Feb 26, 1986

OECD ECONOMIES "ADJUSTING" TO EACH OTHER, NOT THIRD WORLD.

GENEVA, FEBRUARY 24 (IFDA/CHAKRAVARTHI RAGHAVAN) Structural adjustment policies in OECD countries have so far been concerned with adjustment to trade among themselves or with changes in domestic economy, but not in relation to third world countries, according to the UN conference on trade and development.

In a report to the trade and development board, the UNCTAD secretariat has recalled that the 'basic" international policy statement on adjustment assistance measures was adopted in 1976 at UNCTAD-IV in Nairobi.

This called for development of new policies or strengthening existing ones to encourage domestic factors of production to move progressive from lines of production less competitive

internationally, and encourage the redeployment of non-competitive industries to the third world countries.

In 1979, at UNCTAD-V in Manila, the 1976 policy statement was reiterated with a call for "conscious efforts" to promote structural adjustment, and for measures to enable full participation of the third world in the evolution of patterns of trade and production in the world.

While there have been several statements of policy in the OECD on the issue of structural adjustment, it is difficult to detect any explicit concern about third world countries in these statements, UNCTAD complains.

The 1986 Ministerial statement of the OECD countries on positive adjustment policies does not even mention the major agreed international policy statement of 1976, UNCTAD notes.

The main emphasis in structural adjustment policies within the OECD has been on decreasing government intervention at micro-economic levels and giving greater emphasis to market forces, and on greater transparency of policies to minimise conflicts among member-countries.

But all governments were not "equally enthusiastic" about this laissez--faire approach.

And, while the wording of successive OECD statements on the issue have hardly changed, there have been changes of emphasis, partly reflecting the political change in some of the larger economies.

There has been priority to increased flexibility and innovative use of resources, especially in labour and capital markets: emphasis on deregulation and less government involvement in the economy, increasing pressure of competition, and advocacy of greater transparency of policies to minimise conflicts among OECD member countries.

In applying structural adjustment policies, an important trend has been in the gradual reduction and/or transformation of the role of the public sector.

While in many countries there has been a broad process of deregulation, in countries with a tradition of greater government involvement in the economy, not all the previous mechanisms in place have been removed.

In some cases, like steel and ship-building, governments have taken a more active part in the adjustment process, especially in retarding actions through official cartels and/or continued subsidies.

Agriculture, notably in Europe, has altogether escaped the trends towards restructuring or adjustment.

There has been no important modification in the stance of government policies in agriculture, despite "quite dramatic" changes in market conditions.

In many industrial countries, farmers have suffered from indebtedness and high interest rates.

For many field crops and livestock products, there has been a substantial imbalance between supply and demand, resulting from price supports and cuts in imports.

This situation, along with the high value of the dollar and high interest rates, has produced serious tensions between traditional exporters of agricultural products and their partners.

Agricultural policies-have thus becomes a major bone of contention.

The situation has benefited countries with large food deficits.

But temperate zone suppliers, as well as suppliers of tropical substitutes (cane-sugar and tropical oilseeds) have suffered large losses. The low prices of imported food have also acted as a disincentive to food-production in third world countries.

With the shift away from domestic micro-economic intervention, trade policy measures of border protection have gained in relative importance.

There has been growing reliance on Voluntary Export Restraints (VERS), circumventing the Most-Favoured-Nation (MFN) clauses and GATT rules.

The mere threat of new protective measures has undermined the multilateral trading system, "with unfavourable consequences for countries having little bargaining power".

The tax reforms, particularly in the U.S., has reduced the cost of capital, providing a strong stimulus to investment in vehicles, research and development, and machinery and equipment, but has benefited only profit-making enterprises.

The help to channel new investments for capital deepening and service industries, has accelerated the structural changes towards a service economy geared to high-technology and capital deepening, but has not been sufficient to restore competitiveness to manufacturing and agriculture, affected by the over-valued dollar.

In Europe, where measures to raise returns on productive investment have been taken, capital deepening has been within stagnating or even declining total investment.

While underscoring the difficulties of predictions about the world economy over the coming years, UNCTAD suggests that the spring of 1985 has seen the end of the present phase of macro-economy.

Apart from short-term oscillations, it is reasonable to rule out "a marked re-acceleration" of domestic demand growth in the U.S. and/or a recovery of the dollar in the near future.

Outside the U.S., there are also few, if any, signs of significant recovery in domestic demand and employment.

The moderate improvement due to falling interest rates and oil prices, and a slight relaxation in fiscal stringency, "seems unlikely to offset the falling import demand in the U.S.".

"Such an outlook, unless reversed by appropriate and consistent combination of macro-economic policies among the developed market-economy countries, could end the mood of cautious optimism as regards international debt and inhibit the overdue recovery of demand in commodity markets", UNCTAD warns.

The macro-economic environment in the OECD countries over the foreseeable future does not appear to augur well for implementation of effective structural adjustment policies.

In the short-term, the U.S. imports of manufactures from the third world are unlikely to expand much more, in real terms, from their early 1985 peak.

Under conditions of slow growth, "there is unlikely to be any reduction in protectionist measures in the U.S.", and whatever countervailing forces have operated would be weakened.

It is also unlikely that attitudes in western Europe would become less defensive, and offset difficulties of access to the U.S. markets.

UNCTAD suggests that the economic and social forces behind industrial protectionism in industrial countries are likely to remain powerful.

In agriculture too, notably in western Europe and Japan, the domestic political pressures for maintenance of protectionist practices is likely to remain strong.

The OECD countries, UNCTAD suggests, have devoted some attention to structural adjustment policies over the last few years.

But this concern has not been sufficiently responsive to the agreements reached in UNCTAD on use of adjustment assistance measures to facilitate redeployment of industries to the third world.

So far, OECD policies have been concerned very largely with the problem of adjusting the structure of the industrial countries to changes underlying the structure of trade among themselves or with changes yin the structure of the domestic economy.

Whatever positive effects the structural adjustment policy among OECD countries might have had on third world countries, indirectly, have been vitiated by contradictions in these policies and by inter-country discrepancies in policies.

The policies influencing the cost of labour and of capital have not always been consistent or in the interest of redeployment of labour-intensive industries to the third world.

In some countries the shift away from direct government intervention at industry level has encouraged resort to protectionist trade measures, including so-called VERS and threats of new trade carriers.

In other countries there has been no vigorous action to phase out supports that defeat industrial redeployment based on dynamic comparative advantage.

Thus supports continued for agriculture and agro-industries, textiles and clothing, leather, light-engineering products, steel and shipbuilding.

In agriculture and steel the anti-redeployment supports have even tended to be increased.

The experience of the last few years, UNCTAD suggests, has given rise to doubts about the potential effectiveness, so far as the third world countries are concerned, of structural adjustment policy as pursued by the OECD countries.