8:42 AM Nov 6, 1995


by Yilman Akyuz*

Geneva 4 Nov (TWN) -- Since about a decade or so, thinking on economic policy took a radical turn. This was nowhere more apparent than with respect to macro-economic management and development strategy. The view gained ascendancy that markets, and not governments, hold the key to growth and development. This led to widespread liberalization.

Liberalization has been the main factor behind the greater integration of markets i.e. the phenomenon often described as globalization. Cross-border linkages among markets and production and financial activities have reached a point where economic developments in any one country are influenced to a significant degree by policies and developments outside its boundaries.

The growth of international trade represents one important element of increasing interdependence. However, the cross-border exchange of goods does not by itself harbour qualitative changes in the nature of interdependence. Rather increased globalization is largely a phenomenon of greater capital mobility, associated with increased international flows of investment and finance. This has been viewed as particularly favourable for poorer countries on the ground that international mobility of finance would allow the external capital requirements of the developing countries to be met and that the FDI would bring in technology and management skills to the enterprise sector.

But liberalization and greater integration of markets have not been associated with a better performance of the world economy. The period since early 1980s has been characterized by slow growth, increasing disparities within and between countries and increased financial instability. These are not unrelated.

Growth: Since 1980, the world economy has grown at a rate of less than three percent per annum compared to more than four percent per annum in the period until 1980, including the turbulent period of the 1970s.

* Growth in developing countries fell from 6% to 3% per annum while growth in the developed countries slowed down from almost 4% to under 3% between the two periods.

Disparities: Liberalization and globalization have not generally led to a reduction of economic disparities and, in some cases, disparities, both across and within countries, have increased.

* On a per capital basis, the gap between developed and developing countries has been widening: since 1980, per capita GNP in high income countries has grown at 2.2% a year while that in low and middle income countries has grown by less than one percent.

* A small number of countries, mainly in East and South East Asia, have been growing rapidly and closing the income gap with the developed countries. But these countries were also growing rapidly before the 1980s. By contrast, growth performance of most other developing countries has deteriorated. Latin America has registered no per capital income growth and some countries, mainly in sub-Saharan Africa and the Middle East have suffered absolute declines. Today's least developed countries (LDCs) are, with few exceptions, the same countries that were least developed 25 years ago.

* The expected tendency of wage equalization between developed and developing countries has not emerged and the wage gap between skilled and unskilled workers has increased in both developed and developing countries, with unskilled workers suffering absolute declines in many cases.

* The new policy environment has been less conducive to a more equitable income distribution. Indeed, it has given rise to a considerable redistribution of income and wealth in most countries. Since this has taken place in the context of a slowdown in growth, it has meant increased poverty in absolute terms.

The period since 1980s has witnessed a drastically increased instability in financial and currency markets. There has been many episodes of currency crisis, bank failures, stock market instability and debt crisis, both in developed and developing countries.

The crucial question is whether this experience constitutes an ongoing trend; or will the potential benefits of liberalization and globalization gradually offset the initial costs, leading to an improved performance of the world economy?

Prediction is risky and it is difficult to tell how the events will unfold and how they will influence policies. But under the current policy approach it is quite unlikely that the future will be very much different from the past ten years or so.

Macroeconomic policies in OECD: Since 1980, the need for demand management to stabilize employment and output has been by and large denied owing to the perception that the inflationary threat was uppermost. Tight macroeconomic policy was generally justified in the early 1980s when thee was a serious risk of losing control over inflation. But this policy stance continued after 1985 when inflation was reduced to the levels of the 1960s. Monetary policy played a major role in slowing capital accumulation and growth. Real long term interest rates in recent years have been three times as high as those during the Golden Age (1950-1973) and higher than in almost any period since the last century except for the Great Depression Years. Policies have created a low-growth hysteresis: demand growth has been constantly checked in the believe that potential output is not sufficient to satisfy it. This held back the growth of potential output since it influenced capital accumulation: if governments and central banks prevent the economy from achieving a long-run growth over 2.5%, firms will not be inclined to expand their capacity faster. At this rate of growth there is little hope of any boost to employment or wages of unskilled workers in the United States, or of a halt to rising unemployment in Europe or to the steady progression of unemployment in Japan to a historically high level.

Financial Deregulation: This has served to reduce capital accumulation and growth in two ways. By giving rise to greater instability of exchange rates, interest rates and effective demand it has raised risks for investors. It has also created opportunities for quick profits through speculation, diverting resources away from productive investment. Finance has largely ceased to serve investment and trade.

