Africa and the emerging global trade issues : proceedings of an ad hoc experts group meeting on WTO - related issues

Economic Commission for Africa

Working Paper Series

Africa and the Emerging Global Trade Issues

Proceedings of an Ad Hoc

Experts Group Meeting on

WTO-Related Issues

Table of Contents

Part One

Introduction and Overall View 1

1. Introduction 1

2. Trade and Investment Policy in Africa 2

3. Trade and Competition Policy in the Framework of

African Countries 6

4. Practices and Procedures of Government Procurement in Africa 9

Part Two

Trade and Investment Policy in Africa 15

1. Trade and Investment Liberalization Policies: Issues of

Concern to the ESCAP Region 15

2. Africa and the Multilateral Agreement on Investment 22

Part Three

Trade and Competition Policy and Challenges for Africa 59

1. Competition, Competitiveness and Development

in African Countries Hassan Qaqaya (UNCTAD) 59

2. Multilateral Rules on Competition Policy: An Overview of the

Debate Dr. B.R. Paasman (ECLAC) 76

3. Trade and Liberalization in IMF-Supported Medium-Term

Adjustment Programmes in Sub-Saharan Africa: Paper by the

International Monetary Fund (IMF) 116

Part Four

Practices and Procedures of Government Procurement 129

1. Practices and Procedures of Government Procurement

in Africa (Economic Commission for Africa) 129

2. International Institutions and Efficiency in

Public Procurement (World Bank) 153

For this and other publications, please visit the ECA web site at the following address:

http://www.un.org./depts/eca/divis/index.htm or contact

The Director

Economic and Social Policy Division (ESPD) Economic Commission for Africa

P.O. Box 3001

Addis Ababa, Ethiopia Tel: (251-1)51 72 00 Fax: (251-1)5144 16 E-mail: ecainfo@un.org

Part One

Introduction and Overall View

1. Introduction

1. The momentum of globalisation and liberalization of the world economy presents both challenges and opportunities for African countries. Furthermore, the creation of the World Trade Organization (WTO) to oversee a rule-based international trading system is expected to create enormous opportunities for those countries that are able to take advantage of a more liberalised world economy, but it is also expected to pose serious challenges to those countries that do not have the capacity to benefit from these developments. It has been acknowledged that most African countries belong to the latter group. It was in this context that the First Ministerial Conference of the World Trade Organization, held in Singapore in December 1996, acknowledged the need to provide technical and other support to least developed countries in order to assist them to adapt to the Post-Uruguay Round international trading environment. The Conference adopted the "Comprehensive and Integrated WTO Plan of Action for the Least Developed Countries", which is intended to serve as a framework for helping these countries to take advantage of the opportunities to be generated by globalisation and liberalization of the world economy in the context of the WTO.

2. It was in the context of trying to assist African countries to adjust to the post-Uruguay international trading environment that the Economic Commission for Africa (ECA) organized from 9 to 11 March 1998 in Addis Ababa an Ad-Hoc Experts Group Meeting on Appropriate Follow-up Mechanisms to the First WTO Ministerial Conference and Modalities to Facilitate Africa's Participation in the Second WTO Ministerial Conference.

The meeting was organized in collaboration with the United Nations Conference on Trade and Development (UNCTAD), the World Trade Organization ( WTO), and the Organization of African Unity (OAU). It was officially opened by Mrs. Lalla Ben Barka, Deputy Executive Secretary of the Economic Commission for Africa (ECA).

3. The meeting was attended by experts from the following countries: Angola, Benin, Burkina Faso, Cape Verde, Central African Republic, Comoros, Djibouti, Egypt, Ethiopia, Guinea (Conakry), Guinea Bissau, Equatorial Guinea, Lesotho, Madagascar, Malawi, Mali, Mauritania, Morocco, Mozambique, Niger, Rwanda, Sao Tome & Principe, Sudan, Tanzania, Chad, Togo, Uganda and Zambia.

4. The following organizations and institutions attended the meeting: the Economic Commission for Latin America and the Caribbean (ECLAC); the Economic and Social Commission for Asia and the Pacific (ESCAP); the United Nations Conference on Trade and Development (UNCTAD); the World Trade Organization; the Organization of Economic Cooperation and Development (OECD); the International Monetary Fund; the Organization of African Unity; and the World Bank;

5. The Ad Hoc Experts' Group Meeting was held as part of the process of assisting African countries to adjust to the post-Uruguay Round economic and trading environment and to enhance their capacity to take advantage of the opportunities emerging from the new world economic order. The meeting, whose theme was 'Enhancing Africa's Participation Within the Framework of the Multilateral Trade Negotiations', brought together African experts on trade and investment issues and professionals from international organizations to

discuss the challenges facing Africa in adapting to the realities of globalisation and liberalization. The Meeting blended scholarly analysis and practical experience in search of practical and pragmatic solutions to Africa's problems.

6. The main topics discussed included trade and investment in Africa; competition policy in the framework of African countries; and practices and procedures for government

procurement. The deliberations took place against the backdrop of the ongoing discussions on these issues within the framework of the World Trade Organization and other fora. The meeting also discussed the agenda of the Second WTO Ministerial Conference with a view to providing pointers on some of the key issues to be discussed at the Conference that are of importance to African countries.

2. Trade and Investment Policy in Africa

7. The globalisation and liberalization of production processes, markets for goods and services as well as financial markets has heightened the debate as to the link between "trade policy" and "economic growth" on the one hand and "investment policy" and "economic growth" on the other. Furthermore, massive capital flows and globalisation of these markets have also brought to the forefront the debate on the link between "trade" and "investment".

8. Improved trade and investment performance is essential to enhance Africa's economic growth and its role in the international economy. Trade performance and economic growth are closely linked to sound policies, complemented by structural policies. Liberalising the

trading system is an integral part of the policies required for improved trade performance.

Many African countries have to a certain extent liberalised their economies, and in this context they have undertaken some trade and investment policy reforms. Nonetheless, Africa remains restrictive compared to other regions and countries. Accordingly, more can be done to improve trade and investment policies in many African countries.

9. The Ad Hoc Experts Group Meeting deliberated on these issues in the context of African countries and more specifically trade and investment policy reforms in African countries and their impact on trade expansion in these countries; the relationship between trade and investment; and the link between trade and economic growth. Accordingly, the meeting reviewed trade-policy reforms in Africa and their relationship to the performance of Africa's export sector and overall economic growth. Another key issue of discussion was the extent to which investment-policy reforms in Africa have succeeded in inducing foreign direct investment and, if not, what have been the major remaining obstacles.

