United Nations A/AC.253/25

General Assembly Distr.: General22 March 2000

Original: English

00-35468 (E) 280300`````````

Preparatory Committee for the special session of theGeneral Assembly entitled “World Summit for SocialDevelopment and beyond: achieving social developmentfor all in a globalizing world”Second session3-14 April 2000Item 2 of the provisional agenda*Preparations for the special session of the General Assembly entitled“World Summit for Social Development and beyond: achieving socialdevelopment for all in a globalizing world”

Impact of globalization on social development

Report of the Secretary-General

ContentsParagraphs Page

I. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 2

II. Main features and experiences of globalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2–11 2

III. Trade and production . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12–26 3

A. Agriculture. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21–23 5

B. Patents and intellectual property rights in the social sector . . . . . . . . . . . . . . . . 24–26 6

IV. Information technology. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27–33 6

V. Financial markets, capital flows and mergers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34–45 7

VI. Macroeconomic policy management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46–50 10

VII. Concluding observations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51–64 10

* A/AC.253/12.

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I. Introduction

1. The Preparatory Committee for the specialsession of the General Assembly entitled “WorldSummit for Social Development and beyond: achievingsocial development for all in a globalizing world”, atits first session, requested the Secretary-General toreport to it at its second session on the impact ofglobalization on social development.1 The presentreport has been prepared in response to that request. Ittraces the main features and the experiences ofglobalization for broad categories of countries andsociety, highlights salient features of its impact onsocial development as a result of developments intrade, technology and finance, and concludes withsome observations aimed at a closer integration ofeconomic and social objectives in a global marketeconomy.

II. Main features and experiences ofglobalization

2. Globalization has closely intertwined economic,political, cultural and institutional dimensions whosesocial impact is often not easy to disentangle.Notwithstanding the breadth and complexity of theprocess, its principal elements are well known.Technological advancements, especially in the field ofinformation and communication technologies, have hadthe effect of connecting and bringing the world closertogether in time and space, making possible new waysof doing business and profoundly altering socialinteractions. The proportion of trade in goods andservices relative to national income and consumptionhas expanded, and now includes trade in such servicesas banking, telecommunications and even educationand culture. Domestic deregulation and liberalizationof external capital controls have propelled a vastincrease in the volume and speed of capital flows of alltypes, ranging from foreign direct investment (FDI) toshort-term banking flows, worldwide. Competition hascatalysed a reorganization of production networks, anda wave of mergers and acquisitions have fostered therestructuring of corporations on a global scale, givingthem unprecedented size and power. At the same time,venture capital-financed “start ups” are burgeoning in“high tech” sectors in several developed as well assome developing countries. New mass media, such assatellite television and the Internet, have contributed to

globalization and the spread of a culture ofconsumerism.

3. Some of these processes are driven by the logicof new technologies or market forces which aredifficult to control, while others may be more amenableto management. Policy decisions oriented towardsliberalization, deregulation and privatization have beenat least as important as market forces and technology inthe spread of globalization in both its positive andnegative aspects.

4. As a result of greater access to markets, newtechnologies and new ways of doing business, manyaspects of globalization have stimulated growth andprosperity and expanded possibilities for millions ofpeople all over the world. At the same time, it has beenaccompanied by anxiety about its disruptive effects anda sense that the opportunities provided by the processof globalization have not been accessible to many. Ithas enhanced choices for some people but diminishedprospects for others and reinforced inequalities withinand across nations. Perceptions of globalization dependa great deal on the ability of people to take advantageof the opportunities offered by it. Typically, it is mostpositive for people with adequate education and accessto financial resources.

5. For various reasons, the liberalization of tradeand capital flows has been a dominating theme in theeconomic policies pursued by developing countries andcountries with economies in transition during the last10 to 20 years. As a result, nearly all countries at alllevels of development have taken steps to remove orweaken policy instruments that direct and controlcross-border transactions. They have also given marketmechanisms greater scope internally and reshaped orrestructured institutional frameworks, including labourand financial markets and taxation systems, to enablethe freer play of market forces.

6. The actual experience of globalization has, to agreat degree, varied with the level of development atwhich a country has engaged with it. Some developingcountries and countries with economies in transitionhave been well positioned to take advantage of the newopportunities for trade and investment, and building ondomestic savings, foreign investment and capitalinflows, technology transfers, human resourcedevelopment and export orientation, have achievedrapid economic growth.

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7. Others, particularly the least developed countries,have not been able to achieve the same levels offoreign investment or access to world markets,primarily due to an inadequate economic and socialinfrastructure. Not only have they been unable to graspthe opportunities offered by globalization but they havealso had to cope with its impacts, particularly thevolatility of international commodity prices, thereduction of effective preferential treatment for theirexports owing to falling overall tariffs and the declineof official development assistance (ODA).

8. The degree and nature of participation ofdifferent categories of countries in global marketsvaries substantially. For most developing countries,trade in a limited number of goods and servicesconstitute the major form of international economicactivity. For others, private capital inflows supplementtheir foreign exchange earnings, either through FDI orthrough portfolio investment. In only a few developingcountries, mostly in Asia and Latin America, havedomestic companies joined the integrated networks oftransnational corporations and, in some cases, forgedstrategic alliances to exploit dynamic trade andinvestment inter-linkages. Most developing countries,particularly the least developed countries and most ofAfrica, remain outsiders to that process.

