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                                    Achieving greater global equity




            10
                                    We read in chapter 2 that there are huge           making rules that benefit themselves at the
                                    inequities in the world. Even better-off citi-     cost of the weak, poor, and voiceless. There
       chapter                      zens in most of the developing world face
                                    worse opportunities than the poor in rich
                                                                                       is some truth on all sides of the debate. In
                                                                                       terms of trends, we saw in chapter 2 that the
                                    countries. The fact that country of birth is a     picture is mixed: convergence in health and
                                    key determinant of people’s opportunities          (probably) education for many, conver-
                                    runs counter to our view of equity—that is,        gence in incomes for some, but divergence
                                    that people should enjoy the same opportu-         in incomes and health for others. In terms
                                    nities regardless of their background,             of causes, just as some of the major sources
                                    including where they are born.                     of convergence have been associated with
                                        Greater global equity is desirable for         globalization of markets and knowledge—
                                    itself to all those who find equity intrinsi-       the East Asian tigers, China, India making
                                    cally valuable. The international human            use of global markets, the spread of the
                                    rights regime testifies to the shared belief        green revolution and health-related tech-
                                    that all should have equal rights and be           nology—so unequal rules and unequal
                                    spared extreme deprivation. Some even              influence profoundly shape opportunity.
                                    argue that there is a powerful moral case for          Domestic action is clearly central to
                                    rich countries to take action, because of the      reducing inequities. Developing countries
                                    huge disparities and (arguably) because            hold the keys to their prosperity; global
                                    they partly created and perpetuate global          action cannot substitute for equitable and
                                    inequities.1 Greater equity is also desirable      efficient domestic policies and institutions.
                                    because it would likely be beneficial to            But global conditions powerfully affect the
                                    global prosperity in the long run. Greater         scope for and impact of domestic policies.
                                    equity in access to health and health reme-        Global action—by governments, people,
                                    dies, especially for transmittable diseases,       and organizations in developed countries
                                    would reduce global health inequalities and        and by international institutions—can deter-
                                    be beneficial to poor and rich countries            mine whether the globalization process
                                    alike. Greater equity in access to and control     brings about greater equity, peace, and pros-
                                    over natural resources and the global com-         perity, or fuels tensions and conflicts that
                                    mons may lead to more sustainable use.             will lead to backlash and violence.
                                    Some argue that greater equity could also              Current disparities are products of inter-
                                    lead to greater international stability: fragile   actions between two factors: the endowments
                                    and failed states pose a threat to local and       of different countries, and the rules shaping
                                    global stability.2                                 the options for deploying these endowments
                                        What can be done to reduce the huge            on domestic and global markets. Endow-
                                    inequities we experience today? The debate         ments are greatly unequal due to history and
                                    about what causes global inequities and            geography—although some of the history
                                    how to address them is highly contentious.         and aspects of geography are a product of
                                    Some see globalization—greater global              unequal development patterns. Infrastruc-
                                    integration—as a source of equalization,           ture underdevelopment in Africa, for exam-
                                    others a source of widening inequalities,          ple, is partly a legacy of colonial political and
                                    with richer countries and corporations             economic patterns. Institutional weaknesses
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                                                                                                                           Achieving greater global equity                207



        of poorer societies—now part of their                            present inequities in the use of natural
        endowment—also reflect historical pat-                            resources. Then we look at whether aid—
        terns, as discussed in chapter 6. Differences                    the traditional response to global
        in endowments are often exacerbated by the                       inequity—can be used effectively to acceler-
        inequitable functioning of markets. As in                        ate domestic efforts to build endowments.
        the domestic realm, market imperfections                         The current state of international relations
        can be either a product of policy (as in bar-                    may cause some to wonder whether any
        riers to labor mobility or agricultural pro-                     change is possible. So we close the chapter
        tection) or of intrinsic market failures (as in                  by examining factors that have facilitated
        weak protection of global commons and                            transitions to more equitable policies and
        lack of incentives for knowledge creation).                      institutions in the past. We conclude that
           Achieving greater global equity thus                          change may be difficult but not impossible.3
        requires global policies that improve
        endowments and address market imperfec-
        tions and more representative global insitu-                     Making global markets work
        tions. We first discuss the global markets for                    more equitably
        labor, goods, ideas, and capital—all func-                       Global markets have many faces: Filipino
        tioning within the context of international                      nurses, Sri Lankan domestic workers, Polish
        law (box 10.1). For each market, we high-                        care providers, Indian engineers, Ugandan
        light existing inequities and their impact,                      coffee growers, Bangladeshi women working
        discuss the processes that lead to such                          in garment factories, Moroccan craftsmen,
        inequities, and explore some options for                         employers of migrants, and the consumers of
        change. We next turn to rectifying past and                      developing-country products in Australia,


          BOX 10.1             International law, globalization, and equity
          Globalization takes place (mostly) in the context             Rule-setting processes. International laws are   greater equity. In general, the ability of states
          of international law, which governs relations             formed through complex negotiating processes.        to pursue and enforce rights under
          among states, and other international legal sub-          The degree to which these processes are              international law depends on appropriate
          jects, such as international organizations. More          perceived to be equitable affects their adoption     adjudication processes or complaint
          equitable development, application, monitoring,           and implementation—so processes matter               mechanisms and their effectiveness. A number
          and enforcement of international law is essen-            greatly. Generally, a state remains free to decide   of international courts and other adjudicative
          tial to make globalization more equitable.                whether to become a party to a convention or         bodies often have voluntary jurisdiction, but
               The meaning of equity in international law. Equity   covenant. And a state’s satisfaction with the        there is a trend toward judicialization and com-
          considerations inform the development of interna-         process leading to the adoption of a convention      pulsory jurisdiction. For example, dispute set-
          tional law,confirming that greater global equity is a      may facilitate signing and subsequent adoption.      tlement arrangements established under the
          shared value.The principle of equity has accompa-         For example, the Universal Declaration of            1982 U.N. Convention on the Law of the Sea
          nied the development of international law over the        Human Rights, seen by many as the basis of sub-      and the 1994 World Trade Organization
          centuries (chapter 4).Equity in international law         sequent human rights instruments, was                Dispute Settlement Understanding mark a sig-
          encompasses notions of corrective justice and dis-        adopted by the U.N. General Assembly, where all      nificant move toward compulsory jurisdiction
          tributive justice—that the strict application of the      countries are represented and have one vote.         and binding decision making.
          law should be tempered by considerations of               While only a declaration, and not intended to             The ability of citizens and other nonstate
          equity or fairness to achieve a just result,and that      bind states at the time it was adopted, the          actors to pursue their rights and seek redress
          international law should promote a more even dis-         process leading to its adoption was perceived to     under international law depends on whether
          tribution of resources among states.Equitable prin-       be equitable.The body of standards set by the        their state has become a party to the
          ciples have been applied to many areas of interna-        ILO is another example of rules set through an       instruments that allow the use of compliance
          tional law,from the sharing of scientific benefits,         international process that is broadly consulta-      mechanism. For example, for citizens to make a
          technology,and natural resources to laws govern-          tive, encompassing not just governments but          complaint against their state under the Interna-
          ing the sea,international waterways,outer space,          unions and private sector representatives. On        tional Covenant of Civil and Political Rights, the
          and carbon emissions.As highlighted in chapter 4,         the other hand, the rule-setting processes of the    state must have signed and ratified the First
          the most pertinent example of the application of          World Trade Organization (and its predecessor,       Optional Protocol, which allows a complaint to
          principles of equity in international law is the inter-   the General Agreement on Tariffs and Trade) are      be heard by the Human Rights Committee
          national human rights regime.In today’s                   perceived by some as inequitable, and this is        established by the covenant. As the discussion
          international law,equity has not only an interstate       partly responsible for the current stalemate.        indicates and in parallel to what happens on the
          dimension;it also has an intergenerational dimen-             Application and enforcement mechanisms.          domestic arena, rules often block access, even
          sion,in the preservation of the environment and           The processes that interpret, apply, and enforce     before expenses, knowledge, and capacity limit
          other global commons,as we will see below.                international laws are crucial to realizing          effective recourse.
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                                    the European countries, Japan, the United                        people’s opportunities (of course, migra-
                                    States, and the richer middle-income coun-                       tion raises complex issues that are politi-
                                    tries. Global markets create valuable eco-                       cally and socially difficult to tackle in
                                    nomic opportunities for millions of people,                      sending and receiving countries).
                                    who develop ideas, raise capital, and sell their                    Benefits also vary greatly depending on
                                    products and their labor.                                        country context. The fast-growing develop-
                                        But unequal endowments and unfair                            ing countries, including China and India
                                    processes mean that opportunities and rules                      that are home to half the world’s poorest
                                    are not the same for all. Inequities exist in                    people, stand to benefit significantly from
                                    the functioning of these markets. Unskilled                      more equitable global markets. Leveling the
                                    workers from poor countries, who could                           global playing field can help them sustain
                                    earn higher returns in rich countries, face                      fast growth, while equitable domestic poli-
                                    great hurdles in migrating. Developing-                          cies help ensure that this growth is shared.
                                    country producers face obstacles in selling                      Countries with more limited endowments,
                                    agricultural products, manufactured items,                       such as many African countries, that are left
                                    and services in developed countries. Foreign                     behind in the global economy, stand to ben-
                                    investors often get better deals in debt crises.                 efit less in the short to medium run from
                                        In most cases, more equitable rules                          more equitable global markets.
                                    would bring benefits to both developed and
                                    developing countries, but the extent of ben-                     Greater international labor mobility
                                    efits varies by market. Barriers are massively                    Returns to capital, and to some extent
                                    greater in the market for labor—the factor                       skilled labor, tend to equalize across coun-
                                    of production that the poor own in relative                      tries, but returns to unskilled labor, owned
                                    abundance—than in the markets for goods                          by poor people and in abundant supply in
                                    and capital, and factor price equalization                       poor countries, generally do not converge.
                                    clearly does not work through trade alone.                       Wage differentials across countries for jobs
                                    So removing barriers to migration could                          requiring similar skills are large, and sub-
                                    have a significant impact on expanding                            stantially larger than the wage gap between
                                                                                                     the United States and migrant-sending
                                                                                                     countries in the late nineteenth century (fig-
                                    Figure 10.1 Wage differentials are substantially                 ure 10.1). Developed countries severely limit
                                    larger today than at the end of the nineteenth century
                                    Ratios of purchasing power parity adjusted wages of              in-migration of unskilled and semi-skilled
                                    the United States and its migration partners in 1870             workers, which contributes to the lack of
                                    and pairs of countries in the 1990s                              equalization in returns to unskilled labor.
                                          USA/Ireland                                                    Greater migration of unskilled labor
                                                 1870                                                would tend to equalize returns, with win-
                                         USA/Norway                                                  ners and losers, but with potentially benefi-
                                                 1870
                                         USA/Sweden                                                  cial effects on efficiency. History teaches us
                                                 1870                                                that migration has, at various times, allevi-
                                           USA/Italy                                                 ated human suffering and promoted cul-
                                                 1870
                                    Spain/Morocco
                                                                                                     tural and technological exchanges. The mass
                                               1990s                                                 migration from Europe to the Americas in
                                    USA/Guatemala                                                    the nineteenth and early twentieth centuries
                                               1990s
                                                                                                     enabled 60 million people to escape poverty
                                           UK/Kenya
                                               1990s                                                 and persecution, creating some of today’s
                                       Italy/Ethiopia                                                wealthiest societies (although Native Ameri-
                                               1990s                                                 cans faced enormous losses in the process).4
                                     NLD/Indonesia
                                               1990s                                                     Economic analyses indicate that gains
                                     Japan/Vietnam                                                   from expanding migration could be very
                                               1990s                                                 significant. Hamilton and Whalley (1984)
                                                      0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0 10.0   use a highly simplified economic model of
                                                                Ratio of wages in PPP                the world to suggest that the benefits from
                                    Source: Pritchett (2003).                                        reallocation of labor could be huge (on the
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                                                                                                Achieving greater global equity   209



