INNOVATIVE APPROACHES CALLED FOR TO RESOLVE PROBLEMS OF DEVELOPMENT FINANCING

17 October 1995

Press Release
GA/EF/2683

INNOVATIVE APPROACHES CALLED FOR TO RESOLVE PROBLEMS OF DEVELOPMENT FINANCING

19951017 'Whatever Happened to Peace Dividend?', Economic Committee Is Asked; Debate on External Debt Continues

Developing countries this afternoon called for innovative approaches to resolve the problems of financing of development, as the Second Committee (Economic and Financial) began consideration of the subject and the question of external debt.

The representative of the Philippines, speaking on behalf of the Group of 77 and China, said there was need for a thorough examination as to why the "peace dividend" had not materialized in the form of additional financial flows to developing countries. The international community should adopt a common set of principles, including a once-and-for-all arrangement, to ensure a substantial reduction of all categories of debt of developing countries.

The representative of Spain, speaking for the European Union, said a commitment from debtor countries to implement and pursue sound economic policies remained the key element in any strategy to restore viability. The evolving international debt strategy was increasingly contributing to a durable solution to the debt problems of developing countries.

Also making statements were the representatives of Ecuador (on behalf of the Rio Group), Algeria, Russian Federation, Jordan, China, Malaysia and Benin.

Reports were introduced by the Officer-in-Charge of the Macroeconomic and Social Policy Analysis Division, Anatoly Smyshlyaev, and by the Chief of the International Economic Relations Branch, Department of Economic and Social Information and Policy Analysis, Barry Herman.

Also this afternoon, the Committee decided to defer to a later date its consideration of the International Decade for Natural Disaster Reduction and of the United Nations Institute for Training and Research (UNITAR) due to unavailability of documents. Those two items were scheduled for consideration on 20 October.

The Committee meets again at 10 a.m. tomorrow, 18 October, to continue its consideration of financing of development and external debt.

Committee Work Programme

The Second Committee met this afternoon to begin consideration of macroeconomic policy questions covering financing of development and external debt crisis and development.

The Committee has before it three reports of the Secretary-General -- Financing of development: the sources of finance for development at mid-decade (document A/50/397); Long-term trends in social and economic development (document A/50/429); and External debt crisis and development: the developing country debt situation as of mid-1995 (document A/50/379).

Financing of development

The report on financing of development (document A/50/397) states in its introduction that the world economy in the short- to medium-term seemed able to generate the savings needed to finance global investment, including that of the developing countries. It was not clear, however, the report adds, whether those savings would find their way in adequate amounts to the more desirable places and for more desirable projects in terms of equitable, sustainable and efficient development. That would depend on a number of factors: the development of the financial sector in the developing countries; economic reform and socio-economic policy more generally; the ability of private and public investors in developing countries to tap international financial resources; and the flow of official resources for development.

The report finds that under current policy plans, there were encouraging prospects over the near-to-medium term for the global volume of saving and the saving by the developing countries as a whole. Aggregate saving by the developing countries, however, mainly reflected the high saving rates that had accompanied rapid economic growth, especially in many Asian countries. The potential for greater saving existed in Latin America and could be realized if adjustment programmes were maintained and sustained economic growth resumed. The situation in many African countries was more difficult, due to the constraints of low levels of income and slow economic growth, the report observes.

It states that the three largest developing country regions -- Africa, Asia and Latin America -- had had very different degrees of success in drawing upon private financial resources in the international arena. The situation in Africa was especially striking and reflected, more than anything else, the development crisis in much of the continent. The world's private sector had been withdrawing funds on a cash-flow basis for over a decade; interest and dividends paid abroad did not generally return as new credits and investments; new foreign lending and direct investment in Africa were relatively sparse; and some domestic funds left the region.

In the cases of Asia and Latin America, the report cited favourable conditions for the rise in direct investment in the 1990s, such as relatively weak exchange rates, liberalization and simplification of legislation on foreign direct investment.