Demand deficiency has become a source of trade conflicts. Trade surpluses are increasingly viewed as a prop to economic stability while deficits are deplore because of their impact on jobs and profits. The mercantalist notion that countries should seek growth by improving their overall competitiveness vis-a-vis others is fast becoming an axiom, but a mistaken one; one country can improve its competitiveness, but this is not at all possible for all countries at the same time.

The deficiency of demand and slow growth in the North are also impairing the performance of developing countries. It is largely because of that deficiency that the basic factors of production -- labor and raw materials -- have been in excess supply globally, with unemployment in major industrial countries rising to extremely high levels and, conversely, primary commodity prices falling to record lows. Similarly, the fortunes of a number of developing countries has been crucially affected by the instability of capital flows, including private lending and capital flows.

Policy response in developing countries to the changes in global environment has not always been appropriate. Although the wave of liberalization has affected most of the developing countries, the nature of policy reform in Latin America differed sharply from that in the most successful NIEs in East Asia in two respects. Firstly, in East Asia reforms were not a response to stagnation and instability, but followed from a successful implementation of industrial policy. Thus, while in Asia protection and other support to domestic industry were removed because they were no longer needed, in Latin America liberalization was introduced as a reaction to the failure of the import-substitution development strategy based on extensive government intervention to generate rapid growth and industrialization. Secondly, East Asian liberalization was a selective, gradual and controlled process whereby the results were continuously monitored vis-a-vis their objectives, and new mechanisms or new areas of support and control introduced as the old ones were dismantled. In Latin America, as in the transition economies, reforms were implemented in a "big bang" manner. The policy of unconditional liberalization rather than strategic integration has narrowed the policy autonomy and increased vulnerability to external financial instability.

In the poorest countries, LDCs, orthodox policy reforms have not had much impact on growth performance.. These countries are trapped in a vicious circle; their existing production structure can generate little diversification and export growth in the absence of new investment, which requires substantial amounts of imports and foreign exchange. Export growth is thus constrained by the availability of imports, which cannot be increased because of low commodity prices and inadequate export earnings, and inadequate external resource flows. Their problems have been aggravated as the international community abandoned the commodity question and emphasized private financing for development.

How the problem of mass unemployment and falling wages for unskilled labor in the North are dealt with will influence the future course of all economies, including particularly the developing countries. In the absence of a strategy of accelerating growth, it would be difficult to resist to political pressures in favour of protectionist solutions, including the imposition of trade restrictions linked to labor standards designed to reduce Third World competition in manufactures. Trade tensions could also build up in the North. Indeed, events in recent months have evoked memories of competitive devaluations of the inter-war period. It would be unrealistic to expect the international trading system to evolve in the right direction, to maintain international monetary stability, and to expect the outward oriented development to succeed if slow growth and mounting unemployment leads to the reversion of international behaviour to the pattern of competition and conflict characteristic of the 1930s.

Avoiding such an outcome also depends on how interdependence is managed. The sequence of liberalization to date has been in the opposite order of that which would best serve the developing countries. On the one hand liberalization has proceeded rapidly in finance and high-skill intensive manufactured goods and some services -- sectors in which developed countries have a clear advantage. This has induced cumulative efforts in which initial disparities are reinforced through market dynamics. On the other hand international trade in commodities, in commodity-linked manufactures and in low-skill intensive manufactures -- precisely the areas of developing countries' comparative advantage -- continue to be heavily protected.

This liberalization bias has emerged because the relative degree of integration of markets is a political choice. The pattern of integration and globalization has so far been driven by the national interest of the developed countries who, in any case, carry the most weight in the determination of global policies.

There is also asymmetry in global governance: there are no global institutions governing finance on the same level as those dealing with international trade. Beggar-my-neighbour policies are as frequent and disruptive in money and finance as in trade. The impact of such policy conflicts should be discussed and resolved within a global framework. Such a framework, possibly based on the standards and principles of GATT, would be particularly important for developing countries whose economies have become much more vulnerable to abrupt changes in external financial conditions. The extensions of the coverage of existing multilateral lending institutions are not sufficient to the needs of providing governance of money and finance in a global system, including resolution of macro-economic policy conflicts, regulation of finance and lender of last resort.

(Yilman Akyuz is chief of UNCTAD secretariat's macroeconomic unit. The above article is based on a presentation at an UNCTAD-NGO consultation as part of preparations for UNCTAD-IX)