UNCTAD-VII: DEVELOPMENT FINANCE RESTS SQUARELY ON NORTHERN GOVERNMENTS.

Apr 2, 1987

UNCTAD-VII: DEVELOPMENT FINANCE RESTS SQUARELY ON NORTHERN GOVERNMENTS.

GENEVA MARCH 31 (IFDA/CHAKRAVARTHI RAGHAVAN) -- Restoring economic and financial health of the third world is possible only under conditions of "high-growth scenario", and this needs faster growth in OECD economies and policy changes in them and in the third world, as also much larger financial flows, according to the Secretariat of the UN Conference on Trade and Development.

With private financial flows unlikely to expanded vigorously, even with innovations of techniques and instruments, "the question of the future of development finance rests squarely with the governments of developed countries", the Secretariat says.

"Their willingness to intensify aid efforts and to encourage other financial flows, particularly through the intermediation of multilateral development banks (MDB) is of the utmost importance", the Secretariat adds.

In a report on resources for development to the forthcoming seventh session of the conference, the Secretariat has warned that on current trends and policy behaviour, third world countries face a low-growth scenario in which most of them would be unable to revive development and at the same time service their debts.

They could avoid a severe deterioration in external accounts only by keeping the growth rates of their gross domestic product not significantly above population expansion, and in some cases only by further declines in per capita GDP.

For a high growth scenario essential for restoration of third world economic and financial health, the OECD economies should pursue a more rapid growth path, one that would cut their bey half their unemployment rates by year 2000 and with modest improvements in their labour productivity.

It would also require improved domestic policies in debtor third world countries, better trade policies in OECD countries to enable the third world countries to capture an increasing share of world trade, decline in present levels of international interest rates, and accelerated flows of official development aid (ODA) to the poorer countries.

UNCTAD's bases-line low-growth scenario (annual GDP growth rates of around 3.5 percent till 1995) would itself need net capital flows to the "non-oil dominant developing countries" (NODCS) increasing by about 13 billion between 1984-86 and 1990, and more rapidly thereafter by almost 50 billion (to reach 100 billion dollars in 1995).

Average net capital flows to them in 1984-86 was 40.5 billion dollars.

UNCTAD classifies as NODCS all third world countries except seven (Iraq, Kuwait, Libya, Oman, Qatar, Saudi Arabia, and United Arab Emirates) for whom exports of fuel and lubricants account for over 85 percent of total exports, and mining and quarrying account for over 35 percent of GDP.

For a high-growth scenario (GDP growth of four percent increasing to six by 1995), net capital flows would have to increase by nearly 23 billion by 1990, and thereafter by more than 100 billion.

UNCTAD notes that the NODCS as a group commanded progressively small amounts of foreign exchange, and by 1985 the combined foreign exchange availability for them was 68.2 billion dollars lower than in 1981-82.

The decline was smaller in terms of their purchasing power, because of favourable trends of import prices, but even then at 17.5 billion it was a significant reduction in their import capacity.

The overall trends were very much influenced by the experience of the eurocurrency borrowers in Latin America (Argentina, Brazil, Chile, Colombia, Mexico, Peru and Venezuela).

For NODCS as a group, from a positive net transfer of 50 billion in 1980/81, it became negative 14 billion in 1984 and this doubled in 1985.

All country groupings shared this experience, but the problem became particularly serious for Latin America whose cumulative net transfer between 1982 and 1985 was 85 billion.

Some individual countries of Latin America during 1982-84 transferred resources abroad of almost ten percent of their GDP and half of their government revenues.

UNCTAD points out that available historical evidence suggests that such a transfer burden "has never before been imposed on any country, developed or developing, including Germany after world war I and the OECD countries after the oil price rises of recent years".

Third world countries as a group saw a sharp decline in net medium and long-term financial flows (gross flows less amortization), and in 1985 these flows at 83 billion dollars was a fifth below that of 1981.

For many of these countries even the recent strengthening of financial positions of commercial banks has not helped to re-establish spontaneous lending, and even involuntary lending has declined - with only two billion agreed to or committed in 1985, compared to 14-16 billion in 1983-84.

