Issue n° 14 - December 2007 - January 2008
IN THIS ISSUE
ON THE WAY TO UNCTAD XII
Biofuels: an option for a less
carbon-intensive economy
Rio de Janeiro, Brazil,
4-5 December 2007
2
Science, technology, innovation
and information and communication
technologies (ICTs) for development
Geneva, Switzerland,
6 December 2007
2
Experts meet on Least
Developed Countries
Arusha, United Republic of Tanzania,
22-24 October 2007
3
India-Africa Hydrocarbon Conference
and Exhibition
New Delhi, 6-7 November 2007
4
Trade and development implications
of tourism services for developing
countries
Geneva, Switzerland,
19-20 November 2007
4
Global Initiative on Commodities
Brasilia, Brazil, 7-11 May 2007
5
TrADE AND
DEvElOpmENT BOArD
ON THE WAY TO UNCTAD XII
Thousands of people from around the world will gather in Accra, Ghana, for
the twelfth session of the Conference on Trade and Development, or UNCTAD
XII, from 20 to 25 April 2008. The conference, the largest ever organized by
Ghana, will bring together heads of government, ministers and about 4000
participants from UNCTAD’s 193 member countries to focus on the global
economy and its impact on development.
Delegates will consider how to spread
the benefits of globalization more equitably so that no countries or peoples are
left behind. This reflects the conference
theme chosen by member States: addressing the opportunities and challenges
of globalization for development.
UNCTAD XII will also permit decisionmakers to tackle current and pressing
issues such as energy security, the economic consequences of climate change,
commodity-dependence, migration and
the emergence of developing countries
as engines of economic growth. By
working together to address such challenges, UNCTAD member States will
seek to identify appropriate policy responses as well as specific measures and
actions.
With Ghana as host, the conference
offers an opportunity to put the spot-
light on Africa’s role in the international
economy and highlight matters of special concern to African countries. This is
particularly needed given that too many
people in Africa are not sharing in the
gains of globalization.
Preparations in Ghana for the conference are in full swing. During the signing
of the Host Country Agreement on 18
December, Joe Baidoe-Ansah, Ghana’s
Minister of Trade, Industry and Private
Sector Development, underlined his
government’s commitment to a successful
meeting that combines efficiency with a
warm welcome. “UNCTAD XII will be
the first major UN conference ever to
have been held in Ghana, and indeed
the whole of West Africa”, the minister
said. The four-yearly ministerial conference
is UNCTAD’s highest governing body.
Getting “civil society” on board
6
The preparatory challenge
6
Trade as part of a broader strategy:
the advice of eminent economist
Jagdish Bhagwati
7
mAkINg THE gOOD
TImEs lAsT
Interview with Heiner Flassbeck
8
COpINg WITH
THE HAZArDs OF FINANCIAl
glOBAlIZATION
11
UpCOmINg mEETINgs
12
UNCTAD
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Pre events
Ahead of the conference, UNCTAD is organizing a number of official events. They address some of the issues to be
discussed in Ghana and pave the way for in-depth deliberations at the conference itself. Participation varies according to
the theme, with government officials, experts and civil society organizations involved.
Biofuels: an option for a less carbon-intensive economy
A meeting held in Rio de Janeiro, Brazil,
on 4-5 December, provided an overview
of the biofuels market, its trade opportunities and its economic and environmental sustainability. Participants also discussed
how trade can support climate change
policy and contribute to an orderly transition to less carbon-intensive economies
and to achieving effective, sustainable development.
Climate change poses significant threats
to developing countries, which lack resources for dealing with such expected
outcomes as higher sea levels, more and
fiercer tropical storms and shifts in agricultural zones. But along with all these
difficulties there may also be some opportunities. Demand is rising rapidly for
biofuels, which do not add to the greenhouse gases that cause global warming.
Farmers in developing countries could
be well placed to take advantage, reaping
higher incomes from crops such as sugarcane and jatropha that can be used for
fuel. Governments, providing they handle
the opportunity carefully, may be able to
shield their economies from the effects
of rapidly climbing prices for imported oil
and natural gas. If well thought-out, the
development of biofuels opens up an
opportunity to add jobs, raise living standards and mitigate climate change, while
providing developing countries with new
exports and a partial substitute for oil imports.
Nonetheless, the issue is complex.
Depending on circumstances, extensive
clearance of new farmland for biofuels
production can cause unjustifiable environmental damage. Countries struggling
to feed their populations can face rising
prices and increased scarcities if tracts of
agricultural land are abruptly shifted to
produce non-food crops. Moreover, the
technology necessary for competitive
biofuels production may not be readily
available and, even more importantly,
may soon become obsolete as new and
more efficient technology is developed.
The meeting concluded that if well
planned and carried out, production and
use of biofuels offers win-win opportunities for developing countries. But to
provide these, the biofuels option has to
be part of a broad, well-conceived set of
national policies and economic strategies.
