5:25 PM Sep 21, 1995

NEOMERCANTALISM NO SOLUTION TO UNEMPLOYMENT

Geneva 20 Sep (Chakravarthi Raghavan) -- The Trade and Development Board of UNCTAD ended the first part of its 42nd session Wednesday, with a broad agreement that manufactured exports from the South was not the cause of labour market problems in the North and a "consensus that neo-mercantalist, protectionist measures would not only fail to provide a solution, but would also be detrimental to the economic prospects of all countries."

This was part of a summing up by the President of the Board, Amb. William Rossier of Switzerland of the global interdependence debate which focused on "linkages between global financial and trade flows, development, and levels of economic activity and employment, and the future implications following the Uruguay Round."

The annual UNCTAD Trade and Development provided the background document for the debate which covered a wide ground, but dealt with the outlook for the world economy, both long- and short-term; the looming unemployment question in the North (and the much larger unemployment in the South) and its likely impact on an open world trading system and economy; the instability on financial and currency markets and its causes and impact on developing countries; the issues of financial flows and financial market liberalization; the problems of short-term flows and their uncertainties for development.

Rossier described the debate as "rich and constructive". The TDR, he said, was commended by delegations for its high standards of analysis and willingness to tackle challenging policy issues from a fresh perspective. The summing up however said that while the interdependence among unemployment trade and development was generally recognized, concern was expressed at the Board that the 1995 Report devoted too much attention to economic problems in industrialized countries compared to the issue of trade and development, and problems of economic policy, in developing countries.

Several delegates believed that greater attention could have been paid to the consequences for developing countries of the conclusion of the Uruguay Round and that the specific labour market problems of developing countries could have been included in the Report's analysis of inter-dependence and unemployment. Also, the TDR's discussion of economic issues did not give equal attention to all regions, and that attention to issues relevant to Africa, in particular, and the transition economies was minimal.

According to the summing up, there was general optimism over the longer-term prospects for the world economy, but there was general acknowledgement that short-term economic difficulties in some countries were impinging on growth and recovery during the current year.

Some of these difficulties were associated with turbulence in financial markets, but some the result of specific policy actions.

On the unemployment issue, it was generally agreed that in developed countries it was a "very real one" and which needed "increased attention if the benefits of a more open world economy were not to be called into question or even reversed.

However, it was suggested, that while the 34 million unemployed in the North was high by historical standards, it was small compared with the numbers of unemployed and under-employed in developing countries, and there was considerable difference in nature and characteristics of unemployment in developing countries. The transition economies also had historically high rates of unemployment.

There was also broad agreement with the TDR's conclusion that the rise in manufactured exports from the South was not the cause of labour market problems in the North, and the convergence of views and findings on this in the TDR and other international organizations was welcomed.

However, there were views that the problem of labour market rigidities merited greater attention than given in the TDR (which took the view that while some reforms might be useful, it would not resolve the problem of unemployment). The exports to the South was noted by many as a major source of creation in the North. Also, better commodity price trends, increased development assistance and further debt relief, by enhancing import capacity in the South was also seen as useful for reducing unemployment in the North.

Rossier's summing up said that agreement on solutions to unemployment in the North was even more difficult than analysis of its causes.

However, he said, it was generally felt that a multiple approach to the problem had to be matched on the side of policy-makers. Many developed and developing nations said that international trade was not the cause of the problem and "there was a consensus that a resort to neo-mercantalist, protectionist measures would not only fail to provide a solution but would also be detrimental to the economic prospects of all countries.

And while higher rates of growth would make a major contribution to unemployment reduction, delegates from the North said that any attempt to accelerate growth could not ignore constraints on rapid expansion.

In a reference to the UNCTAD view of a one-time-capital-levy to reduce the domestic debt, the summing up "any new fiscal measures would have to be carefully assessed in light of their credibility with financial markets and any relaxation of monetary policy would be unacceptable if it heightened inflationary pressures".

On the rapid expansion of international financial markets and private capital flows, it was noted that while this could make an important contribution to growth and development, much of these flows was in the form of portfolio investment, rather than direct investment in productive capacity, and unevenly distributed among countries. Such flows were also highly volatile and unpredictable, while greater financial stability was of crucial importance both for developing and transition economies.

There was also a widely shared view, according to Rossier, that other developing countries could draw important lessons from the recent Latin American experience.

While the TDR's analysis of the financial crisis in Latin America was praised by many, and its conclusion that large swings in short-term, liquid capital and volatile exchange rates could pose problems of macroeconomic management in all countries, including developed, there was a view that these flows could still be more sustainable than the syndicated bank loans of the 1970s, and that the difficulties of Latin American countries could prove temporary.

But some of the delegations did not agree with the TDR's policy analysis of the reforms in Latin America or the TDR recommendations.

As for financial and currency instability there was divergence of views. Some delegations believed that such liberalization had led to an increase in speculative capital movements. But others saw inadequate economic policies and poor fundamentals as the main culprit.

As for measures to deal with short-term capital flows, there was broad agreement that systemic risks of derivative markets need to be kept under control by improved prudential regulations and strengthening of legal and institutional framework for such markets.

But the view was also expressed that financial liberalization had to be compatible with the level of development of the countries. Some supported tighter controls on such flows through regional and international cooperation -- including tax on short-term capital movements - while others saw such controls as neither feasible nor effective.

The need for official development finance, in view of the problems associated with private capital flows, and its major role was stressed by a number of countries who expressed concern over stagnation of ODA and other forms of official development finance.