Mr. President,
Distinguished delegates,
Ladies and Gentlemen:
I am pleased to be here today and to share with you UNCTAD´s perspective on current developments in the world economy and their possible implications for developing countries.
The recovery in the world economy that started in 2002 continues unabated. High oil prices and the increasing cost of industrial raw materials have apparently not had the negative impact on the recovery that many expected. The economic upswing has brought about a major improvement in the living standards and employment situation of hundreds of millions of people in developing countries. However, this undeniable economic success should give rise to caution as to the possible negative repercussions of a major imbalance in the global economy, as Mr. Ocampo also indicated in his statement this morning.
In many respects, developing countries have been the pace-setters for this success story. As in previous years, rapid growth in China and India is largely responsible for this outcome. Other parts of the developing world have also shown resilience and will continue to grow relatively fast. During 2006, a growth rate of 4.5 per cent in Latin America and 6 per cent in Africa and the CIS should be possible. In West Asia, growth will probably remain around 5 per cent. With monetary policy freed from the chains of unsustainable exchange rate regimes, Latin America has succeeded in transmitting the external stimulus into its domestic economies without reviving inflationary tendencies. Another remarkable feature of the global recovery has been the ability of many African countries to maintain high growth rates since 2003. Higher government and enterprise revenues following the hike in the prices of many commodities appear to be spilling over into the domestic economy and stimulating spending as well.
Since 2003, the terms of trade of many developing countries have changed considerably, with substantial gains by countries specialized in extractive industries but drastic losses by those countries that depend more on exports of manufactures and imports of raw materials, especially oil. Changes were less dramatic in countries that are mainly exporters of manufactured goods but that also rely on primary exports, such as Brazil, Malaysia, Mexico, South Africa and Viet Nam. The terms of trade have varied the most among agriculture exporters, reflecting large differences in the movements of prices for specific products and also differences in the share of oil in their imports. For instance, in 2005 the terms of trade of coffee exporters improved, while those of exporters of cotton and vegetable oils deteriorated sharply.
The recent, largely favourable evolution of the terms at which countries trade with one another has had an impact not only on the balance of payments but also on the income of the various economic agents and their domestic expenditure. In countries with substantial gains from the terms of trade, such as the exporters of hydrocarbons and ores and minerals, the resulting real income gains financed higher domestic expenditure, stimulated growth and helped to reduce net foreign indebtedness.
Mr. President,
Despite the relatively favourable evolution of the terms of trade of many developing countries, our view in UNCTAD is that complacency must be avoided. First, the prices of non-oil commodities in real terms remain clearly below the levels of some 30 years ago. Second, commodity prices are dependent on factors beyond the control of the producer countries, such as demand from large emerging economies and global economic growth in general. Third, volatility in markets has risen recently, posing the danger of a reversal of the price hike. Fourth, several of the poorest countries are not benefiting from buoyant demand for their export commodities, either because their trade structure is heavily biased towards those commodities least in demand or because part of the gains from higher export prices is being absorbed by fuel imports and profit remittances to developed countries.
Thus, one of the most important challenges for national policy makers and for the international community is to ensure a fair distribution of the rent arising from primary production and its proper use in financing development.
Although, as I mentioned above, the commodity price hike did not result in a slowdown of the world economy, the current international situation could still deteriorate abruptly if the prevailing global trade imbalances are not properly managed. If no pre-emptive action is taken, the widening of deficits and surpluses may culminate in a disorderly adjustment of the world´s leading currency, with a negative impact on global growth and poverty reduction. The lack of a multilateral approach to ensuring a smooth adjustment is an ongoing concern. It seems that there is even a lack of agreement on the very nature and seriousness of the imbalances, let alone an agreement on the measures needed to cope with them. I will not dwell on the diverse views and explanations of the global imbalances and the various solutions proposed by observers. However, in our Trade and Development Report 2005, we raised concerns about the possible restrictive impact of global imbalances on the world economy as a whole and the growth prospects of developing countries in particular. We believe that to mitigate such an impact, it is prudent to pursue expansionary policies in surplus economies of a critical size, and particularly in those countries that are growing below their potential. The latter applies mostly to the European Monetary Union and Japan.
Of course, the correction of the global imbalances must not be deflationary if the momentum towards meeting the MDGs is to be maintained. Nor should it rely on downward adjustment of demand and growth in the main deficit countries, especially the United States, or on exchange-rate adjustments in the Asian surplus countries. The developed surplus economies will have to assume a greater role than in recent years as engines of worldwide growth by expanding their domestic demand. Accordingly, we believe that the most promising approach to achieving an orderly adjustment would be through global macroeconomic policy coordination, involving also the major developing economies.
Mr. President,
Strengthened macroeconomic policy coordination is also necessary to improve the coherence between the international trading and financial systems. There is a striking asymmetry in existing multilateral arrangements between trade on the one hand, and monetary and financial relations on the other. While international trade is now organized around a rules-based system with certain core principles applying to all participants, this is not the case in international money and finance. This asymmetry is all the more important given that adverse international spill-overs generated by self-centred national monetary and financial policies can be much more damaging than those created by trade policies, particularly for developing countries.
A global monetary authority like the IMF could play an important role in strengthening the international institutional framework in the monetary and financial area. It would have to focus on international monetary and financial stability. In principle, surveillance could play a significant part in promoting a more stable and reliable system of exchange rates to ensure a predictable trading environment. But in order to fulfil that role, surveillance would need to become more effective and also symmetrical across all countries.
In this connection, the many initiatives taken recently to cancel the debt of the poorest developing countries and to increase the level of ODA are very welcome. In the final analysis, however, the long-term sustainability of external debt depends on a confluence of factors at the international and national levels, notably on economic growth and export prospects of debtor countries and on the creation of an enabling environment that is conducive to development. It should also be noted that enhanced market access for goods and services of export interest to developing countries contributes significantly to their debt sustainability. Beyond debt relief, a large majority of poor countries will continue to rely on external finance to complement their small domestic resources for financing their development goals. In all these initiatives it will be essential to firmly establish that the principle that such initiatives are additional to other ODA commitments.
In the context of the Aid-for-Trade initiative, it must be recalled that in the Uruguay Round, developing countries took on unprecedented obligations at substantial cost to themselves and without any concrete support for supply capacity-building. It is therefore gratifying that in the current Doha Round the need for capacity-building and the risk of potential losses from trade liberalization for many developing countries is being given greater recognition through the Aid-for-Trade initiative. Several analyses suggest that many developing countries will need trade-related assistance to cover the adjustment costs arising, inter alia, from preference erosion, terms-of-trade losses in net food-importing countries, and loss of fiscal revenue from tariffs. Assistance will also be needed to compensate for the compliance costs related to implementing new WTO agreements to build the trade-related infrastructure and supply-side capacity needed for these countries to benefit from the post-Doha multilateral trading system.
We at UNCTAD are convinced that support for trade-related capacity-building in developing countries, particularly the LDCs, is needed regardless of the outcome of the Doha Development Agenda. The Aid-for-Trade initiative must be viewed in this context. Its impact will be meaningful and effective only if it is predictable, non-debt-creating and additional to other ODA commitments. Firm commitments to provide the resources required for the implementation of the Aid-for-Trade initiative, with a substantial proportion delivered through multilateral mechanisms, offer the best guarantees of predictability, additionality and functionality. UNCTAD, as the lead agency for trade and development within the UN system, can bring its accumulated knowledge and expertise to ensure that the Aid-for-Trade initiative results in assisting developing countries to benefit substantially from the international trading system.
Thank you.
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