7:24 AM Sep 16, 1993
UNEVEN SCENE IN SOUTH, TWILIGHT IN FORMER EASTGeneva 15 Sep (TWN) -- The developing countries of the South present an uneven and unbalanced picture in its terms of their economic performance and prospects, according to the Trade and Development Report 1993. Latin America, the TDR notes, has emerged from the crisis of the 1980s, with recovery and growth in some, but the outlook is still one of serious weakness and low compared to postwar averages. In sub-Sahara Africa, performance has been poor, and domestic and international policies need to be revised considerably to reverse the rise in poverty and halt the marginalisation of Africa. East Asia presents a bright picture and, "If the growth rate differential between Asia and the rest of the world in the 1980s is maintained in the 1990s, Asia will become the world's largest market, with purchasing power exceeding that of North America or Western Europe by the year 2000,'' the TDR says. For the former socialist economies of central and east Europe, in contrast to the enthusiasm and optimism when they abandoned central planning in favour of market economy, "the dominant issue now is not so much 'the transition process' as immediate survival," says the TDR which is critical of the "big-bang" approach to reforms pushed on them by the west and the international financial institutions. Latin America: Uncertain and fragile recovery Latin America has emerged from the crisis of the 1980s with recovery and growth in some, more or less same picture as before in others, and with a widespread feeling in most countries that the crisis is over. But the outlook is still one of serious weaknesses and risks and, with very few exceptions, growth is still low compared to the postwar average and compared to countries in East Asia at a similar stage of development, the UN Conference on Trade Development warns in its 1993 Trade and Development Report. Moreover, the TDR stresses, the Latin American growth is driven by consumption, rather than investment, and the region is losing its competitiveness because of currency appreciations brought about by influx of capital. "There is also the risk of a sharp drop in private capital inflows and, if that were to occur, it would once again undermine both stability and growth," the TDR warns. The recent recovery has been uneven and unbalanced and "it is too early to conclude that the region has succeeded in adjusting and moving on to sustained development. Performance is divergent, with half of Latin America (e.g.Brazil) still plagued by recession and instability, and suffering from same constraints and imbalances of the 1980s. Domestic policies are the main determinant of growth prospects in Latin America today, perhaps more than at any other time over the last 10-15 years. Colombia and Chile have been relatively more successful in sustaining growth without serious imbalances. For Chile (so far a success story), the most important challenge is to enter a new stage of export-led growth which implies increasing the level of its industrialized exports (and avoiding currency overvaluation). Growth in Argentina and Mexico are more fragile and there is a much serious trade-off in them between price stability and competitiveness. "If the opportunities for an expansionary adjustment are not exploited, deflationary adjustment may eventually become unavoidable," the TDR adds. A number of countries (including Brazil, Venezuela, Peru and a number of smaller countries) are yet to overcome the forces that restricted their growth and stability in the 1980s. The main constraint in Brazil is still internal, namely fiscal deficits, while the others have to contend with both fiscal and foreign exchange problems. Political uncertainty is also a factor in the three. The TDR notes that in Brazil, the dominant view is still in favour of gradual reduction of inflation -- though there is barely any historical example of successful gradual stabilization under hyperinflationary conditions. The absence of fiscal reform has overburdened monetary policy and without fiscal reform it would be difficult to keep inflation even at its present level, let alone revive growth. However, the TDR adds, the resilience of the Brazilian economy to past shocks and disturbances and its strong recent trade performance suggest that it could recover rapidly and settle on a high growth path if a political consensus can be reached to deal with the fiscal problem and tackle inflation. Stagnation in sub-Saharan Africa The economic performance of sub-Saharan Africa (SSA) over the past two decades continues to be very poor and most of the SSA countries have been unable even to halt the decline, notwithstanding the intense policy efforts and market-oriented reforms which many of them have undertaken. In the absence of a relatively strong recovery in commodity prices, growth will depend on a significant increase in transfer of external resources, the TDR points. However, it notes the World Bank projections assume no such increase, and the high level of ODA flows of 1980s may not be forthcoming now -- because of increase in demand from other countries and increased donor scrutiny on domestic policies. Like other organizations, UNCTAD too finds the Structural Adjustment Programmes (SAPs) undertaken by the SSA countries as a failure in that, despite their best efforts, the expected results for sustained growth driven by private investment (with investment demand stimulating aggregate demand, rather than investment responding to export-led growth) did not materialise. The reason for the failure, TDR says, is structural. The region's industrial base is weak, scope for switching to exports is limited and hence initially investment has to take the lead. Even under an optimistic scenario regarding commodity prices, the prospects of the SSA countries for the reminder of the current decade is rather bleak, says the TDR. Both domestic and international policies need to be revised considerably if the rise in poverty is to be reversed and marginalization of Africa halted. Internationally, there is a need to support SAPs with a greater transfer of external resources on a predictable and continued basis -- both to meet continued terms of trade losses and increase imports and investment capacity. Debt reduction, TDR adds, can play a most important role in this and donors and IFIs should design aid to meet fully needs of recipients and abandon the short-leash approach. "The process of adjustment and development in Africa, is