        order of doubling GDP). This, of course,        not support the view that migration leads
        depends on the specific assumptions used         unequivocally to higher inequality in send-
        and ignores a host of adjustment issues, but    ing countries.
        it does serve to illustrate that the gains          In receiving countries, migration relieves
        could be large and probably much larger         labor shortages in labor-intensive sectors,
        than the gains from the, by comparison,         such as health care, hotels and restaurants,
        already greatly liberalized trade in goods.     and construction. As developed-country
        Indeed, using an approach similar to that       populations age and their levels of educa-
        of analyses of trade impacts, Walmsley          tion and training rise, these shortages are
        and Winters (2003) estimated that increas-      likely to become more severe. Demographic
        ing temporary migration into industrial         trends are another powerful force behind
        countries by 3 percent of host countries’       migration. Current population projections
        current skilled and unskilled work force—       imply that the labor forces of Europe and
        equivalent to permitting an extra 8 million     Japan will decline over the next century, and
        skilled and 8.4 million unskilled workers to    that the ratio of people of working age to
        be employed at any time, roughly a dou-         people of retirement age (the support ratio)
        bling of current net migration into high-       will grow to levels that would make current
        income countries—would generate an esti-        pension and social transfer schemes unvi-
        mated increase in world welfare of more         able. Meanwhile, the population of the
        than $150 billion a year. This increase         North Africa countries south of Europe is
        would be shared fairly equally between          growing rapidly.
        developing- and developed-country citi-             Despite its large benefits, migration is
        zens. Much of the gain would come from          fiercely opposed in receiving countries.
        the migration of unskilled workers. Coun-       Migration involves complex issues of national
        try studies confirm that migration could         and individual identity exacerbated by con-
        have a significant impact. Annabi and oth-       cerns over security. Cultural and social
        ers (forthcoming) found that a 50 percent       integration appears more difficult in some
        increase in the flow of remittances to           countries than it was earlier thought.
        Bangladesh would reduce the incidence of        Moreover, unskilled workers experience
        $1 per day income poverty by 0.8 percent in     wage erosion and unemployment. For
        the short run and by 4 percent by 2020.5        industrial workers, however, this is no dif-
            Doesn’t migration raise income inequal-     ferent than if goods produced in countries
        ity in sending countries? As a high-risk,       with lower labor costs displace domestic
        high-return activity, migration is more         production.
        likely to be undertaken first by members of          In sending countries, there are concerns
        wealthier, less credit-constrained, better-     about the human and social costs of migra-
        educated households. Successful migrants        tion, for instance, on how migration of
        later provide information and assistance to     nurses and doctors hinders progress toward
        potential migrants through social networks,     the Millennium Development Goals (MDGs)
        thus lowering risks and costs and making it     and migration of women creates major
        possible for members of households in           deficits in child rearing, family support,
        lower parts of the income distribution to       and care for the elderly.10 Licensing restric-
        migrate.6 In the first stages of the migration   tions (as for doctors) often force skilled
        process, remittances sent to wealthier          migrants to work in lower-skilled jobs in
        households can increase inequality, if they     host countries—the “brain waste,” and
        are higher than forgone income.7 As migra-      higher returns to education, do not appear
        tion expands, remittances begin to arrive to    to spur human capital accumulation or
        less well-off households and income distri-     “brain gain.”11
        bution improves.8 Remittances also have             Going against the political tide—with
        indirect effects through greater spending,      the partial exceptions of some currents in
        risk diversification, and easing of credit       the United States, Canada and Spain—we
        constraints, which are generally inequality-    argue that greater migration would be good
        reducing.9 On balance, the evidence does        for both equity and efficiency. But what are
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      210                    WORLD DEVELOPMENT REPORT 2006



                                                                                                               women.15 Two possible areas for action are
         BOX 10.2            Making migrant worker schemes more                                                to better regulate recruitment agencies to
                             development friendly                                                              ensure greater respect for workers’ rights
                                                                                                               and to enter agreements that regulate
         Attention to the design of temporary migrant       could help reduce exploitation of potential
         worker schemes and complementary policies          migrants by local recruitment agencies and         migrant flows and conditions with key des-
         could make them more development                   ensure that temporary migrants do not              tination countries, as the Philippines has
         friendly.Temporary migration schemes usu-          overstay their visas, reducing resistance in       done. Sending countries should also help
         ally allow workers into a country from several     receiving countries. Saving schemes would
                                                                                                               migrants use remittances properly, invest
         weeks to up to three to five years.                 encourage migrants to send remittances
              Recent research for the United Kingdom        home, increase incentives to return, and           back home, and reintegrate upon return.
         identified two main policy interventions:           facilitate the start of productive activities on       It is unclear whether an international
         centralized recruitment with government            return. Good examples are the Canada-Mex-          organization in which poor countries have
         screening in sending countries, and manda-         ico program for agricultural workers and the
         tory saving schemes, possibly coupled with         agreement between France and Sri Lanka
                                                                                                               an equal seat at the table could help make
         credit schemes in home countries. Central-         on sharing information about migrants.             progress toward freer migration. Bhagwati
         ized recruitment and government screening          Sources: Barber (2003); Schiff (2005).             (2003) argued that a new World Migration
                                                                                                               Organization—or even a stronger Interna-
                                                                                                               tional Organization for Migration in the
                                                  the prospects for greater migration in the                   U.N. system—might help increase the
                                                  current political climate? Multilateral nego-                developmental impact of migration by pro-
                                                  tiations in the World Trade Organization                     tecting migrants’ rights, providing a forum
                                                  (WTO) offer a framework to address                           to set rules on migration, and monitoring
                                                  migration under Mode IV of the General                       and enforcing compliance. But migrant-
                                                  Agreement in Trade and Services (GATS),                      receiving developed countries resist propos-
                                                  part of the treaty establishing the WTO.12                   als to give up even some control over immi-
                                                  But progress toward greater liberalization of                gration policies, which they view as part of
                                                  temporary migration under GATS Mode IV                       the domestic policy agenda.
                                                  is unlikely in the near future, given that
                                                  contentious issues on agricultural and mer-                  Freer and fairer trade
                                                  chandise trade are dominating negotiations                   Inequities in the trade arena are well
                                                  on the Doha Round.                                           known: rich countries protect their markets
                                                      In this context, progress is more likely to              with tariff and nontariff barriers on the
                                                  come from bilateral and regional negotia-                    goods that poor countries produce more
                                                  tions. Receiving countries could bilaterally                 advantageously (such as agricultural pro-
                                                  expand temporary migration (box 10.2 dis-                    duce and textiles). They provide handsome
                                                  cusses some features of “development-                        subsidies to their farmers, subsidize their
                                                  friendly” temporary migration schemes).                      exports, and discourage value-added pro-
                                                  These countries could also extend greater                    cessing in developing countries. Reducing
                                                  protection to migrants. One way to do this                   such protection and subsidies would have a
                                                  could be to ratify the 1990 U.N. Convention                  beneficial impact on world trade, growth,
                                                  on the Rights of All Migrant Workers and                     and poverty reduction.
                                                  Their Families. If a significant number of
                                                  host countries were to ratify the conven-                    Potential benefits from liberalization. Sev-
                                                  tion, none would risk being considered a                     eral recent studies have estimated the poten-
                                                  haven for undocumented migrants, and                         tial impact of various trade liberalization
                                                  fears about ratification leading to greater                   measures, including those being considered
                                                  inflows might be allayed.13 Facilitating                      during the Doha Round of negotiations
                                                  remittance flows is another action with                       under the WTO. Estimates vary, depending
                                                  potentially high payoffs, and governments                    on the reforms considered (various packages
                                                  should work together with the private sec-                   of partial reforms up to full liberalization)
                                                  tor and NGOs to achieve this.14                              and on whether dynamic productivity gains
                                                      Sending countries should take action to                  are taken into account. At the lower end of
                                                  reduce the likelihood that their migrants                    the range, Hertel and Winters (forthcoming)
                                                  become victims of exploitation, with a                       estimated that the measures being discussed
                                                  focus on combating trafficking of girls and                   in the Doha Round would have a modest
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                                                                                                    Achieving greater global equity   211



