DEVELOPING COUNTRIES NEED SUFFICIENT FLEXIBILITY IN POLICY MAKING, REPORT SAYS

UNCTAD´s Trade and Development Report 2006 says multilateral disciplines are too narrow in international monetary and financial relations, but too broad in international trade

International trade rules and conditionalities attached to aid and loans provided to developing countries should not reach the point of restricting the Governments of those countries from doing what is best for their economies, a new UNCTAD report says.

While calling for such flexibility, the UNCTAD Trade and Development Report 2006 (1) (TDR) says that to work for development, growing global economic interdependence must be complemented by a well-structured system of global economic governance. Self-centred national economic policies - including mercantilist trade policies or beggar-thy-neighbour macroeconomic and exchange-rate policies - through which influential countries can harm the economic performance of others need to be checked by multilateral rules and disciplines. But such restrictions on national policy autonomy should not require developing-country officials to relinquish policies that support economic development.

The report argues that there is no single quantifiable balance between multilateral disciplines and national policy autonomy that would suit all countries or apply across all spheres of economic activity. The degree of national policy autonomy needed to promote national economic development differs across countries.

In the São Paulo Consensus, reached at UNCTAD XI in 2004, the international community recognized "the need for appropriate balance between national policy space and international disciplines and commitments." To move in that direction, the Report counsels, the multilateral trading regime must take better account of the asymmetries existing between its members, and effective multilateral arrangements for exchange-rate management must be created.

The report, which addresses the theme of "Global partnership and national policies for development", argues that globalization makes the impact of external influences over national policy targets more acute. The resulting reduction in autonomy is sometimes seen only in connection with commitments undertaken in multilateral trade agreements. But the report says that bilateral and regional trade agreements often involve even tighter constraints, and there are many non-trade channels that constrain policy space, particularly International Monetary Fund (IMF) conditionalities.

It notes that apart from such de jure constraints of national policy autonomy that are the result of commitments to obligations and acceptance of rules set by international economic governance systems and institutions, there are also a number of important constraints that result de facto from policy decisions relating to the form and degree of a country´s integration into the international economy. Most prominent among these is the loss of the ability to use the exchange rate as an effective instrument for external adjustment, or the interest rate as an instrument for influencing domestic demand and credit conditions.

Deregulation of domestic financial markets, the elimination of credit controls, deregulation of interest rates and the privatization of banks were key elements in the reform agenda of the 1980s and 1990s. Paradoxically, the UNCTAD report says, while the conventional agenda made every attempt to "get the prices on financial markets right," there was no concept of how the most important prices, the exchange rate, and, closely related, the interest rate, should be managed. The two options for national exchange-rate policy that eventually emerged were either to let the currency float freely or to adopt a completely fixed exchange rate, options that came to be known as "corner solutions".

However, for small, open economies, and developing countries in particular, the exchange rate must be flexible enough to prevent persistent misalignments, yet stable enough to avoid excessive volatility and discourage financial speculation. In the absence of effective multilateral arrangements for exchange-rate management, macroeconomic policy in many developing countries has aimed increasingly at avoiding currency overvaluation. This has not only been a means of maintaining or improving international competitiveness; it has also been a necessary condition for keeping domestic interest rates low and has provided insurance against the risk of future financial crises. Moreover, independence from international capital markets allows central banks to use their instruments to actively pursue development targets. Encouraging examples have shown that it is possible to avoid an acceleration of inflation by non-monetary measures, such as income policy, institution building in support of forming a national consensus on reasonable wage claims, or direct government intervention into the process that determines prices and, even more importantly, nominal wages. China as well as Argentina, by experimenting with new price-stabilization devices, have gained considerable policy space recently.

The Trade and Development Report underlines that the international trade rules and regulations which are emerging from multilateral negotiations and a rising number of regional and bilateral trade arrangements could rule out the use of the very policy measures that were instrumental in the development of today´s mature economies and late industrializers. While these rules and commitments extend to all signatories in the same way in terms of legal obligations, they are much more burdensome for developing countries in economic terms. This implies that it is crucially important to look at the "level playing field" metaphor not in terms of legal constraints, but in terms of economic constraints, considering countries´ different structural features and levels of development.

The TDR argues that a fully inclusive multilateral trading regime must have a sufficient degree of flexibility to reflect the interests and needs of all its members. In the spirit of the global partnership for development, developed countries need to agree to a new framework or new guidelines for special and differential treatment (SDT) in the World Trade Organization (WTO) without receiving concessions from developing countries in return. But while greater flexibility would enable developing countries to seek some latitude in the application of multilateral disciplines, such an arrangement must not result in a multi-track trade regime.

The report stresses that the WTO provides negotiated, binding and enforceable rules and commitments. The resultant certainty and predictability in international trade are arguably key benefits of this regime. Jeopardizing the basic rule of non-discrimination and complicating adherence to the consensus-based norm of the existing multilateral trade regime would run the risk of leading to a proliferation of specific agreements with disciplines that may well go beyond the scope desired by developing countries.