inevitably slow and no miracles can be expected," says the TDR. "A pragmatic rather than a doctrinaire approach is required. The debate concerning the best ways of adapting adjustment programmes to the needs and realities of these countries need to be open. However, participation of governments in the initiation and design of SAPs has so far been limited, and their commitment to and ownership of the programmes weak. This lack of ownership is reflected even in the design of technical cooperation projects." A brighter picture in Asia Together with China, the developing countries of Asia now constitute an important and fast-expanding market and the per capita income in some of the countries of the region has surpassed that of many developed countries by the late 1980s. The exceptionally rapid expansion owes much to exports, especially of manufactures, and the ability of many Asean countries to reduce their dependence on primary commodity exports. The East Asian countries have been generally become increasingly important markets for each other's exports and the robust growth performance of the region has been both a cause and consequence of a fast expansion of intra-regional trade and foreign direct investment, including the increasing integration of China. The current pattern of development in the region has been that of the "flying geese" -- based broadly on a vertical division of labour among countries at different stages of industrialization, with competitiveness in previously established export sectors continuously shifting the advantage from countries at higher stages to those at lower ones, and with those at higher stages continuously acquiring competitiveness in new product lines. The opportunities for cross-border production have also given rise to promising growth triangles, linking much of North and South-East Asia But it remains to be seen, TDR adds, whether the wave of labour-intensive exports resulting from such growth triangles will in any significant way alter the industrialization strategy of the countries involved. A favourable factor in the evolution of regional trade and cooperation has been the changing role of China and it seems likely that the developing countries of the region will continue to growth since, unlike Japan, they are still at a relatively early stage of economic development. However, the TDR cautions, obstacles to steady growth are far from being non-existent and social and economic disruptions are constant potential threats in some while in many others infrastructure bottlenecks could seriously interrupt continued fast expansion. But prospects for Asian economies, like those of other regions, are dependent on factors which are external and internal to the region, and associated degree of uncertainty. In the longer run, the successful conclusion of the Uruguay Round remains uncertain as are effects of formation of trading blocs in the western hemisphere and Europe. A more relevant and important question is whether the factors that led to generation of greater demand from within the region will continue to operate. As the economies of the NIEs become more sophisticated, they will become important sources of capital, investment goods and technology. At the same time, large Asian economies, especially China and India, have the potential of providing larger export markets for the NIEs and Japan, thus reducing their dependence on North America. Also, linkages between china, Hong Kong and Taiwan have become so close that they are now regarded as constituting the "Chinese Economic Area" and arguably an additional growth pole in the world economy. But the crucial question is whether the pace of economic growth in China will be more or less smooth or characterized by violent stop-go cycles. But in any case, intra-Asian trade will continue to increase, and where conditions favour, they will favour complementary intra-Asian flows. And Asia as a region will continue to outperform the rest of the world during the remaining years of the current decade. Eastern Europe a twilight zone Unlike China, which opted for partial and gradual economic change, the former socialist countries of central and east Europe tried the "big bang" reform through abrupt liberalization, deregulation and privatization. As a result, "the euphoria that greeted the collapse of communism has given way to pessimism" -- with output declined on average by about onethird and expected to fall even further in many former Soviet Republics, and Russia in the grip of hyperinflation and likely sharp increase in unemployment. Many of the former socialist countries are now in a "twilight zone, where there is neither plan nor market," TDR comments, adding that the economic and social situation is now shaped by the most negative elements of the two systems. Overriding importance, it complains, was given to dismantling the old system, while avoiding new forms of government intervention. But such intervention is needed to give shape to the new market system and cushion the transition. While shock therapy can be effective to fight hyperinflation, "shocks are not a reliable recipe for introducing new thinking, behaviour and norms required," TDR says. "A market economy consists not simply of a predominance of private ownership and a minimum of government control, combined with appropriate laws. It is also a complex multitude of organizations, traditions and understanding". For this process to evolve smoothly, it will be necessary "to widen the reform agenda to encompass a complete overhaul of economic administration, so as to permit the Government to play a more active role in advancing transition and reviving growth". Establishing control over money and credit and ensuring fiscal discipline is needed to bring about return to stability in Russia. It requires ending the practices that enable enterprises to escape the financial discipline of the market, such as borrowing from banks under their control. Also, price controls are needed to combat inflation and prevent monopolistic price abuses. Rapid privatization alone will not restore growth, the TDR cautions. This will not ensure adequate corporate governance nor does the domestic private sector have the financial and technological means. Drawing on the experience of many NIEs, governments should intervene to promote private enterprises and private capital accumulation, rather than simply transferring ownership. Greater effort should also be directed to put enterprises which cannot be privatized on a commercial footing.