9. A study conducted on behalf of the Department ofEconomic and Social Affairs on the experience of ninecountries (Argentina, Colombia, Cuba, India, theRepublic of Korea, Mexico, the Russian Federation,Turkey and Zimbabwe) as a result of liberalization oftrade and capital raises several concerns about itssocial impact.2 In general, liberalization has led togreater inequality of primary incomes. In all but onecase, household per capita income growth was negativeor just above zero. While the participation rate or shareof the economically active population increased, theemployment situation in most countries wascharacterized by reduced wages, underemployment,informalization of labour and adverse impact onunskilled labour, particularly in the manufacturingsector. Virtually without exception, wage differentialsbetween skilled and unskilled workers rose withliberalization. Most countries experienced an erosionof the tax base and a fiscal squeeze, which wasreflected in static or reduced social spending. In somecases, social services were privatized or there wasincreased recourse to user fees. Fiscal andadministrative limitations made it difficult to put in

place countervailing social policies. In terms of theenabling economic environment, though most countriesachieved moderate growth rates, at least three faredpoorly. Capital flows increased substantially, in somecases prior to crises. While exports did tend to rise withliberalization, the export stimulus for growth wasweaker than expected partly because of an increase inimports.

10. Although globalization raises particular concernfor developing countries, apprehensions regarding itabound and have been vocally expressed even indeveloped countries. Concerns in the industrial worldrevolve around employment insecurity as firms respondto competitive pressures and technologicaladvancements, which are to some extent also reflectedin the frequent restructuring of firms and corporations.The growing power and global reach of mega-corporations has also raised questions regardingeconomic governance in a global economy.

11. The experience of countries with economies intransition has been mixed. In general, when thesecountries began their transition, they faced an abruptdeterioration of their previously elaborate socialsupport systems, as well as the handicap of competingin a more open global economy with incomplete andunderdeveloped market institutions. Some countries inCentral and Eastern Europe have traversed thetransition more rapidly spurred by prospects ofintegration to the European Union. In others, socialdisruption, sudden poverty and vulnerability toeconomic change along with the dissolution of barriersto trade and capital mobility have led the developmentof a parallel shadow economy and a criminalunderworld of transnational proportions.

III. Trade and production

12. The changes in level, structure and geographicalpattern of world trade are among the central elementsin globalization. From the perspective of the WorldSummit for Social Development, three aspects of therelationship between liberalized trade and socialdevelopment are particularly notable. The first is howtrade liberalization has applied to products of exportpotential of developed and developing countries. Thesecond is its impact on poorer countries in terms ofgrowth, poverty and income inequality. The third is itsrelationship with other aspects of globalization and itseffect on society.

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13. Though there has been a steady dismantling oftariffs and trade barriers over the past 50 years, crucialsectors of the markets of developed countries remainhighly protected against products of export potential ofthe developing countries.3 Trade liberalization has beenlimited or partial, not only with respect to lowtechnology products with export potential todeveloping countries, such as agricultural products,textiles, clothing, leather and footwear, but also withrespect to some capital-intensive and higher technologyproducts. There has also been a surge in anti-dumpingduties on imports, typically industrial or manufacturedgoods. Such duties are rarely lifted. Developed countrysubsidies in the farm sector, but also in industry, workagainst developing countries.

14. Such limitations in trade access, as in agriculture,make the economic environment for socialdevelopment less enabling by restricting exportopportunities and earnings, hampering diversificationand industrialization in developing countries, andaggravating structural imbalances in trade capabilitiesbetween developed and developing countries as awhole. Fewer countries have been experiencing anannual growth rate or 3 per cent or more since 1996,while many more experienced a decline in grossdomestic product (GDP).4

15. As a result of multinational production networks,mobility of capital, freer trade and new technologies,labour has become more susceptible to global forcesthan ever. Competition for foreign investment and thegreater ability of employers to shift production to otherlocations has weakened labour’s bargaining ability. Thespread of manufacturing for export to more and morecountries provides important employment opportunitiesfor low-income workers, but it has also resulted inrising internal inequality due to unequal distribution ofthe skills and infrastructure needed to participate in theeconomy, the high demand for skilled labour coupledwith excess supply of low-skilled labour, andsubstantial profit income. Many of the new jobopportunities have been low paying and characterizedby poor social protection.

16. These developments pose a peculiar dilemma fordeveloping countries. On the one hand, they needforeign investments for employment growth,productivity enhancement, export networks and higherrate of economic growth. On the other, participation inthe global economy under conditions of liberalizedtrade and capital flows and global competition often

leads to downward pressures on wages, workingconditions, collective bargaining ability and taxation,as investors and companies seek the best economicterms to maximize their advantages in the market. Thenet impact depends on the balance between theexpansion of opportunities for employment that tradeexpansion can offer and the effects of competitivepressures.

17. The large and potentially mobile supply ofunskilled labour in developing countries and thedemand for such labour in many industrial countrieswould seem to point to a convergence of supply anddemand that could benefit both if internationalmovement of labour were as free as capital movements.But concerns about the social and political implicationsof large immigrant populations remain a source ofconcern and thus of strict limits on migration. Demandsof labour mobility accompanying the growth of themarket economy in some developing countries havecreated a transient internal population, with low andinsecure wages and poor access to housing, medicalcare and schooling for their children.

18. New technologies and greater pressure frominternational competition have also had implicationsfor the nature and organization of work in the moderneconomy. The greater mobility of capital as a factor ofproduction have undermined job security and collectivebargaining. Together with other changes in labourrelations, trade union activity is now concentrated in afew relatively entrenched industries. The growth ofservice and knowledge-based industries has contributedto a premium on mobility, flexibility and multi-functionality. Considerations of flexibility andcompetition have also resulted in greater resort tosubcontracting, outsourcing and informalization ofwork. But it also shifts many of the costs of marketvolatility to workers, making them more vulnerable torecessions and threatening their job and incomesecurity.

