Treaties and Agreements

John Kerry’s first major address as secretary of state, delivered Wednesday at the University of Virginia, was light on specifics and priorities. But it offered a useful glimpse into his mindset as the country’s newest chief diplomat. Two themes permeated the speech: the eroding boundary between what is “foreign” and “domestic” in our global era and the risks to U.S. national security of shortchanging investments in diplomacy and development assistance. Kerry’s first observation—on which I’ll focus here—was that foreign and domestic policy are increasingly one and the same. This is most obvious when it comes to climate change. Given the obstacles to negotiating a comprehensive, binding successor to the Kyoto Protocol—or even instituting a global cap-and-trade system—major progress on mitigating global emissions will depend on parallel national actions among the world’s major economies. Thus the most dramatic U.S. government contribution to reducing global emissions has been the Obama administration’s negotiation with the automobile industry to mandate higher fuel efficiency standards. (Of even greater immediate importance to lowering emissions, of course, has been another domestic development led by the private sector: the revolution in unconventional oil and natural gas, reducing U.S. reliance on coal.) The disappearing distinction between domestic and international is apparent across multiple issue areas. Take transnational terrorism, which finds al-Qaeda cells operating not only in Mali but in Minneapolis. Or global financial crises, which may originate in unsustainable debts in Athens, Greece, or real estate bubbles in Naples, Florida. Or the epidemiology of infectious diseases, which can spread to and from the United States among the 150,000 visitors who enter (or leave) the country daily. The blurring border between the national and international has put traditionally “domestic” agencies on the front lines of U.S. foreign policy. Consider the Food and Drug Administration (FDA). Given its limited staff, the FDA already struggles to supervise approximately 200,000 domestic facilities involved in the manufacture, distribution and sale of food, prescription drugs, medical supplies, cosmetics, and the like. Now reflect on this: the United States imports nearly half of its fresh fruit and produce—placing the safety of the U.S. food supply in the hands of foreign regulators. The food scares of recent years—from  tainted Chinese infant formula to salmonella-laden Mexican peppers—point to the potential risks of (essentially) subcontracting regulatory functions to other nations. The risk is even greater when it comes to prescription drugs. Fifteen years ago, the active ingredients in pharmaceuticals were produced primarily in the United States. Today, eighty percent of such ingredients are manufactured abroad, particularly in China and India, and these drugs are often re-compounded in several countries before reaching the United States. As my colleague Laurie Garrett has noted, the emergence of complex international global supply chains presents a regulatory nightmare, particularly as unscrupulous suppliers and illicit networks have flooded international markets with counterfeit, substandard, or entirely fraudulent pharmaceuticals. To be sure, the FDA now places its own inspectors in a number of foreign countries, but the inspection of even a single plant may take a week. The only way out of this conundrum, says FDA Administrator Dr. Margaret Hamburg, is to create a “global alliance of regulators,” committed to establishing common (or at least harmonized) national standards—and to expand information sharing and enforcement efforts. The idea of a “global alliance of regulators” is one that has legs far beyond just food and drugs.  As the world becomes increasingly interdependent, effective global governance will rely less on existing international organizations and laboriously negotiated treaties and more on transnational networks of officials who hail not just from foreign ministries but from domestic agencies that possess specialized technical expertise and regulatory authority in fields ranging from health to transportation, energy, education, justice, labor, the environment, and virtually any other “domestic” sphere imaginable. This isn’t a new idea, of course—Anne-Marie Slaughter of Princeton University has been propounding it for a decade. But the full implications haven’t really sunk in among decision-makers in Washington, to say nothing of the wider public. At the close of the nineteenth century, Frederick Jackson Turner famously declared the disappearance of the American frontier an epochal event U.S. history. More than a hundred years later, the dissolving frontier between the domestic and the foreign will have its own transformative impact on U.S. diplomacy. This is something that John Kerry seems to understand instinctively.  “There is no longer anything foreign about foreign policy,” the secretary of state declared in Charlottesville. In a “shrinking world,” he explained, advances in national security, economic prosperity, and social welfare are increasingly linked with progress on those same objectives abroad.  Kerry used this linkage to urge Congress to invest heavily in the civilian components of its global engagement—namely, the U.S. State Department and USAID.  But to be a truly great secretary of state, Kerry must think beyond the institutional confines of is bureaucratic position. He should welcome and encourage the increased global involvement of America’s traditional domestic departments and agencies, using his position as the country’s chief diplomat to ensure the overall coherence of U.S. foreign policy. That Kerry chose to offer his first major address at “Mr. Jefferson’s University”  lent an elegant historic symmetry to his speech. Jefferson, America’s first secretary of state (1790-1793), had assumed his position “in a nation that was just getting used to its independence.” As the 68th occupant of the same office, Kerry noted, he did so “in a world that’s still getting used to our interdependence.”  