Member States attending UNCTAD XII
may debate the opportunities and costs
of biofuels. In addition, an International
Conference on Biofuels is planned by the
Brazilian government in November 2008.
Science, technology, innovation and information and communication technologies
(ICTs) for development
A meeting on how to increase developing
countries’ access to – and use of – science
and technology, including ICTs, was held
in Geneva, Switzerland, on 6 December.
It focused on government actions to encourage this process and on how governments, businesses, universities, international agencies and donors can work as
teams to expand practical application of
technology and use it in ways that lead to
economic growth and higher living standards.
At the heart of the discussions was the
accelerating rate of scientific and technological progress, a major concern of
developing countries. Evidence indicates
that such countries will have more and
more trouble meeting increasingly demanding global competition if they do not
share in the spread of science and technology. Currently many lack the money,
knowledge, and infrastructure to do so.
Developing countries need not only to
keep up, but to catch up. Participants
concluded that this topic needs high priority from the international community
and should continue to receive extensive
2 - UNCTADnews
attention and research from UNCTAD.
That is one reason a sub-theme of
UNCTAD XII refers to “harnessing knowledge for development.”
Information and communication technology is a key illustration of this challenge.
The Internet, e-commerce, and e-banking are fast, highly efficient ways of conducting business, and the vast majority of
firms in industrialized countries use them.
For business-to-business transactions,
for example, about 93% of firms in the
United States used e-commerce in 2004.
But broadband Internet service is necessary for these activities, and availability of
broadband is still scarce in the developing world. In 2006, only 110 nations
surveyed could provide statistics on the
subject, and for more than a third of these
(36 countries), broadband penetration
rates were under 1%.
Experts Meet on Least Developed Countries
Forty experts from least developed countries – the world’s 50 poorest nations – met in
Arusha, United Republic of Tanzania, on 22-24 October to identify concerns that should
be addressed as a priority at UNCTAD XII. The challenges facing least developed countries
are multiple and complex: massive poverty and under-development, lack of infrastructure,
weak supply chains, shortages of institutional knowledge, lack of technology, low labour
productivity, the loss of qualified workers overseas (“brain drain”) and a shortage of domestic
resources that can spur development. In some cases there are additional difficulties such as civil
strife, desertification, high population growth and high rates of diseases such as HIV/AIDS.
The experts requested that UNCTAD
strengthen its support to least developed
countries seeking accession to the World
Trade Organization. Such membership
is considered important to protect these
countries’ interests and provide opportunities for future economic growth. The
experts also said there is an urgent need
for least developed countries to diversify
economically, because currently they are
too dependent on commodities. Some 85
developing countries now rely on commodities for more than half their export
earnings. For 70 of them, more than half
of their exports consist of three or fewer
commodities. Reliance on commodities is
especially pronounced among LDCs.
The recent encouraging economic growth
in least developed countries, driven by
unusually high demand for commodities,
should be translated into productive employment creation and poverty reduction,
the experts said. In many cases, higher
exports during the current boom have
not resulted in widespread job growth or
broad improvements in living standards.
Meeting participants urged steps to make
it easier for domestic private businesses to
be created, grow, find financing and obtain
the knowledge and technology they need
to be competitive. They said least developed countries should diversify the economic sectors that are most attractive to
foreign direct investment; currently such
investment is overly focused on extractive
industries such as petroleum and mining.
And they said more should be done to
use remittances – money sent home by
least developed country nationals working
overseas – to spur domestic economies.
These remittances are so substantial that
in most cases they exceed foreign investment or official development assistance.
Among the themes to be discussed at
UNCTAD XII are global policies that can
contribute to poverty reduction.
The Least Developed Countries
Africa:
Angola, Benin, Burkina Faso, Burundi,
Cape Verde, Central African Republic,
Chad, Comoros, Democratic Republic
of the Congo, Djibouti, Equatorial Guinea, Eritrea, Ethiopia, Gambia, Guinea,
Guinea-Bissau, Lesotho, Liberia, Madagascar, Malawi, Mali, Mauritania, Mozambique, Niger, Rwanda, Sao Tome
and Principe, Senegal, Sierra Leone,
Somalia, Sudan, Togo, Uganda, United
Republic of Tanzania, Zambia.
Asia:
Afghanistan, Bangladesh, Bhutan,
Cambodia, Lao People’s Democratic
Republic, Maldives, Myanmar, Nepal,
Timor-Leste, Yemen.
Caribbean:
Haiti.
Pacific:
Kiribati, Samoa, Solomon Islands, Tuvalu, Vanuatu.
UNCTAD
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India-Africa hydrocarbon
conference and exhibition
Rapidly growing “South-South” trade
– trade between developing nations – is
a major trend in the global economy that
will be reviewed at UNCTAD XII. Its
potential and international economic implications are immense. Compared with
the standard pattern of exchanging goods
between developing and industrialized
nations, South-South trade tends to
feature a broader range of products
and result in transfers of an especially
useful mix of knowledge and appropriate technology. This can nourish stable,
long-term economic growth.
