Friday 18 September 1992

CURRENCY TURMOIL COULD PUSH RECESSION INTO DEPRESSION

Geneva 17 Sep (Chakravarthi Raghavan) -- The only people who have not been surprised and, if they are able to speak out, could have an 'I told you so' comment, over the turmoil on the currency markets and the shambles of economic policy-making in major countries these days are be the economists in UNCTAD.

Consistently over the last few years they have been dissenting from and questioning the policy analysis and advice flowing out of the high priests of the neo-classical economics - the International Monetary Fund and the World Bank - both on the diagnosis and cures for the ills of the world economy.

But this availability of some counter-views will not be for long, if the UN Secretary General, Boutros Boutros-Ghali's views about the UN (and necessarily UNCTAD as an organ of the UN Assembly and its secretariat a part of the UN Secretariat) playing a 'complimentary' role to the Fund and the Bank in economic analysis and policy advices on Money, Finance and Development, and bowing to the GATT on trade policy.

The move for a unified single-view in the UN system, will result in 'cartelisation' of ideas and analysis in support of the cartelisation and concentration of world economic policy- making and decision-making in the hand of a few and which would be more dangerous to the public than the cartelisation of trade under way.

UNCTAD economists were the first to question the orthodoxy on Third World debt, calling for a debt write-down, long before Baker, Brady, Camdessus and Conable reluctantly accepted it, but in driblets and have been unable to get the private banks whose interests they have been championing to do the same adequately.

Last year, in their Trade and Development Report, UNCTAD economists challenged the view that has been propagated over the last few years about the 'global shortage of savings'.

Fears about a global shortage of savings, they said, was 'unfounded'. For one thing, there was now ample scope for reducing military spending whose rationale had disappeared with end of the Cold War. Cost of investment goods, due to technological change, was actually falling as in computing. Despite appearances to the contrary, household savings behaviour in reality has not been worsening. The level of overall demand is insufficient to allow the full utilization of the world's productive potential; hence investments can be stepped up without governments and households having to cut their consumption, since the investment itself will create the necessary savings by generating additional income.

Factors constraining investment and pushing up interest rates, the UNCTAD economists said, were "the organization of the financial system and its impact on the cost and supply of finance."

The IMF and the Bank sniggered at it and yet, when Japan this year (and rightly) launched on a policy of government spending and internal expansion to stimulate the economy, they gave it a pat of approval.

"If there is a genuine shortage of world savings and capital," surely the IMF should have frowned on the Japanese move, and rather had encouraged the Japanese national characteristic of "savings" and the use of these national savings for investments and more aid abroad, the economists privately point out.

This year, UNCTAD economists again came out, bucking the trend, in calling for a concerted policy of Keynesian economics by the world's major countries for stimulating demand and output by increased government spendings on infrastructures (in countries like the US and UK), and a lowering of short- and long-term interest rates in Europe (by Germany cutting its interest rates and bringing them more in line with those of Japan and the US) to stimulate investments and economic growth.

Arguing that recovery in the US is not the only challenge, they said: "Western Europe is currently entering a period in which expectations of recovery will be disappointed and financial surprises will be reported with increasing frequency...Germany is now playing a role vis-à-vis the rest of Western Europe very similar to that played by the US vis-à-vis the rest of the world in the first half of the 1980s: a rising government deficit, a deteriorating trade balance and a tight monetary policy leading to high interest rates and capital inflows...the increased uncertainty over European union suggests that the Western European economies may experience conditions similar to those of the late 1970s and early 1980s, when changes in the strength of the dollar affected cross rates between the deutsche mark and the currencies of other countries. A further weakening of the dollar...is likely to cause an appreciation of the deutsche mark relative to other EMS currencies, which would then elicit more restrictive monetary policies to defend parities. This would be a strong impediment to recovery. Without the benefit of exports to Germany and without the expansion of the US economy, financial weakness could emerge in a number of countries. Stimulation of economy, such as has been announced in France and the UK, can only be sustained if it does not weaken the currency."

Coincidentally, with the publication on Tuesday of this year's UNCTAD Report (which was written in July and went to press end of July and was in the hands of the media and governments by mid- August), the German central bank acted on Monday, to lower its discount and Lombard rates, but only marginally.

And even as Finance Ministries and governments in Europe were praising this on Tuesday and putting on an air of 'the crisis is behind us', privately several UNCTAD economists were cautioning that while the German action was in the right direction, it was not enough and could merely encourage currency speculators and perhaps worsen the situation.

They were proved true on Wednesday when two interest rate hikes in a day in London failed to stem speculation, forcing the British to suspend the pound within the ERM, while the Swedes (who have linked their kroner with the ERM) have had to push up their interest rates to 500 percent!

As central banks in Europe and the finance and economy ministers gather in Washington this week for the annual Fund/Bank meetings (with the IMF coming out with a preview of its outlook to be published later, lowering the projections it gave just a few weeks ago, but with some soporific bromide stuff for continuance of overall global macroeconomic policy), there will probably be little of rethinking and advice forthcoming.

The IMP still harps on the "unsustainably large" levels of the US budget deficit which, as UNCTAD points out in its report, is no longer structural but due 'cyclical' due to the economic recession and downturn in revenues and which can only be countered by governmental spending on infrastructures and social overheads to stimulate economy and get the economy growing again.

As UNCTAD put it, the "1980s thinking" may still prevail and plunge the world from recession into a depression.

UNCTAD economists privately say that the turmoil in the European currency markets may have been triggered by the token and too- little cut in the German interest rates, sending the signal to speculators that they could be safe in 'parking' short-term speculative money into deutsche mark, as well the published remarks, authorised or otherwise, of the German Bundesbank chief for a more comprehensive realignment of the EC currencies.

The only way further damage could be arrested, and situation reversed, could be for such a realignment in fact to take place along with a more significant downward movement of German interest rates, some of the economists say privately.

Also perhaps, the leading ICs would give up their dogma and put in place policies to discourage short-term speculative movements of capital, by penalising such movements through levies, and for the centre countries to encourage long-term capital movement and investment in the developing world (thus stimulating their growth) and lowering the trade barriers to the exports of the developing world - policy prescriptions which too have been advocated by UNCTAD for some time.