Support for curbing volatile capital flows

In a reference to the recent Asian currency turmoil, the UNCTAD Secretary-General, Rubens Ricupero has called for developing countries and transition economies to retain a degree of flexibility for measures to deal with capital movements. This comment was made by him at the opening plenary of UNCTAD's Trade and Development Board on 13 October 1997.

by Chakravarthi Raghavan

GENEVA: "In the absence of broad international consensus on how to curb volatile capital movements, a reasonable degree of flexibility for measures to deal with inward and outward capital movements remain essential for national authorities of developing countries and transition economies," UNCTAD Secretary-General, Rubens Ricupero declared on 13 October.

Ricupero's remarks at the opening plenary meeting of the 44th session of UNCTAD's Trade and Development Board (TDB) was made with reference to the disorders in the Asian currency markets and its implications that had dominated the recent Hong Kong IMF/World Bank meetings and related events, including that of the finance ministers of the Group of 24.

While welcoming various moves to deal with such crises, including the augmenting of the resources of the IMF, Ricupero said that additional measures were however, necessary, at the national and multilateral levels, in the design and implementation of financial liberalization and on capital transactions.

A text of the speech was not immediately available. Ricupero who appears to have personally gone over the weekend on a draft text, to make some changes and interpolations, told the Board that he was not going to read out a text (but one would be available later).

He made references to what he had said at the meeting of the G-24 in Hong Kong on these very issues.

His remarks at the Board came even as trade negotiators at the World Trade Organization were starting another round of bilateral and multilateral talks to conclude a financial services liberalization accord (with a mid-December deadline), being pushed by the United States and the European Community and their financial services enterprises.

The WTO head, Renato Ruggiero, who has been pursuing the same agenda at the recent Fund-Bank meetings in Hong Kong, has been on the telephone with key Asian capitals to persuade them to "remain on board", and make improved offers and commitments. He is reported to be planning a visit to Kuala Lumpur on 29 October.

While it is premature to assess the long-term implications of events that are still evolving, there is no denying that in the aftermath of the "severe disorder" in the currency markets of a number of Asian countries, "a serious change in perceptions has already taken place, and one reflected in leading publications worldwide and should lead us to a few sobering conclusions," Ricupero said.

An UNCTAD press release of the speech related the change in perception to Asian economies and the view that "not even the most spectacular rapid and continuous growth performance for decades was a guarantee of immunization against risks of sudden and serious setbacks".

But Ricupero's other remarks drew attention to the analyses in the Trade and Development Report 1997, of the widening income gaps between industrial and developing countries, and the danger of a backlash against integration and trade, capable of jeopardizing the benefits of recent economic reforms. This suggested a somewhat wider context for his remark on change in perceptions in the aftermath of severe disorders in the Asian currency markets. Earlier, Ricupero said that greater international flows of goods, finance and investment, associated with globaliza-tion, are not the only basis on which the development process should be judged.

Growth and distribution

"The ultimate objective of development policy is raising living standards of everybody. Measuring economic performance should thus pay greater heed to growth and distribution than has so far been the case. And in this regard, the quality of development efforts must always be stressed and these objectives should be placed back at the center of the development agenda - as the basis for the assessment, design and implementation of sound economic policy, both nationally and globally."

The disorders in the Asian currency markets, the UNCTAD head argued, is no reason for a negative diagnosis, but a reason to consider the scope that existed in current conditions for development and the need for accelerating the rate of growth not only in industrialized countries but in many developing countries that were still growing at a very sluggish rate, one which is incapable of bringing a lasting solution to the problems of unemployment, and that led to waste of productive resources and increase in poverty.

But to have this accelerated growth, and to avoid the vicious cycle of sluggish growth and an increase in imbalances in the economy, "we need faster investments and growth".

What makes for a successful open market economy is the capacity and initiative of entrepreneurs and the business community, and the high rate of savings and investment, providing a social legitimacy for high profits leading to investment and employment, and rising living standards for all income groups.

