Report 5 on UNCTAD meetings: Global, national policy reform stressed in UNCTAD MTR report

Original Publication Date: 
9 October, 2006

Proposals for better United Nations system-wide coherence should start by addressing the need for coordinated economic global policy-making, which is lagging behind the problems caused by increasing interdependence.

This is one of the messages in an UNCTAD secretariat paper being presented to the third and final part of the UNCTAD Mid-Term Review (MTR) being held on 3-10 October.

The UNCTAD paper also stresses the need for developing countries to consider having pro-active industrial policies, and gives examples on how various WTO rules constrain their "policy space" to use policy tools such as subsidies and tariffs.

It criticizes orthodox macro-economic policies promoted by the international financial institutions (IFIs) that over-emphasise only one aspect (inflation control) at the expense of growth, and says that the international economic system is asymmetrical in ways that work against developing countries' interests.

The paper also stresses the important role that UNCTAD should play as the focal point in the UN system for an integrated approach to trade, finance, technology and development issues.

The MTR is reviewing the implementation of UNCTAD XI (the last conference in Sao Paulo in 2004) and proposing UNCTAD's future work.

The review of UNCTAD comes at an important juncture, because of the present process of UN reform, including the attempt to achieve "system-wide coherence" of the UN system in the development, humanitarian and environment areas.

There have been proposals to streamline the work of various UN agencies and departments. The Group of 77 and China has expressed concerns about proposals by certain developed countries to merge UNCTAD with other UN agencies. A high-level panel on the coherence issue is due to submit its report soon.

In its report, "UNCTAD and Development: The Way Forward", prepared for the MTR meeting, the UNCTAD Secretariat says that a key challenge for the UN reform process will be for the UN to develop strategies to respond to the complexities of economic interdependence.

"The growth in global interdependence poses even greater problems today. But the mechanisms and institutions put in place over the past three decades have not been sufficient to meet the challenge regarding the coherence, complementarity and coordination of global economic policymaking.

"Proposals in the current context of UN system-wide coherence should start with an attempt to address these problems, inter alia, through the appropriate parts of the UN system.

"As the focal point within the United Nations for the integrated treatment of trade and development and the inter-related issues in the areas of trade, finance, technology, investment and sustainable development, UNCTAD is well placed to examine these issues and to build a consensus for reformulation of policies from a development perspective."

The report says that the UN has been highly successful in persuading Member States to rally around a shared set of development norms, goals and priorities, as contained in the World Summit Outcome and the Millennium Declaration.

The strength of the UN system in the area of development, and hence its comparative advantage within the multilateral economic governance system, lies in promoting a comprehensive approach to managing global development, upholding values such as universality, multilateralism, neutrality, objectivity, flexibility and non-conditionality, in the use of development-assistance resources.

The creation of a coherent set of international institutions in support of trade and development had been an objective of the post-World War II institutions. But the planned framework for macroeconomic and financial policy issues, envisaged in the Havana Charter, was never implemented, resulting in the greater development of multilateral rules on trade than in the area of finance.

Recent experience has raised questions, particularly from developing countries, about the effectiveness of policies promoted by the international financial institutions (IFIs). Quite apart from destabilizing and deflationary feedbacks in various spheres of economic activity (trade, debt and finance), there are also concerns that global arrangements in trade, debt and finance contain systemic biases and asymmetries that constrain development.

For most developing countries, today's international trade and finance systems do not provide sufficient long-term financial resources to enable them to achieve the needed growth.

UNCTAD adds that the process of reform of the international financial architecture has placed undue emphasis on what should be done at the national level. Just as the original design of the post-war international financial system was undertaken under the UN, the redesign of the current system should also be approached within the UN framework.

In the core area of specialization of global economic interdependence (spanning trade, money and finance, investment, technology and enterprise for development), an integrated vision is essential and UNCTAD is an appropriate vehicle to address that.

In another section, the UNCTAD paper deals with coherence between national development strategies and international economic processes. It says that policies that heavily rely on market forces have often failed to deliver development for many developing countries that tried to integrate into the world economy.

Many developing countries which have undertaken wide-ranging economic reforms did not achieve a satisfactory supply response. In fact, in some cases, these countries experienced reduced or falling growth, especially in the industrial sector. Some have begun to reconsider the use of proactive trade and industrial policies in their development strategies, modelled on the approach used by some successful East Asian countries.

The UNCTAD paper posed two questions: Is there still a role for pro-active industrial policy in building productive and supply capacities in developing countries? To what extent has the revision of the international framework of rules and disciplines limited the options - or "policy space" - available for developing countries to pursue their development objectives?

UNCTAD says that there is a mixed picture as to whether international trade arrangements have restricted the freedom of developing countries to pursue proactive trade and industrial policies.

On the one hand, WTO rules and commitments have made it far more difficult for developing countries to combine outward orientation with the policy instruments employed by mature and late industrializers to promote economic diversification and technological upgrading.