10. The meeting also discussed the issues surrounding the debate on a possible

"multilateral investment agreement" within the framework of the WTO and its implications for Africa should it materialise. The Organization for Economic Cooperation and Development (OECD) has been negotiating such an agreement for sometime. It is imperative for Africa to be proactive on these issues.

11. There were six papers presented under this theme (three of which are annexed to this document), by the United Nations Conference on Trade and Development (UNCTAD), the World Trade Organization (WTO), the Organization of Economic Cooperation and Development (OECD), the Economic and Social Commission for Asia and the Pacific (ESCAP), the Organization of African Unity (OAU) and the Economic Commission for Africa (ECA). In addressing the issues relating to trade and investment policy, the meeting noted that unlike the GATT, its predecessor, which was mainly concerned with measures affecting cross-border trade in goods, the WTO is not limited to the regulation of cross- border transactions, but also contains rules on the treatment of foreign enterprises and natural persons and of the intellectual property of foreign nationals within the territory of a country.

It recognised the growing role of foreign direct investment in the international economy and that the increasing complementarity of trade and investment had recently stimulated interest

in exploring ways to address foreign investment more comprehensively in the context of the multilateral trading system.

12. It was recalled that at the first WTO Ministerial Conference in Singapore in December 1996, the developed countries had successfully pushed their agenda and the developing countries, particularly the African countries, felt completely marginalised. The issues of primary concern and interest to developing countries were never considered. For this reason,

it is important to develop a proactive agenda that is fully shared and endorsed by the developing countries for future WTO negotiations and, at the same time, to ensure against overloading the WTO agenda with issues that are extraneous to trade. It was also emphasised that future negotiations under the WTO should take full account of the development perspective.

13. It was noted that the post-Uruguay Round scenario seems to be unfolding into two main parts: one revolves around the built-in agenda contained in the Uruguay Round agreements that deals with new (or renewed) negotiations in some areas while in other areas, it involves assessments of the situation as specified in the Final Act; the second deals with a range of issues, which in some cases are old, for example, tariff negotiations, but in other cases, are new to the multilateral trading agenda. On some of these issues there is no consensus and they may prove to be increasingly complex and intractable in the years to come. Issues that could find their way into a future round of negotiations, broadly relate to the implications of regional economic groupings, the linkage between trade and the environment, the relationship between trade and investment, the problems relating to competition policy and trade, transparency in government procurement, and the scope for WTO rules in trade facilitation. The setting up of working groups to study the new issues, (except for trade facilitation), could in a way be considered a positive outcome for developing countries, insofar as they are charged with undertaking only analytical and exploratory work. Consequently, it leaves sensitive issues open to further examination and provides greater scope for consensus-building between different groups of countries instead of launching immediately into multilateral negotiations, the outcome of which could have had adverse repercussions for developing countries. Nevertheless, it is certain that these developments are effectively changing the WTO's focus away from a narrow spectrum containing purely trade-policy issues to a wider spectrum of economic issues, some of which could be quite extraneous to the trade agenda.

14. There has been considerable debate on whether investment per se, as distinct from trade-related aspects of investment should be regarded as a legitimate area for WTO rule- making. The natural-boundary question raised at the Singapore ministerial conference concerns the determination of where trade policy ends and where domestic-production policy takes over, and whether the trade-linkage argument can be allowed to extend into the sphere of policy formulation for domestic production. Investment, some developing countries contend, is already a part of the WTO Agreement by virtue of its treatment in the TRIMs Agreement and the market access offers made in the GATs Agreement, specifically with reference to the establishment of commercial presence in the territory of another member.

Investments also feature in the TRIPs agreement. Therefore, it is contended, the WTO Working Group should concern itself with investment issues only in the context of the built- in agenda of the Uruguay Round.

15. The question of whether, in addition to the ongoing work in the context of the above- mentioned agreements, the WTO should launch a more comprehensive work programme on foreign investment was a rather controversial subject in the preparatory discussions for the first WTO Ministerial conference held in Singapore in 1996.

16. A carefully balanced compromise was reached during the Singapore Ministerial Conference on the establishment of a working group to examine the relationship between trade and investment. The mandate contained in the Ministerial Declaration states inter alia that: (1) the work in this Group shall not prejudge whether negotiations will be initiated in

the future; (2) the Working Group shall cooperate with UNCTAD and other appropriate international fora in order to take account of the development dimension; (3) the WTO General Council will determine after two years how the work should proceed; and (4) future negotiations, if any, regarding multilateral disciplines in these areas will take place only after an explicit consensus decision has been taken among WTO members regarding such negotiations. Thus, by its express terms, the mandate of the WTO Working Group on the Relationship between Trade and Investment is of an educational nature and does not include preparations for launching negotiations on investment disciplines in the WTO. While it is no secret that a number of WTO members - developed and developing- favour the establishment of multilateral investment rules in the WTO, initiation of negotiations on investment in the WTO is a matter for future decision and will be possible only on the basis of an explicit consensus.

17. A detailed work programme was adopted at the first meeting of the Working Group in June 1997 in the form of a "Checklist of Issues Suggested for Study".

18. Members agreed on the need to treat the development dimension as a central element of the work of this Group. This is reflected in the first item of the checklist, which deals with the implications of the relationship between trade and investment for economic growth and development. This includes an examination of issues such as the effects of investment on transfer of technology, balance-of-payments equilibrium, employment relation and competition. The second item deals with the economic relationship between trade and investment. Among the issues covered by this item are the determinants of foreign direct investment, the effects of trade policies and trade agreements on investment flows and the effects of investment policies on trade flows. The third item of the Checklist pertains to existing international arrangements and initiatives on trade and investment. This item includes a review of existing WTO provisions on investment-related matters and of the treatment of investment in bilateral, regional and multilateral agreements outside the WTO.

Finally, the fourth item of the Checklist contains issues that are relevant to assessing the need for possible future initiatives. These include the identification of commonalties and differences in existing international instruments in the area of investment, advantages of entering into different types of investment agreements, and rights and obligations of home and host countries and of investors and host countries.

19. Although the work programme is not explicitly designed to prepare the ground for the launching of a negotiation on investment in the WTO, the importance of the analytical work conducted by the Working Group should not be underestimated.

20. By contributing to a better collective understanding of the relationship between trade and foreign investment, between foreign investment and the process of economic development, and between trade arrangements and investment arrangements, the Working Group plays an important role in providing a basis for an informed decision by the WTO membership as to whether or not further initiatives in the WTO might be appropriate with regard to international cooperation on foreign investment.

