FOCUS ON DEMAND DEFICIENCY, SAYS UNCTAD

7:26 AM Sep 14, 1994

FOCUS ON DEMAND DEFICIENCY, SAYS UNCTAD
Geneva 14 Sep (Chakravarthi Raghavan) -- The World Economy is recovering from recession at much slower rate than normal for a cyclical recovery, and below its sustainable long-term growth rate, and needs concerted monetary and fiscal policies in the United States, Europe and Japan to overcome the global demand deficiency which is seriously impairing performance of the major market economies and of the world economy, says the secretariat of the UN Conference on Trade and Development

In presenting this view in the Trade and Development Report 1994 (TDR-94), UNCTAD economists call for changes, away from the over-concentration of the last decade and half on inflation and supply-side economics, to focus also on employment and activity.

Western Europe, UNCTAD says should bring down interest rates substantially and for a prolonged period, putting off fiscal adjustments until recovery is well under way. Japan should loosen its monetary policy and undertake fiscal expansion as well as take measures to increase the propensity to consume, while the US must remain cautious in applying monetary brakes so as not to stifle the recovery of investment and employment and improvement in productivity.

In taking on current dogma, the UNCTAD economists have challenged the consensus view of the Industrial Countries and the multilateral development and financial institutions controlled by them (IMF, World Bank etc) emphasizing supply at the cost of demand management and pushing neo-liberal policies of exclusive reliance on private initiative for development on the developing world.

On the problems of the world economy, and need to move away from the decade and half of over-emphasis on supply and controlling inflation, Roger Lawrence, Deputy to the Secretary-General of UNCTAD told newsmen at a briefing "We are not saying that demand management is all that matters or that supply responses can be neglected or that we can afford to forget about inflation," explained.

"Out point is that we need a balanced, pragmatic, non-ideological approach towards macroeconomic policy, that unemployment and activity levels, and not just inflation, need to be factored into the design of monetary and fiscal policies, and that active fiscal policy has a useful role to play in stabilizing economic activity."

Growth rates in the industrial world, in the range of an annual four to five percent would be required, and that for a decade atleast, in order to see unemployment rates falling to the levels of the 1960s and 1970s, Yilman Akyuz a senior economist said at the briefing.

This, he said, would require real interest rates to be brought down. Historically, he noted, short-term real interest rates, until early 80s, were zero or slightly negative while long-term real interest rates had been in the 0-2 percent range, whereas they are still high even in the United States.

The TDR also challenges the Bank's neoliberal 'market-friendly' policies for development -- withdrawal of the State from the economy and leaving things to private initiative -- and the Bank's view (outlined in its 'The East Asian Miracle') of the policies that had been pursued by the Far Eastern Economies (Japan, Korea and Taiwan) in their successful industrialization and development.

The Bank's views have been challenged by several leading economists, and the economic planners and leading officials of the three economies too at a Tokyo-hosted symposium earlier this year.

But at inter-governmental level, the UNCTAD view is the first institutional challenge to the Bretton Woods theology on the eve of the 50th anniversary "celebrations" of these twins.

The East Asian miracle, the TDR underlines, cannot be ascribed to "market alone". Certainly, business was driven by the profit motive and private enterprise was the dominant force in the economy. "Yet, it is very doubtful whether without the guiding - and unusually visible - hand of government, the 'animal spirits' of the entrepreneurial class would have reached such a high intensity, or flowed spontaneously into developmental activities in a sequence capable of ensuring a continuous dynamic momentum".

The successful adoption of the Japanese model by South Korea and Taiwan showed it could be applied outside Japan. This did not mean the model, or variants, could replicated everywhere. The differing experiences of these (as of Latin America and Africa) would suggest that in the current state of knowledge, no simple and unambiguous recipes for development could be provided. Rather there may be several alternative ones, depending on time and place. Scepticism rather than faith may therefore be in order.

"Rethinking development policy is therefore of great importance and urgency. It has not yet been successfully accomplished nor will it be as long as methodologies deployed neglect, by sins of omission or commission, the true record and rationale of the political economy of Asian capitalism," the UNCTAD economists add in a clear rebuke to the dogmatist view of the Bank economists.

The TDR-94 has also provides what it calls "an initial assessment" of the Uruguay Round Marrakesh agreements and, while viewing it as a significant achievement and one that "should" result in strengthening the multilateral trading system qualifies it with some caveats on possibilities of abuse and discriminatory actions inherent in several of the key agreements that leave much to the discretion of the importing countries.

While the UNCTAD view of the successful policies of the Far Eastern economies underlines the State role in promoting industrialization and development and support to local enterprises, the Uruguay Round assessment, though in a discrete view, brings out that several of these options have been curbed or restricted by the industrialized countries through the WTO, its annexed agreements, and the dispute settlement mechanism with its cross-retaliation provisions.

The TDR's Uruguay Round initial assessment, perhaps given that developing countries have all signed it and are enthusiastically embracing it, is reticent in several areas. It provides no quantitative assessments of the 'market access' gains for the developing world, but some of its tables bring out that for many of the products of export interest to the developing world, the tariffs in importing markets are high, and the agricultural support programmes have been tariffied at a very high (200-400 levels) with little prospect of increasing market access.