The India-Africa Conference/Exhibition,
held in New Delhi on 6-7 November,
featured partners who have a great deal
to offer each other. India is fast becoming
a global economic giant and has increasing
energy needs. It is currently the world’s
sixth largest oil consumer. Africa has much
untapped oil and gas potential – proven
reserves of about 16 billion metric tons
of oil and 500 trillion cubic feet of natural gas. But it lacks expertise, training and
technology for expanding and broadening
the continent’s economies and for getting
the most out of African hydrocarbon reserves.
UNCTAD, as part of its support for the
two-day meeting, focused on establishing
a “development-transmitting partnership.”
The long-term aim is to bolster India’s
energy security while using Indian expertise to help create better financing for African domestic economies, more effective
institutions, improved worker training and
job creation. Added goals are technology
transfers, environmental sustainability and
increased local participation in hydrocarbon industries and services, which could
also lead to the production of more
value-added African products for export,
including to India’s US$1 trillion market.
Trade between India and Africa has already grown ten-fold since 1990. The
framework of cooperation resulting from
the New Delhi conference has among its
goals “hydrocarbon cooperation agreements between India and various African
countries covering exploration and production and downstream policy issues.” It
also calls for cooperation in the area of
research and development and technology transfer; cooperation in retail marketing
of petroleum products and lubricants
by Indian companies in African markets;
and the training in India of technical and
managerial personnel from the African oil
industry.
Trade and development implications of tourism
services for developing countries
Tourism in many developing countries
has greater potential for growth than any
other economic sector, and is already a
major source of income and jobs. Since
2000, tourism has expanded more quickly
in the developing world than in industrialized nations. Among developing countries, China derives the highest income
from leisure travel, lodging and related
activities. In 2006 tourism receipts also
increased by 10% or more in Africa,
South Asia, North-East Asia, Central
America and South-East Asia. Globally,
tourism earned US$735 billion in 2006.
4 - UNCTADnews
A meeting held in Geneva from 19 to 20
November focused on identifying best
practices for promoting sustainable tourism. Developing countries are increasingly pursuing sustainability in tourism,
with the aim of ensuring that benefits
from the sector translate into long-term
economic, social and environmental
gains. To this end, experts recommended
stronger links between tourism and other
economic areas. The meeting stressed
that tourism should provide decent work
that ensures social security, social protection, and good working conditions.
Information and communication technology and foreign direct investment also
play a role in developing sustainable tourism. Direct advertising through the Internet, the use of electronic networks to
arrange travel and the use of e-banking as
a method of payment mean developing
countries have the potential to provide
the full package of services associated
with tourism – and so keep a higher share
of the profits at home. Much of such income in the past has remained overseas
with foreign tour operators, airlines and
the businesses that handle money transfers and currency exchanges.
The conference also explored the potential for expanding tourism through multilateral trade negotiations in the context of
the Doha Round as well as trade agreements and cooperation. And it discussed
ways to help developing countries and
tourism firms capitalize on what is unique
in their natural and cultural heritages.
These are attractions developing countries have in abundance.
The conference noted that among the
advantages of increased tourism are that
it is labour-intensive and employs many
women. It also is a highly diversified activity that can lead to economic growth in
rural as well as urban areas.
Global Initiative on Commodities
Commodities – especially the growth
and sale of basic farm produce, which
is how some 2 billion people earn their
living – are vital for global economic health
and progress.
UNCTAD and three other international
agencies held a week-long conference
(7-11 May) in Brasilia to rekindle active
international discussion on commodities
after a period of relative inattention.
turing and other “higher-value-added”
activities – just as nations in Europe and
North America did 200 years ago during the Industrial Revolution. The article
expressed concern that this opportunity
should be seized before prices fall again...
as they always have in the notoriously
cyclical commodities sector.
The conference, co-sponsored by the
United Nations Development Programme,
the Common Fund for Commodities, the
Africa, Caribbean, and Pacific Group of
States and UNCTAD, drew international
attention to the need for fairer profits for
farmers. At UNCTAD XII, the issue will
be the focus of a roundtable debate.
The news should be good. Demand for
many agricultural products has risen, driven
by growth in China, India, Brazil and other
emerging economic giants. And prices at
the supermarket have climbed to match.
But in many cases the share paid to developing-country farmers has fallen as a
consequence of increasing power on the
buyers’ side (supermarkets) and higher
demands made on suppliers.
An op-ed piece co-authored by UNCTAD
Secretary-General Supachai Panitchpakdi
described this as an “it’s-not-fair situation.”
