Jun 30, 1989


GENEVA, JUNE 29 (BY CHAKRAVARTHI RAGHAVAN)— The sustain growth and employment industrialised countries should undertake a full range of policy measures and effective international cooperation, the Secretariat of the Paris-based Organisation of Economic Cooperation and Development (OECD) advocates.

In advancing this policy prescription, in its June 1989 OECD economic outlook, the OECD says: "the most pressing international priority" in this regard is to use the Uruguay round effectively to reinforce the open multilateral trading system.

The United States, the report adds, should show "a visible and firm commitment" to trade and investment policies that would strengthen the principle of multilateralism and contribute to the successful conclusion of the Uruguay round negotiations.

Presumably in a reference to U.S. attempts to use S. 301 of its domestic trade law to seek bilateral negotiations, under threat of retaliation, the secretariat adds: "it is especially important for the U.S. authorities to refrain from any action which would threaten the integrity of the GATT system".

At the May OECD Ministerial meeting, the United States successfully prevented any direct condemnation of its actions, and the secretariat’s half-yearly report has eschewed any mention of S. 301.

According to the OECD, GNP growth in the OECD countries is already slowing down, and according to current forecasts will be 3-1/4 percent for 1989 as a whole, and slow down further to reach 2-3/4 percent in 1990. GNP growth in 1988 was 4.1 percent.

OECD economies, the report says, are now in substantially better shape than at the start of the 1980’s, and OECD governments can build on these achievements to promote sustained, job-creating growth with low inflation over the next decade.

However, for this they have to tackle a number of remaining and emerging problems.

Inflation has been creeping up, reduction of external imbalances have slowed down or ground to a halt, exchange markets have been exhibiting greater instability, unemployment remains high, the situation of indebted third world countries has deteriorated, and "there is continuing recourse to trade interventionism".

Dealing with these problems require action across full range of policies – monetary, fiscal and structural – and effective international cooperation is needed on all these.

Referring to exchange rate pressures and problems, the report notes the upward pressure on the dollar despite relatively high inflation in the U.S. and large current account deficit, and points out that while currency appreciation would provide some temporary price relief for the U.S., it could prove short-lived, as it did for sterling.

But if the strength of the dollar should persist, the resulting loss of international cost and price competitiveness would go in the wrong direction for current account adjustments.

The U.S. authorities however have little scope for easing monetary policy to prevent appreciation, given the need to restrain domestic wage and price pressures. At the same time, authorities in low income countries (Japan, Germany and most of the European monetary system countries) could face threat of the higher inflation through import price increases, while further monetary tightening to ward off exchange rate falls would go beyond what was called for on domestic grounds.

A shift in market sentiment against the dollar would pose different problems. An abrupt decline in value of dollar, while contributing to current account adjustment, would make task of controlling inflation more difficult for U.S. authorities, and could be achieve only at the cost of pushing up interest rates to levels that would jeopardise activity.

The burden of monetary response in such a situation would be likely to fall mainly on the U.S. authorities.

These alternative possibilities, the OECD adds, point to the need for cooperative actions across the full range of policies to minimise risks of exchange rate pressures getting out of hand.

While monetary authorities need to avoid excessive tightening lest they precipitate a downturn, "they must nevertheless remain vigilant".

In many countries reduction of fiscal deficits is also necessary, and this is particularly so in the U.S. where the budget balancing act has been ineffective, and it has proved impossible to introduce revenue-enhancing measures.

Underscoring the need for structural reforms on a broad front to strengthen growth and employment capacity of economies and to facilitate adjustment, the report adds: "here the most pressing international priority is to use the Uruguay round effectively – to reinforce the open multilateral trading system and to reduce the high costs and inefficiencies of present agricultural policies".

The report also stresses the need for national actions reinforced by international cooperation, and particularly macro-economic policy coordination.

The need for international economic cooperation, the report underlines, extends beyond the OECD area, and OECD member countries should continue to improve their ties with other countries, and encourage their full participation in the open multilateral international trade and finance systems.

The Uruguay round, the report argues, forms part of this process, as also current initiatives to deal with debt problems of both middle- and low- income debtors.

In a separate report on "surveillance of structural policies", the secretariat points out that despite some positive developments and repeated official commitments to standstill and rollback measures, "OECD countries’ trade regimes have on balance become less liberal over the past decade".

Reduction of tariff protection in successive GATT rounds, it further points out, have been accompanied by growing recourse to non-tariff barriers (NTBS) – voluntary export restraints, quantitative restrictions, and various subsidies of preferences for domestic producers.

"A conspicuous example of such measures" is the MFA, a "transitional measure" which has become "a fixture" in the course of successive renewals and extensions.

While countervailing and antidumping measures are recognised GATT instruments for ensuring "fair trade", the expansion and impact of such measures, specially in the U.S. and EEC, give rise to concerns that the measures are being used to impede free and fair trade.

World Bank data show that share of OECD imports affected by NTBS have risen from 25 percent in 1966 to 48 percent in 1986 – "a worrying trend, not only because these measures are often non-transparent and non-market-conforming, but also because they are discriminatory and hence erode the MFN principle, a cornerstone of the GATT".

Trade restrictions, the OECD notes, are continuing to proliferate as international rules of the game are being increasingly challenged by "ambiguously defined concepts of reciprocity, fairness, and managed trade".

Citing data bout the real costs of protection, the report argues that significant progress in reversing the drift towards protection should be achieved in the Uruguay round, and there should be a successful resolution of contentious issues such as agriculture, textiles, subsidies, safeguards, intellectual property rights and implementation of standstill and rollback commitments.

"This will be a key test of governments’ commitments to an open trading system governed by non-discriminatory rules of the game".

On the situation of the third world countries, other than the OPEC and Asian NICS, the report notes that in Latin America the debt servicing problems in most cases are accompanied by difficulties in domestic public finance.

Where the public debt is not matched by public assists with sufficiently high rates of return, the servicing of debt requires an internal transfer of resources from the private to the public sector "and political difficulties in securing such a transfer can lead to pressure to cut interest payments on external debt even when the private sector is capable of generating more foreign exchange".

The report suggests that the idea that middle income countries with sufficiently strong and diversified economies could grow out of debt difficulties has not proved encouraging from the record.

"Weaknesses in the political process and/or social constraints have limited the capacity of a number of these countries to implement and sustain the required policies ... it may also be the case that even with substantial fiscal adjustment and policy reforms a resumption of adequate growth will require more finance than can be obtained from domestic saving if full finance than can be obtained from domestic saving if full servicing of external debt is also to be maintained, given the extent to which investment has been squeezed in recent years".

Referring to the evolving debt strategy and its "menu" approach, and the technical issues to be resolved on the appropriate balance of "burden sharing" as between multilateral institutions or other public bodies and the banks, the report notes that a major question to be resolved is how the residual value of debt, after debt-reduction, could be "enhanced" so as to produce maximum leverage.

"If creditors will accept nominal losses only to the extent that such losses are matched by guarantees on new or residual debt, then the debtor benefits only to the extent that multilateral finance compensates the banks".

Referring to arguments whether debt relief should be through debt reduction or temporary reductions in interest rates with bridging finance for a few years, the report warns of the inherent dangers of such an approach.

"The reversibility of temporary debt-service reduction may result in some undesirable disincentive effects, and over-optimistic assessment of the length of the period for which bridging finance is required could result in unwelcome re-emergence of problems".

"This would be particularly so in plans where return of flight capital, notably sensitive to potential problems, is of fundamental importance".