies. It would not suffice to determine the competitiveness of the exports of one country or one region; it would also be necessary to gauge whether the exportable supply has been expanded and diversified as a result of the new development policies and foreign investments. Within each country, and within each productive sector, the design of future industrial (and agricultural) policies must be based on this kind of diagnosis, and a fair balance must be struck between state support and the private sector's responsibility.

27. The role of privatization should also be considered, since it has been a very important factor in the change of the economic model and in the attraction of foreign investments to Latin America and the Caribbean. It bears a direct relationship with the new industrial development, the employment situation, export competitiveness and the new productive structures being generated within the countries. One of the challenges the region now faces is the need to achieve successful and lasting results in the second phase of the privatization process. After the transferal of firms or activities to the private sector, the design and implementation of regulatory frameworks that respect competition and consumer interests gain high importance.⁶

28. It should also be stressed that the subject of competition is already on the consolidated agenda for economic policies of Latin America and the Caribbean. UNCTAD's contribution is widely known among government institutions in the region, and the academic centres have included the subject in their plans for research on public policy. There are still two areas that warrant further analysis and an exchange of experiences, however. Firstly, "international" competition issues, generated by trade liberalization and regional integration (which are directly related to trade protection measures like anti-dumping); secondly, the implications for competition and development that arise from the increasingly frequent mergers between transnational corporations, which aim at a growing oligopolistic concentration of the world economy. It is thus necessary to determine the implications of those processes for the developing countries and for intra-company trade. It can be asked to what extent one can speak of free competition in the presence of such huge imbalances as those that continue to exist between transnational corporations and the developing countries.⁷ Even more so, one must wonder whether these mergers would lead to intra- and inter-sectoral trade negotiations whose main participants are the transnational corporations rather than the States.

29. Just a few years after introducing the structural adjustments that made up the "first generation" reforms, Latin America and the Caribbean was headed for the "second generation" reforms", addressing the institutional infrastructure needed in order to sustain the new liberalization strategies. To different degrees and at different times, but following a widespread tendency in the region, government institutions appeared that are in charge of implementing new public policies or of improving those that existed only in the legal frameworks,. From the beginning of this decade, agencies emerged that work in the fields of privatization, competition, consumer protection and the environment, financial supervision, intellectual property, investment promotion, and trade defence. Moreover, in some of those fields not subject to multilateral agreements, general guidelines or standards of a universal nature are being worked on in an attempt to reconcile national legislations.⁸

30. The future development agenda will continue to improve these functions and the corresponding institutions; but one might well wonder if the institutional reforms have been sufficient and efficient enough as regards their consistency with the "first generation" structural reforms and development needs. For example, the assessment should not merely consider the "new" institutions derived from the international economic agenda, but also the "traditional" institutions, such as the ministries of trade, agriculture, health and education. It is necessary to see whether the latter become more efficient and whether it is possible to speak of successful institutional development in the different areas of public policy. In other words, it remains to be asked whether the countries of the region now have the right legal and institutional framework to continue to work towards their participation in globalization, and what are their needs with regards to financing, co-operation, training of human resource in policies and public institutions, which are determining factors for their development. All this would lead one to expect UNCTAD to contribute knowledge and novel points of view on these matters – regarding their fundamental aspects as well as the operating difficulties derived from the new institutions.

31. Neither the structural adjustments nor the institutional reforms have alleviated one of the major obstacles to development in Latin America and the Caribbean: the infrastructure deficit (access to drinking water, roads, telephone lines, electricity supply, etc.), which lowers living standards and the systemic competitiveness of economies. Here the subject is linked to the internal and external financing available in the region. Faced with the limitations of domestic savings (accentuated by an insufficient rate of growth, by low rates of productivity, by budget restrictions and by foreign debt service), the development of infrastructure depends largely on foreign investments and bilateral or multilateral financing. The persistent reduction in official development aid, and the tendency of multilateral financial institutions to stimulate the financing of infrastructure projects with private foreign capital, do not seem to support the pressing needs of the population and the companies of the region. It would be a good idea to identify the most important infrastructure deficits, considering the welfare of the most vulnerable populations, as well as those most necessary for business development, and to determine to what extent the internal and external, public and private financing that received by the region during this decade has contributed to reducing those deficits.