        impact on world prices, welfare gains, and         prices.16 But net food-producing countries,
        poverty, with the number of people living          and farmers within them, would benefit.
        below $2 a day declining by 9 million in           There is, indeed, some evidence that rising
        2015 over a baseline estimate of around 2          agricultural world prices were partly respon-
        billion. According to this study, even full lib-   sible for the fact that rural incomes in
        eralization would not bring huge gains, as it      China grew more rapidly than urban
        would help lift 80 million people out of $2 a      incomes in 2004.
        day poverty. At the higher end of the range,           The phasing out of the Multi-Fiber Agree-
        Cline (2004) estimated that full trade liber-      ment, which set quotas on exports of textiles
        alization would lift up to 440 million people      from developing countries, also has heteroge-
        out of $2 a day poverty by 2015.                   neous effects. Chinese textile exports have
            Whatever the size of the overall impact,       made significant gains in markets not pro-
        researchers agree that it would be heteroge-       tected by tariffs—for instance, their share of
        neous across countries and regions. In both        Australian and Japanese markets, where there
        partial and full reform scenarios, the gains       were no quota restrictions, is 70 percent.
        would accrue mostly to large countries             Their share of the U.S. baby clothes segment,
        already significantly integrated in global          where quotas were removed in 2002, jumped
        markets, such as Brazil, China, India, and         from 11 to 55 percent in two years. Exports
        Indonesia. Parts of many Sub-Saharan coun-         from Cambodia and Nepal are reported to
        tries and remote areas in Asia and elsewhere       have declined significantly. The impact of
        are simply not connected to global markets,        these shifts on global income inequality is not
        and farmers eke out a living on subsistence        clear and it depends on the relative position
        agriculture, far from roads, markets, technol-     of garment workers and of those benefiting
        ogy, and information. Many countries are           from indirect effects in the global distribu-
        unable to make full use of improved market         tion. Changes in the existing tariff structure,
        access because of significant supply-side and       whereby producers from the poorest coun-
        institutional constraints. Detailed studies on     tries have duty-free access to markets in the
        Cambodia, Ethiopia, Madagascar, and Zam-           United States and Europe while others face a
        bia showed that the potential impact of the        16 percent tariff on average, would also have
        trade reforms likely to be included in the         an unclear impact on inequality.17 Con-
        Doha Round would be small for such coun-           versely, renewed protectionism in developed
        tries. Some countries would even lose in the       countries is likely to have negative effects.
        short run: Bangladesh and Mozambique, for              Currently, no global assistance program
        instance, would experience a decline in            exists to compensate losers from trade lib-
        incomes, as existing preferences are eroded        eralization. However, international assis-
        and the prices of key food imports rise. Sim-      tance to help meet adjustment costs is an
        ilarly, Bourguignon, Levin, and Rosenblatt         important focus, along with addressing
        (2004b) found that countries in the bottom         supply-side constraints, of current efforts
        two deciles of the international distribution      by a range of donors, recipients, and inter-
        of income would benefit more from a dou-            national organizations, including the World
        bling of aid over current levels than from full    Bank, to increase aid for trade in the context
        trade reform. The estimated impact of trade        of the WTO Doha round.
        liberalization varies greatly within countries
        as well (chapter 9).                               Setting trade rules. Where do the rules that
            Specific liberalization measures would          govern trade come from, and what are the
        also have differential impacts. Anderson           chances of changes? Trade rules, including
        and Martin (2004) found that the removal           the most egregiously inequitable, are part of
        of OECD agricultural subsidies would hurt          complex multilateral, regional, and bilateral
        net food-importing least developed coun-           agreements. As mentioned in box 10.1, there
        tries, such as those in the Middle East and        are significant concerns about the fairness of
        North Africa, and countries that now enjoy         WTO decision-making processes, and these
        special preferences, such as the Philippines,      processes are partly responsible for the cur-
        because of the consequent increase in              rent stalemate in negotiations.
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                                                       But the reality of WTO negotiations is                   in rich countries, who often stand to lose
                                                   complex. In the WTO, each country has one                    from the protection of vested commercial
                                                   vote, and the practice of decision making by                 interests. Consider, for example, cotton sub-
                                                   consensus means that each country can                        sidies (see box 10.3) and international car-
                                                   veto decisions (although the practice of                     tels.19 Poor countries are in an even weaker
                                                   “single undertaking,” or voting on all mat-                  position when negotiating bilaterally with
                                                   ters together, in practice weakens veto                      stronger trading partners than they are
                                                   power). Countries choose to sign on to the                   when negotiating multilaterally. Paradoxi-
                                                   WTO following not only extensive external                    cally, in light of the intense antiglobalization
                                                   negotiations but also domestic decision-                     protests, multilateral negotiations in the
                                                   making processes. So this is not a prima                     context of the WTO hold the greatest prom-
                                                   facie example of unfair rule-setting. In                     ise to reduce inequities that harm poor
                                                   practice, however, poor countries find it dif-                countries. Although even an ambitious
                                                   ficult to follow negotiations, to understand                  Doha Round would bring limited benefits, it
                                                   the implications of proposals to them, and                   remains an important goal to pursue
                                                   to develop alternative proposals—we saw in                   because failure would further undermine
                                                   chapter 3 that even their capacity to be pres-               confidence in multilateral negotiations.
                                                   ent in Geneva is limited.                                        The WTO has another advantage: it pro-
                                                       So, in the end, the rules may at times be                vides for a mechanism to adjudicate dis-
                                                   unfair not because the formal processes are                  putes. This is important, as seen earlier, to
                                                   unfair but because of the underlying power                   ensure that international law is applied and
                                                   imbalance between rich countries with                        enforced. The WTO dispute settlement
                                                   strong commercial interests and poor coun-                   mechanism provides a forum for poor coun-
                                                   tries with weak capacity.18 The balance is                   tries to bring complaints and possibly win
                                                   even tilted against taxpayers and consumers                  them. Unfortunately, winning a case does


         BOX 10.3            Cotton subsidies are huge—and tenacious
         The International Cotton Advisory Committee            implied an 8 percent reduction in rural per         tunity Act provides an opening, but under
         estimated that, in 2001/02, direct production          capita income in the short run and a 6 to 7 per-    rather restrictive conditions: apparel from 14
         assistance by the eight countries that provided        cent reduction in the long run, with the            African countries gets duty-free and quota-free
         subsidies (United States, China, the European          incidence of poverty among cotton growers ris-      access to U.S. markets, but only if made from
         Union, and to a much smaller extent Turkey,            ing in the short run from 37 percent to 59 per-     U.S. fabric, yarn, and thread. So to take
         Egypt, Mexico, Brazil, Cote d’Ivoire, in that order)   cent (Minot and Daniels 2002).                      advantage of this provision, countries need to
         was around $5.8 billion. Direct assistance to U.S.          Estimates of the impact of subsidy removal     establish an effective input visa system to
         cotton producers reached $3.3 billion, China’s sup-    on cotton prices are in the range of 8 to 12 per-   ensure compliance with rules of origin (Baffes
         port totaled $1.2 billion (although some question      cent. Increases of this magnitude would not         2004), which seems exceedingly complex.
         this estimate), and the European Union’s support       hurt consumers—the price of raw cotton is a               Within the WTO, poor cotton-producing
         was $979 million (for Greece and Spain) (Interna-      small component of the price of textiles and        West African countries took the unusual step of
         tional Cotton Advisory Committee 2003).The             garments. Full subsidy removal and the conse-       issuing a joint statement calling for full subsidy
         main impact of U.S. and European subsidies is to       quent rise in prices would help African             removal and for cotton to be treated separately.
         make cotton produced in the United States and          countries, although the distribution of in-coun-    But the July 2004 Framework Agreement of the
         Europe competitive and depress world prices. It is     try benefits would depend on domestic reforms.       Doha Development Agenda does not include
         estimated that in 2001/02 prices would have been       A recent study of the impact of subsidy removal     separate treatment of cotton, stating only that
         71 percent higher without subsidies.                   on three cotton-producing provinces of Zambia,      cotton will receive “adequate priority” in agricul-
              Subsidies benefit large rich farmers in the        for instance, indicates that the direct impact of   tural negotiations. Subsidy removal is politically
         United States and not-so-rich but relatively well-     the subsequent cotton price increase would be       unlikely.
         off farmers in Europe, and harm poor, small            small: about 1 percent of income on average.              In the current climate, a second-best option
         farmers in Africa. Cotton is a crucial commodity       Greater gains would require farmers switching       would be to implement well-designed decou-
         for a number of poor African and Central Asian         from subsistence crops to cotton, which in turn     pled support, in which subsidies do not depend
         countries, contributing up to 40 percent of mer-       requires complementary domestic reforms in          on production and thus do not encourage over-
         chandise exports and 5 to 10 percent of GDP.           extension services and robust growth of             production and consequent “dumping,” as is the
         Most growers are smallholders, so the impact of        demand for cotton exports (Balat and Porto          case with the current schemes. Existing mecha-
         cotton prices on poverty is significant. A study        forthcoming).                                       nisms would need to be reformed, because they
         on Benin found that a 40 percent reduction in               Benefits to African countries would increase    still depend on acreage and thus create incen-
         farmgate cotton prices—equivalent to the price         if they were to expand their clothing production    tives for overproduction. Less overproduction
         decline from December 2000 to May 2002—                and exports.The U.S. African Growth and Oppor-      may help lift prices a bit.
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                                                                                                    Achieving greater global equity   213



