7:36 AM Jul 6, 1995

UNCTAD WARNS OF INSTABILITY, TRADE CONFLICT

Geneva 6 July (Chakravarthi Raghavan) -- The World Economy will continue to be plagued by trade conflicts and instability on capital and exchange markets affecting overall growth unless overall policy changes are made to tackle these problems and reduce unemployment through international cooperation, the UN Conference on Trade and Development warned Thursday.

The Officer-in-charge of UNCTAD, Carlos Fortin, who was speaking at Policy Level Dialogue of the high-level segment of ECOSOC session, said that the Uruguay Round trade agreements would not significantly alleviate or reduce poverty and will increase it to Africa.

Simple modelling exercises in UNCTAD showed that by itself the Uruguay Round process would only reduce the world's poor by less than 1.4 percent and less than one percent in the developing world. In africa it would increase it by 1.2 percent.

Earlier, the ECOSOC also heard statements from the heads of the World Bank, IMF and the World Trade Organization, which essentially repeated their orthodox policy lines and prescriptions.

A late start to the proceedings, due to the UN Secretary-General having to speak at another forum, however forced the four speakers to cut short their speeches, and provide an oral summary (often that did not fully reflect the texts which were later circulated) and left even less time for a dialogue with all. The heads of the Bank and the IMF could only be present at differing times in the afternoon session, the WTO head not at all.

But in some very brief 'dialogue' before lunch, and responding to a question from the UNDP head, Gus Speth about possible cooperation and coordination of the three institutions with the UN, World Bank President James Wolfensohn, said bluntly (and somewhat arrogantly, as several Third World ambassadors privately commented) "I will work with you and cooperate with you. But I don't want to be guided by your or coordinated by you."

The IMF head, Michel Camdessus, though not so bluntly, suggested that the UN should do its task, like keeping peace, and the Bretton Woods institutions to do their tasks.

The WTO head, Renato Ruggiero, said there was already good cooperation between the IMF, World Bank and the WTO and the UN, but this should be done in a pragmatic way. The WTO, he said, was a contractual one with a strong dispute settlement mechanism, and discussions could only be on the basis of what had been agreed. The WTO had practical working relationships and cooperation with UNCTAD in the International Trade Centre and other areas and this would continue.

All three were copious in making references to the G-7's Halifax Communique, but none of them, made a reference or were asked about the fact that the G-7 plus the rest of world's Heads of State/Governments, at the World Social Summit in Copenhagen, have in fact called for 'coordination' between the BWIs and the UN, including on the question of the structural adjustment programmes thrust on the South.

Earlier, in opening the 'dialogue', the ECOSOC President, Amb. Ahmad Kamal of Pakistan, questioned the view that there was now a consensus on a development model. The general agreement on development based on market-based competition and promotion of free trade, should not lead to efficiency prevailing over equity and social justice. The challenge remained how to resolve the tensions between growth and equity.

Kamal posed a number of questions: how could potential effects of financial crisis as in Mexico? What measures could be envisaged for stability of exchange rate regimes and enhanced macro-economic policy coordination? In the light of Halifax, what would be the role of the IMF? What steps could be taken to consolidate and support the new emerging markets in developing countries and minimise their risks? What steps could be taken to enhance capital flows to Africa and other least developed countries? What lessons could be drawn from the experience of the past four years on financial flows and policy advice to the transition economies?

The prepared speeches of the Fund, Bank and WTO heads followed their present policy lines and provided no answers to these questions or even whether there was any new thinking going on in these institutions.

Wolfensohn, in his speech, used the opportunity to stress the case for funding of the Bank's soft-lending affiliate, International Development Association (IDA) -- which is already facing trouble over the US payments of the current replenishment, and whose future replenishment is in jeopardy.

Camedessus, who also plugged the IMF orthodoxy, stressed the need for the IMF's Extended Structural Adjustment Facility (ESAF) for Africa.

Ruggiero, indirectly and somewhat weakly, made a reference to the dangers of trade disorder because of bilateralism, and the imbalances likely to be caused by over-extended regional initiatives and multilateralism. Though he mentioned no names, this seemed to refer to the US which is acting bilaterally and unilaterally in many areas, and pushing regionalism in the Americas and via the APEC. Ruggiero spoke of the growing importance of developing countries, as major and dynamic exporters and importers, and the fact that world was now economically interdependent to a far greater extent than governments were sometimes prepared to admit. This gave the commitments and rules of the multilateral system of primordial importance for peaceful development of the global economy, adding:

"The rule of law in trade is essential to keep trade open; without it we have the law of the jungle, which in an interdependent world not even the most powerful can afford." To maintain the credibility of the system, it was imperative that the commitments taken in the Uruguay Round be implemented and respected in full, including the commitment to make the best possible efforts to expand the benefits to the LDCs.