Second Committee - 3 - Press Release GA/EF/2683 11th Meeting (PM) 17 October 1995

Turning to the aftermath of the Mexican financial crisis of 1994, the report says that it had clearly shown the dangers of allowing policy to become dependent on volatile financing. Although the case of Mexico had several unique features, its contagious effect left no developing country untouched in the short term. Net flows through short-term debt and equity transactions turned substantially negative in the first quarter of 1995. The terms and destinations of financial flows were also altered significantly, reflecting greater investor discrimination among developing countries in terms of risk.

The report notes that portfolio flows to Asia had resumed since the first quarter of 1995, and had accelerated to some countries of the Association of South-East Asian Nations (ASEAN) in the second quarter following the decline in United States interest rates. Inflows had resumed in the second quarter with evidence that quick policy adjustments in Mexico and Argentina were reducing trade deficits. The crisis of confidence over the Mexican situation had left the international policy community shaken and searching for ways to prevent its recurrence.

The report says the international community was facing a crisis in official development assistance (ODA). The overall aid effort of the industrialized countries that were members of the Development Assistance Committee of the Organization of Economic Cooperation and Development (OECD) had fallen to an estimated 0.29 per cent of gross domestic product (GDP) in 1994, the lowest level in 21 years. As of 1994, only four countries had exceeded the United Nations aid target of 0.7 per cent of gross national product (GNP) -- Denmark, Netherlands, Norway and Sweden -- while the aid effort of France put it near the target at 0.64 per cent of GNP. The report states that the emphasis must now fall more heavily on improving the efficiency and effectiveness of aid, since the growth of ODA itself could no longer be taken for granted.

In a section devoted to the role for international policy, the report observes that almost all investment in the developing countries would someday be financed by private savings. That day, however, was far in the future for all but a small number of middle- and upper-income developing countries, it adds. It argues that there was still a major need today for international policy to bolster the financing of development and it highlights three broad targets of international cooperation, namely: financial sector development, facilitated access to international finance and official development assistance.

On financial sector development, the report says the best model of international cooperation seemed to be that of helping policy makers to pose questions and formulate policy options that had respective advantages and disadvantages outlined as fully as possible, rather than providing them with answers.

On access to international finance, it says confidence and profit were the essence of developing countries' capacity to draw private international financing. For decades, private finance had looked warily upon countries undergoing balance-of-payments adjustment, although those that had an active

Second Committee - 4 - Press Release GA/EF/2683 11th Meeting (PM) 17 October 1995

International Monetary Fund (IMF) stand-by agreement were considered to have an international seal of approval of their policies. The new approach, the report indicates, was to involve the IMF more closely in policy dialogues with countries that had not sought formal adjustment programmes. Another aim of the approach was to improve the promptness, regularity and transparency of key economic and financial data that governments supplied to the Fund and the world at large.

The report states that the contribution of ODA to development needed to be argued forthrightly, and that it had the potential to play a significant role in the context of true international cooperation. The ODA was also still needed, it adds, to supplement the low savings that poor countries could realistically mobilize, domestically and through private international channels.

Long-term trends in social and economic development

The report on long-term trends in social and economic development (document A/50/429) addresses selected aspects of long-term changes in the world economy. It estimates the world's population by mid-1995 to be 5.72 billion people rising by about 88 million per year from 1995 to 2005. The report indicates that improvements in nutrition, sanitation, health care and women's education had already led to dramatic reductions in infant and child mortality in all regions.

It notes that an unprecedentedly large number of economies were adopting market allocation systems and that almost every country was seeking the appropriate way to adapt its economy to global competition. The report states that the most noticeable evidence for increasing integration of the world economy in the last five years had been the substantial rise in world trade relative to world production. Progress had been made in the liberalization of the international trading system, both at the multilateral and regional levels. There had also been a rapid expansion of global capital markets, with foreign investment surging in the last few years. There were grounds for optimism about the future of the global economy, but a major issue was whether there would be convergence, with developing countries achieving faster economic growth than the richer.

Elsewhere in the report, there are forecasts that global agricultural output would continue to grow, and that the number of the estimated 780 million persons who still went hungry every day was expected to decline by only 150 million between 1988-1990 and 2010. Africa was the only region where food production per capita had been declining since the early 1970s, while Asia and Latin America had seen large gains since the mid-1960s as a result of the increased use of new high-yielding varieties.