The rules and commitments limit policy space in three areas. First, they severely restrict the use of subsidies that could be helpful in exploiting externalities or offsetting market failures that inhibit the development of local production of new products or new modes of production.

Probably the greatest obstacle to sensible industrial policies in this context is the prohibition under the WTO's Agreement on Subsidies and Countervailing Measures to provide subsidies contingent on export performance.

Second, they prohibit the imposition on foreign investors of performance requirements that favour technology transfer and the use of domestically produced components.

And third, intellectual property rules increase the costs of adopting new technologies and make it difficult or costly for domestic producers to undertake reverse engineering and imitation through access to technology that is covered by patent or copyright protection.

UNCTAD also points out that at present, tariffs are among the few options left to promote industrial development, but trade negotiations at different levels are narrowing this option.

Some flexibility may need to be maintained, bearing in mind that "squeezing the water out of the tariff" (i. e. closing the gap between applied and bound rates) may lead to greater use of contingency measures such as anti-dumping, countervailing and safeguard measures that are inherently discriminatory, complex and expensive to administer.

UNCTAD says that on the other hand, under the current multilateral rules, it is still possible to provide general subsidies in support of R&D, environmental and regional development objectives. Countries in a position to use the WTO rules to this effect can continue to support their own industries with a range of policies and instruments.

The main problem here is that developing countries are often under severe budgetary constraints, so that although the rules provide for legal equality, there is an inherent economic constraint, which some consider as a systemic bias of the WTO system.

UNCTAD says that while the rule-based system provides for greater predictability in trade, there is obviously some concern that rule-making may have gone beyond what is economically advisable. Moreover, there has been a de facto tightening up of past flexibilities that were previously available under waivers.

UNCTAD also criticizes the orthodox approach to macroeconomic policy which stressed price stabilization principally through the use of monetary policy and supported by tight fiscal policies.

The focus on price stabilization was to some extent determined by the experience of the IFIs in dealing with very high inflation in Latin American economies. In contrast, the Asian stabilization experience suggests that the orthodox route is not necessarily the only way to macro-economic stability.

The Asian model combined sound monetary policy with the use of a heterodox, non-monetary toolbox, including instruments such as incomes policy or direct intervention into the goods and labour markets.

In these countries monetary and fiscal policies were to a large extent directed towards increasing growth and investment, e. g. by means of low interest rates and, at least since the Asian financial crisis, a slightly undervalued exchange rate. Fiscal policy was also used pragmatically to stimulate demand whenever that was required in light of cyclical developments.

In the absence of effective multilateral arrangements for exchange-rate management, macroeconomic policy in many developing countries has been geared increasingly to avoid currency overvaluation. This has been a means to maintain international competitiveness and a condition for low domestic interest rates and an insurance against the risk of future financial crises.

By contrast, says UNCTAD, reliance on net capital inflows or current-account deficits proved to be very costly in the past, frequently resulting in financial crises. Interest rate hikes, huge losses of real income and rising debt burdens have been common outcomes of such an approach.

Under the newer approach, which aims at avoiding overvalued currencies, monetary authorities have been able to actively pursue development targets, provided that an acceleration of inflation is checked by non-monetary measures.

UNCTAD also notes that the heterodox Asian policy-mix has been complemented by some forms of capital account regulation. While such regulation may help to contain and prevent crises, the prime objective of economic policy should be to avoid the emergence of large interest rate differentials, arbitrage possibilities and the incentives for speculation.

However, as speculation on currency and destabilizing inflows of hot money cannot be fully avoided, some intervention by monetary authorities, or a "Tobin tax" (a small levy on - especially short-term - capital movements), may be useful in crisis situations.

The UNCTAD report also points out that at the international level, the current system of global economic governance has two overlapping asymmetries.

First, contrary to the institutional structure in international trade, current international monetary and financial arrangements are not organized around a multilateral rules-based system that applies a specific set of core principles to all participants. This asymmetry has particularly strong adverse effects on developing countries because monetary and financial policies can have much more damaging effects than those caused by trade and trade-related policies.

Second, the multilateral rules and commitments governing international economic relations are, in legal terms, equally binding on all participants, but in economic terms they are biased towards an accommodation of the requirements of developed countries.

Taken together, these asymmetries result in multilateral rules and practices which seek to deepen economic integration in areas crucial to the interests and priorities of developed countries, and reduce the degrees of freedom for national economic policies in areas crucial for industrialization and economic catch-up.

UNCTAD adds that the lack of a functioning financial framework in a globalized economy suggests the need for a new and multilateral approach to the management of exchange rates. However, new or reformed institutions promoting a system of stable exchange rates to ensure a predictable trading environment would need to become more symmetrical in their treatment of all member countries.

The main objective of such an institution would be the prevention of systemic crises in emerging markets based on the close monitoring of trade imbalances and global exchange rate misalignments in both surplus and deficit countries. Separating surveillance from lending decisions and assigning it to an independent authority could improve its quality, legitimacy and impact.