        not automatically bring redress: the loser in           The reach of fair trade initiatives, while
        the case may not necessarily change its action.     growing, remains small. In Switzerland,
        The existing mechanisms to enforce decisions        where consumer support is strong, fair
        rely on voluntary compensation of the loser         trade bananas still represented only 25 per-
        and, when this is not satisfactory, the possibil-   cent of overall banana purchases and con-
        ity of retaliatory action (such as suspension of    sumer spending on all fair trade products
        tariff and other concessions) on the part of        was a mere $10 per person in 2002 (Swiss
        the winner. Clearly, poor countries’ retalia-       agricultural subsidies amounted to roughly
        tion against powerful trading partners is           $750 per person in the same year). Fair
        unlikely to provide much of an incentive for        trade coffee accounts for, at most, 3 percent
        rich countries to comply with unfavorable           of world sales, and only about 20 percent of
        rulings, because of their typically smaller vol-    the capacity of certified fair trade producers
        ume of trade with a developed-country               is absorbed by the fair trade circuit.21
        defendant. Even so, developing countries                Another example of organizations act-
        have in recent years brought forward, and           ing directly to establish more equitable
        won, an increasing number of cases.                 trade relations is the growing number of
                                                            initiatives for corporate social responsibil-
        The fair and ethical trade movements.               ity and ethical trade. Companies that join
        Interestingly, some NGOs and civil society          an ethical trade organization, such as the
        organizations in both developed and devel-          Ethical Trading Initiative in the United
        oping countries have acted directly to estab-       Kingdom or the Fair Labor Association in
        lish more equitable trade relations. One            the United States, pledge to respect a code
        such example is “fair trade.” Fair trade ini-       of conduct in return for favorable consid-
        tiatives, led by consumer groups, NGOs,             eration by consumers and investors who
        trade unions, and other civil society organi-       care about equitable development.22 Codes
        zations, aim to control the supply chain            of conduct generally cover fair labor
        from production to market to improve the            practices (usually those set out in ILO con-
        well-being of developing-country produc-            ventions), environmental standards, and
        ers by ensuring a stable price for their com-       monitoring mechanisms—and apply not
        modities, linking them more directly with           just to a firm’s direct production facilities
        markets in rich countries, and strengthen-          but also to those of all its suppliers along
        ing their organizations. The approach is            the supply chain.
        working: sales of fair trade bananas, cocoa,            Are consumers in rich countries willing
        coffee, brown sugar, tea, and a few other           to pay a bit more to ensure that the goods
        products have seen phenomenal growth in             they buy are produced in fair and safe con-
        recent years and now represent a significant         ditions? Proponents of codes of conduct
        share of exports for some countries (for            believe they are. Researchers found that
        instance, 11 percent of Ecuadorian bananas          almost 90 percent of Americans said they
        and 20 percent of Ghanaian coffee are now           would pay at least an extra $1 on a $20 item
        sold through fair trade).                           if they could be sure it had not been pro-
            The few impact studies that exist show          duced by exploited workers.23 Skeptics
        that fair trade initiatives have indeed made a      point to the fact that prices dominate the
        difference to producers, not only through the       decisions of the major corporate buyers.
        premiums paid over world prices but also                Codes of conduct inspired by ethical
        thanks to the services and assistance pro-          considerations might have a positive impact
        vided to farmers by producer cooperatives           on equity, but are they applied? Impact
        supported by fair trade organizations. When         studies conducted by the Ethical Trading
        inequities arise from unequal access to mar-        Initiative found mixed evidence. Consumers
        kets and lack of information, credit, and           may not be willing to pay higher prices in
        risk-mitigation mechanisms, strengthening           exchange for an uncertain (and often
        producer associations can lead to more equi-        unmonitored) positive impact. Consumer
        table outcomes, even without paying a pre-          pressure may thus not be enough (box 10.4).
        mium, in the context of existing trade rules.20     So, these initiatives, while important, are no
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      214                    WORLD DEVELOPMENT REPORT 2006



                                                                                                              position and can charge higher prices.
         BOX 10.4            Will improved working conditions                                                 Extending patent protection to developing
                             in Cambodia’s textile industry survive                                           countries can thus increase total profits by
                             the end of the quota system?                                                     allowing companies to earn them in poor
                                                                                                              countries—and changes the distribution of
         As mentioned in chapter 9, the 1999 bilat-         there are reports of union leaders being          R&D financing, with a greater share borne
         eral trade agreement between Cambodia              fired, lack of adherence to minimum and
         and the United States included a provision         overtime pay rules, and repressed demon-
                                                                                                              by poorer countries. But protection of IPR
         whereby Cambodia’s clothing exports                strations. Employers are allegedly using the      must be balanced by the concern that it
         would increase each year if labor standards        threat of tough competition from China to         restricts access to new technologies. Patents
         improved.The ILO was mandated to prepare           cut salaries and benefits. But the employers       restrict access to innovations by making
         a report twice a year based on factory visits      are being watched—an independent union
         and interviews with workers and unions             movement has grown in the industry and
                                                                                                              them more expensive and more difficult to
         and to make it widely available.                   ILO monitoring is increasingly sophisticated.     copy. There is great concern in developing
              The provision helped bring about a grad-      Monitors are now using hand-held comput-          countries on the availability of various
         ual improvement in working conditions in           ers to transmit findings from their factory        innovations, including patented seeds and
         clothing factories, but this progress is under     visits, allowing timely reporting. If working
         threat with the end of the quota system.The        conditions deteriorate, activists, researchers,   drugs. Antiretroviral drugs to fight AIDS
         government agreed to continue ILO inspec-          unions, and, most important of all, consumers     are a case in point (box 10.5).
         tions until 2008, but employers can no longer      will know.Whether their pressure will be              We look in more detail at pharmaceutical
         count on increases in exports to the United        enough to ensure adherence to labor stan-
                                                                                                              patents as an illustration of the broader
         States if they uphold labor standards. Some        dards is an open question.
         are aware that labor standards compliance is       Sources: International Confederation of Free
                                                                                                              issues. Chaudhuri, Goldberg, and Jia (2004)
         their only real competitive advantage, but         Trade Unions (2005), Washington Post (2004).      estimate that the gains to the Indian econ-
                                                                                                              omy from not following international patent
                                                                                                              protection standards were around $450 mil-
                                                  substitute for more equitable trade rules                   lion, of which $400 million were a gain to
                                                  under the WTO and other arrangements.                       consumers and the rest profits of domestic
                                                                                                              producers. Profit losses to foreign producers
                                                  Intellectual property rights                                were only around $53 million a year. This
                                                  and the global market for ideas                             study illustrates the important point that the
                                                  Protection of intellectual property rights                  profits pharmaceutical companies could gain
                                                  (IPR) is another area in which market failure               in poor countries are not very large. Lanjouw
                                                  and power structures shape unequal pro-                     and Jack (2004) estimate that extending
                                                  cesses and outcomes; the interests of a few                 patent protection to developing countries to
                                                  powerful actors impose costs on the general                 20 years would be equivalent, for firm prof-
                                                  public, particularly the poor. The require-                 its, to extending patents in developed coun-
                                                  ment set forth in the Trade-Related Aspects of              tries by two weeks.
                                                  Intellectual Property Rights agreement                          A solution exists that would lead to more
                                                  (TRIPS)24—that all member countries offer                   equitable provision without undermining
                                                  20-year patent protection—is perceived by                   efficiency: wherever rich country markets
                                                  many to be grossly inequitable. Because                     already support the cost of research, poor
                                                  patent protection was adopted in OECD                       countries could be allowed to produce or
                                                  countries before the 1990s, the main result of              import cheaper generic substitutes, at no
                                                  this requirement is to strengthen patent pro-               significant cost to either rich countries or
                                                  tection in poor countries that become WTO                   the firms that carry out research (see focus 7
                                                  members. Countries adopting patent protec-                  on drug access at the end of this chapter).
                                                  tion today are doing so at levels of GDP                        As with all international law, the existing
                                                  between $500 and $8,000 per capita, while                   IPR protection rules are the result of com-
                                                  OECD countries did so when their GDP per                    plex negotiations. TRIPS—which was basi-
                                                  capita was around $20,000 in 1995 prices.25                 cally written by industry lawyers26—is part
                                                      Patents stem from a legitimate desire to                of the agreement establishing the WTO, a
                                                  provide incentives for the generation of                    multifaceted deal that included the Multi-
                                                  knowledge and cover the cost of developing                  Fiber Agreement and other provisions that
                                                  new knowledge. A drug or other patented                     developing countries deemed beneficial to
                                                  innovation cannot be copied while a patent                  them. Many bilateral free trade agreements
                                                  is in force, so developers enjoy a monopoly                 (such as recent agreements between the
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                                                                                                                      Achieving greater global equity                    215