32. The commercial reforms undertaken at the end of the eighties have, in the majority of the Latin American and Caribbean countries, been rapid, profound and unilateral. The commitments under the Uruguay Round have, generally speaking, consolidated those national processes of trade liberalization. The trade policies of the next few years will continue to be governed by that multilateral framework. However, two kinds of margins of manoeuvre must be taken into account: firstly, the longer implementation schedules foreseen in the agreements of the Round for developing countries (which it would be wise to extend⁹); secondly, the reviews and new rounds of negotiation envisaged both in the "built-in agenda" and in the WTO's work programme, or in the agenda that is ultimately adopted for a possible "Millennium Round". There are already elements of information and analysis that facilitate an evaluation of the implications of the Uruguay Round agreements, regarding the participation of Latin America and the Caribbean in international trade, access to markets by their exports and, therefore, their development.¹⁰ These elements will also help to determine the position of the Latin American countries in the WTO and in the next trade negotiations.

33. Knowledge of the rights and duties of developing countries regarding multilateral trade standards, as well as the identification of costs and benefits, should be central to all UNCTAD's activities on this matter. The exchange of experiences in the area of trade policy between government officials and experts, the business sector, and regional organizations must be the starting point for new analyses and serve as a reference in order to identify the needs for training trade negotiators.¹¹ Within this context, efforts should build on the project that has already been begun by UNCTAD: identifying and designing mechanisms which operationalize the concept of preferential treatment as it is sanctioned in trade commitments.

34. The subregional integration schemes – MERCOSUR, Andean Community, Central American System, and CARICOM- represent a considerable political and economic investment for their members, as do the other free trade agreements and intra-regional preferential trade agreements. Much has been attained in furthering those schemes within the framework of "open regionalism". But the challenge in the medium term consists of progressing towards more complex stages of integration that go beyond the strictly commercial sphere and involve other areas of economic and social policy, such as the harmonization of macroeconomic policies, the establishment of common markets, social and cultural integration, and external policy co-ordination. All these integration efforts, independently of the strategic objectives of each scheme or agreement, increasingly depend on two areas: in the first place, on the multilateral commitments in force, or those derived from future negotiations, and secondly on the results of the FTAA negotiation process.

35. Within this context, the future evolution of intra-regional integration schemes depends on the speed and intensity of convergence achieved among the countries. To the same extent to which the FTAA will determine the indiscriminate trade and economic liberalization of its members, it will lead to the disappearance of existing trade liberalization agreements. It also represents the likely case that these subregional integration schemes do not achieve a degree of integration that allows them to preserve their economic identity and therefore their raison d'être. Consequently, the dilemmas of co-ordination and convergence characterize –and in the next few years will dominate– the formulation of the trade policies of Latin America and the Caribbean. Those dilemmas are neither technical nor legal: their solution is an integral part of the development strategies and determines the nature of participation in the globalization process.¹² The studies being conducted by UNCTAD on the multilateral trade system, as well as the support given for the preparation of negotiating positions, should take into account the implications of regional integration and foster knowledge of those implications in other regions and other international fora.

36. As of 1999, the subject of agricultural trade has become a priority linked both to the design of internal development policies and to the definition of positions in the WTO, in view of the new round of negotiations set to commence at the end of the year. Internal and external decisions of each country in the region should be based on diagnoses and prognoses of the agricultural sector that provide the means: (i) to determine, at the national level, the costs and benefits derived from the Uruguay Round's Agricultural Agreement, examining in particular the implications of the fact that such an important sector for the trade of the developing economies is not governed by the same disciplines as general trade in goods; (ii) to identify the points of negotiation on which the positions between exporting and importing developing countries may match best; (iii) to define the leeway for negotiation, considering the agricultural commitments that exist between members of subregional integration schemes, the commitments that may arise from FTAA, and the objectives to be reached in the new multilateral agricultural round.¹³

