UNCTAD caution on financial liberalisation

UNCTAD's Secretary-General, Rubens Ricupero has advised the countries of the South to retain a degree of flexibility on measures to control movements of capital until a satisfactory international agreement is reached on this issue.

by Chakravarthi Raghavan

IN the absence of broad international consensus on measures to curb speculative capital movements, it may be essential for developing countries and transition economies to maintain some flexibility for measures to deal with inward and outward capital movements, UNCTAD Secretary-General Rubens Ricupero told a press conference in Geneva in September.

Ricupero, who was releasing UNCTAD's Trade and Development Report (which was prepared at a time when Thailand was beginning to face problems, but before it spread across South-East and Far-East Asia), was asked to comment on the recent Asian financial market turmoil and developments. He was also asked on the advice from the US, WTO and others to these countries that the solution to their problems lay in more financial liberalisation along with prudential regulations.

The advice to these economies to liberalise financial services even more, but have more prudential regulations, seemed like the advice to alcoholics to drink more, but with more traffic lights, traffic policemen and lampposts to clutch on the way home.

Important differences

The UNCTAD head said it would be dangerous to make sweeping generalisations about Asian countries over the financial market turmoil. There were important differences among them.

The market developments in some cases were a response to some fundamentals - high debts and current account deficits, overvalued currency and the regimes and the link to the dollar, and lack of adequate regulation and supervision.

UNCTAD, even in last year's TDR, in looking at the East Asian experience, had raised questions about the problems these countries would face in face of insufficient diversification of manufacturing base and upgrading of technology to increase competitivity.

But on the other hand, Ricupero said, the currencies and financial assets in these markets appear to have been subject to some speculative activities only tenuously linked to fundamentals or not linked at all.

The IMF head, Michael Camdessus, had recently spoken of countries having to pay a price for the sins of their neighbours, he noted.

Ricupero was confident that in Asia, the appropriate policy response to longer-term weaknesses in the economy would be developed by governments themselves, and in some cases with the help of the IMF.

But the events of recent months, Ricupero said, drew attention to the disruptive effects which can be exerted by volatility of international capital movements in a global network of financial markets. At the last meeting of the Interim Committee in Washington, both US Treasury Secretary Rubin and Camdessus had said that the recent evolution of financial markets had made other markets more dangerous.

Asian countries had responded to these developments through mutual support of their central banks to counter the damaging effects. 'Nevertheless, in the absence of broad international consensus on measures to curb volatility of capital movements, developing countries and transition economies need to maintain a measure of autonomy to deal with inward and outward movements of capital,' Ricupero added.

Degree of flexibility

At present there is no international consensus to deal with such movements at a more institutional, multilateral level. The need for flexibility for developing countries should be reflected in future negotiations relating to problems that may affect the balance of payments, Ricupero said, speaking on the basis of his own experience as former Brazilian ambassador to the WTO and Finance Minister of Brazil.

'It is absolutely necessary,' he declared, 'to retain a degree of flexibility until we can reach a more satisfactory agreement.'

On the financial services negotiations under way in the WTO, Ricupero said, UNCTAD had been providing technical assistance and advice to developing countries who had sought its advice.

'We have been following these negotiations carefully and we have been saying to these countries "you need to take into your level of development, the financial institutions of each country, the current state of domestic supervisory capabilities, the current state of your financial system as a whole." The situation varies from country to country, and it is difficult to generalise. But I hope each country will make its decisions in the light of their own situations, and this will be seen as a valuable contribution to the liberalisation of financial services sector.' (TWR No. 86, October 1997)

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