          BOX 10.5           Expanding access to antiretroviral drugs in South Africa
          In response to the rising AIDS crisis, the govern-   from about 4,000 rand a month to 1,000 rand a             The Constitutional Court declared that the
          ment of South Africa in 1997 amended the Med-        month.                                               South African Constitution required the South
          icines and Related Substances Control Act of             Other legal cases (not involving TRIPS)          African government to devise and implement
          1965 in an attempt to ensure the supply of more      helped expand access to antiretroviral drugs. In     within its available resources a comprehensive
          affordable drugs to all South Africans.The           2002, a group of complainants, including TAC,        and coordinated program to realize
          amendment encouraged pharmacists to substi-          brought a case against GlaxoSmithKline and           progressively the rights of pregnant women and
          tute costly patented drugs with cheaper generic      Boehringer Ingelheim at the South African Com-       their newborn children to have access to health
          equivalents, allowed for the importation of          petition Commission. In its October 2004 ruling,     services to combat mother-to-child transmission
          cheaper drugs available on the market                the commission found that the two firms had           of HIV.The Court found the state policy of
          elsewhere (parallel imports), and introduced a       engaged in excessive pricing of patented anti-       restricting the availability of antiretroviral drugs
          compulsory licensing system allowing competi-        retrovirals and refused to allow generic produc-     and related services for preventing mother-to-
          tors to produce patented drugs.                      tion of the drugs in return for royalty payments,    child transmission of HIV to a few pilot test sites
               The Pharmaceutical Manufacturers Associ-        actions that the commission ruled were in viola-     unreasonable, and ordered the government to
          ation and 39 drug companies challenged the           tion of the South Africa Competition Act.To          rectify the situation by taking reasonable steps
          government’s legislation in the Pretoria High        keep the case from moving to a higher tribunal,      to facilitate the availability and use of antiretrovi-
          Court on several grounds, including that it          the firms came to a settlement agreement that         ral drugs in all public health facilities.
          violated South Africa’s obligations under            included licensing generic production.                    In 1999, TAC had also been part of a success-
          TRIPS. The Treatment Action Campaign (TAC)               TAC also attempted to compel the national        ful constitutional challenge relating to discrimi-
          and a labor union, COSATU, supported the gov-        and provincial governments to provide                nation of South African Airways cabin
          ernment defense in the case, asserting that the      antiretroviral drugs to all pregnant women to        attendants with HIV.The judgment reinforced
          legislation was valid in that it constituted the     prevent the transmission of HIV from mothers to      the right to equality for people with HIV.These
          government’s positive duty to fulfill the right      their children; the impact of the existing govern-   legal challenges had important indirect impacts,
          to health. Arguably as a result of public pres-      ment policy was to make the drug Nevirapine          setting groundbreaking precedents, increasing
          sure and attention, the Pharmaceutical Manu-         unavailable in public health facilities other than   judicial awareness of human rights obligations,
          facturers Association and the drug companies         the 10 or so pilot sites.The government              and heightening public awareness of rights.
          withdrew their case. An indirect result was to       appealed to the Constitutional Court after TAC       Sources: Decker and others (2005), South Africa
          bring down the price of antiretroviral medicine      secured a successful decision.                       Competition Commission (2003).




        United States and Chile, Jordan, Morocco,                   at least some of the agencies responsible
        Singapore, Vietnam, and others) include                     (such as WIPO and developed-country
        even stronger IPR protection rules than                     patent offices) are perceived as biased.
        TRIPS, such as granting patent extensions                   Inequitable as TRIPS may be, it still provides
        on pharmaceuticals and specific types of                     an internationally agreed standard subject
        protection on clinical trial data submitted                 to intense scrutiny and study, which does
        to obtain marketing approval. Signatories                   make it harder for rich countries to get more
        to these agreements agreed on these rules                   favorable deals in bilateral agreements.
        generally in exchange for preferential access                   An additional advantage of negotiating
        to U.S. markets for their products.                         sessions under the WTO is that they pro-
            But it is hard to argue that the parties to             vide focal events for mobilizing public
        these various bilateral and multilateral                    opinion. An example of how positive results
        agreements were on a level playing field.                    can be achieved within the WTO process is
        Poor countries are in a weaker bargaining                   the Declaration on the TRIPS Agreement
        position overall. For example, the preferen-                and Public Health adopted at Doha in 2001,
        tial access they gain through bilateral trade               which affirms the primacy of public health
        agreements is eroded whenever the United                    concerns over IPR protection. Three subse-
        States reduces remaining tariffs and quotas                 quent U.S. bilateral agreements include side
        in bilateral or multilateral negotiations,                  letters on public health that affirm the sig-
        while IPR protection does not weaken over                   natories’ understanding that IPR protection
        time.27 Moreover, the issues involved in IPR                does not affect their ability to “protect pub-
        protection are complex and require skills                   lic health by promoting medicines for all.”28
        and capacity that rich countries can better                 When negotiations are shifted away from
        afford—often with input from pharmaceu-                     the spotlight, as drug companies managed
        tical firms. Some capacity-building efforts                  to do with drug licensing under the July
        for developing countries are under way, but                 2004 Doha Development Agenda Frame-
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      216             WORLD DEVELOPMENT REPORT 2006



                                    work Agreement, monitoring progress and          including those assessed under the Reports
                                    campaigning become more difficult. So             on the Observance of Standards and Codes
                                    multilateral negotiations within the WTO,        (ROSC), international accounting stan-
                                    which are held under the spotlight, proba-       dards, and the Core 25 Principles for Bank-
                                    bly hold the most promise in terms of            ing Supervision—are also costly for devel-
                                    adopting more equitable rules.                   oping countries and may not be appropriate
                                                                                     to their level of development.
                                    Financial market liberalization
                                    Capital flows to developing countries have        Rules-setting in global financial markets.
                                    grown tremendously in the 1990s, bringing        Some of the key rules governing global
                                    both advantages and challenges. Short-term       financial markets are developed by institu-
                                    capital flows are at times accused of con-        tions to which developing countries do not
                                    tributing to financial instability while not      belong. The Financial Stability Forum,
                                    enhancing growth in countries with imma-         established in 1999 to promote global
                                    ture financial systems. Most countries that       financial stability, brings together senior
                                    received high volumes of short-term capital      representatives of central banks, supervi-
                                    inflows in the 1990s—Argentina, Brazil,           sory authorities and treasury departments
                                    Indonesia, Korea, Mexico, Russia, Thailand,      of nine OECD countries, international
                                    and Turkey—have been hit by financial             financial institutions, international regula-
                                    crises, triggered or deepened by the flight of    tory and supervisory groupings, com-
                                    foreign short-term capital.                      mittees of central bank experts, and the
                                        Domestic factors play a key role in finan-    European Central Bank. The only emerging
                                    cial instability, but global rules also play a   market economies that are members are
                                    role. For instance, debt workout mecha-          Hong Kong (China) and Singapore.
                                    nisms follow informal processes; the IMF’s           The Basel Committee on Banking Super-
                                    proposal for a Sovereign Debt Workout            vision, which developed the Basel II Capital
                                    Mechanism was not adopted. The result is         Accord, comprises representatives of the
                                    that deals tend to benefit international          central banks and banking supervision
                                    lenders at the expense of domestic investors     authorities of Belgium, Canada, France,
                                    and taxpayers.29                                 Germany, Italy, Japan, Luxembourg, the
                                        In contrast to short-term capital flows,      Netherlands, Spain, Sweden, Switzerland,
                                    foreign direct investment (FDI) is generally     the United Kingdom, and the United States.
                                    regarded as having a positive impact on          Its main interlocutor in the development of
                                    receiving countries, but it goes to only a few   the Accord was the Institute for Interna-
                                    countries. In 2002, 84 percent of FDI to         tional Finance, a Washington-based consul-
                                    developing counties went to 12 mostly            tative group of major international banks.
                                    middle-income countries (including China         Neither the Financial Stability Forum nor
                                    and India), with the other 150-odd develop-      the Basel Committee can legitimately repre-
                                    ing countries receiving almost nothing.          sent the interests of developing countries.32
                                    Only 5.3 percent of FDI went to Sub-Saharan      Various other standards, often developed by
                                    Africa.30 Domestic factors play a key role       semiprivate agencies (such as the Interna-
                                    also in determining the location of FDI, but     tional Accounting Standards Board), are
                                    again global rules contribute to inequitable     based on practices in the United States and
                                    outcomes. The Basel II Capital Accord, that      European Union. Greater participation and
                                    sets capital adequacy standards for banks,       voice in rule-setting bodies would help
                                    may overestimate the risk of bank lending to     ensure that outcomes are more favorable to
                                    developing countries (in part because it         developing countries.
                                    ignores the benefits of diversifying portfo-
                                    lios across countries), thus raising the cost    Rectifying past and present inequities
                                    and reducing access to external capital, in      in the use of natural resources
                                    addition to increasing the procyclicality of     The use of natural resources is another major
                                    loans and possibly contributing to increased     arena in which market failures and unequal
                                    volatility.31 Emerging global standards—         power conjure to create major inequities.
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                                                                                                  Achieving greater global equity   217



