8:58 AM Jun 21, 1995
OECD SLOWER GROWTH, 'UNWELCOME EFFECT' ON SOUTHGeneva 20 June (Chakravarthi Raghavan) -- The Paris-based Organization for Economic Cooperation and Development has lowered its growth projections for the OECD area and now envisages a 2.7% growth rate for 1995 and 1996. The slower growth, lower than its projections of December 1994 and early this year, is attributed by the OECD secretariat in its semi-annual economic outlook, to the appreciation of the yen, the turbulence in exchange markets after the Mexican peso crisis of December last, the extremely slow recovery in Japan and the US growth slowing down faster than earlier expected. Such a likely trajectory though has been projected even last year by other international secretariats, including by UNCTAD, which has underlined the problems of demand deficiency in the world economy, and even more in Japan. Other independent economists have also been warning about the dangers in the Japanese situation -- where problem of non-performing bank assets, falling real estate values, and the effects of high yen have been seen collectively as creating a situation more akin to the deflationary situation of the inter-war years. The OECD secretariat's chief economist, Kumiharu Shigehara, at a press briefing in Paris, said that the slowing down of growth in the OECD area would have "an unwelcome effect" on the Third World since OECD growth helps them in terms of net demand. The report though on balance takes a slightly optimistic view of the growth prospects in the dynamic developing country economies, particularly in Asia and the need for continued trade liberalisation by these economies, and other developing countries. The report talks about strengthening the "open multilateral rules-based trading system" and bringing international investment into a similar framework and of its boosting growth through increased productivity and better allocation of resources within countries. The report also notes that trade relations between Japan and the US is undergoing a period of particularly intense tension, while other "trade-related" issues involving competition policies, direct investment, environment and labour standards are under discussion in a number of fora including the OECD. "It is important," the OECD economists say, "that solutions be found -- including the issue of lowering the level of immediate specific trade tensions between the US and Japan", with solutions consistent with "an open, multilateral rules-based approach, conducive to more open competitive markets and more efficient international resource allocation". But these views though do not seem to meet what economists elsewhere see as some major problems afflicting the world economy. At a recent private brainstorming meeting at UNCTAD, senior economist, Yilman Akyuz (and one of the principal authors of its annual Trade and Development Report), however noted that to unilaterally liberalize trade and import more from the North, the countries of the South need greater purchasing power. Without that they would have to curtail demand for increased imports in other, undesirable ways: devaluing the currency and deflating the economy. For increased purchasing power to import more from the North, the South needs increasing financing for current account and higher export earnings by either better access or faster overall growth in markets of the North, better commodity prices and terms of trade. But higher growth in the North is not in sight, Akyuz noted, given the stance of macro-economic policies. And better access to Northern markets is also unlikely given the serious unemployment problem and the tendency in the North to blame this on cheap imports from the South -- with increasing pressures to curb imports of manufactures through labour standards. Nor is there much hope, he said, of external financing to increase imports and run continued higher current account deficits. After Mexico, developing countries would be very wary of encouraging short-term capital flows. FDI, which might allow developing countries to run larger deficits has also problems, since it is concentrated in a handful of successful NICs (who don't have foreign exchange shortage to finance imports) while those facing such shortage, like Africa, get very little. And with FDI going into tradeables in NICs, they serve to substitute rather than increase imports of manufactures or increase exports to the North -- both making unemployment and trade problems in the North worse. These, Akyuz suggested, pose some basic dilemmas in the post-Uruguay Round world and point to the more fundamental dangers: if the North does not succeed in reducing the unemployment problem through a macroeconomic environment conducive to faster capital accumulation and job creation, strong protectionist pressures would threaten the WTO trading system and undermine the success of the South's outward-oriented development. Neither the OECD report, nor for that matter the G-7 Halifax meet and its "declaration" appear to show awareness of these problems or a desire to seek solutions, either alone, or with the rest of the world. While blaming part of the slowdown to the aftermath of the Mexican crisis of last December, and the turbulence in the foreign exchange markets (with the dollar depreciating and the Japanese yen and German deutchmark appreciating), the OECD though came out against measures to discourage the speculative short-term flows on financial markets through a Tobin type levy on transactions. "In view of the adverse economic effects caused by distortions associated with much of past regulation, reversing the trend towards liberalisation (of financial markets) is not a solution, and in any case is unlikely to be feasible," the secretariat insisted in