The report says about half of the world's population had little access to commercial energy and that many in the developing countries continued to depend on traditional fuels such as wood and animal wastes. World fossil fuel consumption could reach 11.0 billion tons of oil equivalent in 2010, the report indicates, adding that fossil fuels were expected to remain the dominant source of energy in 2010.

Second Committee - 5 - Press Release GA/EF/2683 11th Meeting (PM) 17 October 1995

In its conclusions, the report states that policies at the national level, supported in appropriate cases by the international community, could reduce the growth rate of population, improve health and assure a healthier and more satisfying life for the ageing members of the population. To deal effectively with continuing pressures -- economic, social, political and environmental -- for rapid international migration, especially from developing to developed countries, the report states that the international community should increase its efforts to promote rapid, equitable, sustained and sustainable development of the developing countries.

It states that technological innovations would continue to set in motion new cycles of product development. The globalization of an increasing variety of economic activities presented new opportunities and challenges for catching up by the developing countries and economies in transition. The conclusion of the Uruguay Round of multilateral trade negotiations was a hopeful portent that the international community could keep abreast of the rapid evolution of the global production and trade system with appropriate international accords.

The report says adherence to international agreements on the environment was crucially important as atmospheric concentration of carbon dioxide was expected to be considerably higher in 2010 than in the early 1990s. Finally, the report observes that the implementation of international agreements on trade, the environment, human rights, intellectual property rights and protection of foreign investment would help individuals and societies and also create a more stable environment that would foster progress and development.

External Debt Crisis

The report on the developing country debt situation as of mid-1995 (document A/50/379), recalls that the issue and its treatment had been closely monitored by the General Assembly for many years. In its resolution 94/94 dated 19 December 1994, the Assembly requested the Secretary-General to report at its fiftieth session on the major developments that had taken place in the past year on the debt question.

In a brief introduction, the report states that the situation of low-income countries with debt crises had changed a little, although certain initiatives might begin to alter that. The situation was fragile in some middle-income countries once judged by the markets as past their debt crises.

The report observes that the amount of relief extended under present-day debt restructuring agreements had not been uniform, and its modality reflected the particular situation of the creditors and debtors involved in each case.

With regard to debt owed to private creditors, mostly commercial banks, the report states that restructuring agreements allowed the debtor countries to buy back part of their outstanding debt at a discount or convert it into securities that entailed either lower interest obligations or a reduced face value. Debt conversion to securities was a common feature of "Brady Plan" arrangements first applied in 1990. The approach was mainly applied to the renegotiations of bank

Second Committee - 6 - Press Release GA/EF/2683 11th Meeting (PM) 17 October 1995

debt owed by middle-income countries. Buy-back operations had also been conducted by low-income countries with the assistance of official creditors and donors, according to the report. Some of the countries had benefited from the Debt Reduction Facility of the International Development Association (IDA), the concessional lending arm of the World Bank. Debt reduction was not a universal feature of all restructuring, according to the report, which adds that traditional rescheduling of debt servicing with commercial and official creditors still took place.

Concerning bilateral official creditors, the report states that creditor governments generally restructured debt servicing owed to them through a multilateral forum known as the Paris Club. The extent of relief provided depended, inter alia, on the country's per capita income level and the amount of debt involved. Rescheduling only affected payments falling due in a certain period on debt contracted before a specified date. The report states that debt forgiveness and debt conversions had also been undertaken by individual creditor countries outside the multilateral framework.

Debt owed to the multilateral financial institutions could not formally be restructured and was not subject to cancellation or reduction, the report says. In practice, however, there had been a series of initiatives to tackle the difficulties developing countries had encountered in servicing their multilateral debt. Some interest-payment relief was extended by the World Bank through its Fifth Dimension Facility. Heavily indebted countries with IDA borrowing programmes could receive additional IDA credits to help finance payment of their outstanding non-concessional loans from the World Bank. The IMF had no programme comparable to the Fifth Dimension Facility, but operated the Rights Accumulation Programme for countries that had fallen into arrears and wished assistance in working back into regular status.

