"A COMPELLING CASE FOR GLOBAL REFLATION"

5:57 AM Sep 21, 1993

"A COMPELLING CASE FOR GLOBAL REFLATION" - DADZIE
Geneva 20 Sep (Chakravarthi Raghavan) -- "There is now a compelling case for countering global recession through global reflation and, if coordinated, a fiscal stimulus would most likely result in only a small deterioration in government finances," UNCTAD Secretary-General Kenneth Dadzie told the Trade and Development Board Monday.

Earlier, the Board which began first part of its 40th session, elected Amb. Al Sherif Fawaz Sharaf of Jordan as President and the other members of the bureau.

The two-week session will largely focus on issues of interdependence and debt, as well as issues of trade and environment in the framework of international cooperation.

The world economy appears to be "settling into a pattern of slow growth" and the evidence of this trend in the 1993 Trade and Development Report hardly allowed for any optimism on the prospects for the remainder of the decade, and provided "a solid economic argument in favour of bold concerted actions to lift the world economy out of its current morosity", Sharaf told the Board in his opening speech after election.

Referring to the conclusion of the Report that some developing countries, particularly those in sub-Saharan Africa, remained largely outside the scope of global growth dynamics and risked becoming completely marginalised, Sharaf said that the TDR's prescriptions for revising both domestic and international policies so as to meet the challenge of poverty and marginalization deserved careful consideration.

Sharaf also suggested that the Board, meeting at the midpoint between UNCTAD-VIII and UNCTAD-IX, should conduct a review and evaluation of the work of the intergovernmental machinery created at Cartagena. In the case of the Ad Hoc working groups, this should cover the entire work programme, while for Standing committees it should cover the work undertaken by them in the first half of their life-span. This exercise should enable the Board to learn lessons, both of substance and of working methods, to decide on future work.

In his address, Dadzie spoke along the lines of his overview in the TDR to highlight some of the conclusions. Belying projections of almost all international economic organizations, Dadzie stressed, the world economy continued to stagnate. The growing importance given to domestic policy and the widely differing conditions faced by developed countries, had led to a weakening of international cooperation.

Stressing the case for coordinated actions for global reflation, reversing the current deflationary policy stances in the industrialized world, Dadzie pointed out that the fiscal package initially proposed by the new US administration had been shorn of its planned short-term stimulus while in Europe there was emphasis on strengthening government finances over combatting unemployment and recession.

Any serious attempt in Europe to meet the Maastricht fiscal targets will drag Western Europe into depression, Dadzie warned.

Many major developed countries were counting on exports to grow out of recession, but none of them seemed willing to provide a significant stimulus to international trade.

And while the expansionary stance in Japan's fiscal policy was in the right direction, by itself it would not be sufficient.

"In the current situation, we believe governments need more room for expansionary fiscal policy and this could only be achieved by an innovative response", Dadzie said.

The TDR's proposal for further privatization where feasible, and for a one-time capital levy on fiscal assets, Dadzie said, would allow a reduction of government while freeing current revenue for increased spending. A simultaneous relaxation of monetary policy, for which there was considerable scope in Western Europe, would help not only in stimulating aggregate demand but also in reducing the public sector interest bill.

On the varying growth experiences in the developing world and the transition economies, Dadzie noted that East and Southeast Asia represented the brightest spot -- with several countries succeeding in raising output, productivity, exports and employment over many years. China's rapid growth owed much to its gradual reforms, devoid of the shock treatment advocated by mainstream economists for the transition economies. In most of Latin America, radical policy shifts had been introduced with impressive speed and growth has accelerated with rapid inflows of capital which have come in because of interest rate differentials and may not be sustainable.

In sub-Saharan African where most countries have been pursuing structural adjustment programmes )SAPs)for several years, growth has remained extremely poor, per capita incomes lower than 20 years ago. The SAPs aimed at improving quality of investment and strengthening agriculture and exports, Dadzie added, were being jeopardised by underfunding.

Many of the transition economies were in a twilight zone and the experience raised questions about the appropriateness of shock therapy as well as its chances of success. "A market economy consisted not only simply of a predominance of private ownership and a minimum of government control, but also a complex multitude of institutional frameworks, traditions and norms that had usually evolved over time", Dadzie added.