Surprising to many Americans is the importance of the United States’ trade with Mexico. While Asia captures the headlines, U.S. exports to Mexico are double those to China, and second only to Canada. And while many of these goods come from border states—Texas, Arizona, New Mexico, and California—Mexico matters for much more of the union. Seventeen states send more than 10 percent of their exports to Mexico, and it is the number one or two destination for U.S. goods for nearly half the country. The graph below shows those states most economically dependent on our southern neighbor–notice that South Dakota and Nebraska outpace New Mexico and California. These flows are only accelerating. During the first ten months of 2012 exports heading south grew by $17 billion dollars (or 10 percent) compared to 2011, reaching a total of $181 billion. They include petroleum products (some $17 billion worth) and intermediate goods such as vehicle parts, electrical apparatuses, industrial supplies, metals, and chemicals (over $40 billion combined). Spurred on by deep supply chains, these pieces and parts move fluidly back and forth across the border (often quite a few times) before ending up as finished goods on store shelves in both countries. The uptick should be seen as a good thing. According to economic studies, these exports support some six million American jobs (directly and indirectly). But to continue this dynamism, the United States and Mexico need to improve border infrastructure and facilitate flows. This means expanding border crossings and highways, and harmonizing regulations and customs to make the process easier and faster. Prioritizing and investing in bilateral trade will provide greater opportunity and security--for U.S. companies and workers alike.

-- Moscow Having recently assumed the rotating chair of the Group of Twenty (G20), the Russian government is now soliciting input on the agenda for its September 2013 meeting in St. Petersburg. Yesterday I contributed to these deliberations as a member of the “Think20”network—a consortium of independent experts from around the world. My own advice to the Russian sherpa, Ksenia Yudaeva, was that Russia should transform the G20’s nascent development agenda to address the pressing challenge of fragile states. Development has been on the G20 agenda since the Seoul summit of November 2010. Under the South Korean chair, the group endorsed the Seoul Development Consensus, a set of principles for advancing growth in the developing world. This initiative promises unprecedented cooperation between the world’s established donors and dynamic emerging economies. What this approach ignores, however, is the changing landscape of global poverty, which is increasingly concentrated in the world’s fragile states. The Organization for Economic and Development’s Development Assistance Committee (OECD-DAC) and World Bank currently classify forty-seven countries (out of 193 UN member states) as “fragile.” These countries, which have a collective population of 1.5 billion, are a diverse bunch, ranging from Pakistan to Nigeria, Haiti to Yemen. But they all have critical deficits in institutional capacity and political legitimacy, leaving them susceptible to political instability and violent conflict. They struggle to provide their citizens with physical security, the rule of law, stable markets, and social welfare. Historically, fragile and conflict-affected states have been treated as a sideshow when it comes to advancing global development. This approach is no longer tenable. By 2015, the OECD-DAC predicts, fully half of the world’s poorest people, subsisting on less than $1.25 per day, will live in fragile states. As former World Bank President Robert Zoellick has noted, fragile states have become the hard core of the global development challenge. As a cohort, these countries are furthest from achieving the Millennium Development Goals (MDGs). Among other shortcomings, today’s fragile states contain more than three-quarters (77%) of all children not in primary school and account for seventy percent of global infant mortality. They contain 66% of the world’s population without access to safe water, as well as 60% of the world’s undernourished. A G20 focus on state fragility is compelling not only on development but also on humanitarian and security grounds. Fragile states are frequent settings for the world’s worst atrocities, including gross abuses that may merit invocation of the “responsibility to protect” doctrine. They are also capable of undermining regional stability and generating dangerous spillovers, from terrorism to transnational crime, as I outline in my book Weak Links: Fragile States, Global Threats, and International Security. Compared to “normal” developing countries, fragile states remain highly dependent on official development assistance (ODA), their leading source of financial flows (followed by remittances, and thirdly by foreign direct investment, or FDI). At the same time, foreign aid remains highly concentrated: in 2010, half of the $50 billion in ODA to fragile states went to just seven recipients (Afghanistan, the Democratic Republic of the Congo, Ethiopia, Haiti, Pakistan, West Bank and Gaza, and Iraq). Such selectivity contributes to the dual phenomena of "donor darlings" and "aid orphans." Aid to fragile states is also volatile, and a large percentage is simply palliative humanitarian aid. Like aid, remittances and FDI are also highly concentrated in particular fragile states.  