The authors* went on to say that developing countries should be able to use the
current boom in commodities prices to
reap profits, raise living standards, and
diversify their economies into manufac* The other co-authors: Ali Mchumo, Managing Director of the Common Fund for Commodities; John R. Kaputin Secretary General of the African Caribbean and Pacific Group
of States; and Kemal Dervis, Administrator of the United Nations Development Programme.
UNCTAD
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Trade and Development Board
The Trade and Development Board – UNCTAD’s policy setting body –
spent much of its two-week annual session (1-11 October) setting the stage
for UNCTAD XII, which is responsible for major policy decisions about the
organization’s future direction.
Debate focused on how to extend the
benefits of current strong global economic
growth, which has been unusually rapid
and sustained over the past five years, to
all countries and the world’s many poor.
During discussions on least developed
countries and the situation in Africa, members expressed concern that while there
has been stronger growth among the
world’s 50 poorest nations, some countries and people are being left behind. As
a result, more needs to be done to turn
higher exports and expanding business
activity into poverty reduction, including
in developing nations with impressive economic growth. Member States underlined
that current rates of progress will not be
enough to meet the targets set by the
United Nations Millennium Development
Goals, which include halving extreme
poverty by 2015.
still faster growth, and need to learn to
innovate themselves, national representatives told the Board. They contended that
African countries must focus on mobilizing
domestic financial resources, for example
by improving their banking sectors and
investing the huge remittances now sent
home by workers overseas. Foreign aid
and foreign direct investment will not be
enough on their own to achieve sufficient
poverty reduction in hard-hit countries,
Board members said.
The Board created a preparatory committee
to carry out the detailed negotiations for
UNCTAD XII. This group began meeting
the week following the Board.
Joe Baidoe-Ansah, Minister of Trade, Industry and Private Sector Development
of Ghana, described government preparations for UNCTAD XII. And in his closing
remarks, UNCTAD Secretary-General
Supachai Panitchpakdi said the Board had
made “good progress on the road to
UNCTAD XII.”
Least developed countries need infusions
of technology and know-how to spark
Getting civil society on board
During the annual meeting on 2 October between civil society organizations
and the Trade and Development Board,
much of the debate centred on “capturing the benefits of globalization.” Speakers saw a need to address the social costs
of increasingly international business and
economic affairs. They pointed to growing
disparities between and within countries
as a result of economic liberalization and
globalization, even though overall poverty
was being reduced. People in developing
countries, especially women, were subject to greater social and economic insecurity. They also called for steps to end a
widespread brain drain, in which poorer
nations lose many of their most educated citizens to jobs abroad, undermining
the ability of developing countries to use
skills and knowledge to spur economic
growth.
6 - UNCTADnews
A number of speakers sought action at
the international level. They called on
UNCTAD to place greater emphasis on
promoting inclusive globalization. This could
be done through: exploring social protection and social dialogue; studying women’s
experience of globalization; paying attention to environmental damage; greater
accountability and transparency in the
multilateral trading system; reforms to
international financial architecture; and
increased development aid that ensures
a better distribution of benefits.
A Civil Society Forum will begin in Accra
on 17 April, in advance of UNCTAD XII,
and will continue in parallel with the conference. In addition, civil society groups
will provide input on the UNCTAD XII
themes and sub-themes at the conference preparatory committee on 28
January and 3 March.
UNCTAD has set up formal and informal mechanisms for civil society organizations to participate in its work.
Civil society in this sense includes trade
unions, non-governmental organizations, religious-oriented development
groups, universities and other research
institutions and non-profit business organizations.
Civil society organizations attend conferences, workshops and seminars, coproduce publications, share information,
provide policy analysis, exchange ideas
and help carry out UNCTAD’s technical cooperation programmes. This collaboration allows UNCTAD to enrich its
analysis, build an international sense
of partnership and obtain support for
operational work.
The preparatory
challenge
The conclusions of major international
conferences aren’t negotiated in a week.
In the months ahead of UNCTAD XII,
member States, which have already
decided the theme and sub-themes of
UNCTAD XII, are seeking a convergence
of views on key issues. While not determining the conference’s final outcome,
this painstaking work aims to establish
common ground that leads to consensus
in Ghana.
The focus of this effort is the negotiating text. A draft text prepared by the
President of the Trade and Development
Board, Petko Draganov of Bulgaria, was
introduced to the UNCTAD XII preparatory committee on 12 November.
It covers questions such as how to extend recent strong economic growth to
more countries and people and how to
reinforce monetary and financial coherence at international level. “Writing this
draft text was like walking across a minefield,” Mr. Draganov told the committee.
“It was not possible to satisfy everyone.
Consensus building means tackling issues
on which there is no agreement, so that
we can eventually reach an agreement.”
He urged member States to show both
strength of conviction and flexibility: “We
cannot talk seriously about impact and
outreach if we are not clear in what we
say. The text must fairly represent the
concerns of all member States and effective implementation must come from a
feeling of ownership.”
