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Fragile world economy needs multilateral measures

by Chakravarthi Raghavan

Geneva, 1 Oct 2001 - The global economy already deteriorating for more than a year has suffered a serious setback as a result of the events of 11 September, making the world economy more fragile and unpredictable, with developing countries likely to face major setbacks.

In providing this sober and gloomy assessment of the outlook, UNCTAD Secretary-General, Mr. Rubens Ricupero, welcomed coordinated and immediate responses, including that of central banks, to provide liquidity and restore confidence in the stock markets, but suggested that more comprehensive and decisive actions would be needed to address the serious implications of the crisis for developing countries.

What was needed, Mr. Ricupero said, are policy responses in terms of a truly inter-dependent world economy, including availability of international liquidity, solutions to the debt crisis.

Ricupero made these remarks addressing the 48th session of the Trade and Development Monday, which began a 12-day session, and elected Amb. Ali Mchumo of Tanzania as President.

The board will discuss during the session, “Financial stability: reform of the international financial architecture and role of regional cooperation.” Another item on the agenda is the outcome of the Brussels Third UN Conference on Least Developed Countries and discussions on UNCTAD’s contribution to the final review and appraisal of the implementation of the UN’s New Agenda for Development of Africa in the 1990s.

The Board has before it a secretariat note on the Global Economic Trends and Prospects, updating the UNCTAD’s outlook in the last Trade and Development Report, and taking account of the already slowing world economy and the likely effects of the 11 September events.

At the outset the Board observed a minute of silence for the victims of the 11 September events and the more recent, but unrelated, shooting and death caused in Zug (a canton of Switzerland) where a former policeman aggrieved by personal grievances, entered canton legislative chamber with guns and opened fire, killing some 15 and injuring several others, including some legislators and media persons.

In a reference to the 11 September events, Mr. Ricupero said that the hope that the end of the cold-war and the nuclear balance of terror had brought more predictability and control and risk-free international life, had been belied.  While the nature of the danger has changed, the events of 11 September had brought home the terrible revelation of the capacity of a “shadow terrorist organisation” to inflict enormous death and destruction to innocent people. This threat that was already there had gained a new dimension.

Besides the political or security agenda brought to the fore, there were also the social and economic dimensions. The decade since the fall of the Berlin wall had seen many important events with positive developments in economic and social life. At the same time one has been made aware that they were living in a world of light and shadow, and the world was facing more worrying problems in the economic and social spheres.

Ricupero cited in this regard the destructive power of monetary and financial crises since the middle of the last decade, and the current outcome (even before the 11 September events) of a synchronised slowdown of the world economy in all the major centres.

There was also the wide-spread malaise in civil society concerns over some aspects of the recent developments in the economic and social spheres which, for lack of a better description, was being described as the ‘anti-globalization movement,’ and which has found many expressions recently in increasingly violent protests and demonstrations at important international gatherings. All these led to the need for reflection and for drawing lessons from the recent events.  Solutions would need to be sought in terms of the inter-dependence of nations and increased multilateral cooperation, using both inter-governmental gatherings and others to build a consensus, taking a comprehensive approach that would be closer to reality.

Referring to the secretariat’s note on the outlook, looking at the situation from the perspective of development, Mr. Ricupero said there were still many aspects that are yet to evolve. However, it was necessary to take stock.

Even before the recent events, the world economy was showing signs of a simultaneous slow-down with grave consequences for the developing countries, since the Asian crisis. In addition, unlike at that time, there would be no compensation for the drop in demand and growth of output in Asia that came from the US economy. Even before the 11 September events, consumer confidence had fallen by some eight points in the US, according to a Michigan University survey, more than just before the last US recession in 1991-92.

The US economy, Ricupero recalled, had been growing as a result of consumer spending, and the impact of the New York ‘attacks’ would provide another negative blow to consumer confidence and expectations, as had happened in 1990 when Kuwait was invaded, and the consumer confidence index dropped by 12 points.  The more recent conference board survey results showed that consumer confidence in the US had fallen by 16 points.

Ricupero noted approvingly the actions of central banks to pump liquidity into the system before the stock markets reopened after the 11 September events. Even if these had not been formally synchronised, the moves were. All this liquidity would provide a boost to the US economy.

And as the US Treasury Secretary, Mr. O’Neill had remarked, if a recession was inevitable, all these actions would ensure that such a recession would be of short duration, and one would see signs of recovery in the second half of next year. Some of the measures being taken in the industrial countries provided some evidence to make one relatively optimist in the middle term.

However, suggested Ricupero, there should be similar decisive actions in addressing the implications of this crisis for developing countries. The slowdown in the major economies for a longer time would have some disastrous consequences for developing countries, with the negative impulses transmitted through trade, investment and financial flows.

Already the exceptional world trade growth last year had slowed down and it was expected to be less than four percent this year. Such a sharp contraction in world trade would be particularly negative for developing countries. Until a few weeks ago, the US economy had provided a major source of import-demand growth for the world. This was so in the aftermath of the Asian crisis. With import growth slowing down in the US, and with Europe having much less of an import propensity, and with much of its trade intra-EU, regions like south-east Asia, Latin America etc. would be hit hard.

There would also be a sharp slowdown in flows of foreign direct investment and other capital flows.

Ricupero welcomed the recent remarks of the US Treasury Secretary O’Neill, showing opened to the idea of having at international level something akin to the Chapter 11 of the US bankruptcy law (enabling the debtor of an enterprise to seek court protection from creditors, and continue to function with ‘debtor-in-possession’ and enough liquidity and funds, while arrangements for restructuring of debt by creditors are being worked out. O’Neill had said in September in Washington that such an arrangement should be considered in an international context, rather than forcing countries to seek ad hoc funds from the IMF etc. Ricupero recalled that UNCTAD had long advocated such measures.

Viewing some of these as encouraging signs on the international scene, Ricupero noted that since the events of 11 September, there was a growing realization that unregulated financial markets could operate against public interest, and that constructive measures were needed to better manage financial markets in the interest of all countries. The upcoming UN Conference on Financing for

Development, Ricupero added, could provide a multilateral setting where progress towards a more balanced and stable pattern of integration could take place. – SUNS4978

The above article first appeared in the South-North Development Monitor (SUNS) of which Chakravarthi Raghavan is the Chief Editor.

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