19. Many of these trends impact on women inspecific ways. The 1999 World Survey on the Role ofWomen in Development5 presents a complex picture ofthe gender impact of globalization. On the one hand, itis associated with an increase in the female share ofemployment, mainly in export-oriented manufacturingindustries, reflecting a movement of female labourfrom the unpaid household and subsistence(agriculture) sector, to the paid economy. On the otherhand, the impact of the greater “flexibilization” of

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labour, primarily as a business response to changingmarket conditions, has varied in different countries,depending on their levels of development, socio-economic structure and particular form of integrationwithin the world economy. While it has helped in theentry of women into the paid labour market in someregions, at the lower end, it has also often beenaccompanied by insecurity of employment, lowerwages and poorer labour protection. Poorer women inboth developed and developing countries areparticularly vulnerable to economic downturns andeconomic and financial crises. In most regions of theworld, women’s primary responsibility for householdlabour and child care has shown little sign ofdiminishing with their increased participation in paidwork. Besides being among the first to be affected,much of the burden of informal social support providedby the family as the welfare provider of last resort fallson women. Social policy constraints stemming fromglobalization also seem to place women at adisadvantage.

20. In industrialized countries there has been agrowth in employee ownership of stocks along with a“democratization” of stock markets, which has had asignificant impact on earnings of workers and labour-management relations. More and more workers in thedeveloped countries are acquiring shares in thecompanies in which they work and participating infinancial markets through pension and other funds. Inthe United States today, more private-sector employeesown stocks than are union members. Stock ownershiphas also given employees a role in corporate decision-making. Participation in decision-making and stockownership has led to a blurring of lines betweenemployees and employers, workers and investors, wageearners and owners and managers of capital. It hasestablished a greater commonality of interest betweenemployees, corporations and investors as employeessee their interests in the profits of the corporationswhose shares they own and the funds in which theyhave invested.

A. Agriculture

21. Current trends and patterns in agriculturalproduction and trade in agricultural products impact oneconomic and social development in various ways.First, excessively high tariff peaks continue to apply toproducts that constitute exports of or offer a potential

for export diversification in developing countries. Inaddition to tariff and non-tariff barriers that hinderaccess to markets of developed countries, agriculturalsubsidies by developed countries, whether in the formof direct export subsidies, processing subsidies ordirect payments to farmers, also deter entry into theirown or third country markets. Total annual levels ofsupport for agriculture in the Organisation of EconomicCooperation and Development (OECD) countriesaveraged $350 billion in 1996-1998, double the valueof agricultural exports from developing countriesduring those three years.6 Ironically, despite it beingthe primary source of income and employment,particularly for low-income groups, agriculture inAfrica is currently one of the most liberal and subsidyfree in the world.

22. Efforts to dismantle subsidies in OECD have ledto deep cuts in farm subsidies in some countries, whileresistance to such cuts in others have created tensionsin trade negotiations involving agricultural products.But cuts in subsidies for agriculture in developedcountries have been accompanied by a phenomenalgrowth of corporate-driven, industrial agriculture thatis having a profound effect on land ownership,agricultural production and employment, family farmsand rural life and society as a whole. In parts of theworld where women account for much of the foodproduction, such as Africa, it also has an impact onwomen’s livelihoods. Concern regarding the social andenvironmental impact of industrial agriculture has beencompounded by the domination, as a result of mergers,of certain industries, such as the seeds, meat and grainhandling industries, by large global corporations alongwith their marketing apparatus. Genetically modifiedfoods being developed, patented and promoted by somecorporations have raised fears of food safety.

23. Liberalized trade in agriculture should thereforedistinguish and strike a fair balance between the needto promote trade access to developing countries in theagricultural sector, provide some measure of protectionto farming communities worldwide, and tap thescientific and marketing potential of corporateagriculture. A single, uniform and universal regime islikely to benefit corporate industrial agriculture basedin the developed world at the expense of ruralemployment and development, poverty eradication andgrowth in developing countries and rural farmingcommunities everywhere. These concerns need to be

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considered together with issues of food security andproductivity, culture and environment.

B. Patents and intellectual propertyrights in the social sector

24. The relationship between trade and the existingpatents regime has also resulted in the benefits ofadvances in such spheres as health and agriculture,being skewed in favour of the corporate sector at theexpense of the public, with especially adverseconsequences for people in developing countries. Thebasic rationale for an intellectual property rightsregime in the sphere of health and agriculture is toprovide an incentive for and protection of investmentsin research and development.

25. But there is a strong case that the current systemoveremphasizes incentives and protection for theentrepreneur at the expense of the public. In the sphereof health products, the logic of the market leads toinvestments in those medical conditions for whichthere is a market among the more affluent, primarily indeveloped countries. As a result, an overwhelmingproportion of investments and patents in the healthindustry ignore life-threatening diseases that afflict themajority of people in the developing world. Accordingto a recent World Health Organization (WHO) report,less than 10 per cent of the current estimatedexpenditure on medical research has gone into diseasesthat affected 90 per cent of the world’s population. Arecent study concluded that of the 1,223 new drugspatented between 1975 and 1997, only 13 were fortropical diseases and only four of those could beregarded as new drugs suitable for humans.7 Andwhere treatments are available, such as for humanimmunodeficiency virus/acquired immunodeficiencysyndrome (HIV/AIDS), they are too expensive to beafforded by those, increasingly women in Africa andparts of Asia, most affected by it.