Consensus building is one of the central
planks of UNCTAD’s work. Governments of countries with vastly different
levels of development and objectives
gather regularly to reach agreement on
a wide range of issues. The preparatory
committee, which met again in the second
half of December, resumes its work on
16 January.
Trade as part of a broader
strategy: the advice
of eminent economist
Jagdish Bhagwati
UNCTAD’s Trade and Development
Board heard on Oct. 8 a special presentation on the Doha negotiations and
development issues by Jagdish Bhagwati.
Prof. Bhagwati made several points
about the trade negotiations and about
the development capacity of international
trade. Among them:
• Slow growth is probably not going
to reduce poverty in most countries.
Rapid growth might reduce poverty
because more jobs will be created,
but it might not. Segments of a national population often get “lost” even
during long periods of rapid economic
growth. Depending on the situation,
special steps must be taken to spread
growth and employment to marginalized groups. Trade can certainly contribute to this kind of wide progress, but
only as one component of a broader
strategy; it isn’t going to work on its
own; it cannot be counted on as a
sole method. Along with opportunities, trade also creates problems and
challenges. Quick growth fuelled by
trade can be counted on, for example,
to require extensive improvements in
infrastructure. During the years when
it was growing slowly, little was heard
in India about infrastructure difficulties.
But now infrastructure is a major issue
there.
• When it comes to trade, the important
thing is to have an attitude of taking
advantage of international opportunities rather than being afraid of them.
If you believe you can’t export. . . you
probably won’t. Believing is important,
and the real solution to the problem
is to succeed with a product or two.
Many countries have tumbled into a
miraculous situation where a product
– often unexpected – turns out to be
a surprisingly successful export item.
Elasticity of demand is proved then,
and hope is kindled, and imaginations
are set loose, and more exports are
likely to follow.
• UNCTAD has been a leader in many
undertakings leading to export progress
in developing countries, including its
help with trade negotiations. Progress
has been made, and scepticism about
the power of trade around the world
has largely disappeared. It is clear what
trade can do. UNCTAD has long recognized how thoroughly trade and development are linked. The important
point is not to view trade as an end
in itself, but as a policy instrument. It
enables a country to grow better and
to pull more people into employment.
It helps nations to bring their citizens
out of poverty. That is the way to look
at it.
• Opening up trade opportunities, including through the Doha negotiations, will help countries develop. But
it has to be done with care. “Shock
therapy” – opening up economies to
international competition with little
preparation – is probably not going to
work. Shock therapy certainly didn’t
work in Russia. It is important for other
countries to learn from that experience. Linking into trade opportunities
has to be done with attention to the
nuances, with flexibility, and without
losing control of national economies.
Skills will probably have to be provided from outside – throughout Africa,
for example, there are skills shortages,
including in areas linked to meeting the
basic requirements for extensive international trade. These days advice is
needed just to help developing countries keep up with the complexities
of the Doha negotiations – a service
UNCTAD has been providing.
• Overall, he remains an optimist, Prof.
Bhagwati said. He thinks progress is
being made in the world economy
and in prospects for the world’s poor.
JAGDISH BHAGWATI
University Professor at Columbia University in New York City
and Senior Fellow in International Economics at the Council
of Foreign Relations. Prof. Bhagwati, a native of India, served
on the Panel of Eminent Persons established by UNCTAD
Secretary-General Supachai Panitchpakdi in 2005 to guide
the organization in its future work. He gave UNCTAD’s
prestigious Prebisch Lecture in 1996. Among a number of
previous posts, Prof. Bhagwati served from 1991 to 1993 as Economic Policy Adviser to the Director-General of the General Agreement on Tariffs and Trade, the predecessor of the World Trade Organization.
*N
amed after Raúl Prebisch, UNCTAD’s founding Secretary-General, the Prebisch Lectures began in 1982. They feature world-renowned economists or eminent political
figures, and focus on global economic issues of concern to UNCTAD member States.
UNCTAD
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mAkINg
THE gOOD TImEs lAsT
Interview with Heiner Flassbeck, Director, Division on Globalization and
Development Strategies.
The chief author of UNCTAD’s Trade and Development Report says developing
countries are toting up remarkable economic progress.
The challenge is to “make sure it goes on for the next 20 or 30 years.”
Poverty reduction will be a
major focus of UNCTAD XII.
The current economic situation
appears paradoxical: the 2007
Trade and Development Report
says, for example, that circumstances are more favourable for
countries in Africa, Asia, and
Latin America than they have
been for 30 years. Over the last
five years or so, African economies
have been averaging 5% or 6%
annual growth. Yet many of them
do not seem to be significantly
reducing poverty, and the income
gap between the average African
and the average West European
is wider now than it was in 1980.
If the current situation isn’t
good enough to help the world’s
poorest countries, what is?
The subject certainly does deserve discussion at UNCTAD XII. The recent
growth is indeed extraordinary, and in
fact African nations have narrowed the
gap with developed countries in the last
five years. They are reducing poverty.
