Mar 7, 1987


NEW YORK MARCH 5 (IFDA/THALIF DEEN) -- The developing countries remain excessively vulnerable to the volatility of the world economy, the United Nations warned Thursday.

The trading activities of third world nations, the UN said, have been adversely affected not only by protectionism but also by the dramatic falls in commodity prices that have accompanied the weak demand in the industrialized economies.

In a 17-page report (E/C.10/1987/2) release here, the UN points out that the passage through the middle years of the 1980's has provided further evidence that the world economy is in "a precarious state, typified by imbalances and slow growth".

The study, which will go before the 13th. session of the commission on transnational corporations scheduled to meet here April 7-16, focuses primarily on recent developments related to transnational corporations and international economic relations.

The report warns that economic progress has been "hesitant" for the past several years, particularly for the developing countries.

The gross domestic product (GDP) of developing countries as a whole has not grown by more than 2.5 percent in any year since 1980, with the result that many of these countries have encountered stagnant or even falling per capita-incomes for at-least some of the recent past.

On the other hand, argues the report, the developed market economies have fared better, although the countries of western Europe failed to match the recovery from the 1982 recession that the U.S. and Japan were enjoying until recently.

The situation may now be somewhat reversed, with Japan encountering difficulties as a result of the substantial appreciation of the yen and economic growth in the U.S. becoming increasingly uncertain.

The report notes that in the developed market economies, substantial reductions in previously high rates of inflation have been accompanied by significant increases in unemployment.

This has introduced an inward-looking element to some aspects of economic policy-making in those countries, as reflected in, for example, the tendency towards increased protectionism.

This, in turn, has slowed the expansion of world trade and exacerbated the general lethargy in global economic growth.

The study also points out that the behaviour of the U.S. economy has continued to play a pivotal role in determining the path of the world economy, although its dominant position in international economic relations continues to be eroded.

The ascendancy of Japan and, to a lesser extent, West Germany has been reflected in their persistent and sizeable trade surpluses, while the U.S. has had an equally persistent and sizeable deficit.

The accompaniment of the latter by a large and long-term fiscal deficit has caused, and the role of the dollar as a reserve currency has enabled, the U.S. to become the world's largest international borrower.

This extensive borrowing resulted in the U.S. becoming a net international debtor in the middle of the 1980's.

The result of the major trade and financial imbalances among the leading developed market economies has been a recent significant appreciation of the yen and the deutsche mark vis-à-vis the dollar.

In an analysis of third world economies, the study points out that the most recent manifestation of the deterioration in primary commodity markets has been the collapse in the price of oil.

At the beginning of the 1980's, says the report, the possibility of such an occurrence was considered remote.

Moreover, there was little concern about the possible negative consequences of a decrease in the price of oil, since those who would be adversely affected were assumed to be sufficiently resilient to withstand any fall in revenues.

By the mid-1980's, however, the changes in the composition of the oil-producing countries and in their economic circumstances were such that the decline in oil prices had some significant adverse consequences for many countries, including some developed countries or segments of their economies.

The report adds that some of the oil-producing developing countries are now major debtors to transnational banks.

The fall in oil prices has worsened their external payments situation significantly and has increase the uncertainties that are buffeting the international financial system.

On the other hand, argues the report, lower oil prices have been beneficial to the oil-importing developing countries (some of which are also experiencing severe debt-servicing difficulties) and have contributed to the moderation of inflation in the developed market economies (most of which are net importers of oil).