PRESS BRIEFING TO LAUNCH UNCTAD'S 2000 REPORT

Press Briefing

PRESS BRIEFING TO LAUNCH UNCTAD'S 2000 REPORT

Four to five per cent global growth estimates for the current year were excessively optimistic, as was the belief that the problems which caused the Asian financial crisis had been eliminated, Jan Kregel, High-Level Expert in International Finance, United Nations Conference on Trade and Development (UNCTAD), told correspondents this afternoon at a Headquarters press briefing.

Launching UNCTAD's "Trade and Development Report 2000", he said that the macroeconomic imbalances characterizing the global economy resembled those in two prior periods -- the late 1960s and the early 1980s. While Asian recovery had been stronger and faster than expected and the global economy had performed better than foreseen, there were still causes for concern. The global imbalances of the two prior periods were represented by high growth rates in the United States, relative to its trading partners, and a large and increasing current account deficit.

In the 1960s, the solution was to move from fixed to floating exchange rates, he said. In the 1980s, a similar set of conditions led to a 1985 agreement in which the "G3", and then subsequently the "G7", countries decided to intervene directly in currency markets in an attempt to influence the exchange rate of the dollar. Part of that adjustment process was a rapid movement in the dollar that prompted changes in Japanese monetary policy, a sharp reduction in interest rates and a substantial recession in Japan throughout the period.

One of the notable differences in making the comparison was that currently, instead of the dollar being excessively weak as it was in the two prior periods, it was now excessively strong, despite an increasing United States current account deficit. American firms had been in the forefront of introducing new technology. That in turn had led to a demand from foreign investors, particularly European companies, to attempt to join in the technological revolution by means of merger and acquisition activity in acquiring American corporations. That resulted in a substantial flow of foreign direct investment from Europe to the United States, and was one of the basic causes for the current weakness of the euro.

Also, he continued, the recovering Asian economies had been experiencing substantial increases in their current account surpluses. Thus, their exchange rates had not only stabilized but had started to appreciate. Many recovering Asian countries were concerned that appreciation would erode their competitiveness. They then started to intervene to stem the appreciation of their currencies, which had increased their demand for dollars.

In that scenario, he said, there was a potential for crisis, because in order for the United States deficit to decline, either the United States growth rate would have to fall or the dollar would have to appreciate rapidly. The United States had been the buyer of last resort for the recovery of many Asian and Latin American economies. If the United States economy faltered, it would mean a fall in exports from those countries and an increase in their current account deficits, making it that much more difficult for them to continue to expand.

On the other hand, if the United States economy did not slow down, the Federal Reserve would be forced to increase interest rates. The Reserve had already announced that it was going to increase interest rates until the dollar came to what was considered a "sustainable growth rate" -- currently believed to be around 3 or 3.5 per cent. Increases in interest rates would increase the carrying cost to developing countries of their indebtedness and provide competition in terms of global capital flows for financing those current account deficits. Whenever interest rates in the United States rose relative to those in the rest of the world, the United States acted as a magnet for international capital.

Presently, there was an unsustainable cycle within the United States with higher than potential growth rates, higher than potential productivity rates, excessively high capital inflows and a dollar that was too strong. An adjustment by the United States, if it came about too rapidly, would make it extremely difficult for developing countries to attract capital and meet their current account imbalances. It would also bring about a very sharp reduction in growth.

Regarding the recovery in the Asian crisis, the Report attempted to assess the policies that were recommended for those developing countries that accepted funding from the multilateral institutions, particularly the World Bank and the International Monetary Fund (IMF). On the one hand, the original policies that were recommended were policies to increase interest rates and restrict monetary policy while creating increased fiscal surpluses. In standard economic theory, that meant making it more difficult for firms to invest and adjust to the crisis, as well as reducing total demand. Those policies initially had resulted in bringing about extremely sharp declines in both output and employment in most of the Asian economies.

As they were clearly not working, those policies were reversed, government budgets were allowed to go into deficit and eventually monetary policies were relaxed, he said. In general, those policies were cyclical and not structural, and could not be a permanent basis for recovery. There were already calls by the IMF for Asian countries to bring their fiscal positions back into surplus.

With regard to Africa's prospects, he said that Africa, much like Latin America, had looked as if it was coming to a period of better performance at the outbreak of the Asian crisis. Unfortunately, it, like Latin America, had not yet been able to recover that position.

In response to a question on the petroleum situation, he said that the current difficulties in the oil market were the result of the Asian crisis. Currently, supply had not been adjusted relative to a sharply increased demand. The impact in the developed countries had been relatively muted, and was not creating concern in central banks and monetary authorities around the world. Presently, it did not seem that the situation would create some sort of an inflationary spiral. The real negative impact would be on developing countries which were not energy independent and producers of petroleum.

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