        This is greatly skewed in favor of devel-      It allows industrial countries to purchase
        oped countries and impacts are grossly         emission reduction “credits” generated
        inequitable. Without major technological       from activities that reduce greenhouse gas
        innovations several key resources, such as     emissions in developing countries and to
        oil, could be exhausted before the world’s     apply these credits against their obligations
        poor get a chance to attain standards of       under the Protocol. It thus assists industrial
        living comparable to those of today’s          countries in meeting their commitments
        developed-country citizens. Moreover,          under the Kyoto Protocol more cost effec-
        global warming threatens to destroy the        tively and promotes sustainable develop-
        livelihoods of people living in low-lying      ment in developing countries, through
        coastal areas, small islands, and semiarid     supporting greater investments in cleaner,
        regions. Yet the people potentially affected   more efficient technologies as well as
        by these changes (tomorrow’s citizens and      forestry projects.
        many of today’s poor) have virtually no            Fairness in processes is also an issue. In
        voice in setting rules.                        negotiating the Kyoto Protocol, as in most
            The international community has taken      global treaty negotiations, industrial nations
        some steps to manage natural resources in a    had greater power at the negotiating table.
        more equitable way. Some international         An imbalance of technical expertise, a lack of
        legal instruments, such as the Convention      adequate public support for the issues, and
        on the Law of the Sea of 1982, reflect the      problems forming coalitions because of
        concept of distributive justice discussed      diverse interests have attenuated the bargain-
        earlier by taking an approach whereby the      ing power for many developing countries.
        seabed and ocean floor, beyond national             The United States, the single largest emit-
        jurisdiction, are classified as global com-     ter of greenhouse gases, has announced that
        mons and subject to a system of equitable      it is not becoming a party to the Kyoto Pro-
        sharing of the economic benefits derived        tocol, significantly reducing the protocol’s
        from activities in these areas.                efficacy. With the protocol having come into
            Key steps toward redressing inequities     effect in February 2005, the United States
        in the use of global resources are the 1992    will be a mere observer at the Meetings of the
        U.N. Framework Convention on Climate           Parties to the Kyoto Protocol, but because of
        Change and the 1997 Kyoto Protocol. The        the size of its emissions, the other parties will
        protocol is structured to reflect the prin-    not want to ignore U.S. concerns.33
        ciple of “common but differentiated                Equitable access to information is an
        responsibilities” between developed and        important ingredient for more equitable
        developing countries. It recognizes that       use of global resources. The UN/ECE
        industrial nations have emitted the major-     Convention on Access to Information, Pub-
        ity of greenhouse gases in the atmosphere,     lic Participation in Decision-making and
        causing the majority of the harm, and          Access to Justice in Environmental Matters
        places greater demands on them. It sets        (Aarhus Convention) deals with public par-
        binding quantified commitments for             ticipation in environmental management
        industrial countries to reduce their green-    and access to information on environmen-
        house gas emissions by 2008–12, with the       tal issues. The Convention, adopted in 1998
        understanding that the agreement would         and in force among 35 parties since 2001,
        include emission reduction efforts by          grants citizens the right to impose obliga-
        developing nations some time after 2012.       tions on public authorities and parties to
            One important aspect of the Kyoto Pro-     international environmental conventions,
        tocol is the unique set of provisions that     including information disclosure, access to
        allow industrial nations to meet their com-    information, public participation in envi-
        mitments through actions not only within       ronmental decision making, and access to
        their borders but also outside. One of these   justice. A Convention Compliance Com-
        provisions, the Clean Development Mecha-       mittee has been established, to which citi-
        nism, helps address the perceived inequality   zens and NGOs can bring allegations of
        of obligations and the costs of compliance.    noncompliance.
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      218             WORLD DEVELOPMENT REPORT 2006



                                    Providing development assistance                 sively shifting design and management
                                    to help build endowments                         from donors to countries. The United King-
                                                                                     dom’s Commission for Africa (2005) rec-
                                    In shaping global inequities, rules and
                                                                                     ommended a major shift away from ex ante
                                    processes interact with unequal endow-
                                                                                     conditionality toward a new partnership in
                                    ments. Even if all the reforms suggested in
                                                                                     which African countries continue to work
                                    the previous sections were implemented,
                                                                                     to improve governance and accountability,
                                    many poor countries would still not be able
                                                                                     and donors deliver more, cheaper, more
                                    to participate in global markets because of
                                                                                     predictable aid. High levels of aid reduce
                                    their limited endowments of skills, capital,
                                                                                     the need for domestic tax efforts, which
                                    infrastructure, knowledge, and ideas. Action
                                                                                     have historically helped strengthen overall
                                    to build endowments is primarily domestic,
                                                                                     accountability of governments and citizen
                                    through private and public investments in
                                                                                     demand for quality services, so particular
                                    infrastructure and other areas. Can domes-
                                                                                     attention should be paid to revenue col-
                                    tic action be supported by aid?
                                                                                     lection.34 The preparation of poverty
                                    Better development assistance                    reduction strategies is a key, if imperfect,
                                                                                     instrument to shift to country-led processes
                                    From an equity perspective, the main roles
                                                                                     with greater participation and monitoring
                                    of aid are to help countries build the
                                                                                     of how public resources are spent.
                                    endowments of those who are resource-
                                                                                         Fragile states pose a special challenge.
                                    poor, generally through no fault of their
                                                                                     Stabilization and peacekeeping need to be
                                    own, and avoid extreme deprivation (which
                                                                                     complemented with efforts to build state
                                    justifies to some extent the use of aid to
                                                                                     institutions and legitimacy. The sequencing
                                    support current consumption). The focus
                                                                                     of interventions matters—there is some evi-
                                    on building endowments implies that both
                                                                                     dence that ring-fenced, long-term invest-
                                    the level of aid and its effectiveness matter.
                                                                                     ment in human capital development and
                                    Enhancing aid effectiveness. If the goal is to   working with NGOs and the private sector
                                    equalize opportunities for the poor, aid         can be useful first steps. Technical assistance
                                    effectiveness is crucial. Aid that sustains      appears more effective after reforms take off
                                    corruption or marginal projects, or is used      and can help lay the basis for capital invest-
                                    to increase the resources at the disposal of     ment and service delivery interventions.35
                                    the rich, does not help. Aid effectiveness           When domestic political processes are
                                    hinges crucially on aid delivery modalities      manifestly inequitable and corrupt, donors
                                    and on the fairness and transparency of          can try to support moves toward a more equi-
                                    domestic political processes. Birdsall (2004)    table revenue collection and allocation; decen-
                                    cites seven “deadly sins”: impatience with       tralization to lower levels of government,
                                    institution building, failure to exit, failure   which can challenge central control; and the
                                    to evaluate, pretending that participation       strengthening of community-based organiza-
                                    equals ownership, failure to collaborate,        tions, the media, and domestic entrepreneur-
                                    stingy and unreliable financing, and under-       ship, which can help create a middle class with
                                    funding of regional and global programs—         a voice and a stake in better governance.
                                    in addition to tying aid to the use of con-
                                    sultants and firms from the donor country         Improving the allocation of aid. The distri-
                                    and allocating it according to political pri-    bution of aid matters as well. A lively debate
                                    orities. Existing aid planning and delivery      has taken place in recent years on aid alloca-
                                    practices are rooted in political and incen-     tion criteria. Burnside and Dollar (2000) and
                                    tive constraints that the donors face, so        Collier and Dollar (2001, 2002) found that
                                    change is difficult and slow. But some cur-       aid was more effective in reducing poverty if
                                    rent directions are promising: emphasizing       it was allocated to countries that followed
                                    results (including through tracking indica-      good policies and had good institutions. They
                                    tors of intermediate actions and final out-       calculated that reallocating actual aid pro-
                                    comes related to the MDGs), moving away          vided in 1996 across countries to maximize
                                    from ex ante conditionality, and progres-        poverty reduction according to their formula
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                                                                                                     Achieving greater global equity   219