21. In the immediate future, the focus of attention with regard to the Working Group will be the report which the Working Group will submit to the General Council at the end of 1998 and on the basis of which the General Council will decide on how the work should proceed, as provided for in the Singapore Ministerial Declaration. Whether the issue of launching negotiations on investment will already arise in the context of the preparation of this report is somewhat doubtful. A more realistic scenario is perhaps that the Working Group will be instructed to continue its analytical work beyond 1998 and that the question of launching negotiations on investment will be raised as an issue for decision-making at a somewhat later date, along with the preparation for negotiations which, according to the built-in agenda of the WTO agreements, are to take place in various other areas (e.g.

agriculture and services) in the year 2000.

22. While noting with satisfaction that the Working Group had no mandate to initiate multilateral negotiations on investment, some concerns were expressed that the initiative of the OECD on a Multilateral Agreement on Investment (MAI) could eventually turn out to be the precursor to a WTO agreement, especially as the developing countries were not involved in the process of negotiations. It was also noted that it was important for African countries to follow closely the developments relating to MAI and sensitise themselves to its likely implications for them as its coming into force was bound to have a significant impact as a determinant of global investment flows. Countries outside the OECD that decline to accept its provisions could be subjected to considerable pressure in their endeavour to attract FDI especially as the OECD countries are the major source of investment flows. In addition, and more significantly, there could be pressures to discuss the MAI in the WTO. Developing countries could however study the MAI as a benchmark for reviewing their own national policies without committing themselves to its provisions.

23. It was noted that while African countries had undertaken several policy initiatives and measures to attract FDI flows at the national, regional and multilateral levels, including broad macro-economic policy reforms, the liberalization of existing restrictive measures on FDI, the simplification of administrative procedures and the establishment of investment promotion institutions. These efforts had not yet resulted in a substantial increase in FDI flows. However, there were signs of new economic vitality and rising investment activity in the region. Much of the potential of Africa, based on the principal determinants of FDI locational decisions, remained unexploited even though the growth potential of many African countries had improved significantly.

24. Whatever the fate of recent initiatives and discussions, African countries stood to benefit from increasing and deepening their understanding of FDI issues and the effect on their development; and from engaging in early discussions among themselves to work out their strategies to protect their concerns and promote their interests in these process, using their collective bargaining power.

25. The African countries need to give more careful consideration to whether it is in their interest to expand the agenda of future multilateral trade negotiations to include new areas of work, possibly through the resumption of a new round of negotiations. Considering that the Uruguay Round had taken almost a decade to conclude, the feasibility of launching a new round of negotiations on that scale could be questioned. As an alternative, smaller-scale negotiations delineated by sector are generally easier to conclude, although the latitude for trade-off is limited. In either case, it is important that the trade agenda to address adequately the development dimension and thereby enhance the scope for developing countries' full participation in the negotiations. Moreover, as many African countries, particularly the least developed ones, continue to experience increasing isolation and marginalization, a major challenge for the international trading system to the year 2000 and beyond will be to secure a more equitable and beneficial participation of these countries in international trade and investment flows.

26. Some of the more specific needs and concerns articulated by the representatives of African countries that require to be addressed are as follows:

(i) Keeping in view that national efforts had so far not succeeded in enhancing inflows of investments, the need for a regional strategy to attract foreign investments and to establish a regional forum for discussing investment issues on a regular basis should be considered.

(ii) African countries could derive benefit from a study of successful experiences and policies for attracting foreign investments in Asia and Europe.

(iii) Lack of information and the fact that information is not widely disseminated constitute a serious impediment to foreign investment flows. A regional information database should be established.

(iv) There was a need for closer cooperation and co-ordination among the African countries, including the harmonisation of investment laws and regulations in the region.

(v) African countries need to participate more actively in the Working Group on the Relationship between Trade and Investment and other international fora in order to effectively pursue their common interests and protect their common

concerns.

(vi) The Working Group discussions should also focus on issues such as: balance of rights and obligations of investors; more equitable distribution of investment flows to lesser developed and least developed countries as in Africa; negative effects of foreign investments; movement of natural persons; and transfer of technology and results of R&D.

(vii) While a multilateral agreement on investments may not be an immediate possibility, its emergence in the future cannot be ruled out. In this context the meeting welcomed the studies that have been provided by the ECA and OAU to assist African countries to better understand the issues. It also noted a recent OAU study on trade and investment, based on consultations with several African countries and the African Group in Geneva, identifying key areas of concern to Africa with proposals for a possible common African position. It was stated that the studies should be carried out in close co-operation with UNCTAD.

(viii) The ECA and OAU should collaborate in studies on such specific issues as the historical dimensions of investment, including the identification of investment practices that have not proved beneficial to African economies in the past and how such practices could be avoided in the future. Such studies should be made available to the Working Group process in Geneva.

3. Trade and Competition Policy in the Framework of African Countries

27. The meeting, under this theme, discussed trade and competition policy with a view to situating some of the issues under discussion in various fora in the context of African countries. Success in establishing a rule-based international trading system is partially premised on the ability of countries to create mechanisms for ensuring competition on both domestic and international markets. The challenges of promoting and maintaining competitive markets, be it in developed or developing countries, are well known.

28. There is growing interest in the issue of the interface between trade and competition policy. This is due partly to the fact that as governmental trade measures are increasingly brought under multilateral discipline, enterprise practices that distort international trade are becoming more evident and relatively more important. Furthermore, the globalisation and liberalization of the world economy call for a more open and level playing field, since anti competitive practices increasingly have a trans-border dimension. There is a growing worldwide convergence of thinking that open and well-functioning competitive markets are the most appropriate economic structures needed for economic development.

29. There are a number of factors that may limit the role competition law can play in preventing or remedying harmful effects on trading partners resulting from anti-competitive practices. It is these factors that have become the concerns of many trading nations, including those in Africa. Many African countries, partly because of the small size of their markets, are more likely to be affected negatively by such anti-competitive practices.

30. The Meeting positioned its debate in the context of assisting African countries to understand the main issues of competition policy and law currently under discussion in

various fora; the challenges these countries face in trying to establish an effective national competition policy and law; and lessons African countries can learn from experiences of other regions, such as Asia and Latin America.

31. The ad-hoc meeting had before it three papers: "Competition, Competitiveness and Development in African Countries"; "Trade Liberalization in Fund-Supported Programmes in Africa" and "Multilateral Rules on Competition Policy - an Overview". These papers were presented by speakers from the three institutions in the context of three questions that had been posed by the ECA secretariat at the outset of the meeting namely: 1) Is there a need for creation of competitive markets in Africa? 2) Does competition policy promote foreign direct investment ? and 3) should multilateral negotiations on competition policy be a priority for Africa?

