The Hindu Business Line : Unctad's Trade and Development Report — Balancing national welfare and world integration

A fundamental question, according to Unctad, is how to marry national development strategies and global processes and disciplines, as well as bring policy coherence among and within the various sectors of the world economy that impact the development prospects of the developing countries.

THE 1990s saw the Congress pursuing economic reforms resolutely, following the country's brush with bankruptcy and the necessity to go in for structural adjustment lending from the International Monetary Fund (IMF).

Today, the same party, heading an alliance of disparate political outfits, is in a quandary on undertaking economic reforms even while taking steps to bridge development deficit and regional inequalities in a country of continental size and populace.

The task is made more difficult by the constant howls of protest that even Government's reasonable action draws from its own allies such as the one on the recent petro products price hike in the wake of the relentless rise in crude prices.

The Government hardly seems to have any policy space for hard decisions even if they are sound and necessary.

Needed obviously is an approach that balances the views of both the reformists and those opposed to what they call mindless liberalisation.

A starting point could be this year's Trade and Development Report (TDR) of the Geneva-based United Nations Conference on Trade and Development (Unctad). In an appropriate reference to "Policy coherence, development strategies and integration into the world economy," the UN body questions the "openness model" that, it says, has not enabled most developing countries, with some notable exceptions such as Chile, to forge the virtuous interaction between international finance, domestic capital formation and export growth that underpinned the growth of Western Europe after the Second World War, and of East Asia's newly industrialising economies (NIEs) from the 1980s.

Unctad recalls the multilateral effort at designing a trading system that would take account of the policy options of the developing countries, characterised by slow growth and adverse terms-of-trade movement, culminated in the First United Nations Conference on Trade and Development in 1964.

The Report to the Conference mapped out a strategy to help poor countries develop through strong capital formation and and accelerating exports — both traditional and non-traditional. The key to that agenda was the idea of policy space to accelerate capital formation, diversify their economic structure and accord greater `social depth' to development. This agenda also underscored the interdependence between trade and finance, given that imports would almost certainly grow faster than exports particularly in the initial stages of industrialisation and financing the gap would hold the key to accelerating growth.

A perceptive point made by Unctad is that the need for a coherence between the global trading system and the international monetary and financial system has only gained in importance with the abandoning of the system of fixed, but adjustable, exchange rates and the widespread floatation, combined with a return of private international capital flows to levels analogous to those that had caused much economic and social havoc in the inter-War period.

Pertinently, the TDR avers that the liberalisation of capital movements has, on balance, had little impact on levels of development finance, and the balance-of-payments constraints of developing countries have not been removed.

Instead, there has been a de-linking of financial flows from international trade and this is well reflected in the case of short-term capital flows, where over 80 per cent of the transactions are round-trip operations, motivated by hedging, arbitrage and speculative considerations. Particularly disconcerting and a major source of disquietude among developing countries is the heightened level and volatility of short-term private international capital flows, associated with the often sharp swings in exchange rate expectations of international investors, that has a deleterious impact on the principle of non-discrimination in trade and on developing-country trade performance.

Volatility in international financial markets and particularly in short-term capital flows could reduce global competitiveness and the profit incentive for investors to effect productivity-enhancement in developing countries.

Unctad detects an inconsistency in the policy advice that goads developing countries to adopt rapid financial liberalisation and yet to rely on productivity-enhancing investment to reinforce their competitiveness for improved trade performance.

Amplifying this point, Unctad says that after the rapid opening up of their economies in the 1980s, many developing countries became increasingly preoccupied with ensuring sufficient flows of external funds, rather than improving domestic resource accumulation and productivity growth.

As foreign capital flows were regarded as an instrument for accelerating growth, the monetary conditions created by these flows and the policies to attract them were not deemed to hinder domestic investment.

In some countries, the domestic monetary policy was completely renounced and the exchange rate anchor was supposed to stabilise the price level through competition from cheap imports.

It was further assumed that the sale of state assets (disinvestment of public sector equity) and reduced government intervention would improve the overall efficiency of the market system.

But the flip side of this `sound policy approach', or what is broadly hailed as Washington Consensus, was that it overtly lowered profits and the profit expectations of domestic companies and obviated the profit-investment nexus from evolving.

Ultimately, the efficiency gains of the pro-market policy could not make good the overall restrictive stance of economic policy and the pressure from foreign competitors.

Hence, Unctad contends, in the absence of easy growth and adjustment formulas for economic catch-up through industrialisation, strategies that seek to make convergence a common policy objective have to provide a good deal more leeway for experimentation and discrimination in favour of countries with lower efficiency and income levels.

But this applies precisely to India as it is now governed by a multi-party coalition with a mosaic of political ideologies and not by any single Right or Left party.

So, a blend of policies drawing from market forces, policy space and collective actions by consensus among the allies is crucial to putting the Indian economy on the track of development.

Ugly differences among rulers over what should be the right step for lending social depth to economic policies would only make the people lose belief in coalition experiments not resulting in desirable `deliverables' and development dividend.

Both the Right and the Left parties should pause and ponder by drawing ample lesson from this year's TDR, which aptly says that "in an interdependent world, the balance between economic welfare at the national level and integration at the international level will continue to hinge on an appropriate mix of market forces, policy space and collective actions."