But the process is important – not only
the question of where we are now.
What is important is that we preserve
the process in the world economy that
has led to this narrowing of the gap and
make sure it goes on for the next 20 or
30 years. Five years is just not enough.
However, the current success shows
that under benign circumstances it is
possible to improve the situation in most
developing countries “significantly.” To
deny that would be unreasonable. The
global recovery has brought about what
many were waiting for. This reinforces
our message that cooperation between
8 - UNCTADnews
the big old and new powers in the world
economy is much more important than
many isolated actions to spur growth. In
other words, policies to avoid turmoil
and crises are extremely relevant for development.
High prices for commodities – primary
products that include not only oil and
minerals but agricultural goods – have
triggered most of the growth in least
developed countries, Africa and other
regions, and there is a need to take a
fresh approach on the whole issue of
commodity prices. Although there are
no simple policy prescriptions to heal
commodity dependency, the current
improvement in the terms of trade of
commodity producers shows how important the question still is for these
countries. The main task of policy makers in these countries is to use these
higher commodity revenues to diversify their economies to be, at the end
of the boom, less vulnerable to a drop
in commodity prices. They should also
avoid an appreciation of their currencies
by all means and use their commodity
revenues to improve the distribution of
income throughout their economies.
Only wages rising in line with productivity
and terms of trade and social protection can stabilize the domestic situation
and make the domestic economy sturdy
over the long term.
The world economy is growing
rapidly, yet in recent months the
economy of the United States has
slowed – and there is even talk
of a possible recession there. It
used to be that the U.S. was the
“engine” that drove the global
economy. Is that no longer true?
That’s no longer true. The world economy will slow, in my opinion, due to
the slowdown in the United States, but
under normal circumstances we will not
see a full-fledged recession because we
have other drivers in the world economy
that are just as important as the United
States. And, at the moment at least, we
have no indication that China, India, or
other big countries will slow down dramatically. There are some indicators signalling
an end to the boom, such as rising interest rates in India and a bit more inflation
in China, but that should not stop these
economies yet. Nevertheless, the main
danger for the world economy is coming
from the slowdown in the US and possible negative repercussions in Europe
and Japan and some smaller countries,
mainly “transition” countries in Eastern
Europe. Huge parts of the developing
world are quite sound still.
Vulnerability and shocks loom where
countries have piled up huge deficits in
their current accounts – which means
that they are earning much less than
they spend. These economies live, so to
say, beyond their means on a large scale
and this poses a danger because we do
not see any market-driven correction for
these imbalances, as you would expect
from standard economic theory. Economic policy in these countries is reluctant even to acknowledge the problem.
The danger is – as with the recent crisis
in the US – that a country living beyond
its means will sooner or later suffer a
sharp reduction in the value of its currency. This can trigger a severe financial
crisis because many private households
The main danger is that developing countries are normally much weaker than the
big countries they engage in such economic partnerships. In this power game,
the developing countries lose out, and
they lose more than they would lose if
they engaged in multilateral agreements,
because with multilateral arrangements
they can band together and have more of
a level playing field with the big powers.
and companies are “exposed” – they are
indebted in currencies that are re-valued
in relation to their own currencies, thereby increasing their debt tremendously.
This can happen more or less overnight if
their currencies decline sharply. Anybody
who owes a significant debt in Euros but
earns only a national currency is in big, big
trouble.
This year’s report contends that
when poorer nations trade with
each other within their own regions,
it helps them to build healthier
economies. Why is that so?
Regional cooperation benefits manufacturing trade. Manufacturing is important
because in the long run it is the main and
most stable source of higher at-home incomes because of its enormous potential
to improve productivity. For manufacturing
to flourish, small countries in particular
need big markets to realize economies of
scale and to build networks of companies
at different stages of processing. National
borders are normally not the natural borders for such an endeavour and the division of labour in a region may be much
more fruitful than just inside national
economies. Think of Europe as a region
and you see the point that borders don’t
delineate the adequate frame for successful inter-company cooperation. This is
particularly true for small and mediumsized enterprises.
garies of the international capital markets.
They can help each other during crises.
They can stabilize exchange rates. They
can share the financing of infrastructure.
And they can develop regional banks that
are more powerful and serve as a stabilizing force.
The important lesson from Europe is that
one should not separate trade and such
financial cooperation – they belong together.
The report cautions developing
countries about a recent trend in
which poorer nations sign individual trade agreements with
wealthier nations in an effort
to sell more products overseas.
These bilateral agreements function differently than multilateral
agreements negotiated at the
World Trade Organization (WTO),
in which the same rules apply to
many nations. What are the dangers of bilateral agreements?
The other important thing is that there
is no security, no stability in these bilateral relationships with the big powers,
because a free-trade agreement, once
signed, does not imply that the advantages the developing country gets will last
very long. They can disappear the next
year because the big country signs a new
bilateral agreement with another developing country on more advantageous
terms, and the benefits for the first partner are gone overnight.