26. In the case of improvements on existing products,especially traditional products, goods that were once inthe public domain and easily accessible, ranging fromseeds and traditional medicine to knowledge andculture, are being appropriated privately as a result ofthe patents regime. The rules that prevail protect thecorporate innovator at the expense of traditionalproducers and users. There is also a case to establish amore balanced property rights regime that wouldprotect and reward traditional knowledge by requiring

companies that make use of such knowledge to payroyalties on their profits.

IV. Information technology

27. The imbalance between the promise and reality ofglobalization is perhaps nowhere more striking than inthe unequal distribution, among nations and classes, ofdigital resources — hardware, software,communications bandwith. For example, South Asia,which accounts for 23 per cent of the world’spopulation, has less than 1 per cent of the world’sInternet users.8 Africa has seven Internet connectionsfor every 1 million people. While Internet accessrequires a working telephone line, 40 per cent ofpeople living in developing countries do not haveaccess to a telephone line. In Bangladesh, there arefewer than three telephone lines for every 1,000people. In Afghanistan, the ratio is less than one in1,000.

28. In contrast, nearly half the global on-linepopulation resides in the United States. Forty per centof Americans have Internet access at home or at work.The level of Internet usage in Germany and the UnitedKingdom is still about 20 per cent but is increasingrapidly. United States companies have been quickest toexploit the potential of the Internet for business. Manyof the largest are United States-based. By one estimate,United States corporations collect 85 per cent of therevenues from the Internet business and represent 95per cent of the stock market value of Internetcompanies.9

29. The imbalance in the infrastructure and access tothe Internet is significant for several reasons. First,there is a close interrelationship between informationtechnology and the skilled labour that is the primarybeneficiary of trends towards a modern, global,knowledge-based economy. Second, the newinformation and communications technologies form anintegral part of the “new” economy. Third, and perhapsmost importantly, there are strong productivity gainsattached to the use of information technologies and theprogressive networking that has accompanied it. Spin-offs from investments in the sector have been a keyfactor in the recent high employment, low inflationgrowth of the United States economy. It hasdramatically increased the speed and changed thenature of doing business, including through theemergence of electronic commerce. But as a result of

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better monitoring of production and distribution cyclesand more efficient inventory and cost-controltechniques, among other things, productivity returnsare also evident in traditional industries, such astransportation and construction. Finally, theapplications of information technology in the sphere ofeducation, health and information are perhaps the bestexpression of its positive potential for socialdevelopment.

30. New technologies that have been such a factor inglobalization have opened up opportunities for menand women across the world, including in developingcountries, with skills in the new economy (for examplesoftware technicians and transcription services), whichwere previously limited by physical factors. But whileinformation technologies do offer developing countriesprospects of leap-frogging some developmental steps,its potential to stimulate the domestic economy and toact as a catalyst for integrating developing countriesinto the international trading system on a fair andequitable basis is still largely dependent on educationand economic development. Even iftelecommunications systems are installed andaccessible, without literacy and basic computer skillspeople will have little access to the network society.Unless basic education, computer literacy and basicdevelopmental issues are telescoped and tackledsimultaneously, the knowledge gap between and withincountries will widen. Moreover, if informationtechnology is to play its full productive role,developing countries need to go beyond providinginformation services for export and apply it widely intheir own economies also so that the spin-offs in termsof efficiencies, productivity and electronic commercecan be felt domestically as well.

31. There is also a danger that as those in developingcountries with the skills for the new economy getincreasingly networked, the gap between the skilledand the unskilled is likely to get wider. Theinformation-rich will get richer and information-poorwill get even poorer. Given the productivity benefits ofthe new technologies, failure to bridge the gap is likelyto open up a chasm between those countries andsections that are able to plug into this process and thosethat are not. The challenge is not only to exploit theopportunities offered by information technology toimprove the capacity of developing countries in theworld economy but also to integrate the sector that isrelatively better integrated with the sector that is not.

This is true for every society but especially fordeveloping countries.

32. The economic benefits of the new technologiesare undeniable. But apart from aggravating the gapbetween the skilled and the unskilled and reinforcinginequality in the short run, the new information societyposes some challenges for social development. TheInternet offers the possibility of greaterdemocratization of information and business bybringing users in direct contact across Internet space. Anumber of recent campaigns also reveal its utility inmobilizing public opinion around topical public issues.But if its potential for social development is to be fullyrealized, it is essential that its character as a publicspace be preserved. Like most technologies,information technology can also be used to privatizepublic space, making it accessible to some but not toothers. Alternatively, it can be used to widen accessacross social and organizational barriers.

33. A second concern, together with otherdevelopments, is the impact on social cohesion. Theevolution of a consumer society in which almostanything can be acquired in the market, a labourmarket characterized by insecurity and the scope thatthe Internet offers to alter the nature of human contactin the conduct of social and economic relations maywell impact on the cohesion of societies.

V. Financial markets, capital flowsand mergers

34. Two parallel developments in the financial sectorhave defined present-day globalization as much astechnological developments and the growth ofinternational trade. The first is the development of thefinancial markets, institutions, instruments andmechanisms in developed countries. The second is thegrowth in capital flows across borders in several ways,including foreign direct or short-term portfolioinvestments or transactions in foreign exchangemarkets as a result of the deregulation andliberalization of the financial sector in theindustrialized and many developing countries.