Some 80% of fragile state remittances go to just five countries (Bangladesh, Nigeria, Pakistan, Sri Lanka, and Nepal). Likewise, three-quarters of all fragile state FDI goes to seven resource-rich countries, among them Nigeria, DRC, and Sudan. Finally, the vast majority of fragile states are marginalized from the global trading system, particularly since the onset of the global economic crisis. Traditionally, the challenge of states addressing fragility has been the purview of Western countries, in collaboration with UN agencies and the World Bank. But this needs to change, because development cooperation with fragile states is no longer a monopoly of the OECD-DAC. Not only are cash-strapped Western donors cutting back their aid budgets, but a new set of donors—including G20 members like China, India, Brazil, Saudi Arabia, South Africa, and Turkey—is emerging. (Among these countries, China is in a class by itself: its aid budget grew 30% annually between 2004 and 2009). Beyond foreign assistance, emerging donors are increasingly sources of FDI and trading partners for fragile states. These trends underscore the G20’s value as a forum for harmonizing approaches to poverty alleviation in fragile states. Over the past decade, the OECD-DAC and World Bank have refined a set of Principles for Good Donor Engagement in Fragile States and Situations. Their successful implementation will depend on buy-in from new donor countries. The G20 can play a critical role in two policy realms. The first is in putting substance, political muscle, and resources behind the so-called “New Deal for Fragile States.” Agreed at the Fourth High-level Forum on Aid Effectiveness in Busan, South Korea, in November 2011, this initiative recognizes that development cooperation in fragile states differs fundamentally from engagement with “normal” developing countries. Success requires that aid donors and recipients alike “do things differently”—by designing aid interventions that reflect the unique context of fragility in each state—and also “do different things”— by structuring interventions around five agreed “Peacebuilding and Statebuilding goals.” (These include fostering inclusive politics, strengthening human security, bolstering justice systems, generating employment, and ensuring transparent revenue management). Significantly, the driving force behind the New Deal for Fragile States has been a group of nineteen fragile and conflict-affected states—including Liberia, Burundi, and Timor-Leste. This is an important breakthrough. Too often, Western donors have paid lip service to the principles of “country leadership and ownership” that are critical to successful development interventions. The New Deal for Fragile States also puts fragile state governments on the hook to solicit inputs from civil society actors, in designing “one national vision and one plan out of fragility.” Some wonder whether fragile state governments can rise to the occasion. The New Deal for Fragile States assumes that the average fragile state government is weak but well intentioned. In reality, such regimes are often dominated by predatory elites indifferent to their citizens, skeptical of participatory politics, and resistant to transparent revenue management. By raising the normative bar, however, the New Deal for Fragile States may gradually change expectations about appropriate behavior by fragile states and their eligibility for ODA. For such implied conditionality to have an impact, however, all major donors—not merely traditional OECD-DAC partners—must be on the same page. The second area where the G20 can play a useful role is in identifying and ameliorating systemic forces that exacerbate institutional weaknesses within fragile stages. To date, most analysis of state fragility has focused on internal shortcomings. This overlooks that state fragility is often a function of sins of omission or commission by foreign governments, corporations, and individuals. For example, outside actors can exacerbate fragility when they: insist on abrupt economic liberalization that exacerbates social inequality; encourage a precipitous turn to electoral politics in volatile political circumstances; maintain prohibitive tariffs and other barriers that discourage imports from fragile states; cast aside concerns for good governance in resource-rich countries; sustain demand for narcotics or other illicit commodities, undermining the rule of law and licit economic sectors; provide financial safe havens where kleptocrats can stash their ill-gotten gains abroad; and engage in a lucrative trade in arms that subsequently circulate in the world’s conflict zones. Some of these dysfunctional dynamics are outlined in a useful new OECD-DAC report: Think Global, Act Global: Confronting Global Factors that Influence Conflict and Fragility. If the G20 is serious about development, it should launch a new working group to illuminate the global taproots of state fragility—and to explore potential policy responses to mitigate them. Among other items, the G20’s fragile states agenda should consider how to: coordinate strategies with UN Office on Drugs and Crime to fight transnational organized crime, which imposes staggering costs on human welfare in fragile states; bolster multilateral efforts to crack down on money laundering in (and from) fragile states, including through an expanded Financial Action Task Force (FATF); bolster the World Bank/UN Stolen Assets Recovery (StAR) Initiative, which aims to track down the wealth that corrupt autocrats stash abroad; gain wider buy-in, including from emerging powers, for the Extractive Industries Transparency Initiative (EITI), as well as the OECD Anti-Bribery Convention; grant duty-free access to a wider range of imports from fragile states; expand risk insurance and other instruments to allow commodity-dependent fragile states to hedge against fluctuating prices; assume leadership from the Group of Eight (G8) for the Global Peace Operations Initiative (GPOI), which trains peacekeepers to deploy in conflict-affected states; and, more controversially, revisit counterproductive source-control approaches to counternarcotics policies.

