May 22, 1987

UNCTAD-VII: NO SINGLE STRATEGY UNIVERSALLY VALID OR APPROPRIATE.

GENEVA, MAY (IFDA/CHAKRAVARTHI RAGHAVAN) No single strategy - outward orientation, liberalisation and privatisation - is universally valid, and the appropriate balance between liberalisation of external transactions and government intervention has to be determined by the particular circumstances of each country, according to the UNCTAD secretariat.

This conclusion is in the secretariat report to UNCTAD-VII on the overall chapeau to the Conference agenda for revitalising development, growth and international trade, which calls for an assessment of relevant economic trends and of global structural change, and appropriate formulation of polices and measures.

The "understandings" and "clarifications" relating to the agenda require that in making the assessment due attention will be paid to the role of the private sector, and the role of national economic policies and responses.

This was the compromise that the Group of 77 agreed to in response to pressures from the U.S. and other western countries that UNCTAD should focus primarily on third world domestic policies and promote outward-looking market-oriented strategies, rather than its customary focus on the external environment.

The Group of 77, in its recent Havana declaration has decried efforts to downplay the influence of external environment on the development process and focus instead on domestic policy reform based on the efficacy of spontaneous market forces.

The declaration said: "this approach, not even applied by its major proponents, is inadequate to address development problems, carries the seeds of social and political instability and ignores the complexity of the contemporary world economy. This approach enables the transnational corporations to move freely, goods, raw materials, services, data and capital across national frontiers, at their discretion".

The secretariat report, in its overall assessment and review, has looked at the policy responses of third world countries to the external shocks of the 80's, as well as the room for manoeuvre, and analysed the policies and results in terms of export expansion and import substitution, and domestic savings, and the public sector/private sector issues.

Underscoring the "substantially different external and domestic environments" faced by various countries, UNCTAD argues that assessments based on results obtained and viewing countries that avoided debt and development crisis as those with better domestic policies, would be unconvincing since it would not allow for differences in underlying potential for adjustment relative to incidence of shocks.

Differences in policy responses to external shocks played an important role in determining growth and debt performance in individual countries.

But differences in the extent of adjustment required, in the underlying potential for adjustment and in the availability of external finance were even more important factors.

The development crises of the 1980's, the report notes has forced a re-examination of development strategies, with attention focussed on the merits of inward and outward oriented development strategies and the role of public and private sectors.

These two issues, the report notes, have often been equated, with the faster growth performance of the East Asian NICS (newly industrialising countries) being attributed to "an outward-oriented, market driven export promotion strategy based on liberalisation of the domestic economy".

Questioning this generalisation, UNCTAD suggests that the issue of "outward orientation" becomes relevant only after an initial stage of import substitution.

Industrialisation strategies of many third world countries, including some of the "success stories" cited in support of outward-orientation, do not conform to the dichotomy between import-substitution and export-promotion.

Many third world countries typically defined as "outward oriented" have undertaken a substantial amount of import-substitution by providing selective protection, and at the same time subsidising certain exports.

And some so-called inward-oriented countries have pursued active export promotion policies in a number of industries while protecting others from import competition.

Most third world countries that achieved rapid industrialisation had succeeded in substituting imports earlier, usually with interventionist policies designed to bias allocation of resources towards import replacement, UNCTAD points out.

In many East Asian and Latin American countries export growth took place in sectors that were initially protected.

Some of the recent "success stories" in export expansion, UNCTAD adds, were described as "inward-oriented, import-substituting" strategies during the 1970's.

The argument about outward-oriented strategies of a few Asian countries as driven primarily by market signals is not also substantiated by historical evidence, UNCTAD notes.

In some of these countries, "policies pursued in the 1970's can at best be described as dirigistic, while the shift towards increased reliance on markets in the mid-1980's represents a move towards a balanced mix of private market forces and public sector action".

A range of "interventionist" measures - such as export targets, credit rationing and discriminatory fiscal incentives - have been used in one or more of these countries in recent years.