Lawrence agreed that on a preliminary reading of the Marrakesh agreements, it would appear that some of the policies pursued in the past by the successful Asian economies would be constrained.

Another UNCTAD official present, Murray Gibbs, noted that many of the agreements applied the special and differential treatment principle for developing countries, either through a longer time span (5-8-10 years) to conform, and in some cases like the subsidies agreement with a per capita yardstick to relax some of the disciplines.

Each of the agreements, he suggested, needed to be carefully examined by each country to assess the leeway it still has, and to take advantage of it through its implementing legislation.

In a more forceful vein, Sanjay Lall in an article on Industrial Policy in the UNCTAD's just published 30th anniversary review provides a critique of the Bank's views on industrial policy in the East Asian Miracle, but agrees with the Bank that the GATT and pressures of the developed Western countries were inimical to selective interventions and many of the instruments of industrial policy are increasingly constrained in the name of liberalization.

"However," he says, "if a valid economic case for intervention exists surely the study should ask for a review and easing of these pressures. And surely the Bank should use its considerable influence to favour industrial development in the weaker countries? This is evidently out of bounds, since the Bank itself is among the leading forces in imposing sweeping liberalization and 'market-friendly' solutions."

Other economists at UNCTAD, speaking unofficially and anonymously, agreed that the international community, at the UN, UNCTAD (both at the Board and next Conference in 1996), must take a look at the development strategy in the light of the outcome and be ready to advocate changes and create a consensus towards change to accommodate and enable development of the developing countries.

In its short-term outlook (and underlining the uncertainties of forecasts), the TDR projects a moderate 2.5 percent output growth for the world economy in 1994 and five percent in world trade.

Growth in industrial countries would increase from a 1.4 percent in 1993 to a 2.4 percent in 1994 -- reflecting the drag on expansion caused by demand deficiency in Western Europe and Japan.

Growth in developing countries is expected to continue at much the same rate as in 1993 or almost four percent -- with considerable variations among regions and within them.

"But the prospects for Africa remain bleak, with at best only a marginal increase in output and a consequent further decline in per capita," UNCTAD warns.

The TDR.94, in a part titled "Rethinking Economic Policies: Lessons from Experience", deals with the deflationary gap and adjustment in the North and stresses that the level of global demand is not an accident of fortune, but the result of a decade and half of over-emphasis on supply-side economics and financial deregulation and liberalisation and needs to be reversed and tackled, but can be done only by concerted but varied, coordinated and sustained monetary and fiscal actions in the United States, Europe and Japan.

The degree of "global demand deficiency" over the past decade has not been constant but fluctuating, with nevertheless "deficiency of demand as a general rule".

Such a global demand deficiency is a recipe for wasting the world's productive potential and an invitation to conflict among nations," and Governments should act collectively to ensure that the world demand is normally compatible with worldwide growth and equilibrium.

It is to this task international community should now turn with policy approaches beginning with:

* Western Europe bringing down its interest rates substantially and for a prolonged period, while rescheduling its fiscal adjustments until recovery is well under way;

* Japan loosening its monetary policy and undertaking fiscal expansion, while taking measures to increase its propensity to consume;

* the United States being cautious in applying monetary brakes so as not to stifle recovery of investment and employment and improvement in productivity.

In focusing sharply on demand deficiency, the TDR says that it is largely due to deficiency of demand that basic factors of production -- labour and raw materials -- have been in excess supply globally, with unemployment rates rising in developed countries to extremely high levels and, conversely, primary commodity prices falling (until recently) to record lows.

Similarly large imbalances among the major market economies have also to an important extent been a reflection of the success with which some countries have been able to increase their share of global demand at expense of others.

And surpluses are again being valued not only as a means of financing long-term foreign investment or concessional loans or grants, but also as a prop to economic activity at home, while deficits are once again deplored not only because of their implications for indebtedness but also, and even more so, because of their impacts on jobs and profits.

The TDR debunks some recent fashionable concepts loosely bandied about productivity increases through technical advance and all countries increasing their competitivity for growth.

"The mercantalist notion that countries should seek growth by improving their overall competitiveness visavis other countries is fast becoming accepted as an axiom, but it is very largely a mistaken one. Competitiveness is a relative concept. While one country can improve its international competitiveness and thus perhaps its growth performance, that is not possible for all countries at the same time.

"What each country can do is to improve productivity, and international trade flows may facilitate or even promote this. But it is of cardinal importance to bear in mind that improvements in productivity do not by themselves generate the increase in purchasing power necessary to translate them into higher levels of output. they are therefore of little use unless they are matched by an enlarged expenditure flow. Unless sufficient additional demand is created pari passu with an increased potential for supply, technical advance will yield a reduction not only in the ratio of input to output but also in absolute level of use of inputs.

"Moreover, conditions of tight global demand will result in advances in knowledge and techniques being associated not so much with growth of total incomes as with pressures on individual countries to increase their market share at the expense of others. In short, global demand deficiency is a recipe for wasting the world's productive potential and an invitation to conflict among nations."

Stressing the need to move away from such notions and adopt concerted and coordinated actions by the US, Japan and Europe to stimulate demand, UNCTAD economists note that the US room for manoeuvre visasvis other industrial countries is no longer constrained by the Cold war imperatives and that the US now seems poised to pursue policies to strengthen and defend its international economic position.