Bridges Weekly Trade News Digest • Volume 8 • Number 32 • 29th September 2004
Trade And Development Report 2004: UNCTAD Outlines Growth, Advocates Coherence
According to the UN Conference on Trade and Development (UNCTAD)’s Trade and Development Report 2004, released on 16 September, the global economy is looking better than it was a year ago, as are the prospects for developing countries. However, greater openness to international trade and finance has not enabled developing countries to establish a virtuous interaction between external financing, domestic investment and export growth. To achieve this, the report argues, a feasible development agenda has to be based on the concept of ‘coherence’.
Following two years of slow growth, the world economy experienced a 2.6 percent expansion in 2003, according to the Trade and Development Report. This is expected to increase to 3.8 percent this year as a result of growth in the US economy and economic expansion in East and South Asia. Though many view this recovery as an indicator of future growth and prosperity for both developed and developing countries, others worry that imbalances in the world economy and uncertainties about oil prices, exchange rates, and the longer-term health of the US economy may counteract such optimism. It is uncertain whether the US will sustain the growth stimulus it offered the rest of the world in 2003 and the first half of this year. Though the global economy has always been dependent on US economic performance, the US’ deficits are far greater today than they were in the late 1990s. UNCTAD consequently questions the sustainability of the pattern of world growth.
Developing countries expanded last year at a rate of 4.5 percent, and transition economies at a rate of 5.9 percent, thereby surpassing growth in the developed world (2.0 percent). Despite such growth, income distribution is extremely unequal. Nevertheless, both East and South Asia experienced considerable growth. Latin America had an increase in output growth as well. Africa benefited less, with the exception of North Africa, which experienced growth as a result of higher oil prices and a revival of tourism. Per capita income is stagnating in most of sub-Saharan Africa, where poverty and social deprivation have yet to improve.
Trade expands, but not equitably
The UNCTAD Trade and Development Report also chronicled rapid growth in world trade. The expansion has primarily been a result of a surge in the dollar unit value of exports, driven by the recovery in the US and rapid growth in export volume in developing and transition countries. According to the report, in 2002 and 2003 developing and transition countries accounted for around three quarters of the increase in export volume, and for 60 percent of the increase in import volume.
These changes represent the increasing relocation of manufacturing production and the international pattern of demand growth. Countries are expanding their own manufacturing industries and serving as important markets for an array of manufacturers and commodities. Growth in manufacturing requires more inputs of metals and other agricultural raw materials than growth based on expansion of the services sector. Rapidly expanding populations put an additional demand on food products.
Yet another factor influencing world trade was a dramatic increase in the inflow of private capital to developing and transition economies, which rose from US$47 billion in 2002 to US$131 billion in 2003. This increase was the result of a sharp rise in credits and short-term capital flows attracted by high interest rates or the expectation of currency appreciation. However, capital flowed to economies with substantial current account surpluses, where they added to the accumulation of foreign exchange reserves, and not to developing countries with pressing external financing needs and low investment rates. Such countries consequently received little benefit. Given such imbalances, the report said the world should take note of developing countries’ legitimate fear of floating their currencies in the face of changing expectations on international financial markets and work instead to establish a rule-based, multilateral international monetary system.
The Trade and Development Report also focused on the developmental effects of closer integration into the world economy. The "openness model" supported by international financial institutions has not enabled developing countries to foster a harmonious interaction between international finance, domestic capital formation and export growth, for it is too narrow a basis for development through integration. A more comprehensive policy framework that acknowledges the need to bolster coherence between the international trading system and the international monetary and financial system is necessary, the report said. Though the WTO’s Doha round aims at greater liberalisation of international trade, it focuses on reducing trade barriers and restricting trade-distorting domestic policies, instead of analysing trade imbalances and distortions in the monetary and financial system. A more comprehensive and cohesive approach could maximise the developmental effects of integration into the world economy.
For highlights and downloads of the Trade and Development Report 2004, visit http://www.unctad.org.
ICTSD reporting.