32. There was a consensus that competition policy is essential for achieving sustained economic growth and prosperity. To this end the promotion of a dynamic enterprise sector which is well regulated and operating within a stable and predicable environment is a necessary condition if monopolist or collusive markets are to be discouraged. Furthermore, the pursuit of competition must take into account the specific development features and constraints of countries at different levels of development. Competition policy and laws thus need to be reconciled with other policy objectives within a broader context of promoting sustainable growth and development.

33. The experiences of other developing countries suggest that the exposure to international competition alone is not sufficient and that active policies for the promotion of competition are

necessary.

34. It was also noted that nine OECD countries have broadly open trade systems they are beginning to focus on policies to improve competition in the domestic economy, particularly anti-trust policies. While the pursuit of these policies in OECD countries is important to Africa, because it will lower Africa's import prices, anti-trust and other WTO competition policies are not a high priority for Africa. Rather it is the pursuit of competitiveness that is central, which requires above all a firm macro-economic framework, complemented by structural policies, and particularly trade liberalization. Africa's tariff and non-tariff barriers remain generally much higher than other regions'. Some progress has been made in trade liberalization, but much more is needed to enhance Africa's competitiveness.

35. It was agreed that the best impetus for improved competitiveness in Africa comes from achieving and maintaining a stable macroeconomic environment by implementing consistent and prudent fiscal and monetary policies, complemented by aggressive implementation of structural reforms. The latter must be country-specific, but should generally focus on the following five key areas: (i) trade reforms that eliminate export taxes and other constraints;

(ii) abolishing distortions in exchange systems to eliminate parallel market premiums; (iii) dismantling price controls and state intervention; (iv) strengthening the financial system by eliminating administrative controls on interest rates and the allocation of credit; and (v) public enterprise reforms, including privatisation and restructuring of state enterprises.

36. The meeting noted with satisfaction the fact that some progress had been made in liberalising trade systems and that some benefits in terms of improved competitiveness and income growth in sub-Saharan African countries had become apparent over the last couple of years. However, this process needs to be continued, as trade systems in Africa still remain relatively restrictive.

37. The meeting further discussed the interaction of trade with competition policies and investment policies. Participants discussed, inter alia, how best to improve the competitiveness of African economies and enhance their participation in the global trading system. It was noted that many policy-makers tend toward the view that by not adhering to, or not effectively enforcing international norms, countries are creating unfair competitive advantages for themselves in attracting investment and competing in international trade. It

was, however, agreed that the pursuit of competition policy must take into account the specific growth features and constraints at different levels of development.

38. The meeting recognised that competition policy has become more important in different international and regional negotiating fora, and that over the past couple of decades, many trade barriers erected by governments have been abolished or reduced in regional trade agreements and in multilateral trade negotiations. It was also recognised that competition policy should aim at preventing firms from impeding the efficient working of free markets, discouraging them from forming cartels, monopolies or abusing a dominant market position, and scrutinising mergers and acquisitions. The meeting stressed the fact that anti competitive practices might become trade barriers that distort trade and investment flows, thereby reducing global welfare and leading to conflicts between countries.

39. It was also recognised that there was also a strong rationale for a multilateral agreement to prevent anti-competitive cross-border practices. This could aim to abolish trade barriers imposed by firms, replace anti-dumping instruments, which are almost always used for protection purposes, and protect developing countries from adverse discriminatory pricing and distribution policies. An important issue for African economies is the enforcement of anti- RBPs policies, which are lacking at the moment.

40. It was further agreed that the most efficient and effective way to bolster competition and the competitiveness of African economies is to implement ambitious trade reforms, involving opening their economies to international competition, enhancing domestic inter- firm rivalry through tailor-made policies that discourage market collusion and monopolistic practices.

41. There was considerable debate on the differences between trade policies and competition policies; the extra-territorial aspect of competition policy; the interaction between industrial policies and competition policies; the priority given either to liberalization or competition; and whether industrialisation should precede implementation of competition- policy law. It was agreed that trade liberalization should precede competition policy. It was also stated that fiscal reasons should not slow the progress towards trade liberalization.

42. Some delegates felt that trade and competition policy issues were not yet a matter of concern to them as only few countries are in the early stages of industrialisation while the majority are still agriculture-based economies. However, some countries like Chile grew fast with trade liberalization while exploiting their agricultural and mineral resources

43. Concerning some European Union policies towards Africa's agricultural products, it was suggested that these agreement should be reached on taking up these issues in a new comprehensive negotiating round at WTO instead of the present sectoral negotiation. It was also stated that the European Union's agricultural policies were damaging to some African countries' exports including beef and fish products.

44. The meeting recognised the two-way relationships between competition policy and investment. The need for African countries to diversify their economies was accepted, but there was no agreement on the approach to achieve this objective. It was also stated that any liberalization of investment must be considered in conjunction with trade issues of concern to Africa.

45. With regard to the Uruguay Round Agreements, it was agreed that these address competition issues in a somewhat piecemeal manner. There is therefore scope for creating better mechanisms both for addressing RBPs affecting competition at the global level. There is also need for improving international co-operation in consultation procedures, information- gathering and enforcement as well as addressing the issue of extra-territoriality.

46. As regards the division of labour between UNCTAD and WTO in this area, the WTO working group will continue to examine the inter-relationship between competition policy and

trade for the duration of its two-year lifespan while UNCTAD's IGE on competition policy, which is a permanent body, will continue its analytical and technical assistance activities ,in general, under the auspices of the UN Set.

47. The Ad-Hoc Group of Experts is of the view that the African countries may wish to consider:

♦ Formulating competition laws and policies which can promote dynamic enterprise sectors and which are well regulated and operating within a stable and predictable environment. Further, such laws and policies should take into account the specific development features and constraints of countries at different levels of development.

♦ Reviewing their trade regimes with a view to introducing further tariff cuts in order to enhance Africa's competitiveness.

♦ Formulating a common strategy in order to be able to fully participate in the ongoing WTO discussions. This may require identifying areas of common interest, and negotiating strategies that can reflect the positions of all the different African countries.

♦ Formulating proposals which call for differentiated and preferential treatment for the least developed and other structurally weak countries in the implementation of the relevant Uruguay Round Agreement dealing with competition policy.

♦ Mobilising financial, technical and human resources that can assist African countries in understanding competition issues and their inter-relationship with investment and trade as well as identifying priority areas of concern to them.

♦ Formulating proposals that can redress these unbalanced aspects of the Uruguay Round Agreement which does not adequately cover competition-policy and cross- border issues.