"It is thus difficult to attribute the 'success stories' of such countries to the pronouncement of market liberalisation currently being advocated as a crucial instrument for structural adjustment in developing countries".

"In most outward-oriented countries, the development of industrial structure and the volume and composition of trade was due to deliberate government action which made use of profit incentives, rather than autonomous market forces working on their own".

UNCTAD has also contrasted these success stories with the relatively less successful cases "much more in conformity with stylised, open economy strategy".

A number of Latin American countries, particularly in the southern cone, launched extensive domestic liberalisation after the mid-1970's, and this was widely acclaimed at that time as "a successful outward-looking policy" and held out as an example to be followed by other third world countries.

"However, it is now widely recognised that the reforms failed to achieve their objectives and gave rise to a number of problems".

The reforms included extensive financial deregulation and liberalisation, including privatisation of nationalised banking sectors, freeing of interest rates and the steady reduction of reserve requirements with the purpose of ending "financial repression", removing government-induced distortions and ensuring financial market equilibrium in the context of increased efficiency of resource allocation.

But these resulted eventually in widespread bankruptcies and financial crisis, and in a defacto socialised banking system.

There was also the removal of restrictions on convertibility and capital movements, "to an extent not practised even in some industrial market economy countries", resulting in increased capital flight, and the reimposition of more severe restrictions.

Private business was given freedom of access to external finance without prior approval and government guarantee, on the assumption that for private firms the difference between domestic and foreign debt was not significant since they were expected carefully to assess its costs and benefits on which their survival depended.

But this resulted in private sector over-borrowing, subsidised debt servicing via special exchange rates and eventually nationalisation of private external debt and introduction of complete control over foreign borrowing.

The trade liberalisation introduced by these countries, by dismantling or reducing import barriers, contributed to replacement of domestic production by imports and a sharp reduction in trade balances, forcing a re-introduction of restrictions.

A reduction in the relative size of budget and budget balance and share of public enterprises in GDP and fixed capital investments, to levels lower than in some Asian NICS, did not generate a sizeable "crowding in" effect, and liberalisation in many cases failed to attract direct foreign investments (DFI) in external financing.

On the other hand a number of Latin American countries had an impressive economic performance "under a system of extensive involvement and intervention of the public sector in economic activity".

Two such countries, UNCTAD says, had very high GDP growth rates from 1973 to 1980, with marginal capital-output ratios not very much different from those in Asian NICS.

The trend growth rate of purchasing power of their exports improved constantly, and their export growth in current dollars during the late 1970's was faster than that of some "outward oriented" countries. Brazil, one such country, received more DFI, in absolute and relative terms, than some Asian NICS like South Korea.

"While there is no single strategy that is universally valid and appropriate, recent experience has clearly indicated the need to strike a balance between the outward orientation of financial policies and that of commercial ones. However, the external environment is not helping the debtor developing countries to attain such a balance".

On the role of the private sector and entrepreneurship in development, the report underscores the need for third world countries, in the face of severe budgetary and balance-of-payments pressures, to improve the efficiency of resource use in their economies and step up mobilisation of resources including entrepreneurship.

These considerations, it notes, have prompted many third world countries to reassess and revise their policies and strategies towards the public and private sectors, and redefine the relationships between them.

The report notes that the economic crisis has both served to generate pressure for enhanced efficiency, including greater resort to the discipline of market forces, and shown that there are limits to the extent and speed at which privatisation can usefully be undertaken.

Third world governments, UNCTAD says, have approached the issue pragmatically and, eschewing ideological approaches, searched for strategies and policies that take into account the inherent strengths and weaknesses of strictly market-based solutions, the state of development reached, and specific institutional characteristics of their economies.

In that context, governments have by and large sought to enhance the contributions of both the public and private sectors to the development process.

"No single approach or combination of approaches", UNCTAD says, "suggests itself as ideal for all countries, nor is it to be expected that the one that is right for any country at any particular stage of its history will remain so permanently".

"The relationship between the public and private sectors therefore needs to be reviewed and changed periodically, bearing in mind the need of both public and private sector investors for stability in the "rules of the game".