Reinforcing trade and public policies

by Chakravarthi Raghavan

Geneva, 9 Oct 2000 - The need for trade policies and the development of adequate public policies in countries reinforcing each other were stressed Monday at the 47th session of the UNCTAD Trade and Development Board.

The Secretary-General of UNCTAD, Mr. Rubens Ricupero and earlier the President of the Board, Amb. Reyes Rodriguez of Colombia were speaking at the opening plenary meeting of the two-week session of the Board.

The world economy, Ricupero noted, had witnessed a welcome turn-around—with robust growth accompanied by improvement in world trade, and some degree of normalcy in currency and financial markets in 1999 and which looked set to continue or even surpass performance in 2000.

However the world economy was looking like the two-faced Roman god Janus (which in mythology looked with one face towards sunrise and the other to sunset).  There was the prospect of a new golden age of more rapid growth spurred by the new communication and information technologies but at the same time beset with the unsolved problems of the path which threatened to cast a shadow over the future.

But at the recent meeting of the IMF and World Bank at Prague, the world was sharply reminded of this duality by three elements:

·        the concerted intervention by monetary authorities in defence of the Euro, symbolic of the macro-economic imbalances in the three major economies;

·        the sharp drop in value of high-technology stocks, following the announcement about Intel Corporation's profits (less than earlier forecast) and the fluctuations in the stock exchanges, and not only in the United States; and

·        the release on that same day of oil from the strategic oil reserves promoted by the developments in the major markets.

The uncertainty still surrounding the world economy could be gauged by the tone at the recent Fund/Bank meetings in Prague about the potential threat to the world economy by the unexpected rise in oil prices.

But predicting the future course and possible impact of oil prices was no simple matter. The era of cheap oil may or may not be behind the world, but there was little doubt that a decade of depressed prices had helped stoke demand in the industrial world, while discouraging new investment in production and refining and delaying moves to alternative energy sources and more environment friendly technologies.

At the same time, the crude oil prices were having a much smaller influence on the cost of oil to the final consumer, with a corresponding increase in the influence of speculative and fiscal considerations. All this appeared consistent with a much more volatile market than in the past and, as the UK Chancellor said at Prague, the terms of the debate on oil had shifted to the need for stability in the interests of producers and consumers alike.

The immediate responsibility lay with policy markets in industrial countries who must avoid either an inflationary or deflationary spiral, and take appropriate policy responses including fiscal measures where necessary, as had been done by the French.

And while the industrial world was better placed now than in the 1970s and 1980s to make the adjustments needed, for the oil-importing developing countries which were faced with the burden of a rising import bill, compensatory financing from multilateral institutions on soft terms should be considered. UNCTAD was happy to hear in this regard of the World’s Bank’s willingness to make structural loans and other forms of emerging funding available to oil-importing countries.  “Such funding,” Ricupero added, “should in fact be offered to all developing countries according to their payments position.”

Such a more active response would seem particularly appropriate in view of the uncertainty surrounding the future course of oil prices. Over the longer term, the challenge remained of creating a truly global and participatory approach to managing the world’s non-renewable resources. Underlying the immediate concern over oil prices were the global macro-economic imbalances and systemic weaknesses exposed by the Asian crisis. A recently learned lesson about the global economy was that failure to resolve economic imbalances in an orderly manner would be most damaging to growth in the developing world.

Even after hard-won domestic reforms, many of the Asian countries still depended on highly volatile capital flows to support growth. The call by industrial countries for coordinated international policy action in the face of rising oil prices was therefore to be welcomed.

“However,” commented Ricupero, “it contrasted sharply with the indifference to similar calls from the developing world when faced with the devastating consequences of falling commodity prices.”

Referring to the coordinated action of the past week to correct currency misalignments, particularly the drop in the value of the euro against the dollar, Ricupero warned that such action was unlikely to produce the desired effect.

If intervention in support of the euro proved inadequate, the credibility of the pan-European monetary framework might be damaged. But if it proved excessive, a stronger-than-expected impact on the dollar could precipitate renewed instability in the US economy.

