PRESS BRIEFING BY UNCTAD ON TRADE AND DEVELOPMENT REPORT 1998

Press Briefing

PRESS BRIEFING BY UNCTAD ON TRADE AND DEVELOPMENT REPORT 1998

The Trade and Development Report 1998 of the United Nations Conference on Trade and Development (UNCTAD), being released officially on Wednesday, 16 September, was introduced to correspondents at a Headquarters press briefing this morning.

The report covers three issues: the performance and prospects of the world economy, with special reference to the current financial turmoil; and the causes of the crisis and how future ones could be prevented. It also examines the situation in Africa and how the region could be assisted to improve economic growth.

Addressing the press were Yilmaz Akyuz, of the UNCTAD secretariat, and Robert Wade, Professor of Economics at the Watson Institute of Brown University in Providence, Rhode Island.

Introducing the report, Mr. Akyuz said it proposed a recourse to the insolvency principles of chapter 11 of the United States Bankruptcy Code as one means of helping debtor countries out of the financial crisis they faced. Such a safeguard should be written into the rules of international finance, he said, adding that a country facing an attack on its currency should have the right to impose an automatic, unilateral standstill on debt-servicing. An independent panel could sanction the decision. The report was not in favour of giving that sanctioning authority to the International Monetary Fund (IMF) on the grounds that it was a creditor itself and its decisions were dictated by its creditors, he further stressed.

Mr. Akyuz said the proposal was similar to the safeguard action under laws of the erstwhile General Agreement on Tariffs and Trade (GATT) when a country had the right to impose trade restrictions. It was also the principle behind the chapter 11 provision of the United States Bankruptcy Code, which provided debtors-in-possession with a breathing space from their creditors. The UNCTAD believed such a course of action could benefit both debtors and creditors.

The UNCTAD differed sharply from the conventional explanation of the financial crisis of East Asia, he said. In its view, the crisis was the result of the "big bang" financial liberalization. The crisis had not been properly handled, and that was the reason why it had been most severe. Its global impact had been much more severe on developing countries so far, than for developed countries. "In fact, for the first time for many years, developing countries are projected in the report to grow at a slow rate than industrial countries", he said. Growth in developing countries was expected in 1998 to be half that of 1997, falling to less than 2.5 per cent, according to the report. To lessen the risk of the effects of the crisis, many emerging

UNCTAD Briefing - 2 - 14 September 1998

markets and some developing countries had introduced monetary and fiscal restrictions to maintain market confidence and to reduce their vulnerability to capital flight.

The Asian crisis had greatly affected commodity prices, falling to levels not seen for two decades, he said. So far, the impact of the crisis had been favourable to industrialized countries which had gained considerable terms of trade advantages due to collapse in commodity prices.

He said UNCTAD expected the world economy to slow down, particularly on account of that in the United States. The report argued in its overview that the worst possible outcome of the crisis was further rounds of financial instability in emerging markets, a large correction of equity prices in the major industrial countries, together with a sharp slowdown in the United States economy, prolonged recession in East Asia and Japan, and increased trade imbalances in the major industrial countries. Some of those elements started appearing after the report was sent to the printers, particularly the further rounds of financial instability in the Russian Federation and signs of it in Latin America. Also, there was some considerable uncertainty in the stock markets in the North.

Turning to what had to be done, he said there was no quick fixes. Asia, Japan, Europe and the United States should embark upon a coordinated expansionary, monetary policies, particularly in the United States. The report underlined a major dilemma facing the financial orthodoxy today. It promoted better assessment of risks, adequate and timely provision of assistance in response to needs of debtors that would eliminate the need for large-scale bailouts.

In his contribution, Professor Wade said the world might be at the edge of an economic slump. The crisis was no longer an Asian one. There were now full-scale Latin American and Russian crises. Those crises were feeding upon each other, leading to a great deflationary wave which was spreading out over the world economy. The only exception, for the moment, being the United States and, to some extent, Europe. "I think it is an open question how long the United States and Europe can remain exceptions." The reason why the situation was serious might be that deflation was happening at the same time as many countries were heavily indebted. It was similar to the situation which led to the Great Depression of the 1930s.

Until very recently, he said, the main thrust of policy coming out of the IMF and adopted by Asian governments was one of contraction -- a policy of high interest rates in order to keep their currencies from collapsing, so the IMF said. It also included a policy of increasing fiscal surplus by raising taxes and cutting government expenditures. A major policy backlash was being seen in Asia as one Asian government after another turned away from the IMF strategy, towards a policy of expansion. That policy included lower interest rates, increasing the fiscal deficit to expand demand in order to raise liquidity

UNCTAD Briefing - 3 - 14 September 1998

in the system. Along with that was the imposition in some countries of exchange controls in order to prevent domestic expansion from leading to "a stampede to the exits on the part of foreign investors and domestic savers", which would then cause the collapse of the currency. "So suddenly, the issue of exchange controls is very much back on the international agenda. I think, after Malaysia, the big country to watch, in terms of exchange controls, is Japan."

He noted that in the last week or so, some United States banks, as well as Spanish, Italian and French ones which were heavily exposed in Latin America, particularly in Brazil, were now talking about the need for capital controls, particularly exchange controls. The crisis was gathering, but there was, finally, a policy response emerging which might help stop it.

Responding to questions, Professor Wade said economies were now very depressed, and there was an acute shortage of liquidity, to the point where even in the Republic of Korea some of the big firms could not get even trade credits. That was leading more firms to bankruptcy and creating more and more unemployment. There was a big contrast between Asia and Latin America, in terms of savings propensities. Asian households were very big savers, unlike Latin American and United States households. That was the reason why there had to be a very big push to generate expansion, in particular to encourage inflationary expectations.

Mr. Akyuz said UNCTAD was proposing that Japan should put some money in the region from its tax cuts to boost imports. It would be good for Japan and for the world economy, he said.

Asked what the short-term solution to the Asian crisis was, he said that UNCTAD had advocated controls as part and parcel of the existing global system. It was easier to impose controls in good, rather than bad times, he said. UNCTAD's proposal was not in response to the crisis, but to the inherent systemic problems existing in the international financial system.

In a section on the economic problems of Africa, the report states that the region needed fresh policies, institutional reform and a swift solution to its debt problem if it was to fully exploit its potential. The UNCTAD proposes a dynamic investment-export nexus that could expand both production capacity and competitiveness of African economies. The report argues that structural adjustment programmes had left price-setting to highly imperfect markets and recommends corrective action. But the single most important step at the international level, it stresses, was the rapid removal of the debt overhang based on independent assessment of debt sustainability.

In its overview, the report urges African countries to strengthen their regional economic ties, as they had already begun to do in the political sphere. Special attention, it says, should be paid to a division of labour whereby trade and investment flows link countries at different levels of development.

* *** *