presenting the liberalisation dogma of the OECD. "To be effective," the OECD said, "transaction taxes and regulations would have to be applied virtually worldwide, which would require a degree of international coordination that is probably not achievable. "A large pool of funds to stabilise excessive currency movements has also been suggested, but it would create moral hazard problems on the past of both private sector market participants and governments, undermining healthy market discipline on their behaviour and policies". Instead, the OECD argues that the full benefits of liberalised markets will be realised only if necessary information is available for market participants to make decisions wisely and for relevant authorities to assess institution-specific and systemic risks. This calls for enhanced transparency in both private and public sectors: devising more accurate and informative accounting methods - notably for derivatives and other new financial instruments; through earlier and more comprehensive disclosure of financial situation by both private market participants and national governments; and by improving the quality of relevant economic and financial data. There is also scope for improving prudential supervision of financial institutions and markets, as well as for ensuring adequate consumer protection and continued vigorous competition in the financial system, it adds. Given that atleast the major industrial countries, particularly the US, Japan and Germany, publish routinely and periodically much of the information and basic indicators, the OECD though does not explain why there has been volatility and turbulence not only in relation to the Mexicos and other 'emerging' markets, but even in terms of the major industrialized countries where it is no one's case that the official institutions and central banks don't provide the various data and indicators in a timely fashion. IPS adds from Paris At a press conference to release the report, Kumiharu Shigehara, the OECD's chief economist said that a slowing down of economic growth in the richer nations of the world "surely would have an unwelcome effect on non-OECD countries." "Growth in the OECD area helps them in terms of net demand," he said, without supplying details of anticipated changes. "On the whole, the globalised market and the opening of emerging markets with respect to direct investment and transfer of technology would help non-OECD regions. "They must aim at stable macroeconomic policies, fiscal consolidation and greater transparency. The importance of transparency is so that their markets will not be upset by a sudden flow of information." "The downward revision (in OECD growth) mainly reflects the crisis in Mexico," he continued. "Nevertheless, the outlook is favourable in most countries. Unemployment has declined in most of them." The report projects a 3.2 per cent rise in U.S. gross domestic product in 1995, and 2.3 per cent next year; 1.3 percent for Japan this year, rising to 2.3 per cent in 1996 and for the corresponding period three per cent for OECD Europe, holding steady in 1996. Inflation should average 4.1 percent in OECD states this year, 3.7 per cent next year. Unemployment should decrease from 7.8 per cent to 7.6 per cent in 1996. And world trade should grow 8.9 per cent this year but just 7.8 per cent next. Shigehara said economic indicators, revealed since the report was composed, showed that economic growth could be lower than expected in the US, which "has enjoyed robust growth" and that "the Japanese recovery remains delayed." A recent statement from the OECD's Development Assistance Committee (DAC) expressed concern about potential negative effects on aid to developing nations in the face of economic sluggishness. DAC officials declined to comment further in advance of a scheduled Jun 28 OECD meeting to publicise new figures on development aid from OECD member countries, and forecasts for changes. But Annie Simon of the Research and Information Centre for Development, in Paris, said in a telephone interview that she does not believe the slower growth in OECD country economies should have a negative impact on their development aid programmes. "I don't think that the reduction in development aid is linked to economic crisis," she said, adding that aid programmes increasingly emphasise private investment primarily in the developing countries with the most promising economies. "They leave aside countries that have no market interest, no strategic interest, no economic dynamism," Simon continued. "Economic crisis is only an alibi that tries to justify the selfishness of the North." In a brief survey of some non-OECD economies (Eastern Europe and Russia, China, the "dynamic Asian economies" and South and Central America, but not African economies), the OECD says that economic recovery has continued in most of Central and Eastern Europe, although unemployment and inflation remain high. The recession in Russia, it suggests, has "apparently levelled off" in the first months of 1995. The "dynamic Asian economies" (Korea, Taiwan, Hong Kong, Singapore, Thailand and Malaysia), it says are carefully watching developments regarding reforms in China and Beijing's policies toward Hong Kong and Taiwan. Recent depreciation of their currencies relative to the Japanese yen has increased their competitiveness but, together with rapid growth, has generated rising inflation. The Mexican crisis affected other countries in South and Central America by reducing capital inflows and increasing interest rates. As the region adjusts, economic growth and inflation are expected to decline. Shigehara said that the OECD "certainly can't ignore other parts of the world" but did not focus on non-member countries because of "resource constraint".