Only the six billion dollar package negotiated for Mexico in 1986 reversed this declining trend.

Foreign direct investment too has slowed down and had fallen to eight billion in 1985 or half the levels of 1981.

Official and officially-guaranteed export credits, with more than a year's maturity, also fell sharply, and slight reversal since 1984 has been entirely on short-term credits.

IMF conditionality has again become more restrictive, and has deterred many third world countries from recourse to IMF funds.

Gross purchases have dropped dramatically in 1983, and coupled with earlier repurchase (repayment) obligations, net purchases fell from 12 billion in 1983 to 0.7 billion in 1985, and has become negative in 1986.

According to OECD Secretariat estimates, ODA would grow only at an annual two percent till 1990.

This, UNCTAD adds, underscores the need for OECD countries to persevere to achieve their ODA targets, which has now less than half of 0.7 percent GNP and just 0.08 percent for least developed.

As for multilateral development banks, UNCTAD underscores the contradiction between their charter role and the Baker initiative on the one hand, and the present and future sizes of their lending programmes.

Even with the projected increases of 3 billion in World Bank Capital, suggested in staff estimates, net disbursements would not exceed 7-8 billion through 1995 or a nominal 2-3 billion increase over 1985.

For the Bank to assume a leading role for development finance for a high growth scenario, larger capital increases would be needed. But these would not require any budgetary drains, since creditors only looked at its liquid asset portfolio, profitability and callable capital.

There was also need for increases in the replenishment for the banks softlending affiliate, IDA.

IDA-8 at 12.4 billion was no doubt two billion more than combined IDA-7 and special African facility, but in SDR terms is about same as IDA-7, UNCTAD points out.

There would also be need for replenishment of finances for regional development banks and the International Fund for Agricultural Development, all of whom are facing difficulties.

On the Bank's policy-based lending through structural adjustment loans (SALS) and sector-adjustment loans, UNCTAD notes that while there is agreement at general level on need for mixed or market economies to adopt appropriate incentives for economic agents, the operational implications of Bank conditionality is much less clear.

There was much debate on some of the variables targeted - role of price incentives vs. removal of non-price impediments to stimulate agricultural product, export promotion vs. import substitution, role of interest rates in raising savings, etc.

There were also many controversial aspects about the balance sought between public and private sector involvement or government policies towards foreign direct investments and income distribution.

The problems of cross-conditionality between the Bank and the IMF, UNCTAD notes, have also raised some controversies.

Though there was no formal cross-conditionality, only three of the Bank's sectoral loans during 1979-85 were to countries that did not have an IMF stabilisation programme.

On the view that third world countries should have greater recourse to FDI, by improving their domestic climate, UNCTAD suggests that such changes alone would not suffice to increase FDI flows, apart from the need for care to ensure that policy changes introduced are in long-term interests of the countries and of the TNCS.

Policies of home countries too, UNCTAD adds, influence FDI. While some have specific programmes to encourage FDE, others provide direct and indirect subsidies to their own ailing domestic industries and thus reduce incentives to move plants abroad.

Also, protectionism in industrial countries would stifle third world efforts to attract FDI.

UNCTAD however suggests that the MDBS and industrial countries could play a role in promoting new patterns of financial flows that would ensure more balanced risk-sharing between lenders and borrowers, diversify sources of finance, and ensure better distribution between debt-creating and non-debt-creating instruments.

Such new patterns could include equity finance, specially portfolio investments, Bank lending under new modalities, quasi-equity financing including commodity bonds, and variants of project-financing through production-sharing arrangements.

On portfolio investment in third world, UNCTAD notes for foreign investors this would be more attractive because of higher yields, unrelated to investments in industrial country stock markets.

Insurance and pension funds with estimated two trillion dollar resources could be potential sources. At present only a small proportion of their foreign equity investments went to third world countries.

But for this, domestic capital markets would have to function in their world countries.

Also, many industrial countries would have to change their regulatory frameworks to permit such investments, and encourage them through appropriate regulatory and tax policies.