4. Practices and Procedures of Government Procurement in Africa

48. The government is the largest purchaser of goods and services in most countries, both developed and developing. Government procurements represent huge markets, which are estimated at several trillion dollars in commercial transactions annually. Notwithstanding the importance of government procurement in international trade, this sector had in the past not attracted much attention. However, in recent years the restrictive nature of government purchases in many countries has drawn attention to the need to find some common agreed rules for handling government purchases within the framework a rule-based international trading system.

49. A plurilateral Agreement on Government Procurement under the aegis of the World Trade Organization currently exists and has been signed by twenty-six countries, none of which are from Africa. While many African countries understand the need for common rules to govern such purchases, many are concerned about the impact a multilateral agreed on

"Practices and Procedures of Government Procurement " would have on their economies. In view of the fact that, in the current form, this plurilateral agreement may not attract more members and thereby lead to liberalization of government procurement, the matter was taken up at the WTO Singapore Ministerial Conferences, one of the issues to be included in future multilateral negotiations under the WTO.

50. The meeting, therefore, discussed implications for African countries of joining a multilateral agreement on government procurement should it come for further negotiation.

As the Agreement on Government Procurement will most likely graduate from a plurilateral agreement to a multilateral one after negotiations within the WTO, it is essential for African countries to prepare themselves for these negotiations in order to defend their interests.

Furthermore, the meeting offered an opportunity for understanding practices and procedures of government procurement in African countries as well as those of international and regional organizations and donors that provide funding to Africa.

51. Three experts from the World Trade Organization (WTO), the World Bank, and the ECA secretariat made presentations under this theme. The Ad-Hoc expert group reviewed the current state of play regarding the two activities on government procurement in WTO, namely the Working Group on Transparency in Government Procurement established by the Singapore Ministerial Conference in December 1996, which is multilateral in nature as it involves the participation of all WTO members and the plurilateral Agreement on Government Procurement, which involves the participation of only 26 WTO members out of a total of 132 and which is binding only for its signatories.

52. It was recalled that the Working Group was established with the mandate "to conduct a study on transparency in government procurement practices, taking into account national policies, and, based on this study, to develop elements for inclusion in an appropriate Agreement". In doing so, the Working Group is guided by WTO document in terms of identifying the common elements of transparency in national practices as well as in the transparency-related provisions of existing international instruments, namely the UNCITRAL Model Law, the World Bank Guidelines and the plurilateral Agreement on Government Procurement.

53. With respect to the plurilateral Agreement on Government Procurement, it was emphasised that it provides a framework of rights and obligations among its parties with respect to their national laws, regulations, procedures and practices in the area of government procurement. The cornerstone of the rules in the agreement is non-discrimination.

54. It was noted that special and differential treatment for developing countries under Article V of the GPA allows for agreed exclusions from the requirement of national treatment under the GPA. It was said that the GPA recognises the specific needs of developing countries as far as they pertain to their low level of development. Accordingly, a developing country acceding to the Agreement may negotiate with other parties mutually acceptable exclusions from the rules on national treatment with respect to certain entities, products or services that are included in its coverage lists. After its accession to the Agreement, a developing country party may modify its coverage list under the normal procedures of the Agreement or request the Committee to grant exclusions from the rules on national treatment for certain entities, products or services that are included in its coverage lists.

55. The meeting was informed that the Agreement was subject to review. Its main objectives are elimination of discriminatory measures and derogation, the expansion its coverage and the simplification and improvement of the Agreement, including adaptation of its provisions to advances in information technology. During the review process, parties have emphasized that greater simplification should aim at obtaining effective but more easily applicable disciplines while improving the balance between the advantages of certain requirements and the administrative burden of complying with them. Moreover, the committee agreed that the review should seek the expansion of membership by making the Agreement more accessible to non-parties.

56. In the context of the political economy of government procurement, it was indicated that the cost governments are paying due to lack of transparency in their procurement procedures is very high. In this light, it was noted that transparency in government procurement reduces rent-seeking, corrupt practices and inefficiency in the allocation of the scarce resources available for other economic activities. Available evidence in the U.K., for instance, shows that more transparency could save as much as 20-30% of total government

procurement.

57. Joining the WTO plurilateral GPA was expected to lighten the responsibility of monitoring government procurement by government and placing it in the hands of market

forces, thereby ensuring a high level of efficiency. This would require commitment from African governments to transparency in government procurement.

58. As some elements were not covered in GPA, the adoption of negative lists rather than positive lists was suggested with strong provisions on challenge procedures for firms that feel discriminated. Developing countries should be treated fairly through, among other things, price or quantitative advantages.

59. The meeting noted the preliminary results of a study being carried out by the ECA on government procurement in Africa. The purpose of the presentation was to launch a debate on Africa's government procurement rules, procedures and practices and to call the attention of African countries to the need for identifying their specific interests in this area. This would help them prepare for future negotiations on a multilateral government procurement

agreement.

60. The analysis was based on rules of procedures for government procurement of the African Development Bank, the World Bank, the European Development Fund and the World Trade Organization's plurilateral Agreement on Government Procurement. Two important conclusions emerged from the analysis: first, the rules of procedure reflect the interest of the party setting them; secondly, aid- tying is not covered by any of these instruments. The WTO plurilateral agreement goes even further, stating clearly that it does not cover aid tying. This was found to be an important weakness.

61. The analysis led to the following issues of major focus for African countries: (i) there is a need for negotiating a balanced agreement on government procurement within the WTO; (ii) the issue of tied aid should be put on the agenda of negotiations; (iii) there should be recognition of the progress reached in Africa in good governance, accountability and transparency, which constitutes the framework in which transparency in government procurement has to be analysed; (iv) the need for special treatment for Africa should be recognised; (v) a clear position should be taken on the issue of corruption as a bad practice to be combated both by the developed and developing countries; (vi) Undertaking a review, at country level, of African countries' government procurement procedures and practices in order to identify the possible implications of adopting a binding GPA on their economies; (vii) highlighting inconsistencies between the WTO plurilateral GPA, country and multilateral arrangements.

62. African countries were invited to analyse existing multilateral arrangements in order to draw the best provisions that could be incorporated into the new WTO multilateral government procurement agreement once negotiations are started. There was a need for African countries to facilitate ECA's work towards collecting information on the subject in order to finalise its study which is expected to assist them in preparing for the coming negotiations on a multilateral GPA within WTO.