For more than a decade, the global conversation about development has been dominated by the Millennium Development Goals (MDGs). Established at the United Nations’ Millennium Summit of 2000, these eight objectives focused on what the international community could do to meet basic human needs in the developing world. Over the past dozen years the MDGs have been attacked on numerous grounds—for setting impossible goals (such as 100% primary school attendance), for neglecting critical requirements like good governance and strong institutions, and for placing unrealistic expectations on what foreign aid can actually accomplish. But whatever their shortcomings, the MDGs mobilized unprecedented global attention and financial resources for poverty alleviation, driving policy and budgetary decisions throughout the world’s aid agencies. Several of the MDGs have already been achieved (such as halving of absolute poverty) or are on track to be met by 2015. The global development community is now debating what should replace the MDGs when they expire in 2015. What is crystal clear is that the inherited MDG model is increasingly irrelevant to today’s development landscape: - First, the MDG approach focuses overwhelmingly on what Western donors can do to deliver development through foreign aid. This ignores growing evidence that aid often pales in comparison to foreign investment, trade liberalization, private sector promotion, and technology transfer in laying the foundations for sustained economic growth. It also overlooks the growing role being played by non-traditional aid donors, including China, India, Brazil, and the Gulf countries, and pays insufficient attention to aligning global goals and targets to the national development priorities of the poorest countries themselves. - Second, the world’s poor are not where they were when the UN establish targets for the MDGS. In 1990—the baseline date used for MDG targets—fully eighty percent of the world’s poor lived in stable, low income countries. Today, only 10 percent do, whereas nearly two-thirds (66 percent) live in middle-income countries and another quarter (24 percent) inhabit fragile or conflict-affected low-income countries. The implication? Making a dent in global poverty will require unprecedented collaboration with governments in middle-income nations, on the one hand, and new strategies to engage the world’s most conflict-ridden and dysfunctional countries, on the other. - Third, any successor to the MDGs must take a more comprehensive approach to development. As the UN team spearheading global consultations has concluded, follow-on goals must target not only inclusive economic and social development but also environmental sustainability (given short shrift in the MDGs) as well as peace and security (completely ignored by the MDGs, despite being a fundamental precondition for development). So what should replace the current MDGs? The best practical answer to date comes from the Korean Development Institute (KDI) and the Canada-based Center for International Governance Innovation (CIGI), which recently released a glossy report, titled Post-2015 Development Agenda: Goals, Targets and Indicators. Don’t let the soporific title fool you. This short document is an engaging, incisive and timely contribution to debates on the future development agenda. The authors’ eleven goals include: Inclusive growth for dignified livelihoods and adequate standards of living: The KDI-CIGI initiative wisely focuses on broadly shared economic growth as the sine qua non of development. Sufficient food and water for active living: This goal responds to growing concerns about water scarcity and food price volatility, as well as the need for adequate nutrition, not simply caloric intake. Appropriate education and skills for full participation in society: Whereas the MDGs focused on grade school enrollment and childhood literacy, this replacement goal encompasses secondary and tertiary education. Good health for the best possible physical, mental, and social well-being: The KDI-CIGI report wisely integrates all global health targets under one single goal. It also addresses not only infectious disease but the growing burden posed by non-communicable diseases. Finally, it emphasizes the importance of health system strengthening—as opposed to stove-piped, single disease interventions. Security for ensuring freedom from violence: Among the MDGs’ biggest lacunae was inattention to human insecurity (including war, crime, and domestic violence) as a limiting factor to development. Closing this gap is critical, particularly in engaging fragile states. Gender equality enabling men and women in society to participate and benefit equally in society: Reflecting the importance of women in the development process, the report calls for steps to advance the physical, economic, and decision making autonomy of women across societies. Resilient communities and nations through disaster risk reduction: Growing global vulnerability to natural disasters–ranging from drought to hurricanes—underlines the need for all societies to invest in preparedness and recovery systems. Quality infrastructure