Feb 28, 1989

GATT PROJECTS ABOVE AVERAGE GROWTH IN 1989 IF ...

GENEVA, FEBRUARY 27 (IFDA/CHAKRAVARTHI RAGHAVAN) The prosperity for business and industrialised countries in this decade, compared to the 1970s, has been at the expense of labour at home and producers of primary products, fuel and non-fuel, in the third world.

This is brought out in the GATT secretariat's first assessment of developments in world trade in 1988.

GATT economists have predicted for 1989 another likely record year of above average growth of world traje in this decade, provided governments are able to control inflation, which is showing signs of pickup, and also keep world markets open.

According to the GATT survey, world merchandise trade grew in 1988 in volume terms by 8-1/2 percent, outstripping the 5-l/2 percent growth in 1987 and equalling the 1984 record in this decade.

The 1988 growth marks the fourth consecutive year of accelerating trade growth and sixth consecutive year where world trade grew more rapidly than world production.

In value terms, the world merchandise trade in 1988 is estimated at 2,840 billion U.S. dollars or a 14 percent increase. This reflects increased trade volumes, inflation and a further moderate depreciation of the dollar.

Apart from the trade performance, two other favourable factors benefiting economic activity currently is the moderate inflation (compared to the 70s) and the strong investment last year.

The trade expansion also, the economists note, is broad based.

Trade in manufactures grew at ten percent, that of mining products, including petroleum, at seven percent and of agriculture at four percent.

A relatively wide range of countries also experienced the trade expansion - the industrial countries and leading third world countries. But many third world countries did not share in this growth.

Third world countries as a group saw their volume of exports increase by 9-1/2 percent, against eight for industrialised countries, while their imports rose by ten percent as against nine

for industrial economies.

Among third world countries, imports into the OPEC members fell by an estimated 1-1/2 percent.

In 1984, an equivalent year in this decade in terms of trade growth, the boom in trade was largely due to the import demand of the United States.

In 1988, the 6-1/2 percent growth in U.S. imports was well below the world average, while U.S. exports volume increased by percent.

The fifteen heavily indebted countries saw for the second successive year growth in exports and imports, bringing their collective trade surplus to 28 billion dollars.

But this has to be seen against rising interest charges and continued lack of fresh capital flows.

The Federal Republic of Germany and the United States are now a virtual tie for the first place among the world's leading exporters, followed by Japan, France and the United Kingdom.

The U.S. is still the world's biggest importer; percent share in world imports, followed by the FRG, UK, Japan and France.

The GATT economists suggest that the key factor behind the unexpectedly strong expansion in world output and trade in 1988 have been the moderate inflation in industrial countries, investment-led expenditure growth, and the broadly based nature of the trade expansion.

But these are a reflection of the rapidly expanding growth opportunities and cumulation of favourable policy changes.

The expanding growth opportunities have been due to less tight market for labour services, energy and non-fuel primary commodities.

Annual increase in unit labour costs in manufacturing in the OECD area since 1980 has been one-half of that in the 1970s.

The real price of fuel has fallen by more than a one-half since 1981, while the real price of non-fuel primary commodities remain about 20 percent below its 1979 level.

The data cited, approvingly, by the GATT economists suggests that in fact the prosperity of the industrial world has been at the expense of labour at home, and of third world primary producers of energy and other commodities.

The short-to-medium growth prospects of third world countries who are net exporters of primary commodities have not been helped by the decline in real prices of commodities, the economists say.

But these price developments (in the labour and primary commodities) mean that supply constraints that slowed down economic growth in the OECD countries in the 1970s have become less binding in the 1980s, they add.

However, in U.S., Japan and Switzerland there seems to be little slack in the labour markets.

Technological advances, the economists say, are also multiplying opportunities for specialisation, innovation and product diversification in world markets for manufactured goods and services.

Enterprises have been able to take advantage of these opportunities due to changes ranging from improved general political climate to progress in dealing with specific economic policy problems, including continuing efforts to make individual economies more competitive, more flexible and more responsive to structural change.

Other factors include planned elimination of barriers to regional trade among some of world's leading traders, the commitment of countries to the new round of multilateral trade negotiations, and the increased confidence that central bankers could keep under check inflation.

However, the economists note that the sizeable reductions in surpluses of Japan and Germany have not been accomplished, though the U.S. has been able to achieve a sizeable reduction in current account deficit without depressing world output or trade.

However available data of world output, trade, and private non-residential fixed capital formation, suggest that trade and investments are still volatile.

A strong performance one year does not guarantee growth led by investment and trade next year.

This, the economists say, is particularly true as the world still searches for solutions to the long-standing problems of third world debt, large trade imbalances, and high rates of unemployment in many countries, as well as failure of many third world countries to share in recent economic growth.