63. The Ad-Hoc Group of Experts discussed at length several issues that are of particular interest to African countries. Some delegates emphasized the need to clarify the objective of the on-going government procurement process at the WTO. They were of the opinion that the transparency element of the agreement aims mainly at protecting the suppliers and not the purchasers. In this context, it was stated that there was not yet consensus on what constitutes the definition of transparency.

64. There was considerable reference to the issue of tied aid within the context of the WTO Agreement on Government Procurement. Participants were of the opinion that its exclusion in the Agreement creates some kind of unfairness since transparency should apply to all, including the way aid is managed by donor countries. As tied aid provides suppliers from the donor country with an upper hand in the bidding process, it goes against the principles of transparency and equal opportunity for all and discriminates against local and other bidders. However, some participants felt that what is at stake here is not the issue of development aid perse but the conditionally attached to it which violate the principles of transparency and non-discrimination.

65. Specific concern was raised on the subsidiary agreements that exist within the global agreement, such as the Agreement on the Most Favoured Nation (MFN) and the reciprocity that the United States of America (USA) and some European countries currently accord each other. Such agreements, it was noted, are not in the interest of competition and fairness.

66. Participants discussed thoroughly the issue of corruption as it relates to government procurement, which appears to be a protected area in some countries. Questions were raised as to whether there should be punitive measures against corruption in the WTO-GPA Agreement. On this point, the OECD representative informed participants that the organization had signed a convention to combat bribery, under which firms known to be giving bribes to foreign officials would be subjected to judicial sanctions. The impact should be a much more transparent procurement system. While acknowledging the importance of this issue in the context of negotiations of a multilateral GPA, it was widely agreed that it deserved attention and should be subject for further in-depth studies.

67. The scope and coverage of the multilateral GPA was also an issue of concern to the participants, particularly when a distinction is made between goods purchased within the boundaries of a country and those purchased abroad. Recognizing that domestic suppliers in developing countries lack the experience, finance and education to be able to compete fairly in the global economy, participants were of the view that African countries needed to be given some form of preference on grounds of the "infant-industry protection" concept. Since there was a debate on whether the "infant-industry protection" concept was still a viable choice in successfully fostering domestic industrial growth, the Egyptian ceramic industry was cited as a good example of such success. Limited protection was given before opening up the sector for liberalization and deregulation. It was, however, pointed out by the official from the World Bank that protection was still not economical, because it is difficult to determine which firms to protect and what period of protection is sufficient to achieve efficiency.

68. The participants commended the research document presented by ECA as a good paper, bringing out many issues of relevance to African countries' participation in future negotiations on government procurement. In the next stage of the research, the study should also consider the regional dimensions of government procurement. The participants noted that the case of SADC could serve as a good focus for this purpose. Participants, therefore, requested that the document be finalized as soon as possible and be made available to them in order to use its valuable information in their negotiations.

69. The participants agreed on the following recommendations:

♦ Tied aid should be put on the agenda for discussions on the Agreement on Government Procurement because it constitutes a major obstacle to transparency and openness, the cornerstones of the multilateral trading system advocated by the WTO;

♦ The issue of corruption, which concerns both suppliers and purchasers, should be thoroughly discussed in the context of transparency in government procurement procedures and practices;

♦ African countries should aim at identifying their specific needs in order to adopt appropriate negotiating strategies;

♦ African countries should seek fair treatment during negotiations on a multilateral GPA. This will be attained by granting a special and preferential status to African countries as their current level of economic development would not allow them to compete fairly with countries from more developed regions;

♦ The World Bank was requested to provide technical assistance to developing countries, particularly LDCs, so as to enable them to evaluate the implications of the Agreement on their economies;

The ECA and OAU were urged to seek observer status at the WTO in applying to each committee of the Organization. This would improve their technical assistance

delivery to African countries negotiating in Geneva;

The ECA was urged to finalize its study on government procurement and make it

available to countries as soon as possible. In doing so, the study should also

include the regional dimension of government procurement. In this connection the

work carried out by SADC could be useful in completing the work on this issue.

Part Two

Trade and Investment Policy in Africa

1. Trade and Investment Liberalization Policies:

Issues of Concern to the ESCAP Region

Ravi Swahney, ESCAP

Introduction

70. The ESCAP region has made major strides in economic and social progress over the past 50 years, with the largest gains having taken place over the past decade. Remarkable increases in the region's share of global wealth, and substantial improvements in social development in most countries can be traced back primarily to their adoption of outward- looking development strategies. Rapid liberalization of trade and investment regimes in the region, mainly through unilateral actions at the national level, and a large number of bilateral treaties, regional trading arrangements and multilateral trade agreements helped in accelerating the region's economic growth and development.

71. At the global level, the successful conclusion of the Uruguay Round was an event of historical proportions with far-reaching implications. In its wake a global consensus is emerging on the fundamental contribution that open trade policies have made to economic progress. In this expansion of the multilateral trading system, trade policies are in a continuous process of change and now, more than ever before, there is a recognition that a host of other issues have interlinkages with international trade at the economic, institutional and legal levels. This has led developed countries to view liberalization of investments as the next most logical step that is consistent with the WTO's principles, philosophy and approach. The aim, it is contended, is to bring about free and fair trade in an open global economy, which would require the WTO to move away from a framework of purely trade- policy issues to a wider canvas, to economic issues. In recognition of this, the Economic and Social Commission for Asia and the Pacific (ESCAP) has urged the secretariat to assist developing countries in support of trade liberalization, particularly in the context of the WTO and enhancing understanding of emerging issues in this area. The Commission has emphasised the importance of developing, where possible, a proactive agenda that is fully shared and endorsed by the developing countries for future negotiations under the agreements of the Uruguay Round. The commission has also cautioned against overloading the WTO agenda with issues that are extraneous to trade and has stressed that future WTO work should take full account of the development perspective.

72. In response to this mandate and in recognition of the important contribution that the ESCAP region could make to emerging multilateral trading relationships, the Secretariat organised a Senior Officials Meeting in September 1996 prior to the first WTO Ministerial

Conference. The Meeting was organized in collaboration with UNCTAD and UNDP, and in association with the WTO with a view to assisting countries of the region in their

preparations for the Ministerial Conference. The Meeting undertook a review of the

implementation of Uruguay Round Agreements including the built-in agenda, with particular emphasis on the agricultural and textiles sectors, given their strategic importance to developing countries of the ESCAP region. The Meeting also considered some of the new

issues emerging in the multilateral trade agenda.

73. This paper examines trade and investment perspectives of the ESCAP developing

countries in the context of the emerging multilateral trade agenda while keeping in view of

the current financial crisis enveloping the region. The paper argues that while the region's developing countries are adjusting their policies towards achieving integration with global markets, the process is proving to be much more painful and costly than could have been predicted during the so-called miracle years. Openness, liberalization and commitment to sound macroeconomic policies may not necessarily be sufficient conditions for sustained socio-economic progress.