37. For reasons similar to those of agricultural trade, the subject of commodities should continue to occupy a central position in the development agenda of Latin America and the Caribbean, given that the structural dependency of the export revenue from those products has not varied in the last couple of decades. International prices, on the other hand, have varied – and negatively so - furthering the deterioration of the terms of trade for nearly all the countries in the region.¹⁴ In the formulation of trade policies and the positions to be taken at the WTO, considerations such as the following should be taken into account: (i) the subject of commodity exports seems to have vanished from the multilateral agenda, insinuating that the agreements of the Uruguay Round are response enough, whereas no analytical or political effort was spared to speed up the treatment of other topics such as electronic trade; (ii) in addition to the chronic tendency towards lower international prices, the Asian crisis has shown once more that, for the developing countries, commodity trading is one of the key elements of their external vulnerability, both in the case of products whose prices follow a persistent downward trend, and for those products that, within a downward trend, show a high degree price volatility (petroleum, for instance). In both cases, the impact of falling or unstable prices on the developing economies is analogous to the impact of volatile capital flows, and from a political and conceptual point of view this impact can be seen as an additional factor of vulnerability when it comes to talking about equity in the international economic system., The impact of the deterioration of commodity prices has a higher cost for the developing economies than for the industrialized countries, as in the case of capital flight.

38. The issue of trade in services appeared in the trade policies of Latin America and the Caribbean in the mid-eighties, since it was included in the Uruguay Round's agenda. Although the region has made considerable progress in acquiring knowledge about this subject and in defining domestic policies (particularly in the field of financial services and tourism), the majority of countries have just begun to identify their service exports, their most competitive activities, or those which require investments in technology and human resources. In other words, in the field of trade in services, globalization has moved faster than the capacity to diagnose the sector's role in the economies and to give it a place in internal and external development strategies. Therefore, the general provisions on the treatment of development, such as Article IV of the GATS of the Uruguay Round have not yet been implemented. Within the framework of UNCTAD, it will be up to Latin America and the Caribbean, together with other developing regions, to identify this sector's economic potential, to define the multilateral rules and co-operation modalities that would allow countries to take better advantage of the globalization process in trade in services.

39. The topic of "trade facilitation" has recently appeared on the trade agendas of both the WTO and the FTAA. Undoubtedly it is of interest both to the Latin American and Caribbean countries and to the industrialized countries. It is important that the topic be looked at from an "export facilitation" and not only an import point of view in the studies and activities of technical cooperation undertaken at UNCTAD, i.e. the development of the physical and institutional infrastructure necessary for exporters and importers should be the central objective. This means linking the topic to financing and training of human resources needed to support the trade operations of a developing country. UNCTAD might, for example, analyze and design multilateral loan projects that take this approach. It should be pointed out that trade facilitation is particularly necessary for Latin America and the Caribbean, in order to support regional integration, border trade and economic rapprochement between the Caribbean, South America and Central America.

40. In the short run, the formulation of commercial policies by the Caribbean countries that are members of the Lomé Convention will focus on the minimization of costs produced by the revision or eventual disappearance of this preferential trade agreement. In principle, several options have been put forward that should be evaluated in terms of the level of benefits, which could accrue from their participation in the global economy. One option would be to accept the EU proposal to enter into reciprocal free trade agreements with six groups of ACP countries which would substitute for the current ACP regime, which is based on non-reciprocal free access to the EU market.¹⁵ Another could be not to have a special trade agreement with the EU, but to move towards liberalization at a multilateral level, within the framework of the WTO. The third option would be to seek a greater rapprochement of the Caribbean countries with the hemisphere and design preferential treatments within the framework of the FTAA or in agreements with Latin American countries. UNCTAD, together with CARICOM, SELA and other regional and international organizations working on the issue, might analyze these options and support rapprochement of the ACP's Caribbean countries with the existing integration and co-operation schemes in Latin America.¹⁶

41. One of the most recent items on the multilateral trade agenda is electronic commerce, but to date the interest aroused does not meet the quantity and quality of the studies conducted on its impact on development. It is neither clear how this topic could be included in the framework of multilateral trade disciplines, nor what the legal guidelines for electronic trading in goods and services should be. In any event, there is plenty to investigate, starting with the infrastructural requirements, technical co-operation in preparation for any future negotiations and the training of human resources from both the private and public sectors.

