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THE THREAT FROM GLOBAL TRADE IMBALANCES

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GENEVA, Jul 1 2006 (IPS) - Despite the relatively favourable evolution of the terms of trade of many developing countries, complacency must be avoided, writes Supachai Panitchpakdi, Secretary-General of the United Nations Conference on Trade and Development (UNCTAD). In this article, the author argues that one of the most important challenges for national policy makers and for the international community is to ensure a fair distribution of the revenue arising from primary production and its proper use in financing development. Strengthened macroeconomic policy coordination is also necessary to improve the coherence between the international trading and financial systems. There is a striking asymmetry in existing multilateral arrangements between trade on the one hand, and monetary and financial relations on the other. A global monetary authority like the IMF could play an important role in strengthening the international institutional framework in the monetary and financial area. It would have to focus on international monetary and financial stability. In principle, surveillance could play a significant part in promoting a more stable and reliable system of exchange rates to ensure a predictable trading environment. But in order to fulfil that role, surveillance would need to become more effective and also symmetrical across all countries

The recovery in the world economy that started in 2002 continues unabated. High oil prices and the increasing cost of industrial raw materials have apparently not had the negative impact on the recovery that many expected. The economic upswing has brought about a major improvement in the living standards and employment situation of hundreds of millions of people in developing countries. However, this undeniable economic success should give rise to caution as to the possible negative repercussions of a major imbalance in the global economy.

In many respects, developing countries have been the pace-setters for this success story. As in previous years, rapid growth in China and India is largely responsible for this outcome. Other parts of the developing world have also shown resilience and will continue to grow relatively fast. During 2006, a growth rate of 4.5 per cent in Latin America and 6 per cent in Africa and the Commonwealth of Independent States should be possible.

In West Asia, growth will probably remain around 5 percent. With monetary policy freed from unsustainable exchange rate regimes, Latin America has succeeded in transmitting the external stimulus into its domestic economies without reviving inflationary tendencies.

Another remarkable feature of the global recovery has been the ability of many African countries to maintain high growth rates since 2003. Higher government and enterprise revenues following the hike in the prices of many commodities appear to be spilling over into the domestic economy and stimulating spending as well.

Since 2003, the terms of trade of many developing countries have changed considerably, with substantial gains by countries specialised in extractive industries but drastic losses by those countries that depend more on exports of manufactures and imports of raw materials, especially oil. Changes were less dramatic in countries that are mainly exporters of manufactured goods but that also rely on primary exports, such as Brazil, Malaysia, Mexico, South Africa, and Vietnam. The terms of trade have varied the most among agriculture exporters, reflecting large differences in the movements of prices for specific products and also differences in the share of oil in their imports. For instance, in 2005 the terms of trade of coffee exporters improved, while those of exporters of cotton and vegetable oils deteriorated sharply.

Despite the relatively favourable evolution of the terms of trade of many developing countries, complacency must be avoided for a number of reasons. First, the prices of non-oil commodities in real terms remain clearly below the levels of some 30 years ago. Second, commodity prices are dependent on factors beyond the control of the producer countries, such as demand from large emerging economies and global economic growth in general. Third, volatility in markets has risen recently, posing the danger of a reversal of the price hike. Fourth, several of the poorest countries are not benefiting from buoyant demand for their export commodities, either because their trade structure is heavily biased towards those commodities least in demand or because part of the gains from higher export prices is being absorbed by fuel imports and profit remittances to developed countries.

Thus, one of the most important challenges for national policy makers and for the international community is to ensure a fair distribution of the revenue arising from primary production and its proper use in financing development.

Although, as mentioned above, the commodity price hike did not result in a slowdown of the world economy, the current international situation could still deteriorate abruptly if the prevailing global trade imbalances are not properly managed. If no pre-emptive action is taken, the widening of deficits and surpluses may culminate in a disorderly adjustment of the world’s leading currency, with a negative impact on global growth and poverty reduction. The lack of a multilateral approach to ensuring a smooth adjustment is an ongoing concern. It would be prudent to pursue expansionary policies in surplus economies of a critical size, and particularly in those countries that are growing below their potential. The latter applies mostly to the European Monetary Union and Japan.

Strengthened macroeconomic policy coordination is also necessary to improve the coherence between the international trading and financial systems. There is a striking asymmetry in existing multilateral arrangements between trade on the one hand, and monetary and financial relations on the other. While international trade is now organised around a rules-based system with certain core principles applying to all participants, this is not the case in international money and finance. This asymmetry is all the more important given that adverse international spill-overs generated by self-centred national monetary and financial policies can be much more damaging than those created by trade policies, particularly for developing countries.

A global monetary authority like the IMF could play an important role in strengthening the international institutional framework in the monetary and financial area. It would have to focus on international monetary and financial stability. In principle, surveillance could play a significant part in promoting a more stable and reliable system of exchange rates to ensure a predictable trading environment. But in order to fulfil that role, surveillance would need to become more effective and also symmetrical across all countries. (END/COPYRIGHT IPS)

 
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