WTO Issues to the Year 2000 and Beyond

74. The events during the past year have been particularly positive, with the successful conclusion of a series of trade agreements - specifically those covering basic telecommunications and financial services - which completes a substantial part of the negotiations left over from the Uruguay Round. Furthermore, the European Union has tabled a proposal for a new Millennium Round. Considering that negotiations under the Uruguay Round covered an unprecedented range of issues, covering not only new sectors but also intractable ones excluded from previous rounds, the accomplishments have indeed been impressive.

75. However, despite those positive trends, new trade liberalization initiatives over the next few years may be constrained by a number of factors. One is the lack of fast-track negotiating authority with the United States administration. Another factor is the administrative burden faced by developing countries in dealing with the complexities of such a wide-ranging agenda. Moreover, in the ESCAP region, the deepening financial crisis in key countries could divert attention away from trade and investment liberalization towards measures for monetary and financial stabilization.

76. Against this unfolding scenario, developing countries need to give careful consideration to what could be the most favourable course of action for them to undertake.

The central issue is whether the built-in agenda to which countries are committed, should alone be given priority, or whether countries should expand the agenda of future negotiations to include the new issues. Related to this is whether developing countries should consider the new issues within the context of the multilateral trade agenda or whether other approaches would be more appropriate.

77. With the current financial crisis, such matters assume greater significance for the Asian and Pacific region, as protectionist groups make renewed efforts for a slowdown, if not a reversal, of the process of liberalization. It should, however, be expected that despite its seriousness, the financial crisis would abate in the short term. The long-term prospect for the region therefore is broadly positive, based on a strengthened, freer and rules-based trading system. Therefore, to the year 2000 and beyond, strategies based on open trading arrangements need to be further strengthened. These issues are now examined in greater detail.

The Evolving Multilateral Trade Agenda: Response of the ESCAP Region

78. The international trading environment today presents a very different scenario from

that in the years before the Uruguay Round. With the implementation of the WTO

agreements, changing paradigms and deep systemic changes have come about. Recent

developments indicate that the post-Uruguay Round scenario seems to be unfolding into two main parts: one revolves around the built-in agenda contained in the Uruguay Round agreements that deal with new (or renewed) negotiations in some areas while in other areas, it involves assessments of the situation as specified in the Final Act; and the second deals

with a range of issues, which in some cases are old, for example, tariff negotiations, but in

other cases are new to the multilateral trading agenda. On some of these issues there is no

consensus and they may prove to be increasingly complex and intractable in the years to come. Issues that could find their way into a future round of negotiations broadly relate to the implications of regional economic groupings, the linkage between trade and the environment, the relationship between trade and investment, the problems relating to competition policy and trade, transparency in government procurement, and the scope for

WTO rules in trade facilitation. The setting up of working groups to study the new issues,

(except for labour standards), could in a way be considered as a positive outcome for

developing countries, insofar as they are charged with undertaking only analytical and

exploratory work. Consequently, it leaves sensitive issues open to further examination and provides greater scope for consensus building between different groups of countries instead

of launching immediately into multilateral negotiations, the outcome of which could have

had adverse repercussions for developing countries. Nevertheless, it is certain that these developments are effectively changing the WTO's focus away from a narrow spectrum containing purely trade policy issues to a wider spectrum of economic issues, some of which could be quite extraneous to the trade agenda.

79. Among these issues, the relationship between trade and investment is of primary importance to the developing countries of the ESCAP region. In any assessment of the work being undertaken in the Working Group, it should be remembered that the original intention of the sponsoring countries at the Singapore Ministerial Conference was much more ambitious. The approach of sponsoring countries was that investment liberalization was a necessary concomitant of trade liberalization. The issue at stake therefore was how investment flows could be facilitated by developing multilateral rules under WTO auspices.

Developing countries therefore need to carefully address the issues surrounding the possible development of a legally binding multilateral agreement governing transnational investments under the WTO umbrella. In this regard, mutually beneficial arrangements could be envisaged: by assuring foreign investors of a greater degree of predictability, transparency and lower risks, the setting up of a business would be facilitated, with net benefits for developing countries of the ESCAP region and for investors.

Investment Arrangements at the Regional and Multilateral Levels

80. At this point it would be useful to briefly review the major investment arrangements at the regional and international levels that influence investment flows in the ESCAP region.

81. In contrast to the number of regional trading arrangements in the region, there are very few regional investment arrangements. In fact, there are only two major investment initiatives. One is the legally binding intra-ASEAN agreement that provides MFN treatment to investors (but not national treatment, although it may be negotiated between individual countries) and a dispute settlement mechanism. In addition, the ASEAN investment area

(AIA), represents an important step towards establishing the whole ASEAN region as a host to inward FDI. In this way ASEAN is promoted as a single, diverse but increasingly integrated area with larger economies of scale. The other major initiative is that of APEC.

In recognition of the importance of FDI to economic development in the Pacific region, APEC established common non-binding investment principles. They are meant to act as a facilitation device and not as a means to force members to liberalize their investment regimes. The principles espouse transparency in all laws, regulations, administrative guidelines and policies pertaining to investment, MFN and national treatment as well as the settlement of disputes through consultations and negotiations. It is understood that while the principles remain voluntary in nature, they could form the basis for more formal cooperation

at the regional level.

82. Of more significance to the ESCAP region because it could eventually turn out to be the precursor to a WTO agreement, is the initiative of the Organization for Economic Cooperation and Development (OECD). For almost three years, the Multilateral Agreement

on Investment (MAI), incorporating a new set of investment rules based on MFN and

national-treatment principles has been under negotiation. The objective is stated to be to establish a common set of multilateral rules providing a simplified, secure and predictable framework for international investments that are defined in an all encompassing and broad manner. Although the MAI is set to be agreed to and ratified later in the year, a number of

differences among the OECD members remain to be resolved. In particular, environmentalists have protested that "green" provisions in the proposed agreement do not go far enough, and that TNCs gaining better access to markets should bear greater social and environmental responsibility. Reportedly, the United States of America is not satisfied with

the present draft and could therefore withhold its acceptance. Nevertheless, if the Agreement

can be successfully concluded, it has the potential to become a significant determinant of global investment flows. Countries outside the OECD declining to accept its provisions

could be subjected to considerable pressure in their effort to attract FDI. In addition, and

more significantly, there would be pressure to include it in the WTO agenda.