Also, over the long term, if you don’t
have equal balance of power, the danger
is that your economy is left alone. These
bilateral agreements don’t have coverage
for financial crises – if there’s a big shock,
the big power won’t step in and help the
smaller country. If a developing country’s
exchange rate is overvalued, through no
fault of its own, it can lose its trade advantage. Also, there’s a tendency for trade
under bilateral agreements to involve
mainly raw materials or commodities, but
not foster much manufacturing other than
simple assembly operations.
There are many international rules
intended to provide order, fairness, and stability to trade – the
flow of products and services
between countries – but few
rules controlling exchange rates
between the currencies of
Regional trade should be complemented
by regional financial cooperation: bigger
groups of countries have more power
and possibilities for dealing with the va-
UNCTAD
news - 9
different countries, or controlling
the factors affecting the overall
competitiveness of different
countries. The report says such
rules are needed. Why?
They’re needed because the WTO’s rules
are not sufficient to cover what we call
“fair trade” or a “level playing field.” This
is due, for example, to the fact that international speculation can drive a developing
country’s exchange rate in the wrong direction for a very long time. There are also
concerns about wage dumping in some
countries, where wages do not adjust to
productivity. But it is not only wages and
social contributions that are under downward pressure to improve the “international competitiveness” of a country. We
also observe “races to the bottom” in the
tax systems in many regions of the world.
Some countries become low-tax, and
other countries must reduce corporate
taxation or lose business. Many governments in Europe, for example, have been
reducing corporate taxation and have
granted generous subsidies to companies
in an attempt to attract them. In the same
way as the WTO has tried to prevent this
kind of unbridled competition in tariffs that
is attractive for the single player but cannot be successful for the area as a whole,
the world now has to find ways to limit
unproductive competition of nations in
these other areas. No international institutions or regimes are dealing with
these matters although they distort trade
much more than many of the trade policy
instruments that are frequently criticized
and even condemned.
The price of oil is high and rising.
Does that pose a threat to the
world economy?
The increase of a commodity price
– even a vital one like oil – doesn’t necessarily cause a crisis. The additional income
that countries make selling oil tends to be
redistributed around the world economy
in terms of increased demand elsewhere,
and that mitigates the original negative
effect in consumer countries. The main
difference between now and the oil crisis of
the 1970s and 1980s is that the oil shortage then was combined with inflation
– it triggered accelerating price increases,
and that provoked higher interest rates,
and that pushed those economies into
recession. This time, there is much less
inflationary impact – at least so far. Additionally, energy absorbs a smaller part of
overall demand in most consumer countries now as compared to 30 years ago.
Nevertheless, the high oil price is imposing significant costs on many importers.
vIrTUAl prEsENTATION IN COlOmBIA AND BrAZIl
UNCTAD presented its Trade and Development Report 2007 through a videoconference to EAFIT University in Medellin, Colombia, on Nov. 7. EAFIT is a member
of UNCTAD’s Virtual Institute, which aims to strengthen the capacities of academic
institutions, particularly in developing countries, to teach and research trade issues.
EAFIT broadcast the event to 10 other Colombian universities affiliated with the Virtual
Institute. There were more than 300 participants, including journalists. The permanent
Mission of Colombia helped to prepare the event and took part in the presentation,
adding a national perspective to the discussion of the report’s findings. Another presentation – to the University of Brasilia, also a member of the Virtual Institute – was held
on 28 November with the participation of Mr. Roberto Mangabeira, Minister of State
for Strategic Affairs.
10 - UNCTADnews
Coping with the hazards
of financial globalization
Financial turmoil is back. After a few years of relative calm, the crisis of the US
subprime mortgage market has spread uncertainty and apprehension in global
financial markets. A note of the UNCTAD secretariat, Recent Developments
on Global Financial Markets, and a policy brief* analyse the recent crisis and
discuss policy options.
Something fundamental seems to be
wrong with a financial system that cannot
survive for more than three or four years
without facing a damaging, or at least unsettling, crisis. These crises are driven by a
sort of financial alchemy aimed at extracting
high returns through massive leverage and
opaque instruments that confuse market
participants about the risks they take.
What happens next very much depends
on how the subprime mortgage crisis affects the US housing market, and consequently US economic growth. Over the
past decade, the US has accumulated large
trade deficits driven mainly by high consumption of private households. But the
crisis in subprime lending threatens to provoke collapse in house prices. This would
reduce the spending power of consumers
and could cause US consumption to contract.
Such a development, especially when combined with a fall in the value of the dollar,
could help bring down the US trade deficit
and reduce global imbalances. However, if
the dollar fall is not controlled by governments and central banks, the consequences for the global economy may be dire.
While the short-run response to the recent financial turmoil has so far proved
appropriate, long-run policy responses for
developed and developing countries alike
require wider and deeper reflection.