A question that still taxed economists was whether the judicious combination of good policy and good luck that had propelled the exceptional performance of the US economy would have a hard or soft landing.

The vulnerability of developing countries to any abrupt policy shifts in the major industrial countries would depend on their current state of economic health. While the picture since the beginning of last year offered a measure of hope, with stronger-than-expected recoveries in some of the economies badly affected by the financial shocks, “biases and asymmetries persist in the trading system” while structural uncertainty and volatility continued to characterize the financial system. “Growth in many countries remain beholden to unstable capital flows.”

The Latin American region as a whole had registered positive growth, in large part due to the unexpectedly strong performance of Brazil, while recovery was well under way and strong growth was expected for Central America and the Caribbean. However the situation in Argentina and Ecuador remained fragile and a good deal depended on conditions in the world market.

In Africa, the savings and investment levels are too low to allow for sustained robust growth. The basic policy challenge was how to find a way to overcome the savings and foreign-exchange constraints and how to raise investment to the minimum necessary for an annual growth rate of at least 6 percent. The current level of private capital flows was too low to fill the resource gap which was still high enough to make many African countries vulnerable to arbitrage arithmetic of short-term capital flows. This meant a steadily growing dependence of these countries on official flows - which in recent years had barely compensated for resource losses due to unfavourable trading conditions.

UNCTAD believed there was only one way to end Africa’s aid dependence—

“launching a massive aid programme and sustain rapid growth for a sufficiently long period to allow domestic savings and external private flows gradually to replace official flows.”

In contrast to the problems of Africa, the pace of recovery in East Asia over the past year had been encouraging. Neither the depth of the crisis nor the speed of recovery had been anticipated even by those responsible for the policy, and this was a reason for caution against excessive exuberance.

The Asian economies bounced back only when policies of austerity forced on them were reversed and governments were allowed to play a more positive role. In retrospect, it was clear that provision of adequate international liquidity to replenish reserves, accompanied by temporary exchange controls and debt standstill and rollover (policies which UNCTAD had advocated at the onset of the crisis), would have been a much more effective response than the policy of high interest rates which were actually followed.

And despite the stronger-than-expected recovery there were reasons for concern.  Recovery had been accompanied by only limited corporate restructuring and the health of the financial system continued to rely on public intervention via credit mechanisms. Exports were unlikely to continue at the present pace and public deficits and debt have been on the rise in most countries seriously hit by the crisis. Recovery had been aided by highly favourable conditions in the world economy which were susceptible to change.

On the situation of the least developed countries, Ricupero said that in the last decade long-term capital flows to these countries had declined by about 40% in real per capita terms. This was due to shrinking ODA, coupled with failure of most LDCs to attract sufficient private capital flows to offset that decline.

Superimposed on these was the fact of the majority of the LDCs, which import oil and export primary commodities, are exposed to the double squeeze of high oil prices and low and volatile commodity prices on the other. The deterioration of the terms of trade had further exacerbated the liquidity shortage, which in turn discouraged much-needed investments in economic and social infrastructures.

About two-thirds of the LDCs had also unsustainable external debt burden, which was creating a kind of “aid-and-debt trap”. While the Heavily-Indebted Poor Country (HIPC) initiative was important, the current expectations of the benefits of this initiative were unrealistic, Ricupero stressed.

The relief provided was not just coming too late and too slowly, but rather the magnitude of assistance provided was simply too little.

“If the enhanced HIPC initiative is to retain its credibility and succeed in removing the debt overhang of the world’s poorest countries, a bold approach is required."

“One such,” added Ricupero, “advocated by UNCTAD was to establish an independent panel of experts to assess debt sustainability, eligibility for debt reduction, conditionality and financing.”

Looking ahead to the Third UN Conference on LDCs, to be held in Brussels in May 2001, Ricupero said that the new Programme of Action for LDCs should be aimed at concrete and action-oriented solutions, and this required a courageous and innovative approach.

Outlining the secretariat side of the preparations for the Conference, Ricupero said UNCTAD was firmly committed to promoting a truly results-based conference in Brussels, and achieve an outcome commensurate with the ethical imperative of greater solidarity with the weakest countries of the planet.-SUNS4757

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

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