8:41 AM Jan 23, 1996


Geneva 23 Jan (Chakravarthi Raghavan) -- The idea of multilateral framework for managing global interdependence and coherence through effective surveillance and resolution of conflicts between countries over monetary and financial issues has been suggested in the report of the Secretary-General of UNCTAD to the Ninth Session of the Conference.

Such a framework, Secretary-General Rubens Ricupero says, could be based on the WTO/GATT principles of non-discrimination and avoidance of measures of unfair competitive advantage as well as recognition of the need for safeguards and preferential treatment for developing countries.

While market access would be an over-riding goal (of such a framework and surveillance), policies might be singled out for international examination, "and might be considered actionable, if they cause harm to another country's capital market or balance-of-payments position", the report says.

The report adds: "Any policy which could be shown to benefit one country only at the expense of another, rather than improving the conditions in the global economy, could be brought for resolution. The issue of sanctions could also be considered."

Earlier, the report notes that the process of globalization and liberalization posed a number of potential negative consequences and challenges to development: loss of policy autonomy in some areas at national level which restricts or alters the scope of development policies; the risk of instability and disruptions resulting from financial openness; and risk of marginalization.

The economic liberalization policies being implemented in most developing countries, and consolidated in more stringent multilateral disciplines, have the effect of narrowing policy instruments available to these countries. The Uruguay Round specifically involve limitations on the range of policy options available to countries.

Thus, developing countries may not be able to emulate industrial policies of successful East Asian economies -- measures to increase industrial competitivity and exports through subsidies, investment performance requirements and compulsory licensing. The differential and more favourable treatment to development has been limited to grant of longer periods for implementation.

But the loss of policy autonomy doesn't arise only or even mainly from obligations of countries under international agreements. They arise even more from increased financial openness and dismantling of barriers to capital flows which have strengthened the links between financial markets of national economies, reducing ability of national governments to use macro-economic policy instruments to influence objectives such as output, level of employment and rate of inflation.

The increasing financial openness in turn is leading to extreme volatility, instability and disruption to development.

The Report notes that globalization and internationalization of production and markets have given substantial impetus to inter-dependence of national economies. As a result, policies and developments outside a country's border have considerably influence on that country's economic development. National monetary policies of countries have immediate international consequences, even more so in the case of the larger industrial economies.

The US decision early in 1994 to raise interest rates produced a world-wide collapse of bond prices, while the Mexican peso devaluation decision later in the year led to a significant fall in emerging markets throughout Latin America and Asia.

The effective management of interdependence was thus acquiring increasing importance in the context of achieving sustained growth and development in a liberalized and globalizing world economy.

"This requires, among other things, stronger international cooperation to ensure compatibility of policy objectives at three levels: among national objectives of growth and full employment in major industrialized countries; among those and objectives of growth and development in developing countries; and among all of the above objectives and global environmental and social objectives.

"Management of interdependence must also address the problems of achieving greater coherence and consistency between policies in the inter-related fields of trade, investment, money and finance".

The close connections between these and the potential for mutual disruptive effects have long been recognized: currency devaluation has competitive effects similar to increase in import tariffs combined with export subsidies; trade policies can stimulate and impede foreign investment; and countries borrowing from international financial markets may experience deterioration in services account of the BOP due to rise in interest rates more than offsetting improvements in the goods trade balance. These difficulties are generally more important for developing countries who are more vulnerable to external shocks.

The need for coherence in global policy making, the Report notes, has been explicitly recognized in the Marrakesh Declaration accompanying the WTO Agreement.

While recognizing the capacity of a strengthened multilateral trading system to contribute to more effective surveillance of policies, the Marrakesh Declaration, has left open the modalities of such surveillance.

The Secretary-General's report notes that within the WTO have accepted a major loss of policy autonomy by agreeing to restrict the use of trade policy instruments in the context of multilaterally agreed commitment. This was deemed necessary for the evolution of an international trading system to meet the challenges posed by a liberalized and globalizing world economy.

A similar reasoning would suggest that the principles and standards of the GATT and WTO might serve as a starting point for reflection on construction of a framework for effective surveillance and resolution of conflict over monetary and financial issues.

"These principles are non-discrimination and avoidance of measures conferring unfair competitive advantage, as well as the recognition of the need for safeguards and preferential treatment for developing countries.

"Thus, market access would be an over-riding goal, but policies might be singled out for international examination, and might be considered actionable, if they cause harm to another country's capital market or balance-of-payments position.

"Any policy which could be shown to benefit one country only at the expense of another, rather than improving the conditions in the global economy, could be brought for resolution. The issue of sanctions could also be considered."

The analysis and conclusions would appear to suggest, without actually saying so, that the IMF could not undertake this task, without damage to its current role in the monetary system -- because its articles and its governing structures enable it to exercise surveillance only on borrowers (in the Third World and transition economies, but not the industrial countries).

The report refers to past efforts at international coordination of macro-economic policies (IMF, G-10, G-7 and G-5) and says this experience clearly demonstrates the extraordinary complexity and difficulty of any such undertaking.

"Attaining a symmetrical and effective surveillance of national policies would certainly require some ceding of national sovereignty, as well as participation of all countries," the report says, adding:

"However, these difficulties are common to all aspects of global governance and were successfully dealt with in the case of trade. This example, and the approaches that made for success, can provide guidance as other aspects of global governance are tackled."

Referring to the current trends in regulating international financial flows, including the 1988 agreement among members of the Basle Committee on Banking Supervision, and the latest initiative to establish standards for credit and market risks, the Report says that such proposals of the Bank for International Settlements are aimed primarily at internal operations of global financial institutions themselves in the interest of their own stability.

"They do not aim at preventing global financial instability resulting from their operations. This will require international regulation and surveillance of the operations of the banks and financial institutions operating in international financial markets, as well as increased dissemination of information on the activities of these institutions."

With the growing integration of international financial markets and increased contagion risk, the issue of who will play the role of international lender of last resort has acquired greater importance -- a problem which became obvious in the recent experience of Mexico.

"The subsequent multilateral support operation, which was mounted on an ad hoc basis, raised several practical and procedural questions," the report notes.

The present arrangements for financial support to countries in BOP difficulties is financing under arrangement with the IMF. But subject to minor exceptions, IMF resources have not been available under Art. VI of its Charter for financing large or sustained outflows of capital.

Other major sources of external support of a more restrictive nature, and in many cases linked to regional economic arrangements, include reciprocal currency or swap arrangements between central banks, principally of the OECD countries and the various EU facilities.

In Oct. 1995 the IMF's Interim Committee has endorsed the Executive Board's decision to establish exceptional procedures to enable the IMF to respond to serious financial crisis. But the precise nature of the procedures is not yet clear. The resources may eventually include those that could be become available under the initiative of the G-10 to develop new parallel financing arrangements complementing the General Agreement to Borrow.

"These procedures represent a step in the direction of more comprehensive global lender-of-last-resort facilities, and future experience with them will show how adequate a response they represent to the problem of large capital flows."