Unit 5. Legal attemps at narrowing the north-south gap

1 The action of the world community: general

It was essentially after the adoption of the UN Charter and the gradual accession of many developing countries to independence, that the international community awoke to the plight of these countries. Four main factors account for this breakthrough: (1) The gradual dismantling of colonial empires unveiled the real conditions of colonial territories and made it clear that political independence was not sufficient. (2) The increasing impact of socialist ideologies on international relations convinced statesmen that they could no longer turn a blind eye to cruel social realities. (3) Some young leaders of developing countries, fully aware of the real conditions of their nations, started vociferously to demand assistance as a way of compensation for the past exploitation by colonial States. (4) The UN offered emergent States a crucial forum where they could put forward their demands and try to reach some sort of compromise with the industrialized States.

The international community has adopted a three-pronged strategy in response: (a) a partial modification of international economic and financial institutions (the World Bank, the International Monetary Fund, the GATT and the WTO), so as to make them more responsive to the needs of developing countries; (b) the promotion of multilateral co-operation geared to the development of those countries; (c) the establishment of mechanisms designed to guarantee foreign investments in develop­ing countries.

2 The role of international economic institutions

Developing countries have repeatedly endeavoured to prompt the financial and economic institutions established in the aftermath of the Second World War at the behest of the USA (the Bank, the IMF, and GATT-WTO) to adjust their policies so as to take account of their special conditions.

These institutions, to a large extent imbued with a free market and free competition philosophy, were harshly criticized by developing countries, particularly as soon as such countries acquired independence. As pointed out above, with regard to North-South relations, emergent nations advocated two principles conflicting with that philosophy: 'preferential treatment' and 'positive discrimination'. Slowly, under the strong pressure of developing countries, all three international institutions attuned their policy, at least in part, to the North-South question, albeit in a manner which developing countries still consider inadequate.

2.1 THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT (THE BANK)

The statutory goals of the Bank include 'the encouragement of the development of productive facilities and resources in less developed countries'. Since its earliest years the Bank has pursued this goal.

To meet the needs of poor countries the Bank changed its lending techniques, with regard to the countries concerned. Thus, it made loan terms longer, and differentiated between the interest rates charged to industrialized States and those to developing nations (the rate for loans granted to the former is higher by 0.5 per cent). In addition it decided to grant at least part of such loans in local currency. Furthermore, more recently, the Bank has made loans that are primarily designed to protect the environ­ment in developing countries. Thus, in 1990, in agreement with the UNDP and UNEP (the UN Environment Programme), the Global Environment Facility was established. It is financed through contributions from over 60 countries; the Bank is in charge of administering these contributions.

The Bank, created in 1944 at the Bretton Woods Conference, is an inter-governmental organization (it later became a UN Specialized Agency). It is corporate in form, all its capital stock being owned by its member States; the amount of their shares is established on the basis of the quotas set for participating in the IMF. Its primary statutory goals, namely, 'the restoration of economies destroyed or disrupted by war' and the 'reconversion of productive facilities to peacetime needs', were primarily attained through activities carried out directly by the USA (by means of the Marshall Plan). The Bank's principal activity is lending money to member States, to 'political subdivisions thereof, or to business enterprises in the territory of members. If the borrower is not a government, the loan must be guaranteed by the government in whose territory the project financed by the loan is located. Loans, made only for technically and economically valid projects, are long term and incur current interest rates.

The central organ is the Board of Governors, consisting of a Governor and an alternate appointed by each member State. Its decisions are taken by a 'weighted voting' system.

2.2 THE INTERNATIONAL MONETARY FUND (IMF)

The IMF ('the Fund') was established to ensure monetary and financial stability in international relations. It also aimed at promoting the development of international trade, by ensuring the stability of foreign exchange. In addition it intended to prevent crises in the balance of payments. The financial support of the Fund is essentially geared to alleviating the cost of crises and averting competitive devaluations or pro­tectionist measures disruptive of international trade. Loans made by the Fund are subject to the condition that economic adjustments (formally agreed upon but in fact imposed by the Fund) are carried out. Loans are made in instalments payment of which can be held up whenever the essential economic objectives of the adjustment programme are not fulfilled. Initially, loans were linked to the undertaking by the beneficiary to adopt restrictive fiscal and monetary policies. Over the years, however, loans have increasingly been made contingent on the implementation of structural programmes such as fiscal and monetary reforms, reforms in the banking sector, liberalization of foreign trade, privatization programmes, etc.

The gradual opening of the Fund to developing countries took place both through the growing participation of these countries in the IMF decision making process, and through the growing influence of developing countries on the drafting of provisions regulating the IMF and the use of its resources. Furthermore, to meet the specific needs of developing countries the Fund set up mechanisms designed to increase the lending of financial resources to those countries. This has come about through the increase in the maximum limit on authorized drawing, and through the establishment of special resources designed to take into account the wide range of causes of disequilibria in the balance of payments. Initially loans were made in the form of stand-by arrangements, in order promptly to intervene in the event of balance of payments crises; they were granted for short periods and were to be repaid within a brief time span. Subsequently the Compensatory Financing Facility (CFF) was established in 1963 (which was expanded in the following years). It was designed to provide additional resources to States exporting primary products and encountering problems due to temporary shortfalls in receipts for exports. To face balance of payments problems deriving from or caused by natural disasters, in 1962 the Fund made available emergency assistance, extended in 1995 to countries where armed conflicts had just ended.

