Global Policy Forum

By Rubens Ricupero*

The spectre of spurned multilateralism came back to haunt last month's trade discussions in Cancun. Former US president Ronald Reagan chose the Mexican resort to end developing country efforts to build a "new international economic order" through the United Nations 22 years ago. He promised instead a reform programme, with gains to rich and poor countries alike by squeezing out inflation, downsizing the public sector and unleashing market forces. The Federal Reserve had already been tightening monetary policy at home. Less than a year after the collapse of those Cancun talks, global recession along with the sharp rise in US interest rates helped trigger default in Mexico, followed soon after by other heavily indebted developing countries.

Since the debt crisis of the early 1980s, international trade and financial arrangements have been recast to allow much greater reach and influence to global market forces. Private capital flows have supplanted official development assistance, import substitution measures have been abandoned in favour of rapid trade liberalisation, the public sector has been drastically pruned and restrictions on the operations of foreign firms have been lifted. So far the results, notably for countries in Latin America, have been disappointing in terms of growth, jobs and trade performance.

On a fundamental level, as detailed in Unctad's trade and development report last week, the reforms have failed to improve the investment climate in developing countries or to accelerate industrial upgrading. Faults in policy design have been compounded by the failure of the international trade and financial system to provide effective multilateral support. There have been insufficient resources to enable developing countries to reach growth targets and, in the face of frequent external shocks, those countries have been asked to adjust through domestic retrenchment and more exposure to global competition, even as rich countries have used counter-cyclical policies, bailed out their own financial institutions and protected vulnerable sectors.

At Cancun, the plight of West African cotton-producing countries symbolised the double standards facing poorer countries. Events there made it clear that rebalancing those arrangements in support of development cannot be divorced from wider global economic governance. Since the mid-1990s, the threat to global economic stability has been heightened by destabilising linkages between large and unregulated trade and capital flows. Unstable and misaligned currencies as much as comparative advantage have been shaping trade flows; large swings among the main reserve currencies have distorted patterns of international competitiveness and raised trade tensions. Unregulated financial flows have also led to excessive expansion of investment and trade in particular sectors, followed by equally sharp declines; the Asian financial crisis highlighted the virulence of these boom-bust cycles even in countries with sound economic basics.

Destabilising linkages between trade and finance have been further intensified through the higher cost and reduced availability of external financing following financial crises, choking-off productive investments needed to build internationally competitive sectors and further increasing vulnerability to trade shocks; much of Latin America has been caught in this perverse dynamic. Finally, many developing countries have more recently found themselves trading more but earning less from the export of manufactures.

What is now at stake is how to rebalance arrangements to ensure that trade and financial flows reinforce rather than undermine domestic policy efforts in support of equitable, rapid and sustainable growth. This will require a much more pragmatic approach to trade policy, giving less emphasis to levelling the playing field through liberalisation measures and more attention to providing the policy space to promote stronger investment-export linkages in countries with very different economic and institutional capacities.

Doing so will require greater flexibility and consistency among multilateral agencies, both in their policy advice and through the conditionalities attached to their lending practices. A good deal more attention needs to be paid to exchange rates. For most developing countries, neither fixed nor floating regimes have brought the stability required to make long-term trade and investment decisions. Coherence among the macroeconomic policies of the main reserve-currency countries along with effective multilateral surveillance and disciplines is needed.

Reforms are also needed quickly to correct the problem of insufficient and unreliable development finance, the secular declines in commodity prices and export earnings of developing countries. This means not only increasing official development assistance, but also exploring new forms of assistance, such as the international finance facility suggested by the Treasury.

Finally, a more comprehensive, coordinated and equitable approach to debt is essential. A viable exit from the vicious circle of low investment and growth, high interest rates and rising indebtedness is likely to require direct action on the size and servicing of debt. As recent events in Argentina show, the problem is not limited to the poorest countries. The best way forward would be to convene an independent panel to examine the issues raised by debt sustainability, with a commitment by creditors to implement fully and swiftly its recommendations.

About the Author: Rubens Ricupero is secretary general of the United Nations Conference on Trade and Development.

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