35. There has been an exponential growth in the size,operation and sophistication of financial markets in theadvanced industrial countries, illustrated, among otherthings, by the growth and complexity of financialservices, especially the expansion of stock markets.

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This has been accompanied by their “democratization”to cover more and more ordinary, small investors. Forexample, the number of stock-owning workers andfarmers in the United States is estimated to have risen106 per cent between 1989 and 1995. Though theextent of stock ownership in Europe and elsewhere isnot nearly as high as in the United States, it is growing,along with a similar trend towards more middle-incomeand even low-income investors beginning to share inthe growth of the economy by purchasing stock.Privatization of publicly owned corporations in somecountries, accompanied by promotion of the idea ofemployee shareholding, has played a key role. As aresult, in France, roughly three fourths of all employeesin privatized companies are shareholders in theircompanies.

36. It is against the backdrop of the increasing size,depth and complexity of financial markets in developedcountries that the quantum increase in capital flowsacross borders has taken place in recent years.According to recent United Nations Conference onTrade and Development (UNCTAD) estimates,10

worldwide flows of foreign investment rose by 41 percent from $468 billion in 1997 to $660 billion in 1998,and to a record $827 billion in 1999, an increase of 25per cent. Nearly three quarters of that increase, or anestimated $609 billion, took place among industrializednations, with the largest share in the United Kingdomand the United States.

37. The composition of capital flows has changed,with private capital and short-term investmentsdwarfing governmental flows and longer-terminvestments. Short-term capital flows have grownspectacularly and, partly reflecting the integration offinancial markets, transactions in foreign exchangemarkets are nearly 80 times larger than world trade.The share of official financing in total capital flows fellfrom over 50 per cent in the 1980s to 20 per cent in the1990s. While official flows declined from $56.9 billionin 1990 to $47.9 billion in 1998, net long-term inflowsto developing countries increased from $101 billion to$338 billion in 1997 before declining somewhat in1998 with the Asian crisis.11

38. Capital flows from industrialized countries todeveloping countries accelerated in the 1980s andtripled between 1990 and 1996. FDI has been growingfaster than international trade. Portfolio capitalmobility accelerated even more rapidly in the 1990s.Cross-border share dealing has grown 10 times as fast

as national incomes. FDI flows have been shifting fromthe primary to the manufacturing to the service sector,and there have been increasing flows to agri-business.However, such capital flows remain highlyconcentrated, going from a small number of developedcountries to a small number of emerging markets. In1998, the top 10 recipients accounted for 70 per cent ofFDI flows to developing countries, while leastdeveloped countries accounted for less than 7 per cent.FDI flows to developing countries as a whole rose by15 per cent to $198 billion in 1999, after stagnating in1998. Latin America attracted $97 billion, one third ofwhich went to Brazil, while $91 billion went to Asia,$40 billion of which went to China, the largestdeveloping country recipient of FDI. Central and EastEuropean countries retained a stable flow of about $20billion. Africa received between $10 and 11 billion,with Nigeria accounting for $2 billion and South Africa1.3 billion.12

39. Cross-border mergers and acquisitions, whoseannounced value exceeded $1,100 billion in 1999, werethe primary mode of entry into foreign markets inindustrialized countries and are playing a growing rolein developing countries. They have helped enterprisesachieve better economies of scale, stay abreast oftechnological developments, maintain competitiveadvantage and mark their presence in as many nationsas possible. Deregulation and privatization in Europe,Japan, the Republic of Korea and some developingcountries and economies in transition have opened newopportunities for acquisitions by large multinationalcorporations. Such acquisitions have benefitedconsumers in the form of more efficient industries andutilities, access to imported goods and better servicesin some areas. But they have also, in many cases andcertain periods, led to restructuring and closures ofproduction facilities and social costs in terms of lossesof jobs and incomes. In some cases, they have alsobeen accompanied by doubts about the sensitivity offoreign ownership to national concerns.

40. The opportunities and challenges posed byglobalization can be illustrated by the experience ofEast and South-East Asian countries. There,competitive, export-led growth and openness to foreigninvestment, both direct and portfolio, facilitated by anexternal policy environment that strongly advocatedsuch policies and a leadership that was prepared toforce the pace of development, generated rapid andstrong economic growth, greater integration into the

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global economy and healthy advances in socialdevelopment. Inflation rates were modest and monetaryand fiscal policies considered prudent. Poverty wassignificantly reduced all over the region, employmentlevels were enviable, and while inequality and regionaleconomic imbalances may have been aggravated insome areas, problems of social integration in generalwere diluted by the general progress.

41. The financial crisis of 1997-1998 characterizedby a sudden loss of confidence on the part of investorsand swift withdrawal of investments, and its rapidspread to other developing countries and countries witheconomies in transition, at one stage threatening evenindustrialized countries, also exposed the risks inherentin such close integration with the global financialmarkets. The five countries most affected by the crisis(Indonesia, Malaysia, the Philippines, the Republic ofKorea and Thailand) experienced a turnaround of $105billion in a single year from an inflow of $93 billion toan outflow of $12 billion, representing 10 per cent oftheir combined GDP.13 Most of the swing occurred incommercial bank lending and short-term portfolioflows. GDP declined sharply and the impressive stridesin poverty eradication were abruptly reversed andcompounded by problems of heightened inequality,unemployment and social tensions, with particularlyadverse impacts on the poor and on women. The crisisshowed that even more advanced developing countriesthat enjoyed strong macroeconomic fundamentals andwere regarded as successful examples of liberalizationand economic integration were vulnerable to shocksthat could set back decades of economic and socialprogress.