for universal access to energy, transportation and communication: In an age of globalization, development depends on connectivity. The authors thus include targets for increased access to energy, transportation networks, and communications technology. Empowering people to realize their civil and political rights: This proposed goal is both the most controversial and the most important. While authoritarian regimes may bluster, long-term development requires that people participate in the political process, possess civil rights, have access to rule of law, and can hold their governments accountable. Sustainable management of the biosphere, enabling people and the planet to thrive together: Building on the Rio+20 conference, the authors propose steps to break from “business as usual”, including putting a price on the ecological costs of economic activity. Global governance and equitable rules for realizing human potential: Finally, the report proposes sweeping reform of international institutions to advance development globally. This potential agenda is so massive and complex that the authors might wish to limit themselves to an even ten goals or focus on specific shortcomings in the global economy that represent enormous barriers to development. One of the report’s most distinctive—and perhaps controversial—recommendations is that progress toward these goals be measured in all countries, including advanced market democracies. While one can imagine outcries from some sovereignty-minded conservatives about being “judged” by the international community, there is no reason the United States should not voluntarily embrace, domestically, a set of universal, non-binding goals for human betterment broadly consistent with its own political and economic ideals—as well as the development agenda it has long pursued abroad. After all, as philosopher Amartya Sen has written, the most compelling definition for development is “freedom.”

Yesterday Global Financial Integrity released a new report, “Mexico: Illicit Financial Flows, Macroeconomic Imbalances, and the Underground Economy,” which provides an in-depth look at flows of illicit money from Mexico. The study finds that nearly $1 trillion in illicit capital left Mexico from 1970-2010, averaging about $50 billion a year this past decade. Illicit outflows have increased over time – in 1970 only $3 billion of illicit money left the country per year – and experienced particularly large upswings during macroeconomic crises. These flows decreased by more than 50 percent as a share of exports, though this is largely because exports overall increased dramatically as Mexico transformed from a relatively closed to open economy. The report’s most interesting finding is that this illicit capital is not necessarily or mostly drug money. Instead it comes from Mexico’s large underground economy. In these markets the goods being traded are not necessarily in and of themselves illegal. What’s illegal is the under-the-table way that they are bought or sold. The report finds that the vast majority (80 percent) of the money leaving Mexico does so through a method called “trade mispricing.” This is when a company either undervalues exports or overvalues imports, and agrees with its trading partner (for many this is the same entity or owner) to transfer the balance to a bank account abroad. Just as when a restaurant doing cash business fakes the number of customers it receives to avoid paying taxes, companies doctor their trade records to allow money to flow out of a country untaxed. In Mexico’s case, economic liberalization in the 1990s had the unintended effect of promoting this type of capital flight. The explosion of trade around NAFTA provided exporters and importers more opportunities than ever to manipulate the rules of the game. Dealing with this challenge means tackling the informal economy, which both drives and is driven by illicit outflows. Mexico’s regulatory institutions need to catch up to the high volume of trade in the post-NAFTA era, strengthening auditing practices and tax authorities along the way. Another way of chipping away at the underground economy is to shrink the number of people working in it, by creating more formal sector jobs. This is good for workers, who get better social protections in the formal economy, and for businesses, which can get loans and other services needed to grow and expand. More formal sector enterprises will also generate much-needed tax revenue in Mexico (the country with the lowest rate of tax collection in the OECD and among the lowest in Latin America). These extra public funds will pay for more public schools, better roads and stronger police forces, benefiting Mexican society in the long run. The United States also has a role to play in helping Mexico combat money laundering. As the number one destination of illicit funds from Mexico, U.S. banks could make it a lot harder to move money north by improving transparency and reporting more regularly on private deposits. Getting banks to do their part will require deeper cooperation between the United States and Mexico, with tougher rules and regulations on both sides of the border.