Apart from completing the unfinished business of the Round - such as services negotiations - there were four major challenges. Firstly, there was the danger of resurgent protectionism, an "insidious neo-protectionism" which could try to use trade restrictions as response to widespread concerns over labour, social, or environmental standards - concerns that were legitimate but whose response could not be trade restrictions. Secondly, there was the old debate between multilateralism and bilateralism, a debate that has not ended with the reinforcement of the WTO. Thirdly, there was the challenge of a possible imbalance between over-extended regional initiatives and the multilateral system. Unless regional initiatives were firmly grounded in principles and rules of the multilateral system, there was a risk of divisions between regional areas, and risk reopening a North/South division which the Uruguay Round did so much to erase.

"What is at stake," Ruggiero warned, "goes far beyond specific questions of trade barriers. It concerns barriers between peoples, barriers which the advance of the multilateral system did much to break down. Any weakening of its cohesion, and its fundamental principles of non-discrimination, would increase risks of tension and instability in the world - in the economic, political and even military sense".

There was also the most urgent challenge of the "empty seats at the table" -- the virtual absence of African and other LDCs from the growth-oriented possibilities of the trading system. The WTO was trying to improve this - through a major research effort on implications of the Uruguay Round for Africa, cooperation with other organizations to augment scope of WTO analysis and better focus assistance, and promoting cooperation to fight this exclusion of so many of the world's people from the possibility of a better life.

Fortin in his statement noted that the distinct, but closely linked, processes of globalization and liberalization at work in the world economy, offered great opportunities but also entailed risks of instability and marginalization within and among nations. These challenges were going to be addressed at UNCTAD-IX.

UNCTAD's views on some of these global issues, Fortin said, differed from conventional wisdom.

On the problem of volatility of private capital flows, for many years UNCTAD's Trade and Development had stressed that international money and capital markets were naturally prone to instability and, in the context of the surge of capital flows to Latin America since 1990, that it was bubble that would eventually burst. UNCTAD's fears unfortunately proved well founded, and for the reasons it had advanced.

"The costs of not anticipating the Mexican crisis of last December have been very high, not only for Mexico and several other Latin American countries, but also for foreign investors and their governments."

Have the right lessons been learnt? The "new received wisdom" was that the Mexican crisis was due to "policy slippage that was somehow hidden from the international community, and that close surveillance will succeed in avoiding such crises in the future."

"This," Fortin said, "ignores the fact that the crisis was predictable on the basis of the scale and character of capital inflows and of the absence of concomitant vigorous investment. The main 'policy slippage' was the acceptance of the now-conventional, but nevertheless mistaken, view that growth naturally flows disinflation, and that current account deficits cannot be a problem when they are generated by private sector borrowing."

On the exchange rate fluctuations and movements among major currencies, especially pronounced in the past six months, the UNCTAD head said according to orthodox thinking there should have been relative calm on the exchange markets. After all, inflation rates in major industrial countries were now very similar, and very low; long-term interest rates had converged quite considerably, and the US fiscal balance had been improving.

What then was the cause of these movements? UNCTAD believed that for the most part, it was due to "disparities in demand creation" among the US, Europe and Japan.

Western Europe had been enjoying a cyclical recovery, but much of its stimulus had come from external demand, and investment induced by external demand. Home demand had been quite sluggish. Japan had been suffering a continuous debt deflation. The US, on the other hand, had been pursuing, until quite recently, a stimulative monetary policy, thanks to which growth, investment and job creation became very positive.

If the US had been suffering from overheating and inflation, the fall in dollar value would have been very damaging. But in practice, by improving US competitiveness it will help to soften cyclical downturn in the US, but would dampen the upturn in Europe.

By the same token, the rise in value of the yen was putting a further deflationary squeeze on Japan and if the latter was very simply to follow the policy prescription of "putting one's house in order", namely medium-term financial policies designed to raise savings and reduce government debt. Such a policy would turn the prolonged recession in Japan into a deep depression, while what Japan needed was to increase consumption,

Also, some of the advice the US had been receiving, namely raising interest rates, "would guarantee a 'hard' rather than 'soft' landing."

