Spotlighting downturns, UN agency challenges current economic wisdom

The United Nations Conference on Trade and Development (UNCTAD), in its annual world economic forecast released today, challenged industrialized countries struggling to get out of a slump to coordinate growth policies, increase global demand and head off the threat of deflation.

"There is a global glut in both labour and product markets, with too many goods chasing too few buyers and too many workers chasing too few jobs," UNCTAD Secretary-General Rubens Ricupero said in his overview of the Trade and Development Report 2003. "Intense price and exchange rate competition among major exporters have been adding to instability and deflationary pressures, while many developing countries facing tight payment positions are being forced to curtail imports."

The report added that the developed economies looked set to repeat the substandard growth rate of less than 2 per cent of the past two years.

The developing countries in Latin America and Africa, meanwhile, had changed to policies based on optimism about globalization and in many cases had regressed.

"The current economic landscape in the developing world has an uncanny resemblance to conditions prevailing in the early 1980s" with its debt and development crises, Mr. Ricupero said. Blaming the economic failures of the 1980s on government intervention led to a new policy approach of "deferring to the invisible touch of global market forces."

The result has been that between 1980 and the 1990s only eight of 26 countries selected for analysis were able to raise the share of manufacturing value in their gross domestic product (GDP) and increase their share of investment. The production structure in much of Latin America and Africa had moved away from sectors with the greatest potential for productivity growth towards those producing and processing raw materials.

UNCTAD Senior Interregional Adviser Jan Kreger told a news conference at UN Headquarters in New York that Latin America was experiencing premature de-industrialization. It has been moving rapidly to a service economy, although the service sector could not absorb the surplus labour in manufacturing.

Sound macro-economic fundamentals - bringing about low inflation, opening economies to international trade and reducing government share in economic activity - have been very successful in providing price stability, he said. They had failed, however, at the microeconomic tasks of adjusting domestic production to meet international competition and increasing exports and foreign exchange earnings, thus helping countries to service their debts.

"We don't have a ready answer, but what we're attempting to do is draw attention to the fact that simply placing emphasis on introducing sound macroeconomic fundamentals is not sufficient to allow developing countries to reach a sustainable growth path, and that we need to continue and to do more research in order to attempt to identify ways in which we can make these two sets of policies compatible," Mr. Kreger said.

He also dismissed the idea that one development policy could fit countries at different levels of development. The difference between Latin America and more successful Asia was that the Asian countries had tried a very wide range of policies to improve their economies, he said.