The UNCTAD head underscored the need for actions to tackle the debt issues, that owed to banks, bilaterally in terms of official credits and the multilateral debt. Further improves were needed in the Paris club treatment of bilateral debt, with Trinidad terms being adopted by all creditors as a benchmark and eligibility widened to include all indebted low-income countries. On multilateral debt, without impairing the status of IFIs as preferred creditors, there was scope for flexible and pragmatic measures to deal with the problem.

As for commercial bank debts, while the seven Brady deals completed so far had brought about a significant reduction in commercial debt, there had not been much reduction in total debt. And while the deals had contributed to improved creditworthiness resulting from domestic economic reforms, most had not been generous enough to trigger, by themselves, the shift in investor sentiment. And many of the smaller countries still negotiating Brady deals needed lower up-front financing costs and larger reduction than banks have so far agreed to.

On the Russian debt, Dadzie stressed that a comprehensive medium-term debt relief programme was needed, with the burden fairly shared by official and private creditors. If Russia were to reduce its own claims on other troubled debtors, including other former Soviet Republics, this should be matched by increased aid or debt relief to Russia itself.

On the trade/environment linkage, one of the subjects to be discussed at the Board, Dadzie stressed the Rio Earth Summit objective of making trade and environment policies mutually supportive in pursuit of sustainable development and said "If this global understanding is to produce results, it will be necessary above all to foster a climate of genuine cooperation and solidarity. It is therefore appropriate that UNCTAD's intergovernmental work on trade and environment should commence by focusing on aspects of international cooperation."

In a statement on behalf of the Group of 77 and stressing the Group's continued "deep commitment to the irreplaceable mission of UNCTAD", Gilberto Vergne Saboia of Brazil took issue with the oft-heard arguments now that recession in the industrialized countries and loss of jobs was the result of export of jobs to the developing countries.

"..the economic truth," Saboia said, "is that growth in the demand for imports which follows economic growth in developing countries largely compensates, for the developed world, the eventual displacement of their exports to technologically higher levels."

The developed countries, the G77 spokesman added, should endeavour to give a fiscal stimulus to the world economy through concerted action which could result in global reflation and efforts to increase demand collectively. The G77 spokesman commended in this connection the TDR suggestion that governments in the industrialized world should reduce deficits through privatization and a one-time tax on financial assets.

There was also the need for international coordination of macroeconomic policies so as to overcome global deflation in a way that would advance development and reduce poverty. Unless bold measures were taken the problems of the world economy would multiply.

For developing countries, he added, the coordination of macro-economic policies among the developed countries constitutes an essential alternative capable of producing lasting results, with a view to stabilization of the international economy.

The international community should also take a fresh and in-depth look at the most appropriate way of helping developing nations overcome the problems caused by commodity earnings shortfalls, and how to reverse the declining trend in foreign aid, especially for increasing the currently insufficient ODA to the least developed countries.

On the Uruguay Round, Saboia said that the failure to complete the negotiations remained a major source of concern for developing countries. The Round had remained stalemated on the question of Agricultural trade among the developed countries.

"The prevailing uncertainty and risk of disruption in the multilateral trading system has favoured the intensification of trade management through bilateral deals and unilateral action. In this context, the strengthening of trade blocs may undermine the multilateral character of the trading system, with the exclusion of most developing countries from its benefits".

Welcoming the renewed efforts to restart and intensify the negotiations so as to conclude them by 15 December, the G77 coordinator added: "The G77 would like to reiterate that the Uruguay Round should be finalized in a balanced manner, taking into account the financial, trade and development needs of developing countries, especially those of the least developed. Special efforts should be made in the market access negotiations, where important offers presented by most developing countries have not been matched by satisfactory offers by developed countries on products of export interest to us. The G77 also attached great importance to an evaluation of the results of the Round relating to goods in accordance with Part I, section G of the Punta del Este Declaration in order to ensure that developing countries receive differential and more favourable treatment."

Alex Reyn of Belgium, speaking for the EC, expressed overall satisfaction at the way work had been carried out in UNCTAD after Cartagena, but though it might be premature to a global evaluation of the new bodies created at UNCTAD-VIII.

On the economic situation, Reyn underlined the EC's main concern with unemployment. Referring to the varying performances of the developing world, he called for reflection on the most suitable policies for stimulating growth and development in the Third World. Reyn also stressed the importance attached by the EC for an early and successful conclusion of the Uruguay Round.