42. Prior to the Uruguay Round, the use of trade defence policies (anti-dumping, countervailing duties and safeguards) were fairly uncommon in Latin America and the Caribbean, since tariffs and para-tariff measures were defence enough. As a result of trade liberalization, the region has become one of the major users of the standards agreed on at the Uruguay Round, particularly in the field of anti-dumping, above all in recent months, because of the increase in imports from countries that have devalued their currencies as a consequence of the Asian financial crisis. The region's products also continue to be affected by several defence actions, particularly by the United States, where the use of such measures has recently increased.

43. The subject of compatibility between these policies and international competition has appeared at the negotiating table again and needs to be closely examined: in the first place within the context of intra-Latin American customs unions, as it has been proposed that their members refrain from the application of those measures, and adopt common defence standards vis-à-vis third parties; in the second place, within the context the FTAA, where one of the objectives of the Latin American and Caribbean countries should be to obtain more protection for its exports given the United States' trade defence legislation; and in the third place, within the framework of the WTO where this subject should be considered alongside the subject of competition standards and policies. The question is technically and politically relevant, regarding both the preparation of negotiating positions at regional, hemispheric and multilateral fora, and the exchange of experiences among institutions in charge of implementing trade defence mechanisms.

44. As far as the general trend in trade policies is concerned, it is important to point out that those forecasts predicting protectionist measures in the region have not been fulfilled, despite of the increase in Asian and Russian imports in 1998, the growth of trade deficits, and the recession sparked off last year by the impact of the financial crises. In 1998 and at the beginning of 1999, there has only been a slight increase in anti-dumping measures. However, these were isolated instances and did not signify a reversal of the route towards freer trade that is being taken, and there was only one case of a safeguard being applied. By contrast, the concern about protectionist tendencies in the U.S. has increased, given the debates in the U.S. Congress since 1988 and the increase in anti-dumping claims brought by that country since that same year. The impact of the financial crisis on the trading policies of the developing and industrialized countries should be analyzed by UNCTAD, expanding the study presented in the 1988 Report on Trade and Development.

45. One of the achievements of the Uruguay Round has been to provide the WTO with a Dispute Settlement Mechanism that has been designed to guarantee the fair application of multilateral standards by all its members, replacing negotiated settlements, based on economic and political power, as was the case under the GATT regime. The credibility and legitimacy of the WTO largely depends on the effective operation of these "quasi-judicial" mechanism and not only on the multilateral agreements reached. Over the past two years, disputes between the United States and the European Union have put the efficacy of that mechanism to the test and have introduced a new type of trade conflict into the multilateral forum which is relevant to the interests of all the member countries and to the role of the WTO in the trade system. Despite the success attained, the mechanisms seem to need more political weight and improved legal procedures: the members most interested in it are the developing countries.

46. The banana dispute had some "traditional" characteristics, but there were also new elements derived from the rules laid down in the Uruguay Round. In effect, the subject under dispute is situated in the traditional area of access to markets (in this case the European Union's), hampered by non-tariff barriers (the quotas granted to the ACP) which countries considered as incompatible with free trade principles. The transnational corporations that dispute over their share in the international banana market play a predominant role in the controversy, although indirectly through the two parties in conflict (the U.S. and the E.U.) – as happened in the frequent trade disputes that arose under GATT. The use of the WTO's dispute settlement mechanism is novel and promotes transparent settlements, but is not devoid of shortcomings: in the first place, the final ruling was questioned on three occasions by the European Union, thereby harming the credibility of this type of mechanism. In the second place, there was a clear decision to apply sanctions, but the mechanism was not capable of defining them precisely, allowing the affected party a margin of manoeuvre.¹⁷ Lastly, from the point of view of the principles being disputed, the substance of the controversy refers both to access to the market and to the special and preferential treatment in favour of the ACP countries. It is significant to note that this last aspect, which is of interest to the developing countries, did not play an important role in the solution of the problem.