In 1987 the Enhanced Structural Adjustment Fund Facility (ESAF) was established. It had the same purposes as EFP but was designed to assist low-income countries with loans at an interest rate of 0.5 per cent. The establishment of this programme shows that, since the mid-1980s assistance to poor countries became part and parcel of the Fund's objectives. Such assistance culminated in 1996 in the setting up of the programme for alleviating the debt of 'heavily indebted poor countries' (HIPC) that the Fund co-ordinates together with the Bank. Towards the end of the 1990s the reduction of poverty appeared to be a specific objective of policies favouring developing countries, with the transformation of the ESAF in the Poverty Reduction and Growth Facility (PRGF) and the strengthening of the HIPC programme.

To gain the co-operation and commitment of the local authorities in those countries in 1999 the Fund and the Bank produced a 'Poverty Reduction Strategy Paper'. According to this document it is for the local authorities to set out the development programme, and to set priority objectives as well as the strategy for achieving them.

2.3 THE GENERAL AGREEMENT ON TARIFFS AND TRADE (GATT) AND THE WORLD TRADE ORGANIZATION (WTO)

(a) The GATT

In 1947 a new scheme was set up in the shape of the General Agreement on Tariffs and Trade (GATT). The Agreement, unlike the Articles instituting the Bank and the IMF, did not create an international organization; however, over the years an organizational structure did evolve, operating between the 'sessions' of the con­tracting parties, held twice a year in Geneva. Unlike the Bank and the IMF, the GATT is based on the equal voting power of each party or, in other words, not on the weighted-voting system.

The core of the GATT is the set of obligations it imposes on the contracting States, a very complex and technical network of stipulations.

The first obligation is the requirement that each member grant all other parties most-favoured-nation treatment in the field of imports or exports, that is, treat other GATT members in the same manner as the country to which it grants the most favourable conditions. Why was this clause deemed necessary for the purpose of achieving free trade? Clearly, if a great number of States loyally apply this clause, it follows that discriminations between them tend gradually to fall down and a regime of equality in their trade relationship is established.

Another obligation prescribes that imported goods be treated no worse than domestic goods under internal taxation or regulation measures (Article III). Thus, while the most-favoured-nation clause is designed to provide non-discriminatory treatment for imports from different foreign countries, this obligation puts foreign goods on the same footing as those produced domestically. The obligation, it is plain, strikes at the very heart of the protectionist tendency of most States. These two obligations are closely related to, and supported by, the general obligation gradually to reduce customs duties by way of bilateral or multilateral negotiations ('rounds') (Article XXVIII, bis). The first rounds dealt mainly with tariff reductions and were conducted bilaterally, whereas later negotiations, conducted on a multilateral approach, included other areas (anti-dumping and non-tariff measures).

(b) The WTO

The Uruguay Round's Final Act of 1994 strengthened the GATT's institutional machinery through the establishment of the World Trade Organization (WTO). This organization is a single institutional framework encompassing the GATT plus all the agreements and legal instruments negotiated in the Uruguay Round (the GATT, now called the GATT 1994, and other agreements relating to trade in goods; the General Agreement on Trade in Services (GATS); the Agreements on Trade-Related Aspects of Intellectual Property (TRIPs) and on Trade-Related Investment Measures (TRIMs); the Understanding on Dispute Settlement (DSU); and so on).

The WTO is not a successor organization to the GATT. However, contracting parties to GATT 1947 that accept all the undertakings deriving from the Uruguay Round automatically become original members of the WTO. Other States may accede to the Organization, on condition that they accept the undertakings deriving from the Uruguay Round (some exceptions are however envisaged, concerning the so-called 'pluri-lateral agreements'). At present (2004), the WTO has 147 members (about 100 are developing countries), accounting for over 90 per cent of world trade. Over 30 other States are currently negotiating membership.

In practice the structure of the WTO has formalized that with which the GATT had progressively endowed itself. It consists of a Ministerial Conference (meeting at least every two years); a General Council (composed of the representatives of the member States; it meets in the intervals between each session of the Conference and also meets as the Trade Policy Review Body or the Dispute Settlement Body); the Goods Council, Services Council and Intellectual Property Council, reporting to the General Council; a Director General heading the staff and appointed by the Ministerial Conference. The first and second Ministerial Conference (Singapore, 1996; Geneva, 1998) beefed up the WTO structure by establishing working groups relating to specific sectors within the general field of action of the Organization.

As in the GATT, decisions are normally taken by consensus; majority voting is envisaged, but so far it has not been resorted to.

The reduction of the imbalance detrimental to emergent countries was one of the reasons for the establishment of the WTO. The WTO incorporated all the major provisions of the GATT relating to developing countries, including the 'Enabling Clause'. The Clause is the legal basis of (a) the Generalized System of Preferences, whereby developed countries offer non-reciprocal preferential treatment (such as zero or low duties on imports) to products originating in developing countries; it is for preference-giving countries unilaterally to determine which countries and which products are included in their schemes; (b) the Global System of Trade Preferences, whereby developing countries that are members of the Group of 77 exchange trade concession among themselves (UNCTAD providing technical assistance to beneficiaries); and (c) regional arrangements among developing countries.