After having briefly reviewed the recent experiences with trade liberalization the paper argues that the effects of financial liberalization on employment and incomes often carry great disturbances for economic and social development. Therefore, financial liberalization warrants at least as much attention as trade liberalization. The paper weights the potential benefits in terms of growth against the adverse effects of volatility and crises that are frequently associated with financial liberalization, and in particular with debt and portfolio flows. It is motivated by the concern expressed by the World Commission on the Social Dimension of Globalization that “[g]ains in the spheres of trade and FDI run the risk of being set back by financial instability and crisis” and draws the conclusion that volatility in international financial markets is currently perhaps one of the most harmful factors for enterprises and labour in developing countries. Hence, the paper suggests how greater policy coherency between international and national financial, economic and employment policies can give greater attention to employment and incomes.

The impacts of all merchandise trade distortions (including agricultural subsidies) globally are estimated using the latest versions of the GTAP database and the LINKAGE model of the global economy (projected to 2015). Results suggest that developing countries’ economies bear a disproportionate burden of current distortions, reducing their average income by 0.8 percent (and Sub-Saharan Africa’s by 1.1 percent) compared with 0.6 percent for high-income countries.

A huge 63 percent of those costs are due to agricultural market distortions, even though agriculture accounts for just 4 percent of global GDP. As much as 93 percent of the cost of those agricultural distortions is due to import barriers and only 2 percent to agricultural export subsidies and 5 percent to direct domestic subsidies to farmers – although within that, the cost of cotton policies is mostly due to domestic support programs. Half of the overall cost to developing countries is due to the region’s own policies, partly because they trade with each other fairly intensively and partly because their own trade barriers are higher than those of highincome countries. If all those trade-distorting measures were to be removed, the developing countries’ shares of global output as of 2015 would rise from 70 to 75 percent for primary agricultural goods, and of textiles and clothing from 62 to 65 percent. Developing countries’ shares of global exports would rise even more dramatically, especially in agriculture: from 47 to 62 percent in primary farm products and from 34 to 40 percent in processed farm products. That represents a rise in developing country exports of around $200 billion per year (in 2001 US dollars) – an increase of two-thirds compared with the baseline scenario for 2015 – and in exports of nonagricultural goods of $400 billion per year. This amounts to more than six times what was needed to service the foreign debt of all developing countries in 2003. Cotton exports alone would rise by more than $4 billion for developing countries as a whole, almost half of which would be enjoyed by Sub-Saharan Africa. Self-sufficiency in that year would be 102 instead of 100 percent for agricultural products, 121 instead of 118 percent for textiles and clothing, and for other manufactures it would be 100 instead of 101 percent.

A number of high-debt emerging-market economies face structural, long-term debt problems that tend to keep their growth rates low, that impart an unequalizing bias to the growth process, that severely constrain social spending and human development, and that make them vulnerable to capital flow reversals. Unless the nature and pace of growth can be improved in these lower-middle income countries, the Millennium Development Goals (MDGs) are unlikely to be met either in many of these countries, or globally. These high-debt emerging-market economies face an impossible choice between draconian and never-ending fiscal austerity, or crisis and a “debt event.” Both “bitter pills" impose high social and economic costs.

This paper proposes the creation of a “Stability and Social Investment Facility” (SSF) to be housed either at the IMF or the World Bank. It would be a long-term facility to help high-debt emerging market countries cope with and ultimately overcome what will otherwise remain a chronic structural weakness. The SSF would be an instrument providing a steady and predictable source of long-term funds as well as a strong policy signal to help high-debt emerging-market economies reduce their debt burden without having to forgo vital pro-poor social expenditures and growth programs. For the facility to have a significant impact on debt and income dynamics in the eligible countries, we estimate it would need to lend $10-20 billion a year. The financial cost to the donor community would be the interest subsidy built into the SSF; were the subsidy 200 basis points, the cost in the first year would be $20 million for every $1 billion of lending.

The rationale for the subsidy element is its catalytic role in facilitating a strong commitment to both prudent macroeconomic policies and pro-poor growth policies. The lower interest cost of the SSF, even if modest, would make it financially and politically easier for governments in eligible countries to address their long-term social (MDG) objectives, while maintaining a sound fiscal stance.