42. The policies and actions of international financialinstitutions that advocated such liberalization andstressed structural adjustment and fiscal prudence whenthe crisis struck were viewed by many as exacerbatingthe negative social impact of the crisis. It has provokeda rethinking within these organizations in favour of theneed to factor the social dimension in their handling ofcrises as well as in long-term development and arecognition of the risks inherent in capital accountconvertibility.

43. The liberalization of financial flows, floatingexchange rates, financial innovations and newcommunications techniques have increased financialtransactions enormously, as well as the opportunity fordeveloping countries to attract foreign investment andcapital for purposes of business and development,

albeit on commercial terms. But they have alsocompounded a volatility inherent in these markets as aresult of radical shifts of perception or in theinterpretation of information, and sharp revisions ofexpectations not always based on sound considerations,that have resulted in panic reactions, contagion andperiodic crises. Moreover, short-term capital flows, farfrom being a mere reflection of economicfundamentals, can actually push key macroeconomicvariables, such as exchange and interest rates and theprices of such assets as property and shares, away fromtheir long-term equilibrium and consequently affectoutput and employment.

44. Regardless of who or what triggers suchinherently destabilizing movements of capital, theiroccurrence is a matter of concern to investors andreceiving partners alike. Economic interdependencecuts both ways. Under favourable conditions, it helpseveryone; under unfavourable conditions, it hurtseveryone. For investors, financial shocks necessitatecostly bail-outs that are controversial in themselves.For the recipient country, they usually mean austerity,unemployment and painful adjustment processes. Theabsence of principles to guide debtor-creditor relationsin periods of distress has tended to magnify theseverity of these crises, with costs frequently beingborne by the poor and more vulnerable. Typically, theweaker partner, usually a developing country, is forcedto bear a heavier burden of the “costs” of volatility.The interests of investors are taken care of before theinterests of workers and others more directly affectedin terms of employment and livelihood. This is possiblebecause the investors are located mainly in wealthycountries and are able to negotiate more favourableterms and cushion the shock.

45. A number of measures for reducing suchvolatility have been proposed. These include taxes onshort-term capital inflows, preferably coordinatedinternationally; improved regulations and supervisionof financial institutions; policy stability; diversificationof sources of capital; Chilean-type “cooling”mechanisms or reserve requirements; regulation ofmutual and hedge funds; special facilities to deal withcapital accounts-related currency crises; and greaterdisclosure and transparency of financial information,among other proposals. They have also prompted callsfor a reform of the international financial architecture.

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VI. Macroeconomic policymanagement

46. Part of the uneasiness about globalization stemsfrom the fact that national policies are increasinglystrongly influenced by policies elsewhere.Liberalization and integration have affected theautonomy of national policy-making in a variety ofways. First, trade liberalization and the demands ofglobal capital markets and financial institutions have tovarying extents constrained the deployment ofmonetary and fiscal policy options for social purposes,including employment and equity objectives. Theinterdependence of interest and exchange rates has ledto a strong pressure towards a convergence of monetarypolicy in the direction of controlling inflation and offiscal policy towards fiscal restraint from which itbecomes difficult for any country to deviate withoutrisking adverse investor confidence. Conversely,macroeconomic imbalances tend to get amplified in aliberalized environment.

47. Second, the liberalization of trade and finance issteadily changing the traditional idea of countries asdistinct economic entities connected mainly by tradetowards an environment in which companies andfinancial markets can increasingly make production,marketing and investment decisions relatively free ofnational constraints. The promise of direct foreigninvestment and the threat of its withdrawal havesignificant leverage on the policy options ofGovernments.

48. Third, economic developments in one part of theworld effect, in greater or lesser degree, other parts ofthe world. Decisions in bigger economies clearlyimpact more on smaller economies. But crises inemerging markets or economies in transition or otherdeveloping countries can also affect and forceeconomic decisions in the bigger economies. Asinternational responses to the Asian crisis show, muchof the art of economic policy-making today depends onhow national policies are dovetailed to global orinternational developments.14 In such situations, thedanger that countries may attempt to protectthemselves from contagion by adopting measures thatare harmful to the global economy underlines the needfor cooperation and coordination in economic policy-making at the global level.

49. Fourth, the progressive reduction of tariffs as aresult of trade liberalization has removed a major

source of revenue that developing countries dependedon for social expenditures.

50. Finally, globalization is also associated withchanges in the level, pattern and targets of taxation.The increased mobility of capital and high-incomegroups has presaged a shift of taxation from relativelymobile factors to relatively immobile ones. In effect,this has meant a relative shift in taxation away fromcorporations to personal income, from higher incomesto lower and middle incomes, from profits to wagesand from direct taxes to consumption (e.g., value addedtax), in short from capital to labour. There is a near-universal trend towards lower taxation on higherincomes that implies a distancing from theredistributive function of taxation. Between 1986 and1998, 67 of 69 countries for which information on taxsystems was available witnessed a decline in themaximum tax rate on higher incomes.15 Tax breaks andother hidden subsidies intended to retain or attract newinvestments have also worked in favour of thecorporate sector.

VII. Concluding observations

51. The processes associated with globalization haveunleashed energies that are catapulting the worldeconomy to a qualitatively new trajectory ofdevelopment. New technologies are already yieldingproductivity gains, as also greater availability and flowof information worldwide with potential benefits foreducation, health and social development in general.Greater access to markets has provided newopportunities to countries and individuals to participatein the global division of labour and creation of wealth.Increased competition and new forms of business havealso benefited consumers in many ways.