47. The dispute about hormone treated beef between the United States and the European Union is typical of the increasingly frequent trade conflicts. Here the central topic is consumer health protection and the use of biotechnology– a subject with social and ethical implications that go beyond what only until recently only belonged to the field of plant health standards. As in other "new topics" in the field of trade, it is a question of considering certain domestic standards as trade barriers, in this case, those relative to the condition of meat. What is at stake now is not the protection of a national industry, but the protection of standards that represent social values.¹⁸ The solution to this new type of conflict cannot be the same as for disputes over tariff barriers, where the negotiation of a lower tariff, or some compensation in another sector, might be sufficient. In addition to this, the players in these new disputes are not just the States and the firms they represent, but consumer organizations or environmental groups whose political role might be more important than that of firms. In the dispute about beef, the WTO's dispute settlement mechanism does neither carry sufficient political weight nor does it have the legal base necessary to prevent the dispute, which began ten years ago, from spreading and from being fought with economic and political instruments by the two superpowers of the trade system. The subject of beef is only one example of potential conflicts about "genetically modified" cereals and vegetables, or about the use of fertilizers, insecticides and chemicals in foods or even in textiles, so that not only high tech products from industrialized countries are concerned. It is hard to define to what extent there may be multilateral standards that sanction national criteria and values and where the line should be drawn between free trade and the right to set internal standards and policies.

48. The same questions are applicable to the treatment of environmental and labour standards. The topic of trade and environmental protection, introduced in the WTO following the Uruguay Round, has not led to a multilateral code of conduct that might prevent future pressure within and between the States conducting trade negotiations. Something similar has occurred as regards the treatment of the link between trade and labor standards within the framework of the ILO. In effect, both Congress and the U.S. Executive¹⁹ have spoken out in favour of negotiations that include these topics; in Congress, those who make the fast track authorization conditional upon the definition of clear negotiation objectives in both topics are gaining fresh impetus. It is important for Latin America and the Caribbean to prepare solid technical and political arguments on the matter, applicable in a coherent manner both to the WTO forum and to the FTAA.

49. The definition of priorities for trade policies in developing countries not only depends on identifying each country's comparative and competitive advantages, or on commitments reached through regional or multilateral instruments. It also depends –sometimes immediately and inevitably– on the trade agenda defined by the industrialized countries, which largely pursue their interests at negotiating fora like the WTO. It is probable that in the "new trade topics" already dealt with or to be dealt with in the near future in the WTO, the Latin American and Caribbean countries will have many interests at stake and important specific objectives (for instance in the sphere of trade and the environment, government purchasing, competition, investment). But whatever the national interest and order of priorities, Latin America and the Caribbean should place emphasis on the treatment of development issues in each topic and the co-ordination of trade policies with development financing policies. An organization like UNCTAD, together with regional organizations like SELA, ECLAC and ALADI, has a favorable position to take initiatives on these issues.

50. In the early nineties, when the countries of Latin America and the Caribbean regained access to international capital markets and opened their foreign investment regimes and financial systems, their economic strategies gave priority to the attraction of foreign capital. The financing of development increasingly relies on external resources (including multilateral loans) and yet domestic savings have not increased at a similar rate.²⁰ The region learned many lessons from its own experiences as well as from the Asian crisis. First of all, the region learned that the inflow of foreign capital stimulates domestic economic activity and complements domestic investment. There are two risks involved, however: non-productive consumption and the rising value of assets, bearing no direct relationship with the increase in domestic savings.²¹ The other possible deviation is capital flight. In this sense, ECLAC has indicated the need to learn to manage "bonanzas". More specifically, countries need to learn how to manage inflows of foreign capital, much the same way one learns to handle the crises set off by sudden outflows of capital.²²

