Global Policy Forum

By Gustavo Capdevila

Read the overview of the UNCTAD report here

Regional financial cooperation in the developing world can help safeguard poor countries from financial crises, the United Nations Conference on Trade and Development (UNCTAD) says in a new report released Wednesday.

"Because large speculative capital flows will distort exchange rates and perpetuate the huge global current account imbalances, we suggest that as exchange rates are crucial for international competitiveness and trade relations, exchange-rate shifts should be managed in a multilateral framework, just as tariffs and export subsidies are," said UNCTAD Secretary-General Supachai Panitchpakdi. "In this sense, regional financial cooperation among developing countries may be one of the building blocks for an improved international monetary order," he stated at the presentation of UNCTAD's annual report.

The Trade and Development Report 2007, dedicated to "regional cooperation for development," recommends that developing countries "should be cautious with the so-called North-South free trade agreements." Supachai said countries of the developing South "should rather pursue regional integration with close neighbouring countries that are more or less at similar levels of development." Pointing to UNCTAD's projections that the world economy will maintain its momentum and expand for a fifth consecutive year with estimated overall growth of 3.4 percent in 2007, Supachai said "This is another confirmation of the golden period that we are living." But he added that "Of course, we have to be aware that the reported effects of the recent turmoil in the financial market could spread and create some crisis elsewhere in the world," and may exacerbate the impact on the ongoing speculative movements of funds around the world. The turbulence could thus make necessary "a downward revision of this estimate, depending on the extent to which the U.S. economy slows down," he added.

So far, the turmoil has mainly been seen in the U.S. housing market, and has not yet spread much to the exchange rate, said the UNCTAD researchers. But "what we expect is that sooner or later some countries in the world, Eastern European countries and others, will be affected by such a crisis because they have huge current account deficits; that is to say, their indebtedness vis-a-vis the rest of the world is rising dramatically," Heiner Flassbeck, director of UNCTAD's Division on Globalisation and Development Strategies, told IPS. And that includes the United States, he warned, the biggest debtor in the world today, because no country can simply go on accumulating high levels of debt forever. "There must be a turn around; there must be a change," he said. "And this change can only come through a major exchange rate that changes, namely in the fall of the dollar against all other currencies." Flassbeck also mentioned the case of Brazil, which has an extremely strong currency, the real, that stands at around 1.9 to the dollar --"much too high for many Brazilian exporters." The Brazilian exchange rate must come down again, he said, adding that "we can only hope that this will not happen in the form of a big crisis."

In addition, the UNCTAD expert expressed concern over countries in Eastern Europe, like Romania and Bulgaria, which have high current account deficits. "It is very difficult to see how they can ever get rid of these deficits, which could only happen through a major price change and devaluation," he said. But Supachai said that if "a major fallout from the financial crisis in the U.S. housing market can be avoided, we are of the opinion that developing countries will continue to benefit from strong demand for their exports, particularly from primary commodities, with China and India setting the pace for growth in the developing world." The UNCTAD report predicts that Africa will grow at an average rate of around six percent in 2007, while Latin America and Western Asia will slow down, but only slightly, to a five percent growth rate. Supachai pointed out to IPS that the performance of these regions over the past five years has given rise to hopes for significant progress towards meeting the Millennium Development Goals (MDGs), adopted by the international community in 2000. The eight MDGs, which set a 2015 target date, are to halve extreme poverty and hunger from 1990 levels, achieve universal primary education, promote gender equality and maternal health, reduce child mortality, combat HIV/AIDS, malaria and other diseases, ensure environmental sustainability, and develop a global partnership for development.

But in some countries, especially in sub-Saharan Africa, per capita income growth still falls far short of what is needed to achieve the poverty reduction targets set by the MDGs. Flassbeck said the current commodity price boom, which has had "enormous positive effects" on developing countries, will continue. He observed that in terms of per capita gross domestic product (GDP) by region and economic grouping, developing countries have grown since 2003 "to an extent that nobody could expect before." In that period, per capita GDP in the developing South has grown at an overall rate of five percent, compared to two percent in the industrialised world, which is "absolutely extraordinary," said Flassbeck. (END/2007)