52. While providing opportunities for many,globalization has also been disruptive to largecategories of society — poorer countries with weak andunderdeveloped economies, unskilled labour,subsistence farmers and other vulnerable groups, i.e.,those who lack the capacity to exploit suchopportunities for reasons that have as much to do withlevels of development as capacity to compete. Thebenefits of globalization have been unevenly spread. Inthe process, it has tended to split those plugged into theworld economy from those who are not, thus opening abreach that has contributed to poverty, inequality andmarginalization.

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53. Despite the trends towards insecurity,marginalization, concentration of economic power anderosion of social capital outlined above, theinternational community has a strong stake in thetechnological advances and market-led growth andeconomic integration that propel globalization and thathas opened opportunities for those equipped to exploitits potential. The unprecedented opportunities openedby globalization also need to be harnessed in aid of theeradication of poverty, full employment, inclusion,equity and long-term social progress espoused by theWorld Summit for Social Development. There istherefore, an urgent need to “manage” the process ofglobalization better so as to minimize its negativeeffects, make the opportunities provided byglobalization available to all and spread its benefitswider, oversee the operations of the market in order toattenuate its extremes and reduce market failure,combat unemployment and poverty, and ensure a stakefor the poor and the marginalized in the process.Developments since the recent World TradeOrganization (WTO) meeting at Seattle and theoutcome of the tenth session of UNCTAD in February2000 suggest a greater recognition of these problems.Some active intervention will be necessary to tilt theglobal market from its current form of corporateglobalization to a more democratic globalization.

54. To this end, it is imperative to reconcile thecompetitive economic philosophy of the market and thesocial philosophy of inclusion, however difficult thismay seem. It may be necessary to reframe, wherevernecessary, the rules of the market economy so that theyincorporate and integrate better the concerns of boththose on the forefront of the technological andentrepreneurial revolutions and the goals of the Summitto eradicate poverty; provide gainful employment toall; facilitate access to basic social services; promoteequity, inclusion and social integration; and reduceinequalities between and within nations. It is alsonecessary to improve the mechanisms for the concernsof poorer countries and the poor, the vulnerable and themarginalized to be adequately reflected in the decision-making processes that affect them.

55. Economic globalization has revealed a mismatchbetween current systems and institutions of regulationand accountability that are national and the globalnature of economic and financial transactions that posea major challenge for economic governance in thetwenty-first century. The issue of accountability has

typically been cast in terms of the responsibility ofbusiness or corporations to the public. But in fact itgoes well beyond that to the accountability ofGovernments for the operations of the market. Thegreater autonomy given to the economy under pressureof free market policies since the mid-1980s has led to avirtual separation of economic and political life,resulting in reduced accountability for economicdecisions that are attributed to the market. One of thefoundations of democratic governance is its expressionof the public interest and the protection of thevulnerable. This requires some degree of publicoversight in the interests of attenuating the often harshfeatures of the market. Representative and regulatorybodies together perform this function. Yet one corollaryof freer markets is that the exercise of such ademocratic and regulatory function is frequently calledinto question as an unnecessary interference inmarkets.

56. This is happening as government involvement inthe economy, intended to fulfil this function, has beenshrinking and that of the private sector in the provisionof social services has been rising. There are good civicand economic arguments for the private provision ofsocial services, including health, education and publictelevision, primarily on grounds of efficiency. But withloss of public funding comes loss of public controlover social priorities and the ability to pre-empt toprevent exclusion by the market.

57. These and other developments illustrate thechallenge posed to the goals and commitments adoptedat the Summit by free market-oriented economicpolicies and a reduced role for government in theeconomy through policies of liberalization,deregulation and privatization.

58. The need to reconstitute the social parameters ofthe market economy underlies thinking in certainquarters, including the World Bank, to devise a set ofprinciples of social policy that ought to be kept in theforeground in the handling of crises as well as longer-term development strategies supported by theInternational Monetary Fund (IMF) and the WorldBank. The pros and cons of developing such a set ofprinciples was discussed in some detail at a two-dayworkshop convened in December 1999 by the CarnegieCouncil on Ethics and International Affairs in theimmediate aftermath of the ministerial-level WTOtrade talks at Seattle.16

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59. A variety of concerns and views were expressed,including the feasibility and relevance of a common setof principles across societies at different levels ofdevelopment, whether and how they would apply todifferent categories of actors, and their possibletranslation into conditionalities. The seminarnevertheless served to focus attention on the need toestablish certain social fundamentals that could act as acountervailing force to the inequalities, imbalances andsocial disruption attendant to free-market-drivenglobalization. They could also form the basis forbroader social development.

60. These principles were seen as operating atdifferent levels and in different ways: through aninternalization of a set of values that could limit theextremes of the market from the inside; through greaterdemocratization of economic governance, especially atthe international level, where there is a greater deficit,to act as a counter-foil to technocratic and corporatedecision-making; through improved regulatorymechanisms that may require a more effective role forthe state and greater international cooperation; andthrough the anchoring of policies advocated byinternational financial and economic institutionsaround such principles. In doing so, it could serve as abasis for economic policies that integrate socialconcerns a priori rather than a posteriori.