51. The second lesson, still in full discussion and for which no consensus is yet visible on behalf of the region, concerns the turbulence and imbalances generated by short-term capital, and the possibility of eventually controlling these flows. In addition to papers prepared by international financial institutions, UNCTAD could contribute additional elements to the debate from its own perspective, using as its bases some of the countries practical experiences. UNCTAD could also analyze the advantages and disadvantages of measures such as mandatory cash reserves,²³ or dissuasive taxes such as the one proposed by Nobel Prize winner, James Tobin which is applicable to all transactions involving currency conversions and which has been mentioned recently but studied only little in terms of its viability.²⁴ In general, analyses of controls on short-term capital flows do not deal with the aspect of its compatibility with the globalization process. On the one hand, there is a need to avoid destabilizing and contagious "capital flight" but there is no desire to place restrictions to international capital flows. On the other hand, increased monitoring by international financial institutions is required but no country (particularly in the industrialized world) is willing to delegate its sovereignty over the area of monetary policy to a multilateral body.²⁵ Lastly, the main operators of short-term flows are private institutions that are generally organized transnationally, and have their own performance criteria, visions, and interests that are beyond the reach of the decisions made by governmental international organizations. The implementation of any control over "volatile" capital will depend on the resolution of these contradictions.

52. The third lesson learned refers to the pace at which the capital account is opened in developing countries.²⁶ Seemingly, it is not yet fully understood how globalization affects the operation of national financial systems when the opening up process is too fast. Similarly, the sequence of the measures adopted is important and there is no "manual" available, providing instructions to follow in this respect. These instructions would need to treat issues such as criteria, the sequence of steps and additional safety measures that smaller economies should take in order to reduce the risk of an increased openness.²⁷ In this case, "financial safeguards" could be considered, similar to those applied for trade in goods, in the event of a sudden rise in imports.²⁸ In general, criteria and conditions should be studied to reconcile the attraction of foreign capital with the need to avoid speculative capital.

53. The fourth lesson concerns the allocation of responsibilities regarding international capital flows: private investors and recipients should assume the risk of an eventual massive capital flight. Thus, the cost of "bailouts" would not automatically be covered by State or multilateral resources. The assumption that the State or the international financial community will come to the rescue when bank institutions or enterprises are in difficulties ("moral hazard") can imply very high costs for the population of the affected states.²⁹ Another point that could be treated, along these same lines, would be to determine whether these bailouts should distinguish between national and foreign enterprises and banks. For example, when it comes time to distributing the emergency aid, is it fair to grant national treatment to a transnational financial enterprise affected by a crisis such as the one in Asia?³⁰ What is needed here is to find a point of equilibrium (similar to that mentioned in the previous item) between the need to attract foreign capital and the risk that the banking or business sectors of a developing country can assume; in other words, finding the balance between successfully attracting capital and excessive indebtedness. This is an issue that UNCTAD could treat in the framework for analysis and proposals for the "new international financial architecture."

54. Within the framework of development financing through private international resources, a new actor has emerged which at times has a more effective decision-making power than governments and international financial institutions: risk classification agencies. As is widely known, these extrapolate the evaluation methods used for businesses and apply them to the behavior of economies and their future perspectives. there is only a limited number of analyses of their impact on capital flows to and from developing countries.³¹ Even scarcer are ideas of how to avoid that these agencies play such an important role not only in respect to capital flows, but also in respect to flows of information on the situation of countries, which determine short and long-term investment decisions. In this regard, there is a need to study the implications stemming from the fact that multilateral financial institutions no longer have a "monopoly" over the evaluations of economic policies in developing countries. Along these lines, it would also be advisable to examine the operations and the impact of the mechanisms for transparency and information dissemination put in place by financial institutions such as the IMF and the World Bank. These should, in principle, provide access to accurate information from official sources to economic agents.

55. Another experience that has been drawn from the course of the recent crises is the observation that in the event of financial turbulence, international capital markets perceive all emerging economies as being the same. Moreover, risk perception is passed on from short-term to long-term capital, thus affecting the direct investments already made or planned by foreign companies, even in geographically distant countries or in those whose macroeconomic situation had exhibited the "right" parameters. This is the "unfair punishment" mentioned by the Managing Director of the IMF when he commented on the effects of the Asian crisis on the access to capital markets by Latin American and Caribbean countries’. As in the case of the preceding item, this should also be considered in the framework for analyses of the functioning of the international financial and monetary system. This would allow to determine the possibility of preventing these indiscriminate perceptions from occurring and of counteracting them effectively in the context of free circulation of information.³² It has to be asked whether or not policies to promote investments enacted by the region’s countries has been successful in correcting the "risk" image that had spread throughout the capital markets as a result of the Asian crisis. At the same time, it should be determined whether competition to attract foreign investment has been sufficiently assessed.