"We still believe," Fortin declared, "that there is no way out without a coordinated adjustment of demand. Currency misalignment and volatility are very problematic, especially for international trade and damage development. However, the tendency has been to less, not more coordination.

"Exchange market adjustments cannot correct disparities in macro-economic policies except by making it too costly for governments not to change their policies," Fortin noted and went on to ask: "But would it not make more sense for governments to adjust their policies without first suffering such pain?"

It did not mean that correct government policies would entirely avoid all types of currency instability. Even with the best of policies, markets were likely to become turbulent from time to time, as capital movements turn into bandwagons. There was hence need for measures to slow down short-term international capital movements by making them more difficult or costly.

UNCTAD, Fortin recalled, had suggested as far back as 1987 that the Tobin proposal for a tax on such transactions was worth studying. More and more people had now shown interest in that proposal, and had "expressed doubts about the wisdom of a completely 'hand-off' approach."

"We are pleased to see that here, as in many other areas of life, pragmatism wins over paradigm," he added.

Referring to the scourge of unemployment or low-paid employment in industrialized countries, Fortin said this problem was casting "a long and dark shadow over the international community as a whole".

Voices blaming manufactured exports from developing countries, he noted, were becoming more vociferous and demands for a 'social clause' were increasing in some quarters.

The currently prevailing economic thinking seemed to suggest that phenomenon of mass unemployment and disguised unemployment was due to too many regulations and/or not enough skills. But this ignored the fact that rising trend of joblessness and low pay had been accompanied by a slowing in the pace of investment.

This began two decades ago, and the main factor responsible for its continuation after the reversal of oil shocks that initiated it were macroeconomic: high real interest rates, volatility in interest rates and exchange rates, burgeoning fiscal burdens due to rising cost of servicing public debt and so on.

"These are not cyclical phenomenon in the sense that unemployment can be removed simply by pushing a cyclical upturn higher and higher," Fortin said. "What is required is an expectation by businesses that demand will grow vigorously enough over a prolonged period to justify heavy investments in plant and equipment. Without the inducement of higher sales, private firms will continue to be cautious, preferring to invest less and to cut costs rather than increase capacity.

"If this analysis is correct, attempts to solve the problem by making labour markets function like commodity markets - for that is what 'flexible labour markets imply' - will only encourage protectionism in one form or another. Unless the demand side of the world economy receives the attention it deserves, countries will be inclined to deal with unemployment by pursuing beggar-thy-neighbour policies, such as, for instance, competitive devaluations. Or, they will inflict unnecessary pain on themselves and their trading partners by squeezing domestic activity in a quest for increased competitiveness.

"The world as a whole cannot attain increased competitiveness. Unless there is international cooperation to reduce unemployment, we can confidently expect mounting trade conflicts."

Growth in developing countries, the UNCTAD head said, would remain strong in 1995 and continue to grow at 4.5 percent. But disparity in economic performance among various regions would persist and become even more pronounced.

Latin American short-term prospects had been seriously affected by the direct and indirect impact of the Mexican crisis and, as a consequence, growth in the region would fall from 3.7 percent in 1994 to 2.0 percent in 1995. Growth would continue to be robust in Brazil, Chile and Peru, and less so in Argentina. Venezuela will see a further decline in output while Mexico will see a contraction of output of about five percent.

Given the low level of savings and investment in the region, the countries would still be dependent on substantial inflows of capital to finance investment and thus continue to be vulnerable to the volatility of such flows. "There is also the risk that the flow of capital into the region may be further reduced or even dry up."

The prospects for Asia continued to be bright and growths output was expected to further accelerate from 5.3% in 1994 to six percent in 1995. The depreciation of the dollar would have a mixed effect, and the resultant depreciation of regional currencies against major currencies, should lead to improvement in Asian export competitiveness in world markets, relative to Japanese exports. Asian economies would also be in a better position to export to Japan.

But the exchange rate factor could also slow the decline in inflation rates across Asia, increase import prices, especially from Japan. Taiwan and Thailand would face the highest rise in import costs while Hong Kong and China would be least affected.

Africa remained the region which found it difficult to reap the potential benefits of globalization and liberalization and ran the serious risk of marginalization in the world economy.

For most low-income countries in sub-Saharan Africa, the debt problem was not over and acute debt servicing difficulties were evident in the accumulation of large arrears and repetition of debt reschedulings. The Naples terms must be further improved and applied to the largest possible number of eligible countries. Multilateral Financial Institutions, which were also important creditors, needed to do their share and bold initiatives were needed. A hopeful sign was that the international community had begun to focus on the matter.