According to the report, the gross external debt of capital-importing developing countries reached an estimated $1.6 trillion by the end of 1994, a $100 billion increase over 1993. The growth in long-term lending to developing countries was dominated by private creditors in 1994. For the first time in a decade this exceeded official debt. Latin American external debt was still dominated by private debt, while Asian and African external debts were largely owed to official creditors. The report states that Latin America and sub-Saharan Africa had both been accumulating increasing amounts of debt which, in principle, was difficult to restructure.

The report concludes that although significant relief had been accorded some countries and for certain classes of debt, the international strategy had not comprehensively addressed the full stock of debt, leaving a vulnerability for countries whose debt-servicing obligations still exceeded their capacity to pay.

Removing the debt overhang by itself would not solve the development problems of the debt-crisis countries, the report states. It notes, however, that while a debt overhang remained, even the most rigorous and effective programmes of domestic economic stabilization and structural adjustment left the countries in question with serious obstacles to moving to a sustained and

Second Committee - 7 - Press Release GA/EF/2683 11th Meeting (PM) 17 October 1995

sustainable development path. For them, it states, escape from debt overhang "is a race against time".

Innovation would have to be boosted in those heavily indebted countries, requiring, in addition to the appropriate price signals, a measure of business confidence. The report states that the proposed expansion of the resources at the disposal of the General Arrangements to Borrow at the IMF would be a supportive step, as would maintenance of adequate regular multilateral lending capacities through appropriately timed IMF quota increases, development bank capital increases and concessional fund replenishments.

Introduction of reports

ANATOLY SMYSHLYAEV, Officer-in-Charge of the Macroeconomic and Social Policy Analysis Division, introducing the report on long-term trends in social and economic development, said it did not pretend to come up with a set of numbers showing how the world would look in a particular future year. The Division had rather tried to describe some of the most important forces at work in the world and ways in which they could be expeected to lead to higher living standards. Economic growth in general and in manufacturing in particular could gain new momentum with rapidly expanding global markets.

He said the Division would attempt in its future work programme to analyse more deeply the specific implications at both the macro and micro levels, of the globalization process, with a view to understanding the process of economic growth and social progress and to making suggestions for further areas of international cooperation.

BARRY HERMAN, Chief of the International Economic Relations Branch, Department of Economic and Social Information and Policy Analysis, introducing the report on financing of development, said the Department had sought to draw attention to concerns regarding the role of ODA and the debt of the excessively indebted countries. Several countries had significantly cut back their development assistance in the past few years. That was not to deny that a substantial sum was still being provided for development assistance, he added. Noting that the aid crisis went deeper than shortage of funds, he said the effectiveness of assistance was today being questioned.

On the question of external debt, he said the list of developing countries classified as severely indebted in 1995 by the World Bank remained long and continued to include countries from Asia and Latin America, as well as Africa. Consideration was being given to new forms of relief from debt-servicing obligations to multilateral agencies, he added.

Statements

RONALD ALLAREY (Philippines), speaking on behalf of the "Group of 77" developing countries and China, said the international community could do much more to ensure a supportive external environment and implement appropriate measures that would directly address the development problems of developing

Second Committee - 8 - Press Release GA/EF/2683 11th Meeting (PM) 17 October 1995

countries and put them on a path of sustained growth and development. There must be a firm resolve to meet fully the agreed targets of ODA, particularly with regard to donor countries which had yet to fully implement the agreed target of 0.7 per cent of their GNP for ODA.

The international community must engage in a joint search for innovative approaches to seek out more sources of finance for development, he said. There was need for a thorough examination as to why the peace dividend had not materialized in the form of additional financial flows to developing countries. Also the "downsizing" of the United Nations system, which had been pursued for the past year should be quantified and made available for financing of development.

The problem of inadequacy of financing of development was closely linked with the issues of debt and development, he said. The international community should adopt a common set of principles, which must include a once-and-for-all arrangement in order to ensure a substantial reduction of all categories of debt, bilateral, multilateral and commercial, of all debtor developing countries and to meet the debt-servicing capacities of those countries. Measures to reduce the stock and service of debt and to provide debt relief,

including debt cancellation should be broadly implemented. There was a need to increase World Bank funding, replenish concessional funds and increase IMF resources. Special drawing rights (SDRs) should be increased as a means to increase liquidity and to promote development.