At the root of the latest financial crisis are
inadequate regulation of financial institutions and the associated lack of transparency in these institutions’ activities.
Light regulation encouraged the development of sophisticated but opaque financial
products as well as the emergence of socalled special investment vehicles (SIVs), or
lightly supervised affiliates of banks often used
to handle risky operations with limited
capital requirements. Moreover, there was
lack of transparency in the spreading of
risk. Financial institutions chose ways to
“securitize” risky assets, such as subprime
mortgages, that did not make the level
of risk clear to buyers. The fact that such
securitized financial products are rarely
traded on financial markets led to a situation where even the approximate value
of these structured financial products is not
known. Hence the uncertainty on eventual losses related to subprime lending.
In the face of such developments, it is necessary to adopt regulations that favour
simpler and more transparent financial
products and do not allow banks to engage
in risky off-balance-sheet activities.
The role of credit rating agencies also
needs to be considered. Because several
financial instruments must carry credit
ratings, such agencies have a guaranteed
stream of business, regardless of the ac-
curacy of their ratings. At the same time,
rating agencies cannot be made legally accountable for their decisions because they
argue that their ratings are opinions, not
accurate predictions of the risk of a given
instrument.
In the event, credit rating agencies failed
to understand the risk involved with structured financial products and awarded
overly high ratings in many instances. To
reduce the risk of similar problems in
future, a regulatory agency could be established to supervise the role of credit
rating agencies. So, just as food and drug
authorities have to certify the safety of a
given product, such an agency could certify
that assets with the highest rating have
indeed minimal probability of default.
The Subprime Mortgage Crisis
The crisis erupted in the US in 2005-2006, when the number of people defaulting on
their subprime mortgages rose sharply. It grew into a wider financial crisis in 2007,
spreading to other parts of the world.
The crisis stems from subprime mortgage lending, or making loans to people who have
difficulty qualifying for traditional mortgages because of their credit history. Such loans
carry higher interest rates and are considered more risky for borrower and lender alike.
They are controversial, with some lenders or their agents accused of encouraging people
to take out loans they were unlikely to be able to repay.
Subprime mortgages expanded at the start of the decade, when interest rates in the US
were low. As interest rates began to rise, however, people with adjustable rate mortgages
faced sizable increases in repayments. At the same time, the end of the house price
boom led to falling property values. Borrowers increasingly defaulted on loans while lenders
had difficulty recouping their losses.
Because such mortgages had been sold on to other financial institutions in the form of
financial products, the crisis rapidly spread in the US and then to other countries, mainly
in Western Europe.
* Recent Developments on Global Financial Markets: http://www.unctad.org/en/docs/tdb54crp2_en.pdf, Policy Brief: http://www.unctad.org/en/docs/presspb20071_en.pdf
UNCTAD
news - 11
prE EvENTs
12 December 2007
Globalization of port logistics: opportunities and challenges for developing countries
Geneva, Switzerland
14-15 January 2008
Secretary-General’s high-level panel on creative economy and industries
for development
Geneva, Switzerland
10 march 2008
South-South trade in Asia and role of regional trade agreements
Geneva, Switzerland
25 march 2008
Lessons learned from South-South trade in Asian regions
Tokyo, Japan
march-April 2008
Spread of sustainable standards: successful strategies for smallholders
East Africa
19 April 2008
Workshop on development strategies in Africa
Accra, Ghana
UpCOmINg
mEETINgs
11 January, 16-18 January,
21-25 January, 28 January 1 February
Preparatory process
for UNCTAD XII,
Geneva, Switzerland
4-5 February
Commission on Enterprise,
Business Facilitation and Development,
Geneva, Switzerland
7-8 February
Commission on Trade in Goods
and Services and Commodities,
Geneva, Switzerland
To be confirmed
Quantitative effects of anti-competitive business practices
on developing countries and their development prospects
Venue and date to be confirmed
FOR mORE INFORmATION:
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email: unctadpress@unctad.org
UNCTAD WEbSITE:
http://www.unctad.org
press release and publications are available online:
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and http://www.unctad.org/mainpublications
Photo credits
Page 1: Marco Benvenuti; page 2: Gunther Fischer; page 3: Jean Fabre and © ILO / M. Crozet; page 4: Frida Youssef and Gunther Fischer;
page 5: UNCTAD and Gunther Fischer; page 6: J. P. Escard; page 7: http://www.cfr.org/bios/bio.html?id=1753; page 8: Pierre Virot,
page 9: © ILO / J. Maillard – © ILO / A. Fiorente; page 10: Stockbyte/Getty Images; page 11: John Foxx/Stockbyte/Getty Images.
12 - UNCTADnews
Designed by UNCTAD and printed by the Publishing Service, United Nations, Geneva — January 2008 - UNCTAD/IAOS/MISC/2007/20
UNCTAD XII Website:
http://www.unctadxii.org