Macro-policy Constitution and legal system

Macro-policy Constitution and legal system

This area of policy is of particularly high priority. The way political processes are structured and enforced are fundamental to policy-making processes and outcomes. Processes of informed public discourse based on clear rights and freedoms are essential to expanding political participation and providing the conditions amenable to human flourishing. Current international discussion and investment places too little emphasis on this policy area in many countries. It neglects the building of political and governance capacities and prefers instead to focus on governance per se. This contrasts with a prevalent emphasis on building capacities for engaging in market activity. It also neglects the capacities necessary for effective and accountable political processes. The human costs of political failures of all kinds are high, as the enormous suffering of people living in such so-called ‘failed states’ as the Democratic Republic of Congo or Haiti demonstrates all too well. There are always sets of internal, regional and international interests – business, government and often military – with the power to support failed regimes or to do little to oppose them. Current processes in several countries – Kenya, Zimbabwe, Myanmar, Tibet, to name a few – offer some hope that the ‘right’ kinds of regional and international involvement can be helpful and effective, and that strategic and geopolitical interests may shift to greater support of international cooperation in the interests of political renewal. In many cases, the key ingredients are progressive internal opposition supported by key bilateral and regional partners, with sufficient consensus in the broader international community, particularly from the UN and the Security Council.

Economic law We could make many points here. However, we are more interested in highlighting the importance, from the perspective of the human development and capability approach, of laws and policies that facilitate the expansion of informal economic activity and the quality of informal employment. These policies are critical in many developing countries where percentages of employment in the informal sectors (especially agriculture) range up to more than 80 per cent, as is the case in India. Internal political advocacy has brought about significant changes, which is one reason why international organizations such as the International Labour Organization (ILO) have been monitoring and advocating improved informal sector financing, licensing, regulation and taxation since the 1980s.

Macroeconomic policy Many argue that, in today’s global economy, there is not much room for manoeuvre when it comes to deciding what constitutes good macro-policy and management – fiscal deficits have to amount to a certain percentage of GDP, inflation cannot go above a certain rate, the exchange rate has to be on a

HUMAN DEVELOPMENT POLICY ANALYSIS

‘managed float’. While these conservative macro-policies are ‘tried and true’, additional human development dimensions need to be considered. A society needs to adopt the macro-policies that best expand human freedoms, both material and non-material. China – given a combination of low labour costs, high productivity and innovation, and a fairly open international trade environment – has been financing the movement of some 400 million people from low productivity agriculture to higher productivity/wage manufacturing in large part by maintaining a low exchange rate, exporting heavily and lending foreign exchange earnings back to importing countries to buy even more. So far, this has been a very effective macro-strategy and policy frame- work under the circumstances but serious challenges face other areas of public policy, including redistribution, environmental management and human rights – and these may in turn require adjustments to macroeconomic policies.

Not everyone can achieve rapid growth in this way, but pursuing all areas of human and economic potential – given country conditions – should be a macroeconomic policy priority. Periods of intensive structural adjustment are particular challenges to macroeconomic policy. The current global economy is experiencing structural adjustment to a degree at least matching the 1980s, in response to positive forces of overall economic growth and technology advancement, and negative ones including global warming, HIV/AIDS, energy and food prices and financial boom and bust (see Chapter 4).

An important aspect of macroeconomic policy is setting the fiscal framework each year, notably the size of the public budget, based on analysis and projections of economic and financial activity, tax revenues and prudent borrowing. Ministries of finance, economics and planning are typically crucial here, and different forms of economic modelling are also important tools.

Intellectual property (IP) and competition policy Societies strike a balance between protection of IP for business purposes and accessibility for public interests. In general, genuine competition is largely positive. Competition policy is essential in this respect by countering excessive market power – monopoly and oligopoly interests that tend to arise in most sectors and markets. The principal IP policy instruments are patents, copy- right, trademarks, geographical indications and industrial designs. The principal aims of competition policy are reducing excessive concentrations of market power in different industries, or directing their behaviour to be more competitive.

Many developing countries lack capacity in IP and competition policy. In addition, policies have been substantially dictated by international accords such as the TRIPS (Trade-Related Aspects of Intellectual Property Rights) and even more market-friendly provisions in bilateral FTAs (Free Trade Agreements). Other central institutions include: WIPO (World Intellectual Property Organization) and UN agencies such as UNCTAD (UN Commission on Trade and Development), UNIDO (UN Industrial Development Organi- zation) and WHO (World Health Organization). There are other sectoral or

POLICY

issue-area accords and institutions in plant genetic resources, health, biological resources and traditional knowledge. These international issues have increasingly become a source of contention between developed and developing countries, and within international organizations. 1

The human development perspective on policy, in focusing on human flourishing, does not elude the question of balances between private and public interests, but would instead advocate informed public processes in deciding issues, such as the rights of countries to introduce compulsory licensing and parallel trade, where there are no feasible or affordable alternatives for obtaining essential medicines and other public goods. It would also focus on all dimensions of human flourishing, rather than on the more narrow focus on economic consequences, in analysing and deciding a host of specific IP and competition policy issues.