Linkages Between Trade Liberalization and Investments

83. While virtually all developing countries agree on the need for foreign direct investments to supplement domestic savings and investments in their efforts to achieve economic progress, a wide spectrum of views exists in developing countries on the relationship between trade and foreign investments.

84. A popular view is that while investment undoubtedly has some trade linkages, it has a stronger linkage with development, including the transfer of technology and job creation.

As such, UNCTAD as the multilateral institution dealing specifically with trade and development questions - rather than the WTO - would appear to be the appropriate forum to devise a framework for facilitating transnational investments, including provisions pertaining to national treatment and a credible system of dispute settlement. Such provisions, however, should remain voluntary. It would then be up to individual countries to adopt that framework as part of their national policies for encouraging inward foreign investment. The World Bank-sponsored Multilateral Investment Guarantee Agency (MIGA), which already has a large number of signatories, grants the assurance that foreign assets would not be expropriated without due compensation. Based on this, it is argued that the need to use the WTO for safeguarding the interests of foreign investors would not appear to be compelling.

On the whole, therefore, many developing countries would like to see evolving in UNCTAD the basic parameters of a desirable framework of investment policies which would safeguard

legitimate investor interests. It would then be up to individual countries to adapt those

guidelines to their national policies to promote inward-flows of foreign investment.

85. For years, debate and controversy surrounded the role of TNCs, how they are able to

work around or even circumvent national requirements and how their influence impacts at all

levels of society. Efforts should therefore be directed towards an identification of the norms of good corporate behaviour by transnational corporations, including avoidance of predatory

or restrictive business practices. However, similarly to the ILO Conventions concerning labour rights and labour welfare issues, accession to a convention on foreign direct investment and another on the conduct of transnational corporations should remain voluntary and non-binding. If a country voluntarily accedes to a convention after satisfying itself that

its basic national interests are not being jeopardized or compromised, this would increase its

attractiveness as an investment destination for transnational corporations. Similarly, TNCs

should be able to voluntarily accede to the convention on good corporation behaviour, a fact

that would be taken into consideration by national authorities when permitting inward foreign investment under their respective national investment policy regimes.

86. There has been considerable debate on whether investment per se, as distinct from trade-related aspects of investment should be regarded as a legitimate area of WTO rule- making. The natural-boundary question raised at the Singapore Ministerial Conference concerns the determination of where trade policy ends and where domestic production policy takes over, and whether the trade-linkage argument can be allowed to extend into the sphere of policy formulation for domestic production. Investment, some developing countries contend, is already a part of the WTO Agreement by virtue of its treatment in the TRIMs Agreement and the market-access offers made in the GATS Agreement, specifically with reference to the establishment of a commercial presence in the territory of another member.

Investments also feature in the TRIPs agreement. Therefore, it is contended the WTO Working Group should concern itself with investment issues only in the context of the built- in agenda of the Uruguay Round.

87. At the same time, a significant number of developing countries realize that as global challenges increase, revolutionary changes in trade policy are extending into the sphere of international investments. Increasingly, governments see FDI as an essential asset without which economic growth and technological progress cannot take place. Similarly, foreign investors continue to seek ways to maximize their profits while reducing their risks through the rule of law. Consequently, in increasingly complex and interrelated global markets, there is mounting pressure from developed countries to put transparent multilateral rules on investments in place and to open up markets for a wider and more equitable spread of the benefits of globalization.

88. These global pressures are increasing at a critical time, when East Asia is experiencing an unprecedented economic crisis arising from turmoil in the financial sector.

As decades of accumulated wealth are being wiped out indiscriminately, many in the region question the desirability of rapid liberalization and globalization. The following section examines this in the light of preliminary assessments of the fallout of the Asian crisis.

Linkages between Liberalization and the Asian Crisis:

Emerging Lessons

89. The more open economies of the ESCAP region have traditionally been viewed as attractive investment destinations, with relatively low risk premia. Therefore, external finance was raised with ease and labour-intensive, highly competitive industries fuelled export-driven economic growth coupled with low inflation. The process was underpinned by

a purposeful and directed political leadership, and the stage seemed set for the dawning of

the Asian Century. It is indeed ironical that at a time when the world economy is

experiencing its strongest growth the region that led world economic growth, is now experiencing its worst crisis in decades.

90. The factors that led to this dramatic and largely unforseen turnaround in fortunes is best summed up by the words of the Chairman of America's Federal Reserve Board: "It is clear that more investment monies flowed into these economies than could be profitably employed at reasonable risk". In fact, the crisis has propagated itself through an intricate

process of ever widening panic that has created havoc in the real economy. When the problems became apparent in the Thai financial market about a year ago, a flight of capital

back to source took effect almost instantaneously and aggressive central bank intervention to

defend the currency proved unsustainable. The ensuing stock market crash, the reduction in borrowers' solvency and panic among savers resulted in increasing pressure on the national financial sector. Further flight from currencies of Southeast and East Asia ensued, giving rise to a frightening self-reinforcing rampage through the region with socio-political repercussions. It led Malaysia's Prime Minister to liken capital markets to a "jungle of ferocious beasts".

91. As the crisis works its way through the real economy, the turmoil raises difficult questions concerning the role of currency speculation, the desirability of currency pegs, currency boards, overvaluation of assets, banking supervision and private sector debt, and perhaps most importantly, access to accurate financial information. It also raises difficult questions on the nature of political leadership and Asian values. The foundation of the miracle years, it was argued, was the emphasis on social order, social harmony, deference to authority and purposeful and benevolent political leadership. However, as governments, to varying degrees, derived their legitimacy more from their ability to assure economic well- being than from a clear democratic mandate, the turmoil of the past few months will accelerate systemic changes and socio-political transformation.

92. Responses to the crisis have varied. At the international level, besides IMF

interventions, and some individual-country offers of financial assistance, concrete initiatives have yet to materialize. At the regional level, an number of proposals, including so-called

self-help measures are under consideration. Other proposals under consideration, at the ASEAN level, include the setting up of a committee consisting of representatives of central banks and Ministries of Finance to monitor and counter the occurrence of such crises, and greater use of ASEAN currencies in settling trade accounts through the establishment of a clearing account.

93. A few lessons emerge from the early experience of the crisis, which may be briefly summed up as follows:

94. Financial problems spread very quickly. In an increasingly globalizing world economy, financial problems spread much more quickly than has been evident from past experience. Therefore, regulatory and supervisory authorities at the country level need to remain vigilant and carefully monitor key economic indicators. The flow of short-term capital into a country is the key indicator and some controls on such flows may be warranted.