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Trade and Finance systems need integrated solutions

by Chakravarthi Raghavan


Geneva, 18 Oct 99 -- The inherently unstable global financial system, and the asymmetries and systemic biases of the trading system against areas of interest to developing countries, are creating imbalances that raise the cost of greater integration of developing countries into the global trading system, while reducing its benefits, the UNCTAD head, Rubens Ricupero said Monday.

Addressing the 46th session of the Trade and Developing Board, Ricupero said an integrated treatment of trade and finance was essential for a correct diagnosis of problems and for designing consistent national and global policies.

Noting the greater appreciation by the international community of the analytical work by UNCTAD on these national and global issues, Ricupero said these considerations "highlight the value of an independent and critical analysis of inter-dependence... an analysis made possible by providing UNCTAD mandates on a wide range of issues that constitute the integral and inseparable ingredients of such an holistic approach to development."

The UNCTAD secretariat's analysis of the global economy and developments over the past ten years, he said, had emphasized a number of shortcomings in national policies and global arrangements that have impeded rapid, sustained and broad-based growth and development.

The global financial system is inherently unstable and unless action is taken at national and global level to regulate and control financial activities and international capital flows, "financial instability will occur with increased frequency, causing greater damage to the real economy, particularly in developing countries."

There are also asymmetries and systemic biases in the trading system against areas of interest to developing countries, and these imbalances "tend to raise the cost of greater integration of these countries into the global trading system while reducing its benefits."

Trade and finance, Ricupero stressed, are closely inter-related. Financial and Exchange rate instability is a serious threat to trade, while trade imbalances are a major cause of currency instability and financial crises. "An integrated treatment of trade and finance is thus essential for a correct diagnosis of problems, and for designing consistent national and global policies."

The destabilizing interactions between trade and finance, their adverse impact on growth and development, and policies needed to overcome them have been examined at length in this year's Trade and Development Report.

There are supply-side and institutional weaknesses in developing countries which reduce the effectiveness of the price mechanisms, and increase the likelihood of market failures and their adverse consequences for development objectives -- elements identified in the secretariat's report on Africa which highlight infrastructural bottlenecks for African trade, competitiveness and development. Overcoming these call for greater emphasis on institution building, corrective and affirmative public action and intervention, and greater flexibility for developing countries in global arrangements.

"These shortcomings in global arrangements and institutional and structural weaknesses in developing countries interact to lower growth in developed countries, widen income gaps within and amongst countries, and aggravate poverty."

"Developments in the past two years have laid bare these systemic weaknesses and their adverse effects on poverty and development. There is now a greater appreciation of these problems by the international community and the need for global action. The Washington Consensus has been replaced by a search for a new development paradigm and action strategy which recognizes market failures and emphasizes the role of institutions and the state."

These considerations, the UNCTAD head said, "highlight the value of an independent and critical analysis of interdependence in providing new insights, forewarning potential difficulties and pitfalls in national policies and global arrangements, and enhancing our understanding of the problems facing the international community, particularly the developing countries."

Such an approach has guided the work of the UNCTAD secretariat. Focusing on interdependence of issues in the global macro-economic context is a unique and distinctive feature of UNCTAD's analysis in comparison with other international organizations more specialized in sectoral issues. "Such an analysis," Ricupero added, "has been made possible by providing UNCTAD mandates on a wide range of issues that constitute the integral and inseparable ingredients of such a holistic approach to development." (SUNS4532)

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

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