56. In the mid-nineties, Latin America and the Caribbean was able to change the proportion of short- and long-term capital in favor of a greater percentage of foreign direct investment. While this new tendency has undoubtedly been beneficial for the region, a debate on the quality of foreign direct investment, should be initiated. UNCTAD has made significant progress in analyzing the behavioral pattern of foreign direct investments in developing countries and in evaluating policies to attract and promote investments. Now UNCTAD should devote itself to formulating criteria to determine how this capital can contribute to the development process: technology transfer, infrastructure, broadening of the productive capital stock, employment generation, export and market diversification, accordance with national development plans. A similar evaluation could be pursued regarding multilateral loans or bilateral development aid: to what extent have external resources been used to address the priorities defined by recipient countries, and to what extent have they satisfied the agenda of donor countries during the past decade?³³

57. Negotiations of international investment agreements are tied to the concern over foreign investment quality. They tend to regulate national regimes on the basis of international guidelines. In the case of the project advanced by the OECD, efforts are aimed at ensuring that the interests of the more developed countries are given priority over those of the developing countries. At least in the case of Latin America and the Caribbean, it should be borne in mind that upcoming negotiations will not involve a hypothetical multilateral agreement; they will revolve around bilateral agreements which in many cases already exist or are already being negotiated, and around the possibility of a hemispheric agreement in the framework of the FTAA which is already well advanced. An additional aspect is the recent increase in intraregional capital flows which has been stimulated by the developments in the integration schemes and the agreements for co-operation and free trade among Latin American and Caribbean countries. As these developments advance at a faster rate than the multilateral debate and provide precedents, they also play an important role in determining the position of the region’s countries vis-à-vis a number of issues treated by the WTO. These include: the links between trade and investments, the TRIMS agreement, the future of the WTO Working Group on investment, the implementation of GATS and sectoral agreements such as those on financial services and the delicate issue of performance requisites, which also needs to be looked at in the context of active development policies. The training of negotiators to represent the developing countries needs to encompass foreign investment negotiations as an area in itself, not as a minor point linked to trade issues. From a development perspective, the quality of investment attracted and the efficiency of policies to promote investments will depend largely on the negotiation of agreements adapted to the actual needs of the recipient country.

58. The economic situation in Latin America and the Caribbean has undergone such considerable changes that the parameters that applied to the analysis of the foreign debt during the eighties are no longer valid. Despite the facts that both the debt structure and its impact on national economies have changed, that some important restructuring has taken place, and that the topic does not seem to have the same urgency for foreign economic policies as before, the weight and importance of the debt for the region's economies has not diminished.³⁴ It is important that UNCTAD, together with ECLAC, includes the analysis of the implications of the region's foreign debt in its activities that are related to the financing of development. Likewise, UNCTAD could analyze to what extent the debt service, the debt structure which is primarily based on bonds³⁵, and the conditionalities derived from schemes such as the Brady Plan and the IMF loans affect the region's capacity to formulate its own development strategies. The "new debt", above all contracted with multilateral finance institutions, should be considered within this same context, taking into account the significant disparities between the region’s countries in this matter.

59. To date, only 8 of the 41 countries eligible for official foreign debt reduction under the World Bank's "HIPC initiative" (for highly indebted poor countries) have benefited from its restructuring terms. It would be important to find restructuring formulae applicable to the medium income countries that account for the bulk of the region's foreign debt. These could include mechanisms inspired by this initiative but relative to the private external debt, as well as the expansion of the terms of Naples and Lyon for the debt with the Club of París.³⁶ Likewise, the role played by the international financial institutions in the eighties for the process of restructuring the region's foreign debt must be analyzed and compared with the present circumstances.

