Select Committee on European Scrutiny Thirty-Seventh Report





COM(02) 81

Commission Communication: Responses to the challenges of Globalisation: A study on the International Monetary and Financial System and on Financing for Development.

Legal base:


Document originated:

13 February 2002

Deposited in Parliament:

18 March 2002


HM Treasury

Basis of consideration:

EM of 18 March 2002

Previous Committee Report:


To be discussed in Council:

No date known

Committee's assessment:

Politically important

Committee's decision:




    1. On 16 October 2001 Finance Ministers asked the Commission for a study on responses to the challenges of globalisation. This study was to focus on two main issues: reform of international monetary and financial architecture in response to global financial crises, and financing and promoting development in order to reduce global inequality — but not social policy, health and environment aspects of globalisation, which are the subject of a separate Commission Communication.[46]
    2. The document

    3. This document is the Commission's study of globalisation. The document does not provide original research but surveys the existing literature on the subject, attempting to highlight aspects of the debate amongst academics, policy makers and non-governmental organisations. It makes no specific proposals.
    4. The Commission's report says that the economic and financial aspects of post-war globalisation — the subject of the report — have been characterised by strong expansion of trade in goods and services and, more recently, capital flows. Several factors underlie this expansion, including technological progress, for example reductions in transport costs, and public policy measures, for example liberalisation of capital movements. Over the past 50 years world output has increased six-fold while population levels have increased two and a half times. The period has seen great improvements in human welfare and quality of life in many countries.
    5. The report claims there is little doubt that the great increases in global per capita income would not have occurred without continued progress towards greater economic integration. It cites World Bank studies showing that developing countries opening up their economies in the last 20 years have experienced better growth performance than those not doing so. The report notes the position of the very poor countries, especially in South Asia and Sub-Saharan Africa, which are less integrated into the global economy and do not receive much of the benefit of globalisation. It also notes the association of globalisation with other challenges: communicable diseases, climate change, loss of biodiversity or lack of international security. As regards possible policies, the Commission mentions creating public goods, together with measures to reduce poverty.
    6. The international monetary and financial system

    7. The study looks at the evolution and functioning of the international monetary and financial system in the last fifty years and concludes that overall it has worked well. But recent experiences have highlighted some weaknesses, including the system continuing to be crisis-prone and problems of money laundering, financing of illegal activities and tax evasion.
    8. The Commission considers four groups of proposals put forward by academics and others. First, on crisis prevention, it sees broad acceptance of increasing transparency in policy; improving information flows; developing and deepening financial markets; strengthening domestic financial systems; and strengthening foreign exchange reserves of emerging market economies; it sees these as contributing already to making the system more shock-resistant. The Commission notes the resistance to other proposals, such as a currency transaction tax, which it says could make exchange markets even more volatile.
    9. Secondly, in looking at abuses of the international financial system, the Commission notes that intensified international collaboration, increased corporate transparency and a better integrated supervisory system are central to possible solutions. Thirdly, the Commission reviews how the stability of the international system can be improved through intensified co-operation in regional groupings, including proposals for exchange rate co-ordination between the G3. Finally the report looks at proposals for improving the governance of the international system by, for instance, increasing the transparency of the IMF's decision making.
    10. Promoting and financing development

    11. Observing that a number of poor countries have been unable to share in the benefits of globalisation and are in need of international assistance, the report reviews four existing development instruments:

    • official development assistance (ODA) — noting continued concern about, amongst other things, the level and effectiveness of ODA and issues of conditionality and programme ownership;

    • debt relief — noting the HIPC (highly indebted poor countries) debt initiative and its possible extension to other countries;

    • trade measures — noting the importance of market access for developing countries, including the EU's "Everything But Arms" initiative; and

    • foreign direct investment (FDI) — noting the increased role of FDI in development and the necessary conditions for improving developing countries access to FDI.

    1. The Commission also considers several alternative sources of finance for development, including international taxes, such as the Tobin tax and allocations of Special Drawing Rights (SDR). Generally, the Commission does not come to any firm proposals, but it records its view that SDRs are not a suitable development aid mechanism.
    2. The Government's view

    3. The Financial Secretary to the Treasury (Ruth Kelly) says:
    4. "The Government welcomes the Commission's report on globalisation, which gives a good overview of the key issues surrounding development and the international financial system. The report is comprehensive and well informed, and in general its findings tie in well with Government's policy agenda.

      "On the international financial architecture, the Government places particular emphasis on the role of internationally agreed codes and standards in providing macroeconomic stability, promoting growth and boosting investor confidence. The Government also believes that the IMF's Contingent Credit Line facility should play a stronger role in helping countries with transparent and effective policies to strengthen their financial position and guard against contagion. On crisis resolution, the Government believes that the framework for private sector involvement needs to be developed further, to ensure that all parties that benefit from the international financial system play their part in maintaining stability.

      "The Government strongly believes that aid must support country-owned poverty reduction strategies. A key objective for the EC must be improving the effectiveness and poverty-focus of its aid programme. The Government supports the Commission's Development Policy, which identifies poverty reduction as the principal aim of the EC's cooperation with developing countries, and the Government will work to ensure its successful implementation.

      "The Government also recognizes the need to increase the overall level of finance for development — from public and private, domestic and international sources. The Chancellor has proposed the creation of a new international development trust fund, and called upon national governments to substantially increase development assistance budgets. The Government notes the Commission's findings in relation to the feasibility of the Tobin tax as a source of development finance, but remains open to suggestions as to how the implementational difficulties can be resolved, and to other proposals for raising development finance.

      "The Government also recognises the positive relationship between trade and economic growth and poverty reduction. The Doha outcome[47] is an opportunity to pursue a broad trade agenda with a development focus. There is a need to deliver further liberalisation in manufacturing and services, and the Government places particular emphasis on agriculture, where it is committed to negotiations to reduce export subsidies, with a view to phasing them out, The Government welcomes the recent adoption of the Commission's 'everything but arms' initiative for the forty-eight poorest countries and will press for further substantial improvements in market access for all poor countries.

      "The Government recognises the important role that foreign direct investment (FDI) has to play in development, and believes that improving cross-border accountability and corporate social responsibility can enhance the sustainability and effectiveness of FDI.

      "Overall, the Government believes that the Commission's study on globalisation is a valuable contribution to the policy debate. The discussion of the key issues is useful for all governments, within and outside the European Union. There must be a new dialogue on globalisation, which recognises the benefits in terms of growth and efficiency — but also sets out the public policy response to ensure social justice, and to make progress on the Millennium Development Goals. These themes were among those set out in the Government's recent White Paper on European Economic Reform, "Realising Europe's Potential", in particular chapter 8 which covers the international dimension."


    5. Although the report contains no specific proposals, it does provide a useful account of the issues surrounding development and the international financial system.
    6. We are content to clear the document.


46   "Towards a Global Partnership for Sustainable Development".  Back

47   The Fourth WTO Ministerial Conference was held in Doha, Qatar from 9 to 14 November 2001. The Doha Declaration sets out an expanded negotiating agenda and other important decisions and activities necessary to address the challenges facing the multilateral trading system.  Back

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