        would have led to directing aid to roughly 20      aid than predicted by their policy and institu-
        instead of the 60 countries considered, and        tional strength, mostly because of dispropor-
        lifted twice as many people out of poverty.36      tionately low flows from bilateral donors,
            Their findings have been questioned by          while others (“aid darlings”) received more.38
        Hansen and Tarp (2001) and others, who
        argued that their analysis does not take           Increasing aid levels. Conditional on effec-
        country conditions into account and is not         tiveness and distribution, levels of aid do
        robust to different specifications. If aid effec-   matter. Aid levels fell between 1990 and 2001
        tiveness varies across countries not because       both as a share of rich countries’ gross
        of policies but as the result of different coun-   national income (GNI) and in nominal
        try circumstances, such as climate, a different    terms. Calls for more aid to help countries
        aid allocation rule would maximize the             achieve the MDGs have resonated loudly in
        poverty impact of foreign aid.37 Cogneau           recent international gatherings. At the 2002
        and Naudet (2004) suggested an alternative         International Conference on Financing for
        rule for aid allocation and showed that gains      Development in Monterrey, rich countries
        in poverty reduction similar to those found        committed to increasing their aid flows sig-
        by Collier and Dollar could be obtained if aid     nificantly. Net aid flows indeed increased sig-
        was directed to countries that have greater        nificantly in 2002–04 in nominal and real
        structural disadvantages (geographic, histor-      terms, reaching $78 billion.39 Three major
        ical, or economic, as discussed in chapter 3).     factors were behind these increases: continu-
        The resulting allocation would spread the          ing growth in bilateral grants (but with a
        risk of poverty more evenly across the             large share going to technical cooperation,
        world’s population, while reducing global          debt forgiveness, emergency and disaster
        poverty almost as much as the allocation           relief, and administrative costs); the provision
        proposed by Collier and Dollar.                    of reconstruction aid to Afghanistan and Iraq
            In sum, an equity perspective suggests         by the United States (in 2004, $0.9 billion to
        that an approach that does not take a coun-        Afghanistan and $2.9 billion to Iraq); and the
        try’s circumstances into account is likely to      depreciation of the U.S. dollar. While there
        ignore important information about need.           was a small increase in new development
        But an approach that ignores aid effective-        assistance to Sub-Saharan Africa in 2003,
        ness does not lead to expanded opportuni-          even after accounting for debt relief and
        ties. To contribute toward an equalization of      emergency assistance, Highly Indebted Poor
        opportunities across the world’s individuals,      Countries (HIPC) received less in real terms
        aid should be targeted where the probability       in 2004 than the year before. On the positive
        is greatest that it effectively reaches those      side, the International Development Associa-
        with the most limited opportunities—the            tion, the soft-lending arm of the World Bank,
        poorest of the poor, in opportunity terms.         recently received a replenishment for 2006–8,
        That clearly depends on the poverty and            which is at least 25 percent higher than the
        deprivation levels in each country and on its      previous one and represents the largest fund-
        government’s ability and political commit-         ing increase in two decades.
        ment to deliver the aid where and how it is            These recent increases notwithstanding,
        intended. But more research is needed to           aid flows remain small not just in relation to
        fully understand the causal mechanisms.            need but also in comparison to domestic
            In practice, recent research showed that       human development and safety net programs
        many donors indeed seem to rely on both            that aim to equalize opportunities and ensure
        good policies and poor initial conditions. A       against deprivation. Such programs generally
        study of 40 donor agencies by Dollar and           account for more than 10 percent of GDP in
        Levin (2004) found that aid was positively         donor countries. Official development assis-
        correlated with a measure of good policies         tance (ODA), by contrast, was only 0.25 per-
        and with per capita GDP, and the agencies          cent of donor countries’ GNI in 2003. Only
        that focused the most on good policies also        Denmark, Luxembourg, the Netherlands,
        directed their aid to poor countries. However,     Norway, and Sweden meet the U.N. target of
        some fragile states (“aid orphans”) receive less   providing ODA equal to or greater than 0.7
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      220             WORLD DEVELOPMENT REPORT 2006



                                    Table 10.1 ODA as a share of GNI, 2002, 2003, and simulation for 2006
                                                                                                              ODA as %          ODA as %           ODA as % of GNI
                                                                Net ODA 2003           Net ODA 2004            of GNI            of GNI              Simulation
                                    Country                      ($ millions)           ($ millions)            2003              2004                  2006

                                    Austria                             505                   691                0.20               0.24                   0.33
                                    Belgium                           1,853                  1,452               0.60               0.41                   0.64
                                    Denmark                           1,748                  2,025               0.84               0.84                   0.83
                                    Finland                             558                   655                0.35               0.35                   0.41
                                    France                            7,253                  8,475               0.41               0.42                   0.47
                                    Germany                           6,784                  7,497               0.28               0.28                   0.33
                                    Greece                              362                   464                0.21               0.23                   0.33
                                    Ireland                             504                   586                0.39               0.39                   0.61
                                    Italy                             2,433                  2,484               0.17               0.15                   0.33
                                    Luxembourg                          194                   241                0.81               0.85                   0.87
                                    Netherlands                       3,981                  4,235               0.80               0.74                   0.80
                                    Portugal                            320                  1,028               0.22               0.63                   0.33
                                    Spain                             1,961                  2,547               0.23               0.26                   0.33
                                    Sweden                            2,400                  2,704               0.79               0.77                   1.00
                                    United Kingdom                    6,282                  7,836               0.34               0.36                   0.42
                                    EU members, total                37,139                42,920                0.35               0.36                   0.44
                                    Australia                         1,219                  1,465               0.25               0.25                   0.26
                                    Canada                            2,031                  2,537               0.24               0.26                   0.27
                                    Japan                             8,880                  8,859               0.20               0.19                   0.22
                                    New Zealand                         165                   210                0.23               0.23                   0.26
                                    Norway                            2,042                  2,200               0.92               0.87                   1.00
                                    Switzerland                       1,299                  1,379               0.39               0.37                   0.38
                                    United States                    16,254                18,999                0.15               0.16                   0.19
                                    DAC members, total               69,029                78,569                0.25               0.25                   0.30

                                    Source: OECD-DAC (2004).
                                    Note: DAC = Development Assistance Committee; EU = European Union; GNI = gross national income; ODA = official development
                                    assistance.



                                     Figure 10.2 More subsidies than aid                                percent of GNI. Many countries are not on
                                                     Aid and agricultural subsidies                     track to meet their Monterrey commitments
                                                relative to GDP in OECD-DAC countries                   (table 10.1).
                                     Percent of GDP, 2002                                                   Aid also is low in comparison with other
                                     1.6                                                                uses of public resources. Agricultural subsi-
                                                                       Agricultural
                                                                       subsidies                        dies, for instance, were almost five times
                                                                       Aid                              larger than aid in 2002. Japan, the European
                                     1.2
                                                                                                        Union, and the United States had subsidies
                                                                                                        equal to 1.4, 1.3, and 0.9 percent of GDP and
                                     0.8                                                                aid of 0.23, 0.35, and 0.13 percent respectively
                                                                                                        (figure 10.2). Rich countries should deliver
                                                                                                        on their Monterrey commitments; this alone
                                     0.4
                                                                                                        would add around $18 billion to develop-
                                                                                                        ment assistance by 2006. To make further
                                         0                                                              progress toward the 0.7 percent goal, coun-
                                               Japan     European        United           All           tries could establish intermediate targets for
                                                           Union         States       OECD-DAC
                                                                                       countries        2010. But again, higher aid that is poorly
                                                                                                        spent, supports corrupt regimes, or under-
                                     Sources: OECD-DAC (2004) and OECD (2003).
                                                                                                        mines domestic accountability can hinder,
                                                                                                        rather than support, greater equity.
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                                                                                                       Achieving greater global equity   221