He said the problems of inadequate resources for financing of development and the persistent debt crisis were not intractable to durable solutions if there was a sense of common purpose and of appreciation of the realities of an increasingly interdependent world.

ANA MARIA MENENDEZ (Spain), speaking on behalf of the European Union, said a credible commitment from debtor countries to implement and pursue sound economic policies remained the key element in any strategy aiming at restoring viability. As important as debt-relief measures were other domestic and international actions aimed at liberalizing trade and expanding market access, facilitating financial flows, including private capital flows and promoting a more stable macroeconomic environment.

She said the evolving international debt strategy was increasingly contributing to a durable solution to the debt problems of developing countries, adding that the Union continued to support the approach of the Paris Club, which took into account the specific situation of each country. The Union strongly encouraged the international financial institutions to develop a comprehensive approach to assist the poorest countries through the flexible implementation of existing instruments and new mechanisms where necessary. The Union remained committed to a cooperative approach to the debt problems of developing countries.

MARJORIE ULLOA (Ecuador), speaking on behalf of the member States of the

Second Committee - 9 - Press Release GA/EF/2683 11th Meeting (PM) 17 October 1995

Rio Group -- Argentina, Bolivia, Brazil, Colombia, Chile, Ecuador, Mexico, Nicaragua, Panama, Paraguay, Peru, Uruguay and Venezuela -- expressed deep concern about the delay in the submission of documentation on topics under discussion. She said that despite optimism expressed about the growth of the world economy, the trend seemed to be diminishing. Latin American countries were continuing their efforts to control inflation. The Rio Group at a summit last September in Quito had adopted a declaration, which, among other things, had spoken of plans to establish a free trade area among their countries by the year 2000.

Her country was making efforts to improve its economic growth. She said new forms of protectionism must be avoided. The international community must find new mechanisms to resolve the debt problems of developing countries. In the Quito declaration, Rio Group members had noted that globalization had brought about liberalization and integration of their economies. Confidence-building measures must be introduced to attract new resources. She said Latin American countries attached importance to the training of human resources. Efficiency in national education systems, use of new technologies and shared approaches could contribute to building a culture of peace and democracy. This could be done through international cooperation, particularly in the transfer of technology.

She said that in future, conclusions and recommendations in Secretariat reports must be more in line with the actual text.

MERZAK BELHIMEUR (Algeria) said most developing countries were unable to honour their debts and that the phenomenon of external debt remained a reality in the international financial scene. The situation of the least developed countries was particularly grave, with no prospects for them to honour their obligations. He said the international community must consider their peculiar situation. Their debt burden must be alleviated and additional resources provided to them to carry out structural adjustment.

He observed that the various debt-relief initiatives had not been very successful. There was a need for dialogue between creditors and debtors irrespective of their status on ways of resolving the debt problems. A solution would depend on political will, and the parties involved must assume their responsibilities. The issue of debt could not be divorced from the need to restructure the world economy, including opening up markets for products of developing countries at fair prices.

He said that financial transfers to the developing countries had been positive in the last few years, but there were problems. Resources needed to be reoriented. A principle of solidarity should be translated into action by the developed countries to meet their commitment of 0.7 per cent in ODA. There was considerable wealth within the developing world itself, which must be explored.

VADIM S. SMIRNOV (Russian Federation) said there should be monitoring of economic processes in the short and long terms. The requirements of economies in transition called for adequate responses from the international community. He said the governments of the Commonwealth of Independent States had taken

Second Committee - 10 - Press Release GA/EF/2683 11th Meeting (PM) 17 October 1995

effective steps to attract foreign investment, but the Russian Federation continued to have problems gaining access to world markets.

He said external debt questions had been before the Committee for years. He was pleased to note that 12 developing countries had reached agreement with the Paris Club. He said the Russian debt situation was difficult. There had been appreciable progress, particularly regarding the debts of the former Soviet Union. Action on the commercial debts of the former Soviet Union was also under way. He said new strategies, including debt conversion, should be implemented to resolve the debt burden of the least developed countries. Thought should also be given to the cancellation of some debts of the countries with economies in transition.

