UNCTAD's 1992 Trade and Development Report

Pulling the world out of recession

The UNCTAD Secretariat's 1992 Trade and Development Report, published in September, could not have come at a more appropriate moment - in the midst of the crisis in the foreign exchange markets, and just before the meetings of the IMF/World Bank in Washington. Both events brought into sharper focus the report's contention that an undercurrent of debt deflation in a number of industrialised countries, notably Japan, the United Kingdom and the United States, is aggravating the world recession which is seriously affecting international trade. It defines debt deflation as 'a process whereby a decline in banks' willingness and ability to lend forces debtors to curtail operations or resort to distress sales of inventories or other assets, which in turn lowers incomes and asset prices further and thus prolongs the recession'. This is the first time in the postwar period, it notes, that such a phenomenon has been observed.

The reluctance of financial institutions to lend stems from the indebtedness of firms and households and from the huge losses they have incurred since the 1980s - the decade when deregulation led to competition in lending and when borrowers felt highly confident about a continuing rise in asset prices and incomes. The boom came to an abrupt end in mid-1989 as 'all sectors found themselves overcommitted', a situation worsened by the Iran-Iraq war.

With firms and households now facing high interest rates, unable to borrow and more inclined to reduce their indebtedness, the world economy is sinking deeper into recession, plunging a large number of developing countries into greater economic misery. The report recommends a series of measures to pull the world economy out of the recession: government actions to boost economic activities, greater financial flows to the developing countries and the reduction of their debt burden, a gradual approach to trade liberalisation by the developing countries and a more careful approach by them in overhauling public enterprises.

Adoption of Keynesian policy

Because the global economy can no longer rely on the private sector for recovery, the report advocates the adoption of a Keynesian policy of raising government spending, albeit temporarily, to stimulate activities, particularly in the three largest debt deflated economies - Japan, the United Kingdom and the United States. This will allow for spending on the badly neglected social and communications infrastructures and result in improvements in productivity and employment without creating excessive inflation. Although such a policy could bring in its wake risks of budget deficits, the report argues that by promoting the growth of income, 'higher expenditures would probably reduce rather than increase deficits'. However, if the recovery set in motion by government action is to be sustained, long-term interest rates must come down and be kept permanently low and short-term interest rates in Western Europe must also be brought down to the levels prevailing in Japan and the United States; Germany should lead the way in the latter in order to avoid strains within the ERM (the European Exchange Rate Mechanism) and to give its partners the leeway to expand their economies. The report recommends that the United States Federal Reserve Board should revert to the policy it pursued prior to 1979, i.e targeting the rate of interest. It further advises the developed nations to widen their export markets by increasing the flow of long-term capital to the developing countries. The latter, it says, can only achieve sustained expansion if there is strong global growth.

International financial flows and debt

On the subject of international capital flows, the report notes the diversity of situations in 1991. South and South-East Asia were again able to increase their borrowing. Latin America recorded substantial inflows, although these were more in the form of bonding than of bank lending and were due mainly to attractive high interest rates and currency appreciation. There was no improvement for the rest of the developing countries - their access to external funding remained difficult not only because of high costs of finance but also because of an adverse perception of their creditworthiness, a factor that has also begun to affect countries of Central and Eastern Europe.

A similar situation was observed on the debt front where Latin America's performance was much better in terms of rescheduling and relief. Despite substantial lower interest payments by African countries as a result of various refinancing schemes, the region's repayments deficit widened further.

Although the report welcomes the adoption by the Paris Club of the 'entranced' Toronto terms for the reduction of the debt of the poorest countries, it describes it as being a dilution of the Trinidad proposals which it considers as more appropriate in dealing with the problem.

Reforming international trade

It hardly need be said that the recession has continued to have devastating effects on international trade, particularly for the developing countries. Sub-Saharan Africa's overall: trade balance, for example, worsened in 1991 (indeed, Nigeria excepted, its economies grew by only 1.6%, 'so that per capita real income once again declined'). The report deplores the fact that a large number of developing countries have liberalised trade but their efforts have not been rewarded by developed nations which have continued their policy of using tariff barriers to protect ailing industries - precisely the kind of industriesin which the developing countries now have comparative advantage. It called for a reversal of this policy and hoped that this would be achieved through the Uruguay Round.

The report criticises reforms under structural adjustment which require the combination of such macro-economic measures as the abandonment of foreign exchange controls and devaluation with trade liberalisation. These are a set of complex and difficult measures which can innate the cost of adjustment and diminish the purchasing power of households, it says. Indeed trade liberalisation can have a destabilising effect on an economy that lacks adequate foreign exchange to finance a reasonable level of imports 'because it may need to be accompanied by very sharp devaluations'. It suggests gradual liberalisation in which export promotion, backed up with incentives such as subsidies and processing zones, can be combined with temporary protection of a carefully selected number of nascent industrial activities; a full scale liberalisation should take place only after 'export supply capabilities have been built up'.

Overhauling public enterprises

Selectivity is again the watchword of the report on the reforming of public enterprises which, it admits, are in a state of crisis in many developing countries. These enterprises are not always poor performers, as the Kenyan Tea Development Authority and the Guma Valley Water Company of Sierra Leone, for example, have proved. It points out that there is, however, 'a close relationship between the performance of public and private enterprises: in countries where the private sector has performed well, public enterprises have also tended to do so'. The private sector is virtually nonexistent in many developing countries. Public enterprises have come into being in these countries precisely because there was not enough capital in private hands to permit the emergence of the sector. Unfortunately the goals of some of them were not often clearly defined. The report attributes the failure of these enterprises to an absence of competition in their product markets, bad management, lack of effective systems of ownership, control and budgeting as well as political pressures and corruption.

'There are various options for reforms, principally, restructuring, privatisation and liquidation', it says. 'No single answer is applicable everywhere, for the extent and nature of the remedy called for depends on how the performance record of a public enterprise is judged against the objective set for it'. The objectives of those enterprises not performing well should be reviewed. Whatever these are, they should be based on commercial considerations. Where non-commercial objectives are assigned to the enterprises for whatever reason, says the report, 'the costs should be financed separately and transparently.' These are guidelines that should be followed in carrying out reforms of public enterprises under structural adjustment programmes, for they take both their efficiency and social dimensions into consideration.

Augustine OYOWE