        Additional debt relief. Aid should not be          untary contributions. The IFF would make
        undermined by debt payments. Multilateral          future aid available for immediate use (front-
        debt, the largest share of debt for the HIPC,      load aid) and possibly reduce volatility. It is
        is the result of loans received in the 1980s,      an option for some donors, such as France
        and new loans, while generally on more             and the United Kingdom, given their
        concessional terms, continue to add to the         accounting and legislative frameworks, but
        debt burden. Supporters of debt relief argue       not for others, who would not be able to
        that debt payments divert scarce resources         make long-term commitments or consider
        from health and education and other pro-           them off-budget. Even when feasible, the IFF
        poor spending.                                     would move aid off-budget in the short term,
            There has been progress in the last decade.    but it would expand financing for develop-
        In 1995, debt relief was not on the agenda of      ment only if it increased overall aid levels
        international organizations, partly because of     rather than simply shift future aid forward.
        financing issues and partly because of con-             Proposals involving global tax instruments
        cerns about creating a moral hazard (if debts      have also been advanced, including a “Tobin”
        are forgiven, governments of borrowing coun-       tax on short-term capital movements; taxes
        tries may think they are really not expected to    related to pollution, such as a global carbon
        repay). Over the following five years, thanks to    tax, an international aviation fuel tax, and a
        a strong grassroots mobilization in rich coun-     maritime pollution tax; taxes on arms sales;
        tries, effective research on the impact of debt    and surcharges on multinational profits and
        and committed leadership in some rich coun-        on value-added or income taxes. These pro-
        tries and the World Bank, the HIPC Initiative      posals would need to be assessed on the basis
        was launched and then expanded. As of March        of the revenues they could generate, their effi-
        2005, 27 countries had received debt relief        ciency, collectability, feasibility, and not least
        expected to amount to about $54 billion over       their impact on equity.
        time, up from $34.5 billion at the end of 2000.        Voluntary contributions from individuals,
        The ratio of debt service to exports for HIPC      corporations, private foundations, and NGOs—
        has declined roughly by half, to 15 percent.       another source of development assistance
        Poverty-reducing expenditures in the 27 coun-      alongside public aid—are increasing. But
        tries that receive HIPC assistance are estimated   effectiveness is an issue for private assistance
        to have increased from 6.4 percent of GDP in       too. As seen for the December 2004 Asian
        1999 to 7.9 percent of GDP in 2003.                tsunami, private charity can be mobilized
            Even so, many countries continue to bear       faster than public resources. But private con-
        an unsustainable debt burden, and more             tributions are influenced by press coverage
        needs to be done. The agreements reached in        more than actual need; contributors were
        October 2004 to extend the HIPC Initiative         much less generous for the Iranian earth-
        and in June 2005 to grant 100 percent debt         quake that hit in February 2005, which was
        cancellation of the debt owed to the African       virtually ignored in the news. Moreover, lack
        Development Bank, IMF, and World Bank to           of coordination, fragmentation, and infra-
        18 countries are important steps.40 This and       structure bottlenecks—such as bad roads and
        any further debt relief should truly be addi-      a lack of electricity and telecommunications,
        tional rather than substitute fresh aid. Fur-      which cannot generally be alleviated through
        ther debt relief should also be accompanied        private charity—can hinder its effectiveness.
        by careful consideration of debt sustainability    Moreover, alignment with recipient country
        issues, including increasing grants for very       strategies needs to be ensured.
        low-income countries, to avoid the buildup
        of unsustainable debt in the future.               Transitions to greater equity
                                                           Equity-enhancing changes in global policies
        Innovative mechanisms to fund development          and institutions come about through action by
        assistance. Several innovative mechanisms          governments and coalitions of governments—
        to expand development assistance are under         often within international fora, informed
        discussion, including the International            leadership and grassroots mobilization,
        Financing Facility (IFF), global taxes, and vol-   analysis and policy research to inform alter-
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      222             WORLD DEVELOPMENT REPORT 2006



                                    natives, and networks that disseminate those      emerged to try to influence the global agenda.
                                    alternatives. This section looks at some exam-    An example is the launching of the Enhanced
                                    ples illustrating the change processes; it does   HIPC Initiative in 2000. The original HIPC
                                    not attempt to be comprehensive or to assess      Initiative benefited some countries, but
                                    the weight of individual factors.                 progress was slow and there were several
                                        Examples include developed-country gov-       problems. By 1999 these were largely recog-
                                    ernments that take initiative unilaterally—       nized, but an expanded initiative needed to
                                    such as the countries that have already           garner support in creditor countries and in
                                    reached the target of 0.7 percent of GNI for      the World Bank and IMF governing commit-
                                    developing assistance or that cancelled a large   tees, because it required additional funding.
                                    portion of the debts owed to them by the          The Jubilee 2000 campaign, which combined
                                    poorest countries—as well as governments          awareness of the pernicious effects of exces-
                                    acting jointly to form coalitions for change.     sive debt with a call to debt forgiveness
                                    The latter are becoming more frequent in          inspired by the Christian Jubilee idea, mobi-
                                    trade negotiations, in which a group of large     lized hundreds of thousands of people in
                                    developing countries (including Brazil, China,    countries such as Germany, Italy, the United
                                    and India) is spearheading proposals for          States, and United Kingdom. The govern-
                                    greater trade liberalization.                     ments of these countries took notice and
                                        A way to spur equity-enhancing policy         finally agreed to various actions, expanding
                                    changes by developed countries is to accom-       the HIPC Initiative and canceling bilateral
                                    pany calls for change with tracking mecha-        debt. Other examples of pressure by civil
                                    nisms. The eighth MDG relates to greater          society organizations leading to changes in
                                    provision of aid and debt relief and more         rules are the campaigns to reform World
                                    equitable trade policies. Progress toward this    Bank policies on indigenous peoples, resettle-
                                    goal has been reviewed in September 2005 as       ment, and other safeguards.
                                    part of the Millennium Summit+5.                      In a second set of cases, international
                                        Another exercise to monitor rich coun-        rules already exist on paper, and social
                                    try policies, conducted by the Center for         movements bring them into effect by mak-
                                    Global Development and Foreign Policy             ing them visible and insisting that they be
                                    magazine, is the Commitment to Develop-           implemented. In many cases, this process
                                    ment Index. The index examines more indi-         happens at the country level, but it involves
                                    cators than the eighth MDG, including             an interaction with global rule and policy
                                    environment, security, investment, and            changes. The ethical trade initiatives dis-
                                    technology (Center for Global Develop-            cussed earlier are citizen mobilizations to
                                    ment 2004). While there are questions             enforce global and local laws. Similarly,
                                    about the methodology, particularly on            efforts by indigenous movements, NGOs, and
                                    aggregating scores in various areas, the          other activists ensured that ILO Covenant
                                    index exposes how some countries do better        169 on indigenous peoples was recognized
                                    in some areas than in others—Norway, for          as having legal weight (in practice) in vari-
                                    instance, does well on aid but poorly on          ous countries. Experience shows that citizen
                                    trade; Switzerland scores poorly on trade         mobilization is most effective when it
                                    but does better on environment; the United        builds broad-based coalitions for change
                                    States scores poorly on environment but           across countries and groups.
                                    has, with Canada, the most favorable                  But citizen mobilization also poses risks.
                                    migration policies—and how all countries          Civil society movements may partly counter
                                    have considerable opportunities to improve        unequal formal channels, but they are
                                    their policies.                                   highly imperfect mechanisms of aggregat-
                                                                                      ing voice, and their accountability is often
                                    Citizen mobilization. Citizen mobilization,       unclear. In recent years, there have been
                                    combining both grassroots and middle-class        instances of NGO campaigns that have led
                                    interest groups across countries, has grown in    to perverse outcomes, such as donors with-
                                    recent years. In some cases, an international     drawing from infrastructure and resettle-
                                    social movement, network, or alliance has         ment projects only to see governments
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                                                                                                       Achieving greater global equity   223



        move ahead anyway without international               transition countries in the world economy.
        monitoring of social and environmental                Moreover, small and low-income countries
        consequences.                                         have a limited role in their decision-making
                                                              processes. Developed-country governments
        Analysis and research. Socioeconomic analy-           have a majority of the votes on the boards
        sis and policy research also contribute to            of the IMF and World Bank, and two execu-
        making particular domains of inequity                 tive directors represent more than 40
        objects of public debate and action. Global           African countries.
        analysis of gender discrimination and miss-              Several options to enhance voice in the
        ing girls and women (box 2.9) has fostered            IMF and World Bank have been explored,
        public action to redress gender inequities. Ex        but limited progress has been made. In
        ante analysis and policy research are also vital      April 2005, the ministers of the intergov-
        ingredients for informing the design of policy        ernmental Group of Twenty-Four urged
        proposals. A vast body of recent research,            that a new quota formula be developed
        including serious impact evaluations, has             (voting rights depend on quotas), which
        focused on efficient and effective ways to             would give greater weight to measures of
        achieve the MDGs. The more research is con-           gross domestic product measured in pur-
        ducted by and with developing-country                 chasing power parity terms. They also sug-
        researchers, the more likely it is that its results   gested that, in order to strengthen the voice
        will inform policymaking.                             of small and low-income countries, basic
            Some of these key elements have been              votes should be increased to restore their
        missing in failed attempts at change. Analysis        original share of total voting power.41 Mak-
        and policy research is carried out and techni-        ing progress on enhancing the voice and
        cal solutions are proposed; the political will to     participation of developing countries in the
        implement them is missing, however, because           decision-making processes of the World
        political leaders do not think the issue is           Bank and IMF is of fundamental impor-
        important or coalitions are not formed that           tance to increase the legitimacy of interna-
        ensure sufficient support. In other cases,             tional financial institutions and enhance
        grassroots mobilization is strong, but it lacks       their effectiveness in fostering greater global
        well-developed, implementable proposals for           equity. The 13th General Review of IMF
        reform. Indeed, some NGO campaigns have               Quotas provides an important opportunity
        led to perverse outcomes, as when interna-            to make progress on issues of quotas, voice,
        tional organizations have withdrawn support           and participation.
        for projects under international criticism
        only to see governments proceed without               Summary
        international monitoring of social and envi-          In sum, global actions can play a key role in
        ronmental safeguards.                                 redressing inequitable rules and helping
                                                              equalize endowments. The rules that govern
        International organizations. International            markets for labor, goods, ideas, capital, and
        financial institutions can help bring about            the use of natural resources need to become
        global equity-enhancing action through                more equitable. Domestic action to build
        setting agendas and providing a focal point           the endowments of the poor can be sup-
        for international negotiations. Their dis-            ported through aid, but not if aid is poorly
        pute settlement and enforcement mecha-                spent, supports corrupt regimes, or under-
        nisms help ensure that their policies are             mines domestic accountability. Changes
        implemented. But the governance struc-                will require, above all, greater accounta-
        tures of the World Bank and IMF have not              bility at the global level, with greater repre-
        evolved in line with the increased size and           sentation of poor people’s interests in
        role of emerging market, developing, and              rule-setting bodies.

				
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