FARIS AMMARIN (Jordan) said that finding a durable solution to the debt crisis would benefit developed and developing countries and was a responsibility of both. With the end of the cold war, the time was ripe for the rapid transition of the concentration of resources on arms and defence to resources for the purposes of development. That must be at the forefront of the responsibilities and priorities of each State. Although Jordan had had to face the burdens of debt, it had in the last decade been able to create a model of democracy, trigger a major shift towards privatization, engender a free market economy and execute a major peace treaty with Israel.

Jordan was making progress in solving the debt problem, he said. He expressed appreciation of the efforts of the United States in alleviating the pressure on the country by cancelling two thirds of the bilateral debt between the two countries. The United Kingdom and Germany had also alleviated some of the debt pressures, and negotiations were taking place with France and Spain. Japan had provided Jordan with good debt-relief assistance through granting concessionary aid.

CUI TIANKAI (China) said that for developed countries, helping the developing world was both an unshirkable moral responsibility and a worthy long- term investment in their own interests. China was worried about the continuous, drastic reductions in the flow of official development finance from developed to developing countries. He said it was particularly disquieting that because of a major donor, the IDA was in grave difficulties. Chances were that current IDA commitments (IDA-10) could not be fulfilled, he said, adding that there was a long shadow over future prospects.

Such an unfortunate situation might be partly attributable to budgetary constraints in developed countries, he stated. He added that in the final analysis, however, it reflected the continuation of cold war thinking, only in a changed form. It was both narrow-minded and shortsighted, he stated. He urged developed countries to take effective measures to reverse the downward trend in ODA and to honour their commitments.

On the question of private financial flows, he reiterated China's concern over the speculative and uncertain nature of private portfolio flows to

Second Committee - 11 - Press Release GA/EF/2683 11th Meeting (PM) 17 October 1995

developing countries.

HANAPIAH AHMAD (Malaysia) called on the developed countries to fulfil their commitments and provide the necessary resources so that developing countries could improve their socio-economic well-being. That would go a long way in averting social upheavals and attendant problems, in improving global production and in expanding markets. Multilateral financial institutions should be more innovative and creative in facilitating the development process of developing countries. In that regard, the role of the World Bank to shift

towards quality and high performance projects was a step in the right direction. It should also focus more on increasing the productive capacity and productivity of developing countries in its lending activities, he added.

There was a need for the international community effectively to address the question of speculative activities in financial markets, he said, calling for greater financial discipline and an effective surveillance mechanism.

Addressing the debt problem should include reduction of debt stock through cancellation, he said. While there were efforts towards addressing commercial and official debts, albeit with humiliating conditions, multilateral debt, namely debt incurred with various multilateral financial institutions, had not been given adequate attention. Many countries had accumulated significant multilateral debt through their borrowing. Multilateral institutions, led by the World Bank, had steadfastly refused consideration of restructuring debt owed to them. That was a significant anomaly as multilateral institutions should in fact take the lead role in resolving debt problems; "after all, they are development institutions", he added.

ROGATIEN BIAOU (Benin) asked what could be done to go beyond the existing measures to deal with the debt problem of developing countries, as the case-by- case approach had not had the desired impact in tackling their foreign debt problem. Thus, it was time to examine a global approach to that problem. The success of a global approach would depend, first, on expanding measures to deal with the debt problem of a greater number of countries and, second, on the implementation of commitments and recommendations already adopted by consensus by the international community in United Nations conferences.

He noted that the 1990 Brady Plan had benefited 13 countries and the 1994 Naples Terms had only benefited nine countries, adding that those facts were among the evidence demonstrating the need for new initiatives, which would benefit a greater number of countries. He recalled the commitment contained in the final document adopted by the World Summit for Social Development, which addressed the issue of bilateral, multilateral and commercial debt. Its implementation would be a decisive step towards a final solution of the debt problem. The General Assembly was the best forum for States to commit themselves politically to find a solution to the debt problem of developing countries. He expressed the hope that consideration by the Committee of the debt question on the International Day for the Eradication of Poverty, today, would contribute to

Second Committee - 12 - Press Release GA/EF/2683 11th Meeting (PM) 17 October 1995

an increase in the political will of creditors to mitigate the suffering of the poor.

* *** *