61. If the goals of the World Summit for SocialDevelopment — poverty eradication, equity, fullemployment and inclusion — are to shape the market,they must be integrated into the full range of coreeconomic and other public policies. These includethose relating to trade, structural adjustment, fiscalpolicy, taxation, macroeconomic management,environmental management, employment, competition,patents and intellectual property rights, foreigninvestment, capital flows and debt relief. They shouldanimate all public negotiating, decision-making andregulatory bodies, national and international, and exertinfluence on the corporate, financial, business andtrade organizations that play a dominant role in shapingmarkets. Policies should be judged not only by theirefficacy in promoting the dynamism of markets butalso by the extent to which they promote socialdevelopment or at least do not undermine it. Wheresome conflict is inevitable, remedial measures shouldbe integrated as far as possible at the outset in thedesign of the policy itself. The Preparatory Committeemay wish to initiate a process at the level of the United

Nations to develop guidelines integrating the goals ofthe Summit into all economic and social policy.

62. Second, the impact of policies on theexacerbation or alleviation of poverty should be an areaof special concern. Though the rules governing themodern market have generally been guided by theneeds of enterprise, to some extent, social concerns,such as the impact of policies on employment orworker’s rights, have under the pressure of workersalways played a role in their elaboration. There is aneed to go further and place the objective of povertyeradication into the mainstream of economic policies atboth the national and international levels. To take anexample, trade policies that are sensitive to the goal ofpoverty eradication would favour access to preciselythe types of lower-technology, labour intensive, pro-poor activities, such as agriculture and textiles, thattend to face restrictions in international markets atpresent. A pro-poor trade policy would provide greaterspace for the comparative advantages of the poor andpoorer countries.

63. Third, partly in order to address the problem ofpoverty per se and the marginalizing effects ofglobalization, it would be desirable to develop andstrengthen a pro-poor, market-based growth strategythat builds on the capacity of the poor to exploit thepotential of the market to escape from poverty. Mostapproaches to poverty eradication have focused onredistributive strategies, while most market-basedeconomic growth strategies have tended to rely onthose who already have the capital necessary forinvestment. While redistributive policies are importantand will continue to be required, successful strategiesfor poverty eradication that enable those who do nothave assets and capital to use the market profitablyhave attracted lesser attention. Such strategies focus onenabling the poor to act as active agents capable ofutilizing the market to their advantage. They includeeasier access to productive resources and assets,development of rural infrastructure and public goods,development of entrepreneurial and other skills, andmicrofinance and support for cooperatives, small-scalebusiness and industry and other forms of economicorganization of the rural and urban poor. Investment inrural non-farm growth is a particularly promisingapproach to poverty reduction. The thrust of such anapproach would be to expand the opportunities andscope for private initiative “downward” to the grass-roots level.

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64. However, none of this will happen automaticallyor without public pressure. It will require institutionsthat can channel such concerns at the level of publicpolicy-making and the market, which may be a multi-layered process. It is crucial to meet the challenge ofexclusion posed by globalization by improving existingstructures of democratic governance so that the viewsof those excluded and marginalized by the market areeffectively heard and accommodated in the process ofdecision-making. However, in an era of globalizationin which the consequences of actions are felt wellbeyond the borders of any one country, greaterdemocratization of international economic relations isalso required so that the views of countries affected byeconomic decisions of global market players are takeninto account. Only within such inclusive forums canthe views of all those concerned and affected by thedecisions of the few be heard. More inclusivemembership is also essential if internationalcooperation is to be matched with implementation.

Notes

1 See Official Records of the General Assembly, Fifty-fourth Session, Supplement No. 45 (A/54/45), chap.VI.B, decision 1, annex, para. 1 (a).

2 See Janine Berg and Lance Taylor, “Externalliberalization, economic performance and social policy”,New School for Social Research, Working Paper Series:Globalization, Labour Markets and Social Policy,February 2000.

3 See UNCTAD, Trade and Development Report, 1999(United Nations publication, Sales No. E.99.II.D.1).

4 See World Economic and Social Survey, 1999 (UnitedNations publication, Sales No. E.99.II.C.1).

5 United Nations publication, Sales No. E.99.IV.8.

6 See UNCTAD, op. cit.

7 Quoted by Jan Vandemoortele of UNICEF in a workingpaper presented at a workshop on social policyprinciples and the social development agenda, Pocantico,United States of America, December 1999.

8 See UNDP, Human Development Report, 1999 (NewYork, Oxford University Press, 1999).

9 See New York Times, 9 January 2000.

10 See UNCTAD press release, 8 February 2000.

11 See World Bank, Global Development Finance, 1999.

12 See UNCTAD press release, 8 February 2000.

13 See UNDP, Background Papers: Human DevelopmentReport 1999, vol. I (New York, Oxford University Press,1999), paper by S. Griffith Jones and J. Kimmis.

14 This is illustrated by reaction to the Asian financialcrisis. Major industrial countries lowered interest ratesbecause of widespread fears that the crisis might pushthe rest of the world into severe recession. Despite anexpanding economy at that time, the United StatesFederal Reserve’s proactive response in lowering interestrates three times in the fall of 1998 played an importantrole in preventing that outcome. China’s decision, at theheight of the financial turbulence in 1997, to maintainthe exchange rate of the yuan renminbi (in part possiblebecause of a favourable balance of payment status)helped prevent the further spread of the crisis, andindirectly, a worsening environment for socialdevelopment.

15 See ILO, “Country studies on the social impact ofglobalization: final report” (GB.276/WB/SDL/1).

16 See “Report of the Workshop on Social Policy Principlesand the Social Development Agenda” (Carnegie Councilon Ethics and International Affairs).

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