SUNS  4300 Tuesday 13 October 1998



DEVELOPMENT: GLOBAL RECESSION NOT INEVITABLE

Geneva, 12 Oct (Chakravarthi Raghavan) -- A global recession is not inevitable as a result of the current world financial crisis, and there are signs that countries, persuaded that inflation is no longer a threat, are turning their attention to deal with global deflation, UNCTAD Secretary-General Rubens Ricupero said Monday.

"People are moving and there is scope for hope," Ricupero said in addressing the 45th session of the Trade and Development Board, which is due to consider at a High-Level Segment next week "The Impact of the Financial Crisis on Trade, Investment and Development."

The current world financial crisis could perhaps have some positive effect of catalysing necessary actions to make the economic, financial and monetary system a better one, he added.

Earlier, Amb. Chak Mun See of Singapore, who was elected President of the Board noted that unfortunately, as this year's Trade and Development Report has noted, the alarm bells sounded by it in its Report 1990, about the inherent destabilising effects of globalization of finance and the vulnerability of countries has proved well-founded. The speed with which the financial crisis in East Asia has spread to all the world had surprised everyone. Some fundamental questions were now being raised about free markets and benefits of liberalization. However, this should not lead them to wrong conclusions.

Ricupero began his speech by citing from the editorial and news reports of the Financial Times over the last week on the "violent swings" in the dollar/yen exchange rate, the loss in wealth to asset holders as a result of the steep falls in the US and European stock markets, and forecasts of private sector economists cutting down the forecasts for growth of the US economy next year by more than half to 0.7 percent, and of the UK economy growth slowing down to one percent.

One of the reports in the newspaper, cited by Ricupero, said "Any illusion of an orderly exit from the global financial crisis now lies in tatters. The dollar's extraordinary slump is luminous evidence of a
financial system in extreme distress... Attempts to explain the dollar's dive through 'fundamentals' are misguided... this week's move has its roots squarely in the huge de-leveraging of the global economy, under way since the Russian crisis began in August."

The UNCTAD head also cited the comment of a chief economist of a Zurich group that speculative investors (hedge funds) were operating on a global basis of a capital to debt ratio of one to onehundred, something "which has no parallel in modern financial history... leveraged investors have to sell, and sell quickly, when prices move against them."

Ricupero also cited the words of the Chairman of the US Federal Reserve (as the dollar endured its sharpest fall against the yen) that he had never seen anything like in his 50 year experience of monitoring the US economy, and that there was "a broad area of uncertainty or fear" and that in confronted with uncertainty and not understanding the rules or terms of a particular type of engagement, people were disengaging and that "in markets, disengagement means prices fall."

It was an extremely reassuring feeling for UNCTAD to find itself as part of such distinguished mainstream or so suddenly be able to say "We've finally found the maintstream, and the mainstream is us."

Contrasting the current pessimistic forecasts and views of the global economy with what was reported in April 1997 in the IMF World Economic Survey, and the FT reporting it as the IMF's rosy view of the future, its positive view of 'global money' being able to move in and out of countries rapidly, "placing much greater pressure on governments to get policies right" and the IMF economists welcoming this as a meanings of "moving the world closer to the FUND's own ideal of fiscal rectitude and market liberalisation", Ricupero said that in that survey, the IMF economists did map out the areas of danger, "but for a variety of reasons chose to play down the potential for damage".

The first lesson to be drawn from all these was "there are no comparative advantages in the field of ideas... we need diversity of approaches and perspectives in analysis and research on the world
economy, keeping in mind the need to present as comprehensive and balanced a result as possible."

Just as the market is a "wonderful mechanism" by processing millions of pieces of information about millions of individual actors, in the realm of analysis of monetary and financial system, "to be at the mercy of just one provider of thought amounts to accepting a sort of monopoly of truth, a dominant position in the market of knowledge... a situation that should be avoided."

Towards this end, he added, UNCTAD is determined to do its part by continuing to provide "sound and independent analysis" in the fulfillment of its role within the UN system, the treatment of the
various components of economic development.

In providing independence and balanced advice to countries in need of its advice, it was necessary to go beyond the old dogmas. For far too long the international community had been divided, sometimes by extreme views focusing on one or other element in an equation of many variables, and useless discussions of the state vs. market. Both were   necessary and complementary, just as fighting inflation and having economic growth were necessary at the same time. Stability without
growth would result in stagnation.

The main lesson of what is being experienced now was the dichotomy of discussions about external environment and national policies.

"We now can see that a favourable external environment is absolutely indispensable, not only for developing countries but the most powerful and successful economy of the world, the United States, which has begun to feel the adverse consequences of negative external environment... At
the same time sound national macro-economic policies are also needed."

Ricupero referred to the experience of Chile, which had been the most successful example of adjustment in Latin America - with sustained growth for thirteen years in a row, amidst declining inflation and little or no budget deficits, and the only country to have carried out a successful reform of its social security system.

But despite all these, Chile had become a victim of its own success. It had increased its exports to the Asian emerging markets which now absorbed some 35% of Chile's total exports. But when Asia tumbled, Chilean exports were hit - both in the reduction of the exports and in the price of copper, its main commodity export. As a result, Chile was struggling to avoid a deficit in its current account, which some economists believe could be as high as seven percent of GDP, though the Chilean government was confident it could be avoided.

However, continued Ricupero, there was no turning back on integration of developing countries into the world economy and the world system of trade. But when the external environment begins to falter, even integration was no guarantee.

Ricupero though ended his intervention with some pep talk of sorts, suggesting that the crisis would still have some positive effect of catalysing the necessary actions to make the economic, financial and monetary system a better one. Over the last week or so, the world seemed to be moving in the direction of making changes. He did not believe the world was on the eve of "the final crisis of capitalism or globalization" nor that a global recession was inevitable.

Of the three major economies in the world, that of the US and EU had "sound fundamentals" - with no inflation and elimination of budget deficits, and with interest rates moving down or very low.

Citing recent pronouncements of President Clinton and Treasury Secretary Robert Rubin and of the G-7, the interest rate cut by the Federal Reserve and the likelihood of European interest rates
converging and even the German rate likely to be lowered, Ricupero added: "countries are finally being persuaded that inflation is no longer a threat, and we have to turn our attention to deflation as the most serious threat... people are moving and there is scope for hope."