6:40 AM Oct 4, 1993


Geneva 2 Oct (Chakravarthi Raghavan) -- The UNCTAD Trade and Development Board ended its two-week autumn session Friday after endorsing conclusions on a broad range of issues: interdependence, debt, trade and environment, regional integration groups and the Uruguay Round.

The Board discussions on 'growth dynamics in the context of global interdependence' took place on the basis of the 1993 Trade and Development Report and need for stimulative macro-economic policies in industrialized countries to overcome recession and spur employment.

The report and the conclusions of the debate brought out the dilemma faced by the governments of industrialized countries: if they pursued demand and employment-generating fiscal policies there will be rise in government deficits and debt while if they pursued fiscal retrenchment it would exacerbate unemployment.

The agreed conclusions of the Board on the question showed increasing awareness of the impact of the continuing recession in the OECD countries on the developing world, in particular through exacerbation of protectionism and the downward pressure on commodity prices and the need for stimulative macro-economic policies to overcome the recession, but with differences on how to do this in the face of the dilemmas facing the industrialized countries.

The TDR itself in this regard had called for relaxation of fiscal and monetary stances to boost activity, and combing these with privatization and a one-time capital levy on financial assets to reduce public indebtedness.

While a number of countries, in particular from the developing world, supported this approach, others, in particular from the industrialized countries were critical. The International Monetary Fund which took a particularly critical view (as it has been doing in other fora where departures from its line are advocated) circulated its comments in a note to the Board, rather than intervening orally.

The TDR had also been critical of the 'big bang approach' to the marketisation of the former centrally planned economies. A number of governments of the transition economies (who had taken these measures in varying degrees and are now facing domestic opposition) however thought the TDR had been wrong in treating all the transition economies on an equal footing, claiming (as the Czech republic did) that in their country the reforms and transformation commanded wide support.

Abrahamian said that this view of a uniform view of what was happening in the transition economies had arisen from reading the overview, necessarily selective, which concentrated on the wisdom of shock therapy, and not the report which had clearly distinguished between the experiences of the countries and the important differences adopted by them on privatization and price liberalization.

On the idea of one-time capital levy (on which Canada presented perhaps the arguments against it in detail), Abrahamian said the inconsistency pointed out by Canada -- that it was inconsistent to call for stimulative fiscal policies that would increase deficits and at the same privatization plus tax on wealth which would reduce the deficits -- was more apparent than real.

A fiscal policy geared to stabilizing aggregate demand would indeed increase deficit in the short-term, Abrahamian agreed. But over the business cycle as a whole, such a policy would be neutral -- since during the upturn government revenues would rise and expenditures on unemployment benefits would fall.

The rationale for a fiscal stimulus with taxes on wealth to reduce debt, the UNCTAD official said, lay in the widespread perception that, outside Japan, existing levels of government debt were too high to permit governments to undertake discretionary fiscal actions needed to overcome the recession.

The wealth tax proposal, he added, was designed to give governments more room for manoeuvre, both now and in the future, and not simply to make up for the short-term deficit that would result from an expansionary fiscal stimulus to overcome the recession.

Consequently, the precise arithmetic relationship between revenue gain from privatization plus wealth tax, on the one hand, and short-term deficit increase, on the other, was not per se important.

As for the argument that a wealth tax would be distortionary, Abrahamian pointed out that this argument would be true for any tax. As for the argument that this particular tax would benefit net lenders at the expense of the elderly, this would be equally true of a fall in real long-term interest rates -- which everyone would welcome.

Abrahamian also saw little risk of any capital flight, if the onetime levy was imposed on holdings of assets on a prior date.

Abrahamian who had earlier thanked delegates for their close study of the TDR, said the same could not be said of the IMF (which he identified only as an international institution with observer status which had circulated a statement).

The statement, he said, had contained numerous criticisms of the proposal to tax holdings of government debt instruments. But this was not the TDR's proposal.

The TDR's proposal was to tax holdings of financial assets, regardless of whether they were issued by government or other entities. "We were certainly not advocating what would amount to a partial repudiation of government debt and no one who had given our Report close attention could possibly have concluded we were suggesting such a craze idea," Abrahamian added.

Some media articles, he said, had made the same mistake, one of which had even called it "Milton Keynes' Chicago Plan".

"It is to be expected that some journalists will be sloppy," Abrahamian said. "But one is naturally surprised when a sister organization fails to understand a carefully prepared text".

The Board's conclusion also noted that numerous developing countries and countries in transition had undertaken major policy shifts to a market economy but with differing degrees of success in improving performance and prospects.

"It is important for governments to be more pragmatic," the Board concluded, adding government intervention might be helpful in certain circumstances.

The debate had also brought out widespread agreement that the design and implementation of structural adjustment policies could be significantly improved in Africa. Growth rates in some developing regions had been a source of strength for the world economy at a time of general weakness, and more rapid growth in developing countries would benefit all.

It was stressed in this connection that, in the light of growing interdependence, there was need for improved macroeconomic policy coordination and need for adequate public and private finance to underpin growth-oriented domestic policies.

A number of delegates also called for universally accepted guidelines for supervisory and regulatory procedures of financial markets in view of their increasingly integrated nature.

A sessional committee which discussed debt agreed broadly in its conclusions on the current international consensus on debt -- involving support for debt reduction, on a case-by-case basis, for countries undertaking market-oriented economic reforms.