60. The scheme forged at Bretton Woods in 1944 to govern the post-war international economic system comprises three converging areas: the monetary, entrusted to the IMF, the financial, in the hands of the World Bank, and trade, envisaged to be overseen by the International Trade Organization, but actually managed through the provisional scheme of GATT. This scheme proposed an interdisciplinary "architecture" that went far beyond strictly financial matters. However different, the lesson learned from the crises of the 30s is the same as the one we can learn from the systemic crises of our day: dealing with interdependence effectively cannot be achieved through sectoral policies and institutions, as if reality was dividable into separate parts. One of the Ministerial Declarations of Marrakech makes reference to the need for coordination between the WTO, the IMF and the World Bank.³⁷ It would be advisable to study the implementation of this coordination, given the international economic system’s current behavior and the review of the relevance of interdisciplinary concepts as envisaged by the Bretton Woods agreement. It should also include the development dimension and the role that would be assigned to UNCTAD. Along the same lines, the performance of the institutions established under the Bretton Woods agreements also need to be reconsidered; these institutions were devised for a system in which the State was the main actor and where globalization did not have the same characteristics as today. Further, they were designed to tackle national problems that could bear an impact on economic relations with other countries, but not to contend with a systemic crisis with repercussions in a large number of national economies, particularly developing economies.³⁸

61. Hence, an analysis of linkages between monetary, financial, and trade spheres of the globalization process is needed as regards international institutions and policies. First and foremost, transmission mechanisms linking the three spheres should be studied from the viewpoint of their impact on development. From this analysis, conclusions applicable to the corresponding institutional mechanisms can be drawn. Although this analysis would be more important, it would not replace a revision of the individual operations of multilateral financial institutions.

62. The Mexican, Asian, Russian and Brazilian crises have opened the path for numerous changes in policies and operating modalities of the IMF and World Bank. These profound and significant propositions certainly go beyond those suggested in the numerous reports that were prepared for the 50^th Anniversary of Bretton Woods in 1994. Financial aid operations have surpassed the level of even the most important loans granted in previous years. Conditionalities are also being reconsidered: in the case of Indonesia, for example, the IMF accepted a fiscal deficit of 8.5% of GDP and assigned resources to social programmes to counteract the impact of the crisis.³⁹ The World Bank has openly criticized several IMF assistance packages. Until recently, decisions such as the moratorium on debt payments by Russia would have meant not having access to new multilateral loans. In the present situation, on the other hand, the IMF granted new financing to Russia, as observed in March 1999. The new line of contingency credit established by the IMF forms part these operative and conceptual changes. It remains to be seen, however, whether this new tool capable of responding to crises similar to those of Asia.⁴⁰ We are witnessing the move towards a greater flexibility in the policy of financial institutions and in their criteria, and a questioning of models that not long ago seemed rigid and unalterable. The overall development perspective provided by UNCTAD is particularly opportune in this context.

63. Further, UNCTAD could also actively support the treatment of the issue of a new architecture that contains the political elements necessary to ensure its viability: the debate cannot exclusively be carried out in the sphere of the IMF and World Bank, whose decision-making fora depend to a large extent on the Group of Seven and where developing countries, acting as borrowers, have no freedom of expression. The possibility of a Conference or "high level forum", convened by the General Assembly of the United Nations to treat the matter of Development Financing in the year 2001 and following up the work of the Second Commission, would be of great political significance. In the present circumstances, it is difficult to conceive a new architecture of the international economic system that is both politically sustainable and credible without first having met "governance" criteria such as participation, equity and transparency of decisions.

64. UNCTAD has the capacity to contribute conceptual and practical elements related to the need for a "positive agenda" to the debate on the operability of both international finance and trade institutions. The technical support it provides to the Group of 24 is particularly relevant in this respect. Based on its analytical work and exchanges of experiences, UNCTAD can underscore the limitations of "universally applied" models that do not distinguish between national and regional models. Likewise, UNCTAD can also strive for monitoring mechanisms that are not exclusively addressed to developing countries but also towards policies of industrialized countries that can bear a negative impact on the functioning of the global system.

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