Trade policy Trade policy and its impacts have arguably been studied more than almost any other area of economic policy. Trade liberalization is principally the reduction of tariffs (import taxes) and non-tariff barriers such as quantitative restrictions and quotas. Some areas of agreement on the economic results of trade liberalization include the following:

• The initial impacts of across-the-board trade liberalization have been small (relative to GDP) but, in most cases, quite positive. There are initial winners and losers among the poor, as well as among wealthier segments of the population, suggesting that trade liberalization is difficult to tie directly to equity and poverty reduction objectives. 2

• Tariff reductions usually imply significant falls in government revenues, requiring increases in other revenues or expenditure cuts altogether. Compensating tax or revenue changes often have a bigger short-term impact on equity and income poverty than tariff changes. Hence, progressive tax policy is a key affiliate of trade liberalization.

• Longer-term potential benefits of trade liberalization are widely believed

to be positive and large in terms of productivity and income growth. However, benefits do not come automatically and need accompanying public policies and investment (notably in infrastructure), which enable or assist producers to realize export opportunities, and assist those who lose to retrain, relocate or find new sources of livelihood.

As noted in Chapter 4, one of the primary reasons for the growth and distri- butional (poverty reduction) success of the initial price reforms in agriculture in Vietnam was that the de-collectivization process was generally done equitably, resulting in a fairly reasonable distribution of land. This fact, coupled with a supporting public environment and the establishment of networks between factories (public, private or mixed), producers and local governments proved to be crucial for the uptake of new crops and

HUMAN DEVELOPMENT POLICY ANALYSIS

technologies. This example illustrates that policy analysis, from the perspective of the human development and capability approach, involves assessing alternative country-specific policy sets in terms of their impact on a full range of human freedoms, and addressing the political interests which can constrain

or support their expansion. 3 We will return in detail to these issues later. Trade policy is a complex and specialized field which includes, in addition to import barriers, subsidies; equal treatment of foreign and domestic service suppliers; government (local/foreign) procurement practices; dumping or anti- dumping practices; dispute settlement mechanisms; and health, environmental and labour conditions, etc. Trade liberalization is done unilaterally (although rarely), bilaterally, regionally and internationally (WTO) where the most favoured nation principle extends the treatment of a country’s best-treated partner to all countries. Trade policy is closely related to foreign investment policy and incentives. Foreign direct investment (foreigners investing in plants and equipment), unlike portfolio investment (foreigners buying bonds and stocks), can bring skills, knowledge and technology with it.

Tax and revenue policy The configuration of tax systems is important to economic efficiency, equity and stabilization. Indirect taxes, that is, taxes on transactions like sales, are preferred for reasons of efficiency. They do not change relative prices and valuations of goods and services if applied to all relevant transactions. Direct taxes apply to income (personal and corporate) and are progressive (the higher the income, the higher the tax rate). Direct taxes, along with the incidence of the public spending system, are thus a key public policy instrument for equity and redistribution. Tax administration and collection challenges are present in all countries, but prominent in less advanced countries in determining tax system structure. Indirect taxes are usually easier to administer, and import taxes are particularly easy – a main reason for trade protection in many countries. Building and improving tax systems is important and challenging. This involves designing taxes in ways that are as efficient, workable and equitable as possible. This is a particular challenge in economies that are predominantly informal. Corruption may need to be ended and, on the collection side, voluntary compliance by tax payers is also a major factor. Building understanding and consensus on taxes and the services they finance is therefore essential.

Borrowing is typically a small percentage of total revenue, and therefore the tax system, along with the growth of the tax base (that is, the growth of the economy), primarily determines annual levels of public spending on economic and social services. In other words, economic growth determines the public budget. Foreign borrowing is particularly risky where a country’s exchange rate is likely to depreciate. There are also limits to how much borrowing governments can or should do domestically, but government bonds are both staples in government revenue systems and important financial market instruments.

POLICY

Innovation policy

A system of innovation can be defined as ‘a set of functioning institutions, organizations and policies which interact constructively in the pursuit of a common set of social and economic goals and objectives, and which use the

introduction of innovations as the key promoter of change.’ 4 One major international programme adds the following:

Working with (and re-working) existing knowledge, rather than simply generating new knowledge through research, is a predominant activity in innovation. The actors that comprise innovation systems are not limited to scientific elites working in research and higher education organizations. People in banks, in companies, on farms, in business associations and in non-govern- ment civil society organizations contribute extensively to innovation. Interactions between the actors and organizations that comprise innovation systems can be technical, commercial, legal, social and financial. Innovation systems in poorer countries are much smaller in comparison with advanced countries and have weak links between different types of STI capabilities. Formally organized R&D activities undertaken in most develop- ing countries, moreover, do not tend to align or overlap with the activities of private sector or ‘productive’ enterprises to any significant extent. These structural, organizational and linkage deficiencies in developing country innovation systems are compounded by a number of other factors – policies, political leadership, laws, rules, cultural practices and infrastructure are all vital to the functioning of innovation systems. (International Development Research Centre 2006, p3)

The main levers and issues of innovation policy include:

• public research funding: basic or applied, sectoral, balance between

high-tech and local or grassroots; • public funding of primary, secondary and tertiary education, pursuit

of social equity goals, especially access and gender equality; • the system of support for innovation in business, non-profit and

public (including university) sectors: tax incentives, venture capital connections, public funding for business commercialization and community extension;

• the nature of the decision-making processes: openness and inclusiveness.

HUMAN DEVELOPMENT POLICY ANALYSIS