The conclusions brought up a number of issues as requiring further consideration.

In regard to official bilateral debt, several speakers had noted that the proposed Trinidad terms (at the Paris Club, an official creditors' cartel that deals with individual debtor countries and the relief to be given to them) could help in overcoming the debt problems and urged their early adoption by the Club. Others felt even more substantial reductions (than envisaged in Trinidad terms) would be needed. However, some (creditors) felt that the effects of the enhanced Toronto terms should be examined before considering any new measures.

(At last week's annual Fund-Bank meetings, Japan shot down the British proposal for the Paris Club to apply Trinidad terms).

In the session committee debate, as put out by the committee's conclusions as among the issues requiring further consideration, a number of speakers had also called for review of the eligibility criteria for debt reduction to include all heavily-indebted low-income countries and for attention to the urgent needs of lower middle-income countries for debt reduction.

On multilateral debt, the committee's conclusion said, several speakers had stressed that a substantial increase in net transfers from IFIs was particularly important for heavily indebted countries and would help them avoid emergence of arrears.

They also called for adequate replenishment of the soft windows of these institutions.

There were also calls for an agreement on a new Enhanced Structural Adjustment Facility to be reached before end 1993, with concessional elements no less than in the present scheme and for examining with a view to improvement of the terms and conditions of the current mechanisms for handling arrears. The use of SDRs to reduce multilateral debt was also urged by some.

On commercial bank debt, several speakers urged governments of creditor countries to take appropriate measures to ensure that the Brady deals being negotiated brought about a significant reduction in the total external debt of the countries concerned.

The discussions (in a sessional committee) on sustainable development, trade and environment, stressed the need for international cooperation to coordinate trade and environment policies to be transparent and mutually supportive. Environmental problems should be resolved through appropriate macro-economic and environmental policies, rather than trade restrictions, the committee concluded.

A successful conclusion of the Uruguay Round, it was felt, could contribute to sustainable development.

While the benefits of internalizing externalities or incorporating environmental costs in prices was widely recognized, it was noted that the ability of developing countries to do this would be strongly influenced by the conditions under which they are able to export their products. Such efforts should hence be given wide international support.

The Board is to consider at its next session (11-22 April, 1994), "the effect of internalization of external costs on sustainable development", while at its 41st session (19-30 September), the Board will examine the "impact of environment-related policies on export competitiveness and market access".

There was a convergence of views at the sessional committee on the need to avoid use of trade restrictions as a means to offset differences in cost arising from differences in environmental standards and regulations.

Further work of UNCTAD in this field, it was agreed, would lie in policy analysis and debate, conceptual work, building of consensus among member States on the interactions between environmental and trade policies, dissemination of information to policy makers and encouragement and provision of assistance in capacity-building.

Referring to the increasing consumer preference in many countries towards "environmentally friendlier" products, the committee's conclusions said studies were required to assess, on the one hand the economic costs associated with reducing the negative environmental effects of production processes and consumption, and on the other hand the market opportunities for exports which may flow from the demand for such 'friendly' products.

The Ad Hoc Working Group on Expansion of Trading Opportunities is to initiate such work at its Second Session (22-26 November).

UNCTAD was also asked to pay increased attention to environmentally motivated policy instruments with a trade impact -- such as those on packaging, labelling and recycling.

To the greatest extent possible, the Committee said, the impact on trading partners, in particular exporters of developing countries and countries in transition, of such instruments should be considered at as early a stage of their development as possible. Transparency would be a key element in this regard.

Eco-labelling programmes should, to the extent possible, take into account the trade and sustainable interests of the producing countries, particularly the developing countries and countries in transition. International cooperation and further study of such programmes was required.

The Committee also called for UNCTAD study of the effects of the OECD procedural guidelines on integrating trade and environment policies, and the OECD's future programme. Interactions between UNCTAD and the OECD, as well as other intergovernmental and regional organizations working in the field of trade and environment, such as the GATT, should continue to be developed, the committee's conclusions added.

On regional economic groupings, where a sessional committee undertook a substantive review with the participation of high-level experts, the Board's conclusion highlighted the importance of such groupings being outward-oriented and supportive of the multilateral trading system.

"In devising their policies," the Board added, "integration groupings should observe multilateral disciplines and rules, ensure transparency of their rules, regulations and standards, and take account of the effects on third countries."

Countries within integration groupings, it was further suggested, should promote their cooperation with developing countries, notably in the area of investment, and encourage the setting up of joint ventures.

Referring to the Board's discussions of the developments in the Uruguay Round, Board President, Al Sherif Fawaz Sharaf of Jordan, said that the discussions had revealed a wide feeling that prospects for a successful conclusion had brightened, although the most sensitive issues remained to be resolved for achieving a balanced and comprehensive package of results.

For this last to be achieved, the trade, financial and development needs of the developing countries should be taken into account and special efforts should be made to this end in the market access negotiations.

Also, the evaluation of the Round in terms of differential and more favourable treatment to the developing countries in accordance with the Punta del Este Declaration should be undertaken well in advance so as to provide sufficient time to possible corrective measures.

Several delegations, Sharaf added, had stressed that the apparent resurgence of protectionist philosophies based on a mistaken notion of 'unfair competition' was a source of particular concern and served as a reminder of the unpredictable consequences that would ensue from a failure of the Round.