For more investments and faster growth, closer linkages with the world economy through trade and capital flows were necessary, but not a sufficient condition.

"The efforts of developing countries towards the carefully phased integration into the world economy should indeed be accompanied by an accommodating global environment" and enabling rapid integration in areas where developing countries have comparative advantage, at least in the short run.

The UNCTAD head spoke in this connection of on-going work within the secretariat, and in cooperation with the WTO, on trade liberalization, tackling tariff escalation and tariff peaks, and technical assistance and help to developing countries over foreign direct investment (FDI), and the special efforts to help the least developed countries.

Ricupero expressed concern at the emergence of global divergences, similar to those witnessed in the 1980s, with major trade imbalances among the major industrial nations.

The burden of adjustment to these imbalances should be borne by the surplus countries through expansion of demand in their economies, rather than monetary tightening elsewhere which would only add to the current difficulties in labour markets and to the integration of developing countries into the world economy. The developing countries were now much more dependent on highly liquid capital inflows and would be the main victims of an eventual correction of imbalances, as took place in the early 1980s, Ricupero stressed.

Ricupero then recalled the IMF chief, Camdessus's remarks at a forum in Rome in 1995, about four major financial crises (the last of which was the Mexican peso crisis of 1994), which had hit financial markets over the span of 10 years, and the decisions of the international community to take steps to deal with such crises.

But less than two years later another crisis has hit the developing countries in Asia.

Ricupero then went on to welcome the recent decision to augment the IMF resources to enable it to deal with such crises, and added that additional efforts were however, necessary at the national and multilateral levels in the design and implementation of financial liberalization and for capital transactions.

"In the absence of a broad international consensus of how to curb volatility of capital movements, a reasonable degree of flexibility regarding measures to deal with inward and outward capital movements remains essential for the national authorities of developing countries and transition economies," he added.

UNCTAD's utility reinforced by globalization

Earlier, Ricupero said that the processes of globalization and liberalization had reinforced the utility of UNCTAD which was the international body with universal membership, a membership even larger than that of the UN General Assembly (of which UNCTAD is an organ). As nations struggle to understand and come to grips with the impact of global trends and other powerful forces beyond their control, they should fully exploit the possibilities offered by UNCTAD, he said.

"The business of UNCTAD is development. Not only for a few, but for all men, and for man as a whole... It takes a multilateral body with a universal membership and mandate like ours, to examine the interdependent nature of complex economic phenomena, to make sense of the confusion and propose appropriate measures to policy-makers."

Ricupero said, the Board session should enable them to take stock of UNCTAD's intergovernmental machinery, after 18 months from UNCTAD-IX, and looking ahead to the mid-term review as well as preparations for UNCTAD-X to be held in Thailand in 2000.

The UNCTAD intergovernmental machinery and expert meetings, he noted, had produced tangible and action-oriented recommendations. But government representatives should make sure these reach policy-makers and the private sector at the country-level, and are not filed and put away on shelves for future meetings.

But the experience of the functioning of the Commissions had been mixed. While the secretariat could provide a vision, the governments had to demonstrate political commitments to reach action-oriented outcomes with a fair degree of policy content.

But so far, he said, the outcome of Commissions had been mostly procedural and to a work programme, and there was not sufficient feedback from countries.

Referring to the African agenda programme item before the Board, Ricupero said that UNCTAD's analysis showed the need for a significant public investment in infrastructure which, when accompanied by right policies, would help lay the basis for recovery of private investment and process of diversification.

But a sine qua non for this was the removal of balance of payments constraints and provision of debt relief to African countries. Ricupero also sought to link the significance of UNCTAD's work with that of other international institutions, highlighting in this regard, the LDC report and its views on economies in regress. The problems of landmines, as a result of civil conflicts in Africa, and their toll on human life and the economy, and the several civil conflicts and problems that were being dealt with elsewhere by the same government representatives had all interconnections with the economic and development issues raised in and dealt with at UNCTAD.(CR/SUNS4075)

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