7:49 AM Sep 11, 1995

'NEW THINKING' IN NORTH, IFIS WELCOMED

Geneva 11 Sep (Chakravarthi Raghavan) -- The head of the secretariat of the UN Conference on Trade and Development welcomed Monday that international financial policies and measures advocated by it was now gaining ground and called for further developing this new thinking to lay a sound basis for sustained growth in developing countries and enabling developed countries to meet the challenges posed by mass unemployment to free trade and global welfare.

The officer-in-charge of UNCTAD, Carlos Fortin, was addressing the 42nd session of the Trade and Development Board, which opened Monday morning with Amb. William Rossier of Switzerland as President.

Rossier in his opening remarks spoke of the future of UNCTAD "looking brighter again" and that UNCTAD-IX held out the promise of further advancing the development goals set in the UN Charter, namely, contributing to higher standards of living, full employment and conditions of economic and social progress and development.

Speaking for the Group of 77 and China, Amb. Guillermo Alberto Gonzalez said UNCTAD has been and should remain a counter-balancing force to ensure "bold and innovative plurality of thinking at a time when this thinking is in danger of being increasing dominated by the Bretton Woods Institutions."

Any attempt to reduce this role, he said should be resisted and UNCTAD empowered to exercise its development mandate fully, particularly in the light of the globalization of the international economy and the deepening economic interdependence among states and their implications for the future of developing countries.

Spanish Ambassador Fernado-M.Valenzeula, speaking for the EU member-states said that Globalization and liberalization of trade, as well as the creation of the WTO, gave UNCTAD an opportunity to set new priorities in its work stressing the dimension of development and establish an institutional structure which would be flexible and efficient, while preserving ideas already formulated at UNCTAD-VIII in Cartagena (Colombia).

Fortin in his speech highlighted the main messages flowing from this year's Trade and Development Report and welcomed the fact that the policies and measures advocated by UNCTAD for some time in relations to international financial policies and controls on short-term capital flows was now gaining ground.

The Group of 7, he recalled, at their Halifax summit had called for strengthening international cooperation in financial supervision to safeguard the financial system and prevent erosion of prudential standards. Moreover, the IMF had recently endorsed temporary controls by developing countries on international short-term capital flows during times of surge of such inflows.

"These," Fortin said, "are signs that the new thinking on international financial policies which the UNCTAD secretariat has been advocating for some time might be gaining ground. Developing this thinking further could be a fundamental contribution both to laying a sound basis for sustained growth in developing countries and gaining more room in developed countries to master the challenges posed by mass unemployment to free trade and global welfare."

Referring to the recent global trends and prospects in the face of a world economy losing some momentum, Fortin said the fall in rate of growth of output in the industrial world augured badly for efforts to reduce high level of unemployment which in many of these countries had come to be the paramount problem of economic policy.

This situation had potentially threatening consequences for the developing countries inasmuch as the notion was gaining ground in some quarters that unemployment was the result of growth of imports of cheap, labour-intensive manufactures from developing countries and solutions were being proposed for imposing trade barriers.

Such a response would defeat the efforts of developing countries to step up development through integration into the world economy and it bore the roots of new trade conflicts since it implied that unemployment in one country could only be reduced at the expense of its trading partners.

The irony was that this dangerous policy prescription stemmed from an "essentially flawed" explanation for unemployment in OECD countries.

The industrialized countries had consistently run trade surpluses in manufactured goods with developing world -- thus creating jobs at home.

While these surpluses had been reduced in the 1980s and job losses did take place, the swing was much too small and came much too late to explain the current unemployment levels in developed countries. Also, when surpluses went up again in the 1990s, unemployment nevertheless continued to rise. The coincidence of falling employment and rising import penetration of OECD countries in labour-intensive manufactures like textiles and clothing seemed to confirm the argument that manufacturing trade surpluses for the North did not necessarily exclude adverse effects on employment because of more labour-intensive imports from the developing world.

However, Fortin noted, in most cases the declines of these industries in the OECD countries predated the export success of developing countries. Also, since the second half of the 1980s, in a number of developed countries skilled unemployment had grown even faster than unskilled employment.

Trade therefore provided only a superficial explanation for unemployment, Fortin said. While changing patterns of international trade in the last 20 years had tended to reduce demand for unskilled labour in OECD countries, the same had happened in the 1950s and 1960s without mass unemployment.

UNCTAD own analysis showed that the main reason for the phenomenon now was the much lower level of growth and investment in the industrialized world and, hence, the solution lay in the main, not in interfering with trade, but in raising the tempo of investment and growth.

The macro-economic policies of the last two decades -- restrictive monetary policies and wide-ranging financial deregulation -- had significantly slowed down capital formation in the North (with annual growth of investment falling from a six percent in 1960-1973 to less than 2.5% in 1973-1990), and increasing volatility of key financial variables. As a result consumption, exports and imports had all become very unstable and private investment had been discouraged by the resulting uncertainty about aggregate demand.

The solution lay in providing business with improved demand expectations, providing potential investors with lower capital costs and more stable financial environment -- through a monetary policy to ensure low and stable interest rates and stable exchange rates by market interventions and measures to increase cost of currency speculations. There was also need in some countries for increased public sector investment in infrastructures.

But such policies designed to expand demand and investment could not be undertaken by any single country alone since it would lead to adverse consequences on its BOP and, if the country were open to international trade, to expansion of demand leaking abroad.

To avoid competitive currency devaluation and assure low and stable interest rates, policies to increase employment had to be internationally coordinated, the UNCTAD official stressed.

Referring to the consequences of the Mexican crisis and the reversal of capital flows affecting many Latin American countries, Fortin called for capital controls to avoid speculative short-term flows unrelated to trade and investment. While development of financial markets in developing countries was essential for allocating resources efficiently, it had to be ensured that the new markets are not dominated by speculation.

Earlier TDB President, Rossier said that the TDR as usual was rich and stimulating and did not shy away from controversy. In its analysis of the problems of high unemployment in the developed countries, the TDR gave good arguments for policy-makers in the North for resisting protectionist pressures to fight unemployment. In attributing the unemployment to sluggish growth and low-level of investment in productive capacity, Rossier noted, the TDR advocated no doubt controversial policies for investment-led economic growth and monetary and financial policies to lower capital costs and a revision of fiscal policy.

The report's argument for controlling capital flows to reduce vulnerability of developing countries to sudden outflows and need for measures to deal with turmoil in derivative markets, raising the cost of international financial transactions by taxing foreign exchange trading and protecting the financial system from major crises were all issues of direct relevance to the agenda of UNCTAD-IX, Rossier noted.

Because of its wide mandate, UNCTAD had to deal with new issues as they arose and assess how relevant they were to achieve the aims of promoting international trade and development. UNCTAD should hence remain open for reform and adaptable in its structure, using its research and analytical capacity to fulfil its functions as defined in Cartagena and reaffirmed by the UN General Assembly.

UNCTAD's mandate for comprehensive and integrated treatment of development and inter-related issues was also its comparative advantage -- giving the institution an unique breadth of vision. But this broad mandate may tempt member-States to burden UNCTAD with too many tasks and it was for member-States to assume their responsibility and decide what they want the institution to do.

"UNCTAD cannot do everything and a streamlining of its activities in the light of the new economic context may well prove necessary. UNCTAD's responsiveness and effectiveness does not only depend on its dedicated and motivated secretariat, but very much on the member-States," the Board President added.